Financial Resource

overseas loan contracts, and this would substantially increase the field in which evasion could take place. Admittedly, UK residents were already able to buy Euro-dollar bonds issued by UK companies, but for this purpose they must either pay the investment currency premium (which would make the investment unattractive) or evade the exchange control. Bonds issued in sterling currencies by UK companies would be more attractive to UK residents and it would be more difficult to counter evasion of tax on interest on such bonds .

Against these severe practical difficulties, the UK had to counter the possible benefits to the balance of payments and reserves of overseas borrowing in sterling area currencies. If the proposed additional facility did not increase the total amount of overseas borrowing, but merely replaced some foreign currency borrowing by some borrowing in sterling area currencies, this would be unwelcome. To the extent that the UK obtaining sterling area currency prevented the sterling area country concerned from an equivalent diversification of its reserves into foreign currency. The UK’s borrowing in this form would be as good as foreign currency borrowing. But the more likely situation would be that the sterling lending to the UK would be only partly an alternative to diversification and would mainly be offset by a reduction in sterling holdings .

There was however the question of the extent to which the additional facility would open the way to increased overseas borrowing. This was not easy to judge. There was no shortage of available funds for foreign currency borrowing, but an important element in the reluctance of potential UK borrowers to commit themselves was the exchange risk associated with foreign currency borrowing, particularly where the proceeds were to be used for domestic investment. It was thought that the deterrent effect of this risk would be smaller in the case of sterling area currency borrowing, but even this judgement was doubtful. The fact was that experience of the reaction of other countries to UK’s devaluation in November 1967 had demonstrated the probability that, on any future similar occasion, the stronger sterling area currencies would not move with UK sterling . Adding to this, the fact that the sterling area currencies which were most likely to be available for overseas borrowing are those of the countries in relatively strong balance of payments and reserves positions, such as Kuwait, it becomes rather doubtful whereas UK borrowers will in general see the additional facility of sterling area currency borrowing as being so attractive as to increase their overall willingness to borrow.

On balance, it seemed likely that the additional facility of borrowing in sterling area currencies would induce some switching by UK borrowers from foreign currency to sterling area currency which would be disadvantageous, and might be offset to some extent by willingness to borrow on a rather larger scale in this form. There certainly seemed to be no ground for thinking that the additional facility would create a substantially greater level of overseas borrowing, and it was concluded that it was not worth embarking on this against the background of substantial difficulties in tax evasion which would unavoidably be associated with it .

Loans for Non-Trade Activities

The third suggestion was a further extension of Section 22 concession to allow deduction for Corporation Tax purposes for interest paid on loans in support of other and general purposes, as well as the purpose of the borrowers’ trade already covered by Section 22.

Even if there were an argument on balance of payments grounds for making some further relaxation in the treatment of interest, there was no reason why the right to pay interest to non-residents gross should be extended beyond the field of borrowing for trade purposes. Overseas borrowing of money which will be used in a UK business, and thus tend to strengthen the whole UK economy, was one thing. Borrowing abroad and thereby placing a continuing burden on the current balance of payments for the purpose of, say, buying a villa at Cannes, was quite another. Restriction of the concession to loans for trade purposes meant that the concession was available for direct investment, but not portfolio, but it was far from clear that the UK wanted to encourage domestic portfolio investment by UK borrowers using foreign currency finance. The UK certainly did not want to encourage such borrowing to finance or facilitate the payment of import deposits, and indeed in general it seems untimely of such thinking of unrestricted access to foreign borrowing which might in many directions have interfered with attempts to control domestic credit .

D. Conclusion

The general conclusion was therefore negative on all three suggestions, which was open to strong objections of fiscal principle or practice and did not offer commensurate advantages. Levels of overseas borrowing by UK companies for domestic purposes had hitherto been modest. The joint judgement of Lever, the Inland Revenue and the Treasury was that tax differences have played little or no part, and that the most important influences had been fears of exchange risks on the one hand and relatively easy access to funds on the domestic market on the other. Therefore it was considered that there was no mechanical or technical changes which could usefully lead UK companies in the direction of greater borrowing abroad.

In response towards this, Lever recommended the following inclusion in the 1969 Finance Bill of a clause which would authorise the Treasury to direct, in respect of any specified loan raised by a local authority in the currency of a country outside the Scheduled Territories: firstly, that the interest should be payable without deduction of tax at source. Secondly, that it should be exempt from UK tax so long as the stock or bonds in question are held by a non-resident. Thirdly, that the Capital should not be subject to any present or future UK tax on capital where the beneficial owner was neither domiciled nor ordinarily resident in the UK .

The purpose of this clause was that it was in the “public interest” for nationalised industries and large authorities to borrow on the Euro-dollar market . The Chancellor of the Exchequer in his Budget Speech clarified this point and further explained that the proposed Finance Bill clause was designed to facilitate foreign currency borrowing by local authorities :

“A point which has been urged upon me from time-to-time is that some of our public authorities should be enabled to take advantage of funds available in the international capital markets for long-term borrowing, and in doing so bring support to our reserves. The House is aware that a number of nationalised industries are being encouraged in this direction, with the assistance of special arrangements which have been devised to relieve them of exchange uncertainties, and indeed the Gas Council has completed arrangements, and in part funds, from total borrowings of over £30m recently. I am anxious that this facility should be available to local authorities also, and I propose to include in the Finance Bill a clause which will remove a minor tax obstacle which at the moment prevents this”.

ENDNOTE

* Here are two very similar definitions of the term Euro-dollars:

Robert Gilpin, (The Political Economy of International Relations, Princetown University Press, 1987, p. 314-315), states that: The Euro-dollar market received its name from American dollars on deposit in European (especially in London) banks yet remaining outside the domestic monetary system, and the stringent control of national monetary authorities.

Enzig and Quinn (The Euro-dollar System: practice and theory of international interest rates, MacMillan Press, 6th edition, 1977, p. 1) state that: the Euro-dollar system is a term used to describe the market in dollar deposits and credits which exists outside the United States of America.

This paper is based on the following PRO files:

T 295/628: Tax Measures To Encourage Eurodollar Borrowing: (A) Payment Of Interest Gross On UK Bearer Bonds; (B) Allowance Of Annual Interest As A Deduction From Corporation Tax. (5/06/1968 – 8/01/69). File Number: 2FEC 123/76/01 “PART B”

T 295/560: Tax Measures To Encourage Eurodollar Borrowing: (A) Payment Of Interest Gross On UK Bearer Bonds;(B) Allowance Of Annual Interest As A Deduction From Corporation Tax. (10/01/69 – 30/04/69). File Number: 2FEC 123/76/01 “PART C”

T 295/628: Confidential letter on Euro-dollar borrowing for home investment, from Mr. D.A. Walker to Mr. Littler of the Treasury, on 5th June 1968.

Pages: 1 2 3 4 5

Tags: alternative, benefit, borrower, capital, Change, confine, connotation, consideration, difficulty, dollar market, euro dollar, Euro-bond, Eurodollar, Examining, finance, finance bill, foreign currencies, foreign currency, foreign currency denominated bond, uk, google commercial jobs, home investment, income, inland revenue, interest, interest payments, lend money, loan, local authorities, London, loophole, market, maximum, pension corporation, Pledge, policy, possibility, proposed, public sector, rate structure, regard, sense, shell business principles, shell oil reserves, shell operations jobs, simplicity, status, sterling, stock, Tax, tax incentive, tax purposes, time, uk government, uk sources, uk treasury, unsatisfactory, withholding tax