Amendments to the Regime and its Interaction with French and German Bank Levies SUMMARY In the UK Budget of June 2010, the Chancellor of the Exchequer announced a tax based on banks balance sheets, known as the bank levy. The bank levy took effect from 1 January 2011, and applies to UK-headed banking groups and building society groups, and non-uk-headed banking groups as well as non-uk banks, in each case with operations in the UK. Recent updates to the bank levy regime include: An increase in the rates for 2012; Arrangements with France and Germany to prevent double taxation; and Minor amendments to the UK framework. For further detail on the scope of the bank levy, please see our client memoranda of 10 November 2010 1 and 13 December 2010 2. For a comparison of the respective bank levy regimes of the UK, France and Germany, please see our client memorandum of 6 May 2011 3. CHANGE IN RATE The rate of the bank levy from 1 January 2012 will increase to 0.088% for short-term chargeable liabilities, and 0.044% for long-term chargeable liabilities. These rates are an increase on those announced in the UK Budget in March 2011 (0.078% for short-term chargeable liabilities, and 0.039% for long-term chargeable liabilities) in order to ensure the bank levy meets the UK Government s target of raising 2.5bn per annum, notwithstanding the impact of the economic downturn on the UK financial services sector. New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney www.sullcrom.com
DOUBLE TAXATION RELIEF AND INFORMATION EXCHANGE The UK intended to make arrangements for relief from double taxation ( DT ) on an individual basis with other territories imposing a bank levy-type tax. The bank levy legislation provides for UK law to give effect to DT relief arrangements, subject to the non-uk levy satisfying certain equivalence conditions. In contrast to DT relief for income tax and corporation tax, the DT arrangements with France and Germany give primacy to the state of residence of the parent company of the relevant entity or group, rather than the state where the branch is located (i.e. the UK retains primary taxing rights over French and German branches of UK banking groups, with German branches of UK groups being exempt from the German levy). Where the UK has primary taxing rights, it does so by giving credit against the UK bank levy, rather than exemption. A. FRANCE HM Treasury reached an agreement in principle with France on a mechanism to avoid double taxation in November 2010. We understand that this is yet to be finalised and formally documented, but is based on inter-governmental understandings and reflects the principle that the home state of the parent entity has primary taxing rights. Draft regulations reflecting the agreement were published for comment in July 2011 4. The regulations provide for relief to be given by way of credit against UK bank levy that is payable by reference to the UK assets of: non-uk banking groups or entities; or UK non-banking groups. As one would expect, the regulations do not provide for credit against UK bank levy for French bank levy incurred by French branches of UK banking groups (i.e. groups headed by UK banks or bank holding companies). A UK banking group with French subsidiary or French branch -2-
However, as currently drafted, the regulations suggest that a UK credit will be available for French bank levy incurred by French branches of UK non-banking groups (scenario B below). The justification for the distinction between UK banking groups and UK non-banking groups is unclear. This is particularly so given the principle that the state of residence of the top company of the relevant group (i.e. the UK) should have primary taxing authority, with the state of the non-uk subsidiary or branch (i.e. France) providing credit against the UK levy if appropriate. The apparent distinction may be an anomaly to be resolved when the final regulations are published. B UK non-banking group with French subsidiary or French branch of UK subsidiary C French bank with UK subsidiary or UK branch -3-
When determining the credit to be given against the UK levy for the French levy, the UK assets of a relevant group or entity are determined by reference to the accounts of that group or entity, prepared in accordance with international accounting standards or UK GAAP. The amount of credit available against the UK bank levy is a percentage of the French levy payable by the relevant entity or group. This reflects the extent to which the French levy is charged on UK assets. B. GERMANY On 7 December 2011, the UK and Germany signed a convention agreeing the mechanics of DT relief (the Convention ) for their respective bank levies 5. Unlike the agreement with France, which remains to be documented, the Convention and an accompanying Protocol have been made public. Draft regulations giving effect to the Convention were published on 9 December 2011 6. Once ratified by the UK and Germany, the Convention will be backdated to 1 January 2011. The basic position is that a bank of one Contracting State must have a permanent establishment in the other Contracting State if the latter s levy is to apply. However, this rule is overridden to the extent needed to permit the UK to impose its own levy on certain consolidated groups. Unlike the UK levy, the German levy is currently not imposed on a consolidated basis. The UK and Germany propose to give relief against the bank levy of the other country by way of credit (except for the German branch of a UK bank, which will be exempt from the levy see scenario A below). The basic scenarios are set out in diagrams A and B below. A UK bank with German subsidiary or branch (no ultimate German parent company) -4-
