The comments of the CIOT, sent to the Inland Revenue on 3 October 2003, follow. This paper sets out the response of the Chartered Institute of Taxation to the various papers issued by the Inland Revenue relating to the implementation of the Savings Directive.
Definition of “paying agent”
The Revenue have had considerable experience over many years in dealing with paying agents. The most recent is in connection with the implementation of s 118B TA 1988 and SI 1996/1780, which ceased to have effect as recently as 31 March 2001. It might be useful, therefore, to highlight differences between paying agents as understood under Art 4 of the Directive and paying agents as understood under previous UK legislation and regulations.
The old UK rules referred to a person to whom dividends were entrusted for payment. This is similar to the wording of Art 4,which refers to a person who pays interest or secures the payment of interest.
The main difference is that certain recipients may be regarded as paying agents under Art 4 para 2. These are referred to as “residual entities”. Para 2.6 of paper 2 says that paper 9 looks at how to establish whether an entity is a residual entity. In fact, paper 9 does not do this beyond saying, at para 9.6, that residual entities are identified by elimination. Indeed, under Art 4 para 2, it appears that any recipient other than the beneficial owner is potentially a paying agent unless the paying agent under Art 4 para 1 believes otherwise. This definition seems to be unsatisfactory.
We note that both the City Group Technical Working Party and the European Banking Federation have asked for a list of residual entities, but that the Revenue have not found it practicable to provide such a list. This is most regrettable given the absence of a working definition.
Duties of paying agents
We think it is important that the duties imposed by the forthcoming regulations should not go beyond what is required by the Directive as set out in Art 8, which is commendably brief.
Q2.1 What would potential paying agents consider to be reasonable steps to identify the actual relevant payee? (para 2.10 – 2.15)
We think that para 2.12 is the key paragraph. The issue of “reasonable steps” arises only where the application of the Know Your Client (KYC) rules leaves the paying agent in doubt as to the identity of the relevant payee. The Directive does not say what the paying agent should do in this situation. Should it:
(a) not make the payment until the identity of the relevant payee is established;
(b) make the payment, but deduct withholding tax; or
(c) take some other action – and if so, what action?
It may be that commercial considerations will lead the paying agent to adopt (a).
Q2.2 Do you have any comments on what rules might be required for the exercise of the option at Article 4(3) of the Directive? (para 2.20)
Art 4 para 3 merely requires that the entity produce a certificate issued by the Member State in which the entity is established. It does not lay down conditions for the entity to be entitled to apply for such a certificate, this being left to the Member State. Therefore, the UK government has to decide what conditions to impose for an entity established in the UK to be treated as a UCITS, so that it is not regarded as a paying agent. Presumably, the only relevant condition is that the UCITS is an authorised unit trust within the meaning of s 468(6) TA 1988.
Q3.1 Do you agree with the proposed approach to the definition of interest on debt-claims? (paras 3.6 – 3.12)
We agree with the proposal to link the definition to the concept of a money debt in the loan relationships legislation. However, Art 6 para 1(a) defines debt claims to include those that carry a right to participate in the debtor’s profits, where the interest would be a distribution under s 209(2)(e)(iii) TA1988. Such interest is excluded from the loan relationships provisions by Sch 9 para 1 FA 1996. Given that we are concerned with the provision of information rather than the imposition of a withholding tax, it would clearly be useful to include the information that a particular item of interest has been treated as a distribution under UK law, where that fact is known to the paying agent.
Q3.2 Do you agree with the proposed approach to rolled-up interest? (paras 3.13 – 3.15)
There must, presumably, have been a calculation of the rolled-up interest in order to arrive at the full sale proceeds. Therefore the information must be available.
Q3.3 Do you have any comments on whether some paying agents would prefer to restrict their reports to the amount of rolled-up interest? (para 3.16)
Given that the Directive is concerned with evasion of tax on interest, it could actually be misleading to report the capital element of a completion payment, unless that is made clear in the report. Subject to that point, we agree that reporting the whole sale or redemption proceeds may be significantly less onerous than having to ascertain the interest element.
Q3.4 Do you agree that the Government should not exercise the option to require annualised amounts to be reported? (para 3.17)
Q6.1 Are the proposals for determining when new contractual relations begin satisfactory? (paras 6.7 – 6.15)
These proposals are relevant only to the means by which the identity and residence of the “beneficial owner” is to be determined (Art 3 paras 2, 3). We see no reason to impose unduly bureaucratic regulations in relation to transitional provisions.
Q6.2 What other situations may constitute a reasonable opportunity to update records? (paras 6.16, 6.20 and 6.21)
Why is this being considered as an opportunity rather than a requirement? We think that the administrative burden falling on paying agents should be kept to a minimum.
Q7.1 Are you content with the proposed approach to umbrella funds? (para 7.11)
Q7.2 Do you agree that bond funds should report the full amount of periodical income payments? (para 7.15)
We agree that no report should be required where a fund has invested less than 15% of its assets in debt claims. In other cases, it could be misleading to report the whole of the income payment without some explanation. Subject to that point, we agree that reporting the whole income payment may be significantly less onerous than having to ascertain the interest element.
Q7.3 Do you have any views on the alternative approaches to deciding whether or not the 15% test is passed? (para 7.18)
We think that the experience of administering the 15% requirement for investment trusts (S 842(1)(b) TA 1988) may be relevant here. We agree that continuous monitoring would impose an unacceptable admin burden, but an annual review may be acceptable.
Q7.4 Do you agree with the proposed approach of reporting the whole of the sale or redemption proceeds rather than merely the rolled-up interest payment? (paras 7.19 – 7.22)
Ideally, it would be more relevant to report the rolled-up interest payment. However, we understand the concern to reduce the admin burden as far as possible. Therefore we agree with the proposed approach.
Q7.5 Do you agree that the Government should not exercise the option to require annualised amounts to be reported? (para 7.23)
Q8.1 Is the approach in paras 8.20 – 8.24 regarding change of address practicable? Should there be any alternative?
We agree with the proposed approach.
We have no comments to make on the remaining 3 questions.
Q8.2 Do you anticipate any difficulties with the proposals in para 8.25 relating to non face to face business?
Q8.3 What would paying agents consider to be reasonable steps to obtain the required information from the relevant payee? (paras 8.26 – 8.28)
Q9.1 What other possible forms of “official evidence” might be considered as acceptable? (para 9.9)
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