Global Tax and the impact of BEPS on financial services - Deloitte’s 2020 global BEPS survey - Banking blog

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Deloitte’s 2020 global survey on the OECD’s Base Erosion and Profit Shifting (BEPS) initiative shines a spotlight on the next wave of the Global Tax Reset. What are the key finding and impacts on the financial services industry?

The BEPS agenda in 2020 – Financial services industry highlights

Financial services firms are highly engaged in the OECD’s BEPS project. This is unsurprising as the changes still being discussed at the OECD level could have a significant impact on their tax liabilities, business structures and operation of their tax functions.

The survey results suggest the financial services industry remains deeply concerned about the future outcomes of these discussions -- not perhaps on the grounds that governments may fail to reach consensus at a policy level on issues like the Pillar One/Pillar Two project or taxation of the digital economy; but rather that the tax authorities will fail to implement the resulting regulatory decisions and guidelines consistently. For any financial services firm with an international footprint or foreign clients and investors, the spectre of added complexity is concerning.

While this survey was conducted just prior to the outbreak of COVID-19, Deloitte’s experience suggests the crisis has done little to ease the minds of financial services executives. In many markets, banks have been asked to play the twin role of stewards of national stimulus programmes and defenders of critical financial infrastructure. This has thrust them further into the spotlight. Financial services executives know they can’t make any mistakes when it comes to tax.

From an industry perspective, the responses from this year’s survey reveal financial services firms are taking solid and strategic steps to respond to the changing tax environment. Some are entering into new Advanced Pricing Agreements (APAs) and working with tax authorities to achieve greater certainty. Others are implementing new policies, creating greater transparency, and investing in new technologies aimed at reducing the complexity and risk of BEPS-related changes. Finding the right mix of operating models, controls, and processes will be crucial. Based on responses collected from our survey, this industry spotlight explores how financial services companies are responding in this continuously changing environment.

Tax governance never fell from the agenda

Having suffered a historic loss of public trust during the last financial crisis, most financial services firms recognise this financial crisis must be different. Some are playing a role as conduits of government stimulus programmes and fully recognise their actions must be beyond reproach.

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The good news is that financial services executives and boards seem to be highly engaged in helping to manage the changing tax environment. More than six out of ten financial services executives say they have implemented new policies and procedures to tighten tax governance. And more than eight out of ten say their boards are actively engaged in tax governance.

The leading financial services companies – multinational banks, in particular – are working to create greater alignment between their finance functions, tax leadership, and audit committees to ensure that every interaction between the company and the tax authorities is understood and managed. Many are also embedding tax professionals into their corporate approval processes to ensure any tax impacts are well understood.

Craving consistency

Perhaps what worries global financial services firms the most is the potential for a lack of consistency in the way new international tax rules and guidance are applied.

In our survey, only 31 per cent say they think tax administrations will interpret changes to the OECD’s Transfer Pricing guidelines in a consistent manner. Just 55 per cent think there will be global consensus on the taxation of the digital economy. More than half are concerned about the lack of guidance from tax authorities about the Principal Purpose Test in the Multilateral Instrument (MLI).

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In response, one-in-five financial services firms say they are now working to obtain more bilateral APAs. 45 per cent say they expect higher withholding tax obligations as a result of treaty changes, whether under the MLI or as a result of renegotiations of double tax treaties.

Changes to withholding tax obligations in particular could create significant challenges for financial services firms. Those that serve as distributors of dividends, interest and capital gains, for example, are likely to face increased complexity if global consistency isn’t achieved. Private equity and venture capital firms and their portfolio companies may also find that their business and affiliate relationships require updating.

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That being said, our data suggests that financial services firms seem to be working to help understand and influence the OECD’s process. According to our survey, around six-in-ten financial services firms are actively engaged in the OECD’s Pillar One/Pillar Two project consultations, either directly or through other channels. This is providing them with some additional certainty, clarity, and influence as the process evolves.

