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There is still a strong case for dividend exemption, Financial Secretary Jane Kennedy has stated, but the Treasury has yet 'to reach agreement on proposals that would minimise the fiscal risk it could imply'.
In a letter to the CBI, Ms Kennedy referred to the Government discussion document issued in June 2007, which set out thoughts on reforms to the rules for the taxation of foreign profits.
Since then there has been 'extensive and constructive engagement with business on the detail of these proposals', but the Treasury is not yet ready to introduce relevant legislation.
The CBI suggested, according to Ms Kennedy, that 'it would be possible to proceed with a dividend exemption, perhaps accompanied by a form of debt cap, with minimal fiscal risk, but that other anti-avoidance measures could follow at a later stage if necessary'.
The Financial Secretary commented that such an exemption could 'impose significant costs on the Exchequer' and the 'fiscal risks are too great to enable us to introduce a dividend exemption in next year's Finance Bill'.
Referring to the controlled foreign companies rules also set out in the discussion document, Ms Kennedy accepted that they 'could cause problems for business, specifically the proposals relating to the CFC rules that would have affected the tax treatment of intellectual property'.
Therefore, the Government will not continue to discuss reforms on this basis. A technical note has been published, which she hopes will form the basis of further discussions.
Responding to Ms Kennedy's letter, CBI director-general Richard Lambert said: 'The Treasury's willingness to rethink this issue is welcome and the CBI looks forward to further consultation on taxation of foreign profits. This is a particularly important issue for internationally mobile businesses, many of which have increasing flexibility on where to locate'.
Mr Lambert said he hopes that the proposals can be included in the 2009 Finance Bill.
The dividend exemption is what business needs, said PricewaterhouseCoopers' Peter Maybrey, but the Treasury has said it may not happen until after next year's Finance Bill.
It therefore runs the risk of not being in place before the end of the life of the current Parliament, as a general election must take place by May 2010.
Such 'a prolonged period of uncertainty is likely to affect competitiveness and could be damaging to business,' added Mr Maybrey.
He questioned the size of the fiscal risk cited by the Treasury as being a potential problem, saying that an empirical study by PwC suggests the exemption could even be revenue positive to the Government.
However, Peter welcomed the Treasury's decision to refocus its direction on the CFC regime. Overall, he felt that the Treasury's response is a good sign as it shows it has listened to business's and the tax profession's concerns and not pressed ahead regardless.
