31 January Mrs Jas Sahni Tax Treaty Team HM Revenue & Customs Room 3.60, 3 rd Floor 100 Parliament Street London SW1A 2BQ

Transcription

1 31 January 2012 Mrs Jas Sahni Tax Treaty Team HM Revenue & Customs Room 3.60, 3 rd Floor 100 Parliament Street London SW1A 2BQ Jas.Sahni@hmrc.gsi.gov.uk Your reference: TNO Dear Mrs Sahni, Double Tax Treaty Network Review 2012/13 Thank you for the letter dated 19 December 2011 requesting IMA s views on priorities for work on the UK s network of Double Tax Agreements (DTAs) for 2012/13. As you may be aware, IMA represents the investment management industry operating in the UK. Our members include independent investment managers, the investment arms of retail banks, life insurers and investment banks, and the managers of occupational pension schemes. They are responsible for the management of around 4 trillion of assets, which are invested on behalf of clients globally. These include authorised investment funds, institutional funds (e.g. pensions and life funds), private client accounts and a wide range of pooled investment vehicles. In particular, our members represent 99% of funds under management in UK authorised funds (i.e. unit trusts and open-ended investment companies). The attachment to this letter provides our detailed response, which covers a number of specific treaties. These are all important to the funds our members manage and the investors in/beneficiaries of those funds, and we would encourage officials to continue or initiate bilateral discussions accordingly. In particular, we would urge all future discussions to include the position of the UK s new tax-transparent funds, which are to be introduced this summer, and which will have a different tax status to authorised unit trusts and OEICs. 65 Kings way London W C2B 6TD Tel:+44(0) Fax:+44(0) w w w. i n v e s t m e n t u k. o r g Investment Management Association is a company limited by guarantee registered in England and Wales. Registered number Registered office as above.

2 We are pleased to see that the work of the OECD Committee on Fiscal Affairs on the Taxation of Collective Investment Vehicles has been reflected in the updated Model Tax Convention 1 and understand that the modified version of the Model Tax Convention is now informing HMRC negotiations. IMA is a member of the Treaty Relief and Compliance Enhancement (TRACE) Group created in January 2010 by the OECD Committee on Fiscal Affairs to take forward the work of the Pilot Group on Improving Procedures for Tax Relief for Cross-Border Investors 2. We urge HMRC to assign a high priority to TRACE in order to ensure the development of treaty relief systems that are as efficient as possible, in order to minimise administrative costs and allocate the costs to the appropriate parties. If you wish to discuss in more detail any of the issues raised in the attachment, please feel free to call me on or me at jmorley-smith@investmentuk.org. Yours sincerely Jorge Morley-Smith Head of Tax cc: Jon Sherman, HM Treasury Cathy Lynch, HM Treasury Douglas Rankin, HM Revenue & Customs Encs. 1 The OECD Update to the Model Tax Convention 22 July Report on the Informal Consultative Group on the Taxation of Collective Investment Vehicles and Procedures for Tax Relief on Cross-Border Investors on Possible Improvements to Procedures for Tax Relief for Cross-Border Investors 12 January

