If you are a director of a British company, your duties may now include flying to Dublin to attend board meetings. Fed up with Britain’s tax system, a small but growing band of firms have moved their headquarters—most recently WPP, a big advertising company. It took an oft-travelled route, remaining listed on the London Stock Exchange but creating a new parent company that is incorporated in Jersey, in the Channel Islands, and is resident for tax purposes in Ireland.
Inertia no longer guarantees that big British firms will stay put—a majority of boards are thought at least to have explored the idea of changing their residence. So the government finally acted, in its pre-budget report in November. The dividends companies receive from foreign operations will become tax-exempt, replacing a cumbersome system under which Britain taxes foreign profits but gives firms credit for payments they make to fiscal authorities overseas. When America granted a similar, albeit temporary, tax holiday in 2004, several hundred billion dollars were shipped home; the inflow may even have bolstered the dollar exchange rate.
In Britain the change will mainly help British multinational firms that have sold foreign divisions in countries with low or no taxes on such disposals. Unable to repatriate the profits without incurring a hefty tax bill, they have resorted to lending the trapped proceeds to their British parent companies instead. Now, as these fiddly financing arrangements are unwound, some predict that as much as £50 billion-worth of dividends will be repatriated. Sadly for the flagging pound, the net impact is likely to be far smaller, with the dividend inflow offset by repayment of previous inter-company loans.
More important than this technical change, however, may be the broader improvement in what one expert calls the “mood music”. Many of Britain’s corporate tax exiles, including WPP, were scared off by the Treasury’s growing interest in taxing internationally mobile profits—the fruits of intellectual property, for example, or interest income—if it deems a firm is dodging British tax by shifting them around its group. The pre-budget change signals a clear shift to a “territorial” approach, in which the British taxman will limit his enthusiasm to domestic profits and leave genuine overseas earnings alone. “It’s a big step forward,” says Chris Sanger, head of tax policy at Ernst & Young, an accounting firm, and a former government adviser.
There are still grumbles: some worry about the cap the pre-budget report sets on the interest costs firms can deduct from profits. But the change in approach should help to halt the exodus. Whether it will persuade exiles to return is less clear. After years of confrontation with the Treasury, many bosses will reserve judgment until the details are set in stone. WPP says it has an “interest in developments”, but that so far it will not consider returning. The London-to-Dublin shuttle has not yet been grounded.