I am posting this here with the permission of the Progressive Tax Blog, which I strongly recommend.
The matte referred to is vital. As I an my co-autors explain in our book Tax Havens: How Globalization Really Works, this relief was at the heart of maiming the City of London a tax haven. And it still is. That's why this issue is so important. And the OTS decided to ignore it. That, I suggest,. Was a political act. Also one in breach of money laundering obligations as the UK has no idea to whom these funds are paid. Why is that. In that context, please read this:
Anybody who has attempted to read the 191 report by the Office of Tax Simplification on simplifying tax reliefsshould be congratulated; it’s not exactly the most interesting document, and mainly deals with obscure tax reliefs that most people will not have heard of.
There is more interesting discussion over whether the income tax and national insurance regimes should be combined into a single tax (although no real conclusion), and the report recommends abolishing the £8,500 threshold for more generous treatment of employee benefits for low paid workers. However, to give you a taste for some of the other content, of the 191 pages, two deal with the duty treatment of angostura bitters and a specific black beer drunk only in Yorkshire. This is hardly the sort of complexity in the tax system that people complain of.
Nevertheless, there is one relief mentioned deep on page 179 related to relief from withholding tax for interest paid on so-called ‚ÄòEurobonds’ over which there is remarkably little discussion in arriving at the report’s conclusion:
P.79 This relief exempts interest paid on Eurobonds from deduction of tax so that the holder of the Eurobond receives interest gross rather than net of tax.
P.80 A quoted Eurobond is a security, including shares (in particular any permanent interest bearing share), listed on a recognised stock exchange, and carries a right to interest. Some of the major issuers are supranational organisations (such as the World Bank or the European Bank for Reconstruction and Development).
Is the policy rationale still valid, does the relief achieve it and what might be the impact of repeal?
P.81 The original policy rationale is to encourage the growth of the UK Eurobond market, as London is one of the centres of the worldwide Eurobond market.
P.82 If it were repealed, it could reduce investment in this area, and also reduce investment in the UK.
Taxpayer take up and awareness
P.83 This relief is targeted at any holder of Eurobonds.
P.84 In the year to November 2010, funds raised through Eurobonds issued on the main UK market totalled £393billion in over 3,300 issues.
Complexity, compliance costs and administrative burden
P.85 The relief is a simplification to the taxpayer as it removes the need to account for withholding tax.
P.86 The policy rationale remains valid and it is a simplification for the holders.
P.87 We recommend that this relief be retained.
The description of the relief from the OTS is brief and it is useful to put it in broader context.
In general, if a UK resident company borrows money from a non-resident company, it will obtain a tax deduction for the interest payable but under UK tax law is required to withhold UK income tax at 20% on interest paid to the non-UK company. The UK has entered into a number of tax treaties and is also obliged to follow the EU Interest and Royalties Directive which means that in many cases interest payable to an EU member state or another country which has a tax treaty with the UK (e.g. US) will in practice not be subject to UK withholding tax. However, interest paid to companies or individuals resident in tax havens will generally be subject to 20% withholding tax as no treaty will apply.
The relief referred to by the OTS is a specific exemption from withholding tax on interest if the debt on which the interest arises is a ‚Äòquoted Eurobond’. This may sound like a complex financial instrument but in practice this can include any loan agreement which is listed on a ‚Äòrecognised stock exchange’, even if the lender is a related party. The term ‚Äòrecognised stock exchange’ can appear to give the exemption legitimacy but in fact this includes the Channel Islands and Cayman Islands, among other exchanges.
Take the following example:
In this case, the UK subsidiary of a multinational group borrows significant debt from a group company resident in the Cayman Islands. The UK company decides to list the debt on the Cayman Islands stock exchange despite the fact that the lender is a group company and always will be (there is no prospect of a third party buying the debt). As a result of the listing, the UK company is still able to obtain a tax deduction for interest (reducing its UK taxable profits) but is not required to withhold any tax on interest paid. Meanwhile the Cayman Islands lender pays no tax whatsoever. The result is a significant UK tax saving all for the relatively insignificant listing fees and related legal costs associated with listing on the Cayman Islands stock exchange.
The OTS claims that the policy rationale is to promote investment in the UK, and that the relief is a “simplification to the taxpayer as it removes the need to account for withholding tax”. This is either naive or disingenuous. The relief is not a “simplification” but a complete exemption from UK tax for interest paid on these instruments, including to tax havens. The OTS only refers to the Eurobonds issued on the main UK market but neglects to mention that the exemption also applies for listings in tax havens and secrecy jurisdictions.
However, even in these secrecy jurisdictions the listing is public (just ‚Äòpublic’ enough); anybody can visit the websites of the Channel Islands or Cayman Islands stock exchanges and view the listings for themselves. While we cannot definitively say that all of the listings of debt issued by UK companies on these exchanges are purely for UK tax avoidance purposes, it is difficult to avoid this presumption in many cases.
We thought it would be interesting to highlight some of the companies that have debt listed on these exchanges. Unfortunately the sham of these sorts of instruments being publicly traded securities means that information on holders is not made public – although some borrowers do disclose in their own statutory accounts.
Issuer Exchange Holder Debt amount Interest rate UK WHT saved p.a. (estimate) British Telecommunications plc* Channel Islands Group company – unknown £3,611m LIBOR plus 10 bps (e.g. 2%) £14m Everything Everywhere Ltd
(formerly T Mobile (UK) Ltd)
Channel Islands Unknown £1,250m Floating (assume 5%) £12m Ineos Holdings Ltd* Channel Islands Ineos US Finance LLC (group company)
(Note: LLCs are typically non-taxable entities under US tax law)
$1,785m Floating (assume 5%) $18m Taveta Investments (No. 2) Ltd*
(parent of Arcadia / BHS)
Channel Islands Group company – unknown £180m 8% £3m BlackRock Finco UK Ltd Cayman Islands Group company – unknown $3,450m 7.43% to 8.90% $55m Hewlett-Packard Holdings Ltd Cayman Islands Hewlett-Packard Marigalante Ltd
£3,721m 6.5% to 8.3% £50m Transocean Drilling U.K. Limited Cayman Islands GlobalSanteFe Services (BVI) Inc
(British Virgin Islands)
$1,075m 5.54% $12m Transocean Drilling U.K. Limited Cayman Islands Transocean Inc
$750m LIBOR plus 500 bps (e.g. 6%) $9m
These are just a few examples from only two offshore exchanges but is enough to illustrate the point. We would be interested to hear from the above companies to understand what the commercial reason for listing on these exchanges is if it is not to avoid UK withholding tax.
Unfortunately the fact that the OTS has glossed over the Eurobond exemption in its report means it is unlikely to be subject to any further scrutiny (at least until this blog post). One has to question whether the fact that the committee is comprised at least partially by ‚ÄòBig 4‚Ä? accounting professionals, and led by a former PwC tax partner (John Whiting) has anything to do with this. For good measure we have highlighted the PwC audit clients with a “*” in the table above.
Why has the Office of Tax Simplification given its approval to a tax relief which encourages multinationals to locate finance companies in tax havens and pay no UK withholding tax?
I would be willing of course to pass on comments from the companies in question.
I stress: these actions are legal, of course. The question is about avoidance. But that is of itself important. And given the interest in tax haven issues and tax avoidance in the UK, justified, I think.