Exchange differences in international taxation: the UK

1. Presentation to IFA UK Branch 23 October 2008 Exchange differences in international taxation: the UK Roger Muray Ernst & Young LLP Vimal Tilakapala Allen & Overy LLP For information on applying this template to an existing presentations, refer to the notes on slide 2 of this presentation. The Input area of the Beam can be customised to reflect the content of thepresentation. The Input area is an AutoShape with a picture fill. To change this, ensure you have the image you wish to use (ideally a .jpg or a .png file) in an accessible folder. The image should have a ratio of 1:1 to ensure it does not appear distorted. It is not possible to reposition the image within the Input area. Acceptable images for importing into the Input area of the Beam are the three approved graphics (lines), and black and white photography or illustrations which follow the principles laid out on The Branding Zone. Colour images should never be imported into this area. Please be aware that replacing the Input area with high resolution graphics will significantly increase the file size. Contact your local DDC for assistance with updating the Beam. Customise the Input area of the Beam as described below. Click on the View tab from the menu bar and select Master>Slide Master Right-click on the Input graphic and select Format AutoShape From the Fill menu, under the Colour and Lines tab, click on the drop-down arrow next to Colour and select the Fill Effects menu From the Picture tab, click on Select Picture. Navigate to the folder containing the image you wish to insert in the Input area. Highlight the image and tick the Lock picture aspect ratio box. Click on OK You can now preview the image before continuing. If you are happy with how it looks, click OK to continue. Otherwise, repeat the process until you are happy with your selected image To exit from Master View, click on View>Normal. The change you made to the Input graphic should now be visible on the title slide.For information on applying this template to an existing presentations, refer to the notes on slide 2 of this presentation. The Input area of the Beam can be customised to reflect the content of thepresentation. The Input area is an AutoShape with a picture fill. To change this, ensure you have the image you wish to use (ideally a .jpg or a .png file) in an accessible folder. The image should have a ratio of 1:1 to ensure it does not appear distorted. It is not possible to reposition the image within the Input area. Acceptable images for importing into the Input area of the Beam are the three approved graphics (lines), and black and white photography or illustrations which follow the principles laid out on The Branding Zone. Colour images should never be imported into this area. Please be aware that replacing the Input area with high resolution graphics will significantly increase the file size. Contact your local DDC for assistance with updating the Beam. Customise the Input area of the Beam as described below. Click on the View tab from the menu bar and select Master>Slide Master Right-click on the Input graphic and select Format AutoShape From the Fill menu, under the Colour and Lines tab, click on the drop-down arrow next to Colour and select the Fill Effects menu From the Picture tab, click on Select Picture. Navigate to the folder containing the image you wish to insert in the Input area. Highlight the image and tick the Lock picture aspect ratio box. Click on OK You can now preview the image before continuing. If you are happy with how it looks, click OK to continue. Otherwise, repeat the process until you are happy with your selected image To exit from Master View, click on View>Normal. The change you made to the Input graphic should now be visible on the title slide.

2. 23 October 2008 FX in international taxation: the UK Page 2 It is possible to apply this template to exiting presentations. Have the latest presentation template open Click on the View tab and select Normal Delete all unwanted slides Click on the Insert tab from the menu bar and select Slides from Files Click on Browse. Navigate to the presentation you wish to update with the new template. Highlight the presentation and click Open Wait for the slides from the presentation to load and click on Insert All. Then click Close Check the inserted slides to ensure that the most appropriate master slide has been used on each slide To change the master applied to a slide select the slide you wish to apply a different master to then click on the Format tab from the menu bar and select Slide Design From the Used in This Presentation section choose the master you wish to apply to the slide and hover over it to reveal a drop-down arrow. Click on the arrow and select Apply to Selected Slides Please note that the formatted Slide Master may differ from the source file so it is important to thoroughly check the presentation to ensure that no further formatting is needed. It is possible to apply this template to exiting presentations. Have the latest presentation template open Click on the View tab and select Normal Delete all unwanted slides Click on the Insert tab from the menu bar and select Slides from Files Click on Browse. Navigate to the presentation you wish to update with the new template. Highlight the presentation and click Open Wait for the slides from the presentation to load and click on Insert All. Then click Close Check the inserted slides to ensure that the most appropriate master slide has been used on each slide To change the master applied to a slide select the slide you wish to apply a different master to then click on the Format tab from the menu bar and select Slide Design From the Used in This Presentation section choose the master you wish to apply to the slide and hover over it to reveal a drop-down arrow. Click on the arrow and select Apply to Selected Slides Please note that the formatted Slide Master may differ from the source file so it is important to thoroughly check the presentation to ensure that no further formatting is needed.

3. This is a predetermined divider slide and should not be modified.This is a predetermined divider slide and should not be modified.