3 Attachment Entity recognition for authorised funds Currently authorised funds may be either Open-Ended Investment Companies (OEICs) or Authorised Unit Trusts (AUTs). The former are companies (albeit ones with variable share capital), which are constituted under company law and are readily recognisable to legal and taxation systems outside the UK. The latter take the form of trusts and are governed by trust law. Although some legal and taxation systems that have historically developed in a similar way to those of the UK find AUTs readily recognisable, other systems may not. This can lead to issues when Treaty partners seek to disallow treaty benefits to AUTs which would be available to OEICs. In addition, it may be that some treaty partners do not recognise OEICs as the legal and beneficial owners of their income receipts due to their open-ended nature. Authorised funds (OEICs and AUTs) are subject to corporation tax (at 20%) on their investment income but are exempted from tax on any capital gains. They are thus treated as modified investment companies for direct tax purposes. Consequently, it is important that they should be able to obtain treaty benefits in the same way as for other corporation tax payers and, indeed, that there should be no inconsistency in the treatment of OEICs and AUTs in obtaining such treaty benefits. We would therefore request that when DTAs are drafted or modified, officials continue to make clear that for UK tax purposes company includes authorised funds that are AUTs or OEICs (but not the new tax-transparent vehicles). The revised Commentary to the Model Convention, of course, should assist in this process. You may be aware that Luxembourg and Irish funds are in practice effectively tax exempt in their home jurisdictions. While such funds enjoy this advantage over UK funds, UK funds as UK tax resident entities should be able to enjoy the benefit of being able to access the UK s wide network of DTAs. However, if UK funds are unable to access the full DTA benefits to which they should be entitled, this particular advantage, which to some extent compensates for the effective tax exempt status of Luxembourg and Irish funds, evaporates. Therefore, any loss of access to DTAs for authorised funds would be to the detriment of the competitiveness of the UK as a domicile choice for funds. In addition, Unauthorised Unit Trusts (UUTs) may also have difficulty in obtaining treaty benefits. One way of ensuring that UK UUTs would obtain benefits under UK DTAs would be to specify that where income is paid to a UK resident (the legal owner) and the beneficial owner is also a UK resident, then treaty rates of WHT should apply. This would accommodate a UK UUT with both UK Trustees and UK beneficiaries. Entity recognition for Tax-Transparent Funds (TTFs) In January 2012 HM Treasury released a consultation document on proposals to introduce a tax transparent fund in the UK. The draft proposals currently envisage 3

4 two different types of contractual fund: a co-ownership structure and a partnership structure. We believe that the co-ownership fund is likely to be the TTF most widely adopted because it confers the benefit of being treated as transparent for income but opaque for capital gains purposes in the UK. This means that investors are not taxed on a proportion of capital gains each time the fund disposes of an asset. The government will also introduce a partnership TTF because it is envisaged that a partnership TTF is more likely to be treated as transparent by overseas fiscal authorities, and may therefore be of greater benefit where investors are trying to maximise treaty benefits for particular countries that do not recognise the coownership structure as transparent. However, a partnership TTF is unlikely to be a suitable vehicle for taxable investors because of the difficulties of calculating capital gains tax on disposal of fund assets. Key to the success of UK TTFs is the recognition by overseas tax authorities that they are transparent for tax purposes and that their investors are able to obtain treaty benefits as if they held the TTF s investments directly. Without this recognition the UK will not be able to continue to be an attractive domicile for funds. We note that Luxembourg and Ireland both have existing transparent fund regimes which are extensively used for asset pooling. Fund promoters will not choose to set up UK TTFs unless they confer a tax treatment which is at least as good as that offered by Irish CCFs and Luxembourg FCPs. We would therefore request that when DTAs are drafted or modified, officials make clear that TTFs (whether in co-ownership or partnership form) should be regarded as transparent for tax purposes. OECD Tax Treaty Project IMA welcomed the changes to the OECD Model Tax Convention, which should, over time, eliminate many of the current difficulties that CIS face in obtaining treaty recognition. We also welcomed the Implementation Package, which would allow authorised intermediaries to claim treaty benefits on a pooled basis on behalf of their customers that are portfolio investors. By reducing inefficiencies, the primary means by which reduced withholding would be claimed would be through relief at source. The creation in January 2010 by the OECD Committee on Fiscal Affairs of the Treaty Relief and Compliance Enhancement (TRACE) Group to take forward the work of the Pilot Group on Improving Procedures for Tax Relief for Cross-Border Investors is a further positive step. Given that the changes to the Model Convention which impact CIVs, combined with the work carried out by TRACE, address many of the issues currently encountered by UK funds, we urge the Government to assign a high priority to the TRACE work, to ensure the development of treaty relief systems that are as efficient as possible. 4

