Germany Reduced Rate of withholding for UK Pension Schemes

Another post on the practical difficulties of a life insurance company attempting to obtain the reduced rate of withholding available for pension schemes.  This time the issues arises on German equities, under the UK / German DTA dividends paid to pension schemes suffer withholding at 10% rather than general 15% rate on portfolio dividends.

The protocol to the DTA includes the following clarification of what is a pension scheme for the purposes of the DTA

"in the case of the United Kingdom, pension schemes (other than a social security scheme) registered under Part 4 of the Finance Act 2004, including pension funds or pension schemes arranged through insurance companies and unit trusts where the unit holders are exclusively pension schemes."

An issue has arisen where a life insurance company with both BLAGAB and GRB business  has two "accounts" with its custodian for German equities.  One is for pension business where the reduced 10% rate of withholding applies and the other for BLAGAB where the usual 15% rate applied.

The German authorities have questioned the fact that there are two accounts for one beneficial owner and are minded to reject the claim for the reduced rate of withholding on pension business.

I was wondering whether anybody else had encountered this argument and if so whether they were able to successfully explain to the German authorities the requirement for two separate accounts for one life insurance company ?

New HMRC Guidance

HMRC has issued two new pieces of guidance on the Finance Act 2012 regime.  The guidance covers the transition rules and identification of term policies.

The guidance can be found at
http://www.hmrc.gov.uk/life-assurance/manual.htm

Cobham Life Tax Conference 2013

I was at the National Life Tax conference last week.  I won't try and cover the whole conference in the blog but just a couple of themes that emerged.

1.  There was quite a lot of coverage of topics other than corporation tax.  A FATCA/FTT talk, a session on the FCA , a lot on changes to qualifying policies in the Finance Bill 2013 session and  the customary VAT slot.  This is a reflection of the fact that FB 2013 doesn't include any specific legislation on the corporate taxation of life insurers but also perhaps a sign of the areas that large life insurers are looking at and where the big four see their future fees coming from.

2.  It seems that things that I thought had gone away for good are now making a comeback.  A really good example of this is the Andersen case and outsourcing where the UK Government is looking to implement the ECJ decision.  There's a little bit of background on this in the minutes of the IPT and VAT Insurance Liaison Group meeting on the 8th February 2013. (Unfortunately this doesn't seem to be on HMRC's website but there is a copy on the ILAG website).  Another zombie issue is insurance contracts IFRS 4 phase 2.  Kevin Griffith of EY did a good talk on this that pointed out that the IASB's insurance accounting project has been going since 1997.  Sadly it seems that progress is being made with a targeted exposure draft due in June 2013.  Having said that Kevin's slides show an implementation date for IFRS 2 phase 4 of 1 Jan 2018 so not exactly imminent.

There was an interesting discussion on the Wednesday evening with tax directors from Prudential, L&G, LBG and Aviva.  One question that was asked was whether the next step was the abolition of I-E.  I think all of the panel thought that I-E should remain for the short to medium term with the quickest suggested date for implementation being 7 years from now.  So this is one Zombie that won't be coming back from the dead for a while.

Tax Transparent Funds / Deemed Disposals

It occurred to me that my last two posts sit rather well together as the ACS  / Tax transparent fund proposals might offer a route out of the deemed disposals regime and its inappropriate loss relief provisions. (See post of 13 May for the full rant).

This does not apply to co ownership structured tax transparent funds as these are within the deemed disposal legislation (see post of 9th May ) but for tax transparent funds that are set up as limited partnership TCGA 1992 section 212 does not apply. This would seem to square the circle; that is the commercial demand to pool funds to reduce costs but the fact that tax on realisation is a more appropriate CGT basis.

Of course there are problems.

Is the limited partnership structure viable for insurance companies (legal  / regulatory issues?).  I've no idea what the answer is to this.

The no gain  /  no loss provisions for transfers into tax transparent funds only apply where the co  - ownership structure is adopted.  Presumably transferring CGT assets into a limited partnership structure will be a realisation for capital gains tax purposes.  In some circumstances this might make a transfer unappealing but the widespread existence of CGT losses might cushion the blow.

As limited partnership tax transparent funds are transparent for CGT the fund provider is going to need to have some pretty good CGT reporting mechanisms in place to give a life insurer the information to go into its tax computation.

Obviously the real answer is a full reform of the treatment of capital amounts (both CGT and loan relationships) in the I-E computation but I don't get the felling this is likely to happen any time soon.

 

Deemed disposal carry backs

Part 2 of an occasional series - things that make no sense to me -  this time carry back of deemed disposal losses.

Since 2003 a company with a deemed loss has only been able to carry that loss back for two years under TCGA 1992 section 213(3).  (Prior to 2003 a six year carry back applied).  A two year carry back seems inappropriate for a deemed disposal regime.  For instance say that a life insurance company  purchased an asset for £100 and that the asset increased in value by 70 for the first seven years of ownership.  In year 8 its value falls by £490 (i.e. all the way back to its original value of £100) and in year 9 it is sold for £100.

If this asset was not a deemed disposal asset then there would be no chargeable gain on disposal (asset cost £100 sold for £100) but if the asset is subject to deemed disposals then gains of £250 will be taxed even though there is no economic gain.  There are however, losses of £250 to carry forward due to the deemed disposal rules but no guarantee of utilization.  

The example uses some stylized figures to bring out the point but the real world stock market seems to be characterized by long periods of appreciation and sudden falls.  As well as the unfairness I think this effect is sometimes missed by companies making long term estimates of their tax liabilities.  That is such estimates often use a steady rate of investment appreciation but in doing so don't capture the perverse interaction of sudden fluctuations in asset values and the weird and legislation governing offset of losses. 

