Controlled Foreign Companies: Draft Legislation on Assessment and Returns
Contents
3. Background to the Consultations
4. Responses to the 1997 Consultative Document
Appendix - Regulatory Appraisal
1. Introduction
1.1 The Chancellor announced in his Budget in July last year that he intended to introduce legislation in his next Budget requiring UK companies to include amounts chargeable under the CFC rules in their tax returns. He explained that his aim was to make the CFC rules operate more fairly and effectively than they do at present. And he said that he would publish the proposed legislation in draft and consult on the detail.
1.2 The Inland Revenue published a consultative document in November last year setting out the proposed details and draft legislation ("Controlled Foreign Companies: Draft Legislation on Assessment and Returns"). The document built on an earlier consultative document issued in 1995 under the authority of the last Government.
1.3 This feedback document summarises the responses to the 1997 consultative document, and describes how the Government intends to meet them. Legislation giving effect to the Government's proposals will be included in this year's Finance Bill, and will apply to UK company accounting periods ending on or after 1 July 1999.
2. Summary
2.1 The extensive nature of the consultative process has been seen as extremely helpful by businesses and their representatives. The 1997 consultative document was viewed as being clear and constructive. And the presentation of the draft legislation - showing what it would look like when consolidated into the Taxes Acts - was praised.
2.2 The responses to the 1997 consultative document welcomed the various proposals put forward in response to the comments made on the 1995 consultative document issued under the previous Government. Particularly welcomed were the proposals to:
- retain the ADP rules. (The 1995 document had proposed abolishing them.)
- increase from 10% to 25% the minimum share of CFC profits needed before CFC tax is due. (The 1995 document had proposed an increase to 20%.)
- increase from £20,000 to £50,000 the de minimis profit's limit for CFC tax to be due
- reduce the amount of information that had previously been suggested might need to be included in tax returns
- introduce a specific requirement for the continued involvement of the Inland Revenue's Head Office in ensuring consistent interpretation of the rules.
2.3 The responses also welcomed the confirmation that:
- the Excluded Countries List (ECL) would be put onto a statutory basis in regulations
- loan creditors would be removed from the list of UK interest holders to whom CFC profits can be apportioned
- the Inland Revenue would introduce a new comprehensive clearance procedure in respect of all aspects of the CFC rules
- the Inland Revenue would publish new, expanded, guidance material on the CFC rules.
2.4 A number of representations made further suggestions on how the proposals could be improved. As a result, the Government proposes making a number of refinements to the 1997 proposals:
- the exempt activities test will be amended to allow more than one tier of non-local holding company
- the draft Excluded Countries Regulations will be amended to allow certain branch income to be treated as local source income
- a number of detailed amendments and clarificatory changes will be made to the draft legislation and regulations
- the proposed new guidance material (including details of the proposed new clearance procedure) will be issued in draft for consultation.
3. Background to the Consultations
3.1 The purpose of the CFC legislation is to prevent UK companies from avoiding UK tax by diverting income to subsidiaries in low tax countries. A CFC is a company which is not resident in the UK (but which is controlled by individuals or companies who are) and which is subject to a level of taxation less than three quarters of what it would have paid had it been resident in the UK. Subject to various exemptions, the difference between the UK tax it would have paid and the overseas tax (or other UK tax) it has paid can be charged on UK companies with an interest of at least 10% in the profits.
3.2 CFCs are exempt if they pay at least 90% of their profits back to the UK as dividends (this is known as pursuing an "acceptable distribution policy" or "ADP"); or undertake certain commercial activities; or do not have tax avoidance as a main reason for their activities or existence.
3.3 The current legislation, however, only applies to a UK company when the Board of Inland Revenue so directs, and there is no requirement for companies to include details of CFCs in their tax returns. This means that, in order to determine whether or not there is a liability, the Inland Revenue must first make enquiries. In these circumstances it is not possible to ensure that tax is charged in all cases where it should be. As a result, the current legislation is neither fully effective nor fair in its treatment of taxpayers. Companies with no CFC liabilities may find themselves subject to expensive enquiries, while companies which do have potential liabilities may escape entirely.