5 Incorporation of European Court of Justice (ECJ) judgements into UK DTAs and EU matters generally As a general comment, ECJ judgements should be reflected in DTAs with fellow Member States as they are agreed/renegotiated. One example is the decision in the Armurta case in November 2007 that Member States may not apply different rates of withholding tax when a company pays a dividend to a company in its own Member State as opposed to the dividend being paid to a company in another Member State. A further example is the decision in the Aberdeen Property Fininvest Alpha Oy case. This case considered the legality of a Member State levying dividend withholding taxes only to controlled non-resident investment funds while exempting its comparable funds from such taxes. In addition, within the EU, UK DTAs should seek to achieve equivalent benefits for mutually comparable entities (e.g. exempt pension funds in both States should receive the same treatment from both States in terms of complete exemption from tax). To do this, new definitions may need to be inserted into relevant DTAs. We appreciate that HMRC are aware of these points and ask that such matters continue to be pursued. Parity of treatment of pension business in a life company and pension fund Future UK DTAs should ensure consistency of treatment for pension fund business of a life company and other types of pension funds, as was the case most recently with the UK/Germany DTA which came into force on 30 December This is particularly welcome given the scale of UK investment in Germany. We are pleased to see that parity of treatment also applies in the Hong Kong treaty. The French treaty should now be accorded specific priority in this respect given the scale of UK investment in France. Separate treatment of income derived from real estate in UK DTAs The Model Tax Convention includes specific clauses relating to REITs covering: Income Tax implications: In the case of a small investor in a REIT, the investor has no control over the immovable property by the REIT and no connection to that property it may therefore be appropriate to consider that such an investor has not invested in immovable property but, rather, has simply invested in a company and should be treated as receiving a portfolio dividend. Such a treatment would also reflect the blended attributes of a REIT investment, which combines the attributes of both shares and bonds. In contrast, a larger investor in a REIT would have a more particular interest in the immovable property acquired by the REIT; for that investor, the investment in the REIT may be seen as a substitute for an investment in the underlying property of the REIT. In this situation, it would not seem appropriate to 5

6 restrict the source taxation of the distribution from the REIT since the REIT itself will not pay tax on its income. 3 Capital gains implications: It may be appropriate to consider a small investor s interest in a REIT as a security rather than as an indirect holding in immovable property. In this regard, in practice it would be very difficult to administer the application of source taxation of gains on small interests in a widely held REIT. Moreover, since REITs, unlike other entities deriving their value primarily from immovable property, are required to distribute most of their profits, it is unlikely that there would be significant residual profits to which the capital gain tax would apply (as compared to other companies). 4 We support this update to the Model Tax Convention on the basis that it should result in a lower rate of treaty withholding tax for dividends, while still allowing the state in which the property is located to have taxing rights over the property. We believe that the logic underlying the proposals to tax small investors in REITs should apply equally to investors in open-ended funds investing in real estate (i.e. UK PAIFs and non-uk equivalents) and we therefore request that the wording in the Model Tax Convention inform future Treaty negotiations in the context of PAIFs as well as REITs. We continue to be disappointed that new Treaties (including those agreed with China and Hungary in 2011) do not follow this approach but instead impose the right to levy a 15% withholding tax on all investors in the other Contracting Party. However, if the negotiation of a higher withholding treaty rate on dividends paid by UK companies investing in real property is to become the norm, then we would hope that one consequence of this will be that the corporate ownership condition within the Property Authorised Investment Funds regime will at some stage be seen as unnecessary. 1. Are there any problems with any of the UK s existing DTAs which we need to address by a new treaty or a protocol? We would draw your attention to Treaties where there appears to have been a problem for AUTs and OEICs in obtaining Treaty benefits: (a) Treaties currently under negotiation India As we highlighted in our DTT Network Review letter to HMRC of 2 February 2011, India s Direct Tax Code may be able to override domestic law where there is a conflict and the General Anti Avoidance Rule is invoked. We also understand that such rules are unlikely to be used to attack investment funds given the impact that would have on Indian capital markets. Whether or not this is the case, any additional certainty which could be achieved would be welcome. 3 The 2008 Update to the OECD Model Tax Convention: Paragraph 32 4 The 2008 Update to The OECD Model Tax Convention: Paragraph 49 6