5. 23 October 2008 FX in international taxation: the UK Page 5 Suggested contents (1) Very comprehensive, potentially repetitive Brief outline of domestic tax system Foreign exchange controls (RIP 1979) Taxation of exchange gains and losses, general considerations Accounting principles Recognition principles (timing) Character of FX gains and losses Currencies in which taxable profits may be calculated Hyperinflationary currency adjustment? Source of exchange gains and losses Transfer pricing

6. 23 October 2008 FX in international taxation: the UK Page 6 Suggested contents (2) Typical transactions Purchase and sale of goods Measuring cost of plant or machinery, tax depreciation Measuring cost of real estate Measuring cost of securities Intangible property Borrowing and lending Hedging and derivatives � expanded to a separate section in UK report Foreign currency issues related to foreign branches and PEs Measuring profits, intra-company dealings

7. 23 October 2008 FX in international taxation: the UK Page 7 Suggested contents (3) Foreign currency issues related to foreign PEs Measuring branch profits Impact of hedging Intra-company dealings Foreign currency issues related to CFCs Two sections not directly addressed in UK Report: Other FX issues, mainly related to Canadian tax cases Instead ground covered by describing historical development of UK system FX and tax treaties

8. For information on applying this template to an existing presentations, refer to the notes on slide 2 of this presentation. The Input area of the Beam can be customised to reflect the content of thepresentation. The Input area is an AutoShape with a picture fill. To change this, ensure you have the image you wish to use (ideally a .jpg or a .png file) in an accessible folder. The image should have a ratio of 1:1 to ensure it does not appear distorted. It is not possible to reposition the image within the Input area. Acceptable images for importing into the Input area of the Beam are the three approved graphics (lines), and black and white photography or illustrations which follow the principles laid out on The Branding Zone. Colour images should never be imported into this area. Please be aware that replacing the Input area with high resolution graphics will significantly increase the file size. Contact your local DDC for assistance with updating the Beam. Customise the Input area of the Beam as described below. Click on the View tab from the menu bar and select Master>Slide Master Right-click on the Input graphic and select Format AutoShape From the Fill menu, under the Colour and Lines tab, click on the drop-down arrow next to Colour and select the Fill Effects menu From the Picture tab, click on Select Picture. Navigate to the folder containing the image you wish to insert in the Input area. Highlight the image and tick the Lock picture aspect ratio box. Click on OK You can now preview the image before continuing. If you are happy with how it looks, click OK to continue. Otherwise, repeat the process until you are happy with your selected image To exit from Master View, click on View>Normal. The change you made to the Input graphic should now be visible on the title slide.For information on applying this template to an existing presentations, refer to the notes on slide 2 of this presentation. The Input area of the Beam can be customised to reflect the content of thepresentation. The Input area is an AutoShape with a picture fill. To change this, ensure you have the image you wish to use (ideally a .jpg or a .png file) in an accessible folder. The image should have a ratio of 1:1 to ensure it does not appear distorted. It is not possible to reposition the image within the Input area. Acceptable images for importing into the Input area of the Beam are the three approved graphics (lines), and black and white photography or illustrations which follow the principles laid out on The Branding Zone. Colour images should never be imported into this area. Please be aware that replacing the Input area with high resolution graphics will significantly increase the file size. Contact your local DDC for assistance with updating the Beam. Customise the Input area of the Beam as described below. Click on the View tab from the menu bar and select Master>Slide Master Right-click on the Input graphic and select Format AutoShape From the Fill menu, under the Colour and Lines tab, click on the drop-down arrow next to Colour and select the Fill Effects menu From the Picture tab, click on Select Picture. Navigate to the folder containing the image you wish to insert in the Input area. Highlight the image and tick the Lock picture aspect ratio box. Click on OK You can now preview the image before continuing. If you are happy with how it looks, click OK to continue. Otherwise, repeat the process until you are happy with your selected image To exit from Master View, click on View>Normal. The change you made to the Input graphic should now be visible on the title slide.


10. 23 October 2008 FX in international taxation: the UK Page 10 Loan relationships Money debt Transaction for lending of money Or deemed lending � issue instrument representing rights of lender Profits, gains, losses, interest, expenses and charges on loan relationships and related transactions Debits and credits in GAAP accounts No distinction between income and capital

11. 23 October 2008 FX in international taxation: the UK Page 11 Derivative contracts Complex definitions Futures options and contracts for differences Normally accounting test, depending on underlying subject matter Accounted for as derivative, or would be, were initial investment zero or small Profits, losses and expenses and charges on derivative contracts and related transactions Debits and credits in GAAP accounts No distinction between income and capital

