Volume 65, Number 2 January 9, 2012 Details Bank Tax Proposal by Jean-Paul van den Berg and Johan Vrolijk Reprinted from Tax Notes Int l, January 9, 2012, p. 91
Reprinted from Tax Notes Int l, January 9, 2012, p. 91 Details Bank Tax Proposal by Jean-Paul van den Berg and Johan Vrolijk The government on December 15 published its legislative proposal for the bank tax that it had already formally announced on July 1. (For the Finance Ministry s news release, see Doc 2011-26542 or 2011 WTD 243-28; for prior coverage, see Tax Notes Int l, Aug. 22, 2011, p. 591, Doc 2011-17694, or2011 WTD 160-2.) The stated objectives of the bank tax are to: ensure that the banking sector contributes to the cost of stabilization; stimulate long-term financing; and discourage excessive bonuses for the board members of banks. The government emphasized that the bank tax, which is expected to enter into force by mid-2012, should not be considered as an insurance premium for economically difficult times. The tax is intended to complement the tightened capital requirements of the Basel III international regulatory framework for banks (to strengthen bank solvency) and the ex ante financing of the Deposit Guarantee System (DGS) (to secure deposits). It would be levied on banks uncovered debts. This article describes some of the main characteristics of the proposed bank tax. Taxpayers The Financial Supervision Act (DFSA) plays a key role in identifying potential taxpayers of the bank tax. The tax would be levied on entities that are authorized to conduct banking activities in the, specifically: resident entities, including resident subsidiaries of non- banks, that have been granted a banking license by the Central Bank 1 ; 1 Article 2:11, para. 1, DFSA. non- EU/European Economic Area resident entities that operate as banks in the through a licensed branch 2 ; and other foreign resident entities that operate as banks in the through a branch and that have been granted a banking license by the Central Bank. 3 If a non- resident bank exclusively offers Internet banking services (with no physical presence in the through a branch), it would not be subject to the bank tax. Bank Tax Levied on Consolidated Basis If the financial information of one or more entities that may be subject to the bank tax (that is, entities that are authorized to conduct banking activities in the ) is included in a consolidated commercial account 4 headed by a resident entity, the bank tax would be levied on the entity that prepares the consolidated commercial account (and not on the entity that is authorized to conduct banking activities in the ). 5 This would be the case if a resident entity prepares a consolidated commercial account because it heads an independent group ( group) or a part of a larger international group. 2 Article 2:14, paras. 1 and 2, DFSA. EU/EEA entities that have been granted a banking license by the banking supervisory authority of that member state and received an announcement from the Central Bank that it is aware of their intention to operate as a bank in the through a branch. 3 For EU/EEA resident entities, this may concern banks situated in member states that do not require a license to conduct banking activities (article 2:16, para. 1, DFSA). For non-eu/ EEA resident entities, it is not relevant whether they are authorized to operate as a bank in their country of residence because they are required to obtain a banking license from the Central Bank before operating as a bank in the through a branch (article 2:20, para. 1, DFSA). 4 The commercial accounts may be consolidated based on international financial reporting standards or generally accepted accounting principles. 5 If a non- resident parent issues a liability declaration as mentioned in article 2:403 of the Civil Code, on which basis the relevant resident entity would not have to prepare a consolidated commercial balance sheet for the group it heads, the bank tax would still be levied on that resident entity. TAX NOTES INTERNATIONAL JANUARY 9, 2012 1
HIGHLIGHTS Reprinted from Tax Notes Int l, January 9, 2012, p. 91 This would apply regardless of whether the resident entity itself has a banking license. In addition, the consolidated commercial account could also include non- resident subsidiaries. The explanatory memorandum to the legislative proposal contains two examples that illustrate the concept of a group (Figure 1) and the part of a larger international group (Figure 2). In both examples it is assumed that Entity II has been granted a banking license by the Central Bank. Entity II Entity IV Figure 1. Group Entity I Entity III Entity V Entity VI Non- In Figure 1, Entity I heads the group and has control over entities II, III, IV, V, and VI. In this situation, the bank tax would be levied on Entity I over the whole group (consisting of entities I, II, III, and IV and foreign entities V and VI), and not only on Entity II (which holds the banking license). In Figure 2, Entity II heads only part of the group and has control over entities IV, V, and VI. entities I and III do not form part of the part of the group. In this situation, the bank tax would be levied on Entity II over the part of the group (consisting of entities II, IV, and V and Entity VI), and not only on Entity II (which holds the banking license). Obviously, it should be noted that if the resident entity that heads the group or the part of the international group has not been granted a banking license and is a mere holding company of non- resident banking subsidiaries that do not operate as a bank in the through a branch, no bank tax would be levied