CAN THE NEW CFC PROPOSALS KEEP COMPANIES IN THE UK?

London, 25th March 2010

by Helen Blenkinsop

The trickle of UK PLC headquarters to foreign shores isn't a flood yet, but it's gathering pace. Countries like the Netherlands and Switzerland are actively courting both UK PLCs and high net worth individuals, like hedge fund managers. And it's no wonder that companies and individuals are starting to leave. Switzerland offers an attractive tax and commercial environment, and if you like skiing too, why not take a one-way trip to the Alps? It's against this background that we should view the Government's latest proposals for controlled foreign company ("CFC") reform.

CFC reform - what's it all about?

The proposals are the latest instalment of the Government's changes to the taxation of foreign profits, in other words, the taxation in the UK of profits earned outside the UK by subsidiaries of UK companies. The two earlier instalments were a corporation tax exemption for foreign dividends paid to the UK (UK dividends were already exempt) and rules to restrict tax deductions for interest if a group's borrowings in the UK exceeded the group's worldwide borrowings. The CFC rules already allowed the Government to tax UK companies on unremitted profits of foreign subsidiaries. Although there was broad agreement that change was necessary, there was little agreement on the detail, so the CFC rules had to sit in the "too difficult" pile until the dividend exemption and debt cap were enacted. The current proposals, in the form of a discussion document posted on the Treasury website, were issued by the Treasury and HMRC at the end of January 2010. The document sets out the direction of travel, while recognising that details have yet to be agreed.

The Government is too afraid of losing revenue to scrap the CFC rules altogether. Instead, it wants to simplify them, enhance the UK's competitiveness as a place to do business and ensure the rules comply with EU law. It is debatable whether the existing CFC rules are or ever have been compliant with EU law. Suffice to say that I expect cases on the subject will be keeping lawyers busy for many years to come.

Plus ça change

The Treasury's approach to the CFC proposals is coloured by the Government's desperate need for tax revenues and its desire to make the UK competitive. The current CFC regime broadly says that all UK-owned foreign companies are CFCs and their profits taxable on their UK owners, unless one of a number of a number of exemptions is met. The new CFC rules would take the same approach. The exemptions would be different, but apparently easier to operate. There is, however, a real danger that extra complexities would be layered into the rules to collect more tax.

Small is beautiful

The proposed exemptions are similar to existing ones. Capital gains continue to be ignored. There is an existing de minimis exemption for income under £50,000; it is proposed that this is increased. Life would be even easier if the limit were tested against local accounting profits rather than, as now, by calculating UK taxable profits. That, however, is a matter of detail to be covered in the next phase of the consultation.

A whitelist, but who is good enough?

The existing exemptions for high tax rates and "good" excluded countries both involve analysis and calculations; either a calculation of UK taxable profits or analysis of income to prove that most of it is really sourced in the good excluded country. They would be replaced by a simple white list of good countries. A vast improvement, although HMRC has yet to decide which countries are good enough for the white list.

Good news for traders and treasurers…

The exempt activities test currently removes trading companies and some holding companies from a CFC tax charge. Its replacement, an exemption for trading companies, will be more widely drawn so that treasury companies and "active" intellectual property ("IP") owning companies fall within it as well.

The extension for treasury and active IP operations has arisen as a result of determined lobbying by business, and it is encouraging that the Government has listened. There are pitfalls, though. The definition of qualifying treasury activities is restricted to short term borrowing and lending at a profit, and providing treasury services such as cash pooling. Other financial activities, like lending long term within the group, could attract CFC tax. Here, the options suggested by the Treasury start to look rather complicated. One proposal is to levy UK tax on a deemed interest charge unless the finance company is appropriately debt-capitalised. The Treasury is seeking recommendations for an appropriate debt:equity ratio. The irony here is that, while generally HMRC wants UK companies to minimise debt on their balance sheet (thus keeping tax-deductible interest low), I suspect that in this instance, it would like foreign finance subsidiaries to be capitalised with a high level of debt. Even then, the Treasury is very nervous of overseas subsidiaries lending cash back to the UK, and has suggested further restrictions

...and intellectual property, but there's a sting in the tail

The IP proposals would exempt foreign subsidiaries that receive IP income, as long as they either manage all their IP themselves or their IP has no UK connection; for example, a patent developed by a French company, owned and managed in the Netherlands and licensed to an Australian company. The definition of IP management is comprehensive, covering development, legal protection, negotiation and quality control over licence agreements, and brand management. If any of this is outsourced, an active IP company would be expected to employ knowledgeable staff to supervise the outsourcing.

Because of HMRC's evident reluctance to exempt IP owning companies with any connection to the UK, I fear that groups will be motivated to outsource IP management to third parties and group companies outside the UK. It would be unfortunate if HMRC's caution resulted in less work, and therefore jobs, for patent and trademark specialists in the UK.