12. For information on applying this template to an existing presentations, refer to the notes on slide 2 of this presentation. The Input area of the Beam can be customised to reflect the content of thepresentation. The Input area is an AutoShape with a picture fill. To change this, ensure you have the image you wish to use (ideally a .jpg or a .png file) in an accessible folder. The image should have a ratio of 1:1 to ensure it does not appear distorted. It is not possible to reposition the image within the Input area. Acceptable images for importing into the Input area of the Beam are the three approved graphics (lines), and black and white photography or illustrations which follow the principles laid out on The Branding Zone. Colour images should never be imported into this area. Please be aware that replacing the Input area with high resolution graphics will significantly increase the file size. Contact your local DDC for assistance with updating the Beam. Customise the Input area of the Beam as described below. Click on the View tab from the menu bar and select Master>Slide Master Right-click on the Input graphic and select Format AutoShape From the Fill menu, under the Colour and Lines tab, click on the drop-down arrow next to Colour and select the Fill Effects menu From the Picture tab, click on Select Picture. Navigate to the folder containing the image you wish to insert in the Input area. Highlight the image and tick the Lock picture aspect ratio box. Click on OK You can now preview the image before continuing. If you are happy with how it looks, click OK to continue. Otherwise, repeat the process until you are happy with your selected image To exit from Master View, click on View>Normal. The change you made to the Input graphic should now be visible on the title slide.For information on applying this template to an existing presentations, refer to the notes on slide 2 of this presentation. The Input area of the Beam can be customised to reflect the content of thepresentation. The Input area is an AutoShape with a picture fill. To change this, ensure you have the image you wish to use (ideally a .jpg or a .png file) in an accessible folder. The image should have a ratio of 1:1 to ensure it does not appear distorted. It is not possible to reposition the image within the Input area. Acceptable images for importing into the Input area of the Beam are the three approved graphics (lines), and black and white photography or illustrations which follow the principles laid out on The Branding Zone. Colour images should never be imported into this area. Please be aware that replacing the Input area with high resolution graphics will significantly increase the file size. Contact your local DDC for assistance with updating the Beam. Customise the Input area of the Beam as described below. Click on the View tab from the menu bar and select Master>Slide Master Right-click on the Input graphic and select Format AutoShape From the Fill menu, under the Colour and Lines tab, click on the drop-down arrow next to Colour and select the Fill Effects menu From the Picture tab, click on Select Picture. Navigate to the folder containing the image you wish to insert in the Input area. Highlight the image and tick the Lock picture aspect ratio box. Click on OK You can now preview the image before continuing. If you are happy with how it looks, click OK to continue. Otherwise, repeat the process until you are happy with your selected image To exit from Master View, click on View>Normal. The change you made to the Input graphic should now be visible on the title slide.

13. 23 October 2008 FX in international taxation: the UK Page 13

14. 23 October 2008 FX in international taxation: the UK Page 14 UK taxation of exchange differences � key points Pervasive influence of accounting treatment and principles Not for pure income and capital gains Distinction between monetary and non-monetary items All-income approach for most monetary items Resolves most historic problems with FX Sophisticated business-friendly tax regime for hedging Aligning characterisation and timing of taxation of the hedge with that of the hedged item As regards FX, UK well-adapted to globalisation Beneficial effects of consultation process

15. 23 October 2008 FX in international taxation: the UK Page 15 Applicable accounting standards In the context of trading, loan relationships, derivative contracts IFRS, if applied in single entity accounts Otherwise UK GAAP Two versions of UK GAAP: �New UK GAAP� aligned to IFRS as regards: Financial instruments, measurement, IAS 39, FRS 26 Foreign exchange, IAS 21, FRS 23 It is possible to apply this template to exiting presentations. Have the latest presentation template open Click on the View tab and select Normal Delete all unwanted slides Click on the Insert tab from the menu bar and select Slides from Files Click on Browse. Navigate to the presentation you wish to update with the new template. Highlight the presentation and click Open Wait for the slides from the presentation to load and click on Insert All. Then click Close Check the inserted slides to ensure that the most appropriate master slide has been used on each slide To change the master applied to a slide select the slide you wish to apply a different master to then click on the Format tab from the menu bar and select Slide Design From the Used in This Presentation section choose the master you wish to apply to the slide and hover over it to reveal a drop-down arrow. Click on the arrow and select Apply to Selected Slides Please note that the formatted Slide Master may differ from the source file so it is important to thoroughly check the presentation to ensure that no further formatting is needed. It is possible to apply this template to exiting presentations. Have the latest presentation template open Click on the View tab and select Normal Delete all unwanted slides Click on the Insert tab from the menu bar and select Slides from Files Click on Browse. Navigate to the presentation you wish to update with the new template. Highlight the presentation and click Open Wait for the slides from the presentation to load and click on Insert All. Then click Close Check the inserted slides to ensure that the most appropriate master slide has been used on each slide To change the master applied to a slide select the slide you wish to apply a different master to then click on the Format tab from the menu bar and select Slide Design From the Used in This Presentation section choose the master you wish to apply to the slide and hover over it to reveal a drop-down arrow. Click on the arrow and select Apply to Selected Slides Please note that the formatted Slide Master may differ from the source file so it is important to thoroughly check the presentation to ensure that no further formatting is needed.

