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U.K. multinational companies won't have to pay tax on profits from overseas activities under new proposals designed to make the U.K.'s tax system more competitive, the Treasury said Thursday.

The proposals also include a crack-down on companies that "artificially" divert profits made in the U.K. to other low-tax countries to avoid paying tax. A consultation on the proposals will run until Sept. 22.

The Treasury said the proposals were aimed at striking a balance between improving competitiveness and protecting the U.K. tax base from tax avoidance.

"Multinational business plays an important role in this, but as the marketplace has become increasingly globalized, the U.K. has lost tax competitiveness," said David Gauke, Exchequer Secretary to the Treasury.

The taxing of U.K. based multinationals' foreign profits--known as controlled foreign company tax rules--is an issue that dogged the previous Labour government and led to the departure of several high-profile firms, including advertising company WPP PLC (WPP.LN), media group United Business Media Ltd. (UBM.LN), pharmaceuticals company Shire PLC (SHP.LN) and asset management firm Henderson Group PLC (HGI.LN).

The U.K.'s coalition government, which came into office in May 2010, has moved quickly to make changes to the country's corporate tax regime in an effort to stop other companies leaving and to attract back the ones that have already left.

The government's stance was applauded by WPP, with the company's chief executive Martin Sorrell in June saying the group intends to move its headquarters back to the U.K.

In March, Chancellor of the Exchequer George Osborne announced plans to reduce the U.K.'s corporate tax rate to 23% by 2014, which would give the U.K. the lowest rate among the Group of Seven leading countries. The corporate tax rate was reduce by two percentage points to 26% on April 1 with a plan to reduce it by a further percentage point every year until 2014.

Chris Sanger, head of tax policy at business services Ernst & Young, said the business community would welcome the proposals. "Today's consultation document shows a real intention towards making the U.K. tax system an asset, and will play an important role in helping to meet the coalition's pledge of having the most competitive tax system in the G-20," he said.

-By Ainsley Thomson, Dow Jones Newswires; 44 20 7842 9318; ainsley.thomson@dowjones.com

(Ruth Bender in Paris and Steve McGrath in London contributed to this report.)

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