The Treasury is also concerned that IP could be transferred from the UK too cheaply, especially in the case of newly developed IP that doesn't generate profits yet. The Treasury's answer is to revalue IP on an earn-out basis several years after the move offshore. If there has been an increase in value, HMRC will collect more tax. Naturally, if the IP has fallen in value, no tax refund will be forthcoming. This one-way bet for HMRC appears to ignore risk inherent in the IP's value when it is transferred, as well as the contribution made outside the UK to the IP's growth in profitability. The measure would introduce uncertainty: when IP was transferred offshore, no one would know if a large tax charge loomed ahead. Perhaps, rather than apply a stick, the Treasury could give a carrot by improving its proposed patent box regime. This initiative already offers low tax rates for patent royalties from 2013.

Loopholes to close

A widely used loophole will be closed. At the moment, exempt trading companies can receive non-trading income without any effect on their CFC position. A common tax planning technique known as swamping involves loading a trading company with low-tax interest or royalties amounting to just less than half of its profits. In future, only incidental non-trading income will be relieved from a CFC tax charge. Comments are being sought on the definition of "incidental". My guess is that we will land somewhere around 10% to 20% of profit before tax.

Holding companies – watch this space

The Treasury admits that it hasn't decided what to do about holding companies, and is open to ideas. The simplest option would be to treat holding companies like trading companies, and refrain from a CFC tax charge if they receive only dividends plus, say, non-dividend income below the de minimis exemption limit.

Are your motives good?

The Government's intention, repeated throughout the discussion document, is to prevent the artificial diversion of profits from the UK. They recognise that, however widely drawn, the specific exemptions may not cover every company established overseas for commercial reasons. It is possible today to claim a motive test exemption in this situation, by persuading HMRC there is no tax avoidance motive and no loss of UK tax. Although my experience of the motive test has been positive, I understand that HMRC hasn't always been persuaded in other cases. A more user-friendly motive test is promised in future. The Government is moving away from the default assumption that all activities that could have been undertaken in the UK would have been undertaken there, were it not for the tax advantages offered overseas. Instead, the focus will be on proving a commercial rationale. There may also be a statutory period of grace for newly acquired companies (HMRC already allows this, but it isn't enshrined in statute) and flexibility where other exemptions are narrowly missed.

Keeping it simple

To summarise, the direction of travel is encouraging. The Government is making a welcome effort to design new CFC rules that are simple and fair. Yet, there is a real danger that they won't be simple enough or fair enough. Concerned taxpayers should give their views to the Treasury by 20th April 2010, the deadline for comments on the discussion document. Equally, HMRC should resist the temptation to collect more tax by adding complexity and retrospective tax charges. Multinationals will vote with their feet otherwise.

"Helen Blenkinsop FCCA, trained and worked as a corporate tax manager in the Big 4 before moving in-house. She spent 12 years heading two international FTSE tax teams and recently completed senior interim assignments in the insurance and packaging industries. The CFC rules have played a bigger part in her life than she cares to mention."

For more information contact Rob Stephenson, Managing Partner of Maven Partners on 0207 061 6421.

“Job prospects looking rosier for senior finance candidates…………..”

Never has spring been so keenly anticipated at Maven Partners as this year. Not only are we looking forward to a general thawing-out to allow us all to return to our normal life activities (let’s face it the novelty of snow & ice soon wore off) but there is also a mounting level of evidence that the economy may be starting to bear more fruit. The recent Deloitte CFO survey (2009: Q4 results) indicated a 2-year high in confidence amongst Senior Finance staff – with many planning to deploy a series of strategies designed to expand market share and increase revenues in 2010. Introducing new products and services was cited among their top three priorities by 46% of respondents. Expanding into new markets and expanding by acquisitions were also widely recorded.

In the meantime a new survey from McKinney Rogers, the leading global business performance consultancy, has highlighted a significant change in the emphasis that Boardrooms are now placing on hiring senior talent – with the cold calculus of financial restructuring and cost management skills falling behind innovation, entrepreneurship and leadership for the year ahead.

Here at Maven Partners we can support these findings with discernible evidence that our clients are once again talking about new ventures, new geographies, taking increased market share; and having the talent in place in order to take advantage of these opportunities. With respect to Senior Finance recruitment - conversations, briefings and written specifications are focusing on bolder and more creative qualities: supporting commercial activities in business development, providing the financial rule over potential corporate transactions and leading and developing finance teams.

Provided that the elephant in the room, namely, the impending election (and let’s hope it comes sooner rather than later) does not trample all over the daffodils, then we are anticipating a much rosier picture this spring than we have seen for the past two years.

Matthew Leedham is a Managing Partner at Maven Partners and has over 20 years experience in recruiting senior finance professionals at the Board level. He can be contacted at matthewleedham@mavenapartners.co.uk or by telephone on 07787-574-244

A Positive Outlook for Private Equity Finance Directors…?

