BEPS: Implications for Funds and Asset Managers legal update 2017... · BEPS: Implications for...

25
BEPS: Implications for Funds and Asset Managers René van Eldonk Steven den Boer Financial Markets Legal Update 18 May 2017

Transcript of BEPS: Implications for Funds and Asset Managers legal update 2017... · BEPS: Implications for...

BEPS: Implications for Funds and Asset Managers

René van Eldonk Steven den Boer

Financial Markets Legal Update 18 May 2017

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

1 / B_LIVE_EMEA2:906222v1

Overview

Background to and progress to date of BEPS Action Plan

More in-depth look at most relevant BEPS action points, including treaty abuse, hybrids, PE status, transfer pricing, CbC reporting and harmful tax practices.

Practical implications for funds and asset managers

What next?

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

2 / B_LIVE_EMEA2:906222v1

What has happened? Increasing political and public interest in tax avoidance, e.g. Starbucks, Google.

Political agreement that better rules need to ensure the principle that profits are taxed where economic activities generating profits are performed: – OECD: action plan on Base Erosion and Profit Shifting (BEPS) leading to 15

action points and the OECD Common Reporting Standard (CRS) – EU: Anti Tax Avoidance Directives (ATAD) 1 and 2. – National: for example the Netherlands has introduced minimum substance

requirements for finance and IP platforms.

Overarching themes: Transparency (more information and automatic exchange of information) Substance (tax follows real activities) Coherence (avoid double non-taxation) Fairness (reputational issues)

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

3 / B_LIVE_EMEA2:906222v1

What is BEPS? Base Erosion – exploiting gaps and mismatches in tax systems to make profits

‘disappear’ through tax structuring

Profit Shifting – moving profits to jurisdictions where taxes are low (and moving losses to jurisdictions where taxes are high) Although not illegal, in a number of cases BEPS strategies take advantage of loopholes and mismatches to distort competition and create competitive advantages. The final reports on all 15 actions have been released in October 2015. Hard changes to international agreed standards – CbC (Action point 13); Agreed minimum standards – treaty abuse (Action point 6); Recommendations – hybrid mismatches (Action point 2); Best practice – interest deductions (Action point 4). BEPS initially focused on large multinationals, but the changes affect all business that operates cross border.

-

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

4 / B_LIVE_EMEA2:906222v1

Funds and BEPS: Timeline

MLI – will be signed in June 2017, followed by negotiations between states

ATAD – will come into force as from 1 January 2019

CbC: reporting to commence from 31 December 2017, covering the first fiscal year beginning after 01 January 2016

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

5 / B_LIVE_EMEA2:906222v1

BEPS: Where are we now? Multilateral Instrument (MLI) To implement the tax treaty measures developed through BEPS in the tax treaties. Preventing different actions by the states. How: Adding new provisions – art. 16 sub 4-b-i MLI; Modifying existing provisions – art. 7 sub 5 MLI; Replacing existing provisions – art. 5 sub 10 MLI. States have to choose which treaties will be Covered Tax Agreements and send the OECD a notification of their choices. Different sections: hybrid mismatch arrangements, treaty abuse, avoidance of PE status, and improving dispute resolution.

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

6 / B_LIVE_EMEA2:906222v1

MLI

Flexibility

MLI only has its effect if treaty partners make the same choices regarding the different options

Compatibility clauses if a Covered Tax Agreement already contains provisions regarding BEPS. Describes when the MLI provisions should be added or replace a provision.

Even when it comes to minimum standards, the parties have the choice to offer alternatives.

Minimum standards – PPT/LOB Reservations – art. 12 PE definition Options – art. 13 artificially avoid PE

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

7 / B_LIVE_EMEA2:906222v1

Funds and BEPS – Treaty abuse (action point 6) The October 2015 report endorses measures to prevent tax treaty shopping and

the use of conduit companies through adoption of minimum standards: – General principal purpose test (PPT) to operate where an arrangement has,

as its main purpose, the obtaining of tax treaty benefits. – Simplified LOB clause plus PPT; or – Detailed (US style) LOB plus anti flow through measures.

Position of the Netherlands (letters of 28 October 2016 and 21 March 2017): ‘Main purpose test’ is similar to the PPT. The Netherlands wishes to apply the PPT in its double tax treaties in order to prevent tax treaty shopping (article 7(1) Multilateral Instrument).

When NL chooses the Principle Purpose Test (PPT) and the other state chooses the LOB, the parties should come to a reasonable solution together to reach the minimum standard.

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

8 / B_LIVE_EMEA2:906222v1

Funds and BEPS – Treaty abuse (action point 6) Principal purpose test:

– Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining the benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention.

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

9 / B_LIVE_EMEA2:906222v1

Funds and BEPS – Treaty abuse (action point 6) – Dividends

A

B

A

B

X 15%

0%

0%

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

10 / B_LIVE_EMEA2:906222v1

Funds and BEPS – Treaty abuse (action point 6) Principal purpose test

´One of the principal purposes´ is a light test (from the perspective of the tax authorities!). See the difference with ‘the main purpose’, ‘ the sole purpose’, ‘the principal objective’, ‘the dominant purpose’ etc. Multinationals always consider the tax treatment when making an investment into a particular jurisdiction. How will that impact that tax treaty entitlement?