3.4 Under the authority of the previous Government, the Inland Revenue issued a consultative document in 1995 ("The Controlled Foreign Companies Legislation") inviting views on the possibility of bringing the CFC rules into Corporation Tax Self Assessment. Such a move would require companies to include amounts chargeable under the CFC rules in their tax returns. Following those consultations the then Chancellor announced in November 1996 that he had decided to go ahead with the change, and would consult on the detail.
3.5 The consultative document issued in November 1997 under the present Government carried forward the process started under the previous Government.
4. Responses to the 1997 Consultative Document
4.1 The Inland Revenue received 30 representations: 7 from companies, 8 from tax professionals and 15 from representative bodies. The Inland Revenue also gave presentations to, and held meetings with, a number of interested parties.
4.2 Almost all the representations specifically welcomed the Government's decision to consult on the detail of the proposals. The consultative document was generally felt to be clear and well written. And the document was widely welcomed for the positive and constructive way in which it sought to address concerns people had had with aspects of the 1995 consultative document.
4.3 The Government is grateful for the responses, and has found the comments extremely helpful. It is pleased that people found welcome the proposals addressed at points raised on the 1995 consultative document. And, having considered very carefully the various suggestions of ways in which the measures could be further improved, the Government intends making a number of additional refinements. These are set out in Chapters 6 and 7 below.
5. Compliance Costs
5.1 The various proposals to keep compliance costs to the minimum compatible with a fair and effective system were widely welcomed (para 3.13 of the consultative document). And many respondents noted that the Government had adopted the majority of their suggestions on how the 1995 proposals could be improved.
5.2 Some representations remained concerned about general compliance costs. But in the main these concerns focused on past changes in the CFC rules (particularly the FA1994 and FA1996 changes in the way profits must be calculated for the ADP exemption) rather than the self-assessment proposals themselves.
Commentary
5.3 The Government's objective in bringing the CFC rules into self-assessment is to improve the effectiveness, and so the fairness, of the existing rules. The object is not to tighten or weaken the actual underlying rules as a result of the proposed move to self-assessment.
5.4 It follows therefore that the Government does not intend adopting those suggestions for changing the underlying charge - for instance, the suggestion in some responses that the calculation of the ADP should be changed, or that the percentage of profits liable to CFC tax should be reduced. These suggestions are therefore not considered in this document.
5.5 The Government is, however, keen to improve the proposed administrative rules and procedures where that would reduce compliance costs without compromising effectiveness and fairness. It has therefore carefully considered the various representations in that light, and proposes making a number of refinements set out in Chapters 6 and 7 below to help further minimise compliance costs.
5.6 The Appendix to this document contains a Regulatory Appraisal of the overall proposals. The Appraisal concludes that for companies which at present in effect voluntarily comply with the CFC rules (generally speaking, by pursuing an ADP where CFC tax would otherwise potentially be due) the additional costs of bringing the rules within self-assessment will be negligible. Companies which do not voluntarily comply at present, and which instead wait to see if the Inland Revenue ask questions, may face additional costs. They may also face additional tax bills. But, to a large extent, any additional costs will simply be a reflection of moving from an erratic system (under which those who voluntarily comply tend to bear higher compliance costs than those who do not) to a fair and equitable system which requires all companies to comply. And the Government has sought hard to keep the costs for all concerned to the minimum necessary.
6. Technical Issues
Definitions
6.1 The proposed increase from 10% to 25% in the minimum interest required before a self assessment will be needed was welcomed. A few responses suggested raising it further to 50%+.
6.2 The proposal to remove loan creditors from the list of persons to whom CFC profits can be apportioned was felt to be helpful.
6.3 The proposed residence election at s749 was welcomed. There was a suggestion that the definition of residence in the ECL and s749 might be unified to allow a single test.
Exemptions
6.4 The proposed increase in the de minimis limit (40% in real terms) was welcomed. A few representations suggested it be increased further.
6.5 The decision to retain the ADP exemption was very widely welcomed, and the inclusion of an "intention to pay" provision at s754A was seen as helpful.
6.6 Two representations suggested an extension of the ADP period from 18 months to two years where a CFC's accounting period is the same as its UK parent. Two responses proposed that a single deadline of 18 months plus 30 days should exist under proposed s754A for all amendments to returns relating to the implementation or otherwise of an ADP.
6.7 It was suggested that a top up dividend should be allowable where a dividend is paid to the UK based on net chargeable profits and it turns out on enquiry that the test has been failed by a marginal amount.
