Funds Industry Fears BEPS ‘Substance’ Changes
Tax experts have highlighted the increasing importance of substance in the fund management sector in view of the OECD’s base erosion and profit shifting (BEPS) project recommendations.
The OECD’s recommendations, among other things, aim to realign taxation with economic substance and value creation, while preventing double taxation.
Speaking at the eighth annual Guernsey Funds Forum, which took place in London last month, Tony Mancini of KPMG Channel Islands and Abhijay Jain of PwC’s Deals Tax Team in London, both stressed the importance of the sector being vigilant as to how the BEPS negotiations unfold.
“I agree absolutely that BEPS is not intended for the investment management sector, but the problem we have is that we could be collateral damage. There’s a steamroller that if it carries on we could just get squashed,” said Mancini.
Mancini said industry bodies such as the British Venture Capital Association and the Alternative Investment Management Association were providing a degree of pushback to ensure that exemptions for the funds industry were guaranteed, but said BEPS still has a long way to evolve. He said a danger is that most of the people involved in formulating the BEPS principles did not necessarily appreciate the importance of the investment fund sector or how it operates.
Jain said: “What this substance argument is doing is providing ammunition to local countries and local governments and local tax authorities to say, ‘you know what, I’m going to ignore all of that and I’m going to penalize you.’ So, if you are doing investment into an Italian business, Italy will argue that you have a business of fund management in Italy itself and they will tax you for every dime you make in Italy.”
“That’s where I think it becomes something the fund management industry does need to watch out for, because the application is not uniform. Every country has its own version of what BEPS really means,” he said.
Along similar lines, Tony Mancini of KPMG Channel Islands stressed that a continuing focus on the term “substance” and what constitutes “substance” from both funds and commercial business perspectives had created a lot of noise – much of it misdirected – which could lead to BEPS and related EU initiatives being misapplied to the funds sector.
