Tax boon for wealth funds shows their value to UK, says minister

CNBC via Reuters

• Dominic Johnson: Scrapping of plan to levy tax is ‘powerful signal’
• Investment minister also hailed progress in free trade talks with GCC
• Sovereign funds QIA and Mubadala have upped stakes in UK projects

The UK’s decision to scrap a planned tax on sovereign wealth funds highlights the importance the government places on Gulf investors, Britain’s investment minister has told AGBI.

“I’m personally very pleased that we’ve decided to maintain the status quo,” said Dominic Johnson, a minister of state in the UK’s newly formed Department for Business & Trade. 

Johnson, who sits in parliament as Lord Johnson of Lainston, added: “Our collaborative relationships with Gulf sovereign wealth funds are very important to the UK and our decision not to tax them has sent a very powerful signal around the world of the value that we place on our partnership with these pools of capital.” 

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The proposal, which had been scheduled for April 2024, would have required the funds to pay 25 percent corporation tax on property and commercial enterprises in the UK. This would have brought Britain in line with markets such as the US, Australia and Canada, which already have such tax measures in place for sovereign wealth funds.

The Treasury announced earlier this month that it was abandoning the proposal after a consultation and cabinet warnings that it would hit inward investment. 

Johnson, a former financial services executive who co-founded Somerset Capital Management with Jacob Rees-Mogg, ruled out the idea that the government might revisit its decision. 

“We won’t be reviewing this again,” he said. “We need the investment and how better to have it from these organisations who are truly our long term partners and whose interests are aligned with ours.” 

Several Gulf sovereign wealth funds have increased their UK investments in recent months.

Last May the UK and Qatar signed a new Strategic Investment Partnership (SIP) which will see Qatar invest up to £10 billion ($12.1 billion) in the British economy over the next five years. The agreement covers sectors including technology, healthcare, infrastructure and clean energy.

The same sectors are the focus of the $13.8 billion, five-year SIP that Abu Dhabi’s wealth fund, Mubadala, announced in September 2021. So far, Mubadala has invested around $6.5 billion.

The UK’s budget, unveiled by the chancellor Jeremy Hunt in mid-March, focused on the need to increase investment in those sectors.

“I’d love for the UK to do SIPs with the other Gulf states as well,” said Johnson. “But the important thing is to put some structure around our industrial co-operation.”

Last week the UK and Kuwait issued a joint communiqué on the back of talks in London. They said bilateral trade has almost doubled year-on-year to reach £4.5 billion in the four quarters to the end of Q3 2022. 

Johnson said he was keen to collaborate further with Kuwait. 

“They are now interested, in my view, in not simply investing in infrastructure and property, but also looking at areas such as science and technology, R&D and so on that will help to future-proof our economy,” he said. 

“If you take an area like nuclear fusion – that requires tens of billions, if not hundreds of billions, of investment to bring it to fruition. We need more partners in order to fund our desire to become a science and technology superpower.” 

As part of its science and tech plans, the UK government has committed to increase public research and development spending to £22 billion a year by 2024-25.

A significant proportion of this sum is expected to go to life sciences. Mubadala’s SIP includes an £800 million investment in UK life sciences.  

UK-Gulf trade talks ‘progressing very well’

UK exports to the GCC reached £31.2 billion for the 12 months to September 2022, while imports from the GCC amounted to £23.3 billion for the same period. 

However, a UK-Gulf free trade agreement is regarded as the big prize. According to a UK government analysis, a free trade deal with the GCC would boost trade by at least 16 percent, add £1.6 billion a year to the British economy and contribute an additional £600 million to UK workers’ annual wages.

The third round of UK-GCC trade talks took place in Riyadh in mid-March, with technical discussions held on 13 policy areas over 30 sessions.

A British government trade update said the draft treaty text was advanced across the majority of chapters and the fourth round of negotiations was due to be hosted by the UK later this year. 

“The talks are progressing very well,” said Johnson. “However, as you get closer to the final wire, you have to deal with the more contentious aspects.”