London, 8th February 2010

Last week was a positive week all round in business terms. Not only did we come out of recession, albeit by 0.1%, we also saw some major movement in the Private Equity space; all very encouraging.

The big news in the retail world was of course the sale of Pets At Home to KKR for £955m. With three other notable deals totaling over £900m, it seems that things are really starting to shift. If you listen to the experts then this is only the start, and whether it is because funds are running to the end of their investment periods or due to more stability in the credit market, this can only be positive for those Finance Directors and CFOs looking to take up roles in Private Equity-backed businesses.

For the past 18 months in recruitment terms this market has been fairly stagnant, even for those with proven ability in other similar environments, and practically impossible to break into for those wanting to secure their first move into a portfolio business.

This dynamic should start to change as more deals complete and more Finance Directors get changed or professional interim managers are drafted in to manage change or assess a situation. Competition for these roles will remain incredibly high and relevant industry exposure and specific experience in similar situations will be essential to most firms looking to take on such people.

Mary Driscoll is a Managing Partner at Maven Partners and a specialist in the recruitment of experienced Interim Managers and permanent employees into senior Finance positions often into Private Equity or Retail and Consumer businesses. For a confidential conversation please contact Mary on 020 7061 6489 or email marydriscoll@mavenpartners.co.uk

Cash Pooling - Are you Managing the Tax Issues?

London, 12th January 2010

Cash pooling tools, such as notional pooling and zero balancing, are used to move cash around a group and manage working capital, but different tools have different tax implications that treasurers need to be aware of.

In my previous article Moving Cash Around the Group: Are You Tax Efficient?http://www.mavenpartners.co.uk/recruitment_news/moving_cash_around_301109.html, I took a high level look at how groups move cash around and the associated tax consequences.

In terms of the techniques available, I referred to cash pooling/cash sweeping arrangements, stating that these are common ways for both moving cash around a group as well as securing the efficient management of the group’s day-to-day working capital requirements

While such arrangements may be relatively straightforward from a banking and commercial perspective, they do give rise to a range of tax issues, including transfer pricing, thin capitalisation and related party rules relating to the deductibility of interest

But isn’t cash pooling was straightforward from a tax perspective? Well, it may be.

Ultimately the complexity from a tax perspective depends on both the type of cash pooling arrangement and the jurisdictions involved. While there are many variations, in essence there are two main forms of cash pooling: notional pooling and zero balancing.

Notional pooling

In the case of notional pooling, the debit and credit balances kept by the various members of the pool are added up and interest is calculated on basis of the net result. The balances themselves are, however, not transferred to one separate central entity, but remain with the individual member companies of the pool.

Zero balancing

In the case of zero balancing, also known as sweeping, the balances of the pool members are physically transferred (i.e. swept) to one central entity (the pool leader). At the time of the sweep (normally at the end of the day), positive balances will be transferred to the pool leader. The pool leader will also provide the necessary cash to those entities that are in an overdraft position resulting in the individual companies having a zero balance at the end of the day.

Notional Pooling Versus Zero Balancing

While economically the same, these two forms of cash pooling have substantially different tax aspects. In this regard, the key point from a tax perspective relates to the fact that while with notional pooling the pool members retain their existing balances, with zero balancing intra-group balances are created between the pool members and the pool leader.

What this means in practice is that with notional pooling issues relating to interest deductibility, thin capitalisation and withholding tax remain the same. While some consideration does need to be given to such issues as the interest rates applied within the pool and the transfer price for any financial guarantees, in general notional pooling is relatively straightforward from a tax perspective

With zero balancing, however, new intra-group balances are created and so the rules relating to interest deductibility, thin capitalisation and withholding taxes will all have to be revisited. This is firstly because the rules for intra-group funding may be different from those applying to external funding and secondly because a previously in-jurisdiction balance may have become a cross-border balance. Consideration will also need to be given to the transfer pricing consequences of any financial guarantees associated with the zero balancing arrangements

In summary, therefore, the tax consequences associated with zero balancing are complex and could adversely effect a previously neutral tax position

Conclusion

Cash pooling arrangements exist in many forms and in this article I have focused on:

1. Notional pooling, or interest compensation, where there is no physical transfer of funds and where banks will require a legal right of off-set
2. Zero balancing, where funds are physically transferred and each member of the pool has only one counterparty - the pool leader

The key message for treasury and finance professionals is that there will always be tax issues associated with both the establishment of a new cash pool and the addition of new members to an existing cash pool.

