England Contemplating Territorial Tax Regime

The core principles of good tax policy are low tax rates, taxing income only one time (no more double-taxation of saving and investment), no special loopholes (which also means simplicity), and territoriality (only tax income inside national borders). The Anglo-Saxon world is often guilty of violating the last principle, generally imposing worldwide taxation. Fortunately, tax competition is eroding the ability of nations to impose bad tax policy. The United States, for instance, approved the Homeland Investment Act a couple of years ago, which temporarily allowed companies to repatriate foreign-source income at a much lower rate of tax. The United Kingdom is now considering a a much better solution – a permanent change that would move much closer to a territorial tax regime. As is so often the case, tax competition is the impetus for the reform. British policy makers are afraid that companies are moving abroad to escape the anti-competitive burden of having foreign-source income subject to tax by both the nation where it was earned (which is appropriate) and the British Exchequer. Tax-news.com reports on this potentially important development:

The United Kingdom government is reportedly working on proposals that would allow British-based multinationals to repatriate billions of pounds in profits earned overseas free of tax. According to a report by the Financial Times, the Treasury is preparing to launch a consultation document this Spring which will discuss a number of options, including an European-style “participation exemption” for foreign dividends, as well as a different approach to the anti-avoidance rules that impose tax on profits generated in low-tax jurisdictions. The move by the British government is being viewed as part of its effort to improve the corporate tax regime, after several warnings from business groups that recent additions to UK tax legislation are making the country increasingly uncompetitive compared with its economic rivals. Seemingly heeding these calls, Chancellor of the Exchequer Gordon Brown announced in his budget statement last month a 2% cut in corporate tax to 28%, bringing the UK below the OECD corporate tax average. …it is anticipated that the change would be welcomed by companies, as they would no longer have to apply complex tax strategies to minimise taxes on repatriated profits.