Speech to the International Fiscal Association
By the Paymaster General, UK
(Continued from Unit 4)
One approach is for countries to introduce anti-avoidance legislation to counter the use by their residents of overseas discriminatory regimes. For example, the UK, like some others, has Controlled Foreign Company legislation. Greater transparency and exchange of information will assist countries in developing appropriate anti-avoidance measures. But this kind of approach does not offer a complete solution.
The Government therefore supports steps by the international community to promote the rollback of anti-competitive discriminatory practices and attaches great importance to the work of the OECD and the EU in this area.
We fully support the OECD's work in the Forum on Harmful Tax Competition which has identified 47 measures in member countries as potentially harmful. In addition we continue to actively support the work on the EU Code of Conduct6 on business taxation as part of the tax package. In November 1999, the Code of Conduct Group, which I chair, reported to ECOFIN on its assessment of 271 measures, 66 of which it had found to be harmful.
The Government firmly believes that the rollback of such discriminatory practices, coupled with greater transparency and exchange of information, are the necessary preconditions for strong and fair competition which in turn will release the dynamic forces in the economy.
But simply acting to curb anti-competitive practices will not be enough. In a world of open markets and massive coital flows, no country or group of countries can afford to operate as if insulated from what the rest of the world does and ignore fair lax competition and the need to remain competitive.
The UK is committed to ensuring that fair tax competition is allowed to flourish. And by competing fairly we intend to ensure that the UK has a highly competitive and efficient tax system that will support our long-term aim of achieving high and stable levels of growth and employment.
The UK has long been a hub for global business. There are many factors that make the UK particularly attractive and the natural location for business, including our sophisticated financial markets, our strong trading links with all parts of the world and the status of English as the global language of business.
The tax system must complement these attractions. It must not stifle business but should empower it to compete in a global marketplace. The system we inherited in 1997 needed urgent reform to meet our objectives. We have therefore embarked on a series of reforms to enhance both competitiveness and fairness, to build a system that will better respond to the changing needs of business and that will provide a stable framework into the medium term.
We have cut the main rate of corporation tax from 33% to 30%, the lowest ever rate. Outdated elements of the tax system have been swept away. We abolished Advance Corporation Tax (ACT) which affected the structure and investment decisions of many multinationals. And we also abolished payable tax credits on dividends, removing a distortion that encouraged companies to pay out dividends rather than to retain them for investment.
We have tackled the issue of withholding taxes. These can impose a high burden on business, often resulting in one company withholding and another reclaiming tax. Where we have been able to conclude that these rules are unnecessary, such as for intra-UK corporate interest payments, Eurobonds and gilts, we have abolished them.
Other elements of the system have been updated to tueet the challenges of a modem business environment. With business increasingly organized on an international scale, the rules for allowing losses to be used within multinational groups needed to be modernized. So these rules have been liberalized to give groups the flexibility to structure themselves in the way that best meets their needs.
Intangible assets are of growing importance in the emerging knowledge-based economy. The available reliefs for business expenses did not recognize this. So new reliefs have been introduced, such as for the cost of purchasing third generation mobile phone licenses and the Government has proposed a comprehensive regime that will provide a lasting solution for all intangible assets.
Looking at the UK today, it now offers a highly attractive tax regime for multinational business. Reforms undertaken by this Government have modernized the tax system, eliminating outdated structures and removing tax constraints on businesses ability to adapt to emerging commercial opportunities.
But there are more steps to be taken. Encouraging research and development is a vita] component of the Government's strategy for improving the UK's productivity performance and competitiveness. Comparisons with other countries show that in nearly every sector the UK trails behind other major industrialized countries in business R&D, although our science base is strong.
This has translated into lower overall levels of innovation, in the last Parliament the Government introduced an R&D tax credit for SMEs in order to address the particular difficulties such firms face in accessing capital to invest in innovation and R&D.
To complement this in Budget 2001 the Government published a document “Increasing Innovation” which set out the case for a proposed new tax incentive to encourage R&D and innovation among larger firms, and invited views on the design issues for the measure.
To address concerns about the quality and supply of skilled researchers, the Government has also announced an independent study into the provision of skilled scientists and engineers to British industry. The Government is considering the representations it has received with a view to introducing the new R&D tax credit for large firms in Budget 2002.
I have already referred to the reform of the taxation of intangibles, and we hope to have the changes in place no later than Finance Act 2002, You will also be aware that we will shortly be publishing a further paper, taking forward the current proposals for a relief on gains arising on the disposal of substantial shareholdings.
Considerable progress has already been made on developing this relief which takes further the principle that groups should be able to structure and restructure their operations to meet global opportunities without undue impediments. The paper will contain details of how the proposed exemption could operate, so that respondents can make a realistic comparison between this and a possible deferral regime. This will also provide the opportunity to consult business on associated issues aimed at producing a flexible and competitive tax system for parent companies based in the UK.
The UK is engaged in a process of modernization of its corporate tax system. We wish to create a system that allows business to flourish, and meet the challenges of a global economy. The UK's work with the OECD is an essential part of this agenda—ensuring that companies can compete on a level global playing field. But we should always keep the ultimate goal in sight—enhancing opportunity and prosperity for all through sustained economic growth.