modernising the taxation of corporate debt and derivatives

Modernising the taxation of corporate debt and derivatives

Consultation open meeting 27 June 2013

Loan relationships open meeting 27.6.13 | 20/04/23 | 2

Purpose

• Introductions

• Explanation of the consultation process

• Brief review of the consultation material

• To facilitate participation in the process


Agenda

Introduction

1. Context 2. Aims3. Timeline4. Consultation process5. Questions and discussion

Break

6. The consultation document content

7. Questions and discussion


What’s the problem?

17 years old

Loss of structural integrity

Complexity

Accountancychanges

Commercial practice

Taxavoidance


Policy drivers

• Simpler rules

• Appropriately aligned with commercial and accounting practice

• Legislation more useable

• Restoration of coherence and elimination of uncertainties

• Integrated anti-avoidance provisions


Consultation – general points

• A starting point, not an end point

• Collaborative process: if you have a better idea, let’s hear it

• An opportunity for all stakeholders

• We are interested in fiscal impacts, cost implications and other consequences – don’t ignore Chapter 15!

• Nothing in the consultation reflects on our view of existing disputes

• Transition


How you can take part

Bilateralcontacts

WorkingGroups

FormalConsultation

(2013 and 2014)

Balancing broad representation and detailed discussion


Working groups

The framework

Looking behind the accounts

A unifiedregime?

Anti-avoidance

ConnectedParties

Intra-groupTransfers

Partnerships

Debtrestructuring

Accounting issues

Forex andHedging

Hybrids etc

Bond funds

Corporatestreaming

AndyStewardson

TonySadler

RichardDaniel

ChrisMurricane

StructureGroups and connections

Accounting Funds


Working groups – what we need

• Joint membership: HMRC; rep bodies; individual companies; advisers; etc

• Membership by invitation, but volunteers welcome

• Representative of wider constituencies

• Wide practical experience – “wise heads”

• Manageable numbers

• Active participation - expect monthly meetings


Working groups – what will they do?

• Consider proposals and options

• Identify issues

• Develop solutions

• Review draft legislation

• But recommendations to ministers are for officials


Issues for Finance Bill 2014

• Unallowable purpose rules Working Group 1

• Partnerships Working Group 2

• Index-linked gilts Working Group 3

• Bond fund rules Working Group 4


Indicative Timeline 2013

Draft FB2014

legislation

Informal consultation

Working groups

Formal consultation

June August Autumn

Statement

Summary of

responses

FB14 Comment period


Indicative Timeline 2014

FA 2014Draft

FB2015legislation

Informal consultation

Working groups

Formal consultation

March July Autumn

Statement

Summary of

responses

April

Budget?

FB15 Comment period


Questions?


Consultation document - content


Working Group 1 – Andy Stewardson

• The framework

Subject matter – role of accountancy – overriding the accounts – default approach - departures from the default

• Looking behind the accounts

Cases where the accounts treatment of an instrument or transaction is influenced by the existence of other

• A unified regime?

Is it worth it?

• Anti-avoidance

A “regime TAAR”Updating the unallowable purpose rules


Working Group 2 – Tony Sadler

• Connected parties

• Intra-group transfers

• Partnerships

• Debt restructuring


Working Group 2: Connected parties

• Key departure from ‘following the accounts’

• Two options• Minimal change, mainly definition of Amortised Cost Basis

• More extensive change, retain denial of impairment, follow accounts on releases, anti-asymmetry rule

• Not hard and fast options – key issue, would the change be worth it?


Working Group 2: Group continuity

• Three possibilities• Forward continuity

• Backward continuity

• No rules other than anti-asymmetry

• No preferred option at this stage


Working Group 2: Partnerships

• Better alignment of principles and mechanics

• Change in partnership interests

• Control

• Link with separate consultation on partnership taxation

• Finance Bill 2014


Working Group 2: Debt restructuring

• Section 322(4) – debt equity swaps; explicit ‘distress’ criteria for exemption from release?

• Sections 361-362 – deemed release rules broadly retained; impact of other possible changes (e.g. connected parties, partnerships)?

• Less need for clearances.


Working Group 3 – Richard Daniel

• Accounting issues

• Forex and hedging

• Hybrids and “special treatment” instruments


Working Group 3

Where are we now?

Where do we do we want to be?

What are we proposing?

• Follow ‘profit or loss’

• Exclude non-trade forex by default … … with specific rules for hedges

• Repeal of the ‘Disregards’

• Repeal of most of the ‘Alphabet Soup’

• Scope of relief for Index-Linked Gilts

How do we get there?

Facts

Scope

Accounting

Treatment


Working Group 3: Hedging relationships

Hedges of forex risk (non-trade) Forex initially excluded, with specific rules to bring forex into account in a similar manner to the hedged risk.

Designated cash flow hedges Following amounts in profit or loss should give the desired result.

Designated fair value hedges Proposed relaxation of CP debt rules should address the main issue at source.

Undesignated hedges Propose to follow accounts – tax volatility in line with the accounting treatment.Developments in accounting should ease some of the difficulties with FRS 26 / IAS 39.


Working Group 4 – Chris Murricane

• Bond funds

• Corporate streaming


Bond Fund Rules

• Chapter 3 of Part 6 CTA 2009

• Aim to ensure that loan relationships held in funds are brought into tax

• Complicated & avoidance prone

• Proposal: largely repeal

• But keep anti-avoidance rules in some circumstances

• Finance Bill 2014


Bond Fund Rules

• What do we need to keep?

• Tightly-controlled funds.

• Offshore funds.

• Impacts on particular types of company (CFCs, life insurers)


Corporate streaming

• Chapter 3 of Part 4 of the Authorised Investment Funds (Tax) Regulations 2006, referred to as the “corporate streaming” rules.

• Issue: income in AIFs taxed at lower rate.

• Problem solved by tax rate convergence?

• In secondary legislation?

• Specific industry issues.


Questions?


Contacts

Andy Stewardson 0207 147 2600 [email protected]

Tony Sadler 0207 147 2608 [email protected]

Richard Daniel 03000 569 408 [email protected]

Chris Murricane 0207 147 2818 [email protected]


Thank youAndy Stewardson

HM Revenue & Customs

Room 3C/06

100 Parliament Street

LondonSW1A 2BQ

Telephone 0207 147 2600

Email [email protected]

modernising the taxation of corporate debt and derivatives

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