7 We therefore ask HMRC to make representations to the Indian authorities with a view to mitigating any conflict between the current DTA and this legislation. Israel The Israeli treaty requires that a dividend is subject to tax in order to receive the reduced withholding rate. Whilst AUTs and OEICs may generally be able to make an election to tax these dividends in the UK, this may result in a worse after-tax position and also will increase administration costs. If an election to tax is not made (or cannot be made, e.g. Tax-Elected Funds), then the UK fund will suffer the domestic withholding tax rate in the overseas country, which in some cases may result in a materially greater rate of non-uk withholding tax being applied. We ask that every effort is made to ensure that the subject to tax requirement is removed from the treaty in future negotiations. Peru The industry continues to be concerned about the levying of capital gains tax on shares quoted on a recognised stock exchange. We ask that the capital gains article in any future treaty should achieve exemption from Peruvian capital gains tax in these instances. USA Limitation of benefits article Our members continue to face the difficulties we first mentioned in our letter to Douglas Rankin of 29 January 2008 relating to the Limitation of Benefit (LoB) article in the UK/US treaty. The current treaty states in Article 23 that a fund is entitled to the benefits of the treaty only if more than 50% of the members/participants/ beneficiaries are resident in either the UK or the USA. This means that for OEICs with more than 50% of investors not resident in the UK or USA (e.g. UCITS marketed to European investors), withholding tax on dividends and interest received by the OEIC from the USA is applied at the non-treaty rate of 30% (rather than the treaty rate of 15% for dividends and 0% for interest). It is often the case that the European investors in the OEIC would benefit from an equivalent US treaty if they had invested directly into the US rather than via an OEIC. Therefore the OEIC itself should be able to benefit from the treaty in order to make the system equitable. This problem is exacerbated where, for the purposes of the application of the LOB article of the UK/USA DTA, the fund is an umbrella fund. We are informed that the current practice of the USA is to consider the position at umbrella level and not on a sub-fund by sub-fund basis. The USA also looks at the value of investors fund holdings, whereas other countries may look at the number of share/units owned or even the number of investors. In an extreme case, one could have an umbrella with a single sub-fund investing into the USA where 100% of the investors in that sub- 7

8 fund were UK resident but the USA might deny relief under the DTA on LoB grounds, where more than 50% of the investors of the umbrella as a whole were not UK resident. And this would be the result even where none of the investors resident outside the UK invested in sub-funds with US assets. Ideally, one would solve the umbrella fund problem by obtaining clarification from the USA that they would apply the LOB article at a sub-fund level, but the optimal solution would be achieved both by applying the article at a sub-fund level and also amending the LOB article in order that equivalent beneficiaries (i.e. those who would gain access to a USA treaty had they invested directly into the USA) are included in calculating whether the 50% test for treaty access is met. The USA has accepted such a provision in at least one other treaty, that with Germany. The protocol between Germany and the USA was revised in 2006 and states that the limitation of benefits article is amended so that the benefits of the treaty are granted to a German investment fund if 90% of the beneficial interest in the fund is owned directly or indirectly by equivalent beneficiaries. This would seem to provide a useful precedent. We understand, though, that more recently US negotiators have not followed this precedent. We therefore ask that Officials continue to use any opportunity to seek treaty reform, citing the recommendations in the OECD Report. (b) Treaties not currently under negotiation Austria We recognise and are appreciative of the considerable efforts made by HMRC to improve materially the position under the Austria-UK treaty. Members still face considerable difficulties, however, in respect of the reclaim process. We ask HMRC to request a move to relief at source and for AUTs and OEICs to be fully eligible for treaty benefits in line with the recommendations in the OECD report. China We understand that efforts have been made to ensure that the Chinese authorities ratify the treaty promptly. We request that HMRC continue to press the Chinese authorities on this to ensure that this comes into force as soon as possible. Greece The Greece DTA dates from 1953 and we understand it to be one of the oldest DTAs in force. From 1 January 2012 dividends from Greece are now subject to withholding tax of 25% and we note that under the terms of the current DTA no beneficial treatment is afforded for UK recipients (in fact the DTA has no article covering treatment of dividends). We would ask that officials to include provisions for reduced withholding tax on dividends in any future treaty negotiations with Greece. 8