From a tax perspective, the most important piece of initial information your tax colleagues will need will relate to the type of arrangements being used, i.e. notional pooling or zero balancing, as this will determine both the nature and extent of the tax issues that need to be addressed

Martin Bardsley, Senior Director with Alvarez & Marsal Taxand UK, serves as head of the firm's Treasury & Financing Tax practice and also leads Taxand's Global Financing service line. Taxand is a global network of leading tax advisors from independent firms in nearly 50 countries

Martin brings over 20 years of experience in providing corporate and international tax advice to a wide range of multi-national clients and has significant experience in advising on Treasury and Financing transactions, both in the corporate and financial industry sectors. Prior to joining Alvarez & Marsal, Martin spent 17 years with the tax groups of PricewaterhouseCoopers and KPMG, 13 of which were spent in London focusing on Treasury and Financing Tax. Martin also completed a long-term secondment to a major FTSE 100 multinational firm during 1998 and 1999 where he was tax adviser to the Treasury, Corporate Finance and Asset Management teams.

For more information contact Rob Stephenson, Managing Partner of Maven Partners on 0207 061 6421.

The Taxation Recruitment Market 2009/2010

London, 5th January 2010

Financial News reports that "The first decade of the 21st century has been marked by excess, instability and increased risk". As the decade draws to a close I wanted to give you an insight into my view of the taxation market over the last 12 months and hypothesise about what 2010 might bring.

Without doubt it has been a tough year for candidates looking for a role, for clients attempting to obtain sign off to recruit and (of course) for recruiters. I feel the frustration of candidates who have witnessed roles that come to market only to be withdrawn in short order. I also feel the frustration of clients with a clear need to add resource but no budget to do so. We did not see the expected post summer pick up in roles and the market is certainly not free and flowing at the moment. There are still a number of interesting in-house roles currently being fulfilled by Big 4 secondees.

RSM Tenon has come into existence creating the UK's 7th largest accountancy firm. This seems to be a good move for Tenon in creating a better geographical balance.

In terms of recruitment, the Big 4 have generally been very quiet with only one of the firms consistently recruiting throughout the year. The hottest area within the profession is tax technology/tax transformations. We remain very keen on talking to candidates that have implemented SAP or Oracle from a taxation perspective. Private Client tax is another specialism that has been in demand at the Partner level.

We have also seen law firms recruiting transfer pricing professionals with Freshfields and CMS Cameron McKenna both making senior hires this year. We expect this trend to continue.

What will 2010 bring?

The CBI recently commented that "The outlook is brightening as the global economy finds its feet, although we need to keep our nerve during early 2010". I think that this is also applicable to the recruitment market in general. We will likely see a number of new mandates come to the market in Q1. We also expect some movement between the banks post bonus round with potential higher base salaries tempting professionals to make a move. We expect candidates with financial services tax experience to be in demand in 2010. Also, in talking to my contacts within the Big 4, the transactions tax groups are starting to get busier. There may be some demand at the manager level for professionals with private equity experience. Within industry and commerce we are aware a number of roles that are expected to come to the market early in the New Year. With confidence generally improving we expect this to be a more active market than that of 2009

It is also possible that we may see more consolidation amongst the accounting firms with plenty of rumours flying around at the moment!

Rob Stephenson | Managing Partner | Maven Partners +44 (0) 20 7061 6421 robstephenson@mavenpartners.co.uk

Tax Opportunities Associated with Intra-group Lending

Treasurers need to consider what tax techniques are available, such as standalone technologies or treasury centres, to enhance intra-group lending.

Best practice

When addressing the tax issues associated with intra-group lending, the key considerations are ensuring that: first, the tax relief is obtained for the financing costs; and second, any costs associated with withholding taxes on interest are minimised.

And in many cases this is where the story ends - the company treasurer believes that they have secured full relief for their financing costs, suffered no withholding tax costs and feel happy that they have achieved their overall objective of minimising the group's post-tax costs of funds.

But have they actually achieved that objective?

Depending on the group's approach to tax planning, the answer could be "no" as there a whole range of opportunities for using tax techniques to enhance intra-lending for example taking an interest receipt out of the charge to tax.

Some treasurers may say "Never again!", as they are reminded of the complicated structures their group has implemented involving chains of entities going through various jurisdictions and all to take an interest receipt out of the charge to tax. And then a month after implementation, the tax director walks into the treasurer's office and tells them that something has changed somewhere so the structure no longer works.

Does it need to be this hard? In my opinion, the answer to this question is no.

Looking at what's happening across Europe today, it is clear that groups are still undertaking tax planning in the intra-group financing arena with the planning being based around both standalone technology and treasury centres.

Standalone Technology

Take into consideration the standalone technology currently around: one of the more popular opportunities in Europe involves using the Belgian notional interest deduction regime. This regime allows a Belgian (finance) company to claim an interest rate based deduction, which is computed by reference to the equity of the company. Therefore, in essence an equity-funded company with otherwise taxable receipts becomes, for tax purposes, a debt funded company taxed on only a small interest margin.

