Swedish Withholding Tax

Something that I hadn't realized was that Swedish dividends paid to collective investments (including non  - Swedish resident collectives), no longer suffer withholding tax under Swedish law.  

See below for detail.

EY_withholding_tax

This compares to the 5% rate of withholding provided for in the UK/Sweden double taxation treaty.  Accordingly Sweden joins the list of EU countries where investment via a collective obtains a better rate of withholding than direct investment. Of course there are other European countries where, for pension linked investments, the rate of withholding is better for direct investment than it is via a collective.  See previous post on France for more detail on this.

Indexation Allowance

I've noticed that HMRC don't seem to have published indexation allowances for either November or December 2013.

If people are looking for the indexation allowances for these months to update CGT calculations then I think that if you look at the RPI column on table C page 12 of the attached document it will provide RPI factors for November and December 2013.  The factors for Jan through October agree to the figures published on HMRC's web site.

ons_inflation

Loan Relationship Consultation

HMRC has now issued the draft legislation to be included in Finance Bill 2014 relating to bond funds i.e. collective investments that are more than 60% invested in loan relationships.

The legislation and related guidance can be found here:

draft legislation and guidance 

From a quick (ish) read through I would say the legislation does the following.

Firstly it changes the wording of CTA 2009 section 490. (Which is the basic rule that funds with over 60% of their investments in loan relationships are treated as loan relationships.) Particularly significant is the introduction of 490 2(b) which covers distributions from bond funds received by companies and operates so that:

"b) any distribution in respect of the relevant holding were not a distribution (and                 accordingly is within Part 5)"

So this seems to be saying that all distributions received by a company from a relevant holding (i.e. bond fund) are taxable as loan relationship income.

What I don't follow here is what this means if an AIF bond fund pays a distribution that is not an interest distribution?  Does the FII part of the streamed distribution become taxable under the loan relationship legislation?  If this were to be the case I think it would give an incorrect result.  That is if a UK AIF had 61% of its assets in gilts and 39% in equities it may either choose not to pay an interest distribution or might not be able to (say its equity holding had gone over 40% during the distribution period).  It would then seem correct that 39% or so of the dividend should be franked and not taxable.  Does the proposed legislation turn franked payments into taxable loan relationships, leading to double taxation?

The comment in the guidance is that 

"Any distributions or other sums arising from the holding to the company are to be included in the fair value calculation and are not to be treated as distributions for tax purposes

(section 490(2)(b)).

The sums to be taken into account include any interest distributions and the gross amount of the unfranked part of dividend distributions from authorised investment funds (i.e. including any income tax treated as having been deducted), along with all other types of distribution or dividend from funds other than authorised investment funds." 

Which I think could be read as saying that the FII element of a streamed distribution is not taxable as loan relationship income.  But the guidance is not as clear as I would like and I'm not sure it is what the legislation says.

The revised changes to the legislation also makes some alterations to CTA 2009 section 465.  These are interesting changes and I wonder if they reveal a flaw in the legislation as it stands.  I'll have a think about this and may post again.

Unfortunately HMRC have gone ahead and introduced new anti avoidance legislation for the bond fund provisions of section 490. As a result the old section CTA 2009 492 that had two subsections has been completely overhauled and now runs to 5 subsections. The overall intention seems to be to extend the anti avoidance legislation so that it applies to not only bond funds but where: 

" a related fund enters into any arrangements,or arrangements are entered into that in whole or part relate to a related fund,"

So we now have all sorts of terms that are defined very widely in the legislation: related fund, arrangements and tax advantage.   During the initial consultation there had been representations that the anti avoidance legislation should only apply where funds did not meet the diversity of ownership condition in si 2006/964.  The guidance makes some encouraging noises that, generally, the new 492 will only apply where there isn't diversity of ownership but leaves HMRC wriggle room to apply it in other circumstances as well.

I don't feel the anti avoidance legislation is a disaster but its wide ranging nature combined with the rather sparse guidance might lead to future problems.  Hopefully in the next (brief) consultation process HMRC can be persuaded to either narrow down the potential impact of the legislation or expand the guidance.  An example of the type of tax avoidance the new 492 is intended to prevent, and how the legislation would be used to counteract this avoidance would be useful.