From in-house tech to outsourced innovation

At the time the survey was conducted – prior to COVID-19 – many financial institutions saw technology as the clearest path to dealing with the added complexity of BEPS-related changes. Most had a long-term tax technology roadmap that aligned with their organisation’s overall digital journey. The expectation was that eventually they would get the systems and tools they require.

The pandemic may have changed all that. Enterprise digitisation journeys were suddenly disrupted. Despite the fact that the crisis is accelerating digital change, often the data is being housed in ways which prevents the tax function from effectively managing their processes internally. At the same time, CFOs’ capital investment budgets have shrunk. Few are looking to invest in new tax technologies at the moment.

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While just 14 per cent of financial services executives say they would leverage outsourced or co-sourced models to deal with BEPS-related changes, our view is that this proportion would be much higher if the survey were re-run today. Financial services tax functions now understand that outsourcing is, in many cases, the only viable way to manage increasing complexity without increasing risk.

“Financial services tax leaders simply do not have the capital or the bandwidth to be managing these more complex, data-heavy processes internally,” adds John Rieger, Deloitte Global Tax & Legal, Financial Services Leader. “It’s not just that it’s complex work. It’s also very labour intensive, sophisticated and quality-driven. Given the risks facing financial services today, I expect to see more and more organisations start to explore how BEPS-related processes could be outsourced.”

Deloitte’s view

“Financial services tax leaders need to ensure they are highly engaged in the OECD process and that they are keeping their leadership teams abreast of the changing dynamics in the tax environment. In this environment, ensuring strong relationships with tax authorities by maintaining a steady dialogue and providing transparency is critical.”

John Rieger, Deloitte Global Tax & Legal – Financial Services Leader

 

What's on the minds of global and Swiss tax leaders? Read the key findings and to get the full report here

Blog contributor: Michelle Chan, Marketing Lead, Tax & Legal Switzerland

If you would like to discuss this topic, please do reach out to our key contacts below.

Key contacts

Reto Gerber

Reto Gerber - Managing Partner, Tax and Legal Deloitte Switzerland

Reto Gerber is a tax partner with more than 22 years of experience with a focus on transaction related tax matters such as acquisition structures, due diligence work (buy-& sell-side) as well as tax advice on SPA and management participations plans. He also advised on a number of tax efficient principal structures for multinational groups.

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Brandi Caruso - Partner, Financial Services Tax 

Brandi heads Deloitte’s Financial Services Tax team in Switzerland and Liechtenstein. She has extensive expertise in advising the Swiss financial services industry on the implementation of U.S. and international transparency regimes (including QI, FATCA, Section 871(m), CRS, MDR and DAC6). Brandi leads the Financial Services Tax team efforts related to innovative technology solutions. Brandi is a U.S. Certified Public Accountant and has 20 years of experience with Deloitte and has worked in London and San Diego.

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Salim Damji - Partner, Transfer Pricing 

Salim Damji joined Deloitte Switzerland as a Transfer Pricing and VCA Partner in our Zurich office from another Big Four firm in Switzerland. Salim has been a Big Four firm’s partner for approximately 14 years. He primarily works with Swiss groups to assist them in developing transfer pricing models which are globally sustainable, Advance Pricing Agreements, Mutual Agreement Processes, and Business Restructuring issues. Salim, who works extensively in the field of Intellectual Property, started his career in the UK, before moving to Switzerland in 2005 and worked in the UK, USA, and Switzerland. He holds degrees from Oxford University and Southampton University. .

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André Kuhn - Director, Financial Services Tax

André is a Swiss Certified Tax Expert with more than twelve years of experience in corporate international taxation. He leads the Swiss corporate tax team in Zurich that advises banks, insurance companies and asset managers on Swiss tax matters. As tax responsible for the investment management industry in Switzerland, he also acts as the subject matter expert on all tax aspects of collective investment schemes.

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