Budget 2009: Banking - Mazars - United Kingdom
Budget 2009: Banking
- Anti-avoidance legislation targeting Double-taxation relief schemes
- Hedging Proceeds from Future Share Issues
- Credit Crisis: stock Lending and repo arrangements - eliminations of adverse tax consequences of default
- Code of practice for the Banking Sector
- Asset Protection Scheme: Agreements to forgo tax reliefs
Anti-avoidance legislation targeting Double-taxation relief schemes
Two measures will be introduced to stop current schemes. The first measure will affect banks and financial institutions using avoidance schemes involving manufactured overseas dividends. Legislation will be introduced in Finance Bill 2009 to deny relief for foreign withholding tax where the recipient of a manufactured overseas dividend has not borne the economic cost of the tax.
This measure is targeted against a specific scheme which seeks to generate a pre-tax loss. The scheme involves the sale and repurchase of a foreign shareholding between two banks. Part of the repo agreement involves what is in substance the obligation to pay an amount that represents an overseas dividend. The current rules and regulations aim to give the recipient of a manufactured overseas dividend the same relief for foreign tax as the recipient of the real dividend. The measure will deny a deduction for foreign tax where the economic cost of the tax has not been borne by the company.
The second measure will affect UK Banks with effect from 22 April 2009. The announcement today states that legislation will be introduced to increase bank regulations and avoid credit abuse. The measure will clarify legislation introduced in Finance Act 2005 which limits the credit for foreign tax paid on trade receipts of a bank to no more than the corporation tax arising on the relevant part of the trade profits. The measure will put beyond doubt that the assumption should be that the restriction applies to any banking receipt where that income is artificially diverted to a non-banking company in the bank’s group. The measure will also ensure that a bank’s average funding costs over all its transactions are always taken into account when calculating the relief due.
The measure is targeted against specific schemes involving the making of financial transactions through an investment subsidiary where the income is taxed differently from the parent company, which retains the costs of earning the income.
Hedging Proceeds from Future Share Issues
The Disregard Regulations (Statutory Instrument 2004/3256) will be amended to bring in special rules that apply when a company announces a rights issue of shares denominated in a currency other than its functional currency and enters into a currency derivative contract that seeks to hedge the risk to the value of the future share issue proceeds from currency fluctuations. Where this is the case, any exchange gain or loss on the currency derivative contract will be disregarded.
Generally speaking the changes will ensure that any gains or losses on relevant currency derivatives contracts will not be brought into account for tax purposes as they arise.
The new rules will apply to all currency derivative contracts entered into on or after 1 January 2009 (unless the hedge was entered into before 10 March 2009 and was not still current at that date) with the intention of hedging the exchange risk to the future share proceeds.
Credit Crisis: stock Lending and repo arrangements - eliminations of adverse tax consequences of default
HMRC have confirmed the reforms announced in the pre-budget report in November 2008 which are likely to affect market makers, securities dealers and financial institutions that enter into stock lending or sale and repurchase (repo) agreement.
The measures will help to eliminate potential distortions which would otherwise be triggered by default in those transactions.
They seek to disapply the rule that treats the non-return of borrowed securities as a disposal by the lender for capital gains purposes (capital gains tax and corporation tax on chargeable gains), provided that the lender uses collateral provided by the borrower to acquire replacement securities of the same kind in the market.
Measures will be introduced in Finance Bill 2009 to provide relief from unexpected stamp duty and stamp duty reserve tax (SDRT) charges that would otherwise arise where a stock lending or repo arrangement terminates, so that stock is not returned to the originator under the terms of the arrangement owing to the entry into insolvency of one of the parties to the arrangement. The stamp duty and SDRT changes will have effect for stock lending arrangements where the borrower becomes insolvent or to repos where the purchaser becomes insolvent, on or after 1 September 2008.
Code of practice for the Banking Sector
HMRC will shortly publish a draft Banking Code of Practice under which banks will be expected to go beyond statutory requirements in maintaining a transparent relationship with HMRC and comply fully with their tax obligations. There will also publish a draft consultation document which will set out Government expectations for all banks in the UK, including UK branches of overseas banks.
Asset Protection Scheme: Agreements to forgo tax reliefs
Agreements entered into by a group of companies with the Treasury or another Government Department in connection with the Government’s Asset Protection Scheme or similar arrangements designated by the treasury may include provisions for those companies to surrender their rights to certain tax reliefs. Some of these tax reliefs are automatic in the absence of a specific claim. This includes the carry forward of tax losses under section 393(1) ICTA 1988.
Legislation will be introduced in the Finance Bill 2009 in order to ensure that provisions of the Corporation Tax Act granting those automatic reliefs, will not override the surrender provision in the agreements.
The legislation will apply to such qualifying arrangements entered on or after 22 April 2009 and will only affect those groups of companies that have entered into such agreements with the Treasury or another Government Department or agency.
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