Published: April 01, 2012
Welcome to the TMI Tax Doctor, which is designed to look at some of the tax issues associated with treasury globally. In this first column I answer a UK tax-related question around debt restructurings. I also address a second question relating to the key tax issues to consider when assessing potential jurisdictions for a group treasury and finance company.
Simple waivers or releases of debts by lenders prima facie result in an immediate UK tax charge for the borrower.
However credits arising in respect of debt releases in borrowing companies that have issued equity to lenders are generally exempt from being taxed, but this does not apply to all types of shares.
Recently updated HMRC guidance on the taxation of debt for equity swaps has also confirmed this tax treatment should remain (i.e., credits on such debt releases in the borrower are not taxable) even where lenders sell on the equity stakes shortly after issue, but notes that where shares issued to the lender are immediately sold to a party that is connected to the borrower, then the consideration for the debt may be the cash received on the on-sale and the exempting provisions may therefore not apply.
What is clear from HMRC’s guidance is that, as you’d expect, the tax analysis will turn on the facts and a realistic appraisal of the transactions is needed in order to determine the potential tax issues.
The UK tax issues highlighted above can be involved and are not limited to the debt itself, as the associated hedging instruments can carry significant tax consequences and/or attributes which also need to be managed. The restructurings that may be required to benefit from the relevant exempting provisions can be complex and therefore the earlier companies start thinking through their refinancing needs and options, the better they can navigate through to obtain an optimal solution.
In terms of comparing the various taxation regimes in each jurisdiction in the context of a local treasury and finance company, some of the key tax issues to consider would be (i) local tax rate on finance income; (ii) extent of tax treaty network; (iii) treaty withholding tax rates on interest and dividends; (iv) transfer pricing provisions and (v) stability of tax regime.
The local corporate tax rate on income in Singapore is currently 17% compared with a rate in Hong Kong for locally sourced income of 16.5%. In Singapore, a rate of 10% may also be accessed under the Finance and Treasury Centre tax incentive and un-remitted foreign source income is tax exempt. Hong Kong applies a rate of 0% to offshore income.
Both Singapore and Hong Kong have stable tax regimes, advanced ruling systems and guidelines on the application of arm’s length principles to transactions between related parties. However Singapore has a more extensive treaty network (c.68 treaties vs c.18 for Hong Kong).[[[PAGE]]]
As well as determining which jurisdiction is optimal from a local tax perspective, you should also consider the tax treatment of the entity in the parent jurisdiction and applicability of any controlled foreign company rules that may seek to tax the finance income of a treasury company subsidiary.
We are seeing a general trend of corporate groups consolidating overseas treasury activities into regional finance companies located in key high growth geographical areas such as Asia and South America. Establishing a hub for a group’s treasury activities can provide a structural platform to efficiently finance overseas operations and growth plans, with tax being a key consideration when considering the optimal legal entity structure.
If you have any questions regarding the issues discussed here, or would like to suggest topics for future columns, please contact Leo Humphries in the Deloitte Treasury Tax team.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