This is not complex technology, but is relatively easy to implement and expected to be around for a number of years to come.

Another popular area for intra-group funding involves Luxembourg, where the regime governing the tax treatment of hybrid instruments makes it a useful location for (European) inbound financing. In essence, the Luxembourg company acts as a "transformer" between two jurisdictions, for example US as lender and UK as borrower, and thus enables a tax mismatch to be created between those jurisdictions

While such opportunities are more complex than the Belgian notional interest deduction, the complexity derives from the features of the hybrid instrument rather than other factors such as multi-entity or multi-jurisdictional

The Netherlands has always been a key player in terms of intra-group financing technology. While some would say that the Netherlands has "quietened down", there remains much talk, particularly in terms of the proposals that would exclude intra-group interest, both receivable and payable, from the charge to tax. If enacted, a new regime along these lines would be an interesting alternative to the Belgian notional interest deduction.

The technologies outlined above offer a broad flavour of what's currently around in the European financing arena, and so it is always worth considering what's available, taking into account, of course, a group's specific facts and circumstances.

Treasury Centres

The key point is that establishing a treasury centre will give rise to significantly more commercial issues than standalone opportunities, given that it will involve moving at least some of a group's treasury activities.

The extent of any commercial issues will, however, depend on the nature of the activities to be transferred, for example using a treasury centre solely for intra-group lending will be much more straightforward than using it for cash pooling or hedging activities. And this is also the case when it comes to tax - the more activities transferred, the more complicated the tax analysis will be.

This being said, the use of treasury centres for intra-group financing has become increasingly popular in recent years. When measured against some of the more complex standalone technologies, using a treasury centre is likely to be more straightforward. For example, the treasury centre makes plain vanilla loans to group companies with the tax benefit being derived from the tax rate arbitrage between the treasury centre and the group borrower. As a result, low tax jurisdictions such as Switzerland and Ireland are popular locations for treasury centres.

Conclusion

There are still plenty of opportunities around which will enable a group to enhance its intra-group lending, whether this be using standalone technology, a treasury centre, or a combination of the two.

While enhancing intra-group lending via tax techniques has become more challenging in recent years, treasurers and finance professionals should always consider when make new intra-group loans what enhancement opportunities are available to help them further reduce their group's post-tax cost of funds.

Martin Bardsley, Senior Director with Alvarez & Marsal Taxand UK, serves as head of the firm's Treasury & Financing Tax practice and also leads Taxand's Global Financing service line. Taxand is a global network of leading tax advisors from independent firms in nearly 50 countries.

Martin brings over 20 years of experience in providing corporate and international tax advice to a wide range of multi-national clients and has significant experience in advising on Treasury and Financing transactions, both in the corporate and financial industry sectors. Prior to joining Alvarez & Marsal, Martin spent 17 years with the tax groups of PricewaterhouseCoopers and KPMG, 13 of which were spent in London focusing on Treasury and Financing Tax. Martin also completed a long-term secondment to a major FTSE 100 multinational firm during 1998 and 1999 where he was tax adviser to the Treasury, Corporate Finance and Asset Management teams

For more information contact Rob Stephenson, Managing Partner of Maven Partners on 0207 061 6421.

Moving cash around the group - are you doing it tax efficiently?

n previous articles I have looked at securing tax relief for financing costs, tax issues associated with debt restructuring and opportunities for structuring intra-group lending. Whilst these are undoubtedly important issues each article focuses on what amount to stand-alone/single financing transactions. So in this article I want to take a broader look at the Treasury function and how it moves cash around the group.

The Primary Role of the Treasury Function

In looking at the Treasury function it seems to me that its primary role is that of the Group Bank, acting as lender of choice, managing risk(s) and minimising the group’s cost of funds.

So at its simplest level what the Group Bank does is to manage group liquidity with a view to ensuring that cash is available when and where it is needed and manages this on a group/holistic basis.

But if we take a look behind this high level analysis what we find is a much more complex position made up of a myriad of intra-group loans/balances and involving a large number of entities located in many jurisdictions.

What this means in practice is that, whilst the Group Bank may have plenty of cash available within the group, in terms of employing the cash within the various businesses it isn’t necessarily in the right place and so consideration has to be given as to how to move cash between legal entities.

But this should be relatively straightforward I hear you say?

Well it might be.

As a starting point many multi-national groups operate “regional” e.g. European, US, AsPac cash pooling/cash sweeping arrangements. These are a common tool for moving cash around a group and so securing the efficient management of the group’s day-to-day working capital requirements.

But whilst such arrangements may be relatively straightforward from a banking and commercial perspective, they do give rise to a range of tax issues including transfer pricing, thin capitalisation and related party rules relating to the deductibility of interest. In particular, as I mentioned in my article on Issues with Securing Effective Tax Relief for Financing Costs (article link please), achieving tax neutrality for the intra-group balances that will be created with cash sweeping cannot be guaranteed.