Tax Transparent Funds

In its UK investment management strategy document published on budget day 2013 HM Treasury confirmed that

 "By the end of spring 2013, two new authorised contractual (tax transparent) scheme (ACS) vehicles will be available for fund managers to establish in the UK"

So by 21st June there should be two more UK collective investment vehicles available to life companies. 

Tax transparent funds or ACSs can come in one of two flavours, one a limited partnership structure and the other a co  - ownership structure.  It is envisaged that the two types of ACS will use arrangements permitted by UCITs iv to provide "top level" funds that other UCITs funds can invest in.  

Pension companies are also mentioned in the strategy document as being potential investors in ACS vehicles for withholding tax reasons.  Presumably this is a reference to the current situation where if a UK pension company invests directly in US equities it will obtain a 0% withholding rate under the UK / USA double taxation agreement and associated competent authority agreement (see Philip's post of 16th April if you would like a link to the competent authority agreement).  However, if a UK pension company invests in US equities via a UK resident OEIC the OEIC will suffer withholding tax at the treaty rate of 15%.  If a pension company invests via a SICAV then the SICAV would suffer withholding on  US dividends at 30% as there is no US / Luxembourg DTA.

Investment by a UK pension company in an ACS should hopefully provide access to the 0% treaty rate (as the ACS is transparent  the pension company continues to own the assets) whilst allowing pooling of funds with cost savings etc.

There is some draft legislation for ACS vehicles including measures specific to the BLAGAB business of UK life insurance companies.  ACS vehicles established under the co  - ownership structure although transparent for income will not be transparent for CGT purposes i.e. the holding in the ACS will be treated as an asset subject to CGT.  (This will not be the case for ACS vehicles set up as limited partnerships where it will be necessary to keep track of CGT on an asset by asset basis.)  

The draft legislation also extends the deemed disposal legislation in TCGA 1992 212 to ACS vehicles established with a co  - ownership structure and introduces a new TCGA 211B that provides that when assets are transferred to a co  - ownership structure ACS wholly in exchange for units in the ACS being issued to a life insurance company then the transfer will be treated as no gain /  no loss.  This relief is extended to relevant offshore funds.  There is anti avoidance legislation when the ACS units issued are disposed of within three years of the end of the accounting period in which the transfer took place.  This is presumably to prevent life insurers using the ACS as a way of obtaining a 7 year spread of gains on assets that they wish to dispose of.  Which is a bit petty but in general the ability to transfer in to a contractual ownership ACS without realising a gain is welcome. 
Link to the draft legislation is below
http://www.hmrc.gov.uk/drafts/draft-cgt-regs.pdf 

Double Taxation 0% Rate for Pension Schemes

A follow up on double taxation treaties that provide for reduced rates of withholding tax for UK pension schemes.  The double taxation agreements that provide for reduced rates that I am aware of are as follows.

Holland, Germany, Switzerland, USA, Japan and Belgium.

The reduced rates for pension schemes in these agreements should be extended to investments in respect of unit linked pension business of UK life insurance companies but there seem to be some difficulties convincing Swiss authorities that this is the case (see post of 25th April on this topic).  In addition to the countries listed above there are reduced rates for pension schemes in the Spain and Norway double taxation treaties that have yet to be ratified. (see post of 14th March)

For Germany the double taxation treaty reduces the withholding tax rate from 15% to 10% for pension schemes, for all other countries the rate is reduced to 0% for UK pension schemes.

Life assurance: new regime guidance

HMRC have published interim guidance on two aspects of the new long-term business corporate tax regime which commenced on 1 January.  The issues covered are:

• allocation of income, gains, profts etc and expenses between tax categories
• interaction with CFC legislation:  application of the Avoidance of Double Charge Regulations 2012

The interim guidance is at http://www.hmrc.gov.uk/life-assurance/manual.htm.

Capital Allowances Changes

One of the things I am doing at the moment is trying to get all of the various capital allowances rules and calculations into an excel format.  Nothing to do with life companies but a project to develop a database tool that can work with Sage to provide useful fixed asset and capital allowances information (don't worry I'm only doing the tax there's someone else to do all the whizzy stuff on the database.)  The intention is to market to SMEs but if anyone can see any applications for larger companies then very happy to talk.  

Going through the exercise its clear there have been a lot of changes and as LifeTax people aren't usually focused on capital allowances it might be useful to jot down what these were.

1.  The rates of writing down allowance are reduced from 1 April 2012 to 18% for main pool assets and 8% for special rate pool allowances (long life assets, integral fixtures, high emission cars etc.)  For periods straddling 1 April 2012 allowances are time apportioned so for the year to 31 December 2012 the rates are 18.49% main pool and 8.50% special rate pool.

2. The Annual Investment allowance ("AIA") that provides 100% writing down allowances for a certain amount of expenditure has now become very complicated.  For periods to 31 March the AIA is at 100,000 per annum.  For periods from 1 April to 31 December 2012 AIAs are available on £25,000 per annum and for periods from 1 January 2013 the AIA is £250,000 per annum (per FB 2013) but due to drop to £25,000 from 1 January 2015.  Again for periods that straddle 1 April 2012 or 31 December 2012 the allowances need to be prorated.  So for accounting periods to 31 December 2012 the AIA is £43,750 (i.e £100,000 x 3/12+ £25,000 x 9/12) or £43,493 if you work out in days.  There are also transitional rules for straddling periods that are horrendous and I won't go into here. (I do, however, have a spreadsheet that purports to work it all out).

3.  From 1 April 2013 the definition of a high emission car will change from > 160g/KM to > 130g/km.

A couple of links

http://www.hmrc.gov.uk/budget-updates/autumn-tax/tiin1310.pdf

http://www.hmrc.gov.uk/tiin/2012/tiin1278.pdf