Base Erosion Profit Shifting (BEPS) for financial services companies
Published in Finance Dublin magazine
From an FS perspective, BEPS poses opportunities and threats for the industry. The transparency of our 12.5% tax rate, the robustness of our tax framework and the substance of many of the financial operations here will all count in our favour in the changing landscape. The real challenge around Ireland’s positioning in a post BEPS environment is ensuring that we respond appropriately in dealing with the issues that BEPS is aiming to address, whilst ensuring that our tax framework adopts a holistic approach, with the 12.5% tax rate being a key plank of our strategy.
From an FS perspective the key BEPS action items include Action 2 on hybrid mismatches, Action 6 on Treaty abuse and various action items on transfer pricing.
Neutralising the effect of hybrid mismatch arrangements so that a deduction is not claimed in one country if the receipt is not taxed in the other, or ensuring double deductions are not obtained, seems reasonable. However, when one looks at the proposal details some of the focus such as having a 10% ownership threshold for related party transactions are unworkable in a commercial context in the FS industry. The practicalities of trying to obtain the relevant ownership information and then monitor it (with nominee structures, and generally how the capital markets work), causes issues. Other possible outcomes such as the removal of the effective management test for residency purposes would not be welcomed. On the other hand, wholly/partly transparent structures are an opportunity for Ireland given our tax transparent regulated fund structure, the CCF, particularly if a more pragmatic approach to treaty access such as self-certification was introduced.
Regarding Action 6, while there is merit in ensuring treaty benefits are only applied in appropriate circumstances, when one considers the cross border nature of financial services and the range of industries involved (funds, banking, insurance, structured finance, leasing), it is the Treaty abuse agenda that has the potential to do most damage to Ireland’s FS industry. For example, if a limitation on benefits clause is adopted then this could result in Irish funds not getting treaty access, which would be catastrophic. It would appear that the OECD review, carried out in 2010 regarding the taxation of collective investment vehicles (which was positive in the context of funds obtaining treaty access), had been forgotten when drafting the proposals on Action 6. While this omission has been acknowledged by the OECD, such unintended consequences would cause serious collateral damage. For this reason we would urge the funds industry to continue to lobby on this issue. At Deloitte, we are feeding in our own commentary on the importance of finding a solution on this matter.
From a transfer pricing perspective, Actions 8 to 10, which seek to ensure that transfer pricing outcomes are in line with value creation, are of relevance for financial service companies. In addition Action 13 on transfer pricing documentation will result in changes in the documentation to be provided to tax authorities to ensure they will be able to see the “big picture” view of a taxpayer’s global operations and value chain.
While it could seem that BEPS is to be feared, there is a great opportunity in Ireland to ensure that the debate around BEPS is a holistic one with a coordinated strategic approach. In addition, our existing tax framework is an excellent base to position Ireland as a country that has substance and transparency around its tax regime and can benefit from the post BEPS environment. While there are uncertainties out there, the debate has still quite a bit to run and it is up to all FS companies and advisors to participate to shape our future.