BEPS: What does it mean for funds and asset managers? Client Seminar Martin Shah René van Eldonk Malcolm Richardson, M&G 10 March 2015
Overview Background to and progress to date of BEPS Action Plan More in-depth look at most relevant Action Points: Treaty abuse (Action 6) Hybrid mismatch arrangements (Action 2) Interest deductions (Action 4) PE Status (Action 7) Transfer Pricing (Actions 8 to 10) Country by country reporting (Action 13) Harmful Tax Practices (Action 5) Practical implications for funds and asset managers What next? 1 / L_LIVE_EMEA1:25345279v2
What is happening? Increasing political (and public) interest in tax avoidance, notably Google, Starbucks etc. G20 directive to the OECD to produce an action plan on Base Erosion and Profit Shifting ( BEPS ) On 19 July 2013 the OECD published its Action Plan on Base Erosion and Profit Shifting with 15 action points Political agreement that better rules need to ensure profits are taxed where economic activities generating profits are performed Overarching themes: Transparency (more information and more automatic information exchange) Substance (tax follows real activities) Coherence (avoiding double non-taxation) Fairness (reputational issues) 2 / L_LIVE_EMEA1:25345279v2
What is BEPS? Base erosion exploit gaps and mismatches in tax rules to make profits disappear through tax structuring Profit shifting moving profits to jurisdictions where there is little or no real activity but the taxes are low Whilst not illegal, in most cases BEPS strategies take advantage of loopholes and mismatches to distort competition and create competitive advantages On 16 September 2014 OECD published reports on first seven deliverables Remainder of deliverables to be addressed by end of 2015 Initial focus on large multinationals, but changes introduced will affect all business operating cross-border 3 / L_LIVE_EMEA1:25345279v2
BEPS Action Points The OECD s Action Plan identifies 15 action points These action points can broadly be broken down into two areas issues of globalisation (challenges of the digital economy, treaty abuse, avoidance of PE status, hybrid mismatch arrangements, CFC rules, interest deductions and other financial payments, counter harmful tax practices, revisit transfer pricing methods) information gathering (establishing methodologies to collect and analyse data on BEPS and the actions to address it, transfer pricing documentation requirements, CbC reporting requirements, obligations to report aggressive tax planning) Parallel action on OECD Common Reporting Standard global FATCA Also action by EU Commission to implement BEPS within EU And unilateral actions UK s diverted profits tax and consultation on hybrid mismatches 4 / L_LIVE_EMEA1:25345279v2
Funds and BEPS: Treaty abuse (Action Point 6) September 2014 report suggested measures to prevent double tax treaty treaty shopping (ie structuring transactions through entities in advantageous jurisdictions) and use of conduit companies: US style limitation on benefits (LOB) clause and/or general principal purpose test (PPT) to operate where an arrangement has, as its main purpose, the obtaining of treaty benefits. Further November 2014 discussion draft with discussion on the treatment of funds under the proposed LOB clause Outcome of January 2015 public discussions? Ability to apply for treaty status provided entity can show it is not established or maintained principally to obtain treaty benefits? LOB rule in EU may infringe fundamental freedoms? 5 / L_LIVE_EMEA2:10926425v1
Funds and BEPS: Hybrid mismatches (Action Point 2) September 2014 report contained: recommendations for domestic rules to neutralise the effect of hybrid mismatch arrangements and changes to the OECD Model Tax Convention to address such arrangements Autumn Statement 2014 consultation on the UK Government s introduction of new UK legislation to give effect to the OECD approach from 01 January 2017 Restricting use of hybrids may have impacts on: Use of hybrid financial instruments / entities for financing Choice of investments 6 / L_LIVE_EMEA1:25345279v2
Funds and BEPS: Interest deductions (Action Point 4) December 2014 public discussion draft set out different options for BEPS approaches to interest payments Discussion draft rejected argument that arm s length approach to interest deductions is sufficient on its own to deal with the use of interest in base erosion and put forward other options: a fixed ratio approach a group-wide interest allocation rule Scope of Action 4 is to develop recommendations regarding best practices only (except in relation to transfer pricing) Challenges to use of leverage in fund structures eg PE / Real estate 7 / L_LIVE_EMEA1:25345279v2
Funds and BEPS: PE status (Action Point 7) October 2014 public discussion paper: Redefining the preparatory and auxiliary activities exception Reviewing agency and commissionaire arrangements Possible impact on marketing activities? Implications for offshore manager/onshore adviser structures? Any implications for use of servers (overlap with Action 2, Digital Economy)? Broader focus on location of customer base? Location of investors? Scope of UK proposed DPT to impose PE where avoidance arrangements present 8 / L_LIVE_EMEA1:25345279v2
