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Introduction

The Global Transfer Pricing practice of Deloitte Touche Tohmatsu Limited is pleased to present International Tax Review's guide to transfer pricing in the financial services industry, a collection of articles on different aspects of transfer pricing specifically geared to this industry.

For the past two years, since the OECD issued its report on Addressing Base Erosion and Profit Shifting, BEPS – which quickly became part of the tax lexicon – has permeated discussions of international taxation. For better or for worse, today most transfer pricing conversations take place in the context of BEPS. This is true for all sectors, and the financial services industry is no different. But multinational corporations engaged in financial services also face other transfer pricing issues, and different countries have developed different approaches to these issues, rendering the global environment for FSI companies a complicated one.

In this guide, we provide valuable insights into some of the most significant challenges that financial institutions are likely to come across in connection with international taxation, as well as updates on the status of some transfer pricing initiatives that will affect FSI multinationals.

Our first article addresses the OECD's draft guidance on risk and recharacterisation. One of the open questions in the draft was whether the guidance should apply to financial services firms. As Robert Plunkett explains in this guide, for entities with significant levels of regulatory capital, risk management on a cross-border basis can constitute a vital component of their business. In that light, complying with some aspects of the risk and recharacterisation draft may give rise to tensions between regulatory requirement and tax requirements.

The BEPS initiative is also looking at "preventing the artificial avoidance of PE status," an issue that affects insurance companies in particular. The act of negotiating and concluding insurance contracts by mobile underwriters, senior executives, and MGAs risks creating a taxable presence or permanent establishment (PE) of the primary insurer or reinsurer in the jurisdiction where these activities take place. When a PE is created, profits must be attributed to the PE for tax purposes, and the insurer will be required to file a corporation tax return in that jurisdiction. Sebastian Ma'ilei and Jeremy Brown's article identifies those circumstances under which a PE is created in the insurance sector, and most usefully, answer two questions: "So what if you have a PE?" and "What should you do about it?"

In the first of our country-specific articles, Anis Chakravarty, Vineet Chhabra, and Neha Bang of Deloitte India examine the transfer pricing issues faced by financial services taxpayers, which they believe have recently increased in significance and scope. As they explain, "[T]his may be attributable to the experience gained by field officers in scrutinizing financial services transactions, the near absence of guidance in the Indian regulations, and limited judicial precedents on the application of transfer pricing methodology to complex financial services transactions."

In China, many multinational financial institutions have had their intragroup service fees and royalties scrutinised by the Chinese tax authorities in the past few years. Most of the tax authorities' reviews of these institutions' outbound payments have focused on the concept of "benefits," and in particular what "benefits" were provided by the services or intangibles to the Chinese entity in question. China recently issued Bulletin 16 to formalise its position on some of these issues, and as Patrick Cheung and Johnny Foun explain, the benefit tests introduced by Bulletin 16 are consistent with the OECD's historical approach to analyse the reasonableness of service fees, and also with the discussion draft issued under the BEPS initiative regarding low-value-adding intragroup services.

In Australia, a very recent move by the tax authorities – the release in May 2015 of exposure draft legislation – the Tax Integrity Multinational Anti-avoidance Law – poses a new challenge for FSI taxpayers. Geoff Gill and Priscilla Ratilal of Deloitte Australia provide a review of the basic mechanics of the new law, identify a number of important features, and discuss the implications of the new law and associated ATO compliance activity for the financial services and financial technology sectors.

At the end of last year, the Upper Chamber of the German Parliament adopted the final version of the German Regulation on the Application of the Arm's Length Principle to Permanent Establishments. The regulation provides detailed guidance regarding the application of the authorised OECD approach (AOA) in Germany, and binds the taxpayer, the tax authorities and the tax courts. The Branch Profit Attribution Regulation governs, in particular, the principles of asset attribution, the branch capital allocation, and the recognition of internal dealings (so-called "assumed contractual relationships" in German tax law). Oliver Busch and Jobst Wilmanns of Deloitte Germany explain the operation of the new regulation, and summarise the special German rules for permanent establishments of financial institutions.

Deloitte's UK transfer pricing practice recently held a seminar for its clients in the financial services sector. As part of this event, representatives from Deloitte's financial services transfer pricing practices provided updates on key events in their respective markets. Bill Yohana of Deloitte Tax LLP has summarised the presentations from the London event.

Navigating the world of financial services transfer pricing is not easy. For assistance in this endeavour, please contact your local Deloitte transfer pricing specialist.

Robert Plunkett
Global Leader, FSI Transfer Pricing

Todd Wolosoff
Global Managing Partner, Transfer Pricing Service Line

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