There are also amendments to the qualifying investments test in CTA 2009 463.  The changes apply where a bond fund invests in another collective that is also a bond fund and deals with an apparent defect in the existing wording.

The new legislation comes into effect from 1 April 2014 but there is an unwelcome proposal that " an accounting period beginning before, and ending on or after, 1 April 2014 is to be treated as if so much of the period as falls before that date, and so much of the period as falls on or after that date  "

 Responses to the draft legislation and guidance are to be submitted by 14th February.

The guidance ends with the following comment:

"Separately, HMRC will consult further on proposals to permit companies to make a claim

that section 490 CTA 2009 should not apply in certain prescribed circumstances; and to

remove non-exempt unauthorised unit trusts from the scope of the bond fund rules. Any

changes will be made in secondary legislation under existing powers in sections 17(3)."

So there may be more to come on this.

Guidance on Certificates of Residence

Life insurers and companies acting as custodians for life insurers may be interested in the new HMRC guidance on certificates of residence. The guidance can be found here

certificate of residence guidance

The guidance will be paragraphs 120090 - 162500 of HMRC's international tax manual. 

I've summarized below what I see as the key points.

• This is clearly quite a fast moving area as this guidance replaces guidance issued on the 4th January 2013.

• HMRC's approach is that although eligibility for treaty benefits is ultimately between the UK claimant and the relevant non - UK authority, HMRC will do some due diligence and will refuse to issue a certificate of residence where the UK company clearly does not meet the treaty conditions. "As the purpose of a CoR is to support claims for benefits under a particular Article of a DTA (being the Article applicable to the relevant income source), HMRC may refuse to issue a CoR where it is clear that the customer would not be entitled to those benefits."

• In my opinion this strikes the right balance and it is a good template for areas like QROPs approval.

• Paragraph 162020 sets out the information that should be sent to HMRC to support a claim for a certificate of residence.

• Where the other state produces a specific form on which a claim for a reduced rate of withholding tax etc should be made, the claimant should also provide a copy of that form to HMRC (after completing the parts applicable to them)

• Where the relevant treaty includes a subject to tax clause then HMRC requires that the claimant confirm that it is subject to tax and there is reference in the guidance to companies providing HMRC with copies of elections to tax dividends (CTA 2009 section 931 R).

• It is an interesting issue as to whether the pension linked dividends of life insurers are able to benefit from special treaty rates where those are dependent on the dividend being subject to tax?  As per FA 2012 section 111 dividends referable to pension business are included in the non  - BLAGAB trading profits computation, but does this mean they are subject to tax?  On balance, I don't think it does.  For unit linked business the taxable dividend is "matched" by an increase in tax deductible policyholder reserves.  Additionally treaty definitions of pension schemes often include a requirement that the income of the scheme is exempt from tax.  Claiming relief at a subject to tax rate might compromise life company claims for pension scheme preferential rates in other jurisdictions (I'm applying the well known legal doctrine of you can't have your cake and eat it.)

• Some double taxation treaties include liable to tax wording.  Its worth noting that HMRC regard this as much less stringent condition than subject to tax: i.e. a charity is liable to tax but not subject to tax.

• The guidance confirms that UK branches and permanent establishments of non residents cannot receive a certificate of residence.  Non - resident branches of UK resident companies will generally be able to obtain certificates of residence and obtain treaty benefits under the UK's treaty network.

UK Spain Double Taxation Treaty

Just a quick update on my post of 27 March 2013 on the UK / Spain double taxation agreement.  The statutory instrument bringing the agreement in to force has now been signed see:

Statutory instrument

However, I don't think the agreement is yet in force as the entry into force provisions (article 28 of the treaty) apply 3 months after each state has notified the other that the internal procedures required by each contracting state for the entry into force of the agreement have been complied with.  So hopefully will be in force some time this year.

USA Withholding Tax and Pension Schemes

At the end of last year I was asked some questions by a client on the USA withholdiing tax position of pension unit linked business.

As the current UK/USA treaty as been in force since 2003/2004 I thought it would be be useful to set out how the treaty and the associated competent authority agreement ("CAA") mesh together.

