ISLA gains last-minute concessions on GITA 2018
20 December 2017 London
Image: Shutterstock
The German Ministry of Finance has bowed to industry wisdom on the German Investment Tax Act (GITA 2018) following an eleventh-hour meeting with securities lending representatives ahead of the 1 January deadline.
EY partners Petar Groseta and Marcus Helios, who travelled to Germany on behalf of the International Securities Lending Association (ISLA), reported that they “had an extremely successful and productive meeting at the Finance ministry. It went for over two hours which shows how important the topic was”.
The meeting covered four key elements of GITA 2018, including the scope of taxable transaction, the tax base, collection of tax, and application of a double tax treaty.
Regarding the scope of taxable transactions, the new tax will be limited to transactions over the dividend record date only, in line with suggestions from ISLA, which were first outlined in a letter to the ministry earlier this month.
“This is what ISLA requested in our letter and so this is an excellent result,” stated ISLA in reaction to the concession.
The regulation around tax base has also been amended. Manufactured dividend will be subject to tax at gross level because that is what the BMF sees as the core tax base for their anti-avoidance intentions.
EY’s interpretation is that as long as the manufactured dividend corresponds to the gross dividend, the fees and earnings from collateral are effectively out of scope.
If there is an attempt to shift the amount of the manufactured dividend to the fees, the tax base will be increased by this amount to reach the gross dividend.
Collection of tax against foreign lender and borrower is still under discussion. As it stands now, the withholding obligation is with borrower.
The BMF sees obligating the foreign borrower is more practicable than requiring funds to file German tax returns.
Until the German ministry clarifies the exact method of the investment tax collection, EY suggests to the borrowers to put the money in an escrow and wait for further guidance.
Further, the applicability of a double tax treaty on manufactured dividend is still open question.
The only way to overcome the uncertainty right now for the industry will be to make the refund claims and see how the things will evolve.
EY partners Petar Groseta and Marcus Helios, who travelled to Germany on behalf of the International Securities Lending Association (ISLA), reported that they “had an extremely successful and productive meeting at the Finance ministry. It went for over two hours which shows how important the topic was”.
The meeting covered four key elements of GITA 2018, including the scope of taxable transaction, the tax base, collection of tax, and application of a double tax treaty.
Regarding the scope of taxable transactions, the new tax will be limited to transactions over the dividend record date only, in line with suggestions from ISLA, which were first outlined in a letter to the ministry earlier this month.
“This is what ISLA requested in our letter and so this is an excellent result,” stated ISLA in reaction to the concession.
The regulation around tax base has also been amended. Manufactured dividend will be subject to tax at gross level because that is what the BMF sees as the core tax base for their anti-avoidance intentions.
EY’s interpretation is that as long as the manufactured dividend corresponds to the gross dividend, the fees and earnings from collateral are effectively out of scope.
If there is an attempt to shift the amount of the manufactured dividend to the fees, the tax base will be increased by this amount to reach the gross dividend.
Collection of tax against foreign lender and borrower is still under discussion. As it stands now, the withholding obligation is with borrower.
The BMF sees obligating the foreign borrower is more practicable than requiring funds to file German tax returns.
Until the German ministry clarifies the exact method of the investment tax collection, EY suggests to the borrowers to put the money in an escrow and wait for further guidance.
Further, the applicability of a double tax treaty on manufactured dividend is still open question.
The only way to overcome the uncertainty right now for the industry will be to make the refund claims and see how the things will evolve.
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