The evidence on withholding taxes
20 September 1999
Heather Corben, partner, SJ Berwin
Paul Hale, head of corporate taxes, Simmons & Simmons
Kevin Ashman, group manager of tax, Lovell White Durrant
City lawyers are keeping a close eye on how Gordon Brown steers the UK's way through the EU debate on whether withholding tax will be introduced here.
Various pundits have pointed out problems with the tax. Currently duty does not have to be paid on interest on UK eurobonds. But this will change if the levy is brought in to the extent that the EU wants.
This could create bureaucracy, higher administrative costs, and lead to taxes being paid as soon as interest is received on bonds.
Brown threatened to block the measure at an EU meeting in Finland, but it remains to be seen whether he can continue to fight the pressure from the EU.
But what do lawyers think its impact on the UK's financial services industry would be? And what repercussions would it have on the UK legal industry?
Heather Corben, tax partner at SJ Berwin, says: "The effect would be big. It would move the bond market out of Europe. It would make the EU less attractive because withholding tax would make it too complex for transactions to take place here." Corben thinks that if the withholding tax is introduced in the UK, investors may look to non-EU countries when buying eurobonds. "Switzerland would become more important," she says.
"The main concern for lawyers must be the eurobond market. If this was affected there would be less business for lawyers in the UK and the City. Swiss lawyers are perfectly able to cope with the added work. They are good commercial lawyers in the same way that people in the City are."
But she says it would take time before lawyers saw the full impact of the tax. She says: "The primary effect would be on a very narrow band of lawyers but if it led to money moving out of the EU then it may have a very bad effect on the City."
In the 1960s the US introduced a withholding tax and Corben claims that led to the development of the eurobond market in London.
"Look at the US and how it was affected. Who knows what effect this will have if it is added to a common currency," she says.
Paul Hale, head of corporate and indirect taxes at Simmons & Simmons, agrees that UK lawyers should look at the US to judge the impact of withholding tax.
Hale says: "Eurobonds have been around since the 1960s. They started as a result of the US imposing a withholding tax. The US lost and has not regained the market in raising money in Europe.
Hale thinks eurobond deals would move abroad but that UK lawyers may still handle the work. He says: "A lot of legal work may not move abroad. The legal work gets done in London because the bonds are issued under English law.
"In theory, because a paying agent is appointed to pay interest on bonds in Switzerland will not make any difference."
But he says this may not always be so. "More and more work may move to Switzerland and elsewhere because the headquarters of the banks will be transferred there. Over time it may affect UK lawyers," he says.
Kevin Ashman, group manager of tax at Lovell White Durrant, agrees that applying the withholding tax to the eurobond market in the UK would push business abroad.
Ashman says: "Even if you could reclaim it by repayment or credit you will have cash flow and administrative problems. Markets run on such fine markets that if those things were imposed everyone investing in eurobonds would go elsewhere. It would have a huge effect on the City. Several thousand jobs would be lost."
He adds the lawyers most affected would be capital markets specialists, but it depends on whether English law would still apply to eurobond transactions. He says: "It may be similar to the offshore funds market in the mid-1980s. The revenue introduced changes to it, but lawyers carried on in London and instructed their Jersey counterparts."