Asterik Blue

UK Tax Policy and the Euro-dollar Market

UK TAX POLICY AND THE EURO-DOLLAR MARKET *

A. Introduction

The view of the UK Treasury and the Inland Revenue was that, the way was now open for the nationalised industries and the local authorities to borrow in this way, if the UK wanted this to happen, and that the Boards and authorities concerned were prepared to go ahead.

This led to a very important issue, which had to be fully recognised. The amendment to the Finance Bill will allow interest payments to be paid free of tax only where the bond of stock was issued through an overseas agent subject to foreign law. It did appear to mean that, when a Euro-bond was issued in London, withholding tax will still apply where the interest was paid out of UK income. Thus the effect of the amendment would be to impair the status of the London issuing houses since if the amendment leads to a rise in this type of borrowing they will be effectively excluded from participating in the increase: an increase which will derive entirely from the UK sources. It was envisaged that the UK would have a presentational problem on its hands. As, if the UK government wanted a public sector authority to borrow in foreign currencies, it had to approve in their arranging for the issue to be made through an overseas agent and in an overseas centre. In short, the UK government had cut out the possibility of the public sector itself utilising the Euro-dollar resources of London with regard to its borrowing operations .

The tax change, under which interest paid on foreign currency borrowing for home investment would be treated as an expense for corporation tax purposes, though designed to encourage such borrowing by the nationalised industries, would create an incentive also for the UK commercial concerns. Given the rate structure in the Euro-dollar market, the new tax incentive may well create substantially increased interest by UK firms, particularly those with overseas income, in currency borrowing for home activity. A central question was, how would this be regarded under the exchange control rules? There had been little interest shown by UK firms in this type of activity but given the prime need to strengthen the reserves, it plainly made sense to allow firms to borrow fairly freely in the Euro-dollar market for home investment if they found it attractive to do so. The UK government’s attitude, was that, if UK firms want to borrow on appropriate terms in Euro-dollars for home investment, they would normally be allowed to do so .

Hence, due to Lever’s proposal: An insertion of a provision in the Finance Bill was needed, to allow a corporation tax deduction in respect of interest paid on Euro-dollar bond issues, where the funds were to be invested in the UK . The change would serve no useful purpose unless the UK firms concerned were prepared to arrange for their loan contracts to be signed outside the UK, e.g. in Switzerland or Luxembourg. The reason for this was as follows: Subscribers to Euro-bond issues were interested in no shares other than those on which interest was paid gross of local tax. Under the provisions of the 1952 Income Tax Act, UK borrowers may not pay interest gross to non-residents unless the interest had a non-UK source in the hands of the bond-holder. For UK companies (including the nationalised industries) the latter condition can be complied with only by the conclusion of the approximate loan contract abroad. There are strong Revenue arguments against any relaxation, in which, Lever and the official Treasury had been inclined to accept.

However, it should be noted that; firstly, the change would not affect materially the position of the potential UK borrower who has substantial overseas income. Secondly, in respect of other companies, including the nationalised industries other than the Air Corporations, the change would encourage foreign currency borrowing only if the relative contracts are established abroad under foreign law. Thirdly, much of the extra banking business, which was created by the change, would therefore benefit overseas rather than London banks .

This meant that, the UK were not in the position, or able to hold the situation of the proposed change, and would face early pressure for the relaxation of the income tax rules on payment of interest gross. This was what the Revenue had always foreseen, and what led them to resist any changes, even changes in the corporation tax .

B. Opinions of the Inland Revenue

On the 26th June 1968 a confidential meeting on Euro-dollar borrowing was held by Lever, the Inland Revenue, the Treasury and Mr. Stainton of the Parliamentary Counsel. Lever first raised the question of an arrangement by which interest might be paid gross on loans raised in the Euro-dollar market. It was emphasised that Lever was anxious not to allow payment of interest gross to UK residents, but that it was possible to pay interest gross to non-UK residents without excluding UK banks from taking part in the arrangement of these loans .

However, the Revenue stated that they were not going to accept a position where interest was paid gross in London to UK residents. This was based under the rule that interest could not be paid gross, except where existed a non-UK source. Various Court decisions, interpreted by the Revenue, meant that the Revenue were prepared to regard interest payments as having a non-UK source when they were made under a contract concluded abroad under foreign law, with a foreign paying agent, even where the income which were used to pay the interest was itself generated in the UK . This was a new different area, as statute law did not cover it in any detail, and decisions had to be taken on interpretation based on a few court decisions. Under these circumstances, it was possible that some modification of the Revenue’s existing rules were possible. For example, it was possible to accept that a UK bank in London might pay interest gross in external sterling to non-resident accounts, as in practice this was a very similar operation to a foreign bank paying gross abroad in a foreign currency. However, it was not possible to legislate in this area in the Finance Bill of the time, as there was no time to work out the necessary complicated clause .

Lever, nevertheless, stated that he was interested in further exploring the extent to which UK banks were able to take part in loans raised abroad. However, he was content that the law was not altered involving the definition of “foreign source” income in the Finance Bill. So, the clause was approved in principle. Lever raised the question of allowing in the clause for loans the interest on which might, at the option of the lender, be paid in sterling. There was no objection to this in the meeting, provided the option was exercised at the discretion of the lender .

The “machinery problem” of the Inland Revenue

However, this issue was not passed onto Lever, because of “the machinery problem” caused by certain large barriers that were raised by the Inland Revenue . There was three issues of principle: firstly, non-resident borrowers paying interest through London – (if they are not paying interest through London there is no reason why any aspect of UK taxation should affect them). Here there is a “machinery problem”, the Affidavit procedure, which has been removed. Secondly, UK borrowers paying abroad – provided that the bonds are denominated in foreign currency and held only by non-residents, and that the issue formally takes place in a foreign market, gross payment of interest without formality is possible and, under the proposed Finance Bill change, payment will count as an expense before assessment to Corporation Tax. Finally, UK borrowers paying through London – it is here that the problems still remained. The primary problem through London would almost certainly disqualify borrowers from payment gross of tax, with or without an Affidavit procedure. The Inland Revenue will be considering whether, provided the borrowing is in the form of foreign currency bonds, with interest payable in foreign currency, and to be held only by non-residents, they could agree to payment of interest gross, without requiring the additional non-UK features of issue abroad and payment abroad .