16. 23 October 2008 FX in international taxation: the UK Page 16 Which companies apply �New UK GAAP�

17. 23 October 2008 FX in international taxation: the UK Page 17 Monetary items According to IAS 21 �units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency� A payment or payments become due or can be demanded There is a mechanism for determining the amount payable Will include cash, debt and derivatives Excludes real property, chattels, IP, most shares

18. 23 October 2008 FX in international taxation: the UK Page 18 Monetary items and UK tax on exchange differences Loan relationships and derivative contracts will be monetary items Measurement and timing of taxable amounts determined by debits and credits in IFRS or UK GAAP accounts Will include exchange differences Either on amortised cost basis (retranslation) Or fair value basis FX an economic component of fair value profit or loss All characterised as income for tax Unless matching rules apply This is key to overcoming the pre-1993 problems

19. 23 October 2008 FX in international taxation: the UK Page 19 Amortised cost basis A method used under IFRS and New UK GAAP Essentially the same as accruals basis under old UK GAAP Also briefly described in loan relationships provisions In essence spread payments over lifetime of item on an effective interest rate method Where in foreign currency, translate carrying value to sterling at spot rate Differences on retranslation to profit and loss Except foreign operations and some hedging scenarios Exchange differences to equity not taxed e.g, s84A(3) FA 1996

20. 23 October 2008 FX in international taxation: the UK Page 20 Fair value accounting Carry items at fair value in accounts Establish by reference to market transactions or by discounting anticipated future cash flows Fair value profit and loss to income statement Apply to all derivatives, to financial assets designated as held at fair value Also apply to available for sale financial assets But then fair value profit and loss to equity; recycle to income statement such that get same answer as under amortised cost Similar approach for designated effective cash flow hedges Tax Regulations define exchange difference component of fair value profit and loss

21. 23 October 2008 FX in international taxation: the UK Page 21 Non-monetary items Treatment of economic exchange difference depends on tax treatment of item May be circulating capital of a trade, such as inventory Follow accounting treatment, s42 FA 1998 May be wrapped up in pure income received (e.g, dividends) Translate amount received to sterling at spot May be capital expenditure of a trade May impact cost for capital allowances May simply be capital gains item Compute by reference to sterling proceeds and base cost

22. 23 October 2008 FX in international taxation: the UK Page 22 Currency in which taxable profits are calculated (1) Superficially simple rules in s92A � 92C FA 1993 Default is apply sterling Even where foreign branch, see later Currency accounts drawn up in (presentation currency) not sterling and differs from functional currency (s92B) Use functional currency, then translate to sterling UK-resident, single non-sterling presentation and functional currency Apply that foreign currency (s92C)

23. 23 October 2008 FX in international taxation: the UK Page 23 Currency in which taxable profits are calculated (2) Non-resident company, UK branch Use currency of branch accounts used as basis for tax filing (s92C) Other non-resident company (e.g. CFC) Use presentation currency Potential conflict with �correct accounts� requirement under loan relationships provisions Might have different functional currency under UK GAAP

24. 23 October 2008 FX in international taxation: the UK Page 24 Transfer pricing OECD principles embedded in interpretation of Schedule 28AA ICTA 1988 Normally respect currency of debt but expect appropriate interest rate for that currency. In cases of thin capitalisation do not tax FX on excess debt May deem actual or implied guarantor to have issued excess debt Expect FX to move to guarantor But what if functional currency different?


26. 23 October 2008 FX in international taxation: the UK Page 26 It is possible to apply this template to exiting presentations. Have the latest presentation template open Click on the View tab and select Normal Delete all unwanted slides Click on the Insert tab from the menu bar and select Slides from Files Click on Browse. Navigate to the presentation you wish to update with the new template. Highlight the presentation and click Open Wait for the slides from the presentation to load and click on Insert All. Then click Close Check the inserted slides to ensure that the most appropriate master slide has been used on each slide To change the master applied to a slide select the slide you wish to apply a different master to then click on the Format tab from the menu bar and select Slide Design From the Used in This Presentation section choose the master you wish to apply to the slide and hover over it to reveal a drop-down arrow. Click on the arrow and select Apply to Selected Slides Please note that the formatted Slide Master may differ from the source file so it is important to thoroughly check the presentation to ensure that no further formatting is needed. It is possible to apply this template to exiting presentations. Have the latest presentation template open Click on the View tab and select Normal Delete all unwanted slides Click on the Insert tab from the menu bar and select Slides from Files Click on Browse. Navigate to the presentation you wish to update with the new template. Highlight the presentation and click Open Wait for the slides from the presentation to load and click on Insert All. Then click Close Check the inserted slides to ensure that the most appropriate master slide has been used on each slide To change the master applied to a slide select the slide you wish to apply a different master to then click on the Format tab from the menu bar and select Slide Design From the Used in This Presentation section choose the master you wish to apply to the slide and hover over it to reveal a drop-down arrow. Click on the arrow and select Apply to Selected Slides Please note that the formatted Slide Master may differ from the source file so it is important to thoroughly check the presentation to ensure that no further formatting is needed.

