On 5 October 2015 the OECD published the final package of recommendations to reform the international tax system – the "BEPS" Project.
Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprise.
The BEPS Project is divided into fifteen "Actions", with separate recommendations for each. The recommendations, if implemented, would have a significant impact on many businesses (including those that don't operate cross-border). The changes to treaty relief, interest deductibility and permanent establishment changes will have particularly wide implications. However, despite being referred to as the "final" recommendations, in reality much remains unclear – including questions such as which countries will implement, which parts will they choose to implement, and which countries will choose to ignore all recommendations. The implications should become clearer as we move towards implementation stage.
One of the key areas specifically addressed by the OECD in BEPS Action 6 is granting tax treaty benefits to collective investment schemes. This is particularly important in determining whether reduced rates of withholding tax apply to income earned by collective investment vehicles. Currently, there is a lack of clarity on the issue and the determination of the eligibility of a collective investment vehicle to avail of tax treaty benefits is often based on various factors such as the form of the vehicle (trust, company, etc.), fiscal transparency (liability to pay taxes), beneficial ownership of the income, etc. As this has been an area of uncertainty, clarity on the issue will be welcomed by the industry generally. Implementing the proposals will hopefully ensure that investment funds in “on-shore” locations such as Ireland benefit in comparison to off-shore locations that seldom have double tax treaties.
As the BEPS process progresses to implementation, there will be other BEPS related challenges for internationally distributed investment funds to manage. One key area that investment managers should pay particular attention to is in relation to how they distribute their funds. There is an expectation that the threshold that determines when a taxable presence (and therefore a liability to tax) will be lowered. Fund managers will need to carefully consider the impact of this when deciding on a distribution strategy.
The BEPS recommendations and subsequent implementation will impact on the funds industry across the globe. While it is difficult to comment on the practical implications at this early stage, the fact that Ireland has a wide tax treaty network should prove advantageous to the Irish funds industry when compared to other competing jurisdictions.