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The UK Treasury published documents today proposing the way forward for the reform of the taxation of foreign branch profits and controlled foreign companies.

The government said " the discussion document on the scope of an exemption for foreign branch profits [is] aimed at delivering a more territorial approach to corporation tax to enhance the UK's competitiveness". It added that large companies in the oil and gas, banking and insurance sector tend to be those that make significant use of foreign branches.

The government presents two options for quantifying branch profits. One would be to " identify foreign branch profits on the basis of how these are calculated under the UK's double tax treaties". The other would "identify foreign branch profits as defined under existing legislation for UK branches of foreign companies".

The scope of an exemption, the government said, needs to consider how the foreign branch taxation regime should prevent the artificial diversion of profits; whether the exemption should apply to air transport and shipping; how to provide double taxation relief alongside a branch exemption regime and whether the scope of exemption should extend to countries with which the UK does not have a double taxation agreement.

Another part of the discussion document sets out options to be considered to relieve losses incurred in foreign branches. They are:
• maintaining loss relief to various extents, either coupled with a profits exemption or as part of an elective regime;
• mechanisms for the reclaim of any relief previously provided in respect of branch losses once the branch moves into profit; and
• a transitional rule for losses carried forward that are derived from branch business, the subsequent profits of which become exempt from UK tax as a result of any change to the regime for taxing foreign branches of UK companies.

October 15 is the deadline for anyone with comments on the discussion document to send them to the Treasury. Eight business representatives will form a working group to look at the options and proposals in more detail in August and September.

The CFC proposals come from a government announcement in the budget in June that it would introduce interim improvements to the regime in spring 2011, to be followed by final changes a year later.

Taxpayers, the government and advisers have been debating reform of the CFC rules for more than three years.

The government said it wants the interim improvements to "modernise aspects of the rules so as to exempt commercially justified activities that both business and HMRC agree do not erode the UK tax base but which could give rise to a CFC charge under the current rules" and "help UK businesses that wish to undertake overseas acquisitions and reorganisations".

Any changes to CFC rules on IP and on monetary assets and interest income will be made when full reform takes place in 2012.

A separate working group has been set up to consider the interim improvements in more detail. Further details and draft legislation will be published in October or November and the interim improvements will be part of Finance Bill 2011.

The Treasury also published consultation or discussion documents on seven other parts of the tax code today, including associated company rules and the modernisation of the tax regime for investment trust companies.

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