EBF Annual Tax Conference 2016 BEPS: impact for business and banks’ specificities Wim Eynatten 2 February 2016

Enlarged taxable basis Practically BEPS is structured around 15 actions with three main impacts for MNEs BEPS Pillar Actions 3 main impacts Coherence 1. Digital economy 2. Hybrids 3. CFC rules 4. Interest deductions 5. Harmful tax practices Enlarged taxable basis Interest Taxable presence Profit allocation Increased Compliance TP documentation Disclosure of tax information Uncertainty GAAR MAP? Harmful tax practices? Abuse of tax treaties? 6. Abuse of tax treaties 7. Permanent establishment 8 – 10 : Transfer Pricing Substance Transparency 11. Data collection on profit shifting 12. Disclosure of tax planning arrangements 13. TP Documentation 14. Arbitration 15. Multilateral Instrument 5

15 Actions around 3 main pillars Transparency and Certainty Potential BEPS impact for banks 15 Actions around 3 main pillars Coherence Substance Transparency and Certainty Preventing Tax Treaty Abuse (6) Hybrid Mismatch Arrangements (2) Hybrid Mismatch Arrangements (2) Measuring BEPS (11) Hybrid Mismatch Arrangements (2) Avoidance of PE Status (7) Hybrid Mismatch Arrangements (2) Hybrid Mismatch Arrangements (2) CFC Rules (3) Disclosure Rules (12) TP Aspects of Intangibles (8) Hybrid Mismatch Arrangements (2) Hybrid Mismatch Arrangements (2) Interest Deductions (4) TP Documentation (13) Hybrid Mismatch Arrangements (2) TP/Risk and Capital (9) Hybrid Mismatch Arrangements (2) Harmful Tax Practices (5) Dispute Resolution (14) Hybrid Mismatch Arrangements (2) TP/High Risk Transactions (10) Digital Economy (1) Multilateral Instruments (15) Taken from OECD live webcast “The BEPS Package” – 5 October 2015

Preventing treaty abuse Actions 2, 4 and 6 Key considerations The proposals will require changes to domestic legislation and are likely to take effect from 2017 or later. There is no grandfathering of existing arrangements, so taxpayers will need to consider whether their arrangements fall within the scope of the rules. Jurisdictions remain free to exclude hybrid regulatory capital from their hybrid mismatch rules / apply special rules, which could lead to increased complexity. Hybrid mismatches Specific rules for banks and insurance companies are still awaited with final proposals to be released in 2016. There is no exclusion for securitisation issuers or SPVs. Interest deductions The general proposed LOB rules broadly prevent treaty relief from applying unless an entity can show that its ultimate beneficial owner is entitled to equivalent treaty relief. Creates pressures for fund entities – some relief measures for CIVs. This leaves whole area of uncertainty around non-CIV, SPV’s, private funds, securitisation etc. Implications for equity trading businesses. Preventing treaty abuse

Action 7 - Permanent Establishments Two key changes: Updating the dependent agent definition “habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise and, these contracts are a) in the name of the enterprise, or b) for the transfer of ownership of […] property owned by that enterprise [… or] c) for the provision of services by that enterprise ” Independent agent exemption will not apply where the agent acts “exclusively or almost exclusively” for closely related enterprises Tackling artificial avoidance of PE status through the specific activity exemptions Are the activities ‘preparatory or auxiliary’ for the enterprise’s business as a whole? Further guidance on the meaning of ‘preparatory or auxiliary’

Action 7 - Permanent Establishments Examples of activities potentially caught by the widening of the PE definition Remote booking Asset management – marketing and distribution services Electronic platforms Short term visitors Private banking Corporate banking M&A advisory

Action 7 - Permanent Establishments Example 1: Remote booking model Contract concluding activities Reliance on independent agent status Transaction booked onto BS of the UK Booking entity UK Hong Kong US Trader employing entity Sales team employing entity Critical new words in Article 5(6) “… Where, however, a person acts exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related, that person shall not be considered to be an independent agent”

Action 7 - Permanent Establishments Example 2: Short term visitor/Marketing and distribution Principal Third party customers Country R Country S Contract concluded STV / M&D Example 2: Employees of principal company resident in country R travel to country S to conclude contracts with customers in country S Employees are only in country S on a short term basis with no fixed place of business Not covered by existing Article 5(5) unless viewed to be habitually concluding contracts, but increased risk they will be covered by the proposed amendments Critical new words in Article 5(5) “or habitually concludes, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise”

Action 7 - Permanent Establishments Effect of recognising new PEs: Different approaches to profit allocation in different jurisdictions Increased compliance costs Accounting consequences Regulatory position could be affected New tax reporting obligations Other taxes: bank levy, indirect taxes, withholding taxes, exit taxes

What should banks consider?

4 key actions to be considered by banks Prepare for the new reporting requirements I Determine the data to gather and implement data collection process Analyse and check the data Back-test the results on the precedent fiscal years Anticipate the possible analyses of tax authorities and test the compliance of the TP policy with the economic substance of the Group II Review the current tax positions Use of hybrids Debt / interest policy Use of commissionaires / agents Booking models Short term business traveller programs III Adjust tax strategy Adjust tax strategy towards business strategy (more integrated vision and anticipation) Align profits with value creation (tax optimisation = business optimisation) Transform the tax teams, towards a more business oriented activity Prepare tax communication strategy IV Define level of information to be disclosed Define the communication packages by type of stakeholders (tax administrations, shareholders, public opinion…): annual report, specific tax report… Brief and align the management (including business)

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