6.8 Clarification of the treatment of funded accounting and the ADP was requested.
6.9 A few representations wanted an option to accept a current year charge of 80% (the proposed replacement for the ADP as set out in the 1995 consultative document) instead of paying an ADP. Some representations suggested a return to accounting profits as the basis for the ADP.
6.10There was a strong view that the practice outlined in the October 1995 Tax Bulletin should be included in statute.
Regulations
6.11 The proposed introduction of the ECL into regulations met with general approval.
6.12 There was a strong view that the regulations should be extended to cover ECL companies trading through branches in other ECL countries.
6.13 Some representations questioned the need for the provision at s748(1A)(b) allowing regulations to be made which reach back for up to one year.
6.14 A number of issues to do with definitions and clarification were also raised.
Other Technical Issues
6.15 One respondent suggested that the start date should be linked to CFC accounting periods ending on or after 1 July 1999, rather than to UK company accounting periods ending on or after that date. A few responses suggested delaying the start date further.
6.16 Specific guidance was requested on the interaction of transfer pricing with CFCs: in particular, when transfer pricing will apply in computing chargeable profits, and what mechanism will be used to avoid double charging.
6.17 Two representations suggested that overseas grouping (and group relief) arrangements should be taken into account in deciding whether a charge should arise in respect of a CFC.
Commentary
6.18 The minimum interest requirement will be increased from 10% to 25% as proposed and welcomed. This is in line with a number of suggestions made in response to the 1995 consultative document, and is a significant increase. Going beyond 25% would not be appropriate as it would seriously weaken the charge.
6.19 As proposed and welcomed, loan creditors will be removed from the list of people to whom CFC profits can be apportioned.
6.20 Also as proposed and welcomed, the Government intend introducing a residence election at s749. The Government intend keeping separate definitions of residence in the draft ECL regulations and s749. The definition of residence in the ECL is simpler than that in s749 because the ECL does not need to determine a single country of residence. Aligning the two definitions would mean complicating the ECL definition, which would seem to be unhelpful.
6.21 The de minimis limit will be increased to £50,000 a year as proposed and welcomed. This is a significant real terms increase, and will be the first time that the limit has been increased since the legislation was introduced in 1984. Raising the limit further would seriously weaken the charge.
6.22 The ADP exemption will be retained, as proposed and welcomed. And the standard period in which to pursue an ADP will continue to be 18 months from the end of the CFC's accounting period. In response to suggestions, the proposed "intention to pay" provision at draft s754A will be simplified so that amendments (up or down) have the same basic date by which they need to be made: 18 months plus 30 days after the end of the relevant accounting period.
6.23 The Inland Revenue will continue to consider an extension to the normal 18 month period (under the powers at Schedule 25 para 2(1)(b) ICTA) where a top-up dividend is needed to meet the 90% profit standard following an enquiry in cases not involving neglect or fraud. Further details of this will be provided in the proposed guidance notes.
6.24 Regulations dealing with funded accounting will be made under the powers at proposed s755C. These will be published in draft for comment.
6.25 In response to suggestions, the exempt activities test will be amended to allow more than one tier of non-local holding company. The extended exemption will be on the lines of the present practice set out in Tax Bulletin No 19. The proposal should provide greater certainty for companies and reduce the need (and therefore the cost) of making clearance applications under the motive test. (Companies will continue to be able to "claim" the benefit of the motive test under the practice in Tax Bulletin where the holding structure falls outside the new extended exempt activities test, or where companies prefer to "claim" the motive test rather than the exempt activities test.)
6.26 The ECL will be put into regulations as proposed and welcomed. A further draft will be published shortly. In response to a number of representations, the new draft will allow certain branch income to be treated as local source income, and will contain a number of other clarifications and changes in definitions.
6.27 Some responses questioned the need for the proposed provision at s748 (1A)(b). Para 111.11 in Appendix III of the consultative document explained that the provision was needed in order to allow the present practice to continue of consulting on changes to the list of excluded countries. The subsection will not be used to change countries for periods ending before any proposed country changes are announced by news release. The subsection will also ensure that the earliest CFC accounting periods affected by self-assessment will be able to benefit from the proposed regulations.
