CFC Reform

1. CFC Reform Open Event 11 January 2012

2. Aims and objectives A CFC regime that reflects the way businesses operate in a more globalised economy moving towards a more territorial corporate tax system Strike the right balance between delivering a more competitive tax system and protecting the UK tax base Targeting artificially diverted UK profits - proportionate Keeping the compliance burden to a minimum Key features Targeted � �all out unless in� Reduced rate for overseas intra-group financing Flexibility to self assess using the entity level exemptions or the Gateway

3. Key developments since the summer Gateway The Gateway identifies circumstances where there has been artificial diversion of UK profits. An �all out except in� approach following representations. Groups can self assess through the Gateway or the mechanical exemptions. Finance income Government still considering the case for full exemption in limited circumstances. Finance company rules - non-financial companies of banking and insurance groups. Safe harbours Refinement of the mechanical exemptions to ensure they are coherent with the gateway and appropriately targeted. Other No separate local management condition.

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5. The Gateway Defines profits within the scope of the regime� �all out unless in�. Business profits will be in the scope of the regime only where profits derive from UK operations Financial investment profits generally dealt with separately from business profits � either as income incidental to an exempt trade or property business or, through the finance company rules. Some special rules for trade finance profits (banking and insurance)

6. Non-financial profits are brought into the CFC charge (subject to the exemptions) where: The CFC holds assets or risks, but does not carry out most of the key people functions relating to them; There are not substantial commercial benefits from the CFC holding the asset or risk; and The arrangement is not one that an independent company would enter into. These are cases where the CFC�s reliance on UK people functions allows it to hold assets or risks that it would not hold as an independent company.

7. UK perspective Are there people in the UK generating profits that are realised elsewhere? Is UK reward modest � typically cost +? But the group�s profit is much greater? Does this profit attach to assets or risks under UK management? Overall, is the UK�s reward commensurate with UK activity?

8. What are the SPFs? They are the functions that lead to: The assumption of risk The ownership of assets The ongoing management of risks and assets They are not: Advisory functions Supervisory functions � e.g. saying yes or no to a proposal Governance arrangements

9. When is intra-group service provision an SPF? Generally, it should not be an SPF. Transfer pricing will determine the correct price It may be an SPF if, for example: The CFC could not hold the assets and risks without the service; and The service could not be replaced at arm�s length; and The CFC is essentially a �puppet� for UK operations.

10. The trading income exclusion Replaced the proposed manufacturing and commercial activities TBE and the leasing exemption. An alternative to the consideration of SPFs, but is meant as a proxy and should exclude similar situations from the regime. Conditions Business premises <50% expenditure on management per arrangement is in the UK <20% UK income IP transfers <20% income is from goods exported from the UK The safe harbour includes a TAAR to prevent manipulation of commercial arrangements.

11. Permanent Establishment exemption PE exemption legislation will be updated so that the anti-diversion rule matches the CFC rules Exemptions apply as if the PE were a CFC Gateway becomes 2 step process: Any chargeable profits? Are they attributed to the PE? Non-trading finance income exempt if effectively connected to a trade or property investment business Draft legislation to be published this month

12. Treatment of finance profits � routes to exemption Non trading finance profits Chapter 9 � non trading finance profits KERTs in the UK Funds invested directly or indirectly from the UK Upstream loans with a UK or non-UK tax main purpose Chapter 13 - Incidental finance income Safe harbour Facts and circumstances Chapter 17 � finance company partial exemption Entity level exemptions provided finance safe harbours not exceeded Trading finance profits Chapters 10 to 12 � trading finance profits Entity level exemptions

13. The Gateway : non-trading finance profits Limited to chargeable profits that fall within one of 3 categories KERTs in the UK Funds invested directly or indirectly from the UK Upstream loans with a UK or non-UK tax main purpose KERT functions for a loan Active decision making Initial assumption of risk Ongoing management of risk Role of group treasury function vs role of UK board Funds invested directly or indirectly from UK Profits previously subject to CFC charge Profits subject to a transfer pricing charge

14. The Gateway : trading finance profits Finance profits of financial traders Investment of capital directly or indirectly from UK Capitalisation condition Safe harbours Captive insurance companies Premiums paid by non UK companies and PEs exempt EEA � significant non-tax reasons for UK insurance contracts Non-EEA � UK premiums chargeable in full Capitalisation condition

15. Finance company rules - overview Introduction of FCPE is a pragmatic and competitive approach to allow groups to manage overseas finance operations while protecting UK tax base Recognises that multinationals prefer to manage overseas financing centrally, but also removes ability to �swamp� finance income Deliver an effective UK tax rate on overseas intra-group finance profits of 5.75% in the majority of circumstances Applied to intra-group finance income with non-UK connected persons Does not apply to monies held on deposit with third parties, loans to insurance companies or banks, or to finance income on most upstream loans to the UK Full exemption

16. Finance company rules � mechanics of rules The basic rule � 3 conditions Claim Business premises Qualifying loan relationship profits If rule applies Recalculate CFC�s assumed total profits Limit to 25% of qualifying loan relationship profits Include attributable profits/losses from hedging relationships Subtract just and reasonable expenses Qualifying loan relationship Ultimate debtor - TAAR Debits brought into account for UK tax purposes Financial traders CFCs within Chapters 3 and Chapters 8 to 12

17. Entity level exemptions Low profits exemption Simple exemption for companies making a small profit or a loss. <�500k trading income, <�50k investment income. Low profit margin exemption <10% profit above operating expenditure. Accounts based exemption Measure of expenditure excludes related party expenditure but include cost of goods for resale delivered into territory of residence. The tax exemption Replaces the lower level of tax test. Now an exemption . 17

18. Excluded territories exemption CFCs are exempt if they are resident in a territory with a headline tax rate of >75% of the UK main rate of Corporation Tax and satisfy a number of conditions. Threshold amount not to be exceeded TAAR Feedback re complexity 18

19. Other issues Control TAARs Property business profits � outside the scope of the regime Offshore funds Commencement

20. Next steps Businesses and advisors can and should continue to play a key role in developing the CFC reform proposals. The Government encourages all interested parties to engage to ensure a full range of views are heard. Deadline for representations is 10 February 2012 Informal or staged responses welcome at earlier date Working groups to continue Further legislation, late January 2012. Final legislation, Finance Bill 2012 CFC team contacts carol.johnson@hmtreasury.gsi.gov.uk 020 7270 6032 andrew.page@hmrc.gsi.gov.uk 020 7147 2673 alison.hughes@hmrc.gsi.gov.uk 020 3300 9170 andy.mill@hmrc.gsi.gov.uk 020 7147 2668