Corporation Tax Reform Alexander Klemm

Introduction Pressures on Corporation Tax Tax competition Developments at the ECJ Reform Proposals Conclusion

Developments in ECJ jurisdiction European Community Treaty (1958) fundamental freedoms non-discrimination provision Increased willingness of companies to challenge national tax legislation that appears in breach of treaty

UK: Examples of potential problems Leasing Transfer pricing legislation / thin capitalisation Controlled Foreign Companies regime Group relief Dividend taxation Exit charges, etc.

Transfer prices Transfer prices are prices used for transactions between related parties In international transactions there is scope for profit shifting International transfer prices are therefore bound by transfer price legislation Reform: apply transfer price legislation domestically  Higher compliance and administrative costs

Finance leases Capital assets entitle owner to capital allowances Tax-exhausted firms cannot benefit from them A finance lease helps: Lessee faces most risks and benefits of asset ownership Lessor remains legal owner Lessor can pass on benefits of allowances through lower leasing charges But: lessor only receives full allowances if lessee is UK based Reform: Move capital allowances from lessor to lessee in finance leases –Higher cost of capital for tax-exhausted firms

Old reform proposals Replace capital allowances by account depreciation Abolish (or limit scope of) schedular system some merits and risks but not dealing with pressures

Conclusion UK tax system is under pressure developments at the ECJ tax competition Current reform proposals in response to legal pressures remove benefits enjoyed by domestic firms rather than extending benefits EU-wide may not solve all potential challenges More reforms (at least consultations) likely to come!