Instead of trying to grab revenue from a firm’s global profits, the new code aims to take a slice only of money generated at home. The goal was to entice back international firms which had fled the country to nations with friendlier tax systems.
The final stage of this momentous transition will be completed in July, with changes to the controlled foreign companies regime. This system was originally set up in the 1980s to stop companies from avoiding British tax by siphoning profits to lower tax nations.
Most experts agree that this system had become too complicated and onerous - adding to the incentive to flee British shores. Yet many, like Michael Devereux, director of the Oxford University Centre for Business Taxation, fear the new rules will make it too easy for companies to avoid tax at home.
The complexity of these organisations makes it easier for them to shift profits around the worldProfessor Devereux
Until 2009, Britain taxed all corporate income globally. Firms were given credit for tax paid to foreign governments. But if this was lower than the UK tax rate, they would have to hand over the difference when the profits were brought home.
"This gave firms an incentive to hoard profits in low tax countries overseas" says Helen Miller, a senior research economist at the Institute for Fiscal Studies in London. The original point of the controlled foreign company rules was to prevent companies from sheltering too much capital in such havens.
Any foreign subsidiaries in countries with far lower tax rates than the UK could be hit by the controlled foreign company rules - in which case the business would have to pay full UK tax even if it kept the funds overseas.
The new system is very different. Since 2009 British companies no longer have to pay tax on dividends brought home from foreign subsidiaries. So the problem instead is that companies have an incentive to earn more profits in lower tax countries like Switzerland with its 8% corporate tax rate, rather than in Britain with its 26% rate.
This could be done in one of many ways. For example, rather than holding a patent in the United Kingdom, a company could decide to transfer it to Ireland, which has a 12.5% tax rate.
Then when the foreign profits are remitted back to head office, there will be no extra tax to pay.
The updated controlled foreign company rules are designed to prevent such artificial transfer of profits overseas for the purpose of skirting tax. Ian Young, manager of international tax at ICAEW, believes the new rules to determine such abuses are "more like a rapier than a blunderbuss".
"Previously more firms were caught by the controlled foreign company rules in ways that sometimes seemed unreasonable," he says. "The goal of the new system is to ensure that only the bits of business that are really conducted in the United Kingdom are taxed."
To ensure that such foreign profits are held out of reach of the UK tax collector, firms need only to demonstrate foreign subsidiaries hold no assets in Britain and no significant risks are managed out of the home office. Or they can show that they are not employing certain tax avoidance schemes.
For the first time, according to Bill Dodwell of Deloitte, companies can assume they will not be caught by the controlled foreign company rules. Previously they would have assumed that offshore operations would be impacted, unless they could find ways to exempt them.
The bright side of the reform is that British multinational firms love it. In recent years Britain had experienced some embarrassing corporate defections. Among the home grown multinationals that decided to move abroad were advertising firm WPP, which left for Ireland, and Regus, the office space firm, which moved its HQ to Luxembourg. Since the reforms have been announced several, including WPP, have said they are coming back.
The reforms even appear to be contributing to winning over foreign firms. In January Aon became the first S&P500 firm to shift headquarters from America to London. This was certainly a coup for London, though it's not yet clear whether it will create many jobs or generate much tax revenue.
Still, some believe the system is too lenient. Of particular concern is the extremely low tax on the profits of offshore financial subsidiaries included in the reform package. Professor Devereux explains how this could be used to dramatically reduce the tax bill of some British multinationals.
"Imagine for example that a UK multinational puts equity into a subsidiary in an ultra low tax country," he says.
"This subsidiary could then lend money to other subsidiaries for operations and investment, with interest on this money flooding back to the tax haven in high profits." These profits will then be taxed at around 5.5% - about a quarter the rate charged on normal corporate income tax rate.
Such a generous rate is close to being government sanctioned tax avoidance, according to some critics.
The Treasury believes that the reform will cut government revenues by about £840m a year or $1.35bn. But the complexity of the system makes precise estimates tricky, says Helen Miller of the IFS. The true fiscal sacrifice could be greater.
Professor Devereux believes that there are better ways for governments to divvy up the right to tax profits.
"It is undeniably getting harder to tax international companies because they are so mobile and also governments are willing to fight to attract them," he says.
"Also the complexity of these organisations makes it easier for them to shift profits around the world." Devereux recommends a system based on where final sales occur.
"It is far harder to move final customers in the same way you can transfer profits," he says.
Such radical schemes, however, are not favored by business. The latest set of anti-avoidance rules were drawn up in consultation with the likes of Barclays, Vodafone, Shell, Diageo and GlaxoSmithKline.
Former British tax collector and Private Eye journalist Richard Brooks has argued that the influence of such firms has been too great. When the reforms are brought into full effect Britain will have one of the lightest corporate tax regimes among major Western European economies. Supporters of the new system think this will make the nation more competitive.
Detractors, meanwhile, worry that Britain has simply given in to the demands of rich and powerful companies.