Helen Buchanan comments on Labour’s proposals to close the quoted Eurobond exemption ‘loophole’
Anyone reading recently that the quoted Eurobond exemption (or ‘QEE’) is a ‘tax dodge’ costing the economy £500m per year could be forgiven for thinking the tax world had gone a little bit mad.
The QEE has sat relatively quietly on the statute books since 1984, allowing UK corporates to pay interest to bondholders without withholding. It’s a simple relief available for interest-bearing bonds issued by companies and listed on a recognised stock exchange (the ‘euro’ bit is a misnomer). The bonds needn’t be issued to independent persons, widely held or traded, so the relief is certain and effective.
The bond markets, like the gilt markets, are gross-paying markets – it’s expensive and impractical for paying agents and bondholders to manage withholding tax obligations and reliefs, particularly as the UK’s treaty relief system remains cumbersome. Many other jurisdictions don’t apply withholding to bond interest, so there’s also a competitive angle. And as the world moves towards full transparency, there is less risk than in the past that the interest will not ultimately be taxed.
The problem is that, in some cases, where the stock exchange doesn’t require bonds to be traded or widely held, the QEE has been used for intra-group debt. This is seen as abusive and potentially erosive for the UK exchequer.
But restricting the QEE wouldn’t necessarily solve this problem. In many cases, investors could avoid the withholding by obtaining treaty or other reliefs – or by not investing at all; and existing bonds would probably be grandfathered to avoid early redemptions and market chaos.
If the real objection is foreign investors loading up UK corporates with debt, HMRC can restrict the borrower’s deductions for interest. Messing around with the QEE while markets remain fragile is a riskier option.
These points were put to HMRC during the 2012 consultation and HMRC decided not to take action. Not because the representations were hectoring, but because that was the sensible conclusion at the time. If changes to the QEE would not raise revenue but could damage bond markets, the risk/reward analysis doesn’t add up. HMRC was right to consult on something so important. It knows respondents have an agenda and it is entitled to (indeed often does) ignore responses received. But where a proposal does not achieve its policy aims, it is better to think again than to push on regardless.
The Labour party has promised a further review if it is elected, focusing on instances where bonds have been issued to connected persons. But ‘closing the QEE loophole’ may not be the answer: it may be more productive to focus on the BEPS agenda or take a broader look at UK withholding tax and source rules for interest.
Home >Articles > Quoted Eurobond ‘loophole’ shocker!
Quoted Eurobond ‘loophole’ shocker!
Helen Buchanan comments on Labour’s proposals to close the quoted Eurobond exemption ‘loophole’
Anyone reading recently that the quoted Eurobond exemption (or ‘QEE’) is a ‘tax dodge’ costing the economy £500m per year could be forgiven for thinking the tax world had gone a little bit mad.
The QEE has sat relatively quietly on the statute books since 1984, allowing UK corporates to pay interest to bondholders without withholding. It’s a simple relief available for interest-bearing bonds issued by companies and listed on a recognised stock exchange (the ‘euro’ bit is a misnomer). The bonds needn’t be issued to independent persons, widely held or traded, so the relief is certain and effective.
The bond markets, like the gilt markets, are gross-paying markets – it’s expensive and impractical for paying agents and bondholders to manage withholding tax obligations and reliefs, particularly as the UK’s treaty relief system remains cumbersome. Many other jurisdictions don’t apply withholding to bond interest, so there’s also a competitive angle. And as the world moves towards full transparency, there is less risk than in the past that the interest will not ultimately be taxed.
The problem is that, in some cases, where the stock exchange doesn’t require bonds to be traded or widely held, the QEE has been used for intra-group debt. This is seen as abusive and potentially erosive for the UK exchequer.
But restricting the QEE wouldn’t necessarily solve this problem. In many cases, investors could avoid the withholding by obtaining treaty or other reliefs – or by not investing at all; and existing bonds would probably be grandfathered to avoid early redemptions and market chaos.
If the real objection is foreign investors loading up UK corporates with debt, HMRC can restrict the borrower’s deductions for interest. Messing around with the QEE while markets remain fragile is a riskier option.
These points were put to HMRC during the 2012 consultation and HMRC decided not to take action. Not because the representations were hectoring, but because that was the sensible conclusion at the time. If changes to the QEE would not raise revenue but could damage bond markets, the risk/reward analysis doesn’t add up. HMRC was right to consult on something so important. It knows respondents have an agenda and it is entitled to (indeed often does) ignore responses received. But where a proposal does not achieve its policy aims, it is better to think again than to push on regardless.
The Labour party has promised a further review if it is elected, focusing on instances where bonds have been issued to connected persons. But ‘closing the QEE loophole’ may not be the answer: it may be more productive to focus on the BEPS agenda or take a broader look at UK withholding tax and source rules for interest.
