Rates and Update SUMMARY In his Budget statement delivered on 22 June, 2010, the Chancellor of the Exchequer announced that the UK will introduce a tax based on banks balance sheets from 1 January, 2011, to be known as bank levy. The rate of the bank levy has now been set at 0.075% from 2012, with a lower rate of 0.05% for 2011. Funding liabilities of greater than one-year maturity and certain uninsured deposits will be charged at half the rate otherwise applicable. Once fully in place this tax is expected to generate around 2.6 billion annually. Both the rates and the total amount expected to be generated are slightly increased from previous estimates. The government expects the levy to be paid by between 30 and 40 banks, building societies and banking groups. Revised draft legislation and accompanying guidance were published on 9 December, 2010. This memorandum describes the changes made and other developments since our previous memorandum on this subject of 10 November, 2010. Generally speaking, the design of the levy is unaffected and the changes are to matters of detail. The changes since our previous memorandum include: restoration of an exclusion for sovereign repos; rewriting of the anti-avoidance provision; introduction of various powers to amend the legislation by Treasury order; publication of details as to how the tax will be administered; and announcement that an agreement on prevention of double taxation has been reached with France. The current status is that the revised draft legislation is open for further consultation until 9 February, 2011. The legislation will be included in the Finance Bill due to be published on 31 March, 2011 and passed into law in the summer. Theoretically the legislation could be amended at any point up until that time. However, given that the legislation will be effective from 1 January, 2011, it can be expected that the government will be reluctant to make any significant changes to the latest draft legislation. Once the New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney www.sullcrom.com
legislation is passed, the ability to make certain changes by Treasury order is written in to the legislation. It has been announced that the legislation will be formally reviewed in 2013. BACKGROUND The bank levy is briefly described below. For a more detailed description, please refer to our memorandum of 10 November, 2010. The tax will apply to both UK-headed banks and to non-uk headed bank groups with operations in the UK. In particular, the tax will apply to: (1) the global consolidated balance sheet of UK banking groups and building societies; (2) the aggregated UK subsidiary, UK subgroup and UK branch balance sheets of non-uk banking groups; and (3) the balance sheets of UK banks, UK bank branches and UK bank subgroups in non-banking groups. Once the relevant balance sheet has been identified, the tax will be calculated annually as a percentage of the total equity and liabilities shown on the relevant balance sheet excluding in particular: (1) Tier 1 capital; (2) insured deposits; (3) policyholder liabilities of insurance business within banking groups; and (4) certain tax and pension fund liabilities. Some adjustments to balance sheets may be required in order to net certain assets and liabilities e.g. cash-collateralised derivatives and credit is given for high quality liquid assets. The tax will not be covered by the UK s existing double taxation treaties, not least because it is not a tax on income or gain. The government has begun discussions with other countries that are introducing similar taxes (France, Germany and Sweden have committed to introduce similar taxes) to avoid double taxation issues. THE SCHEME OF THE BANK LEVY This section summarises the few, comparatively minor, changes that have been made to the scheme of the bank levy. Long-term liabilities are taxed at half the standard rate. Intra-group liabilities owed to entities not subject to the bank levy are long-term only if the relevant group is able to demonstrate that it funds those liabilities through long-term liabilities or excluded liabilities to third parties. The discrepancy mentioned in our previous memorandum between the draft legislation and the draft guidance on this point remains. The draft guidance indicates that intra-group debt which cannot be traced to external funding will be split into long-term and short-term liabilities according to the group s external funding ratio of short-term debt. It appears that the UK tax authorities ( HMRC ) have discretion here and that the guidance is an indication as to how HMRC intend to exercise it. -2-
The revised draft legislation still fails to distinguish, from other long-term liabilities, those very long-dated subordinated obligations which can count towards the regulatory capital base, even if they do not satisfy the criteria to be treated as excluded Tier 1 capital. It looks like this position will now stand. In determining the tax base, a deduction is allowed for high-quality liquid assets. This concept has been expanded so that taxpayers can take account of such assets which they hold as collateral under a repo or similar arrangement and which are therefore not on balance sheet. In such cases the amount of the deduction will be the lesser of the fair value of the collateral and the loan asset recognised on the balance sheet in respect of the repo. In some cases, commercially similar arrangements may be treated slightly differently for the purposes of the bank levy. It will be interesting to see: (i) whether the impact of the levy will be considered by banks to be sufficiently material to impact the structuring of individual transactions or types of transactions; and (ii) to what extent increased costs-type language in legal documentation will be used to pass on the cost of the levy to specific borrowers. One of the issues that foreign banking groups in particular will face in calculating the levy is the need for the levy to be calculated by reference to UK GAAP or IAS. Particularly where they are headquartered outside of the European Union, such groups are likely to draw up their accounts under different accounting standards. The draft HMRC guidance goes into some detail as to the main adjustments that HMRC think will be required to US GAAP and Japanese GAAP in particular. This suggests that HMRC is expecting such groups to start with their existing audited accounts and then adjust them for the purposes of calculating the levy rather than to draw up completely new financial statements under UK GAAP or IAS. The extensive draft guidance also goes into some detail in relation to joint ventures, another area which appears to have given rise to difficulty in determining how the bank levy should apply. EXCLUSIONS FROM THE TAX BASE FOR THE