HSBC 2007 Annual Report Download - page 461

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Taxation of dividends
Currently no tax is withheld from dividends paid by
HSBC Holdings. However, dividends are paid with
an associated tax credit which is available for set-off
by certain shareholders against any liability they
may have to UK income tax. Currently, the
associated tax credit is equivalent to 10 per cent of
the combined cash dividend and tax credit, i.e.
one-ninth of the cash dividend.
For individual shareholders who are resident in
the UK for taxation purposes and liable to UK
income tax at the basic rate, no further UK income
tax liability arises on the receipt of a dividend from
HSBC Holdings. Individual shareholders who are
liable to UK income tax at the higher rate on UK
dividend income (currently 32.5 per cent) are taxed
on the combined amount of the dividend and the tax
credit. The tax credit is available for set-off against
the higher rate liability, leaving net higher rate tax to
pay equal to 25 per cent of the cash dividend.
Individual UK resident shareholders are not entitled
to any tax credit repayment.
Although non-UK resident shareholders are
generally not entitled to any repayment of the tax
credit in respect of any UK dividend received, some
such shareholders may be so entitled under the
provisions of a double taxation agreement between
their country of residence and the UK. However, in
most cases no amount of the tax credit is, in practice,
repayable.
Information on the taxation consequences of the
HSBC Holdings scrip dividends offered in lieu of the
2006 fourth interim dividend and the first, second
and third interim dividends for 2007 was set out in
the Secretary’s letters to shareholders of 3 April,
30 May, 29 August and 5 December 2007. In each
case, the difference between the cash dividend
foregone and the market value of the scrip dividend
did not equal or exceed 15 per cent of the market
value and accordingly, the price of HSBC Holdings
US$0.50 ordinary shares (the ‘shares’) for UK tax
purposes for the dividends was the cash dividend
foregone.
Taxation of capital gains
The computation of the capital gains tax liability
arising on disposals of shares in HSBC Holdings by
shareholders subject to UK capital gains tax can be
complex, partly depending on whether, for example,
the shares were purchased since April 1991, acquired
in 1991 in exchange for shares in The Hongkong and
Shanghai Banking Corporation Limited, or acquired
subsequent to 1991 in exchange for shares in other
companies.
For capital gains tax purposes, the acquisition
cost for ordinary shares is adjusted to take account of
subsequent rights and capitalisation issues. Further
adjustments apply where an individual shareholder
has chosen to receive shares instead of cash
dividends, subject to scrip issues made since 6 April
1998 being treated for tax as separate holdings. Any
capital gain arising on a disposal may also be
adjusted to take account of indexation allowance
and, in the case of individuals, taper relief. Except
for gains made by a company chargeable to UK
corporation tax, any such indexation allowance is
calculated up to 5 April 1998 only.
Changes to capital gains tax have been
announced that will apply to disposals of shares with
effect from 6 April 2008. The proposals are expected
to be confirmed by the Chancellor of the Exchequer
in his budget due on 12 March 2008. The proposals
include:
• shares will no longer be treated as separate
holdings but pooled, the consequence of which
is the tax basis of disposals will be calculated on
the average cost of the shares held;
• indexation allowance is withdrawn;
• Taper Relief is withdrawn; and
• a single tax rate of 18 per cent will apply to all
gains.
If in doubt, shareholders are recommended to
consult their professional advisers.
Inheritance tax
Shares or ADSs held by an individual whose
domicile is determined to be the US for the purposes
of the United States-United Kingdom Double
Taxation Convention relating to estate and gift taxes
(the ‘Estate Tax Treaty’) and who is not for such
purposes a national of the UK will not, provided any
US Federal estate or gift tax chargeable has been
paid, be subject to UK inheritance tax on the
individual’s death or on a lifetime transfer of shares
or ADSs except in certain cases where the shares or
ADSs (i) are comprised in a settlement (unless, at the
time of the settlement, the settlor was domiciled in
the US and was not a national of the UK), (ii) is part
of the business property of a UK permanent
establishment of an enterprise, or (iii) pertains to a
UK fixed base of an individual used for the
performance of independent personal services. In
such cases, the Estate Tax Treaty generally provides
a credit against US Federal tax liability for the
amount of any tax paid in the UK in a case where the
shares or ADSs are subject to both UK inheritance
tax and to US Federal estate or gift tax.