27. 23 October 2008 FX in international taxation: the UK Page 27 Plant and machinery Capital allowances regime applies Uncertain how to establish sterling base cost Probably use spot rate at date on which obligation to pay became unconditional UK does not have a fully-joined up tax system Disallow depreciation in accounts Substitute capital allowances based on sterling cost

28. 23 October 2008 FX in international taxation: the UK Page 28 Real estate Normally within capital gains regime Calculate gain by reference to sterling base cost and disposal proceeds Bentley v Pike 51 TC 580 Compute sale proceeds by reference to spot rate on date on which contract to sell became unconditional FX on unpaid consideration in loan relationships regime Section 100 FA 1996 Likewise base cost

29. 23 October 2008 FX in international taxation: the UK Page 29 Securities Debt securities and shares radically different Debt securities Loan relationships Accounts-based all income regime FX on retranslation or as economic element of fair value profit or loss Shares Normally capital gains, realisations basis Sterling disposal proceeds and base cost Substantial shareholdings regime may apply

30. 23 October 2008 FX in international taxation: the UK Page 30 Intangible property Intangible Fixed Assets rules may apply Assets acquired or created since October 2002 with complex transitional rules Complex accounts-based all-income regime Accounting even defines what is taxable FX determined by accounting Will not be monetary items, so no retranslation But revaluations or impairment may lead to tax of FX that is an economic component



33. 23 October 2008 FX in international taxation: the UK Page 33 Hedging and taxing FX - objectives Where hedge accounting possible under GAAP Ensure timing aligned Where hedging intended but not possible under IFRS or New UK GAAP Permit hedge accounting for tax, if it is possible under Old UK GAAP Do not penalise companies forced to apply new GAAP Ensure timing aligned Deal with mismatches of characterisation Where hedge accounting possible, or hedging intention

34. 23 October 2008 FX in international taxation: the UK Page 34 FX hedges of monetary items IFRS or New UK GAAP A natural hedge will often apply without any need for hedge designation If use floating / floating currency swap Fair value profit and loss on swap Approximates to Exchange differences on loan (amortised cost basis)

35. 23 October 2008 FX in international taxation: the UK Page 35 Cross currency swap, floating rate legs only Within definition of interest-rate contract But predominantly a hedge of exchange risk Fair value movements mimic retranslation of $ principal Some interest rate �noise� where interest rate reset not at year-end

36. 23 October 2008 FX in international taxation: the UK Page 36 FX hedge of anticipated transactions Disregard Regulations 7 and 10 Mimic IFRS accounting of cash flow hedge of FX risk Fair value profit and loss on hedge not taxed before maturity If purchasing inventory for trade Fair value profit and loss on hedge not taxed until inventory sold If hedges effective in accounting terms Can elect to follow income statement, Regulation 9A If intend to hedge, but cannot satisfy stringent hedge effectiveness tests Do not elect to apply Regulation 9A

37. 23 October 2008 FX in international taxation: the UK Page 37 FX hedges of anticipated transaction � example 1 October 2008 Expect to buy inventory for �100 1 April Buy �100 6 months forward �81 31 December 2008 End of accounting period, �100 = �84, 3 months forward Fair value of forward = (�84 - �81) discounted 3 months Say �2.95, profit not taxed 1 April 2009 Buy inventory, �100 = �83, profit on hedge �2 Still do not tax it

38. 23 October 2008 FX in international taxation: the UK Page 38 FX hedges of anticipated transaction � example (continued) 31 December 2009 Inventory unsold; no profit on inventory So hedged item does not affect company�s profits No tax on hedge profit or inventory 1 February 2010 Sells inventory for �90 FX is irrelevant, it is a non-monetary asset Profit on sale is �7 �90 less �83 (cost of inventory 1 April 2009 at spot rate) Now also tax profit on hedge �2 , tax �9

39. 23 October 2008 FX in international taxation: the UK Page 39 Matching Company hedges FX risk on underlying assets of subsidiary Use foreign currency swap or borrowing It is possible to apply this template to exiting presentations. Have the latest presentation template open Click on the View tab and select Normal Delete all unwanted slides Click on the Insert tab from the menu bar and select Slides from Files Click on Browse. Navigate to the presentation you wish to update with the new template. Highlight the presentation and click Open Wait for the slides from the presentation to load and click on Insert All. Then click Close Check the inserted slides to ensure that the most appropriate master slide has been used on each slide To change the master applied to a slide select the slide you wish to apply a different master to then click on the Format tab from the menu bar and select Slide Design From the Used in This Presentation section choose the master you wish to apply to the slide and hover over it to reveal a drop-down arrow. Click on the arrow and select Apply to Selected Slides Please note that the formatted Slide Master may differ from the source file so it is important to thoroughly check the presentation to ensure that no further formatting is needed. It is possible to apply this template to exiting presentations. Have the latest presentation template open Click on the View tab and select Normal Delete all unwanted slides Click on the Insert tab from the menu bar and select Slides from Files Click on Browse. Navigate to the presentation you wish to update with the new template. Highlight the presentation and click Open Wait for the slides from the presentation to load and click on Insert All. Then click Close Check the inserted slides to ensure that the most appropriate master slide has been used on each slide To change the master applied to a slide select the slide you wish to apply a different master to then click on the Format tab from the menu bar and select Slide Design From the Used in This Presentation section choose the master you wish to apply to the slide and hover over it to reveal a drop-down arrow. Click on the arrow and select Apply to Selected Slides Please note that the formatted Slide Master may differ from the source file so it is important to thoroughly check the presentation to ensure that no further formatting is needed.