What are the Options?

So what options are there for moving cash around a group outside of cash pooling/cash sweeping arrangements?

Well if the funds do happen to be located in the centre i.e. Group Bank then the most common technique will be one step on from cash pooling i.e. the making of longer term loans and the tax issues here should be broadly as outlined above for intra-group balances arising from cash sweeping. Whilst funding may also be provided to a group company in the form of equity, this isn’t typically undertaken by the Group Bank and so is outside the scope of this article.

But what if, as is more often the case, the funds aren’t located in the Group Bank? What if, as is often the case, the funds are located in an offshore Special Purpose Entity (“SPE”)? How do I move the funds out of the SPE?

Well the starting point is having the SPE lend the funds either to the Group Bank or to the group company requiring the funds. This can however give rise to adverse tax consequences e.g. irrecoverable withholding taxes, restrictions on relief for financing costs etc. if the SPE is tax resident in an “unfavourable” jurisdiction.

The "Other Half" of the Balance Sheet

Next we look to the “other half” of the balance sheet and consider if we can move/extract cash via equity based transactions. So, for example, can we extract the funds by paying a dividend or by repaying share capital? Again, whilst both are viable options consideration does need to be given to the tax consequences with two of the initial issues to consider being:

• How much tax will the recipient be payable on the dividend? Will the payer of the dividend have to deduct withholding tax from the payment?
• Will the repayment of share capital give rise to a tax charge? Could the receipt be taxed as a capital gain in the hands of the holder of the share capital?

The key point to note here is that if there is any taxation arising from such equity based transactions then a significant amount of the cash may have been lost to the group. So whilst equity based transactions may represent a good alternative to debt funding, in that it removes the funds from the entity permanently, the associated tax cost may be prohibitive.

And where do we go after intra-group debt and equity based transactions?

Well it then becomes much more complex, both from a tax perspective and a commercial perspective with some of the options being.

• Migrate the tax residency of the SPE to a jurisdiction where debt and equity based transactions are more tax efficient
• Have the existing SPE create a new funded SPE located in a jurisdiction where debt and equity based transactions are more tax efficient.
• Have the SPE acquire some income generating assets from within the group e.g. via repo or stock lending arrangements.
• Engage in third party structured finance transactions.

The key point to note here is that, to seriously consider implementing one of these options, both the amount of funds involved and the potential tax charge being mitigated will need to be considerable as such transactions will undoubtedly involve significant costs.

So to summarise, in this article I have taken a high level look at how cash can be moved around the group and considered some of the tax issues that could arise when doing so. The key message for Treasury & Finance professionals is that moving cash around the group can be a complex and costly issue from a tax perspective and, furthermore, there are many pitfalls to be avoided. If however advice is taken upfront then in most cases the pitfalls can be avoided or alternatively another technique employed or transaction implemented.

Martin Bardsley, Senior Director with Alvarez & Marsal Taxand UK, serves as head of the firm's Treasury & Financing Tax practice and also leads Taxand's Global Financing service line. Taxand is a global network of leading tax advisors from independent firms in nearly 50 countries.

Martin brings over 20 years of experience in providing corporate and international tax advice to a wide range of multi-national clients and has significant experience in advising on Treasury and Financing transactions, both in the corporate and financial industry sectors. Prior to joining Alvarez & Marsal, Martin spent 17 years with the tax groups of PricewaterhouseCoopers and KPMG, 13 of which were spent in London focusing on Treasury and Financing Tax. Martin also completed a long-term secondment to a major FTSE 100 multinational firm during 1998 and 1999 where he was tax adviser to the Treasury, Corporate Finance and Asset Management teams.

For more information contact Rob Stephenson, Managing Partner of Maven Partners on 0207 061 6421

Back

Pre-budget wish list: dropping IR35 and income shifting

London, 10th November 2009

With the Pre-budget report due out on the 9th of December 2009, various special interest groups are lobbying for changes in taxation. Most vocal so far are those who represent professional contractors and seek to repeal the dreaded tax rules known as IR35. However, as tax expert Nichola Ross Martin explains, the government is so dependent on contractors that any request for change is unlikely to be heeded now or at any time in the foreseeable future.

Anne Redstone (author of IR35, Personal Service Companies and a visiting professor of tax at Kings College, London) argued in Taxation magazine that IR35 “is a high-cost, high-stress and a low revenue part of the tax system”. She argues that it is unfair to make small business subject to such complex rules; they serve only to stifle entrepreneurs.

Her call has been matched by the Chairman of the Professional Contractors’ Group, Chris Bryce, who has written directly to the Chancellor. He sets out a number of issues affecting freelancers and including an urgent need to repeal IR35 and to drop proposals for "Income Shifting" legislation. Whilst also requesting re-examination of sections 44-47 of the Income Tax (Earnings and Pensions) Act 2003, which effectively force a contractor to incorporate.

