Tax round-up for banks

Transcription

1 Tax round-up for banks Mark Sheiham René van Eldonk 07 & 08 October 2015

2 Topics to be covered July Budget changes to UK bank levy and bank surcharge The future of UK withholding taxes (WHT) General HMRC consultation on future of UK WHT Private placement exemption from UK WHT Peer to peer lending Tax treatment of bank and insurance regulatory capital securities. Financial Transaction Tax not quite as dead as hoped. 1 / B_LIVE_EMEA1: v1

3 July budget bank levy and bank surcharge Previous coalition government saw banks as a soft target to milk for more tax Repeated increases in rates of bank levy charged on bank balance sheets Culminating in large increase to 0.21% / 0.105% just before election Enough is enough UK headquartered international banks consider relocating 2 / B_LIVE_EMEA1: v1

4 July budget bank levy and bank surcharge Bank levy rates gradually reducing from January 2016 But only slowly eventually reach 0.10% / 0.05% by January 2021 From 2021 also limit bank levy tax base to UK operations Put UK headquartered banks on same footing as non-uk banks BUT.. 3 / B_LIVE_EMEA1: v1

5 July budget bank levy and bank surcharge BUT 8% UK corporation tax surcharge on bank profits from January 2016 Can t be offset by pre-2016 losses (though can still offset up to 50% of profits for mainstream corporation tax) First 25 million of profits per group exempt At least banks benefit from slight reductions in mainstream corporation tax Down to 19% in 2017, 18% in 2020 Disallow deductions for compensation to customers 4 / B_LIVE_EMEA1: v1

6 July budget bank levy and bank surcharge The government s calculated gamble. Pain now, gain later Ie costs banks more in short term Government scared of headlines about banks leaving UK Hopes banks focus on longer term bank levy reductions will eventually help. Good news for UK headquartered international banks (eventually) 5 / B_LIVE_EMEA1: v1

7 July budget bank levy and bank surcharge Bad news for domestically focussed UK banks Surcharge hurts more than bank levy reduction helps Particular concerns raised by challenger banks and building societies A cynical guess that UK-focussed banks are less likely to move? But surcharge makes UK banking industry as a whole less competitive. 6 / B_LIVE_EMEA1: v1

8 The future of UK withholding taxes Ongoing developments Private placement exemption from UK WHT Consultation on UK withholding taxes more generally Consultation on peer to peer lending WHT depends only on status of lender not borrower Platform not borrower applies any WHT 7 / B_LIVE_EMEA1: v1

9 General consultation on future of UK WHT Started from dull mechanics re introduction of personal savings allowance Abolition of WHT on interest on bank/building society deposits to individuals From 06 April 2016 Lead to wider discussion of future of UK withholding taxes July 2015 consultation document blue sky review of UK WHT on interest 6 different options considered Wide ranging Even considers outright abolition of UK WHT (unlikely, alas!) Possible restriction of scope of UK WHT Possible improvement to WHT-related processes E.g. perhaps replace treaty clearances with payer reasonable belief 8 / B_LIVE_EMEA1: v1

10 General consultation on future of UK WHT Consultation closed 18 September 2015 HMRC still considering submissions Not yet clear where this will end up Unlikely to abolish UK WHT altogether (alas!) May produce some improvements Removing requirement for treaty clearances would be a good start! Previous Labour threat to Quoted Eurobond exemption now gone away? But still casts a shadow on current policy 9 / B_LIVE_EMEA1: v1

11 The EU dimension EU Commission action plan on Capital Markets Union 30 September 2015 Raises concerns about cross-border withholding taxes impeding capital markets Proposed EU Commission best practice + code of conduct for relief from WHT Encourage better systems providing exemption of WHT at source Where do need WHT reclaims, improve speed and burden of reclaim process standardised procedures 10 / B_LIVE_EMEA1: v1

12 Private placement exemption from UK WHT Background policy Encourage more sources of funding for UK corporates Particularly non-bank funding Particularly for SMEs Private placement market Existing WHT rules work fine for most UK lenders But not so good for many non-uk lenders To use treaty need treaty clearance the processes is a hassle Some treaties permit > 0% WHT on interest 11 / B_LIVE_EMEA1: v1

13 Private placement exemption from UK WHT Background policy Private placement exemption from UK WHT Intended to encourage development of private placement market BUT government very keen NOT to allow it to be used for avoidance Fear of adverse press headlines Still bruised re adverse press on Quoted Eurobond exemption Scope of exemption needs to be restricted 12 / B_LIVE_EMEA1: v1

14 Private placement exemption from UK WHT History and current status Proposed in December 2014 technical note for consultation Very restrictive - so many conditions = unworkable in practice Since then, HMRC really is listening HMRC want it to work and be used. but so long as prevents avoidance / adverse headlines Primary legislation enacted in Finance Act 2015 (pre-election) Implementing regulations currently under discussion Hopefully in force around late 2015 / early / B_LIVE_EMEA1: v1

