Wolseley's Switzerland move leads to redomiciling debate

With the worst of the recession now over, companies are no longer focused on survival and finance directors are returning to the matter of managing their tax rate. The decision by Wolseley, the world’s largest plumbing and heating products supplier, to move its tax domicile to Switzerland has put the issue of moving to more favourable tax regimes firmly back on FDs agendas.

In the latter stages of the previous Labour government, corporate relocations became a serious headache, with rows over corporation tax and the treatment of taxation of earnings from foreign subsidiaries spilling into open warfare.

In September 2008, WPP, the world’s second-largest marketing services group, followed the lead of a host of other UK businesses and announced plans to move its tax domicile to Ireland. Earlier that year, drugmaker Shire and media group United Business Media decided to shift their tax domiciles from the UK to Ireland because of planned tax changes on foreign earnings.

Then the rot seemed to stop. Then-prime minister Gordon Brown offered concessions on the taxation of foreign profits, a major bugbear for many companies, while the near-term challenges of the financial crisis came to dominate FDs’ minds, pushing tax down the agenda.

However, despite a number of further concessions and promising noises coming from chancellor George Osborne, the spectre of an exodus of UK companies to more tax-friendly climes has risen once more. According to a report commissioned by HM Revenue & Customs, released in August, one in five businesses have considered relocating abroad for tax reasons.

Foreign riches
This has been backed up by action. In September, Wolseley revealed plans to create a new holding company in Jersey that will have a tax residence in Switzerland. The company, which trades in 25 countries and generates 81 percent of its revenue from outside of the UK, cited tax as the dominating factor behind the move.

Wolseley said it expects its tax rate to come down to 28 percent from 34 percent, as a result of the move, with its finance director John Martin adding that if the company had already been domiciled in Switzerland, it would have saved £23m in the year ending 31 July. The promise of such savings is likely to raise fears that others could follow suit.

The main criticism being voiced by Wolseley is of the UKs’ onerous tax treatment of profits generated by controlled foreign companies (CFCs) tax. Under the rules, UK-domiciled companies are subject to a charge on tax on the income of low-tax, foreign-controlled companies of which they are shareholders.

As an example from the Association of British Insurers, a UK company with an Irish branch will pay 12.5 percent Irish corporation tax on the profits made by the branch in Ireland and then 15.5 percent UK corporation tax on the same profits.
However, the move by Wolseley, which will cost the company £6m in implementation costs, brought a stinging rebuke from Richard Murphy of Taxation Research.