FII GLO

I was having a bit of a think on the practical implications of the High Court decision in

Prudential Assurance Co Ltd & anr v Commissioners for HMRC EWHC 3249 (Ch).

 

As the likelihood is that the High Court decision will be appealed there's an argument for not worrying about this until the Court of Appeal and Supreme Court have had their say. But I think there are some points that might need to be considered now.

 

1.  Documentation

Assuming for the moment that the High Court approach of providing relief for underlying tax but at the higher of the treaty rate or the nominal rate is upheld then being able to produce the relevant paperwork to support the appropriate nominal rate of tax will be important.  It is clear from the High Court judgement that Prudential were able to analyse their foreign income by country for each year of claim. It might be an idea for companies that have submitted claims for foreign dividends to be exempt to ensure that they can lay their hands on a similar analysis.  If its not possible to do this then a visit to the archives might be in order.

2.  Time Limits

The ECJ has now issued its judgement on the issue of whether FA 2004 section 320 is  consistent with EU law.  The judgement is that FA 2004 section 320 cannot be allowed to reduce the period of a mistake claim.  This link to Simmons and Simmons (You will have to sign up for their service) indicates that companies only have until 16th January 2014 to issue protective High Court claims before statutory changes bar claims.

Time Limits  

 

Might this allow companies to make claims for exemption for foreign dividends (or relief from underlying tax at nominal rates for periods where they had previously thought they were time barred from making claims?

 

3.  Recognition in accounts

 

With year end almost upon us companies will need to consider whether to recognise the High court decision in their 2013 accounts.  As far as I can see there are limited grounds for recognising the benefit.  IAS 37 prohibits the recognition of contingent assets that are defined as follows:   "contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the entity. An example is a claim that an entity is pursuing through legal processes, where the outcome is uncertain."

 

There is similar wording in UK GAAP.

 

Given the likelihood that HMRC will appeal the High Court decision and continue to claim that credit relief should be provided at the underlying rate but without the nominal relief provision included in the High Court judgement I don't think its possible to claim that there is no contingent element to the reclaim.  

 

There is however, a requirement to disclose contingents assets (by way of a note) where recovery is probable.  

 

4. Recognition in Policyholder Benefits  

The issue here is whether to recognise the benefit of claims for exemption for foreign dividends in the policyholder value of unit linked and with profit funds.  This is of course an issue that has existed since the start of the FII GLO but the High Court decision has brought in into focus.  From a theoretical view I think the correct position is that some credit should be given to policyholders.  That is the chances of overall success in the litigation must be greater than 0% so there is an asset.  That asset should be recognised in policyholder funds to ensure inter generational equity for policyholders.  

 

Having said that there are practical reasons to not recognise; most importantly recognising the value of exemption in policyholder assets and then clawing that value back in the event of a future court decision is likely to cause a terrible stink.

 

5.  Collective Investments 

 

I am struggling to see how investment in a foreign collective such a Luxembourg SICAV would fit in to the High Court decision. Luxembourg does tax corporate profits but not return accruing to a SICAV.  So is the nominal rate 0% or the Luxembourg CT rate?  Assuming for the moment that the 0% rate is the nominal rate (No idea is this is the right answer just an assumption) then underlying credit rules do allow you to go down a chain of holdings in calculating underlying tax.Link to HMRC manual.

 

But this just takes us back to point 1 what documentation do you need to evidence the nominal underlying tax on the dividends received by the SICAV?  

 

 

 

Loan Relationship Consultation

HMRC have now published the summary of responses to the Modernising the taxation of corporate debt and derivative contracts consultation document.

LR Condoc Responses

In general the document does exactly what it says on the tin: it summarizes the responses to the original consultation document and commits to further consultation with a view to legislation in Finance Act 2015.

A welcome development is that HMRC have backed down from the initial proposals for bond funds.  The key paragraph is 13.12 reproduced below.

"In the light of this, HMRC has been exploring with stakeholders, and continues

to do so, a less radical approach, which will retain the bond fund rules, while addressing both the tax avoidance issues and some of the difficulties with the operation of the test for identifying a bond fund. As set out in the consultation document, it is intended that changes in this area will be included in Finance Bill 2014."

 

The clauses to be included in Finance Act 2014 are (scheduled) to be released in January. 

 

It probably shows a lack of imagination on my part but I'm at a loss to see how bond funds could be used in a tax avoidance scheme.  I wonder if an anti avoidance provision is really needed in this area?  If avoidance was a clear and present danger then I suspect we would have had legislation already rather than waiting for the Finance Act.

On corporate streaming the position is less clear cut.  The final paragraph on this is as follows.

"The Government notes the issues raised and intends to explore further with

stakeholders implications arising from the identified options before determining

the way forward. It is expected that any changes in this area can be implemented by way of secondary legislation under existing regulation-making powers conferred on HM Treasury"

 

So really a question of watch this space but I think HMRC may be moving away from outright abolition of streaming.  

 

One pet peeve that I have is that HMRC keep referring to the corporate streaming provisions as anti avoidance legislation.  But this simply isn't the case, if it was anti avoidance legislation then it would be worded as such.  Of course the key consideration in HMRC's (collective) mind when the legislation was instigated was the need to prevent investment via an AIF turning taxable income into FII but that's not the same thing (parliament passes legislation not HMRC).  Corporate streaming provides continuity of treatment to the tax system and is beneficial both for tax payers and HMRC.

 

Pet peeve aside its good to see HMRC has paid attention to industry representations on the bond fund point and hopefully we are headed in the same direction on streaming.

 

French Dividends Paid to OEICs

An update to my post of 11 July on this topic.  One of my clients has pointed out to me that the French fiscal authorities have now issued guidance on how UCITs can obtain a 0% rate of French withholding tax.

More information can be found in the link below

http://www.pwc.lu/French_withholding

(There's a rather better note from Ashurst Paris that I can't link to but you should be able to google)

As far as I am aware it is not possible for a life company investing in French equities to obtain the 0% rate via this UCITs route.  There might be a case in European law that UK linked pension business holdings should not suffer French withholding tax at 15% but such claims seem to be hard to enforce in practise.

Accordingly,linked pension business investment in French assets via a UCIT will obtain a better rate of withholding than direct investment in equities.  This is of course the reverse of the position for Dutch, German, Swiss and Belgium equities where direct pension business  investment obtains a lower rate of withholding than investing via a UCIT.

A tax transparent fund holding collectives investing in France (and maybe Italy) but having direct investments in other European markets might square the circle but whether the cost or complexity involved would be worthwhile is unclear.