According to some tax experts, the UK government’s proposal to require sovereign wealth funds to pay corporation tax on real estate and business ventures may discourage foreign investment in the country.
This week, the Treasury opened a consultation on ideas to harmonize SWFs’ tax treatment with that of other foreign institutional owners of UK real estate, which includes some of the largest global investors.
The proposals may limit rather than increase foreign investment, according to Grant Wardell-Johnson, global tax policy leader at accounting firm KPMG. “There will be some businesses that will be adversely affected and will need to consider restructuring for the future,” he said.
According to the consultation, the government wants to entice investment by formalizing the rules governing sovereign tax immunity “to provide greater clarity and certainty for foreign investors.” In contrast, under the current system, HMRC evaluates eligibility on a case-by-case basis.
According to Chris Sanger, tax policy leader at auditor EY, the government appears to be hoping that, in large part due to the strength of the economy, “the tightening of the fiscal regime to remove some of the benefits to sovereign wealth funds of investing directly will not significantly dampen the UK’s attractiveness.”
The rules will be released by the Treasury in April 2024. The proposals would keep SWFs’ passive portfolio investment income, such as that from stocks and bonds, exempt from paying direct taxes.
According to HMRC, indirect equity ownership accounted for the majority of UK sovereign wealth investments.
The plans would eliminate what some view as an unfair advantage over other institutional investors and more closely align the UK’s taxation of foreign sovereign investors with how they are treated in nations like the US, Australia, and Canada.
The problem has gained importance in recent years as sovereign funds have increased their attention to business ventures and real estate ownership.
According to Lucy Frazer, financial secretary to the Treasury, “The proposal is more restrictive than current practice, but the government sees it as a fair and proportionate restriction that will bring the UK more in line with the exemptions that other equivalent counties provide.” “The government does not anticipate that the consultation’s proposals will have a detrimental effect on overall investment.”
The proposals were welcomed by Dan Neidle, the founder of the think tank Tax Policy Associates. “It’s never been clear why a sovereign wealth fund should be treated any differently,” he said, “especially when the majority of foreign investors are taxed on their UK trading and rental income.” It is anti-competitive and probably results in significant tax revenue losses.
The consultation follows a number of significant SWF investments in the UK, which are still open until September 12. The Qatar Investment Authority promised in May to invest $10 billion in the UK over the following five years, including in the fields of clean energy, infrastructure, healthcare, and technology.
British Land announced in April that it had paid Singapore’s GIC £694 million for a 75% stake in its Paddington Central estate.
The government values the inward investment provided by foreign sovereign investors, according to HMRC, and is dedicated to making sure the UK remains a desirable location for such investors and maintaining the advantages this offers for both the UK and those who invest here.