Funds and BEPS: Transfer pricing (Action Points 8-10) In addition to the September 2014 report on transfer pricing issues in relation to intangibles: November 2014 discussion draft on proposed changes relating to low value-adding intra-group services December 2014 discussion draft on the use of profit splits in the context of global value chains Greater emphasis on where functions are actually carried out and where people are located, rather than the location of assets and risk Focus on unjustified fragmentation of activities Reducing the scope for erosion of the tax base through excessive management fees and head office expenses Small mark-up on cost for intra-group low value-adding services such as: legal, tax, accounting, auditing, IT services and other general services of an administrative or clerical nature 9 / L_LIVE_EMEA1:25345279v2
Funds and BEPS: CbC (Action Point 13) September 2014 report - require MNEs to report annually and for each tax jurisdiction in which they do business: revenue, profit before income tax and income tax paid and accrued total employment, capital, retained earnings and tangible assets in each jurisdiction identify each entity doing business in a particular tax jurisdiction and provide an indication of the business activities each entity engages in Reports to tax authorities only (not public but note political calls for public disclosure) February 2015 Guidance on the Implementation of CbC Reporting: recommended threshold of 750m Euros annual consolidated group revenues reporting to commence from 31 December 2017, covering the first fiscal year beginning after 01 January 2016 10 / L_LIVE_EMEA1:25345279v2
Funds and BEPS: Harmful tax practices (Action Point 5) September 2014 interim report includes: New focus on substantial activity requirement Framework for compulsory spontaneous exchange on rulings related to preferential regimes (ie rulings that are specific to an individual taxpayer) Next steps in 2015 will include: More work on the substance requirement, especially in the context of IP Extending compulsory automatic exchange on rulings related to preferential regimes involving general rulings Extending participation to non-oecd jurisdictions NB: EU Commission work on legislative proposal for the automatic exchange of information on tax rulings 11 / L_LIVE_EMEA1:25345279v2
Funds and BEPS: Dutch perspective (1) Netherlands feels that it has own responsibility to act and to prevent improper use of double tax treaties by Dutch holding, finance and IP platforms Dutch actions in 2014 included introducing minimum substance requirements for finance and IP platforms, as well as information exchange with relevant foreign tax authorities if minimum substance requirement are not met and offering to add anti-abuse provisions into Dutch treaties with 23 double tax treaty partners mainly in developing countries Netherlands emphasis is that further actions to combat undesirable, aggressive tax planning under BEPS should be taken by ALL states, so that there will be a level playing field between states and taxpayers 12 / L_LIVE_EMEA1:25345279v2
Funds and BEPS: Dutch perspective (2) Netherlands feels that there is a need to recognize that Funds, and the holding, finance and IP platforms beneath Fund vehicles, could lose ALL double tax treaty benefits under the current LOB provision and purpose test proposals - which requires further consideration Possible approaches include: CIVs and certain non-civs funds are not subject to, or are deemed qualified persons under, LOB provision or purpose test or on-shoring Funds from typical offshore jurisdictions (Bermuda, Caymans, Guernsey, Jersey) to onshore jurisdictions (Ireland, Luxembourg, Netherlands), with the Fund, management of the Fund and holding, finance and IP platforms beneath the Fund in one single jurisdiction Netherlands like other EU Member States will implement amendments to EU Parent Subsidiary Directive by 31 December 2015 to prevent the use of hybrid mismatches and to introduce certain general anti-abuse provisions. The latter will affect holding platforms beneath Fund vehicles in that it will become more difficult to apply dividend withholding tax exemption. Netherlands double tax treaty network with other EU Member States provides for fall back scenario for the time being in terms of exemption from, or reduction of, dividend withholding tax 13 / L_LIVE_EMEA1:25345279v2
BEPs risk in the products Distribution - Investors - Investor reporting in new markets (Swiss, Belgium) - BEPS- Action 13 Distribution Marketing - Branch v subsidiaries (Austria, France, Spain, LatAM) BEPS Action 7 & 13 Global reporting - FATCA - CRS - BEPS Action 13 Fund Operational - CGT compliance/ accruals - CT returns BEPS - Action 6: Treaty abuse - Action 2: Hybrids - Action 4: Interest deductibility Tax treaties - Germany - Switzerland - US - BEPS- Action 6 14
