Finance
of tax treaties, preventing avoidance of taxable presence in a jurisdiction and rewriting transfer pricing rules.
Words: David Burrows
BEPS has mainly impacted the bigger corporates, but questions have been raised about how changes to taxation might affect asset management. so Here’s our take on what hedge funds should look out for CURRENT INTERNATIONAL TAX
rules, which were designed to prevent double taxation, are based on principles that haven’t kept up with globalisation and the rise of the digital economy. As a result, there are gaps in the rules that allow ‘double non-taxation’ to occur – that is for profits not to be taxed at all. Even when companies do pay tax, they’re often able – perfectly legally – to use various schemes to shift profits across borders to take advantage of tax rates lower than those in the country where they made the majority of their profits. If you take Amazon as a case in point – officially, they may not have a delivery service in all of the countries where they sell goods. In Europe, their main business is based in tax-efficient Luxembourg, while the billions of euros in sales income generated elsewhere isn’t taxed in those countries. According to the OECD, some multinationals end up paying as little as five per cent in corporate taxes, while many smaller businesses are paying up to 30 per cent. These giant companies are able to exploit the fact that tax
systems are still essentially nation-based, designed for the ‘old’ economy where companies had a less global footprint and the internet was an almost inconceivable space-age idea. The media and anti-corporate organisations haven’t been slow to shine a spotlight on high-profile companies practicing these kinds of tricks, such as Amazon, Google and Starbucks. But there are many other companies across a broad number of sectors to which these charges can equally be applied. Acknowledging that a substantial overhaul was needed to combat base erosion and profit shifting (BEPS), the OECD launched an ambitious 15-point action plan to rewrite international tax rules in 2013. This action plan is clear in its intention – it aims to close these tax gaps and prevent double non-taxation while maintaining its long-standing goal of preventing double taxation. In particular, the plan will address the tax challenges of the digital economy, countering harmful tax practices, increasing transparency, clamping down on the abuse
When it comes to who’ll be affected by changes brought about by BEPS, Richard Corrigan, Deputy CEO at Jersey Finance, insists the impact will be felt widely. “Household retailers have been the poster boys of the BEPS project. However, BEPS has such a broad scope that almost all businesses operating in multiple jurisdictions will be affected to some extent.” He believes the transparency actions will require businesses to report more information to authorities, and that this will have obvious administrative implications. On the substance side, he says there will be a greater emphasis on being able to demonstrate a genuine presence in the jurisdictions in which a business operates. In effect this means proving an office is not just a ‘letter box’ address, but a location where management decisions are made on a regular basis (see page 41). While the BEPS agenda isn’t specifically targeted at asset management groups, they will be affected by changes in the approach of tax authorities, domestic legislation and double tax agreements (DTAs). Corrigan suggests hedge funds, along with all asset managers, can expect greater scrutiny of their activities – particularly their operations that benefit from access to DTAs. However, with regards to what hedge funds should be thinking of doing now, he believes most will wait for more detail to emerge before they make any definite moves. “BEPS is a moving target, and it’s important that managers are aware of the potential recommendations and their implications. However, until clarity is received – hopefully before the end of the year – most won’t be taking any substantial action at this time.” Ben Robins, Partner at Mourant Ozannes in Jersey, takes a similar line. “As things stand, it’s not at all clear how BEPS will affect hedge funds as they don't necessarily rely on trading activity through entities enjoying tax treaty benefits – unlike, say, private equity funds. At the moment a hedge fund operating in London can operate under a UK limited liability partnership, which is tax efficient. “However, it’s been made clear that these partnerships will be scrutinised – if not under the BEPS initiative, then by the UK Treasury itself. A general preoccupation of the BEPS initiative is that profits should be taxed where substantive economic activities are actually taking place.” Robins says some hedge fund managers will be looking at what BEPS has up its
www.blglobal.co.uk july/august 2015 37
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THE WAITING GAME