What was not clear was, assuming that the Inland Revenue were to decide that they could allow payment gross of tax even with Issue X and payment Y in London, but on the narrower limitations of foreign currency denomination and interest and non-resident holders, the Inland Revenue would still have to take special steps to remove the obligation of Affidavit procedure, or whether this would simply not apply in any case .

Obstacles to raising foreign currency loans by UK companies

The law and the practice of the Inland Revenue was unsatisfactory in relation to Section 52 (5) and provided obstacles to the raising of foreign currency loans by UK companies. It was considered, by the Inland Revenue that there was no justification for the continued separation between annual interest payable to residents and to non-residents . These obstacles were:

Firstly, relief is not available in cases where a loan has been raised for purely investment purposes, e.g. the acquisition of a new subsidiary. This construction is an obstacle to foreign borrowing in cases where the borrower has insufficient Case IV or Case V income, and it ignores the realities of much foreign investment where the acquisition of an existing business will almost always be made through the acquisition of shares. Furthermore, it ignores the Revenue’s own practice in allowing “short interest” incurred on loans used to purchase capital assets rather than as working capital .

Secondly, relief is not available for interest payable in the currency of a country outside the Scheduled Territories when it is payable either to a company which controls or is controlled by the UK company liable to make the interest payments or to a company which is under the control of a third company which also controls the UK company. This refusal to allow inter-group interest payments is an obstacle to foreign borrowing in cases where, for good practical and business reasons, a foreign subsidiary, having acted as the primary borrower from the foreign lenders with the guarantee of the UK parent company, relends the proceeds of the foreign currency loan to its UK parent company on the same terms as those applicable to the underlying loan. The subsidiary/parent company loan can be made on a short-term basis which could be renewed year by year so that the interest would qualify as “short interest” and therefore be allowed against corporation tax. However, this would not be satisfactory in the case where the foreign lenders wishes to take security by a charge on the parent company’s indebtedness to its foreign subsidiary. Also, there is some doubt whether a 360-day loan between parent and subsidiary, which is renewed year after year, would be regarded as a short-term loan .

Thirdly, to obtain relief, the interest must be paid to a non-resident. It is not practical for UK issuers of foreign public bonds to obtain evidence of residence from persons who obtain payment of interest at paying agencies outside the UK. The Inland Revenue will not unconditionally accept that interest paid in those circumstances is in fact paid to non-residents and cases have been known, to mark their position, where the Inland Revenue only allow 99% of the interest payments to be charged against corporation tax. This position is inequitable and penalises the UK borrower for a situation over which it has no control. It seems to fail completely to recognise the exchange control and paying collecting agent tax regulations relating to the holding by residents of the UK of foreign currency securities. Under those regulations, a UK resident can only hold foreign currency securities through an authorised depositary and upon receipt by the relevant bank of any interest or dividend payments the bank is obliged to deduct and account for any applicable UK income tax .

C. Public Sector and nationalised industry foreign currency borrowing

(1). Introduction

1969 was facing a difficult liquidity situation in which, the Treasury had favoured for some time steps to enable public and private borrowers to borrow foreign currencies in the Euro-bond market. This was a means of meeting some of their financing requirements and, at the same time, of increasing the nation’s reserves. However, the issue of tax was causing some problems with the British government.

The issue in which a local authority may be able to pay interest gross on an issue of bearer bonds denominated in foreign currency was a welcome opportunity, as if this was accepted, it was likely that one local authority, the GLC, would begin negotiations. The Bank of England took the view that it was advantageous that the first Euro-bond issue by a public borrower was the GLC. Due to this reason, they wanted to get the position on the tax difficulty cleared up as soon as possible. Their understanding seemed to be that, since GLC borrowing would be secured on a domestic asset (the GLC rate revenues), it would not qualify for the permission to pay interest gross conveyed in the 1968 Finance Act.

It was clear that there was a genuine obstacle standing in the way of GLC and other local authorities borrowing foreign currency abroad, and it was necessary to consider means of removing an impediment to foreign currency borrowing by UK local authorities in the Euro-bond markets. It was suggested that the required provision should be generalised in order to cover nationalised industries or private sector borrowers as well as local authorities; to cover a direct charge on UK assets as well as the indirect one that arised from a subsequent loan contract, which was the particular problem of local authorities; and to limit the arrangements to foreign currencies, excluding currencies of the Scheduled Territories. Looking at the tax position on foreign borrowing – any UK borrower wishing to tap sources of funds in the international capital markets needs to take into account the following two points:

(a.) He will have to contrive a means of paying interest to the lenders gross without formality, because this is a demand of lenders in the international capital markets.

(b.) He will naturally wish to be able to charge the interest payable on his borrowing as an expense for the purpose of UK tax assessments.

(2). Payment of interest gross

Euro-bond issues were not practicable unless the borrower undertook to pay interest gross, and it was therefore important to be clear as to the terms on which London, other local authorities and the nationalised industries could arrange borrowing on gross terms. It was possible for a local authority or nationalised industry to arrange to pay interest gross, without attracting any UK tax charge, provided that the interest has an overseas source in the hands of the bond-holder . This interest has an overseas source if; firstly the loan contract is made abroad, secondly if the loan contract is governed by foreign law, thirdly if the interest is payable abroad, and there is no UK paying agent. Finally if the loan is not secured on any specific assets or revenue in the UK.

The Revenue had to consider all the specific arrangements before they took a final view that it takes the relative interest outside the UK tax charge. In their sterling borrowing hitherto, the local authorities had secured their loans on their revenue, largely from rate income. The fourth condition would preclude this. On the basis of the forth requirement being fairly inflexible, there was no means by which the local authorities could secure their loans (if for good reasons they wished to do so) on any assets or income in the UK .

