Understanding the implications of the 'bank bonus tax': a Q&A
The UK Government introduced a new bank payroll tax in its 2009 Pre-Budget Report that will impact companies within the banking sector. The 'bank bonus tax' – a 50 percent charge on discretionary bonuses exceeding $25,000 – will apply to bonuses issued between 9 December 2009 and 5 April 2010. Read on for answers to some frequently asked questions about this tax.
Q: What organizations are affected by the bank payroll tax?
A: The tax applies to banks and companies that offer financial and lending services operating in the UK, as well as members of their groups that are UK-resident investment companies or UK-resident financial trading companies. Banking groups must identify the subordinate companies to which this measure applies. According to the UK HM Revenue & Customs (HMRC), the tax only applies to:
- Deposit takers
- Full-scope BIPRU 730k investment firms (firms authorized by the UK Financial Services Authority to conduct regulated financial activities in the UK), if they are wholly or mainly engaged in the following “relevant regulated activities”:
- Accepting deposits
- Dealing in investments as principal or agent
- Arranging deals in investments
- Safeguarding and administering investments on behalf of clients
- Carrying out retail mortgage lending
Q: What companies are excluded from the bank payroll tax?
A: Companies with the following characteristics are excluded for bank payroll tax purposes:
- A company in a group that is not a deposit taker and is only carrying on relevant regulated activities on behalf of an insurance company in the same group
- A company that does not carry on any relevant regulated activities other than as a manager of a pension scheme
- A company whose activities consist wholly or mainly of acting as the operator of a collective investment scheme
- An exempt BIPRU commodities firm
- Prime brokers who are full-scope BIPRU 730k firms
- Non-banking financial services groups incorrectly characterized by the rules as “banking groups” simply because the group structure includes a company with banking activity, even though that is a minor activity with the group as a whole
Q: What types of bonuses fall under the purview of the bank payroll tax?
A: The tax only applies to discretionary bonuses paid by such firms for “relevant banking employees” whose duties are mainly or wholly related to the “relevant regulated activities” mentioned above. Discretionary bonuses include all earnings or employment benefits other than salaries, wages, shares or share options awarded under an approved share incentive or qualifying share option plan.
Q: How does the tax affect the effective tax rate?
A: The tax is non-deductible for UK corporation tax purposes and will adversely impact the effective tax rate.
Q: What will this tax mean for transfer pricing purposes?
A: The issue that arises is whether the costs related to the UK bank payroll tax may be shared globally among all major participants in a global profit split arrangement, or if the costs should be borne solely by the participating entity in the UK. Ultimately, this will be determined by the facts and circumstances and may include payroll tax costs in the general cost base before residual profits are allocating, thereby being deductible in the country that is allocated such costs to the extent such costs would be deductible under local law.
Q: Will a markup on allocable costs be required?
A: These costs could arguably be regarded as pass-through costs, since they bring no value-add to the services provided and are potentially a one-time interim charge. However, it may be best to further support this argument by leaving these UK bank payroll tax-related expenses in the cost base with the application of certain adjustments to arrive at a lower markup as compared to the benchmark companies that did not have such costs.
Similar windfall-type taxes on financial services companies are currently being considered by the US and French governments as well. Visit ey.com often to stay informed about bank payroll tax news and updates.
For additional news about the bank payroll tax, download our March FSTP Worldwide newsletter.