A recent Treasury discussion paper had proposed that companies which specialise in intellectual property will have to pay higher taxes on some overseas earnings. This created quite a stir among the business circles.
The Confederation of the British Industries (CBI) president Martin Broughton said that such proposals would dull Britain’s attractiveness. “What business wants from the system of corporate taxation in Britain is clarity, certainty and competitiveness,” he said. “What we are getting is cost, complexity and capriciousness. “We now have a tax system which makes it harder for both British and foreign firms to justify investing in Britain.”
The Conservatives warned that the nation’s finances stand to lose £160 million in corporation tax if only six major companies abandon their UK headquarters.
Shadow chancellor George Osborne said a Conservative-commissioned study by PricewaterhouseCoopers had shown that exempting foreign profits from tax would increase competitiveness and could ultimately pay for itself - rather than needing to be funded by raising other taxes on companies.
The research showed that the revenue from taxation of foreign profits was “surely under £500 million and probably in the range £100-200 million”.
Mr Osborne said: “This research shows that Alistair Darling’s dithering is damaging our economy and undermining tax revenues. He should do yet another U-turn and climb down from his badly thought-through proposals on taxing foreign profits. Britain needs a government that is thinking about the country’s long-term future, instead of the current government’s short-term dithering and confusion.”
Responding to such vehement opposition to the proposed taxation the Chancellor took another of his by now well known U-turns when he promised midway through last week at a CBI dinner that he would not slap extra taxes on international businesses.
Mr Darling said: “A few years ago, one of our airlines used to say, ‘We never forget you have a choice’. Today, governments should remember that. Business does have a choice. Business is increasingly mobile.
”Tax rates have to be globally competitive. I am determined that British business will not be the fiscal fall guy. Business is the linchpin of the British economy. We need to ensure that the tax system is competitive and predictable, as well as ensuring that the business environment is attractive to increasingly mobile businesses.”
Mr Darling insisted that he intended the changes to foreign profits taxation to be revenue-neutral. He said that a new forum with businesses would “see how we can, in the longer term, deliver our aim of bringing the corporation tax rate down”. While looking around for additional revenues, the government has not closed the option of borrowing.
It has already forecast that it will borrow a record £43 billion next year.
It claims that borrowing will begin to fall after that as the economy recovers, but these plans are optimistic, according to the Institute of Financial Services (IFS).
The IFS believes the government will be under strong political pressure to extend its temporary concession (to the families which suffered due to an unnecessary twist given to taxation in the current budget) for another year, or face millions of angry voters ahead of an election that must be called by May 2010.
It says that “given the political pressures,” it expects the government to borrow more money to finance this change and make it permanent.
This, however, “would leave the taxpayers to pick up the bill in future years” and could mean the government breaches its own debt ceiling of 40per cent of gross domestic product (GDP).
The IFS concludes that the measures taken on May 13 were a £5.5 billion giveaway, and was the largest such package since the general election year budget of 2001/2. But a Treasury spokesperson disputed the IFS’s claims.
”The increase in the personal allowance will mean that 22 million people will gain an additional £120 this year, including those on middle incomes,” they said.
”And we are providing support at a time when families are facing additional costs.
”As the Chancellor said in his statement to the House of Commons, for future years our aim is to continue the same level of support for those on lower incomes.
”We will set out our plans for future years in the Pre-Budget Report along with our fiscal projections, consistent with the fiscal rules and in line with the requirements of the Code for Fiscal Stability.”
Meanwhile, according to Capital Economics, a London-based research organisation, “although the liabilities of Northern Rock have yet to be included in the public sector’s balance sheet, the ONS estimated that this would boost the ratio of public sector net debt to GDP from 37 to around 43 per cent, above the ceiling specified by the Sustainable Investment Rule. In short, the public finances are in a worryingly poor position to cope with the coming downturn in the economy.”