40. 23 October 2008 FX in international taxation: the UK Page 40 Matching Potential tax mismatch Shareholding is non-monetary asset Capital gain on sale on realisations basis Or substantial shareholdings exemption Hedge is monetary item Exchange difference on hedging loan taxed on retranslation On swap fair value profit and loss approximates to FX and is taxed as income It is possible to apply this template to exiting presentations. Have the latest presentation template open Click on the View tab and select Normal Delete all unwanted slides Click on the Insert tab from the menu bar and select Slides from Files Click on Browse. Navigate to the presentation you wish to update with the new template. Highlight the presentation and click Open Wait for the slides from the presentation to load and click on Insert All. Then click Close Check the inserted slides to ensure that the most appropriate master slide has been used on each slide To change the master applied to a slide select the slide you wish to apply a different master to then click on the Format tab from the menu bar and select Slide Design From the Used in This Presentation section choose the master you wish to apply to the slide and hover over it to reveal a drop-down arrow. Click on the arrow and select Apply to Selected Slides Please note that the formatted Slide Master may differ from the source file so it is important to thoroughly check the presentation to ensure that no further formatting is needed. It is possible to apply this template to exiting presentations. Have the latest presentation template open Click on the View tab and select Normal Delete all unwanted slides Click on the Insert tab from the menu bar and select Slides from Files Click on Browse. Navigate to the presentation you wish to update with the new template. Highlight the presentation and click Open Wait for the slides from the presentation to load and click on Insert All. Then click Close Check the inserted slides to ensure that the most appropriate master slide has been used on each slide To change the master applied to a slide select the slide you wish to apply a different master to then click on the Format tab from the menu bar and select Slide Design From the Used in This Presentation section choose the master you wish to apply to the slide and hover over it to reveal a drop-down arrow. Click on the arrow and select Apply to Selected Slides Please note that the formatted Slide Master may differ from the source file so it is important to thoroughly check the presentation to ensure that no further formatting is needed.

41. 23 October 2008 FX in international taxation: the UK Page 41 Matching: Old UK GAAP If old GAAP applies Can carry shares at foreign currency amount FX on retranslation of shares taken to reserves FX on hedge offset in reserves SSAP 20 �cover method� As FX goes to equity, it is not taxed s84A(3) FA 1996, Para 16(3) Sch 26 FA 2002 Accounting approach extended by established practice to more complex scenarios

42. 23 October 2008 FX in international taxation: the UK Page 42 Matching: the problem under new GAAP If IFRS or new GAAP applies Cannot carry shares at foreign currency amount They are not monetary items Usually carry at historic sterling cost Cannot take FX on hedge to equity Net investment hedge treatment denied As no �foreign operation in single entity accounts So s84A / Para 16(3) cannot solve the mismatch

43. 23 October 2008 FX in international taxation: the UK Page 43 Matching: New GAAP fair value hedge approach Applying IFRS or New UK GAAP in single entity accounts Designate borrowing a fair value hedge of FX risk on shareholding Make fair value adjustments to carrying value of shares This does not help directly as shares are capital gains assets taxed on realisations basis, or not at all But Disregard Regulations allow FX or fair value profit or loss on swap disregarded and not taxed To the extent it relates to FX Regulations to work out the FX element

44. 23 October 2008 FX in international taxation: the UK Page 44 Matching: intention approach IFRS or New UK GAAP Borrowing or swap Intended to hedge FX risk on shareholding; and Is economically suitable FX on hedge or fair value profit and loss on swap relating to FX disregarded Limit normally carrying value of shares But may elect for underlying net asset value Figures usually derived from parent�s consolidated accounts

45. 23 October 2008 FX in international taxation: the UK Page 45 Matching � when is FX on hedge taxed? Repaying loan or settling swap has no effect on past exchange differences Selling shares is a trigger If substantial shareholding regime applies Still no tax Matches timing and characterisation If the SSE does not apply Past FX treated as a capital gain or loss Matches timing and characterisation