Article 10 (3) (b) of the the UK / USA treaty provides for a 0% rate of withholding where dividends are paid to:

"a pension scheme, provided that such dividends are not derived from the carrying on of a business, directly or indirectly, by such pension scheme."

I think it would be fair to say that there was a misunderstanding at the time that the treaty was signed. In the UK it was understood that the unit linked business of a life insurance company would be able to benefit from the 0% pension scheme rate.  However, when after the treaty was signed, this point was raised with the USA authorities they were of the opinion that UK life insurers would not be able to benefit from the 0% rate.

This caused rather a kerfuffle (almost breaking out into a fully fledged brouhaha) and as a result the competent authority agreement between UK /USA was signed. The purpose of this was to extend (or you could argue clarify) the definition of what constitutes a pension scheme so as to extend the 0% rate to linked pension business. There is a link to the CAA in Philip Govan's post of 16th April 2013.

This gave  UK life insurers with significant amounts of UK business sufficient assurance for them to proceed to claim the 0% rate.  However, the CAA is not a particularly clear document, I think it must have been drafted by US officials and tries to define what is unit linked business from scratch.  As a result in some circumstances its hard to advise clients on whether they meet the criteria in the CAA.  

For instance condition b (i) requires that:

"Contributions by the pension scheme are placed by the insurance company in a fund that is generally exempt from tax in the United Kingdom."

 

You can see what this means but its not very precise.

In a perfect world the CAA would be replaced with something that states that "pension unit linked business of a UK life insurer qualifies for 0% withholding."  However,  both HMRC and the "industry" are reluctant to revisit this issue for fear we would end with something worse than the CAA.

Tax Disputes

In the run up to Christmas HMRC published two documents on tax disputes: A code of governance for tax disputes and a commentary on the litigation and settlement strategy.  The documents can be found here.

Code of governance

Commentary

It is good news that HMRC are publishing this information which will help taxpayers to understand HMRC's approach in a dispute.

 If you're wondering why HMRC are focusing on the way that disputes with tax payers are conducted then this may be of interest.

Public Accounts Committee 

The Code of governance document sets out the controls that HMRC have introduced to ensure that tax disputes are settled in a consistent manner and meet HMRC's objective of " efficiently determining and collecting the correct tax to maximise revenue flows, while reducing costs and improving the customer experience."

There is now a tax assurance commissioner who has a veto over any settlement where the amount at stake is over £100m and a sample of those disputes where the amount at stake is over £10m.  The tax assurance commissioner and two other tax expert commissioners  are the decision makers in cases with over £100m at stake and are advised by the Tax disputes resolution board.

For disputes with multiple cases, including transfer pricing there is an interlocking system of panels and boards to determine policy for the dispute to apply to all cases.

The document also sets out a process for reviewing settled cases to ensure that the new procedures are working in practice.

Clearly consistency of approach is a good thing for tax payers but the other side of the coin may be that it takes longer to settle disputes due to the need to get buy in from panels boards and commissioners before HMRC can sign off.

The commentary is really a HMRC manual on how staff should apply the Litigation Settlement Strategy and work with all the new institutions set out in the code of governance. 

One point to note is that the document defines a dispute as anything that has not been agreed with HMRC so I would suggest that any company that has open enquiries from HMRC should at least read through the commentary. 

Pages 17  - 22 of the commentary that provide detailed guidance for the conduct of a dispute are particularly interesting.  The guidance here is practical and makes some (not very) veiled criticisms of how HMRC has sometimes conducted disputes in the past. If companies feel HMRC are dragging their heels in a dispute referring to this guidance might help to speed things along.

There is also a revised Litigation Settlement Strategy set out in the appendix to the document.

Unauthorized Unit Trusts

A happy new year to one and all.  

One point that caught my eye was that at the back end of December HMRC issued a technical note on the taxation of unauthorized unit trusts.  This is a holding measure whilst the draft technical guidance published previously is finalized.  (See post of 30 September for a bit more on this).  The note also provides some additional guidance on the transitional provisions and the application procedure to qualify as an exempt unauthorized unit trust.

The technical note can be found at:

Technical note