6.28 The new system of assessment and returns will apply to UK company accounting periods ending on or after 1 July 1999. Any later start date - whether linked to UK or CFC accounting periods - would mean retaining the present separate CFC assessment provisions for a time under self-assessment. This would add complexity and delay the benefits of greater effectiveness and fairness which the Government seeks to achieve from the proposals.
6.29 In response to suggestions, provisions will be introduced to prevent double charges arising on the interaction of the transfer pricing and CFC rules. And the proposed new guidance material on CFCs will cover how the transfer pricing rules will apply to CFCs.
6.30 The general technical details of the CFC provisions will remain essentially unchanged by the proposals in this document, in line with the Government's wish not to disturb the underlying charge by the move to self-assessment.
7. Procedural Issues
Board's Approval
7.1 All respondents who commented on the point were in favour of the proposed new Board's approval provision. One respondent thought a right of appeal would be useful.
Clearances
7.2 The proposal to introduce a comprehensive clearance procedure was welcomed. There was a request that the details of information required by the Inland Revenue from applicants should be published. And a few responses suggested that the new clearance system begin as soon as possible before the commencement of self assessment for companies. There was a clear view that it is important that the operation of the clearance procedure is fast and efficient. Those responses that suggested a specific turnaround target, suggested 30 days.
7.3 A minority of respondents suggested that the clearance procedure should be statutory. A few suggested there should be a right of appeal.
Self-Assessment Returns
7.4 A number of respondents commented that considerable improvements had been made in relation to the proposed return form. The increased flexibility proposed was particularly welcomed.
7.5 Two representations suggested that, in circumstances where CFCs are held at various tiers of a group structure, a single UK resident member of the group should be nominated as the representative member solely responsible for self assessing the CFC liabilities of the group.
7.6 Two representations were received in respect of investment vehicles which invest in offshore open-ended investment companies. They felt that there could be practical difficulties for them in knowing whether they needed to complete a return in respect of such investments.
Guidance Notes
7.7 The proposal to publish new, expanded, guidance notes was widely welcomed. A number of suggestions were made on areas that the guidance should cover. And a number of requests were made for the notes to be published in draft to allow consultation.
Appeals
7.8 Two responses suggested that a procedure should exist for the Inland Revenue to notify third parties about CFC appeal hearings.
Corporation Tax Instalments
7.9 Some respondents suggested that the proposed instalment regime for corporation tax should not apply to CFCs.
Commentary
7.10 The new approval procedure at s754B will be introduced as proposed and welcomed. So too will the proposed new comprehensive clearance procedure.
7.11 Details of the clearance procedure will be included in the proposed guidance notes, and (see para 7.16 below) published in draft for consultation. Clearances will normally apply indefinitely, provided the underlying facts and legislation remain unchanged. And the Inland Revenue will work to a 28 day turnaround target where all the necessary information is included in an application.
7.12 Some representations suggested modelling the CFC clearance procedure on the statutory clearances at s138 TCGA, s215 ICTA, s225 ICTA and s707 ICTA. These come from a different stable than the proposed CFC clearance procedure. They are concerned essentially with helping companies decide whether or not to go ahead with a particular transaction, whereas the Government sees the CFC clearance procedure as being a customer service measure to help companies complete their self- assessment returns with confidence.
7.13 The intention is that the clearance procedure build on the existing one for the exempt activities test and motive test. The Government believes that this administrative rather than statutory approach will best provide the flexibility in terms of documentation requirements and scope that companies want.
7.14 Providing all the relevant facts are accurately given, the Inland Revenue will be bound by clearances. If a company were to disagree with the Inland Revenue's view on a clearance, the company would be free to make its self-assessment on its own understanding of the law and appeal in the normal way against any amendment to the self-assessment which the Inland Revenue made.
7.15 In line with self-assessment generally, UK companies will have to self-assess their own liabilities rather than provide a group tax return. But the Inland Revenue will adopt the various simplified and flexible arrangements for the completion of tax returns proposed and welcomed in the consultative document (paras 3.15 to 3.18 of the document). And they will provide further details about the practical application of these - including in relation to investments in open-ended investment companies - in the proposed guidance notes. They will also make clear in the guidance notes that, if a CFC satisfies one of the exemptions, the UK company will not need to include details of the CFC's chargeable profits (as opposed to the name of the company and the exemption applying) on the proposed supplementary page to the tax return. Some representations mistakenly assumed that companies would need to include these details. (And as proposed and welcomed in the consultative document, no entry will be needed at all for a CFC covered by the ECL.)