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

11 / B_LIVE_EMEA2:906222v1

Funds and BEPS – Treaty abuse (action point 6) BEPS makes a difference between Collective Investment Vehicles (CIVs) and

non-CIVs.

A CIV is an investment vehicle with a large investor base and holds a diversified pool of investments. All other investment vehicles are non-CIVs.

New rules will prevent the use of structures of treaty shopping in absence of real people and activities.

Onshore funds may become more attractive.

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

12 / B_LIVE_EMEA2:906222v1

Funds and BEPS – Treaty abuse (action point 6) OECD has provided 13 examples. However, these do not provide sufficient

guidance, as: ‘lowest common denominator view’ Examples are not ‘real world scenario’s’

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

13 / B_LIVE_EMEA2:906222v1

OECD example 1 – Regional investment platform

SCo

RCo

Fund

10%

5%

T

R

S

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

14 / B_LIVE_EMEA2:906222v1

OECD example 2 – Securitisation company

Trust

RCo

receivables

Bank and third party investors

10%

R

S

Notes

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

15 / B_LIVE_EMEA2:906222v1

OECD example 3 – Immovable property non-CIV Fund

Example is not very helpful as: - Why limited to real estate investments? - Not realistic that the Fund manages the

assets (is usually done by an investment manager).

- Not realistic that ‘Rco does not derive any treaty benefits that are better than those to which the investors are entitled’.

Investor

Real Estate Fund

RCo C

R

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

16 / B_LIVE_EMEA2:906222v1

Funds and BEPS – Treaty abuse (action point 6) Who will be affected?

Higher source country taxation for global investments. Result:

Shifting taxation revenue on passive income from the residency to source country

Dramatic increase of the tax burden on these investments.

A much lower risk of double taxation for local investments. Result:

A much bigger focus on domestic investments or straight forward investments closer to home.

Disadvantage for small counties that are forced to invest overseas and for countries with a large trade surplus which is typically offset by a negative capital account through overseas investments.

Since the risk of double taxation will be much higher for equity investments than for debt instruments, funds are likely to develop an even stronger preference for debt funding.

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

17 / B_LIVE_EMEA2:906222v1

Funds and BEPS: Interest deductions (action point 4) BEPS project recognizes that location of debt within multinational groups is

heavily influenced by tax and use intra-group finance accordingly.

The OECD is of the view that the ‘arm’s length approach’ to interest deductions is not sufficient and recommends: Limiting interest deduction up to a percentage (between 10% and 30%)

of EBITDA, subject to a group-wide interest ratio rule (exception).

Anti Tax Avoidance Directive (ATAD)

Interest deduction up to a percentage of 30% of EBITDA. Escapes:

Threshold – 3 million EUR

Grandfathering – loans originated before 17th June 2016

Standalone entities

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

18 / B_LIVE_EMEA2:906222v1

Funds and BEPS: PE status (action point 7) Widening the Permanent Establishment concept:

Limiting the ‘preparatory and auxiliary activities’ exception Broadening the PE status for agency and commissionaire arrangements

May impact on marketing activities, asset raising activities, sub-advisory agreements and the use of servers.

Position of NL: not adopting the PE status action, since the Dutch treaties contains similar provisions.

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

19 / B_LIVE_EMEA2:906222v1

Funds and BEPS: Transfer pricing (action points 8-10) Focus on three areas:

TP issues in relation to intangibles, reducing the importance of legal ownership

Contractual allocations of risk only to be respected where supported by actual decision making

Other high risk areas, including profit allocations within groups

Greater emphasis on where functions are actually carried out and where people are located, rather than the location of assets and risks

Focus on unjustified fragmentation of activities

Reducing scope for base erosion via excessive management 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 services of an administrative or clerical nature.

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

20 / B_LIVE_EMEA2:906222v1

Funds and BEPS: CbC (action point 13) CRS FATCA Master file Local file

Applies to MNEs with at least €750m annual consolidated group revenues, which could also be a fund.

Obligation for MNEs to report annually and for each tax jurisdiction in which they does 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.

Reporting to jurisdiction of ultimate parent entity and shared via AEOI.

Reports to tax authorities only (not public – but political calls for public disclosure), Reporting to commence from 31 December 2017, covering fiscal year beginning after 01 January 2016.

Implementation package of model legislation and competent authority agreements.

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

21 / B_LIVE_EMEA2:906222v1

What is next?

Monitoring the impact of interest deductions (ATAD);

Monitoring the impact of treaty abuse provisions (Action 6) and PPT;

Monitoring PE status and Transfer Pricing rules;

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

22 / B_LIVE_EMEA2:906222v1

Contact Steven den Boer Managing Associate T +31 20 722 2538 M +31 6 1005 4642 E [email protected]

René van Eldonk Partner T +31 20 722 2537 M +31 6 5368 4330 E rené[email protected]

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

23 / B_LIVE_EMEA2:906222v1

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

24 / B_LIVE_EMEA2:906222v1

simmons-simmons.com elexica.com

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 simmons-simmons.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.