Food Merger Highlights UK, Irish Corporate Tax Regimes

The decision by U.K.-based Northern Foods PLC (NFDS.LN) and Ireland's Greencore Group PLC (GCG.DB) Wednesday to base their merged company in Ireland highlights the continuing discrepancy between U.K. and Irish tax regimes and underscores the Irish government's determination to preserve current corporate tax levels and the need of the U.K. government to push through reforms.

In particular, the U.K. government needs to push through plans to ease rules on the taxation of some foreign subsidiaries of U.K.-based companies, an issue that dogged the previous Labour government and caused several companies to move to Ireland from the U.K.

Announcing a merger Wednesday, Northern Foods and Greencore said tax had been a major consideration when they decided to base their merged company in Ireland rather than the U.K. Essenta Foods, as the new company will be known, will however be listed in London.

Greencore Chief Executive Patrick Coveney, who will be chief executive of the merged entity, said the company would benefit from being based in Ireland, which currently has a corporation tax rate of 12.5%, one of the lowest rates in Europe and less than half the 28% rate in the U.K. The merged company probably won't pay any tax for about three years due to the merger, said Simon Herrick, Chief Financial Officer of Northern Foods and CFO-elect of the merged company.

The Irish government, under pressure to "normalize" its tax regime as the European Union prepares to bail out its struggling banks, has said it won't change its corporate taxes. Ireland's deputy prime minister Mary Coughlan Thursday told parliament "it's non-negotiable." Her comments came after French Finance Minister Christine Lagarde said there is no reason not to look at changing the Irish tax regime as a condition for aid and Europe should work towards convergence of regimes to avoid dumping. She noted that Ireland's business tax regime is very light and helped the Irish economy take off before the financial crisis hit.

The low tax rate has been a key plank of a successful policy to attract foreign businesses to Ireland, but just as important in terms of U.K. companies migrating to the country was a move by the previous U.K. government to tighten rules on the taxation of foreign subsidiaries of U.K. companies.

Theat prompted advertising giant WPP PLC (WPP.LN) to move its base to Ireland and it was joined by pharmaceuticals company Shire PLC (SHP.LN), United Business Media PLC (UBM.LN) and fund manager Henderson Group PLC (HGI.LN). Elsewhere, industrial giant Ingersoll Rand Co. Ltd. (IR) moved headquarters to Ireland from Bermuda after the U.S. planned changes to the Bermudan tax regime.

The new U.K. coalition government, elected in May, has moved quickly to try to improve the U.K.'s corporate tax regime, announcing that corporation tax will be reduced to 24% from 28%, reducing it by 1% a year starting in April 2011, a move it calculates will save businesses about $2 billion a year. It has also announced a review and consultation on the rules that affect the taxation of foreign subsidiaries of U.K.-based companies with a view to easing them. However, the full reform of Controlled Foreign Corporation tax rules isn't due to come into effect until spring, 2012.

According to WPP, the CFC tax change proposals by the previous government was the main reason it moved to Ireland from the U.K.

"The reason we moved our domicile to Ireland was because of the concern about the taxation of overseas profits. That would be totally unaffected by what the rate of Irish tax is," WPP Chief Executive Sir Martin Sorrell reiterated to Dow Jones Newsires at a conference in Washington Tuesday.

Sorrell said the new U.K. coalition government had made "very positive noises" about the U.K. being open for business, but he would like some certainty.

In September, BTG Tax, the tax specialist arm of Begbies Traynor Group PLC (BEG.LN), said a further five U.K. companies could move abroad before spring 2012 to cut their tax bills. It reckoned that up to a fifth of the FTSE-350 companies could be reviewing their positions.

The BTG report came as construction materials supplier Wolseley PLC (WOS.LN) said it would move its headquarters to Switzerland because it was concerned about the government's intentions on corporation tax.

Under the current system, profits are taxed by the authorities where a subsidiary is located, but if the rate is less than 28%, then the firm has to pay a top-up to the U.K. government. There are some clauses that allow companies to escape the top-up, chiefly if they can prove that the subsidiary has a commercial rationale for being in the jurisdiction.

BTG tax partner Larence Bard told Dow Jones Newswires Thursday that the latest proposals on reforming the CFC rules focus on easing the restrictions around the commercial rationale of a foreign subsidiary, but don't seem to be much of an advance on the current system.

-By Steve McGrath, Dow Jones Newswires; 44-20-7842-9284; steve.mcgrath@dowjones.com

(Jon Kamp, William Horobin and Laurence Norman contributed to this article.)

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