B German bank with UK subsidiary or branch, no ultimate UK parent company The Convention does not eliminate the risk of double taxation in respect of a German subsidiary in scenario C below. A German subsidiary of a UK bank having a German ultimate parent company will be subject to the UK bank levy and also the German bank levy. This is because the German levy is imposed on an entity basis whereas the UK levy is imposed on a consolidated basis. The UK will not provide a credit for the German bank levy against the UK bank levy because the UK is only obliged to provide credit in respect of German bank levy of a UK entity that is a subsidiary of a German entity 7. It does not require the UK to give credit for German bank levy of a German entity. The presence of a German ultimate parent bank means that Germany will not provide a credit for the UK bank levy against the German bank levy 8. It is probably unusual for a German parent bank to hold a German subsidiary via a UK subsidiary, so this issue may not be significant in practice. It has been drawn to the attention of HM Revenue & Customs, and would not arise if the German parent bank held its German subsidiary directly rather than via the UK. C UK bank with German subsidiary, and ultimate German parent company: double taxation? -5-
Where a credit against UK bank levy is due in respect of German bank levy payable by a UK branch, the credit due is an amount equal to the German bank levy attributable to that UK branch or subsidiary. The credit will reduce the bank levy attributable to the chargeable equity and liabilities of the UK branch or subsidiary, determined on a just and reasonable basis. The arrangements are considerably more detailed than those for the French bank levy. For example, the draft regulations set out a waterfall determining priority of credits where multiple subsidiaries of a group are eligible for credits in respect of non-uk bank levies. However, the arrangements do not currently provide for the utilisation of any excess credits (e.g. by carry-forward or carry-back). Taxpayers may appeal to the relevant competent authority in the UK or Germany where bank levy is charged otherwise than in accordance with the Convention, notwithstanding remedies provided by domestic law. Where the competent authority is not able to resolve a dispute, the Convention and regulations provide for a mutual agreement procedure. As a final resort, the Convention envisages a form of limited arbitration at the request of the relevant taxpayer if the issue cannot be resolved at competent authority level. The Convention also provides for exchange of information between the UK and Germany in respect of the administration and enforcement of the respective bank levies. This follows the publication on 6 December 2011 of draft legislation allowing more extensive exchange of information arrangements between the UK and other territories in respect of the bank levy. The dispute resolution and exchange of information provisions in the Convention follow the latest UK/Germany direct tax treaty which entered into force on 30 December 2010 9. OTHER JURISDICTIONS It is envisaged that the UK will enter into similar arrangements for DT relief with other territories imposing a bank levy-type tax. OTHER DEVELOPMENTS On 18 November 2011, HM Revenue & Customs published the final version of its guidance on the bank levy 10. However, there are still gaps, e.g. in respect of the DT relief arrangements with France and Germany. Recent legislation extended the kinds of netting arrangements taken into account when computing chargeable liabilities for bank levy purposes. These changes should be broadly favourable to the taxpayer. Minor changes are also proposed to the bank levy legislation to ensure that joint ventures are not subject to economic double taxation due to the different methods of accounting for joint venture interests; but also -6-
to ensure that certain liabilities of joint ventures do not fall out of account for bank levy purposes because of the way in which the interest in the joint venture is accounted for. * * * ENDNOTES 1 2 3 4 5 6 7 8 9 10 www.sullcrom.com/buk-bank-levyb-uk-publishes-draft-legislation-for-its-new-tax-on-banks- 11-10-2010/ www.sullcrom.com/uk-bank-levy-rates-and-update-12-13-2010/ www.sullcrom.com/bank-levies-in-the-uk-france-and-germany-05-06-2011/ http://www.hmrc.gov.uk/drafts/bank-levy-dtr-regs.pdf http://www.hmrc.gov.uk/taxtreaties/signed/uk-germany-bank-levy.pdf http://www.hmrc.gov.uk/drafts/german-banklevy11.pdf Article 7(2)(a) of the Convention Article 7(1)(a) of the Convention http://www.hmrc.gov.uk/international/germany.pdf www.hmrc.gov.uk/budget-updates/autumn-tax/bank-levy-manual.pdf Copyright Sullivan & Cromwell LLP 2011-7-
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