The problem with all these arguments is that IR35 suits the government quite well, especially in a time when the Treasury is demanding efficiency savings from other governmental departments. The Ministry of Defence is heavily reliant on contractors, many of whom as ex-forces and now contract via umbrella companies to service, maintain, cook and clean our military machinery and bases. Likewise, the NHS uses a small army of contractors on similar lines. Lord Carter’s transformation programme has meant that departments such as HM Revenue & Customs are completely reliant on IT workers, the majority of whom are contracting via their own service companies and umbrella companies. State funding of the 2012 Olympics also demands cheap labour whenever possible, and then of course, there are the banks. Banks are heavy users of contracted labour, and some which are state owned too these days. So, why would the government wish to abolish IR35 and repeal tax-employment law? There is no logical benefit: it stands only to increase its own costs, which are of course, our costs by 12.8%, and no one would want that, would they?

Nichola Ross Martin, is Tax Director with www.rossmartin.co.uk and Head of Ross Martin Tax Consultancy's Virtual Tax Partner services.

A Chartered Accountant with over 20 years experience in advising owner-managed business and assisting other professional firms. She trained with Baker Tilly before setting up her an accounting and audit practice. In 2000 she moved into tax acting as tax director for a firm accountants in Kent before setting up her own Virtual Tax Partner consultancy service. She is the creator the Practical Tax Database, an online service that provides tax planning and know-how to accountants and tax partners. Nichola advises clients and accountancy firms nationwide.

For more information contact Mary Driscoll, Managing Partners of Maven Partners on 020 7061 6420.

Keeping up to date with tax developments whilst between jobs

London, 5th November 2009

For job seekers in the tax arena, keeping up to date can seem quite daunting. Of course if you are currently in employment then your employer will (hopefully) have provided you with the tools with which you can keep up to date, but the issue for those currently between jobs is that many of the better resources are subscription based. Nevertheless there are still publicly available sources of information that can be used in order to keep oneself informed of new developments as and when they arise.

HMRC Resources

The HMRC website itself contains a wealth of information - see http://www.hmrc.gov.uk/thelibrary/. In addition, there is a "What's New" sectionhttp://www.hmrc.gov.uk/news/index.htm that indicates what has recently been added to the HMRC website and a "News Releases" sectionhttp://nds.coi.gov.uk/clientmicrosite/default.aspx?clientID=257.

What is an RSS Feed?

The News Release section has been set up as a "RSS feed" - an RSS feed is a special format used widely for distributing news and other web content. To pick up RSS feeds, you can use a RSS reader that you can set up to pick up news items from your chosen sources. Sharpreader is easy to use and is free (http://www.sharpreader.net/) For more information on RSS feeds see http://en.wikipedia.org/wiki/RSS.

Budget material

HM Treasury and HMRC websites contain the raw press releases and other materials issued on Budget/PBR days. However, by the following morning you will be able to download the initial thoughts and analysis of the Big 4 from their websites.

Third Party Websites

There are also third party websites that carry news items, e.g.

ICAEW http://www.ion.icaew.com/TaxFaculty

CIOT's Technical Committee Newsdesk http://www.tax.org.uk/index.pl?section=28;n=3791

Accountancy Age http://www.accountancyage.com/tax/

AccountingWeb http://www.accountingweb.co.uk/topic/tax

TaxationWeb http://www.taxationweb.co.uk/tax-news/

RSS feeds can be set up for all of these sites.

The Big 4

Finally, the Big 4 also publish regular news updates, with users being able to subscribe by email to their weekly news emails. PwC in particular has an excellent offering - PwC Plus - for which registration is free.

Remember that keeping up to date is vital, especially during this difficult time when competition for positions is fierce. Good luck.

Andrew Ross is a Senior Tax Manager with Mazars. Within his previous role at PwC Andrew acted as tax technical advisor to the whole of the PwC tax practice and as knowledge management champion within the M&A Tax department.

Rob Stephenson is a Founder and Managing Partner of Maven Partners, a specialist taxation recruitment business. For more information please contact Rob on 0207 061 6421 or robstephenson@mavenpartners.co.uk

Debt Restructuring Issues in the Current Environment

London, 1st October 2009

What problems arise when a group needs to restructure its existing debt? This article looks at what would be the next step if a group is not securing effective tax relief for its financing costs: debt restructuring and its related tax impact.

The previous article in this series, Issues with Securing Effective Tax Relief for Financing Costs, focused on whether or not a group is securing effective tax relief for its financing costs in the current economic environment. This article will look at what would be the next step if a group is not securing effective tax relief for its financing costs: debt restructuring and its related tax impact.

The tax issues associated with debt restructuring are complex and this is particularly the case when we are dealing with cross-border debt. But for those who deal with debt restructuring, this is nothing new.

