Many banking operations may already be excluded from the OECD secretariat proposal because of their business-facing activities, but retail banking is at risk because it utilises the digital economy to provide services its consumers too.
Multinational banks say they should benefit from a carve-out from the pillar one framework because their digital operations apply in jurisdictions where they already have a physical presence. These taxpayers argue the arm’s-length principle (ALP) has been allocating profit to market jurisdictions effectively for their industry.
“With respect to the retail business lines, we do not derive revenue from market jurisdictions without significant physical presence and activity and we do not have any market differentiating intangible assets in low-tax jurisdictions,” said Jamie Wall, executive vice president of advocacy at the Securities Industry and Financial Markets Association.
Wall and other taxpayers in the finance sector said their business models necessitate a significant physical presence wherever their customers are located and they do not utilise valuable intangible assets to generate extraordinary profits, which are the actual targets of an OECD solution.
“Considering the specificities of the banking businesses – especially the strict regulatory framework banks operate within and the significant restrictions in reaching into foreign markets – banks generally pay their fair share of taxes in the countries where they operate and thus should simply not be the primary concern of this OECD initiative,” said Petrit Ismajli, head of tax at the Swiss Bankers Association.
Taxpayers in the finance sector, including Ismajli, also mention that the OECD Report on the Attribution of Profits to Permanent Establishments already provides the necessary basis for attributing profits to local market jurisdictions based on the nexus for the banking sector and ALP.
Banks already utilise a transfer pricing framework that is closely connected to their regulatory allocation of capital so the bank can cover its business risks. This significantly reduces the chance of disguising profit distributions across countries where they operate.
“[Additionally], retail banks do not enter the domain of collecting, retaining and analysing client data for the sale to third parties,” said Ton Daniels, senior policy advisor of tax and risk at Dutch Banking Association, on the recent expansion of retail banks’ digital activities such as personal banking platforms via mobile apps. “Consequently, the types of revenues that the unified approach is directed at and seeks to tax in the market jurisdiction do not exist in a retail bank,” he added to justify a carve-out option for the banking sector.
Pre-empting a carve-out denial
Carve-outs are not guaranteed and still under consideration, so corporate comments to the OECD secretariat proposal continue to emphasise sidestepping an increase in the tax base of multinational companies that play by the rules in market jurisdictions using the ALP.
“We already allocate appropriate value to market jurisdictions under current transfer pricing rules,” said Wall. “Most global banks already have relatively high effective tax rates,” he added.
If retail banking is not carved out then pillar one could create significant compliance and regulatory costs because of the conflicts it creates with the existing regulatory framework and unique challenges to applying formulary apportionment measures to the banking industry, according to finance tax professionals.
Technical concerns on pillar one continue to persist such as how to calculate the split of non-routine profits for Amount A, which is a share of deemed residual profits allocated to market jurisdictions using a formulaic approach. Other points of confusion, include the interaction of Amount A and Amount C, which covers extra profits from in-country functions, to avoid double taxation and the quantum on activities that qualify under Amount B, which refers to the fix rate for baseline marketing and distribution functions.
Tax professionals are hesitant that the OECD will find a global solution that fits well because of the variances across industries such as the unique accounting treatment and financial regulations for banks.
“It is our view that the financial sector has important specificities that distinguish it from other consumer facing sectors, which have to be factored in the new model,” said Ismajli.
Under a failed approach to carve-out retail banking, the finance sector has called on the OECD to keep simplicity front of mind by implementing a global solution consistently and simultaneously across countries using a mandatory multilateral instrument to limit future dispute risks. This keeps all jurisdictions and relevant tax authorities on a level playing field.
“This will avoid different interpretations by the tax authorities of jurisdictions impacted by the reallocation of taxing rights,” said one head of tax at Banco Santander, who emphasised the risk of multiple taxation across jurisdictions without establishing clear guidelines early.
However, policy analysts at NGOs said this approach would undermine the taxing rights of countries.
Another suggestion to reach a simple solution is delegating responsibility of overseeing compliance to tax authorities in countries where the corporate group holds its parent company in order to minimise delays in calculating appropriate profit splits and paying fair tax. Companies such as Amazon also back this proposal.
As the OECD continues to finalise an appropriate framework to advance the discussion on pillar one, ITR will report on the proceedings from Paris at the OECD public consultation meeting on the ‘Secretariat Proposal for a Unified Approach under Pillar One’ from November 21 and November 22.