on the resident entity. Bank Tax Not Levied on Consolidated Basis If banking activities make up only a small part of the activities of the group or the part of the international group, the bank tax would be levied on the entity that is authorized to conduct banking activities in the (instead of on the entity that heads such a group). This would be the case if the stand-alone commercial balance sheet total of such an entity (or in the case of a branch, the stand-alone commercial balance sheet total attributable to the branch) that forms part of the group or the part of the international group does not exceed 20 billion (efficiency exemption); 6 or does not exceed 10 percent of the consolidated commercial balance sheet total of the group or part of the international group. If the group or part of the international group consists of more entities that are authorized to conduct banking activities in the, the stand-alone commercial balance sheet totals of those entities (or branches) combined should not exceed 10 percent of the consolidated commercial balance sheet total of that group. The explanatory memorandum to the legislative proposal contains examples (Figure 3) to illustrate the scenario described above. It is assumed that entity C has been granted a banking license by the Central Bank. In Figure 3, entity A heads the group and has control over entities B, C, D, and E. Entity A also heads a group together with entity C, and entity B heads a group together with entities D and E. Because only entity C has been granted a banking license, the only groups that are considered to be relevant for bank tax purposes consist of A and C, and of A, B, C, D, and E. In this respect, only the largest group will be taken into consideration (that is, the group consisting of entities A, B, C, D, and E that is headed by entity A). If the consolidated commercial balance sheet total of that group amounts to 500 billion and the stand-alone commercial balance sheet total of entity C amounts to 25 billion, the stand-alone commercial balance sheet total although exceeding the efficiency exemption constitutes only 5 percent of the consolidated commercial balance sheet total. The bank tax would therefore not be levied on a 6 The amount of the efficiency exemption would be adjusted every five years by ministerial decree. It should be noted that if the commercial balance sheet total does not exceed the efficiency exemption, no bank tax would be levied on the entity that is authorized to conduct banking activities in the because the taxable amount would be zero. 2 JANUARY 9, 2012 TAX NOTES INTERNATIONAL
Reprinted from Tax Notes Int l, January 9, 2012, p. 91 HIGHLIGHTS Figure 2. Part of International Group Non- Entity IV Entity II Entity I Entity V Entity VI Entity III Non- Non- consolidated basis, but only from entity C based on its stand-alone commercial balance sheet total. If the consolidated commercial balance sheet total of that group amounts to 50 billion and the standalone commercial balance sheet total of entity C amounts to 10 billion, the bank tax again would be levied only on entity C because the standalone commercial balance sheet of entity C does not exceed the efficiency exemption of 20 billion. The efficiency exemption could be applied several times by non- resident banks if they ensure that not all of their resident banking subsidiaries or the branches through which they operate as banks in the are structured under the same resident entity that heads the group or the part of the international group. Therefore, non- resident banks should carefully review their structuring in and through the. By contrast, resident banks could only apply the efficiency exemption once, at the level of the resident entity that heads the group or part of the international group. resident banks therefore seem to be at a disadvantage compared with non- resident banks that operate as banks in the. Taxable Amount For bank tax purposes, the taxable amount is considered the tax base less the efficiency exemption. 7 If the tax base is less than 20 billion, the efficiency 7 Based on a ministerial decree, it may be possible to calculate the taxable amount in a currency other than euros. TAX NOTES INTERNATIONAL JANUARY 9, 2012 3
HIGHLIGHTS Reprinted from Tax Notes Int l, January 9, 2012, p. 91 Figure 3. Bank Tax Not Levied on Consolidated Basis U.K. Entity D Entity B Entity E exemption would be equal to the amount of the tax base. Therefore, the taxable amount could never be negative. The stand-alone commercial balance sheet total is relevant for determining the tax base of the entity that is authorized to conduct banking activities in the. For resident entities, the tax base would be equal to the stand-alone commercial balance sheet total minus: the regulatory capital of the bank (as defined in sections 57-66 of the first and second EU capital requirements directives) 8 ; deposits covered by the DGS 9 ; and liabilities that relate to insurance activities (if any). 10 8 Directive 2006/48/EC (Capital Requirements Directive I) and (combined) Directive 2009/27/EC, Directive 2009/83/EC, and Directive 2009/111/EC (Capital Requirements Directive II). 