Clause 48 and schedule 13 provide an opt-in exemption from corporation tax for the profits of foreign branches of UK companies. Where an election is made, a UK company with a foreign branch will now only be subject to corporation tax on its UK profits. That change will contribute to the competitiveness of the UK tax system by ensuring that the UK remains a location in which businesses want to locate and invest.
The Government aim to create the most competitive corporate tax regime in the G20. We are sending out a signal that Britain is open for business. The corporate tax road map published in November set out the key changes that will ensure that the UK’s corporate tax regime becomes an asset. We have already discussed the keystone measure—the cuts in corporation tax—that will support a private sector recovery that generates growth, creates jobs and contributes to the public finances.
[Mr Jim Hoodin the Chair]
We have just looked at another part of the package, the interim changes to the UK’s outdated CFC rules. The reform of foreign branch taxation will further improve competitiveness by taking a more territorial approach to income earned abroad and by more closely aligning the tax treatment of foreign branches and subsidiaries. That will allow companies to make commercial decisions on the structure of their overseas operations without significant distortions caused by the tax treatment. For too long, businesses have been leaving the UK due to concerns about tax competitiveness. We want to attract them back, and this measure will help us do so.
Moving to the detail of the clause, the changes will allow companies the option to elect for exemption from corporation tax on the profits of their foreign branches. That election will be made at company level and will be irrevocable. The opt-in exemption will apply to foreign branch profits including chargeable gains and investment income. Exempt profits will be defined by reference to the UK’s tax treaty with the branch territory. For branches in territories where there is no treaty, the measure of the exempt profit will be determined by the OECD model treaty. The Government will not extend the exemption to non-treaty territories for branches of small companies because the risk of tax loss through diversion of personal income is too high. That is consistent with the tax treatment of foreign subsidiaries.
Mr Hood, it is good to see you in the Chair, although I can assure you that the hon. Member for Edinburgh South did a splendid job. As the Committee knows, the Government are committed to tackling all forms of tax evasion and avoidance. The clause includes anti-avoidance protection to prevent artificial movement of taxable profits from the UK into an exempt branch. That will provide similar protection to the Exchequer as that achieved by the CFC rules in respect of foreign subsidiaries, and will mean that only genuine economic activities carried on overseas will be exempt from UK corporation tax.
The provisions will also offer protection to the Exchequer where branch loss relief has been claimed, but is not matched by branch profits in the six years prior to any election. Any company entering this exemption with outstanding loss relief will still be taxed on the profits of their branches until this balance is recouped. New losses made after the election will be cancelled, and will not be eligible for relief in the UK.
Based on current corporate structures, the proposal could benefit around 150 companies, primarily those owned by large UK multinational groups, plus a small number of companies owned by non-UK multinational groups that operate foreign branches out of the UK.
The measure has been subject to consultation on both the policy design and draft legislation. We received more than 50 responses from representative bodies, affected companies and members of the public. In designing the new regime we have reflected consultation responses to ensure that it meets the needs of all affected sectors. Some respondents raised some issues on the transitional and anti-avoidance provisions. Those have now been addressed, ensuring the regime provides certainty to business and protection to the Exchequer.
I have chosen to maintain the policy objectives of greater consistency of tax treatment of branches and subsidiaries, and of moving towards a more territorial tax system, and have decided not to offer any form of loss relief within exemption.
Those companies for whom loss relief is important can still benefit from the relief by choosing to remain within the current regime. In the coming year we will ensure that the changes to the CFC regime work for all business models—both branches and subsidiaries. We will monitor the interaction between branch exemption and regulatory changes for the insurance industry. Since the publication of the draft clauses we have worked with the life insurance sector to ensure that branch exemption is available to them.
The Government are tabling six amendments in three groups to ensure that the legislation functions as intended and to provide certainty to business and protection to the Exchequer.
Amendment 123 applies to the anti-diversion rule, which will prevent any branch profits that have been artificially diverted from the UK from becoming exempt. It is designed to be broadly consistent with the CFC rules. The amendment makes it clear that chargeable gains are not within the scope of the anti-diversion rule, consistent with the CFC rules on which it is based. Amending the rules will prevent any loss of tax, while providing business with clarity.
Amendments 124 and 128 will ensure that the transitional rules apply to transferred businesses in the same way as any other business that moves into exemption for the first time. The transitional rule protects the Exchequer where loss relief has previously been given to a branch and would not otherwise be clawed back—by taxing subsequent profits—once branch profits become exempt. Branch exemption is an optional regime and the election is made on a company-by-company basis. That gives groups of companies flexibility in their use of exemption, but means that we need to ensure that the transitional rule cannot be side-stepped by intra-group transfers of business.