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It was important to clarify the point of whether there was any difficulty for the GLC in making a Euro-bond issue provided that the borrowing contract was signed abroad. To enable the authority to pay interest gross, to give the interest a foreign source, it was necessary for the four conditions to be met. The fourth condition was of extreme concern – the provision that the loan should not be secured on any specific assets or revenue in the UK. The concern was that the GLC and other local authorities almost invariably secured their sterling borrowings of rate income, they would wish to do the same in the Euro-bond market, and the fourth provision would effectively preclude them from paying interest gross. It was far from clear that it would be necessary for the GLC or any other local authority to offer a lien on the rates if they undertook a Euro-bond issue .

It seemed that, it was almost certainly necessary to give an indirect lien in the following way. On the basis that the loans to the cities Oslo, Bergen and Copenhagen being regarded by the bond market as the relative precedents, it was necessary for the GLC to give a negative pledge to the effect that if on any subsequent borrowing a security is given, then this security will be available equally for the bond issue. It seems likely, that if the fourth provision was indeed inflexible, then the negative pledge would also fall foul of the Revenue requirements, and it would not be possible for the authority to pay interest gross. This seemed like a very tiresome procedure which involved three possibilities; firstly the Revenue may conclude, on reflection, that the “revenue” to which reference is made; in the fourth provision (that the loan is not secured on any specific assets or revenue in the UK.) relates to trading income, and does not therefore cover the rate or other income of local authorities; there will therefore be no problem. Secondly, the law could be amended in the 1969’s Finance Act. Thridly, the local authorities might discontinue their practice of securing sterling loans against rate income .

However, this problem did not arise for the nationalised industries, because they did not, secure their loans on specific assets or income. The Chancellor of the Exchequer (on the 15th January 1969) approved the conclusion that foreign currency bond issues by nationalised industries were desirable as a contribution to Britain’s foreign currency financing problem, and that the Government should offer to carry the exchange risk so as to facilitate the making of such issues and other local issues . It was noted that the GLC might be debarred for tax reasons from making such issues. If local authorities were in fact debarred, or the GLC decided not to make an issue, it will not be worth extending this arrangement to local authorities as well as nationalised industries. It was finally decided that, if the GLC were not debarred and they have firm plans to make an issue, then the door can be opened to local authorities .

The obvious thing to do was for the local authorities to make an issue unsecured. It seems that unsecured borrowing was a normal procedure in Continental capital markets. However, the borrower was normally expected to provide a “negative pledge”. E.g., the Euro-bond markets may take some issues by the cities of Oslo, Bergen and Copenhagen as precedents. These cities borrowed without security, but provided a negative pledge to the effect that if on any subsequent borrowing a security was given, then this security would be available equally for the bond issue. If a local authority must provide adequate security when it is borrowing in this country, then it seems that the negative pledge would result in a borrower providing security in the foreign currency market as well. This falls “foul” of the revenue requirements. This is a difficulty, which does not stand in the way of a possible foreign currency issue. An appropriate amendment to the Finance Act is necessary .

A tax problem arose, because the Revenue considered that income paid by a UK borrower does not qualify as foreign source income, and is therefore outside the UK tax net, unless the loan is not secured on any specific assets or revenue in the UK. The problem arises for the GLC and other local authorities from the authorities’ traditional practice of giving a “lien” on the rates and other revenues in respect of their London market loans, and the insistence of Euro-bond subscribers on receiving special most favoured nation treatment. This means that the local authorities will almost certainly be required to agree to insertion in the loan agreement of a security provision on the lines of those in the loan agreement for the cities of Copenhagen, Bergen and Oslo. The result, if Revenue stand by their interpretation of the statutory position, is that the act of creating a lien on rate income in the first Sterling loans after the Euro-bond issue will cause the interest paid by the local authority to revert to the status of UK income source, thus coming within the tax charge .

The position of the local authority would be impossible in this situation. It would be regarded as part of the preliminary negotiations as well as in the loan agreement itself, to indicate that interest would be payable gross and yet would be inserting in the agreement a second provision which would be bound in a relatively short time to frustrate its ability, within the law, to fulfil the first requirement. This problem did not arise for the nationalised industries, because it was never their practice to create a lien on UK assets because they borrow under Treasury guarantee. The solution was to remove the offending Revenue requirement in respect of overseas borrowing by the nationalised industries and commercial borrowers (for simplicity and to avoid highlighting the position of the local authorities) . There were four alternatives: firstly, to abandon the idea of foreign currency borrowing by the local authorities. Secondly for the local authorities to abandon their old-established practice of creating lien to secure their sterling issues. Thirdly, a less statutory interpretation by the Revenue of the statutory position to regard the interest payable on these issues as retaining its foreign source connotation even when the indirect pledge became effective. Finally, to amend the law.

Examining these alternatives, the first alternative was unquestionable, especially since the GLC and Manchester had relative borrowing powers. The second alternative was “impracticable”. The third alternative was “a possibility”. So it seemed that the fourth choice was “fairly obviously the right solution” .

The point was that bond issues could be made in the Euro-bond market only if the borrower undertakes to pay interest gross. That the relative interest income has to be given a foreign source (based on the four requirements). The only point of difficulty arose on the fourth – the requirement that the loan should not be secured on any specific assets or revenue in the UK. The problem had arisen only for the nationalised industries where it may be necessary to create an indirect security where the borrower is called upon to give a direct security in a subsequent loan .

However the Revenue view stated that if by such a provision a loan became subsequently secured on assets or income in the UK, then the source could no longer be regarded as foreign. This problem did not arise for the nationalised industries, as they borrow under Treasury guarantee. Therefore, two possibilities were either to abandon the idea of local authority foreign currency borrowing in the face of this tax difficulty or, alternatively to modify the loan established practice under which the local authorities charge their London market borrowing on their rate income. The first possibility was clearly unsatisfactory, due to the potential gain for the reserves, which would have been forgone. The second was considered impracticable. Therefore the tax position was the only consideration. There was a strong case in the longer term for removing the “loophole” through which income has a UK source in all but the legal sense can be paid gross to non-residents .

