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Comment: Revenue and Treasury update on reforms of branch taxation and CFCs
Last night HM Treasury and HMRC hosted a very well attended open event which provided a status update on proposals to reform foreign branch taxation and the controlled foreign company (CFC) regime
Government thinking on a possible exemption for foreign branch profits is still at an early stage. Decisions remain to be taken on how branch profits will be defined and whether branch capital gains will be included in the exemption. HMRC is looking at how to prevent the exemption being used to divert profits, possibly incorporating aspects of the CFC regime. They also need to resolve what happens to branch losses available for carry forward when the exemption comes into force. Consultation ends on 15 October and Government still intends to bring in the changes in 2011.
The CFC project has been split into two: interim improvements planned for 2011 and major reforms (which will address monetary assets and IP) planned for 2012. The event focused only on the interim improvements (the aims and scope of which were set out in a note published in July). HMRC have been focusing on three main issues: a new exemption for "commercially justified activities"; a grace period for newly acquired CFCs; and various "other worthwhile improvements". Businesses are invited to comment on these issues and to suggest additional issues for improvement. As indicated in the July note, draft legislation is planned for this autumn, with the changes coming into force in 2011.
Both reforms appear to be on track but there are major issues to be resolved in both areas. In keeping with the Government's new approach to tax policy (published as part of the June Budget), consultation is continuing apace (with various meetings with business and tax professionals scheduled for coming weeks). Further details of the proposals (and draft legislation) should be available in the next few months.
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08 September 2010
