Tax experts taking part in a panel discussion at the recent Guernsey Funds Forum in London warned that the asset management industry could end up becoming the victim of ‘collateral damage’ as the proposed Base Erosion and Profit Shifting (BEPS) regime is implemented.
The Funds Forum saw such tax authorities as Tony Mancini of KPMG Channel Islands and Abhijay Jain of PwC’s Deals Tax Team stressing the need to keep a close eye on the BEPS negotiations.
While the BEPS regime was not designed to target the asset management industry specifically, they noted that the question remains as to what degree the industry may be capable of getting an exemption from the rules.
BEPS has been defined by the Organisation for Economic Cooperation & Development, which is overseeing its introduction on behalf of the G20 group of nations, as “tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low- or no-tax locations”.
The organsiation is therefore seeking to determine rules that would apply to minimise BEPS arrangements by companies. It adds that under the proposed framework, “over 100 countries and jurisdictions are collaborating to implement the BEPS measures and tackle BEPS.”
The danger, according to the tax experts, is that those involved in formulating the rules do not recognise how the asset management industry works, and what makes it different from companies operating in other industries.
For example, Mancini noted that the term “substance”, as used in the proposals, could be misapplied to funds as well as “commercial business”.
Jain outlined an example whereby “What this substance argument is doing is providing ammunition to local countries and local governments and local tax authorities to say, ‘you know what, I’m going to ignore all of that and I’m going to penalise you’.
“So, if you are doing investment into an Italian business, Italy will argue that you have a business of fund management in Italy itself and they will tax you for every dime you make in Italy.”
Another challenge is that the application of the BEPS regime will not be uniform from jurisdiction to jurisdiction.
Guernsey joined Jersey, the Isle of Man and other jurisdictions in signing up to the OECD’s Multilateral Competent Authority Agreement in October 2016, which forms part of the organisation’s development of the implementation of its BEPS regime – see: http://www.internationalinvestment.net/other/iom-jersey-guernsey-among-new-beps-signees/.
The European Commission announced in June 2016 (http://europa.eu/rapid/press-release_IP-16-1886_en.htm) that its member states had agreed to implement the BEPSs regime. Pierre Moscovici, the commissioner for Economic and Financial Affairs, Taxation and Customs at the time, said: “Today’s agreement strikes a serious blow against those engaged in corporate tax avoidance.
“For too long, some companies have been able to take advantage of the mismatches between different Member States tax systems to avoid billions of euros in tax. I congratulate our Member States who are now fighting back and working together to make the changes needed to ensure that these companies pay their fair share of tax. I also thank The Netherlands Presidency for their dedication in achieving this deal.”
Moscovici then also referenced the re-launch of the Common Consolidated Corporate Tax Base (CCCTB). That re-launch took place in June 2015, following its original proposal by the EC in 2011, and defined as “a single set of rules that cross-border companies could use to calculate their taxable profits in the EU, instead of having to deal with different national systems.”
It is uncertain how the CCCTB might apply specifically to UK based companies, including asset management companies, doing business across the region once the UK has exited the EU, because negotiations have yet to start in earnest pending the outcome of the UK’s general election on 8 June.