The policy was to encourage foreign currency borrowing, and to encourage UK borrowers to use the artificial foreign source route to the fullest extent possible. There was no objection on principle to any modifications on the proposed legislations in order to get the maximum benefit from it. A subsidiary point had arisen as a result, as whether it was necessary or desirable to confine the amendment to the local authorities. The tentative view was that there were advantages in generalising the change to apply for all UK borrowers. As it would have been impractical if the nationalised industries or private sector borrowers were called upon to introduce a charge on UK assets in their loan contracts, and because the tax change was confined to the local authorities, were inhibited from further foreign currency borrowing .

The possibility of local authorities borrowing in foreign currencies unsecured was governed by Section 197 of the Local Government Act 1933 (extended by Schedule 4 (43) of the London Government Act 1963) to include the Greater London Council and the London Boroughs) which required that all moneys borrowed by a local authority in England and Wales should be secured on all revenues of the authority, except any money borrowed by way of a temporary loan or overdraft without security. It seemed that there was no possibility of local authorities being able to borrow unsecured, except at the very shortest term, either in sterling or in foreign currencies. Also that local authorities could have had difficulty in meeting the requirements of the international capital markets for payment of interest gross. A clause was needed in the 1969 Finance Bill to get over the difficulty, giving wider facility to the tax difficulties which obstructs foreign borrowing. As the present tax arrangements had the effect that in order to be able to pay interest gross, borrowers had to arrange loans in contracts ruled by foreign law and with interest payable overseas. This gave rise that there needed to be some changes in the fiscal rules to allow straightforward borrowing in London to qualify for payment of interest gross .

(3). Tax arrangements on borrowing by UK companies from non-residents

Lever with the Inland Revenue and the Treasury reached a conclusion in January 1969, which involved three separate suggestions which were designed to facilitate borrowing by UK companies from non-residents. The conclusion was that there was no particular need for further relaxation and that the three particular suggestions could not be recommended .

Payment of interest gross

The first suggestion was that UK companies should be permitted to pay interest due to non-residents on overseas loans gross of UK tax, irrespective of the source of the interest or the residence of the paying agent.

The suggestion arises because (a) in respect of interest which has a UK source, tax is deductible unless the interest is bank deposit interest, short interest, interest payable on certain British Government securities and interest exempted under a double taxation agreement. (b) Subscribers to Euro-bond issues require payment of interest gross without formality and will not subscribe on other terms .

UK borrowers at the time met the requirement at (b) provided that they arrange their loan contracts so as to give the interest a foreign source; in essence this means that the relative loan contract must be established under foreign law and the interest is paid overseas. Such arrangements are not particularly difficult to set up and they involve no tax or other penalty on the borrowing company. The disadvantages are: first, that it would be slightly easier, and certainly more straightforward, if UK companies could set up their arrangements through London agents; secondly, that the need to use an overseas base may seem to be a little undignified particularly for an important UK company or a nationalised industry; and thirdly, that the modest professional fees and commissions associated with the handling of these arrangements go abroad instead of remaining in London .

None of these objections was particularly powerful, and there was no evidence that they inhibit borrowing possibilities at all. The small inconvenience and possible indignity of arranging a loan contract governed by foreign law, once the decision to borrow from foreign sources has been taken, does not appear to affect potential borrowers – one nationalised industry commented revealingly that it meant no more than a day in Luxembourg for the directors. The amounts involved in professional fees are trifling and there is no suggestion that foreigners involved in the loan arrangements could use them as a point of entry for wider operations.

Against these modest and in part merely presentational advantages, there were strong objections against changes in the principles and practice of taxation of the kind which would be involved in the payment of interest gross .

In general and in common with other countries the UK sought to tax all income arising within its borders, wherever the recipient of the income resides, and the law was constructed accordingly. The right to charge income having a UK source was of course given up in many double taxation agreements in relation to investment income, but this was always subject to reciprocity by the other country and on the understanding that the other country will in general tax the income concerned in full. In the case of interest the UK had gone further and surrendered unilaterally its right to tax short interest, bank deposit interest and certain interest on Government securities going abroad. There was the further special case of loans based on contracts governed by foreign law, where UK tax law may in principle provide for the deduction of tax, but the UK had to recognise that the lender may be able to sustain a refusal to accept less than the full amount of the interest, and the UK had adopted the somewhat artificial convention that the interest on a loan where the contract was governed by foreign law was regarded as deriving from a source outside the UK, provided that it was paid outside the UK and that the loan was not secured on specific assets in the UK. It was under this arrangement that UK borrowers issued Euro-bonds with payment of interest gross .

Despite these special exceptions, the UK considered that the principle of its right to tax income arising within its borders remained broadly intact, and that any further erosion of it, except on the clear basis of reciprocity, would be mistaken.

The potential dangers were considerable. Willingness to give up its right unilaterally would undoubtedly make it more difficult to secure reciprocal exemption in double taxation agreements. There were many cases in which a concession given unilaterally would involve loss of revenue without countervailing advantage, thus: some deduction of UK tax may be acceptable to the lender if he is resident in a country with which the UK has a double taxation agreement and in which he can credit his UK tax against his own country’s tax charge – the effect of a concession from the UK would be a benefit to the revenue authorities of the other country. Some of the UK’s agreements provide for interest to be taxed in the country in which it arises at some low fixed rate, usually 10% or 15% – here the tax the UK would give up would be completely lost, because claims to a partial repayment of the UK’s 41¼ % charge on interest have to be made through the other country’s revenue and it must be assumed therefore that the lenders concerned are not striving to remain anonymous from their own authorities; and coming closer to the field of Euro-bond issues, the UK tax deduction is regarded as acceptable in the case of other fixed interest borrowing and to refrain from taking UK tax in such circumstances would be an absurd self-denial .

In the particular case of Euro-bond issue, there would of course be no direct tax loss, given the UK’s assumption that potential borrowers are already able to adopt the method of a loan contract under foreign law which avoids UK tax liability in any case. But it is difficult to envisage an arrangement under which a concession could be confined to Euro-bond issues without encroaching on important fiscal principles elsewhere .

