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Taxation of foreign profits to come under review

Osborne seeks to recoup tax without risking capital flight

In a bid to restore Britain's tax competitiveness, George Osborne, Chancellor of the Exchequer, will launch a consultation on rules that govern the taxation of foreign profits after the exodus of several high-profile multinationals in recent years.

The Treasury aims to make the UK the "most competitive corporate tax system in the G20" and is expected to propose a more "territorial" approach to the controlled foreign companies (CFC) rules.

The move would restrict the right to impose tax on profits earned in low-tax jurisdictions and would effectively stop companies moving their tax base out of Britain to countries with no CFC rules, such as Ireland.

However, the Treasury, which is under pressure to deliver on its business-friendly message, has a difficult task on its hands as it must reform the rules without foregoing significant revenues.

In case the Treasury chooses to get rid of CFC rules in their current form altogether and instead limit deduction of interest costs in respect of foreign profits, it would protect the tax base from erosion but would risk alienating inward investors.

Meanwhile, some firms expressed concern that they might get higher tax bills as a result of the reforms.