We consider below certain recent tax developments in the United Kingdom and Europe which will likely be of interest to a range of international enterprises, including the international investment management industry.
1. UK: Extending the scope of the UK investment manager exemption
In broad terms, the UK investment manager exemption (IME) is a safe harbor which allows a UK-based investment manager to provide investment advice to, and to carry out transactions on behalf of, a non-UK fund without exposing the fund to the creation of a taxable presence in the United Kingdom.
The IME, however, is limited to profits of a non-UK fund that are derived from "investment transactions" carried out by a UK-based investment manager on behalf of the non-UK based fund. To this end the UK Government publishes a list of the type of transactions that are considered to be "investment transactions" for the purposes of the IME, and so within the safe harbor (the White List).
Following a period of public consultation announced as part of the UK Budget 20131, on March 18, 2014 the UK Government published legislation which extends the White List to: (i) cover a potentially broader range of "carbon credits", and not just transactions in carbon emission trading products under the EU emissions trading scheme or the Kyoto Protocol; and (ii) include transactions in rights under a life insurance policy.
Although it remains a relatively modest asset class, the extension of the White List to cover a wider range of "carbon credits" which are traded in the "voluntary markets" is potentially of some assistance. It is important to note, however, that the manner in which the UK Government has sought to extend this aspect of the White List has left open certain questions as to exactly which "carbon credits" will, and will not, be treated as being covered by the White List.
The extension of the White List to transactions in rights under a life insurance policy will likely be of greater practical value. Given London's leading position in the international insurance markets, it is a very welcome development that market participants will now be in a position to trade such products from within the United Kingdom.
The extended White List will have effect for transactions entered into on or after April 8, 2014.
2. International: Base Erosion and Profit Shifting
Work continues on the base erosion and profit shifting (BEPS) project of the Organization for Economic Co-operation and Development (the OECD). The OECD has recently published discussion drafts in certain aspects of its BEPS "Action Plan" published in July 2013.
On March 19, 2014, the OECD published two discussion drafts on "Action 2" (Neutralize the effects of hybrid mismatch arrangements), inviting comments by May 2, 2014 at the latest. Action 2 is focused on the development of model treaty provisions and recommendations for the design of domestic rules to neutralize the effect (e.g. double non-taxation, double deduction, long-term deferral) of hybrid instruments and entities.
The first discussion draft sets out recommendations for domestic rules to neutralize the effect of hybrid mismatch arrangements. The second discussion draft discusses the impact of the model treaty provisions on those rules and sets out recommendations for further changes to such model treaty provisions to clarify the treatment of hybrid entities.
On March 14, 2014, the OECD published a discussion draft on "Action 6" (Prevent Treaty Abuse), inviting comments by April 9, 2014 at the latest. Action 6 covers the possible modification of domestic and international tax rules to align more closely the allocation of income with the economic activity that generates that income.
Treaty abuse, and particularly so-called "treaty shopping", is identified in Action 6 as "one of the most important sources of BEPS concern". The discussion draft advocates a three-pronged approach to combat treaty shopping: (i) revise the title and preamble to treaties to make it clearer that both contracting states entering into the treaty wish to prevent tax avoidance and avoid opportunities for treaty shopping; (ii) insert a specific anti-abuse rule based on the "Limitation-on-benefits" provision found in certain treaties, including those concluded by the United States of America; and (iii) insert a general anti-abuse rule.
Although the discussion drafts have been specifically provided only for analysis and comment, certain of the proposals will likely give rise to concern and comment in equal measure, with those aimed at counteracting "treaty shopping" receiving particular focus.
Further to the international efforts noted above, on March 19, 2014 the UK Government published a paper entitled "Tackling aggressive tax planning in the global economy: UK priorities for the G20-OECD project for countering Base Erosion and Profit Shifting".
The paper seeks to set out how the United Kingdom intends to work with its international partners to prevent perceived unfair tax avoidance and aggressive tax planning by multinationals whilst remaining an open, competitive economy. The paper also sets out the key legal and other factors the UK Government will take into account when developing its policy towards the BEPS project, as well as giving an insight into the UK Government's position on the specific BEPS Actions.
3. EU: Financial Transaction Tax – Latest Developments
Since the original deadline of January 2014, to introduce the proposed European financial transaction tax (FTT) was not met, Germany and France, in particular, have renewed their efforts to agree a form of FTT by May 25, 2014.
Accordingly, it remains likely that a form of the FTT will be introduced and will be phased in gradually over time.
It has been reported that the revised FTT would initially apply only to share transactions. However, recent press coverage has stated that Germany may be pushing for the FTT so to apply to derivative transactions as well as share transactions.
It was understood that immediate application of the FTT to derivative transactions was not favored by France, apparently due to the fierce lobbying of French banks active in the derivatives market. Notwithstanding this, Germany, and other interested member states, are reported to be optimistic that Francois Hollande's government may be more amenable to applying the FTT to derivatives than previously thought.
Clearly, there remain a number of details to be resolved prior to the May deadline. However, it seems inevitable that the FTT, in some shape or form, will be introduced. As Francois Hollande noted, it would be preferable to introduce "an imperfect tax to no tax at all".
Further to this, it is being reported that a leaked opinion of the legal service of the Council of the European Union opens the door for the FTT to apply to spot currency transactions.
The reported conclusions of the opinion will likely cause considerable consternation for affected parties. Not only did the original formulation for the FTT specifically exclude spot currency transactions but it has also been widely reported that it would have been considered to be illegal for the FTT to cover such transactions. Notwithstanding this, it has been reported that the leaked opinion concludes that the inclusion of spot currency transactions within the scope of the proposed FTT "would not necessarily be incompatible with the free movement of capital", one of the "four freedoms" at the heart of the European Union single market.
It is further understood, however, that the leaked opinion also notes that including spot currency transactions within the scope of the current proposal for a FTT would exceed the Council's power of amendment in respect of such a proposal. Accordingly, to bring spot currency transactions within the scope of a FTT would require a new proposal to be submitted by the EU Commission.
Given the important market consequences that would arise from extending the application of the FTT to spot currency transactions, there will likely be significant opposition to this proposal.
4. EU: EC adopts changes to EU Savings Directive
Introduced in 2005, the EU Savings Directive (EUSD) is intended to counter-act certain types of cross-border tax evasion within the European Union. Through an automatic exchange of information on certain types of savings income, the EUSD allows for greater co-operation between relevant tax authorities, and thus a more efficient and effective basis for collecting tax from residents of Members States.
Since its introduction, there have been concerns that loopholes in the scope and application of the EUSD are being exploited. Accordingly, in 2008, the European Commission announced proposals to amend the EUSD with a view to closing down such perceived loopholes.
On March 24, 2014, the Council of the European Union adopted a new directive which extends the scope of the EUSD. In short, the revised EUSD will cover new types of savings income and products that generate interest or equivalent income, and will include life insurance contracts, as well as a broader range of investment funds. Further, a new "look through" procedure will be established in order to limit the opportunities for circumventing the application of the EUSD through the use of certain intermediaries.
Member States have until January 1, 2016 to introduce domestic legislation to give effect to the revised EUSD.
This development should be considered alongside other international tax developments. These would include, for example, the introduction of FATCA, the ongoing BEPS project (see above) and the wider EU proposal to extend the automatic exchange on information between Member States.2