Finally, although the UK are content to adopt the artificial convention that the interest on loan contracts set up under foreign law derives from a source outside the UK, the whole discussion is addressed to Euro-bond issues whose proceeds are used for domestic investment in the UK, and a more realistic appreciation would recognise that the true source of the interest is within the UK. On economic grounds, therefore it was considered reasonable and right for the UK to demand its tax entitlement. At the time in the late 1960s, the UK were content to waive this in the interest of encouraging a source of foreign borrowing .

However, there were still those in the Treasury and the Inland Revenue who considered, that the UK’s arrangements of the time had gone too far, and that there would be a weighty case in the medium term, when the UK could afford to be less encouraging towards foreign currency borrowings, for reverting to a more rational and defensible arrangement under which all interest paid out of income generated in the UK is subject to UK tax, unless reciprocal tax agreements apply. Generally, there were dangers in making fundamental changes in the tax system – or indeed peripheral changes which bear upon fundamental principles of the system – as part of arrangements designed to meet a balance of payments and reserves situation which was expected to improve over the years ahead. So, it was concluded that the balance of argument was overwhelmingly against the suggested change .

Interest on loans in Sterling Area Currencies

The second suggestion, was that the concession in Section 22 of the 1968 Finance Act should be extended to enable companies in computing their profits to deduct interest in respect of loans denominated in any currency of the Outer Sterling Area as well as loans covered in the Section 22 concession denominated in foreign currency. The object was to facilitate borrowing in currencies of the Outer Sterling Area as well as foreign currencies, particularly prompted by the thought that Kuwaiti funds might well be a promising source of overseas borrowing .

There was no ground of tax principle for dispensing less generous tax treatment (for the purpose of computing profits) in respect of loans denominated in sterling area currencies. Also, that, there would be no difficulty in principle in allowing a payer of interest a deduction in computing his profits for interest paid on a sterling area currency loan made to enable him to earn these profits. The difficulty was the serious practical one that further liberalisation of the treatment of interest going abroad would much enhance the dangers of avoidance and evasion of tax. The avoidance danger was that profits earned in the UK would be drawn out of the country without suffering any Corporation tax, through the creation of artificial loan liabilities. Thus, a company can lend money to an overseas associate (on interest free terms) and the associate can lend the money back to another UK member of the group which then incurs a liability to pay interest abroad, and may thus be able to pay in interest gross of UK tax. If the associate is resident in a tax haven, part of the profits of the group have then effectively been taken out of the UK tax net. This could be achieved under the existing law of the 1960s, but the scope for such avoidance schemes was considerably restricted by the fact that the associate either had to be in a non-sterling country (when exchange control comes into operation), or a double taxation agreement had to be invoked to enable the interest to be paid gross – and there were provisions in double taxation agreements designed to prevent the misuse of the reliefs allowed under them . Extension of the Section 22 concession to loans denominated in sterling would make it practicable for UK borrowers to pay interest gross to a sterling area country (for example a West Indian tax haven) without deduction of tax, and such avoidance schemes would be much more difficult to counter. Anti-avoidance provisions similar to those appearing in out double taxation agreements could be included in the necessary legislation, but these might well be ineffective since it would be difficult for Inspectors to link up a chain of associated lending operations designed to take advantage of the concession. It was then suggested that, the UK should not then be able to consult the other country’s Revenue to confirm that the relief was not being abused .

The scope for evasion of tax on interest received by individuals resident in this country would also be extended if UK borrowers were able to claim a deduction in computing their profits for interest paid on sterling area currency loans and it thus became practicable to pay interest gross to sterling area countries. Interest from an overseas source paid through a UK paying agent or collected by a UK collecting agent was subject to UK’s “foreign dividends” machinery; interest on British Government securities payable gross to persons not ordinarily resident in the UK was policed in a similar way. This machinery ensured that where dividends or interest are paid direct to a UK resident, tax was deducted and accounted for to the Revenue by the paying or collecting agent. To evade tax on such income, therefore, a UK resident had either to make it appear that the income was payable to a non-resident or that he had to keep it entirely outside the paying and collecting agent machinery – either by retaining the income abroad or by having it remitted to this country in a form which does not bring it within the taxing machinery. If the income was left abroad, the UK were not likely to find out about it (unless the UK learn of it indirectly, e.g. in the course of a back duty investigation) . Often however, the individual would want to use the income in the UK and this was difficult to arrange without coming within the taxing machinery, particularly if the income was in a non-sterling currency.

While therefore evasion of tax on interest payable abroad was possible under existing arrangements the scope for it was restricted. Furthermore, many individuals prefered to buy bonds of UK companies rather than of foreign companies. To extend the Section 22 concession in the manner proposed would have enabled UK borrowers to pay interest gross on sterling area currency loans under overseas loan contracts, and this would substantially increase the field in which evasion could take place. Admittedly, UK residents were already able to buy Euro-dollar bonds issued by UK companies, but for this purpose they must either pay the investment currency premium (which would make the investment unattractive) or evade the exchange control. Bonds issued in sterling currencies by UK companies would be more attractive to UK residents and it would be more difficult to counter evasion of tax on interest on such bonds .

Against these severe practical difficulties, the UK had to counter the possible benefits to the balance of payments and reserves of overseas borrowing in sterling area currencies. If the proposed additional facility did not increase the total amount of overseas borrowing, but merely replaced some foreign currency borrowing by some borrowing in sterling area currencies, this would be unwelcome. To the extent that the UK obtaining sterling area currency prevented the sterling area country concerned from an equivalent diversification of its reserves into foreign currency. The UK’s borrowing in this form would be as good as foreign currency borrowing. But the more likely situation would be that the sterling lending to the UK would be only partly an alternative to diversification and would mainly be offset by a reduction in sterling holdings .