15 Private placement exemption from UK WHT How it works Qualifying private placement exempt from WHT I.e. loan relationship with company as debtor Not listed on a recognised stock exchange Meets conditions prescribed by regulations 14 / B_LIVE_EMEA1: v1

16 Private placement exemption from UK WHT How it works requirements Discussion ongoing from 10 December 2014 HMRC note including Lender and borrower must not be connected Lender must be located in qualifying territory I.e. jurisdiction with tax treaty with UK with non-discrimination article Treaty does not need to provide for 0% WHT 15 / B_LIVE_EMEA1: v1

17 Private placement exemption from UK WHT How it works requirements Genuine commercial reasons - not part of tax advantage scheme Requirements for terms of debt: Minimum 10 million size Maximum duration Can be loans or notes, but must be unlisted 16 / B_LIVE_EMEA1: v1

18 Private placement exemption from UK WHT How it works - process No requirement for HMRC clearance So better than treaties Self-certification Lender must give a certificate to borrower Without certificate from lender, borrower can t apply exemption HMRC has power to audit and/or cancel certificates but not retrospectively 17 / B_LIVE_EMEA1: v1

19 Private placement exemption from UK WHT Practical implications for capital markets Won t work for cleared notes Due to restrictions on which lenders can benefit + certification So won t be commonly used in capital markets transactions Generally use listed notes and Quoted Eurobond exemption Market standard capital markets documentation should not be affected May be used on occasion to solve WHT issue without treaty clearance Unlisted notes in definitive registered form Will need some adaptation of documentation 18 / B_LIVE_EMEA1: v1

20 Private placement exemption from UK WHT Practical implications for bank lending transactions Provides another route to exemption from UK WHT UK lenders don t need it Useful to non-uk lenders Avoids need to obtain treaty clearance from HMRC Still need certification but easier self certify no HMRC input needed Allows lenders in treaty jurisdictions with >0% interest WHT Expect LMA documentation to be updated: Additional limb of Qualifying Lender Lender s certificate included in facility / transfer documentation 19 / B_LIVE_EMEA1: v1

21 Private placement exemption from UK WHT Practical implications for funds Will be useful to debt funds investing in UK loans Many currently rely on treaty exemption e.g. Lux fund vehicles Requires HMRC clearance for each and every loan / facility Private placement exemption will allow self-certification Avoid need for clearance But beware anti-avoidance If receipts passed on to tax-exempt entity, exemption may not be available 20 / B_LIVE_EMEA1: v1

22 Tax treatment of bank and insurance regulatory capital securities What is the regulatory and tax framework for bank regulatory capital securities? December 2010: new global regulatory standards on bank capital adequacy and liquidity (Basel III) 01 January 2014: standards implemented in EU by means of Capital Requirements Directive and Capital Requirement Regulations (together: CRDIV) CRDIV: the risk weighted assets of banks must comprise at least: 4.5% Common Equity Tier 1 Capital ( CET1 ), 1.5% Additional Tier 1 Capital (AT1 ) and 2% Tier 2 Capital. Furthermore, certain additional buffers need to be maintained 21 / B_LIVE_EMEA1: v1

23 Tax treatment of bank and insurance regulatory capital securities We focus on the tax treatment of AT1 as this is the most problematic from a tax perspective From a regulatory perspective, AT1 must meet EU-wide regulatory requirements set out in table hereto The tax treatment of AT1 for banks varies by jurisdiction and there was no uniformity across all European jurisdictions in characterizing such instruments for tax purposes Global banking industry requires a level playing field across the EU. So, AT1 should have the same tax treatment across the EU 22 / B_LIVE_EMEA1: v1

24 Tax treatment of bank and insurance regulatory capital securities What is the regulatory and tax framework for insurance regulatory capital securities? 01 January 2016: insurance companies are subject to more stringent capital requirements under Solvency II Solvency II codifies and harmonises EU insurance legislation, including the type and amount of regulatory capital for insurance companies From a regulatory perspective, there is a EU-wide regulatory framework for insurance companies The tax treatment of Tier 1 instruments issued in debt form varies by jurisdiction and there is no uniformity yet across all European jurisdictions 23 / B_LIVE_EMEA1: v1

25 Tax treatment of bank and insurance regulatory capital securities Why is the tax treatment so important? Bank and insurance companies want to ensure lower after-tax costs of capital through: Tax deductibility of coupon payments No tax upon trigger events (e.g. write down or conversion) No withholding tax on coupon payments Need to consider local tax rules harmonisation of tax treatment for bank regulatory capital securities in EU achieved, but not yet for insurance regulatory capital securities Take local tax advice where appropriate 24 / B_LIVE_EMEA1: v1

