UK tax regime still most attractive for businesses, but "tone of debate" closing gap says KPMG

Luxembourg, Ireland and Switzerland are being mentioned more often as tax competitive investment destinations by senior tax decision-makers, according to this year's KPMG Annual Tax Competitiveness Survey (15-page / 507KB PDF). Two thirds of those surveyed who were with FTSE 350 companies said that media and political pressure over tax avoidance was likely to deter investment into the UK, although the country continued to be mentioned the most often as having an attractive tax regime by respondents.

"There is a clear tension between the Government's stated wish to have a competitive tax regime and the way that large companies' tax affairs are routinely portrayed by the Public Accounts Committee and in the media," said tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com.

"The Government wants companies to invest in the UK for the economic benefits that brings. If the policy intent is contradicted by continual criticism of those who merely claim allowances or pay interest, then companies will be more wary of choosing the UK for their business activities," she said.

According to KPMG's report, 80% of the foreign-owned subsidiaries it surveyed said that the current tone of the debate was having no effect on their investment intentions. Only 10% of those surveyed said that they were considering reducing their UK investment, while the same figure said that they were more likely to increase their investment.

Looking at UK-based companies, only 5% of those surveyed told KPMG that they were "actively considering" moving their tax residence away from the UK – the lowest percentage doing so since 2007. Although a further 15% of companies had studied the implications of moving, they had decided against doing so following policy changes such as those to the branch exemption rules and the controlled foreign companies (CFC) regime.

All of the companies surveyed by KPMG had an annual turnover of at least £100 million, while 56% of them had a turnover of more than £1 billion. Just under a third of respondents were listed on the FTSE index of leading companies by share value, half were FTSE 350 companies and one fifth were foreign-owned subsidiaries.

"Our research shows that the efforts that the current and previous government have made to address anomalies and improve the attractiveness of the UK to business from a tax perspective are bearing fruit," said Jane McCormick, KPMG's UK head of tax. "Policymakers recognise that business is a powerful growth engine, creating jobs, wealth and generating economic activity."

"The dial seems to have moved on the UK's tax regime from it being an actual deterrent to business and economic activity just five short years ago when some PLCs were emigrating, to it now being positively attractive, especially when viewed in the context of the UK generally being seen to be a very desirable place to live, work and do business. Even better, the results suggest there is no need for a 'race to the bottom' on rates with few respondents calling for further rate cuts," she said.

Respondents to the KPMG survey generally recognised the need to become more transparent about their tax affairs, with more than half of them saying that either they had already become, or that they would become, more transparent in their reporting. Amongst the FTSE 100, this figure increased to 60%. Companies were also broadly supportive of the new general anti-abuse rule (GAAR), with 84% of those questioned stating their belief that it would be effective. However, 56% of them believed the measure would catch genuine commercial transactions and 71% that it would catch legitimate tax mitigation.

Three quarters of those surveyed supported the "general aims" of the Organisation for Economic Co-operation and Development's Action Plan on base erosion and profit-shifting (BEPs). Support was even stronger among those working within the FTSE 100, according to KPMG. However, the response indicated that tax receipts in the UK could fall as a result of the changes, particularly if there was a shift towards focusing tax payments on where customers were based.