7.16 The Inland Revenue will ensure that the guidance notes cover the range of issues which respondents said it would be helpful to cover - including, for instance, more guidance on the Inland Revenue's approach to the motive test, and the application of penalties in those exceptional cases where they may be relevant. The proposed guidance notes will be issued in draft for consultation as soon as possible after the Finance Bill receives Royal Assent. And they will be finalised well in advance of the first UK company having to make a self-assessment.
7.17 Proposed s754(3A) allows a person who may be affected by an appeal to have the same rights as the appellant to appear before the Commissioners. This measure was seen as helpful, and the Government proposes proceeding with it. A company wishing to ensure that it learns of an appeal in relation to a CFC in which it has an interest will need to set up suitable arrangements with fellow interest holders. This should generally be straightforward as most CFCs which are not 100% subsidiaries of a single UK company are wholly owned by a single UK group. The Inland Revenue will not be responsible for notifying potentially interested third parties of a prospective appeal hearing, since they will not necessarily know who the other parties are.
7.18 The Government feels it is right to include CFC tax within the instalment regime. To do otherwise would mean treating profits arising in tax havens more favourably than profits arising domestically. That would clearly be unfair.
7.19 However, the Government recognises that with some CFCs there could be difficulties obtaining the necessary information to estimate in-year what the final profits are likely to be. In practice, this is unlikely to matter in many cases, since UK companies generally arrange for CFCs to pursue ADPs (and thereby avoid the CFC rules coming into play) if there would otherwise be a tax charge. But, in response to representations, and other than in very exceptional circumstances (involving, for instance, flagrant abuse), a penalty will not be sought in respect of instalments that are not paid, or are paid in insufficient amounts, due to a company's failure to include CFC tax when working them out. And this matter will specifically be covered in the Statement of Practice which the Inland Revenue will be issuing about the charging of penalties under the instalment regime.
8. Conclusion
8.1 The Government believes that, with the additional refinements it proposes making, the measures to be included in the Finance Bill will significantly improve the effectiveness and fairness of the CFC rules, while keeping compliance costs to the essential minimum. The shape of the proposals strongly reflects the various detailed representations made during the consultation process; and the Government is grateful to all those who have made such a valuable input.
Appendix
REGULATORY APPRAISAL:
CONTROLLED FOREIGN
COMPANIES AND SELF ASSESSMENT
1. Outline of Purpose and Expected Benefit of the Measures
1.1 The controlled foreign companies (CFC) legislation was introduced in 1984. It seeks to prevent UK companies from avoiding UK tax by diverting income to subsidiaries in low tax countries. The current legislation, however, only applies to a UK company when the Board of Inland Revenue so directs, and there is no requirement for companies to include details of CFCs in their tax returns. As a result, it is not possible to ensure that tax is charged in all cases. In addition to the loss of tax, there is a lack of equity between companies. The absence of any requirement to include CFC details in tax returns means that some companies which in effect voluntarily comply with the legislation may nevertheless find themselves subject to expensive enquiries. While some companies which make little or no attempt to voluntarily comply may escape both enquiry costs and tax liability. (Voluntary compliance can take the form of ensuring that a group does not have CFCs; or ensuring that one of the exemptions is met - for example, by ensuring that CFCs pay adequate dividends back to the UK.)
1.2 The objective of the Budget proposals is to ensure that in future the legislation is more effective and that it applies fairly to all UK companies. The proposed measure will require companies to include in their tax returns details of their interests in certain CFCs and to self assess any tax chargeable under the CFC rules. At the same time the Government wants to ensure that any additional compliance costs are kept to the minimum necessary. The proposals include a number of measures to achieve this. The minimum stake needed by a UK company in a CFC before the legislation applies will be increased and some of the exemptions will be relaxed to ensure that the rules only apply in significant cases. The proposals also seek to keep the administrative burden as light as possible by minimising the return requirements (see 4.3 below) and by introducing a comprehensive clearance procedure to help companies complete their self assessment with confidence and certainty.