BANK LEVY When determining liabilities for the purposes of the bank levy, legally effective netting arrangements can be taken into account (so as to reduce those liabilities) in a wide range of situations. The legislation has now been changed to clarify that multilateral netting arrangements are included, provided they are legally effective and enforceable between the two relevant parties. Excluded liabilities are ignored altogether when computing the bank levy. An exclusion for sovereign repos, which was originally included, but then withdrawn on the basis that the reduction for high quality liquid assets made it redundant, has been reintroduced. The exclusion applies where the taxpayer has a liability under a repo where it has posted debt securities issued by a designated multilateral development bank or by a designated government or central bank as collateral. While welcome for taxpayers, it is not clear why the government has changed its mind on this point; some potential overlap with high quality liquid assets appears to remain. -3-
The legislation now provides for a power to remove, as well as add to, the excluded liabilities by secondary legislation. ADMINISTRATION The bank levy will be accounted for and paid under the existing Corporation Tax Self Assessment system, subject to appropriate amendments, and the corporation tax quarterly instalment payment system will apply to the bank levy regardless of whether a company would otherwise fall within the requirement to pay quarterly instalments in respect of corporation tax. Intra-group payments relating to meeting or reimbursing the cost of the bank levy are to be disregarded for corporation tax, and the bank levy will not be deductible for corporation tax purposes. For groups, a single group member (the responsible member ) will pay and account for the bank levy on behalf of the group, and will submit bank levy computations as part of its corporation tax returns. A responsible member can be nominated to HMRC so long as it is a chargeable member of the relevant group for bank levy purposes and has an accounting period which is the same as the chargeable period. If no group entity meets these requirements, the parent of a UK banking group or building society group is eligible for nomination. For non-uk banking groups or relevant non-banking groups, a chargeable member with an accounting period which is the same as the chargeable period can be nominated, provided it is either the group company with the greatest amount of chargeable equity and liabilities for bank levy purposes, or the parent of a UK subgroup or a relevant UK banking subgroup. If no valid nomination is made, HMRC may designate a responsible member within 30 days of the end of a chargeable period. Subject to a specific exemption for securitisation companies, all members of banking and building society groups that are within the charge to UK corporation tax, and all members of non-banking groups that are both chargeable to the bank levy and within the charge to UK corporation tax, are jointly and severally liable for the bank levy. The Treasury is given a new power to make, by secondary legislation, such amendments to the legislation as they consider appropriate in consequence of regulatory or accounting changes. It is specifically provided that such changes can be to some extent retrospective. ANTI-AVOIDANCE Any arrangements in respect of which the main purpose, or one of the main purposes of any of the parties to the arrangements is to reduce a liability to the bank levy will be disregarded for the purposes of calculating the bank levy. The revised draft legislation has changed significantly from its original iteration in October 2010. In particular, there is no longer a requirement to satisfy an officer of HMRC as to the effect of any arrangements in order to fall outside the anti-avoidance provisions. Instead, the revised legislation specifies certain exemptions from the anti-avoidance provisions, without reference to the -4-
determination of an officer of HMRC. Arrangements will be disregarded to the extent that they have one of the following effects on an ongoing basis : Increasing excluded equity and liabilities, or long-term equity and liabilities, or high quality liquid assets; Reducing short-term liabilities where there is no corresponding increase in the amount of funding from sources which are not excluded equity and liabilities or long-term equity and liabilities; Reducing long-term equity and liabilities where there is no corresponding increase in the amount of funding from sources which are not excluded equity and liabilities; or Entering into netting agreements. Unlike the previous draft, this should cater for the possibility of a permanent reduction in overall funding, as well as a shift to the less risky funding that the government says the levy is intended to encourage. It is difficult to see what type of corresponding increased funding would fit the scenarios described in the second and third bullet points; this is presumably intended to address the possibility of banks finding a method of funding that falls outside the scope of the levy. Draft guidance indicates that whether a measure is on an ongoing basis is a question to be considered in the context of a bank or group s overall funding profile over a period of time. The guidance is clear that window dressing to achieve a short-term effect around the balance sheet date will not generally be considered to be on an ongoing basis. The bank levy will constitute a tax for the purposes of the many other anti-avoidance rules targeting arrangements aimed at securing a tax advantage (notably, the anti-avoidance rules in the UK corporation tax code regarding corporate debt and derivatives). DOUBLE TAXATION ISSUES It is a matter of some considerable concern for taxpayers that little progress seems to have been made on resolving double taxation issues caused by the extraterritorial scope of the levy. There have been two developments since our previous memorandum: The government announced on 29 November, 2010 that it had reached agreement with France on a mechanism to avoid double taxation. Details of the agreement are not yet known. However, legislation giving effect to this agreement is proposed to be enacted once the Finance Bill 2011 has received Royal Assent. The newly-published draft guidance specifies that a non-uk levy is only considered equivalent to the bank levy if that non-uk levy (i) follows the proposals made by the IMF in June 2010 (see http://www.imf.org/external/np/g20/pdf/062710b.pdf); (ii) is based on the balance sheet (rather than income, profits or gains); and (iii) is similar in intent to the bank levy. * * * Copyright Sullivan & Cromwell LLP 2010-5-
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