9 This prevents these deposits from being subject to both the ex ante deposit guarantee levy and the bank tax. 10 The reason that liabilities related to insurance activities are deducted from the balance sheet total is that insurance companies have their own specific supervisory laws based on Directive 2009/138/EU (Solvency Directive II). Entity A Entity C By deducting these items from the total liabilities on the balance sheet, the bank tax would effectively be levied over the remaining liabilities in short, the amount of the uncovered debts. For branches of non- resident entities, the tax base would be equal to the stand-alone commercial balance sheet total minus: the liabilities that are not attributable to the branch; and both the regulatory capital and the deposits covered by the DGS that are attributable to the branch. If a resident entity prepares a consolidated commercial balance sheet, the tax base would be equal to the consolidated commercial balance sheet total minus the above-mentioned liabilities on that consolidated commercial balance sheet. Rates The taxable amount would be divided into parts relating to short-term debts (with a term of less than one year) and long-term debts (with a term of more than one year). The tax would be levied at 2.2 basis 4 JANUARY 9, 2012 TAX NOTES INTERNATIONAL
Reprinted from Tax Notes Int l, January 9, 2012, p. 91 points (BPs) 11 for short-term uncovered debts and at 1.1 BPs per annum for long-term uncovered debts. This would create an incentive to attract long-term financing, further increasing the stability of the financial system, according to the government. However, if one or more of a bank s board members receives a bonus (variable remuneration) that exceeds his fixed remuneration, the rate would be 2.31 BPs on the amount of short-term debts and 1.155 BPs on the amount of long-term debts. The bank tax would not be deductible for corporate income tax purposes. Procedure The bank tax would be due on the first day of the 10th calendar month after the date on which the balance sheet is prepared, and would have to be declared and paid within one month after the date it is due. This means that if the book year is the same as the calendar year, the bank tax would be due on October 1 of the subsequent year, and would be payable before November 1. If the annual accounts have not been adopted at the time the bank tax would become due, the tax would be due on the first day of the calendar month after the date on which the annual accounts are adopted. Avoidance of Double Taxation It is slightly disappointing that the legislative proposal does not contain a well-considered provision to avoid double taxation, which could arise if, for example, the country of residence of a non- resident subsidiary of a group levies a similar bank tax on more or less the same tax base. This creates unnecessary uncertainty because bank taxes and similar levies in other EU member states have different tax bases, rates, and (possible) exemptions. The current tax treaties do not cover the bank tax, but the explanatory memorandum to the legislative proposal indicates that the government will, in the coming months, review situations in which double taxation may arise and determine whether relief should be granted bilaterally or unilaterally. Bilateral relief does not seem to be realistic because it would require the to enter into new treaties or amend its existing treaties with all its important trading partners. HIGHLIGHTS Further, according to the explanatory memorandum, the intention is that the country of residence of the subsidiary or the country in which the branch office is established should grant double tax relief in favor of the parent bank s country. This would mean that if the liabilities of a resident subsidiary of a non- resident bank are included in the tax base of a foreign bank tax, the should grant relief to avoid double taxation. This seems to be based on the principle of capital export neutrality, under which the home country levies tax regardless of the country in which the income is earned. Capital export neutrality does not seem to be beneficial for countries with a relatively small home market and an open economy, such as the. Also, this would be in conflict with treaty policy, which for decades has aimed at realizing capital import neutrality for active income to ensure equal tax treatment for all capital invested within a given country, regardless of the investor s country of residence. Final Remarks There is no EU harmonization or European guideline on bank taxes. The government, however, has explicitly been considering bank taxes and similar bank levies that have been, or are being, introduced in other EU member states (for example, in the U.K., short-term uncovered debts are also subject to a higher tax rate). Most of these bank taxes (in Austria, Hungary, Portugal, and the United Kingdom) and similar bank levies (in Cyprus, Germany, and Sweden) are charged on the banks total liabilities, less the regulatory capital and the amount of deposits guaranteed by the DGS. In France, the bank tax is levied from riskweighted assets. The Council of State, an independent adviser to the government on legislative proposals, advised against the introduction of a bank tax. It pointed out, for example, that the legislative proposal applies to all banks, whereas the government granted support only to banks in certain situations and those banks have repaid, or will have to repay, that funding with interest. The council also noted that the banking sector is already being confronted with several other measures and that the introduction of the bank tax will make banks more reluctant to grant credit. In spite of the council s advice, however, the government sent the legislative proposal to the lower house of the parliament, and there appears to be political impetus to get the proposal passed. 11 A unit equal to 1/100th of 1 percent. Jean-Paul van den Berg and Johan Vrolijk are tax lawyers with Stibbe in New York. TAX NOTES INTERNATIONAL JANUARY 9, 2012 5