1.3 The proposals are the outcome of an extensive consultative process, which began under the last Government and which included the publication under this Government of a consultative document (Controlled Foreign Companies: Draft Legislation on Assessment and Returns) on 12 November 1997 . The 1997 consultative document included a number of proposals in response to comments on the earlier consultative document issued under the previous Government. The 1997 document was widely welcomed for the positive and constructive way in which it responded to comments. And in line with the Government's wish to keep the compliance costs to the minimum necessary, the Budget proposals include a number of further helpful refinements suggested by companies and their representatives.
Options and Benefits
2.1Preferred Option
The CFC legislation exists to prevent tax avoidance by multinationals who seek to reduce their UK tax bill by shifting profits into low tax countries. The problem with the current direction based system is that the legislation does not apply automatically and companies are not required to include details of CFCs in their tax returns. As a result the legislation is neither wholly effective nor fair in its operation. Some companies with no CFC liabilities may find themselves subject to expensive enquiries, while some companies which do have potential liabilities may escape entirely. The Government's preferred option requires all UK companies to return details of their interests in certain CFCs and, where CFC tax is due, self assess the tax. Those who ignore the current system would therefore no longer enjoy an unfair advantage. No other option would fully meet the Government's objectives of a fair and effective system at minimum necessary compliance cost.
2.2. Alternative Option 1 - No Change to CFC Legislation
The proposal for UK companies to return and self assess any CFC liability arises in the context of the introduction in 1999 of self assessment for corporation tax (CTSA). As CTSA will come into existence whether or not the CFC regime is brought within it, doing nothing to the current CFC system would
i) lead to companies having to bear the cost of operating two different regimes - one for mainstream corporation tax and one for CFC tax;
ii) deprive companies of the benefit of having the CTSA regime apply to CFC tax (for instance the benefit of the clear CTSA rules for time limits and the closure of enquiries); and
iii) may delay the final settlement of CTSA liabilities, as the CFC position (which could directly affect CTSA group relief claims) would be operating to different rules and a different timescale.
In addition, the problems of effectiveness and the fair operation of the system, which is the primary objective of the proposed changes (1.1 and 1.2 above) would remain unsolved.
2.3 Alternative Option 2 - Return Requirement without Self Assessment
A further option would be to require UK companies to include details of their CFCs in their tax returns but not self assess any CFC tax that was due. This option would mean an overall increase in compliance and administrative costs. Compared with the Government's preferred option, there would be a slight saving from not being required to establish the size of a CFC's profits in those relatively rare cases where these were not computed to establish the level of distribution required to fulfil the Acceptable Distribution Policy (ADP) exemption. But balanced against that small saving would be the cost of retaining the procedures and knowledge to operate a new parallel assessment and enquiry regime outside self assessment. And, the advantages of certainty and finality which self assessment would provide if it covered CFC tax would be lost.
3. Who Benefits?
3.1 Preferred Option: Taxpayers as a whole would benefit through the operation of a fairer system. No longer would voluntarily compliant companies be disadvantaged. And, the requirement to self assess CFC tax may encourage companies who have not sought to comply voluntarily and, who have not been subject to enquiries or a direction in the past, to pursue an ADP or pay CFC tax. This would raise an estimated additional £50M per annum.
3.2 Alternative Option 1: Doing nothing would benefit companies seeking to avoid a UK tax charge.
3.3 Alternative Option 2: There would be some increase in fairness from the requirement to include details of CFCs in tax returns, as this would provide a level playing field for Inland Revenue enquiries. But it would carry the costs and the disadvantages referred to at 2.3 above.
4. Compliance Costs for Business, Charities and Voluntary Organisations
4.1 Business Sectors Affected
These proposals only affect UK resident companies who hold an interest
of at least 25% (to be increased from 10% by the proposed legislation)
in a CFC (UK controlled company in a low tax country).
4.2 In practice, this amounts essentially to around 1500 UK multinational groups, within which a minority of large groups account for the bulk of CFCs.
4.3 Compliance Cost of Proposals
The majority of CFCs which are not otherwise exempt and which in effect currently comply voluntarily with the legislation do so by paying to the UK a dividend equal to 90% or more of the CFC's profit (a so called "Acceptable Distribution Policy" or "ADP"). This computation probably represents the major cost of the CFC legislation, and is unaffected (for companies that are currently voluntarily compliant) by the new proposals. The only additional cost would be the requirement: to note on the schedule to the tax return the fact that an ADP had either been paid or will be paid within the required 18 month period; or to check that another exemption applies (seeking clearance in some cases). Some increase in the current volume of voluntary clearances is expected. However, any additional initial compliance cost in obtaining a clearance, which would operate for the current and future accounting periods provided there was no change in the underlying facts, would be more than offset by the avoidance of costs arising from potential future enquiries.
