Navigating BEPS 2.0 and increasing tax administration requirements
The value in a coordinated approach – PART 1
The OECD’s Pillar Two global anti-base erosion (“GloBE”) rules, which were agreed to by the OECD/G20 Inclusive Framework on BEPS (“IF”) in December 2021, are now beginning to be enacted into law.
The European Union (“EU”) agreed a Directive committing EU member states to implement Pillar Two rules from 2024. Similar announcements have followed from Hong Kong (SAR), China, Japan, Singapore and the UK.
In this article we highlight some of the key steps that firms in the asset management space should take to determine whether or not they are in-scope of Pillar Two. This follows the Administrative Guidance for the Pillar Two GloBE Rules1 released by the OECD in February 2023.
We also touch on some of the lessons learned from the implementation of the Foreign Account Tax Compliance Act (“FATCA”), CRS and Economic Substance rules in the Channel Islands, with a particular focus on approaches to tax compliance.
Pillar Two: an overview
Pillar Two is a significant change in the international tax landscape. It follows a direction of travel felt in the Channel Islands since the introduction of the BEPS Project back in 2013.
The BEPS Project was designed to prevent companies operating internationally from avoiding taxation, leading to the introduction of both the Common Reporting Standard (“CRS”) and Country-by-Country Reporting (“CbCR”) in 2016. It also led to the introduction of the Economic Substance Regulations (“ESR”) in 2018 and several other targeted initiatives.
The Pillar Two rules are an extension of the original 15 Point BEPS Action Plan, where it was felt that not enough action had been taken to tackle certain critical areas. The key themes running throughout are information exchange and transparency.
A significant increase in the amount of data being reported to tax authorities has created an administrative burden on an industry facing increasing regulation outside of tax, as well as resourcing constraints. Much of the information being reported under different regulations is similar in content.
Therefore, taking a coordinated approach to “tax” reporting has never been more important.
Are you in or out-of-scope?
A common misconception is that asset managers are automatically “excluded” from Pillar Two, although the rules are not quite that simple. For asset managers that are potentially in-scope of Pillar Two – or where the application of the scope rules outlined below are uncertain – now is the time to think about next steps.
Focussing on Pillar Two for asset managers, the initial question is whether the investment funds they manage or the management group itself is in-scope of the Pillar Two rules?
These are limited to multinational enterprise (“MNE”) groups with annual consolidated group revenue of 750 million Euros (“EUR”) or more in the financial statements of the ultimate parent entity (“UPE”), in two of the four prior fiscal years.
The International Financial Reporting Standards (“IFRS”) have specific consolidation requirements for investment companies or entities. As a result, most investment funds do not consolidate their portfolio companies, but account for these investments at fair value through the profit or loss account.
The effect here is that many investment funds will fall out of scope of Pillar Two, largely because their annual revenue will not exceed EUR 750 million, or because they will be excluded by specific exclusions contained within the Model Rules themselves.
Prior to the release of the Administrative Guidance, there had been concern the deemed consolidation requirement in the Pillar Two rules could have been interpreted to override the consolidation rules that apply to investment companies or entities under IFRS Standards and other authorised financial accounting standards.
As a result, funds would be required to prepare consolidated financial statements including their portfolio companies, leading many more funds to meet the EUR 750 million scope threshold and thus bring more portfolio companies within scope of the rules.
The Administrative Guidance clarifies this is not the case. Instead, they state that the deemed consolidation requirement is not intended to modify the rules in circumstances where an authorised financial accounting standard does not require consolidation.
When considering the Pillar Two implications, asset managers will need to think about the implications from an investment fund, portfolio company and management company perspective.
Even in situations where Pillar Two will not result in additional tax being paid, it is important for firms to establish who is responsible for any compliance and reporting obligations. If situations arise where independent portfolio companies are treated as being part of the same MNE Group, issues around data access will become particularly important.
In the second part of ‘Navigating BEPS 2.0 and increasing tax administration requirements’, we look at what is next for Pillar Two and offer even further insight in the value of taking a coordinated approach to tax reporting.
How we can help
Experts at KPMG recognise that the challenge of an increasing amount of reporting requirements for MNE groups across multiple jurisdictions – combined with multiple data systems that often don’t have the capability to interact with each other – is making it difficult for tax and finance functions to comply.
To help resolve this, we recently rolled out the Digital Gateway, which provides a platform to clients looking to consolidate and simplify both data exchange and monitoring of compliance obligations. Clients get the benefit of a central engagement team, while having access to specialist teams in the relevant jurisdictions they operate in through the KPMG Member Firm network.
The Digital Gateway enables easy upload of bulk raw data, which can be extracted and formatted into the appropriate reporting framework. With a two-way dashboard, it allows both client and adviser to see the live status of all engagements. Find out more by contacting Matthew Thomas.
KPMG Crown Dependencies
Senior Manager, Tax
KPMG Crown Dependencies