Proposals for controlled foreign companies reform: a tale of two principles

Research Highlight 2010

Taxing controlled foreign corporations

The UK government has struggled to create a new and stable regime for taxing controlled foreign companies. After its 2007 proposals were withdrawn, it proposed instead a less radical reform. The later proposals were intended to be based more clearly on the “territorial” principle, under which the intention is to tax income arising from activity in the UK, rather than the “worldwide” principle, in which income ultimately owned in the UK is taxed. This research project considers the principles involved, and how they should be translated into policy. We suggest that the new proposals do not sufficiently follow the territorial principle. Indeed, the proposals rely at times on the territorial principle and at times on the worldwide principle. For example, a territorial approach would not seek to tax monetary income arising abroad, although it should restrict relief for costs borne in the UK in respect of activity and 
income arising outside the UK.

Michael Devereux