BEPS from a private client perspective

Certain aspects of the BEPS project will affect Irish individuals and business owners, privately held Irish corporations, and global families and their private wealth structures, including the following:

1. Accessing treaty benefits (e.g. no capital gains tax protection, preferential withholding tax rules)
2. Denial of interest deductions affecting financial arrangements
3. Increased tax exposures
4. Additional reporting obligations/compliance burdens and costs
5. Increase of taxation audits and taxation under worldwide income systems
6. More-effective cross-border dispute resolution through improvement of the mutual agreement procedure.

In Part I of this three-part series on the impact of BEPS on private clients, we considered the changes being proposed to the transfer pricing rules under the BEPS project. Part II went on to focus on the changes being made to the rules on permanent establishments and the ‘trigger points’ that have the potential to create a foreign tax exposure for Irish entrepreneurs with a presence in more than one country.

The third and final part of this three-part article focuses on other international tax issues emerging as a result of the BEPS project that have a potential impact for private clients.

Strengthening of controlled foreign company (“CFC”) rules

The recommendations under the BEPS project in relation to CFCs outline ‘building blocks’ for the design of a CFC regime and outline international best practices. According to the OECD, the definition of a CFC could extend to partnerships, trusts and permanent establishments treated as taxable entities separate from their owners.

The impact these changes may have on global families is two-fold. Firstly, these CFC rules may create new tax exposures for global families with controlling family members based in different jurisdictions, whereby certain notional income or gains could be attributed to family members based abroad. Secondly, the new CFC rules may result in additional reporting obligations with an enhanced compliance burden and associated costs and they should therefore be borne in mind.

By way of example of how these new rules may have an impact on certain global families, take the following fact pattern: Consider a member of a global family with a small percentage shareholding of an investment company who emigrates to a country that has broader CFC rules that apply to individuals than the rules that had applied in the previous jurisdiction of residence. The new rules may apply to this fact pattern to create unexpected tax exposures and reporting obligations in the other country.

Treaty abuse

The OECD’s work on treaty abuse will ultimately result in treaty provisions and domestic rules to prevent the granting of treaty benefits in certain circumstances. The potential impact on global families may, in certain circumstances, extend to the denial of capital gains tax protection on certain disposals, the denial of preferential withholding tax rates, and the denial of access to the mutual agreement procedure to resolve disputes with foreign tax authorities.

Take the example of passive income-generating companies with no real activities or conduit companies. Going forward, these types of companies may find it difficult to rely on certain treaty benefits where the relevant tax authorities question the motives behind particular transactions.

Dispute resolution

The OECD’s work on dispute resolution is aimed at improving the mutual agreement procedure and providing for mandatory and binding arbitration to resolve disputes between tax authorities.

From a private client perspective, one area where such enhancements to the dispute resolution procedure may have an impact is in the area of disputes of dual residency of family members, which are currently relatively subjective and which can result in prolonged uncertainty and periods of double taxation where a conclusion cannot be agreed between the tax authorities concerned.

Conclusion

In this, the last of a three-part series of articles, we highlight certain other areas that should be considered as part of an overall tax strategy for private clients operating in a post-BEPS era. Separate to the OECD’s BEPS project, other areas likely to have an impact and which are aligned to and underpin the measures to be introduced as a result of the OECD’s BEPS project are the changes that may arise on foot of the EU’s Anti-Tax Avoidance Directive and/or changes introduced into Irish domestic tax law as part of the annual Budget.

In our view, in an era of unprecedented change in the global tax environment it will be fundamental to the success of any well-thought-out tax strategy that these three dimensions of the evolving international tax landscape are taken into account in identifying opportunities and navigating areas of risk.