Pressure mounts on government as Solvency II signals change of emphasis on overseas operations

The ABI has urged the government to complete its review of the taxation of foreign branches as soon as possible to assist companies with their post-2012 Solvency II planning.

Financial secretary to the Treasury Stephen Timms announced the review in a speech to the Institute of Chartered Accountants in England and Wales’ annual dinner last week.

He said that the review of how foreign branches are taxed would be conducted alongside the reform of the controlled foreign companies rules, which deal with the taxation of overseas subsidiaries.

However, he added that any legislative changes to the way in which foreign outfits are taxed would have to wait until after next year’s post-Budget finance bill.

No decisions have been taken on preferred reform options. A number of alternatives will be explored, including branch exemption.

There has been long-standing pressure from across the general insurance sector for a review of the tax arrangements governing foreign branches. Under the existing rules, companies have to pay to the UK Exchequer the difference in taxes on profits between the rates levied where the branches are located and those applying in the UK. However, the same requirement does not apply to subsidiaries, which has created an uneven playing field between the two types of structures.

The issue has been thrown sharply into focus by the EU’s upcoming Solvency II directive, which will make it more attractive to run foreign operations as branches rather than subsidiaries because of the less onerous capital requirements governing the former.

The ABI’s director-general, Kerrie Kelly, said: “With the Budget imminent, the announcement by Stephen Timms that the government will look at the taxation of foreign branches is welcome news.”

She said a modernised regime would encourage global businesses to remain headquartered in the UK, as well as attracting those domiciled abroad.

“2011 is the earliest date for legislation, so the government needs to make clear its plans as soon as possible to assist companies in their decision making, as other jurisdictions work hard to attract UK businesses,” she added.

An ABI spokesman said companies needed time to plan how they would structure themselves for the Solvency II regime.

Chaucer became the latest insurer to signal that it was abandoning the UK as its tax domicile when it announced in its results this week that it was weighing up whether or not to move abroad.