Fixed Income funds Investors Guernsey LP Lux Securitisation vehicle Debt investments Investors Irish s110 company Tax deductible distributions Interest income Tax deductible distributions Interest income Structure has been designed to be tax efficient through the use of an Irish/Luxembourg vehicle which has access to tax treaties. Income received is subject to margin tax in Ireland/Luxembourg but substantially all income is distributed. Action 2&6 looks to: challenge situations where treaty benefits are claimed inappropriately. E.g. where the claimant is not the beneficial owner of the income Prevent mis-matches which provide for deductions in one jurisdiction and not taxable in another jurisdiction But what happens where the investor would have got treaty access in the first place and the vehicle is just used for pooling? Debt investments 15 Source: [Arial Italic 8pt]
Risks Increased uncertainty in structures Higher tax drag on funds due to removal of treaty benefits Reputational risks of locating in certain jurisdictions Greater reporting requirements and public disclosure 16
Practical implications: overview Impact on fund/management structuring Hybrid mismatches PE issues Transfer pricing of related party payments Impact on investments Hybrid mismatches Treaty abuse/anti-treaty shopping both on holding vehicles and funds per se (withholding and other taxes) Impact on investors Treaty abuse/anti-treaty shopping issues (withholding and other taxes) Administrative/cost issues Country by country reporting admin burden Greater focus on transfer pricing and methodologies 17 / L_LIVE_EMEA1:25345279v2
BEPS: Long term outcomes? Place of taxation Treaty shopping based structures under pressure Shift to more source based approach to taxation? Transfer pricing More focus on substance, people and real activities Capital and risk reduced importance (intra-group) Greater information exchange under CbC and transfer pricing documentation Financing Impact on capital structuring (including use of hybrids) Impact on interest deductions? Anti-avoidance Greater focus on anti-avoidance generally Simmons & Simmons LLP 2014. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities. 18 / B_LIVE_EMEA1:1865339v1
BEPS: What s next? G20 communiqué of September 2014 significant progress achieved Ongoing discussions on initial seven deliverables Commitment to balance of deliverables by end of 2015 Political will and public pressure GFC in context Renewed focus on developing nations and commitment to three new related actions OECD CRS implementation plan release early adopters by 2017 others aiming for 2018 although still some uncertainty around implementation Multilateral instrument? Position of the USA? 19 / L_LIVE_EMEA1:25345279v2
BEPS: 2015 Deliverables October 2015 Recommendations regarding the design of domestic CFC rules (Action 3) Recommendations regarding the design of domestic rules to limit base erosion via interest deductions and other financial payments (Action 4) Strategy to expand harmful tax practices forum participation to non-oecd members (Action 5) Tax treaty measures to prevent the artificial avoidance of PE status (Action 7) Changes to the transfer pricing rules in relation to risks and capital, and other high-risk transactions (Actions 9 and 10) Recommendations re data collection on BEPS and methodologies to analyse it (Action 11) Recommendations re the design of domestic rules to require taxpayers to disclose aggressive tax planning arrangements (Action 12) Tax treaty measures to make dispute resolution mechanisms more effective (Action 14) December 2015 Changes to the transfer pricing rules to limit base erosion via interest deductions and other financial payments (Action 4) Revision of existing criteria to counter harmful tax practices more effectively (Action 5) The development of a multilateral instrument (Action 15) 20 / L_LIVE_EMEA1:25345279v2
Round up/q&a Martin Shah Partner, Corporate Tax London T +44 20 7825 4638 E Martin.Shah@simmons-simmons.com René van Eldonk Partner, Tax Amsterdam T+ 3120722 2537 E Rene.vanEldonk@simmons-simmons.com re-regis Dukmedjian Malcolm Richardson Head of Tax M&G Investments T + 44 207548 2316 E malcolm.richardson@mandg.co.uk This document is for general guidance only. It does not contain definitive advice. SIMMONS & SIMMONS and S&S are registered trade marks of Simmons & Simmons LLP. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated practices. Accordingly, references to Simmons & Simmons mean Simmons & Simmons LLP and the other partnerships and other entities or practices authorised to use the name Simmons & Simmons or one or more of those practices as the context requires. The word partner refers to a member of Simmons & Simmons LLP or an employee or consultant with equivalent standing and qualifications or to an individual with equivalent status in one of Simmons & Simmons LLP s affiliated practices. For further information on the international entities and practices, refer to simmonssimmons.com/legalresp. Simmons & Simmons LLP is a limited liability partnership registered in England & Wales with number OC352713 and with its registered office at CityPoint, One Ropemaker Street, London EC2Y 9SS. It is authorised and regulated by the Solicitors Regulation Authority. A list of members and other partners together with their professional qualifications is available for inspection at the above address. 21 / L_LIVE_EMEA1:25345279v2
BEPS: What does it mean for funds and asset managers? Client Seminar Martin Shah René van Eldonk Malcolm Richardson, M&G 10 March 2015