Memorandum from Allen and Overy LLP
THE PRE-BUDGET REPORT: IMPLICATIONS FOR PRIVATE
BANKS
The Treasury Committee has announced that it
will take evidence from experts in the light of the Budget announced
by the Chancellor of the Exchequer on 12 March. The Committee
has indicated that it would welcome written evidence, prepared
in response to the Budget, as part of this inquiry. It expects
to publish a Report arising from its inquiry before the second
reading of the Finance Bill.
The following memorandum addresses the serious
technical implications that we believe arise from one particular
measure in the Pre-Budget Report and the Budget.
1. EXECUTIVE
SUMMARY
1.1 A particular aspect of the Chancellor's
Pre-Budget Report is of serious concern to the UK private banking
and investment management industry. The problems are likely to
be common to most banks and investment managers offering global
banking services which provide any of their services to UK resident
but non domiciled (RND) clients from the UK or deal with the UK
on their behalf. It is even possible that the problem will extend
to banks which offer services to clients offshore where there
are UK non-client facing operations behind the scenes.
1.2 There is a real risk that the consequence
will be that many UK private banking operations will be obliged
to consider moving significant parts of their operations offshore.
We recommend that amendments be introduced in the Finance Bill
2008 to address this.
1.3 We are drawing this danger to the attention
of other private banks and various industry bodies.
2. TECHNICAL
ANALYSIS
2.1 The Chancellor's Budget on 12 March
contained some welcome concessions for non-UK domiciliaries. Nothing
in the Budget nor the accompanying notes, however, has addressed
the technical concerns which are described below.
Definition of "remittance": section
809H
2.2 The concern results from the proposed
new definition of "remittance" in section 809H Income
Tax 2007. Section 809H comprises two conditions ("Condition
A" and "Condition B") which, taken together, are
extremely broad. Condition A (broadly speaking) tests whether
assets (not just cash) have been brought to, are received or are
used in the UK, or whether any service has been provided in the
UK. Condition B "links" the assets or cash identified
in Condition A with unremitted income or gains, using an extremely
wide and undefined test of derivation.
Application to fees of investment advisers
2.3 It appears from the new definition of
"remittance" that, under the new test, payments of fees
outside the UK to banks and fund managers will now be capable
of constituting a remittance of foreign income and gains to the
extent that the fees relate to any part of the global services
by the bank or fund manager provided from the UK. Establishing
exactly how much of a global service relates to the UK will be
challenging in many cases. There is no definition of what constitutes
a "service in the UK" for the purpose of the new test
of remittance, and no guidance on how (if at all) a composite
cross-jurisdictional service should be analysed. Some products
may, for example, be developed in one tax jurisdiction, marketed
from another and transacted in a third. The end user gets some
benefit but which are services provided to or for his benefit?
The competition issue
2.4 The remittance considerations set out
above will make it very difficult for banks and fund managers
based mainly in the UK to compete with offshore rivals for RND
client business because the payment of their fees will entail
reporting obligations and the payment of tax on top of those fees.
2.5 Likewise, where unremitted income and
gains are invested in UK assets, or paid offshore to settle derivative
transactions and deals with UK brokers or counterparties, it appears
that there will be a remittance even if payment is made offshore.
Given that the banks' mandate will generally be to obtain the
best deals for their customers, investment in UK assets, and transactions
with UK brokers and counterparties, will accordingly be unattractive.
This will affect both UK branches and overseas branches of banks
and fund managers, which will be under pressure to avoid UK deals
for RND clients.
2.6 The effect may extend far beyond the
RND market. Many banks and fund managers offer a global investment
service to all clients, whether RND or not, and source services
and investment opportunities worldwide. It would be very difficult
for such global businesses to set up special teams and opportunities
outside the UK just for RND clients. As a result, they may have
no option but to move all their investment services outside the
UK, and to avoid transactions with UK brokers and counterparties,
if they are to be able to assure RND clients that their platform
will avoid remittances, which is what will be required if they
are to be able to compete for the RND business which is often
a very substantial part of their client base.
3. SUGGESTED
SOLUTIONS
Investment Management Exemption
3.1 Elsewhere in the tax code, the use of
UK investment services is given express protection. The Investment
Management Exemption ("IME") protects offshore persons
from the UK tax that would otherwise be levied on trading profits
where a trade is carried on in the UK through an independent investment
manager. We believe that it would be consistent with this policy
to ensure that UK private banking and fund management services
for RNDs; inward investment by RNDs; and deals with UK counterparties
are all similarly protected in order to avoid a flight of private
banking and investment business from the UK.
Clarification of what is meant by "services"
3.2 In other contexts, such as VAT, there
are specific statutory and case law tests to determine where cross
border composite services are provided. Given the particular complexities
involved in the context of the provision of global services, we
strongly believe that similar guidance is needed in the context
of the proposed new test for remittance.
17 March 2008
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