Taxpayers and advisers believe the discussion document on controlled foreign companies reflects a genuine attempt by the UK tax authorities to respond to their concerns.
The document covers the overarching framework for the reforms and then goes into more detail looking at complex monetary assets and intellectual property (IP) issues.
"Suitably drafted CFC rules will be a major improvement in the competitiveness of the UK tax system," said Peter Vipond, director of financial regulation and taxation at the Association of British Insurers.
"The government has listened to a number of concerns from business during the consultation and the proposals do reflect the complexities of modern, global business," said Diane Hay, international tax consultant at PricewaterhouseCoopers.
"My immediate reaction was that it was obviously important to HMT to reassure business that they were genuinely trying to make the CFC regime more workable," said Gary Richards, partner at Berwin Leighton Paisner.
Many are still uncertain about what the future legislation may look like, but hope the discussion draft is a good indication of where the government is going.
"It too early to predict what any final legislation will look like, [but] the context for reform and the key policy principles as set out in the discussion document present a very sensible framework for further consultation," said Ian Brimicombe, head of the tax group at AstraZeneca, who was one of six tax executives that sat on the business liaison committee during discussions with HMRC and HMT.
"The document proposes many changes, many of which are intended to avoid imposing charges and obligation on activities of UK-headquartered companies that are unconnected with the UK," said Christopher Sanger, head of tax policy at Ernst & Young. "The challenge will be for these to be translated into workable legislation, avoiding the good policy intentions being undermined by overly burdensome or clumsy implementation."
Big change
The document unveils a significant shift in the government's attitude to CFC taxation, It promises to stop assuming that a business activity that could be performed in the UK, would have been were it not for the tax advantages gained by going overseas.
This move is welcomed by Richard Baron, head of tax at the Institute of Directors in London.
But the move to an exclusion approach whereby all subsidiaries are caught by the CFC rules unless specifically excluded, finds less support.
"We are not wholly convinced by the argument that an exemption basis is better than an inclusive basis," said Baron.
"It will be essential for the exemptions to be generously drawn. The compliance burden will only be acceptable if the great majority of subsidiaries are straightforwardly exempt," he added.
"Moving to an exemption regime in principle is fine but a cautionary note on the drafting has to be struck if it follows the foreign profits approach of exemption unless a targeted anti-avoidance regime applies," said Richards.
Uncertainty remains
One area of concern is the tests that are suggested as ways to see if companies fall within the exceptions to the rules, they are criticised for being too subjective.
"Quite a few of the tests are intended to be objective, but there is a worrying element of subjectivity," said Richards, who hopes this will be sorted out as the reforms progress. "Until the proposals are further refined, I'd be inclined to give HMT the benefit of the doubt," he said.
One test causing particular alarm relates to intellectual property. In the discussion document the government expresses several concerns about misuse of shifting, holding or managing IP offshore. An extremely subjective test is proposed as a way to tackle this.
The document states: "one way in which the rules could be refocused would be to look at the extent to which an offshore company that owns IP undertakes active IP management similar to a trading activity."
This would mean that in situations where there is no or minimal UK involvement and the offshore company undertakes sufficient IP management activity, the company would be exempt under the new CFC rules.
The document suggests that "this approach could include a characteristics based test, identifying activities required for the IP to be actively managed offshore".
How the government would assess this, is not made clear.
"The question remains as to whether the active management /substance test for IP as applied to a single entity is relevant or practical in the context of modern multinational, integrated businesses," said Brimicombe.
"There is still a great deal of work to do on the treatment of intellectual property," said Baron.
Richards agrees there is more to do, but finds the progress positive.
"On IP, a lot of detail needs to be fleshed out, but at least innovative thinking [such as] the earn out proposal in [section] 4.9, is in evidence."
Protecting revenue
The document repeats more than once the need to protect the UK tax base. Some advisers are concerned the government is still not appreciating that business decisions involving moving elements of the business offshore, are often done for legitimate reasons.
"The need to have measures that protect the UK tax base comes through very strongly," said Hay. "Until there is more understanding of the way that these anti-avoidance elements will work, the response from business is likely to be very cautious."
"There is an argument regarding protecting the UK tax base that, looking at a £178 billion ($288 billion) deficit, it is not plugging holes in the corporate tax base that will fill that gap," said Richards.
EU rules
One important topic of discussion among specialists is whether the new rules will be in line with EU expectations following the Cadbury Schweppes decision .
It is still not clear whether, however much they wish to protect the tax base from artificial diversion of profits from the UK, the tests proposed will be EU compliant," said Richards.
"Moving away from the default presumption that, subject to exceptions, all CFCs can be subject to counteraction is welcome but long overdue," he adds. "But they say (in paragraph 2.17) a company that does not satisfy the objective tests would be able to rely on a redesigned motive test where it is "properly established overseas" - whatever that may mean - and can demonstrate the commercial rationale, which [may] go further than the EU permitted," he adds.
The government is keen to receive feedback on the proposals in the discussion paper. Any comments or technical queries should be addressed to Hannah Mitchell (Hannah.Mitchell@hmtreasury.gsi.gov.uk) or Jennifer Payne (Jennifer.Payne@hmtreasury.gsi.gov.uk).
Comments should be submitted by April 20 2010.
After that date there will continue to be consultations with interested parties until the draft legislation is released, which is expected to be by the end of 2010.
