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By Ben Stupples
Oct. 19 — The U.K.’s tax authority will extend the existing tax treatment of securitization companies for the next two decades, partly to boost the country’s competitiveness as a global finance center.
The existing corporate tax regime for U.K. securitization companies was due to expire next year, but the current tax treatment—which reduces volatility in securitization firms’ profits—will now continue until 2037, Her Majesty’s Revenue and Customs said in draft legislation published Oct. 19.
“This measure supports the government’s objectives of improving the competitiveness of the U.K. as a financial center and reducing the administrative burden of taxation,” HMRC said in a policy paper on the legislation. “It will enable the existing Corporation Tax treatment to continue and so remove an area of uncertainty and ensure these companies aren’t subject to an inappropriate tax charge.”
The U.K.’s securitization market is one of the largest and most developed in Europe, as well as an important source of finance for U.K. businesses. Often used by banks, insurance companies and hedge funds, securitization is the process in which debt-based assets—such as mortgages—are pooled together and then re-packaged into interest-bearing securities for investors to purchase.
With almost a third, the U.K. held the largest share of Europe’s 1.4 trillion euro ($1.5 trillion) securitization market in 2014, according to the Association for Financial Markets in Europe.
The U.K.’s securitization companies are exempt under the existing tax regime from International Accounting Standards, which were introduced by the British government in 2005 and would have increased volatility in securitization firms’ taxable profits due to factors such as interest rate movements.
Instead of the international standards, U.K. securitization companies are taxed based on generally accepted accounting principles as of Dec. 31, 2004. This exemption reduces the volatility in earnings for securitization firms by taxing them on their cash profits, which in turn makes it easier for rating agencies such as Moody’s Corp. to rate their debt—a key aspect of any pooled securitized asset.
HMRC has been consulting with the U.K.’s securitization industry on how to modernize the taxation of the securitization sector since October 2015, it said in an explanatory note to the draft legislation.
“Discussions with the consultative group and other professional firms confirmed that it would be better to extend the interim regime for a further 20 years, instead of allowing it to expire,” HMRC said, adding that it didn’t consider that a formal consultation on the changes was appropriate.
Barclays Bank Plc uses U.K.-based investment vehicles that securitize both residential mortgages and credit card interest payments, according to data compiled by the Bank of England. Deutsche Bank AG, meanwhile, uses an investment vehicle in the Channel Islands that securitizes corporate loans.
Popular for their stability, securitized assets first became popular during the 1970s in the U.S. when government-backed agencies pooled mortgages. Yet the sup-prime mortgage crisis that erupted four decades later in the same country has led to controversy over securitized assets and multi-billion dollar fines for U.S. banks, such as of JP Morgan Chase & Co. and Bank of America Corporation.
Over the past month, Deutsche Bank’s shares have slumped to a record low after the U.S. Justice Department requested $14 billion to settle a probe tied to residential mortgage-backed securities.
The extended regime for the U.K.’s securitized companies will come into force in December 2016, HMRC said in the policy paper published alongside the Oct. 19 draft legislation. The new rules are being implemented through a statutory instrument, a form of legislation which allows the provisions of an act of Parliament to be introduced or altered without Parliament having to pass a new act.
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HMRC’s policy paper is at https://www.gov.uk/government/publications/corporation-tax-extension-of-interim-securitisation-regime/corporation-tax-extension-of-interim-securitisation-regime#detailed-proposal.
The draft legislation is at https://www.gov.uk/government/publications/draft-legislation-securitisation-companies-application-of-section-831-of-the-finance-act-2005-accounting-standardsamendment-regulations-2016.
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