48. 23 October 2008 FX in international taxation: the UK Page 48 Foreign branches: exchange differences in equity Can see them as having two main causes: Retranslation of opening net investment in branch to closing rate Retranslation of net assets derived from the profits of the year to the closing rate Also applied under Old UK GAAP, SSAP 20 Known as closing rate / net investment method Exchange differences taken to equity not taxed S42 FA 1998, or s84A(3) FA 1996 It is possible to apply this template to exiting presentations. Have the latest presentation template open Click on the View tab and select Normal Delete all unwanted slides Click on the Insert tab from the menu bar and select Slides from Files Click on Browse. Navigate to the presentation you wish to update with the new template. Highlight the presentation and click Open Wait for the slides from the presentation to load and click on Insert All. Then click Close Check the inserted slides to ensure that the most appropriate master slide has been used on each slide To change the master applied to a slide select the slide you wish to apply a different master to then click on the Format tab from the menu bar and select Slide Design From the Used in This Presentation section choose the master you wish to apply to the slide and hover over it to reveal a drop-down arrow. Click on the arrow and select Apply to Selected Slides Please note that the formatted Slide Master may differ from the source file so it is important to thoroughly check the presentation to ensure that no further formatting is needed. It is possible to apply this template to exiting presentations. Have the latest presentation template open Click on the View tab and select Normal Delete all unwanted slides Click on the Insert tab from the menu bar and select Slides from Files Click on Browse. Navigate to the presentation you wish to update with the new template. Highlight the presentation and click Open Wait for the slides from the presentation to load and click on Insert All. Then click Close Check the inserted slides to ensure that the most appropriate master slide has been used on each slide To change the master applied to a slide select the slide you wish to apply a different master to then click on the Format tab from the menu bar and select Slide Design From the Used in This Presentation section choose the master you wish to apply to the slide and hover over it to reveal a drop-down arrow. Click on the arrow and select Apply to Selected Slides Please note that the formatted Slide Master may differ from the source file so it is important to thoroughly check the presentation to ensure that no further formatting is needed.

49. 23 October 2008 FX in international taxation: the UK Page 49 FX on internal transactions � the grin on the Cheshire cat Internal transactions can give rise to FX For instance US branch of UK bank �deposits� dollars with head office of GBP company Prepare separate statements and consolidate Internal balance disappears. But FX to income statement in head office No FX in branch but deposit is part of net assets, so equal and opposite FX to equity Is it taxable? No real loan relationship But FX in p/l does exist in GAAP accounts, s42 FA 1998

50. 23 October 2008 FX in international taxation: the UK Page 50 CFCs Current regime works company by company Escape via exempt activities and motive tests Relevant profits, compute on modified UK CT principles Normally compute in currency in which the company draws up its accounts � s93C FA 1993 Possible loan relationships issue If company would have different functional currency in UK GAAP �correct accounts�





55. 23 October 2008 FX in international taxation: the UK Page 55 Marine Midland Pattison v Marine Midland Ltd, 57 TC 219 Case concerning a bank USD capital monetary liability funded circulating capital monetary assets Court held there was no profit or loss due to FX Amagamated what would normally be a non-deductible loss on a capital liability with an income gain on circulating capital asset to say overall no gain or loss Analogy to matching own share capital under Disregard Reg. 3(5) Eventually led to complex statement of practice Almost impossible to apply in practice It is possible to apply this template to exiting presentations. Have the latest presentation template open Click on the View tab and select Normal Delete all unwanted slides Click on the Insert tab from the menu bar and select Slides from Files Click on Browse. Navigate to the presentation you wish to update with the new template. Highlight the presentation and click Open Wait for the slides from the presentation to load and click on Insert All. Then click Close Check the inserted slides to ensure that the most appropriate master slide has been used on each slide To change the master applied to a slide select the slide you wish to apply a different master to then click on the Format tab from the menu bar and select Slide Design From the Used in This Presentation section choose the master you wish to apply to the slide and hover over it to reveal a drop-down arrow. Click on the arrow and select Apply to Selected Slides Please note that the formatted Slide Master may differ from the source file so it is important to thoroughly check the presentation to ensure that no further formatting is needed. It is possible to apply this template to exiting presentations. Have the latest presentation template open Click on the View tab and select Normal Delete all unwanted slides Click on the Insert tab from the menu bar and select Slides from Files Click on Browse. Navigate to the presentation you wish to update with the new template. Highlight the presentation and click Open Wait for the slides from the presentation to load and click on Insert All. Then click Close Check the inserted slides to ensure that the most appropriate master slide has been used on each slide To change the master applied to a slide select the slide you wish to apply a different master to then click on the Format tab from the menu bar and select Slide Design From the Used in This Presentation section choose the master you wish to apply to the slide and hover over it to reveal a drop-down arrow. Click on the arrow and select Apply to Selected Slides Please note that the formatted Slide Master may differ from the source file so it is important to thoroughly check the presentation to ensure that no further formatting is needed.

