Draft Bank Levy (Double Taxation Relief) (SIngle Resolution Fund Levy) Regulations 2016

Peter Dowd Excerpts

Thursday 8th December 2016 General Committees

[Peter Dowd (Bootle) (Lab)]

It is a pleasure to serve under your stewardship, Mr Flello. This is one of those technical pieces of legislation with which Committees such as this deal daily, but which belie the importance of the provenance of the issue before us. Given that, I want to explore the issue in a little more detail.

I appreciate that we are dealing with regulations that give clarity to an element of the tax position of certain affected banks, as set out in regulation 5(1), while they do business in Europe. However, given the context and history in the background, it would be remiss not to remind ourselves why we are in this position: it is the result of the cataclysmic banking crisis. I say that not to rehash old arguments about the cause of the financial crisis and its dreadful effects on the economy and the lives of so many people, but to ensure that we do not simply wave this legislation through without contextual comment and certain questions being asked. Coincidentally, it also comes the day after the £500 million fine announced by the European Commission in relation to the Euribor case. We owe it to the taxpayers who picked up the bill to look at the context. It is important to do so because of the effect that the financial crisis is still having on people’s lives almost a decade later; many people’s lives and many businesses have been blighted. We agree that the single resolution fund serves a significant stabilisation purpose in the wake of the bank recovery and resolution directive, which only very few people could object to—for example, those who have been in some sort of political and economic solitary confinement for the past 10 years.

Looking to the future, we are unable to escape the fact that Brexit informs virtually everything we do in economic terms. In that respect, how this will ultimately play out in the light of the Brexit process is moving from delphic to opaque. We hope that, in the not-too-distant future, it will move to somewhere between recondite and abstract. On that note, perhaps the next time the Financial Secretary chats to the Prime Minister, she can remind her that there are nine flags in the European Union, if I remember correctly, that are red, white and blue, including the French tricolour. I think that is worth a mention over a cup of tea—and a mince pie, at this time of year.

I have to say that I was not inspired in any comforting way about the pathway to a post-EU nirvana by the comments made by some Members in yesterday’s debate, but we are where we are. That was clear from yesterday. We live in hope rather than expectation on that one and we need to be grateful for small mercies as things are moving along.

Double tax treaties are a key part of tax law for multinational activities. The simple principle is that no one should be required to pay tax twice in two different jurisdictions in relation to the same asset or profit. Of course, the problem is making sure that some tax is paid somewhere, and that that does not simply become a way of forum shopping, as it has become known, which means picking the jurisdiction with the lower rate of tax or the more benign system. For example, different jurisdictions tax derivatives contracts in different ways, so banks will look to the more benign treatment, which is unsurprising.

The purpose of double taxation treaties or arrangements is to allocate the liability to tax in given situations. As we know, the majority of such treaties follow the OECD model treaty. Such treaties will become a big part of our legal culture post-Brexit—in all situations, not just with tax—so the regulations are very important.

Specifically on the matter before us, at first examination there is little about the regulations that is controversial. That was almost implicit in the statement and the presentation from the Minister. If the aim is to implement EU legislation, there is little to be done. In other words, we must implement its principles, but we do not need to go further than implementing the core provision. However, the Government have some leeway on the precise form of the implementation of EU legislation, so I have some specific points to raise about the regulations, and in so doing I seek reassurances from the Financial Secretary—if not today, then subsequently.

First, we must ensure that no individual treaty permits a bank to direct its profits towards a benign tax regime instead of facing its tax liabilities in the United Kingdom. That raises the question of how the Government propose to deal with potential forum shopping by banks under the regulations, as I mentioned earlier. In addition, what tax avoidance measures are in place beyond what some—although not everybody—consider to be the relatively weak scheme governing the abuse of tax avoidance under the Finance Act 2013?

Secondly, there is good reason to believe that HMRC is underpowered in its personnel, and thus in its ability to investigate the practical implementation of measures of this sort. The Opposition are committed to investing in HMRC to make it fit to represent Britain in the new post-Brexit world. A key part of that will be negotiating bilateral treaties, and it is vital that we can protect our public finances, which means not allowing tax credits or reliefs to allow tax income to go offshore. Given that, how will the Government ensure that HMRC is in appropriate condition to ensure that the regulations are not abused?

Thirdly, regulation 5(3) relates to the calculation of the levy and its tax credits. There must be concern about the calculation of a bank’s equity, which is taken to mean its assets, as opposed to its liabilities, for the purposes of its balance sheet. It should be remembered that in the financial years before it fell into insolvency, Lehman Brothers Inc. was found to have deliberately understated the toxic assets on its balance sheet by entering into the infamous Repo 105 trade, by which it transferred $50 billion off its balance sheet temporarily while being contractually obliged to buy back those assets a few years later. By using such transactions, banks are able to mis-state their equity and liabilities too easily, which is important. Can the Minister guarantee that banks will not be able to do the same thing in relation to these regulations? Moreover, how will we prevent banks from juggling their assets between jurisdictions so as to reduce their liability to tax?

Fourthly, in relation to regulation 7, on determining assets and UK assets, there must be concern that the reference to UK generally accepted accounting principles—so-called GAAP—will permit the sort of fair value or mark-to-market accounting that permitted Enron to overstate its profits by fixing an entirely artificial market value for its derivatives and similar transactions. Can the Minister guarantee that such accounting treatment will not permit banks to understate their liabilities to tax in the United Kingdom?

Fifthly, there is concern that reference to “permanent establishment” in regulation 7(4) could allow a bank to use non-permanent entities to book its activities. One example, Citibank, had more than 2,000 subsidiary entities in 2008, and it is usual practice for banks to have multiple subsidiaries through which they seek to achieve regulatory arbitrage by booking assets in benign jurisdictions. Against that backdrop, is the Minister confident that the regulations will achieve the orderly raising of the levy against the banks? Do we think the regulations will do the job for which they are intended?

Sixthly—Members will be happy that I am coming towards my conclusion—in the brief policy paper from HMRC, the section on the Exchequer impact was blank, with reference to the Office for Budget Responsibility including the impact of the regulations in its autumn forecast. I was unable to find that impact in the OBR’s forecast, but I possibly did not look hard enough. Perhaps the Minister could help.

Finally, in relation to the monitoring and evaluation section of the same policy paper, a little more detail on the review mechanism and timetable would be welcome in due course. However, notwithstanding my observations and questions, we support the Government’s approach to ensuring that, in effect, relief exists so that double taxation does not put UK companies at a competitive disadvantage where there is imbrication between the bank levy and the single resolution fund levy. The question of ensuring equity or, as the policy paper puts it, a level playing field across borders on taxation for UK companies, and in this case banks and financial services, is self-evident, but the UK taxpayer should not be expected to provide largesse for those who want to have their cake and eat it.