In its 2013 Autumn Statement, the government has announced immediate measures which will change the controlled foreign company (CFC) rules to prevent abuse by addressing UK base erosion through the transfer of profits from intra-group lending offshore.
With immediate effect, the government will switch off the partial exemption rules for loan relationship credits of a CFC that arise from an arrangement with a main purpose of transferring profits from existing intra group lending out of the UK.
It has also amended the anti-avoidance rule relating to the transfer of external debt to the UK to ensure that the rule works as intended.
The first part of the measure will apply to arrangements entered into on or after 5 December 2013 and the second part will have effect for accounting periods beginning on or after 5 December 2013.
Deloitte's head of tax policy, Bill Dodwell, said the measure closes a small gap in the legislation but still keeps the main thrust of the new CFC reform unaltered.
'It will apply to a small number of UK groups which have moved existing debt outside the UK, so as to try to benefit from the finance company partial exemption (ie, an effective 5.75% rate this year). HMRC considered that the regime was intended to apply to new overseas financing and not to allow existing UK taxable income to be reduced.
'The measure is most unlikely to affect overseas groups considering migrating to the UK,' said Dodwell.
Other experts did not expect the new measures.Stella Amiss, international tax partner at PwC, says the changes indicate a chancellor keen to demonstrate that his policy of reducing tax rates and making the UK tax regime competitive was working.
'But there was a surprise change on the newly introduced Controlled Foreign Companies rules. These were introduced from 1 January this year as part of the Government's corporate tax reforms, to make the UK tax regime competitive for international business.
'Today new restrictions have been introduced, making it harder for some businesses to qualify. This is somewhat a curve ball and will send mixed signals to investors of the government's commitment to these reforms. There will now be a degree of instability surrounding the corporate tax reforms that will not be welcomed.
'The chancellor made no comment on the government's ongoing support of the other key reform measure the Patent Box regime which is disappointing given that this has been under the spotlight from the EU and again investors will be looking for stability,' said Amiss.
