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FOREIGN GOVERNMENTS SHOULD RETAIN BLANKET WITHHOLDING TAX EXEMPTION.

AUG. 26, 1988

FOREIGN GOVERNMENTS SHOULD RETAIN BLANKET WITHHOLDING TAX EXEMPTION.

DATED AUG. 26, 1988
DOCUMENT ATTRIBUTES
  • Authors
    Kentfield, G. E. A.
  • Institutional Authors
    Bank of England, London
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    gross income from sources within the United States
    source rules
    interest income
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 88-7514
  • Tax Analysts Electronic Citation
    88 TNT 184-31

 

=============== SUMMARY ===============

 

G.E.A. Kentfield of the Bank of England, London, has written that the reporting regulations under section 892 are unworkable with respect to U.S. securities held by the British government. Kentfield says that the regulations would require the bank (as the government's agent) to file with the withholding agents details for each individual security of the amount of income to be received in each taxable year, before that income becomes payable. Kentfield further contends that the bank would not be able to comply with this aspect of the regulation, since it cannot ascertain its income from coupons before the close of the tax year.

The proposals are unworkable unless, says Kentfield, the reporting of exempt income could be made after its receipt. Even if the regulations are modified to enable the retrospective notification of security-specific details of income, they would result in a significant increase in the bank's workload and its operating costs.

 

=============== FULL TEXT ===============

 

August 26, 1988

 

 

Commissioner of Internal Revenue

 

(Attn: CC:LR:T, INTL-285-88)

 

Washington, D.C. 20224

 

 

FROM: George W. Ryan

 

Vice President

 

Federal Reserve Bank of New York

 

Foreign Relations Department

 

 

Comments: Copy of authenticated message received today by this Bank

 

from the Bank of England, London, containing comments on

 

temporary Income Tax Regulations relating to current

 

taxation of income of foreign governments from investment

 

sources within the U.S. 26 CFR Parts 1 and 602.

 

 

Dear Sir:

Thank you for your letter of 11 August 1988 concerning the proposed income tax regulations issued by the Internal Revenue Service.

Owing to the short deadline for responding to these proposals we have not had the opportunity to seek expert advise from tax or legal advisers, as we would have wished. However, we wish the following comments to be submitted to the Commissioner of Internal Revenue.

Under current arrangements, tax exemption on U.S. securities managed by the Bank of England on behalf of Her Majesty's Government, is granted on the basis of an exemption certification. This exemption applies to all securities held and traded by the Bank as agents for HMG.

Our interpretation of the new proposals is that we will be required to file with our withholding agents (which we understand to mean brokers and securities houses) details for each individual security of the amount of income to be received in each taxable year, before that income becomes payable. Unfortunately, we do not see how this regulation could be complied with, because the holdings of U.S. securities which we manage form part of the U.K.'s foreign exchange reserves, whose size, currency composition and pattern of individual holdings are determined by a variety of market related factors which cannot be predicted. It is thus impossible to predict with complete accuracy what our income from coupons will be.

The proposals would therefore be unworkable unless the reporting of exempt income could be made after its receipt. However, even if the proposals were modified in such a way as to permit the retrospective notification of security-specific details of income, this would, based on the number of different securities held and the past volume of transactions, represent a considerable increase in our workload, well in excess of the Department of the Treasury's estimate of 15 hours per annum.

It is not clear from the proposals whether details of income to be filed are to include accrued coupon interest, which, in accordance with standard market practice, is included in the total costs or proceeds of all securities transactions.

According to paragraph 1.892-3T(2), income from investments is defined as including gains from their disposition and income earned from engaging in securities lending transactions. If details of this category of income are required to be submitted, in addition to coupon payments, this would raise questions concerning the accounting treatment of profits and losses in securities trading, for which there are many alternative approaches and no generally accepted standard.

In summary, we submit that the tax proposals, as drafted, would present considerable difficulties. Even if modified to permit retrospective reporting, the proposals would result in a significant increase in our workload and hence in our operating costs. There are important ambiguities concerning the definition of income to be included in the statement claiming exemption, regarding firstly accrued coupon interest and secondly capital gains and losses. In view of the fact that the bank's status as an agent for Her Majesty's Government is not the point at issue and remains constant, a comprehensive exemption from US withholding tax, such as we have enjoyed for several decades, would seem to be the most practical method of implementing the regulations, since in essence these remain unchanged with regard to the tax exempt status of foreign governments.

Yours faithfully,

 

 

G. E. A. Kentfield

 

Deputy Chief

 

Banking Department

 

Bank of England, London
DOCUMENT ATTRIBUTES
  • Authors
    Kentfield, G. E. A.
  • Institutional Authors
    Bank of England, London
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    gross income from sources within the United States
    source rules
    interest income
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 88-7514
  • Tax Analysts Electronic Citation
    88 TNT 184-31
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