9 Indonesia We are aware of changes to Indonesia s administrative procedures to evidence the entitlement of a claimant under a DTA to access rights under that DTA. In the context of AUTs and OEICs, most of the new documentary and evidential requirements are not relevant and we make no comment on them. However, Indonesia is requiring that the claimant must certify that the income is subject to tax, and this may be of concern in the context of portfolio income received by AUTs and OEICs in that it appears to be in direct conflict with the terms of the UK/Indonesian DTA. This means that the position for UK funds has become less certain as a fund must now take a view on whether they can give a representation that the Indonesian dividends are subject to tax in the UK. Market practice may therefore differ on this when it should not. We do not yet have information on whether claims by AUTs and OEICs are being rejected on these grounds. However, we understand that unless claims are made within a few days of the dividend payment, there is currently no mechanism for repayment of withholding tax in excess of the treaty rate and therefore AUTs and OEICs are foregoing treaty benefits. We shall continue to monitor the position and inform HMRC should problems emerge. We therefore ask HMRC to make representations to the Indonesian authorities that the requirement to certify that the income is subject to tax is inconsistent with the DTA with the aim of forms being modified for UK funds or a clarifying statement issued by the Indonesian authorities. Italy We appreciate the large amount of work that HMRC have undertaken with the Italian tax authorities in respect of delays in the reclaims of withholding tax and in the refund of tax credits. We are sorry to have to report, however, that members have seen no discernible improvement. We are also aware of instances of the Italian tax authorities having requested repayment of a tax reclaim plus interest, and further cases where appeals against these reclaims are being rejected on totally spurious administrative non-issues. We therefore ask that HMRC continue to take every opportunity to impress on their Italian counterparts the need for this issue to be addressed. Korea We have become aware of new draft tax laws in Korea that require overseas investments vehicles ( OIV ) to submit to the Korea tax authorities a Report of OIV in which the OIV will be required to submit a list of all beneficial owners of the Korean source income. In addition, the new law requires beneficial owners of Korean income (ie the fund investors) to complete an Application or Reduced Tax Rate under a Double Tax Treaty and submit that to the OIV. However, the law stipulates that the requirements are not needed where a OIV is defined as a resident under a DTT, which is not the case under the current UK/Korea treaty of The requirement to submit a list of all beneficial owners of the Korean source income is impossible to meet without a breach of privacy laws. We therefore ask HMRC to seek to amend the UK/Korea DTA with a view to including AUTs and OEICs within the definition of resident. 9

10 Pakistan The industry is concerned about the levying of capital gains tax on Pakistan shares quoted on a recognised stock exchange. We ask that the capital gains article in any future treaty should achieve exemption from Pakistan capital gains tax in these instances. Philippines We are aware of changes to the approach taken by the Philippines in respect of their procedures to evidence the entitlement of a claimant under a DTA to access rights under that DTA. Inter alia, it will be necessary to appoint a local agent to deal with the claims. This process has to be carried out on a fund-by-fund basis. In the context of a portfolio investor, such as an AUT or OEIC, the cost of this requirement will frequently make it uneconomic to make the claim under the DTA. Even in emerging markets funds, Philippines will be a minor portion of the total portfolio and in most cases the only rational decision is to accept the higher withholding tax, which is contrary to the policy outcome previously agreed by the two countries. We would appreciate any support which HMRC can provide in order to ensure that the clear intention of the DTA is not frustrated. Poland We welcome the amendment to Polish Corporate Tax Law to provide an exemption from withholding tax on dividends for EU and EEA resident pension and investment funds, effective 1 January We note that the exemption is available only to residents of countries that have signed a double tax treaty, or an agreement on the exchanges of information with Poland. Our concern is that a UK corporate taxpayer (including AUTs and OEICs) might not be able to avail itself of this relaxation in Polish domestic tax law because of the exemption from tax applicable to (most) dividends, including foreign dividends, and that this might be so even where an AUT or OEIC opts to tax all its dividend income, including income from UK dividends. This concern is based our understanding that the fund must be subject to unlimited tax obligations on all income. We would urge HMRC to seek amendment to Article 10 of the UK/Poland DTA to ensure parity of treaty for the UK with other EU/EEA members. Furthermore, we are aware of Irish unit trusts having received FOKUS Bank reclaims from Poland, which indicates that the Polish tax authorities are aware that the subject to tax clause in the UK/Poland DTA is in violation of the EU Treaty insofar as funds are concerned. 10

