Mark Hoban, the financial secretary to the Treasury, on Thursday published draft legislation on the government’s proposed Bank Levy to come into effect on January 1 2011.
He said the levy, which is expected to generate £2.5bn of annual revenues by 2012-2013, had two objectives: ensuring that banks “make a fair contribution in respect of the potential risks they pose to the UK financial system and wider economy” and to incentivise banks “to make greater use of more stable financial sources, such as long term debt and equity”.
The levy, which was first outlined in June, will work by taxing the global consolidated balance sheets of UK banking groups and building societies, the aggregated subsidiary and branch balance sheets of foreign banks and the balance sheets of UK banks in non-banking groups.
However, according to the consultation documents published alongside the draft legislation, all the banks and trade bodies to have responded to the consultation were concerned by “double taxation”.
France had set out its plans for a bank levy as part of its budget in September, while Germany's plans are currently working their way through the country's parliament. Sweden already has a bank levy, while Hungary, Portugal and Austria have set out plans to introduce a levy. A Treasury spokeswoman said the government welcomed other countries introducing the levy.
As other countries impose similar taxes, UK bank’s could potentially be forced to pay tax on its global balance sheet to the UK government, and tax on its subsidiary balance sheets in other countries, creating a double taxation. One respondent said that subsidiaries and branches should only be taxed in the country of their parent, provided an equivalent bank levy is in place.
"All banks and trade bodies raised the issue of a risk of double taxation as other jurisdictions introduce their own levies and suggested that the scope of the Levy should be aligned with the French or German levies ", according to the consultation response document.
Banks to have responded to the consultation document included UK-based Barclays, Royal Bank of Scotland, HSBC and Standard Chartered as well as foreign-based Citigroup, JP Morgan, Nomura and Société Générale.
In a statement, trade body British Bankers' Association said: "Questions are being raised about the UK proposing to apply tax to a global balance sheet. The Treasury’s statement is largely silent on how this levy would interact with taxation in other countries.
“Until this is clearer, some banks could be taxed multiple times by multiple jurisdictions on the same activities. There is also no international consensus on how banking activities should be taxed: the G20 members still hold very different views."
A spokeswoman for the Treasury said the institution was talking to international partners on double-tax relief.
Matthew Barling, UK banking tax partner at PwC in London said in an emailed statement: "The draft legislation deals with the critical issue of double taxation, although the precise way in which this will work in practice remains unclear given the wide variety of bank levy regimes being introduced in other countries. The announcement that the Government is continuing to explore with international partners the potential introduction of a Financial Activities Tax on top of the Bank Levy will be of concern to the banking sector."
However, the Treasury document insisted it remained "of the view that the broad scope of the application of the levy to UK and foreign banking groups properly reflects the nature of the risks that the banking sector poses to the UK financial system and wider economy. "
The government added that, as a matter of competition policy, it was important to ensure the levy did not create a competitive distortion between banks operating in competition to each other in UK markets.
Meanwhile, one respondent to the consultation said the scope should be expanded to include hedge funds, while the banking sector trade bodies suggested that the levy could be applied to a wider base of financial market participants.
Aspects of the levy to have been changed post-consultation includes a condition on defining a banking group whereby companies where more than 50% of the group’s activities are non-financial are excluded from the levy. In addition, details on derivatives netting and deductions for high quality liquid assets were set out.
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