British finance minister Alistair Darling moved today to discourage companies from moving abroad by dropping plans to tax their foreign earnings.
Delivering his pre-budget report designed to inject some life into Britain's flagging economy, Mr Darling announced a tax exemption for the dividends foreign subsidiaries pay to their parent firms in the UK.
"I will introduce an exemption for foreign dividends in 2009 for large and medium businesses, and improve our rules for taxing Controlled Foreign Companies," Mr Darling said.
Richard Lambert, director general of the Confederation of British Industry, described the move as very welcome."It will help to stem the incentive to move tax domicile overseas," Mr Lambert said.
WPP, the world's second-biggest advertising and marketing group, drugmaker Shire and media group United Business Media have all announced plans this year to move their tax domicile to Ireland.
"This issue has been at the heart of the problems leading to some companies deciding to leave the UK this year," said Sue Bonney, head of tax at KPMG Europe. "They will have been looking out for some good news especially as they will be thinking ahead to future tax rises to pay for today's package."
Bill Dodwell, head of tax policy at Deloitte, said the new system, which he expects to take up to two years to come into effect, was a good result for the consultative process between the government and business.
"This will benefit not only the corporate sector, but also funds, especially those managed by life companies," Mr Dodwell said. "This will be financed by a new restriction on the amount of interest expense that may be deducted against UK profits."