11 Portugal Our members continue to experience practical problems with reclaims of withholding tax in Portugal. Although in principle the Portuguese authorities have not been denying treaty benefits to collective investment schemes, they have made the reclaim process difficult for many funds and have introduced yet further administrative difficulties before a fund can successfully apply for relief at source, which in effect has prevented some funds from obtaining treaty benefits. We would ask that HMRC take this matter into account in any future treaty negotiations with Portugal. Russia and Portugal Our comments under (a) above in relation to Israel apply equally to the Russian and Portuguese treaties. However, the differential of withholding tax in both these countries between the treaty rate and the domestic rate is 5%, and priority should therefore be given to the treaty with Israel. Switzerland Our comments in relation to Austria above apply equally to Switzerland. However, given the differential of 20% between the Swiss domestic withholding rate for dividends of 35% and the treaty rate of 15% is so high we ask HMRC, if and when opportunities arise with the Swiss tax authorities, to prioritise a request to move to relief at source and for AUTs and OEICs to be fully eligible for treaty benefits in line with the recommendations in the OECD report. Taiwan We have previously raised the Taiwan-UK DTA as an issue for our members and appreciate the progress that HMRC officials have achieved. The tax ruling Tai-Tsai-Shuei , issued by the Taiwanese Ministry of Finance ( MOF ) on 17 January 2009, which states that AUTs that are not qualifying bond funds are able to apply for the reduced withholding tax rate pursuant to the Taiwan-UK Double Taxation Agreement provided specified documents are submitted, is helpful for our members and demonstrates that progress is being made on this issue. However, we are unsure of the reason why only AUTs have been specifically mentioned and not OEICs, or the rationale for the current exclusion of bond funds from the announcement. Moreover, we understand that our members are, in practice, still experiencing difficulties, and these difficulties are impacting both AUTs and OEICs. Whilst we appreciate that the 17 January ruling deals explicitly only with AUTs, given that OEICs are UK companies, we find it hard to see on what basis the MOF could accept that AUTs may make a valid claim, but not OEICs. As Article 3(1)(c) of the treaty states that company means any body corporate or other entity that is treated as a body corporate for tax purposes, it clearly should include both AUTs and OEICs, including bond funds, and we would urge HMRC to continue to discuss with the Taiwanese tax authorities the applicability of Article 3(1)(c) to both AUTs and OEICs. Even where an AUT is clearly within the terms of the MOF ruling, the process still involves a potentially onerous and expensive administrative 11

12 process. For example, a local adviser needs to be appointed on the UK taxpayer s behalf and potentially excessive documentation needs to be provided. UUTs currently do not fall within the terms of the treaty. Following one of the approaches now embedded in the revised Model Tax Convention, this could be solved by amending the treaty to allow benefits to be claimed where both legal and beneficial owner are UK residents. (This would also provide an alternative solution for bond funds, in the event that the Taiwanese continue to take the line that they are not covered by the terms of the current treaty.) We ask that HMRC consider this option. 2. Are aspects of the UK s existing DTAs un-competitive when compared with agreements our treaty partners have made with other countries? Spain Our members continue to report difficulties in being able to access the Spanish quick reclaim procedure, which is currently unavailable to UK investors. The quick reclaim procedure works well for those investors that are not resident in a country covered by the special development rule. In general, all investors have to provide a beneficial owner breakdown to the Spanish sub-custodian for each income event. However, investors eligible to join the quick reclaim procedure (which include US investors) have only to ensure a valid tax residence certificate to be held on file by the investor's custodian. This contrasts with the position of an investor resident in a country covered by the special development rule (which includes the UK), where the investor has to provide a certified reclaim form to their custodian for each income event. Thus, in order to benefit from the quick reclaim procedure, UK investors must complete a tax reclaim form and get this form certified by HMRC. At best, if the dividend is paid at beginning of the month, they will have a month to do so. At worst, if the dividend is paid at end of the month, they will one or two days to do so. In contrast, investors that do not reside in a special development country have to provide only a single tax residence certificate, which covers all income payments. Moreover, we understand that the Spanish tax authorities are now requesting to see original versions of FSA certification of UCITS III [sic] status for each year a reclaim is made. In practice this is not feasible because the FSA does not provide certification of UCITS status annually. There are concerns therefore that WHT in excess of treaty rates will not be recoverable at all from Spain. We understand that negotiations with Spain have taken place in the last three years. In renegotiating this treaty, we request that officials seek to ensure that the UK is able to take advantage of the quick reclaim procedure and that the Spanish tax authorities do not seek certifications other than those required under the tax treaty for residence. 3. Are there any particular gaps in the DTA network that you wish to highlight in the context of our criteria for prioritisation? Resolution of the issues with existing treaties mentioned in the answers to questions 1 and 2 above are of greater priority than further expansion of the network. 12

13 4. Are there any particular gaps in the DCA network that you wish to highlight? We have no comments. 13