What is Different in the Current Economic Environment?

In a normal economic environment, debt restructuring issues typically arise in highly leveraged private equity groups where debt restructuring is a regular feature of daily life. While debt restructuring does happen in more typical multinational groups, it invariably takes place around a key event such as the disposal of a non-performing business.

In the current environment, however, debt restructuring is likely to be more commonplace in multinational groups as balance sheets deteriorate due to exceptional and unpredictable trading conditions with companies no longer being able to support advancement with the existing levels of debt and payables.

While there are a number of possible actions when considering debt restructuring, two of the more familiar actions are a debt waiver (i.e. where the lender releases the borrower from its obligation to repay the debt) or a debt conversion (i.e. where the lender and borrower agree that the debt will be ‘converted’ into shares in the borrower company).

What are the Problems?

First, there are the tax issues arising in respect of debt waivers. With intra-jurisdiction debt waivers there is a reasonable expectation is that a debt waiver, whether this be a third party or intra-group, should be either taxed or ignored on both sides, but this should always be checked. I have come across a number of instances where this isn’t the case, and in one particular situation the debt waiver was subsequently found not to be tax neutral because the waiver hadn’t been put into effect by a formal deed of release.

With cross-border debt waivers, the position is much more complex, particularly with intra-group debt waivers, and achieving tax neutrality becomes a challenge. The following two examples illustrate some of the problems that can arise in cross-border situations:

1. A shareholder resident in Territory A waives a formal loan due from its subsidiary, which is resident in Territory B. In some cases while the shareholder won’t obtain tax relief on the amount waived, the subsidiary could be taxed on the amount released, e.g. as a capital contribution.
2. A subsidiary resident in Territory A waives a formal loan due from its shareholder, which is resident in Territory B. In many circumstances this can be treated as a distribution in the subsidiary such that no tax relief is obtained on the amount waived. The shareholder, however, may be taxed on the waiver as a dividend and may therefore pay tax on the amount waived.

Therefore, the key message is that tax neutrality, particularly in relation to cross-border loan waivers, cannot be assumed and, in some cases, may not be achievable. In such cases, alternative cross-border planning mechanisms for eliminating the debt will need to be considered.

Second, there are the tax issues arising in respect of debt for equity conversions and in many ways the issues to consider here are similar to those in respect of debt waivers. As with debt waivers the most difficult scenarios invariably arise in relation to cross-border transactions.

This is best illustrated by way of a simple example:

A company resident in Territory A has £100 of debt and has agreed with a lender, which is resident in Territory B to convert the debt into shares. If the £100 debt is converted into shares with a value of £100, the expectation is that there shouldn’t be any direct tax consequences arising from the conversion, although this should, of course, be checked.

If the £100 debt is converted into shares with a value of £75, then arguably the borrower has been released from £25 of debt and the question arises as to whether or not this is a taxable release. Accordingly, consideration will need to be given to the same issues mentioned above in relation to debt waivers.

Again, the key message is that tax neutrality, particularly in relation to cross-border transactions, cannot be assumed even with a straightforward example. As with debt waivers, alternative mechanisms need to be considered to the extent that tax neutrality is not achievable.

What Action Should Treasurers and Finance Professionals be Taking?

Whenever I am involved in a debt restructuring, the key issues for me as a tax professional are to understand, first, how the debt arose, e.g. loan financing, trading balance, etc, and, second, what is going to be done to the debt and how.

Obtaining accurate information is absolutely critical to the efficacy of the subsequent tax analysis and this is particularly the case for interim professionals who have little prior knowledge of the organisation. In the absence of such information, expected tax neutral restructurings can, on subsequent enquiry by the tax authorities, give rise to an adverse tax mismatch and a resulting cash tax cost. The position is further complicated in relation to cross-border transactions and it should be accepted that alternative mechanisms will need to be sought if the overall commercial objective is to be achieved without giving rise to a tax cost.

Martin Bardsley, Senior Director with Alvarez & Marsal Taxand UK, serves as head of the firm's Treasury & Financing Tax practice and also leads Taxand's Global Financing service line. Taxand is a global network of leading tax advisors from independent firms in nearly 50 countries.

Martin brings over 20 years of experience in providing corporate and international tax advice to a wide range of multi-national clients and has significant experience in advising on Treasury and Financing transactions, both in the corporate and financial industry sectors. Prior to joining Alvarez & Marsal, Martin spent 17 years with the tax groups of PricewaterhouseCoopers and KPMG, 13 of which were spent in London focusing on Treasury and Financing Tax. Martin also completed a long-term secondment to a major FTSE 100 multinational firm during 1998 and 1999 where he was tax adviser to the Treasury, Corporate Finance and Asset Management teams.

For more information contact Rob Stephenson, Managing Partner of Maven Partners on 0207 061 6421.