BEPS: Why banks cannot afford to ignore the developments
Banks may be relieved that in recent months the media focus on tax affairs has turned to the digital economy. But the OECD response via the base erosion and profit shifting (BEPS) action plan has momentum and could fundamentally change the tax environment that all multinational groups, including banks and other financial services businesses, operate in.
Grant Thornton's financial services tax teamrecently hosted a dinner in their Heads of Tax Club series focussing on the banking sector and discussing the above questions. The discussion was chaired by Richard Milnes, financial services tax partner, together with members of Grant Thornton’s financial services and transfer pricing teams.
A consensus feeling, at the dinner, was that banks are in a somewhat different place from other sectors – they do not benefit from some of the special regimes and reliefs that may give rise to BEPS concernsand are heavily constrained by regulation in their freedom of action (and in their bandwidth to engage in the process as they are involved in so many other sector specific issues coming out of the pace of regulatory change and the rapidly evolving developments in tax policy in relation to customers’ tax affairs).
Some of the key actions points from BEPS that banks and other financial institutions should consider in their focus include:
• Country-by-country reporting: continue to seek as much alignment with, for example, the Capital Requirement Directive IVas possible;
• Particular concerns in relation to the impact of exchange of informationon client data protection and confidentiality;
• Banks should be concerned about the passing comment in the digital economy (Action 1) paper that a possible policy response may be to introduce a new withholding tax in relation to payment for digital services, because the suggestion is that the obligation for operating such a tax could fall to financial institutions involved in processing payments for such services;
• Potential changes to PE definitions in the context of cross-border provision of financial services (for example under pass porting arrangements, where the BEPS tax changes could point in the opposite direction from commercial and regulatory drivers);
• Base erosion by financial payments: ensuring that banking business models are understood and respected in any potential developments;
• Ensuring any OECD move to revisit the importance of rewarding capital as opposed to people functions still respects the importance of capital and liquidity in the banking regulatory and commercial context;
• The issue of treaty abuse is causing a great deal of concern in the context of funds and collective investment schemes, and their brokers and withholding agents. There is potential for changes in this area to make it more difficult to access treaty benefits through fund structures, even though the economic role of such vehicles is to facilitate the meeting of a broad pool of investors with a broad range of underlying investments without additional tax friction.; and
• Hybrid rules as applied to intra-group regulatory capital issuances.
By Wendy Nicholls (firstname.lastname@example.org) and Lorna Smith (email@example.com) of Grant Thornton UK.