London's Foreign Bankers Start Packing Their Bags

by Jeremy Hetherington-Gore, Tax-News.com, London

19 April 2002

London's foreign banking community - one of the country's biggest financial success stories over decades - was aghast yesterday at Chancellor Gordon Brown's decision to tax branches as if they were incorporated subsidiaries, treating them as if their local operations are financed with equity capital rather than debt, therefore massively increasing their taxable profits.

Branches have until now been allowed to finance their operations with loans from overseas parent companies, the interest being tax deductible.

Although banks are the most obvious victims of the measure, because of the large amounts of capital they consume, many other types of company could suffer, including insurance companies, leasing companies, venture capital providers and even company HQs if they have been using London as a staging post for the onward financing of EU subsidiaries.

The chief financial officer of one large foreign bank told the Financial Times it would cost his bank and others like it UK£20m- 30m a year.

"For the smaller banks the number may be smaller but it is a much bigger issue. Some of them are seriously thinking about getting out of London. All the banks will lobby very heavily against this," he said.

There are about 750 foreign banks in London, although not all of them have branch status; and hundreds more financial operations of other types which could be affected.

The Chancellor booted into touch the proposed removal of tax privileges for non-domiciled foreigners in London, but this anti-branch measure may have been calculated to have about the same effect, with a mass exodus of bankers from London to friendlier centres if the Treasury sticks to its guns.

Ian Mullen, chief executive of the British Bankers Association, said: "This will massively increase the costs of foreign banks operating in the UK and have an adverse impact on jobs and the competitiveness of the City. To cherry-pick foreign banks will have a significant effect on London's unique position and adversely impact jobs and in the long term, lead to a loss in tax revenue."

In a letter to the Financial Times, Angus MacLennan, chairman of the Foreign Banks and Securities Houses Association, warned: "Modern technology and the increasing mobility of labour - which this government supports - is such that much of the business which is transacted or booked in the London branches of foreign banks can very easily be done or placed elsewhere."

The changes come into effect on January 1st 2003 and would generate UK£350m in the first year, says the Treasury, with the gain rising to UK£650m in the following year.

Well, yes, that's on the robust assumption that the foreign targets of this lunatic measure will remain stuck to their chairs like so many patient geese waiting to be plucked.

The fate of governments which spit in the face of foot-loose international financiers was demonstrated in the 1970s when the US attempted to tax international capital issues, and promptly lost the business to the Euromarkets; and again quite recently when the German government was forced to back down after a unilateral attempt to tax interest payments at source caused a immediate flood of capital to Switzerland.

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