There was however the question of the extent to which the additional facility would open the way to increased overseas borrowing. This was not easy to judge. There was no shortage of available funds for foreign currency borrowing, but an important element in the reluctance of potential UK borrowers to commit themselves was the exchange risk associated with foreign currency borrowing, particularly where the proceeds were to be used for domestic investment. It was thought that the deterrent effect of this risk would be smaller in the case of sterling area currency borrowing, but even this judgement was doubtful. The fact was that experience of the reaction of other countries to UK’s devaluation in November 1967 had demonstrated the probability that, on any future similar occasion, the stronger sterling area currencies would not move with UK sterling . Adding to this, the fact that the sterling area currencies which were most likely to be available for overseas borrowing are those of the countries in relatively strong balance of payments and reserves positions, such as Kuwait, it becomes rather doubtful whereas UK borrowers will in general see the additional facility of sterling area currency borrowing as being so attractive as to increase their overall willingness to borrow.

On balance, it seemed likely that the additional facility of borrowing in sterling area currencies would induce some switching by UK borrowers from foreign currency to sterling area currency which would be disadvantageous, and might be offset to some extent by willingness to borrow on a rather larger scale in this form. There certainly seemed to be no ground for thinking that the additional facility would create a substantially greater level of overseas borrowing, and it was concluded that it was not worth embarking on this against the background of substantial difficulties in tax evasion which would unavoidably be associated with it .

Loans for Non-Trade Activities

The third suggestion was a further extension of Section 22 concession to allow deduction for Corporation Tax purposes for interest paid on loans in support of other and general purposes, as well as the purpose of the borrowers’ trade already covered by Section 22.

Even if there were an argument on balance of payments grounds for making some further relaxation in the treatment of interest, there was no reason why the right to pay interest to non-residents gross should be extended beyond the field of borrowing for trade purposes. Overseas borrowing of money which will be used in a UK business, and thus tend to strengthen the whole UK economy, was one thing. Borrowing abroad and thereby placing a continuing burden on the current balance of payments for the purpose of, say, buying a villa at Cannes, was quite another. Restriction of the concession to loans for trade purposes meant that the concession was available for direct investment, but not portfolio, but it was far from clear that the UK wanted to encourage domestic portfolio investment by UK borrowers using foreign currency finance. The UK certainly did not want to encourage such borrowing to finance or facilitate the payment of import deposits, and indeed in general it seems untimely of such thinking of unrestricted access to foreign borrowing which might in many directions have interfered with attempts to control domestic credit .

D. Conclusion

The general conclusion was therefore negative on all three suggestions, which was open to strong objections of fiscal principle or practice and did not offer commensurate advantages. Levels of overseas borrowing by UK companies for domestic purposes had hitherto been modest. The joint judgement of Lever, the Inland Revenue and the Treasury was that tax differences have played little or no part, and that the most important influences had been fears of exchange risks on the one hand and relatively easy access to funds on the domestic market on the other. Therefore it was considered that there was no mechanical or technical changes which could usefully lead UK companies in the direction of greater borrowing abroad.

In response towards this, Lever recommended the following inclusion in the 1969 Finance Bill of a clause which would authorise the Treasury to direct, in respect of any specified loan raised by a local authority in the currency of a country outside the Scheduled Territories: firstly, that the interest should be payable without deduction of tax at source. Secondly, that it should be exempt from UK tax so long as the stock or bonds in question are held by a non-resident. Thirdly, that the Capital should not be subject to any present or future UK tax on capital where the beneficial owner was neither domiciled nor ordinarily resident in the UK .

The purpose of this clause was that it was in the “public interest” for nationalised industries and large authorities to borrow on the Euro-dollar market . The Chancellor of the Exchequer in his Budget Speech clarified this point and further explained that the proposed Finance Bill clause was designed to facilitate foreign currency borrowing by local authorities :

“A point which has been urged upon me from time-to-time is that some of our public authorities should be enabled to take advantage of funds available in the international capital markets for long-term borrowing, and in doing so bring support to our reserves. The House is aware that a number of nationalised industries are being encouraged in this direction, with the assistance of special arrangements which have been devised to relieve them of exchange uncertainties, and indeed the Gas Council has completed arrangements, and in part funds, from total borrowings of over £30m recently. I am anxious that this facility should be available to local authorities also, and I propose to include in the Finance Bill a clause which will remove a minor tax obstacle which at the moment prevents this”.

ENDNOTE

* Here are two very similar definitions of the term Euro-dollars:

Robert Gilpin, (The Political Economy of International Relations, Princetown University Press, 1987, p. 314-315), states that: The Euro-dollar market received its name from American dollars on deposit in European (especially in London) banks yet remaining outside the domestic monetary system, and the stringent control of national monetary authorities.

Enzig and Quinn (The Euro-dollar System: practice and theory of international interest rates, MacMillan Press, 6th edition, 1977, p. 1) state that: the Euro-dollar system is a term used to describe the market in dollar deposits and credits which exists outside the United States of America.

This paper is based on the following PRO files:

T 295/628: Tax Measures To Encourage Eurodollar Borrowing: (A) Payment Of Interest Gross On UK Bearer Bonds; (B) Allowance Of Annual Interest As A Deduction From Corporation Tax. (5/06/1968 – 8/01/69). File Number: 2FEC 123/76/01 “PART B”

T 295/560: Tax Measures To Encourage Eurodollar Borrowing: (A) Payment Of Interest Gross On UK Bearer Bonds;(B) Allowance Of Annual Interest As A Deduction From Corporation Tax. (10/01/69 – 30/04/69). File Number: 2FEC 123/76/01 “PART C”

T 295/628: Confidential letter on Euro-dollar borrowing for home investment, from Mr. D.A. Walker to Mr. Littler of the Treasury, on 5th June 1968.

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Becoming a Successful Finance Manager

But in the last 2 years more options have emerged for graduates which can lead them to successful career in Finance. IMS Proschool has researched and come up information on Finance Careers and how to prepare for these careers. Please note that this is not a complete guide, and also do keep in mind that Finance career is not for every one. It is important that you judge yourself thoroughly and make sure that Finance is what you want to do.

