Select Committee on Treasury Appendices to the Minutes of Evidence


Memorandum submitted by the London Investment Banking Association (LIBA)

  1.  LIBA[10] wishes to express its concern about the total lack of consultation over the proposals for "modernising the UK tax regime" for branches of foreign companies.

  2.  The proposals appear to run a severe risk of pre-empting the continuing, thorough, and well-conducted OECD study into the Attribution of Profits to Permanent Establishments, which is referred to in Budget Notice BN 25. In a LIBA covering letter to evidence submitted to the OECD in June 2001, jointly with the British Banking Association (BBA) and the Foreign Bankers and Securities Association (FBSA), we said:

        "It is critical to the success of (the OECD) approach that all relevant fiscs apply the same rules in the same way. It follows that no action should be taken by any individual fisc ahead of a firm consensus emerging and, particularly, that individual fiscs refrain from `cherry-picking' aspects of the proposals which they may find independently attractive".

  Such a cherry-picking initiative by the UK can only encourage other countries to pick their own cherries, thus increasing inconsistencies between the foreign company tax regimes of different countries. This in turn risks harming the overseas branches of UK companies, as well as inevitably weakening the OECD's role in this area.

  3.  The successful implementation of a system of the type which appears to be under consideration is likely to be complex and expensive, both for taxpayers and for the Inland Revenue. To make matters worse, experience suggests that such systems only work well where there is reasonable consensus between taxpayer and tax authority about what is to be achieved. This is particularly true here, where the OECD work has underlined the difficulties of creating a system which is both effective and equitable.

  4.  As a part of their study OECD held a major consultation meeting in Paris very recently (on 11-12 April), at which four Inland Revenue officials were present. This confirmed that much work is still needed before international consensus is reached. If in due course the OECD—as is quite possible—were to decide on a different approach, the Government would presumably have to change track, with substantial consequent disruption and costs for all concerned.

  5.  The Red Book figures for additional tax (£350 million in 2003-04, £650 million thereafter) suggest that this measure is seen as a substantial fund-raiser. We have no information on how these figures have been calculated. In particular we do not know what allowance has been made for loss of potential revenue, jobs or business should banks rearrange their structures in the light of any new rules, let alone should they decide to move some or all of their UK operations elsewhere. If, however, the figures are broadly correct, the proposed change will have a major impact on one of the UK's most successful international industries.

  6.  The fact that a change of this magnitude is even contemplated without appropriate prior consultation suggests a surprising lack of understanding of the ever more competitive global environment in which the City of London now operates. The choice of financial multi-nationals as to whether—and to what extent—they do business in the UK depends critically on how they perceive the regulatory and fiscal environment. Policy decisions taken without regard for such important issues are therefore risky and irresponsible, particularly when the firms concerned are by their nature cosmopolitan and increasingly mobile. This precipitate action is reminiscent of the equally ill-thought-out proposals for the abolition of off-shore "mixers" announced in Budget 2000. It also runs wholly counter to the admirable, sustained and high quality consultations carried out by Inland Revenue and Treasury officials on other recent financial sector topics, such as the proposed EU "Savings" Tax Directive and the review of the taxation of loan relationships, derivatives and foreign exchange.

22 April 2002

10   LIBA is the principal UK trade association representing investment banks and securities houses. Back

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