UK and International Tax news
Double Tax Treaty Passport Scheme Review
Monday 13th June 2016
HMRC has launched a consultation on renewing and extending the scope of the Double Taxation Treaty Passport Scheme.
Borrowers in the UK are currently obliged by s.874 ITA 2007 to withhold income tax at the basic rate, currently 20%, on payments of annual interest to overseas lenders, including interest on loans of over a year in duration.
If the lender is resident in a territory with which the UK has a tax treaty, the UK payer of interest may be entitled to deduct tax at a lower rate, or not to deduct WHT at all, depending on what the treaty specifies. The OECD Model Treaty, on which many treaties are based, covers this in Article 11: Interest.
Where such treaty benefits apply, Regulation 2 of SI1970/488 allows HMRC to direct, by means of a notice, the UK payer to pay the interest at the lower rate of tax or without deduction of WHT to the non resident lender who is beneficially entitled to the income.
This process can be cumbersome for overseas lenders, as a Direction needs to be issued for each loan, and in each case HMRC requires the overseas lender to obtain proof of their residence for tax purposes from their own fiscal authority. This is known as the “certified claim” method. If an overseas lender makes multiple loans to the UK it needs to go through this process each time before HMRC will issue a Direction to each borrower in the UK. Thus even where WHT can be wholly or partly relieved, this administrative burden can act as a barrier to overseas investors making investments in the UK by means of debt finance.
In 2007/2008 HMRC reviewed the process in order to reduce the administrative burden, provide business with certainty and avoid legislative change whilst minimising information gaps for compliance purposes. As a result, the Double Taxation Treaty Passport (DTTP) scheme was introduced in September 2010 after consultation. DTTP applies to connected (e.g. intra-group) and unconnected (third party) loans. It is an administrative simplification.
The DTTP scheme is currently available to corporate bodies only. The overseas corporate lender applies for a treaty passport under the scheme and, once granted, this passport can be used to make multiple loans to UK borrowers. Thus the lender does not need to apply to their own tax authority and HMRC in connection with every loan. The prospective borrowers in the UK consult an online database of passported lenders to check that a valid passport exists and, prior to making the first interest payment, the UK borrower notifies HMRC of the lending/borrowing relationship by submitting Form DTTP2. HMRC then issues a Direction to the UK borrower to pay the interest without WHT or at a lower rate of WHT, as specified in the relevant tax treaty.
Passport holders need to apply for renewal of their passports after five years. A passport is cancelled if no reply is received to the renewal correspondence from HMRC.
Non DTTP situations continue to operate via the “certified claim” method, as described above.
Around 3,000 passports have been issued in the five years since the scheme commenced.
Another recently introduced provision that reduces the circumstances in which withholding applies and provides administrative simplification is the private placements legislation. S.23 FA 2015 introduced s.888A ITA 2007 and SI 2015/2002, which covers relevant securities between unconnected parties where the value is £10m+ and of less than 50 years duration. Dependent upon the territory in which the lender is resident, the borrower can self assess that no WHT need be paid. Again, this is a simplification for persons who would, in most cases, already qualify for relief.
The consultation seeks views on the DTTP scheme to ensure that it still meets the needs of UK borrowers and foreign investors, and on its possible expansion beyond corporate to corporate lending, to encompass funds and partnerships.
This consultation does not intend to initiate legislative change and is concerned with administrative simplification only. As a purely administrative simplification, any measures resulting from this consultation should be revenue neutral.
The consultation does not cover relief from withholding under the EU Interest & Royalties Directive, which is covered by specific UK legislation dictating its operation and time limits. Payments under the Directive do not require the DTTP scheme.
The consultation runs until 12 August 2016 after which a response document will be published within 12 weeks and the DTTP scheme will then be revised.
For more detail on the above contact Keith Rushen on 0207 486 2378.
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