Pillar 1: assess asset management carve-out


On May 6, the OECD published its proposals for the exclusion of regulated financial services activities from the first pillar of the BEPS 2.0 project.

The first pillar is the initiative to reform the rules governing the allocation of the right to tax the profits of multinational enterprise groups. Under the first pillar rules, a greater share of these taxing rights will be allocated to the countries where the clients of the groups are located. The new rules will initially only apply to the largest and most profitable groups – those with a turnover of at least 20 billion euros and a profit margin of at least 10% . Over time, the income threshold will be reduced to €10 billion, bringing more groups within the scope of the rules.

What is the rationale for excluding regulated financial services firms?

The first pillar was driven by concerns that existing profit attribution rules focus too much on physical presence. This means that companies that can operate in a market without a significant physical presence – most obviously, digital companies – can generate significant profits from sales in a country by making commensurate taxable profits there.

For many financial services groups, however, the key factor that will determine where taxable profits are earned is the location of capital, which is governed by regulatory requirements. This means that financial services firms are less able to control where taxable profits are made through structuring, and there is more acceptance that their profits are taxed in the “right” place.

How does exclusion work?

The exclusion applies to several types of financial services activities, including retail and investment banking, insurance and asset management. The definition of excluded asset management activities is broad and formulated in general terms, rather than referring to specific types of regulated funds or activities.

Exclusion is assessed entity by entity. For example, any entity in a group that derives 75% or more of its gross income from excluded asset management activities will be fully excluded, while entities that do not meet this threshold will not. A group with excluded activities will only fall within the scope of the first pillar if its non-excluded activities alone reach the turnover and profitability thresholds.

Is it settled?

Not necessarily. The consultation paper specifically reminds readers that the proposals do not represent the final or consensus views of Inclusive Framework countries, and notes that some countries believe that reinsurance and asset management should not be excluded.

The fact that these activities are covered in the published proposals indicates that most countries want to exclude them from the first pillar, but this is not done. The OECD invites the public to comment on the exclusion proposals until May 20, so interested financial services industry stakeholders should consider making their voices heard.

As part of the ongoing work of the OECD/G20 Inclusive Framework on BEPS to implement the two-pillar solution to address the tax challenges arising from the digitalisation of the economy, the OECD is seeking public comments on the exclusion from regulated financial services under amount A of the first pillar.



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