Inland Revenue 24
17 March 1998
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CONTROLLED FOREIGN COMPANIES (CFCs):
SELF ASSESSMENT AND OTHER CHANGES
Following extensive consultations with business, the
Controlled Foreign Company rules are to be brought within
Corporation Tax Self Assessment.
The new rules will be based on those set out in an Inland
Revenue consultative document issued last November. The
document was widely welcomed for the positive and
constructive way in which it responded to comments on
proposals put forward by the Inland Revenue under the last
Government.
As a result of the consultation process, the proposals
announced today by the Chancellor will include a number of
further helpful and important refinements suggested by
companies and their representatives. This reflects the
Government's wish to keep compliance costs to a minimum.
The proposals will ensure that the rules operate more fairly
and effectively to prevent tax avoidance. The new system will
apply to UK company accounting periods ending on or after 1
July 1999.
The Inland Revenue are publishing a consultation feedback
document summarising the responses received, and a regulatory
appraisal.
In addition to the main proposals, the definition of
activities potentially covered by the CFC rules will be
strengthened in two respects. The changes will apply to CFC
accounting periods beginning on or after today.
DETAILS
Self Assessment
1. The proposals in the consultative document issued last
November have been widely welcomed for the way in which they
deal with earlier concerns about how the CFC rules would work
under self-assessment.
2. Particularly welcomed were the proposals to:
- retain the Acceptable Distribution Policy rules;
- increase from 10 per cent to 25 per cent the minimum
"share" of CFC profits needed before CFC tax is due;
- increase from 20,000 pounds to 50,000 pounds the de
minimis profit's limit for CFC tax to be due;
- put the current non-statutory Excluded Countries List
into regulations;
- reduce the amount of information that had previously been
suggested might need to be included in tax returns;
- introduce a specific statutory requirement for the
continued involvement of the Inland Revenue's Head Office
in ensuring consistent interpretation of the rules; and
- remove loan creditors from the list of UK interest holders
to whom CFC profits can be apportioned.
3. All these proposals will be included in the new rules.
4. In addition, in response to suggestions made by companies
and their representatives, and with a view in particular to
increasing certainty and reducing potential compliance costs,
the Government proposes making a number of further
refinements to the original proposals:
- the exempt activities test will be amended to allow more
than one tier of non- local holding company. The extended
exemption will be on the lines of the present practice
set out in Tax Bulletin No 19. (Companies will continue
to be able to "claim" the benefit of the motive test
under the practice in Tax Bulletin where the holding
structure falls outside the new extended exempt activities
test, or where companies prefer to "claim" the motive test
rather than the exempt activities test.);
- the draft Excluded Countries Regulations will be amended
to allow certain branch income to be treated as local
source income. A further draft of the regulations will
be issued shortly; and
- a number of other detailed amendments and clarificatory
changes will be made to the legislation and regulations.
5. The proposal to issue new guidance material was also
widely welcomed. This will consolidate existing material and
add further guidance and examples. In response to a number
of suggestions, the Inland Revenue will publish the material
in draft for consultation as soon as possible after the
Finance Bill receives Royal Assent.
6. There was wide endorsement too of the proposal to
introduce a new comprehensive clearance procedure for CFCs.
This will be modelled on the existing CFC clearance
procedure, which has worked well in those areas which it
currently covers. Details of the new procedure will be
included for consultation in the draft guidance notes, and
will incorporate a 28 day turnaround target for the Inland
Revenue where all the necessary information is included in
the application.
Exempt Activities Test
7. In addition to the measures to bring the CFC rules into
self-assessment, the exempt activities test will be
strengthened in two respects.
8. An anomaly in the definition of "intellectual property"
will be removed by making clear that the definition is
illustrative, and by specifically including the holding of
trademarks and know-how in the list of examples.
9. The definition of "banking or any similar business" will
also be changed to make more specific what is covered.
10. Companies not involved in the reduction of UK tax will
continue to be exempt, under the motive test.
11. A copy of the new clause is attached to this press
release.
NOTES FOR EDITORS
1. The object of the CFC legislation is to prevent UK
companies from avoiding tax in the UK by diverting income to
subsidiaries in tax havens.
2. A CFC is a company which is not resident in the UK (but
which is controlled by individuals or companies who are) and
which is subject to a level of taxation less than three
quarters of what it would have paid had it been resident in
the UK. Subject to various exemptions, the difference between
the UK tax it would have paid and the overseas tax it has
paid can be charged on UK companies with an interest of at
least 10 per cent in the CFC.
3. At the moment, UK companies are not required to include
in their tax returns amounts chargeable under the CFC rules.
Instead the Inland Revenue must first identify that a UK
company has an interest in a CFC before any tax assessment
can be made. This is not a secure basis for ensuring that all
CFC tax that is potentially due is in fact charged, nor is it
fair between taxpayers.
4 The Chancellor therefore announced in his Budget in July
last year that he intended to introduce legislation in his
next Budget requiring UK companies to include amounts
chargeable under the CFC rules in their tax returns. And the
Inland Revenue published draft legislation for consultation
last November (see Inland Revenue press release "Controlled
Foreign Companies" of 12 November 1997).
5. Thirty responses were received to the 1997 consultative
document. And the Inland Revenue gave presentations to, and
held meetings with, a number of interested parties. A
summary of the replies to the consultative document, and a
regulatory appraisal, are on the Internet at:
http://www.open.gov.uk/inrev/cfc.htm
and will be available in printed format from 6.00 am tomorrow
from the Inland Revenue's Orderline - telephone 0845 3000504.
6. The purpose of the exempt activities test is to exclude
automatically those CFCs which, because of the nature of
their activities, can reasonably be assumed not to be being
used to avoid UK tax. Activities that are not exempt include
the holding of intellectual property and, in certain
circumstances, banking and any similar business.
7. The revenue yield arising from these changes is estimated
at 50 million pounds for 1999-2000 and 100 million pounds for
2000-01.
INLAND REVENUE PRESS OFFICE
Media enquiries to: 0171 438 6692/6706/7327
(Out of hours 0860 359544)
Non-media enquiries to : 0171 438 6420/6425
(Office hours only)
DRAFT CLAUSE
Controlled foreign companies: exempt activities.
(1) Part II of Schedule 25 to the Taxes Act 1988
(exempt activities) shall be amended as follows;
(2) In paragraph 9 (activities which constitute investment
business) for sub-paragraph (1A) (definition of
"intellectual property") there shall be substituted-
"(1A) In sub-paragraph (1)(a) above "intellectual
property" includes (in particular)-
(a) any industrial, commercial or scientific
information, knowledge or expertise;
(b) any patent, trade mark, registered design,
copyright or design right;
(c) any licence or other right in respect of
intellectual property;
(d) any rights under the law of a country
outside the United Kingdom which
correspond or are similar to those falling
within paragraph (b) or (c) above."
(3) In paragraph 11(1) (activities which constitute
wholesale, distributive or financial business) for
paragraph (c) (banking or any similar business
involving the receipt of deposits, loans or both and
the making of loans or investments) there shall be
substituted-
"(c) banking, deposit-taking, money-lending or
debt-factoring, or any business similar
to banking, deposit-taking, money-lending
or debt-factoring;".
(4) In consequence of subsection (3) above -
(a) in paragraph 9(3), for "banking or any
similar business" there shall be
substituted "business";
(b) in paragraph 11(3), for "banking or other
business" there shall be substituted
"business".
(5) This section has effect in relation to accounting
periods of a controlled foreign company, within the
meaning of Chapter IV of Part XVII of the Taxes Act
1988, beginning on or after 17th March 1998.