 

Every Organization needs Finance professionals to manage their business

There are more than 800,000 registered companies in India and every one needs a Finance Manager however big or small.  If you want to target for these jobs, then you should be focusing on Corporate Finance and Finance Management Subjects.

Another common role in Companies is Treasury.  This is the staff that manages the corporation’s investments into shares, fixed income, property, and other assets.

Management Consulting Firms for those from Top 10 MBA Colleges

 

Most Consulting Firms hire MBA’s from Top 10 Institutes.  Consulting can either be “management consulting” or functional consulting.  Finance is one of those functions where consultants can focus.  Consulting firms tend to be organized by practices aligned along functions, which determines the office in which a consultant is based.  Virtual (and sometimes actual) practices are often aligned along industry expertise.  These two dimensions (function and industry) form matrix organizations.  Consultants tend to work at specific intersections, known sometimes as “nodes.”  Whether your goal is management consulting or financial consulting, you need to first identify the practice in which you want to be based.

 

Banks and Insurance Companies

 

Commercial Banks

Banks present opportunities often overlooked by those wanting careers into finance, and thus are great prospects.  Banks often have management rotation programs, as well as direct hire positions into commercial credit, or in wholesale banking, which means taking care of all the financing needs of a large client, including investment needs, debt financing, and merger financing. Some banks also hire candidates for risk assessment roles.

 

Insurance Companies

Insurance companies also have management rotation programs leading up to senior management positions. Insurance career may look tough in the early stages, but those who learn to survive in this tough business have lot of opportunity to have fast track career.

 

Investments

 

Big Investment Firms

International Firms like J P Morgan, Goldman Sacchs, Nomura Securities, Citi, Deutsche etc   are what many people think of when they say investment banking.  But there are other firms like SBI Caps, IDBI Caps, 40+ Fund houses in India.  A commonly desired entry point is as an equity or fixed income (debt) analyst or associate looking for investment opportunities in their industry of expertise.  Associates pitch their stock picks to the Portfolio Manager, who decides what stocks are in and which are out.  When the decision to invest or sell is made, the trade is ordered from the trading desk.  On the “distribution” side one can work with possible institutional investors who may want to buy into the various portfolios available.

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Mid-Cap and Boutique Firms

These smaller firms run more limited investment portfolios, but the roles are very similar to those in Big Investment firms.  Being smaller, they may be easier to gain entry into if you can develop contacts in them.

 

Corporate Finance

Although the name can be confusing, banks use Corporate Finance to refer to the structuring of deals centered around Mergers and Acquisitions.  If a company were to acquire another, the mixture of debt and equity financing can yield major returns for the company.

Private Equity

Private equity firms arrange for investment in companies that are not publicly traded on any stock exchange.

Venture Capital

Small firms looking for cash to grow their business find financing with venture capital firms, which are a form of private equity.  These firms collect private capital from interested investors, then look for prospective businesses to grow.  Venture Capitalists not only identify prospects within their area of industry expertise, but also are actively involved in the management of those companies as they grow.

 

Rating Companies

Rating companies like CRISIL, Care Ratings, ICRA, Brickworks Ratings, Fitch have grown considerably in the last 5 years and are increasing their employee counts. These presents a new opportunity for those who want to make career in finance.

 

 

Required Skills

Finance careers require the same soft skills as any other career.  However, quantitative skills need to be superior.  Finance professionals in many roles need to analyze both quantitative (typically financial) and qualitative data, then build models upon which to base decisions.  Here are specifics about desired skills.

·Critical, detail-oriented thinking, with strong quantitative skills.
·An understanding of managerial accounting, and operations background can help in project analysis.  MIS coursework may help with both internal systems and general analysis tools.
·Knowledge of financial markets, capital structure and other fiscal policies and risk management.
· An understanding of financial statements, an ability to analyze those statements and an ability to translate financial and other information into opinions about credit quality and relative pricing of equity securities.
·Candidates should be able to forecast scenarios, analyze them and recommend a course of action.
·The ability to create and use financial models is essential.
· All employers seek leadership skills and the ability to work in teams.
· Strong oral and written communication skills.
· Personal computer proficiency and information technology skill.

 

Sample Questions for Interview

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         What do you know about WACC?   Where do the cost of capital and cost of debt values in the WACC equation come from?

         What is better for our company, 2/10 or net 30?

         If you are analyzing the credit of a potential customer, what factors would you consider?

         What is good/bad about debt/equity?

         Walk me through the steps of conducting an NPV analysis.

         Is ROA a good measure of success?

         What are the methods of raising capital for a project?

         What could be some reasons why our actual cash flow was less than forecast?

         Does it ever make sense to accept a negative NPV project?

         What are some things you can do to further investigate a negative NPV project?

         How do you calculate WACC?

         What is an accrual?

         How would you go about pricing a product?

         How would you go about analyzing a situation where demand exceeded capacity?

         Which is better for your company, offering a 2% discount if paid in the first ten days, or getting the net due in 30 days?

         If you have two products that are similar, how would you decide which one you want to launch (or both?)?

         How does the increase in interest rates affect our company?

         How would you make a business profitable (discuss P&L for this one!)?

         Revenues are rising and profits are falling.  What could be going on?

         You have the option to fund a project that will cost an amount approximate to 80% of equity.  Do you undertake the project?

         What is the difference between Internal Rate of Return and Weighted Average Cost of Capital?

