2nd UPDATE: UK To Deepen And Speed Cuts In Corporate Taxes

In a move to make the U.K. more competitive for businesses and to entice back British companies that have recently moved overseas, the British government Wednesday said it would deepen and accelerate a planned cut in corporate tax and would push ahead with plans to change the taxation of profits earned overseas by British businesses.

U.K. Chancellor of the Exchequer George Osborne told lawmakers that U.K. corporate tax would be cut to 23% by 2014 from 28% currently, a move he said would give Britain the lowest rate among G7 countries. The reduction will involve a 2% cut from April 1, and a 1% cut at the same time each year until 2014.

Previously, the government had planned to cut the rate to 24% by 2014, starting with a 1% cut this April.

"Let it be heard clearly around the world--from Shanghai to Seattle, and from Stuttgart to Sao Paolo: Britain is open for Business," Osborne shouted as he announced the changes in his annual budget to lawmakers.

However, amid continued public anger over the role of banks in causing the financial crisis and economic downturn, Osborne said he would offset the impact of the cut in corporate tax for banks by raising the U.K.'s Bank Levy to 0.078% from Jan. 1, 2012, instead of the planned 0.07% rate. The levy on bank balance sheets was introduced at the start of this year to help the government pay down debts it built when it had to bail out some banks during the crisis.

Analysts warned the move could prompt some banks to consider moving abroad. "We can expect more rumbling from banks about relocating now. Osborne is further unlevelling the playing field for U.K. banks vis-a-vis global competitors whose tax and regulation burdens so far appear less onerous," said one banking analyst.

"If the right policy is to reduce tax rates to encourage growth then logically that must apply in banking as well as manufacturing. And judged by the government's own criteria--that the tax system must be fair and encourage growth--why has it singled out this particular sector for higher duties?" said Michael Wistow at law firm Berwin Leighton Paisner.

Earlier this month HSBC Holdings PLC (HBC) said it wanted to remain headquartered in the U.K. but increasingly was having to justify the decision to shareholders in light of measures like the bank levy, which applies to its global balance sheet even though about 13% of its $19 billion 2010 pretax profit was earned in the U.K. HSBC said the levy would have cost it around $600 million on its 2010 balance sheet, making it among the largest contributors to the tax that aims to raise about GBP2.5 billion annually.

HSBC wasn't immediately available to comment.

Osborne's move to cut corporation tax, along with measures to change the taxation of foreign profits of U.K. businesses and a reduction in the tax rate on overseas financing income, comes after several high profile British companies moved overseas in recent years, citing an unfavorable corporate tax regime in the U.K.

Advertising giant WPP PLC (WPP.LN) moved its base to Ireland, which has a corporate tax rate of 12.5%, and it was joined by pharmaceuticals company Shire PLC (SHP.LN) and United Business Media PLC (UBM.LN). Others moved to Switzerland and the Netherlands.

"I want Britain to be the place international businesses go to, not the place they leave," Osborne said, adding that he was considering allowing Northern Ireland to make extra cuts to corporate tax.

"On the surface the budget looked good for us with corporation tax coming down more than we had thought," said WPP spokesman Richard Oldworth. "The government has fulfilled all their promises and appears to be moving in the right direction."

WPP collects almost 90% of its revenues outside the U.K.

Oldworth declined to comment on a media report that the U.K. government had been holding talks with WPP's tax department for more than six months.

A spokesman for Henderson Group PLC (HGI.LN), the global asset-management company that moved its tax exile to Ireland in 2008, said that it was too early to say whether the Chancellor's cut in corporation tax would lure it back to the U.K.

"We continue to monitor the situation and what is most suitable for us," the spokesman said.

A spokeswoman for Shire said: "We'll look at the detail of these interesting proposals but at this stage our position remains unchanged."

The U.K. Treasury said changes to rules on the taxation of profits earned by British businesses on their foreign operations would come into force in 2012, although there would be interim measures put into law this year to help companies with the transition. A consultation document on the changes will be published in May this year.

Uncertainty over the foreign subsidiaries rules was cited by those businesses that have left as one of the key reasons for relocating.

In December, the government set out plans to exempt a U.K.company's foreign subsidiary from U.K. tax if it can be proved that the trading activities or intellectual property holdings of the subsidiary have limited connection with the U.K. The plans would also raise the exemption rate above which foreign profits are taxed to GBP200,000 a year, from GBP50,000.

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.

For overseas branches--which are directly controlled by the U.K.-based entity and fall under the U.K. tax regime--the government said companies would be allowed irrevocably to exempt those branches from U.K. corporation tax. However, no U.K. tax relief will be available against any losses incurred by the foreign branch, and the government said it would prevent companies from diverting profits that would have been taxed in the U.K. to a foreign subsidiary to try to avoid paying the U.K rate.

"We have long argued that CFC reform will boost U.K. competitiveness. We now cannot afford delay as other countries, who already have developed business friendly rules, are actively seeking to attract U.K. business to their shores. We welcome today's commitment to deliver this reform by 2012," the Association of British Insurers said.

-By Steve McGrath, Dow Jones Newswires; 44-20-7842-9284; [e-mail]

(Marietta Cauchi, Ishaq Siddiqi, Margot Patrick, Adrian Kerr and Tommy Stubbington contributed to this article.)