56. 23 October 2008 FX in international taxation: the UK Page 56 The �Group of Nine� By mid1980s it was clear that the traditional approach did not meet the needs of modern business 9 representative bodies joined in consultation with Inland Revenue Protracted process as different taxpayer groups had different agendas Companies wanted to keep FX on net investment hedges out of scope of tax as income on retranslation

57. 23 October 2008 FX in international taxation: the UK Page 57 Following the consultation FA 1993 code for taxing exchange differences Essentially FX on monetary items Shortly followed by FA 1994 regime for financial instruments Partly-overlapping regime for interest rate and currency derivatives Both came in for APs on or after 23 June 1995 And then FA 1996 loan relationships Very much an Inland Revenue initiative, Brought in quickly , from 1 April 1996

58. 23 October 2008 FX in international taxation: the UK Page 58 FA 1993 foreign exchange regime All-income regime for taxing exchange differences On qualifying assets and liabilities and currency contracts An attempt to define monetary items Very prescriptive mechanistic approach Attempted to create accounting frame work through statutory rules Definitions of accruals periods, rates, etc. etc. etc. Regulations for transition Regulations for matching Anti-avoidance rules, but still much scope for planning

59. 23 October 2008 FX in international taxation: the UK Page 59 FA 1994 financial instruments regime Another all-income code with a mechanistic approach Interest rate contracts, currency contracts and debt contracts Again created statutory accounting regime applied to defined qualifying payments Flawed overlap with FA 1993 regime Under old GAAP hedge accounting, foreign currency debt hedge with a swap was carried at implied rate FA 1994 did not treat final exchanges of currency as qualifying payment, but did so treat a net payment Litigation continues

60. 23 October 2008 FX in international taxation: the UK Page 60 FA 1996 loan relationships code Better drafted than FA 1993 and FA 1994 Closer link to real accounts But FX left out of account Dealt with under FA 1993 mechanistic regime

61. 23 October 2008 FX in international taxation: the UK Page 61 Further consultation and its outcome (1) Inland Revenue consulted with a limited group on replacing FA 1993 and 1994 regimes Result FA 2002 derivative contracts code Improvements to loan relationships code FX brought within scope Related party bad debt traps removed Both codes more tightly-linked to accounts

62. 23 October 2008 FX in international taxation: the UK Page 62 Further consultation and its outcome (2) Group drew attention to possible tax significance of IFRS Impact of extended fair value accounting on cash tax IAS 39 consultation group set up, FX sub-group Essentially self-appointed � undemocratic but practical? Initial attempted to preserve old UK GAAP for tax For instance in disregard regulations Now change of emphasis to reducing volatility by sticking closer to IFRS or New UK GAAP accounts numbers With only such adjustments as are necessary Consultation continues



65. 23 October 2008 FX in international taxation: the UK Page 65 Two approaches to foreign exchange and tax The commercial approach Focus on impact on the business and finding solutions What is the business context in which exchange differences arise? What are the finance director and corporate treasurer trying to achieve? Impact on financial statements, managing financial risks How are these impacted by tax? How can this impact be managed? Apply legal analysis in the commercial context Apply and seek to improve the applicable law It is possible to apply this template to exiting presentations. Have the latest presentation template open Click on the View tab and select Normal Delete all unwanted slides Click on the Insert tab from the menu bar and select Slides from Files Click on Browse. Navigate to the presentation you wish to update with the new template. Highlight the presentation and click Open Wait for the slides from the presentation to load and click on Insert All. Then click Close Check the inserted slides to ensure that the most appropriate master slide has been used on each slide To change the master applied to a slide select the slide you wish to apply a different master to then click on the Format tab from the menu bar and select Slide Design From the Used in This Presentation section choose the master you wish to apply to the slide and hover over it to reveal a drop-down arrow. Click on the arrow and select Apply to Selected Slides Please note that the formatted Slide Master may differ from the source file so it is important to thoroughly check the presentation to ensure that no further formatting is needed. It is possible to apply this template to exiting presentations. Have the latest presentation template open Click on the View tab and select Normal Delete all unwanted slides Click on the Insert tab from the menu bar and select Slides from Files Click on Browse. Navigate to the presentation you wish to update with the new template. Highlight the presentation and click Open Wait for the slides from the presentation to load and click on Insert All. Then click Close Check the inserted slides to ensure that the most appropriate master slide has been used on each slide To change the master applied to a slide select the slide you wish to apply a different master to then click on the Format tab from the menu bar and select Slide Design From the Used in This Presentation section choose the master you wish to apply to the slide and hover over it to reveal a drop-down arrow. Click on the arrow and select Apply to Selected Slides Please note that the formatted Slide Master may differ from the source file so it is important to thoroughly check the presentation to ensure that no further formatting is needed.

66. Presentation to IFA UK Branch 23 October 2008 Thank you

Exchange differences in international taxation: the UK

Exchange differences in international taxation: the UK

Presentation Transcript

Taxation in the UK

Taxation in the UK

INTERNATIONAL CAPITAL TAXATION

International Taxation

U.S. International Taxation

Exchange differences in international taxation: the UK

International Capital Taxation

U.S . Immigration and International Taxation Key Concepts and Differences

The legitimacy of international taxation

Issues in International Taxation

INTERNATIONAL EXCHANGE

International Taxation

International Students in the UK

The Netherlands in international taxation

Currency Exchange Rates Paddington | Monex International UK

International Taxation in Dehradun

International Taxation

Taxation of individuals investing in the UK

Taxation in the UK

Taxation in the UK

Permanent Establishment in International Taxation

International Taxation Consultants in Dubai, UAE