 

 

Must Read books for those who want to make a career in Finance

The Intelligent Investor – Benjamin Graham

Alchemy of Finance – George Soros

Investment Analysis and Portfolio Management – Prasanna Chandra

Reminiscences of a Stock Operator – Edwin Lefèvre

Advanced Corporate Finance – Joseph Ogden

Markets, Mobs, and Mayhem – Robert Menschel

Extraordinarily Popular Delusions and the Madness of Crowds – Charles Mackay

The Money Game – Adam Smith

Money Ball – Michael Lewis

The Innovator’s Dilemma – Clayton M. Christensen

Gorilla Game – Geoffrey A. Moore

Risk Budgeting – Neil D. Pearson OR Capital Market Risk Advisors (not sure which)

Liar’s Poker: Rising Through the Wreckage on Wall Street – Michael Lewis

 

Article written by Kaushik Ramachandran – Director, IMS Proschool

UK Tax Codes Explained, Br Basic Rate Tax Coding and New Tax Code

Virtually everyone in the UK is entitled to a personal allowance if they are resident in the UK which entitles them to tax free income, the amount of that tax free income being dependent on the size of the personal allowance according to the specific circumstances. Earnings above the tax free allowance are subject to the basic rate tax. The basic tax rate personal allowance was £5435 from 6 April 2008 and increased by £600 to £6,035 which effect from the first pay date after 7 September 2008. The original personal allowance tax code 543L being increased to new tax code 603L reflecting these changes to calculate tax at the new rate from 7 September 2008..

Basic rate tax for 2008 is 20 percent. For earnings above the higher income threshold which is £34.800 the basic rate tax increases to 40 per cent.

The personal allowance of people over 65 and up to 74 is £9,030 which is reduced if income exceeds £21,800 and people over 75 receive a personal allowance of £9,180 also reduced when income exceeds the £21,800 income threshold. The rate of tax allowance reduction is £1 for every £2 above the income threshold until the basic personal allowance is reached.

The number in the UK tax code is known as the prefix while the letter following that number is known as the suffix. Each suffix letter in the tax codes explained as a different meaning.

Letter L means eligible for the basic personal allowance and is also used for the emergency tax codes. Letter P is for people aged 65 to 74 and letter V for people aged 75 and over, while letter Y is also for people over 75 but who are eligible for the full personal allowance. A tax code with a suffix letter T indicates there may be issues that HMRC still need to review regarding the tax code and letter K indicates that the value of taxable benefits exceeds the personal allowance.

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Where untaxed incomes, such as benefits, are received by the employee exceed the personal allowance a K code is issued by HMRC. The number following the letter K indicates the amount of benefits multiplied by 10 that are to be taxed in addition to the gross earnings received. This is achieved by adding the K code number multiplied by 10 to the gross earnings of the employee for income tax purposes.

Some Inland Revenue tax coding consists of just letters allowing the tax codes explained simply. The BR tax code means basic rate where the employee entire earnings are taxed at the basic tax rate. The BR tax code is often used when an employee has a second job and should also be applied by an employer who has not received a P45 or P46 for a new employee. The NT tax codes explained is that no tax is deducted from the employee so the basic rate tax does not apply..

HMRC are responsible for issuing tax codes and determine the Inland Revenue tax code by giving everyone the personal allowance, deducting any earnings where tax remains unpaid from the previous year and dividing the result by 10. Variations to this calculation are when other factors affect the tax code.

An emergency tax code is issued to calculate tax when the new tax code is not immediately available. That can occur when the employee does not have a P45 or completes a P46. The emergency tax code 543L is replaced with the new tax code 603L from 7 September 2008 which is the basic tax allowance but is also applied on a week one or month one basis. A week one or month one basis means the employer will calculate tax to be deducted for each pay period and not on a cumulative basis which in effect prevents tax refunds until a confirmed tax code is received to replace the emergency tax code..

It is important for employers to use the correct UK tax code which is stated on the P45 an employee presents to the new employer when starting employment to deduct the correct rate of tax. If the new employee does not have a P45 for the current financial year then the employer should request the employee complete a P46. The P46 is sent to HMRC who then review the tax coding and issue an appropriate tax code for the employer to use.

The personal allowance usually changes each new tax year and the old Inland Revenue tax codes from the previous year can be used for the first few weeks of the year and replaced with the new tax code in week 7. The rate of tax deducted if the previous year personal tax allowance has been increased is common and the employee receives a tax refund when the new tax code is applied.

When the new tax code is known from the start of the new tax year the tax coding can be applied from week one and as the correct tax has been deducted no refund is due.

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Fulfill Your Personal needs with Personal Loans

There is infinite number of loans options inUK finance market at present. So many choices for borrowers now a days.Borrowers takes loan for different purpose. To fulfill your personal needs by getting loans that is called “Personal Loan”.

A Personal Loan is a loan that is lent to an individual by financial institutions such as bank, building society or other financial service provider for a specific personal reason. There are two main types of personal loan – secured loans and unsecured loans.

A secured loan is any loan where the security is needed against loan such as your property. Keep in mind that when you take a secured loan your home or the property is at risk if you fail to make payments on your mortgage or other loan secured on it.

Unsecured loans are without any collateral or security and are totally depend on the character and capacity of the borrower to repay

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Personal loans are issued in the market with an agreed sum of money for an agreed period of time. The interest rate charged on the loan can be a bit higher. Two type of interest can be possible fixed and variable. A personal loan with a fixed rate has the fixed interest rate set throughout the life of your loan, which means you have the reassurance of knowing your monthly payments will not go up or down. A loan with a variable rate has an interest rate that fluctuates with the market change.

There are the various option in Personal loan matching the potential of different people. The key issues you should consider while choosing which Personal loan to take out are: -

- Borrowing limits – You can generally avail a personal loan in the range of £1,000 to £75,000, it exclusively depends on how much do you need.
– Loan terms – The loan term may vary from 5 to 25 years depending on the type of loan taken

- Providers – There are so many loan providers in the market like Banks, building societies and, increasingly, supermarket chains offer personal loans at competitive rates. Avoid loans from small firms that you have never heard of – this is a lightly regulated area and some of these loans can carry high interest rates coupled with heavy redemption penalties should you decide to move your loan to a cheaper firm.

- Interest – Rate of interest depends on the duration for which the loan is taken. Generally there is, negative relationship between the rate of interest and duration for which the loan is taken.

- Credit checks – Lender wants to make sure that it is not risky to give you loan and you do not have bad debts history. To do this they will check your entry on credit registers. A poor credit record won’t necessarily prevent you from getting a loan, but you will probably have to pay a higher rate of interest. You can know your credit score from the credit reporting agencies.

Boat Financing- Useful Fact For Car Finance Rates

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