Should I stay or should I go?
Published : July 2008
The question posed by The Clash in 1982 is increasingly being asked in the boardrooms of some of the UK’s top companies, driven by growing concerns about the British tax system. Sue Bonney, head of tax at KPMG Europe LLP, examines some of the issues boards are facing
The business community has been voicing concerns about the UK corporate tax system for some time now.
But the level of dissatisfaction reached a new high this spring when two FTSE250 companies (Shire Pharmaceuticals and United Business Media) announced that they had had enough, and were relocating their headquarters to Ireland for tax reasons.
The main concerns business has with the British tax system are that it’s too complicated and too uncertain, with frequent rule changes. And there are specific issues too, mostly around the way in which Her Majesty’s Revenue and Customs (HMRC) is able to tax foreign profits – earnings from territories outside the UK.
HMRC has already acknowledged that it needs to reform the way in which it taxes foreign profits. In June 2007, together with HM Treasury, it published a discussion document outlining various scenarios for reform. Included in this document were proposals that the UK authorities should be able to tax what was referred to as ‘mobile’ or ‘passive’ income, which was not closely defined – but it was widely felt that it could well include financing and intellectual property income, whether arising from the normal course of business or from a royalty type arrangement.
At the extreme, what this could mean is that all worldwide profits generated from intellectual property might be subject to UK tax. For example, a brand or royalty stream from a fictional character, pharmaceuticals, spin-offs from inventions...the list goes on. But in the absence of clarity over what exactly is being suggested, many businesses have been getting nervous. Even tax experts disagree about what the proposals mean. This makes it easy for business to fear the worst and take the view that it may be best to get out of the UK now before it’s too late.
The prospect of more businesses leaving the country does, however, seem to have focused the authorities’ attention on the issue, prompting the establishment in May this year of a new working group to “look at the long-term challenges facing the UK tax system and ensure competitiveness remains at the heart of any future reforms”. Of course it has to be a good thing that the authorities are looking at the issue. The criticism they need to dispel, however, is whether there is an element of ‘too little’and possibly ‘too late’ on this.
Too little? The group assembled by the Government is very small – just 14 representatives. Is this really a representative sample of UK business? They need to be sure to gather wider input. And too late? Business has already made its views known on the foreign profits proposals. The deadline for submitting representations fell in the middle of September 2007, and the Treasury’s response is already promised for this summer.
There’s been plenty of talking already. What is needed is some action. The sagas around proposed and subsequently amended reforms to capital gains tax, the non-doms regime and, most recently, the 10p tax rate, which have prompted cries of ‘u-turn’ from commentators, have not helped the situation.
It’s important to acknowledge that any proposed change to taxation of foreign profits would not be a u-turn – rather, a case of sympathetic and responsive listening. What we have here is an ongoing consultation process that pre-dates these other tax issues and that was always meant to be a collaborative process between business and the authorities. We need to keep sight of this and not lose faith in the process.
And beyond the specific concerns on foreign profits, there’s the tax rate, of course. At 28 per cent, the UK isn’t the worst. In fact, it’s the lowest rate among the G7 countries. But these aren’t really the competitors in terms of potential headquarter locations. Luxembourg, Switzerland, the Netherlands and Ireland tend to be the contenders in this context. When it comes to tax, these ‘shops down the road sell it cheaper’. More and more businesses are now competing on a global scale, and companies cannot afford to be at a competitive disadvantage, whether it’s on labour, raw materials, rent, distribution or, in this case, tax. Tax is under the same scrutiny as all these other business costs.
Whether in assessing a particular jurisdiction as a headquarter location, or lobbying the UK Government on improving the tax system, business looks for certain attributes on tax. They want simplicity and fairness but, within that, specific areas that are attractive are: a tax-free repatriation of profits earned and taxed overseas, a more sensible set of rules for taxing profits from low-tax jurisdictions and either no or a low withholding tax on dividends. When dealing with their group territories, businesses want to see favourable tax treaties (including withholding tax rates) in place. They want to be able to negotiate with the authorities to agree concessions or get certainty through advance rulings on tax. They like to see
no capital or stamp duties. And, from a personal perspective, they will look for a favourable personal tax system.
Of course, such a big decision as a headquarter location is not purely tax driven. A business will assess other non tax attributes such as political stability, quality of infrastructure, access to capital markets and so on. But tax seems to be creeping up the agenda and the imperative to fix our system has never been more urgent.
Questions to consider
Migration is a major move and isn’t for everyone. But there are some key questions to consider in order to make a decision. For boards, it is arguably a fiduciary duty for them to at least consider the pros and cons of their tax location.
What is your view on migration?
Are you staying, are you going, are you thinking about it, have you thought about it and made a decision, or do you yet need to look at it? Shareholders, employees, financial analysts, the press, your customers, your suppliers – stakeholders across your business are likely to ask. And they won’t necessarily be looking for the same answers. Don’t forget the potential reputational impact of migrating.
If you seem to be paying more tax than your peers, what can you do other than migrate to improve your position?
There may well be management improvements and efficiencies on tax that you can benefit from without actually moving the headquarters.
If you’ve decided to go, have you got a full picture of what’s involved? Do the (usually very senior) members of the management team understand what will be required of them?
It’s largely the board who will need to move to demonstrate that a headquarters operation is being conducted in a different location. Does everyone in your organisation appreciate, at really quite a detailed level, exactly what’s involved? As a minimum, board meetings will have to be conducted at the new location. Some senior management may be required to base themselves in a different country. Are they prepared to do that and have they spoken to their families?
And once you’ve done it, how do you ensure that you extract the full benefit?
Having made what is potentially a very major move, clearly you will want to make sure that you make the most of it. You will need ongoing tax advice.
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