4.4 Four major multinationals who currently comply voluntarily with the legislation were consulted and all believed that the additional costs to them of the new legislation would be negligible (see below).
4.5 Cost for Groups Consulted
4.6. Total Compliance Costs arising from Legislative Changes
Clearly the additional compliance costs arising from the new legislation would be very low even for relatively large groups. Taking into account a proportion of companies who do not at present voluntarily comply (which are likely to be found among groups containing fifty or fewer CFCs) and given some 1500 multinational groups in all which would be affected by the new legislation, the total additional compliance cost could be expected to be under £10 million in the first accounting period and considerably less thereafter.
5. Impact on Small Businesses
5.1 The 1997 Consultative Document indicated that very few small and medium sized companies were likely to have overseas subsidiaries which give rise to a charge under the CFC rules. To the extent that they have foreign subsidiaries they are likely to be straightforward trading companies carrying out their activities in territories with normal tax rates. In these circumstances it should be relatively easy for companies to identify that there is no CFC charge, often by quick reference to the Excluded Countries Regulations. It was also noted that if a company were in any doubt it could ask the Inland Revenue for a clearance covering current and future years (see 4.3 above). And the proposal to increase the de minimis limit to a profit of £50 000 per CFC per annum before CFC tax might be due was noted. The consultative document concluded therefore that the proposed legislation would not have a material impact on small or medium sized companies. (Controlled Foreign Companies: Draft Legislation on Assessment and Returns. Paragraphs 3.7 and 3.8).
5.2 Four organisations representing small businesses were approached in writing and asked to help in identifying any members who might be affected by and interested in contributing to the Regulatory Appraisal. No suggestions were received.
6. Other Costs
6.1 Some additional minor cost will be suffered in Inland Revenue Head Office as a result of the proposal to extend the existing clearance procedure to the CFC legislation as a whole. Clearance applications currently run at 70-80 per year and engage 10% - 20% of a unit (approximately £7.7K to £15.4K including overheads). Many of these applications cover several companies within a group.
6.2 It is likely that the number of clearance applications will increase following CTSA. Of the four groups consulted, two said they would probably not request clearance, one would seek clearances occasionally and one would seek clearances on potentially difficult CFCs. As clearances would apply for future years (providing the underlying facts remain the same) the number of applications is likely to tail off in the medium term. And balanced against the additional cost would be the administrative saving from the streamlining of the present direction based system.
6.3 Any additional cost in tax offices of checking the CFC information on tax returns would be balanced by the saving in not having to begin enquiries from scratch.
7.Results of Consultation
7.1 The proposals are the outcome of an extensive consultation process. 30 representations were received in response to the consultative document issued in November 1997. The document was widely welcomed for the way in which it responded to comments on proposals put forward by the Inland Revenue under the last Government. And, in line with the Government's wish to keep compliance costs to the minimum necessary, the measures announced in the Budget include a number of further helpful refinements suggested by companies and their representatives. A summary of the representations is available from the Inland Revenue (Chapters 1 to 8 of this document).
8. Summary
8.1 This measure is intended to ensure greater effectiveness of the CFC legislation and increase the fairness of its operation. The legislation is concerned with tax avoidance. And it is focused on large multinationals rather than small or medium sized companies. The additional compliance costs to companies which currently voluntarily comply are likely to be negligible. Companies which at present do not comply voluntarily are likely to be subject to additional costs roughly equivalent to those currently experienced by companies which do seek to comply voluntarily. This is the hallmark of a fair tax system, and the tax likely to be obtained as a result will considerably outweigh the relatively low compliance costs set out in 4.5 and 4.6 above. Additional Inland Revenue administrative costs will also be small.
9.Contact Point and Date
Richard Parry
International Division 4
Room 314
Melbourne House
Aldwych
London
WC2B 4LL
Telephone 020 7438 6823
Fax 020 7438 7511
March 1998
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