As drafted, the clause does not give the right result in two significant circumstances. First, where the transferor of the business is not UK resident there would be an inappropriate application of the rule to losses for which no corporation tax relief was ever given. That would act as a disincentive to a company looking to invest in the UK by moving its branch headquarters here. It runs counter to the policy aim of creating competitive conditions for businesses wanting to invest in the UK.
Secondly, the rule will not be fully effective where the transfer of business is made to another group company, which is exempt before the transfer takes place. As currently drafted, this would enable companies to side-step the transitional rules through transfers of business to companies already in exemption.
Let me turn now to the final group of amendments. There are rules in existing legislation for chargeable gains and for intangible fixed assets that deal with intra-group transfers of assets. Those rules ensure that no tax charge arises on any gain realised in an intra-group transfer. Instead, any charge is deferred until such time as the asset is disposed of from the group.
It is necessary for the branch exemption legislation to set aside such rules, otherwise a gain made exempt under branch exemption would re-emerge as a taxable gain when the asset is eventually sold outside the group. To prevent that, there are rules in schedule 13 to ensure that the exemption of a gain and a cancellation of a loss arising on a branch asset are made permanent within the group of companies.
Amending the rules in relation to intra-group transfers and replacement of business assets will ensure that they have the intended effects, providing certainty for business and preventing risk of tax loss. These amendments ensure that the legislation works as intended, providing certainty for businesses and protection to the Exchequer, and I urge the Committee to accept them. This measure will ensure that the UK remains a competitive location for businesses and it more closely aligns the tax treatment of branches and subsidiaries. I therefore propose that this clause and schedule stands part of the Bill.
I am grateful to the Minister for his explanation of clause 48 and schedule 13. Let me give notice that I intend to press amendment 101 to schedule 13 to a Division when the opportunity arises. I want to ensure that we have the same principle that we have just debated apply to clause 48 as well, but I will not go over old ground for the sake of the debate here today.
I have a couple of points on clause 48. The Minister has helpfully explained that branch exemption and distribution exemption, as introduced in 2009, effectively mean that profits earned through foreign operations of UK resident companies will not generally be taxed in the UK except by reason of the controlled foreign company rules or other rules intended to prevent the artificial diversion of profits from the UK.
One legitimate area of concern is that because both subsidiaries and branches of companies are eligible for exemptions there could be a significant loss of transparency, which the Minister has touched on. None the less, I would welcome his further assurances that branches that do not have the same reporting requirements in many countries that subsidiaries have will not result in a reduction of transparency of taxation measures.
I am concerned that the difference between a branch and a subsidiary is clear. There are countries where that difference is palpable. I want the Minister to tell me whether he and his officials have considered that difference, whether he has any concerns about the reduction in transparency that those changes will bring, particularly with regard to the treatment of branches, and whether he will give us an assurance that he will continue to press in the G20 for greater transparency so that multinational companies can be held to account for their actions. I will be grateful to the Minister if he can give me a response. If he cannot, I will push amendment 101 to a Division.
First, may I say that I am grateful to the right hon. Gentleman for his support of what we are trying to do in clause 48 and schedule 13. He is right to make the point that the regime for subsidiaries was introduced by the previous Government, and the clause and schedule ensure greater consistency between subsidiaries and branches. We believe that is the right thing to do because it will help to create a level playing field across different business operating models and in some respects tax considerations should not drive the choice of business model—subsidiaries versus branches.
A UK-resident company must prepare accounts showing worldwide profits, including all branches. So there will still be that level of transparency. It will not be affected by clause 48 and schedule 13. The right hon. Gentleman touched on the broader issue of greater transparency within the tax system and I have made the point in public before that companies should be willing to go out and explain their tax arrangements in greater detail so that there is a better understanding of taxation of multinational companies.
Obviously, at an international level there is considerable momentum towards increasing transparency, which is something that my right hon. Friend the Chancellor has spoken about very widely in relation to extractive industries. We support greater transparency in that area specifically, but also more generally we look favourably on steps to ensure that the opportunities for avoidance that may have existed historically can be reduced. We think that the measures contained here are proportionate, appropriate and a step in the right direction. We want to move towards a more territorial regime in which we tax the profits that arise within the UK but do not try to tax profits that arise elsewhere. That is the direction that we are pursuing in the clause. I hope that it will have the support of all members of the Committee.