Taxation of foreign branches
The measure
HMRC have announced that they will engage in preliminary discussions concerning the possibility of a move to a UK tax exemption for foreign branch profits.
Currently the UK imposes corporation tax on all foreign branch profits, with credit for any foreign taxes paid, and so this would represent a major change in approach.
Who will be affected?
This measure is relevant to UK companies that operate in foreign countries through branches rather than through separate local subsidiary companies. This is particularly common in certain industry sectors (eg banking, insurance and oil & gas).
When?
This is very clearly stated to be a preliminary discussion only and as such no potential implementation date is specified.
We welcome the announcement that this issue is to be discussed. The treatment of branch profits was explicitly excluded from the reform of the taxation of foreign profits implemented in Finance Act 2009 and so it is appropriate that it is now revisited. Now that the UK has introduced an exemption for most foreign dividend income received by companies there is an apparent policy inconsistency.
The reaction from different industry sectors will be varied. Some groups use foreign branches in riskier ventures as a way of ensuring some relief for any start up losses and therefore there may be winners and losers if a branch exemption system were introduced. HMRC will need to manage these conflicting interests in the consultation process.