26 Comparative tax treatment of AT1 for banks across the EU Limitations on corporate tax deduction of interest Withholding tax on interest payments France No No (except in limited circumstances) Corporate tax on trigger events write down: yes conversion: no Germany No No write down: yes conversion: to the extent that nominal amount exceeds FMV of the AT1 instrument Italy Yes Yes (in limited circumstances) write down: no conversion: no Luxembourg [No] [No] write down: [no] conversion: [no] Netherlands No No write down: yes conversion: no Stamp taxes Comments on reg cap securities No No specific guidance from relevant authorities. French tax treatment is based, by analogy, on a regulation in respect of Islamic bonds (sukuks) No German tax treatment is based upon a tax decree issued by the Federal Ministry of Finance and only applies to specific AT1 instruments issued in accordance with conditions laid down by the Federal Association of German Banks No No No New rules on Italian tax treatment of AT1 for banks substantially assist from 01 January 2014 General principles should apply to determine whether AT1 should be considered as debt or equity for tax purposes. AT1 should generally qualify as debt for tax purposes to the extent that it is treated as debt from a company law and accounting perspective New rules on Dutch tax treatment of AT1 for banks substantially assist from 01 January 2014 Equivalent tax rules for insurance regulatory capital? Currently, no tax rules on regulatory capital or insurance companies No equivalent tax rules and, in particular, no equivalent tax decrees on regulatory capital for insurance companies New rules on Italian tax treatment of regulatory capital for insurance companies substantially assist from 01 January 2014 Currently, general principle should also apply to determine whether insurance regulatory capital should qualify as debt or equity from a Luxembourg perspective Equivalent tax rules on regulatory capital for insurance companies have been announced. These rules are expected to enter into force on 01 January 2015 Spain No No write down: yes conversion: no No New rules on Spanish tax treatment of AT1 for banks substantially assist from 01 January 2014, under preferred share structures Currently, no equivalent tax rules on regulatory capital for insurance companies UK No No write down: no conversion no No New rules on UK tax treatment of AT1 for banks substantially assist from 01 January 2014 Draft resolutions published applying same UK tax treatment to insurance tier 1 as bank AT1 from 01 January / B_LIVE_EMEA1: v1

27 AT1 EU-wide regulatory requirements for banks Feature Requirements Coupon Discretionary Non-cumulative Maturity Perpetual First issuer call: 5 years With prudential regulator s approval No incentive to redeem Early calls (prior to 5 years) Change in tax treatment Change in regulatory treatment Only with prudential regulator s approval Ranking Above ordinary shares Below Tier 2 Not a liability for insolvency test Events of default Non-payment (only if due) Winding up Regulatory amortisation N/A Loss absorption Write-down (permanent or temporary) or conversion into ordinary shares Trigger: below 5,125% CET 1 26 / B_LIVE_EMEA1: v1

28 Financial Transaction Tax - not quite as dead as hoped... Little had been heard of FTT for many months But now it s back A bad idea that just won t die 27 / B_LIVE_EMEA1: v1

29 Financial Transaction Tax - not quite as dead as hoped... A long and tortured history 2011 EU Commission Proposal for EU-wide Financial Transactions Tax was never going to get the unanimous agreement it needed EU-wide proposal abandoned Enhanced Cooperation Procedure (ECP) starts: between 11 participating EU Member States 2013 Formal proposal for FTT under ECP 2014 Participating Member States failed to agree terms of FTT 2015 Still discussing but seemed to go to sleep Everyone hoped it was dead. until now 28 / B_LIVE_EMEA1: v1

30 Actually I m not quite dead 12 September 2015 ECOFIN Council meeting agreed many core features of FTT Trades in equities issued in FTT zone based on location of issuer Derivatives everything except over government debt based on residence location of issuer of underlying location of counterparty Won t apply to bonds, notes, repos/reverse repos Cascading all transactions in chain caught except agents and clearing members Still no agreement on rates or scope of market maker exemption 29 / B_LIVE_EMEA1: v1

31 Financial Transaction Tax the Road Ahead 11 Participating Member States trying to agree terms for FTT Won t make firm announcements until technicalities agreed Discussion papers published Impact on pension funds Impact on real economy Still some way to go. But Greater risk of progress now 30 / B_LIVE_EMEA1: v1

32 Financial Transactions Tax the Road Ahead Will there be consensus among 11 in FTT zone? Possible legal challenges: have ECP procedures been complied with? are FTT proposals contrary to EU fundamental freedoms Wolfgang Schauble (German Finance Minister). says wants to push for EU-wide FTT on equity and bond trading seems doomed from start needs unanimity by 28 Member States Jeremy Corbyn now says he supports FTT! 31 / B_LIVE_EMEA1: v1

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