COVID-19 may have impacted on fintech deal activity in the first half of this year, but there is no doubt that investing in fintech services through either in-house development, partnerships or acquisition will be a significant focus for many financial institutions across the spectrum in the months to come. The pandemic has made the digital agenda more critical than ever – and fintech capabilities could be central to success.

Whatever route you are taking to creating a fintech footprint, there are a myriad of issues to consider. But one important area that often gets overlooked at the outset is tax. In any fintech operation, technology is central to the value they create. This makes them fundamentally differentiated from traditional financial services, where the typical value drivers are people and capital, with technology an enabler. This distinction creates different tax issues that must be factored in if you are not to encounter unwelcome surprises later on, especially as your fintech operation expands into new territories and broadens its customer base.

The OECD’s Base Erosion and Profit Shifting (BEPS) project has focused on tax transparency and recommended wide ranging reforms since 2015. The OECD is currently focused on addressing the immediate and longer term tax challenges arising from digital business models and the digitalization of the economy more generally.

Tax authorities have become ever more active in seeking to ensure that any business operating in its jurisdiction, physically as well as digitally, is paying what they consider to be its fair share. 

This is even more the case now, with COVID-19 having placed significant pressure on public purses the world over. Increasingly, consumers are also taking account of companies’ contribution to society when making their buying decisions, amplifying the commercial significance of being seen to get your tax right.

In order to establish the appropriate tax base, financial institutions need to consider where and how value is created and how the existing narrative changes with the fintech involvement.

Historically, technology activities in financial institutions have been viewed as supportive in nature. As fintech becomes more embedded within the core operations of financial institutions, possibly assuming some or all of traditionally human roles in terms of key functions and management of risks, that may necessitate a revisiting of value drivers. A change in value drivers may, in turn, impact which jurisdictions/legal entities are entitled to the profits and where your tax base needs to be reported, which of course will drive your effective tax rate. 

In order to establish the appropriate tax base, financial institutions need to consider where and how value is created and how the existing narrative changes with the fintech involvement.

Technology service or financial service?

When considering how exactly to characterize intra-group relationships and flows in engaging with tax authorities on transfer pricing and corporate tax, there are several indirect tax grey areas it is also worth considering at the outset. For example, whether to present the activity as a single bundled service or break it down into its constituent technology and functional components. This may not seem intuitive to the business but it can have significant implications for costs and profit margin – for instance in the EU, where there is still an (increasingly outdated) distinction  between mere technology services (subject to VAT) and substantive financial services (potentially VAT exempt). This somewhat arbitrary distinction leads to uncertainty and, increasingly, litigation around fintechs – which has finally prompted the UK and EU recently to review their overall approach to financial services VAT as digitalization progresses and traditional distinctions break down further.

Digital Services Tax (DST)

There is also the related area of Digital Services Taxes (DST) which have been introduced in various countries around the world. These regimes are primarily designed to tax platform-based technology services – but, not being harmonized and with broad definitions and vague guidance as to what is in scope, there is concern that in some countries they might be applied to certain aspects of financial services too. What’s more, while they may not apply to some parts of a fintech business – a core payments services for example – they could apply to others – e.g. an associated shopping and rewards platform.

It is critical, therefore, in considering the relevant parts of your business or weighing up fintech investment opportunities to be clear on how services are viewed in each territory from a commercial and regulatory perspective and to consider the tax implications of the different potential business models. The level of responsibility and risk at each stage in the value chain is often a determining factor but the considerable divergence between global regions on what is seen as falling in or out of indirect or digital services taxation make this challenging to navigate. Holistic consideration of tax implications at the outset for the key jurisdictions will help guide commercial decisions about the business model and the strategy for engagement with the different tax authorities. It will also be important to think about the quality of data available and the ability of the in-house tax team to meet ever growing tax reporting obligations.


With tax scrutiny likely to continue to rise in the post COVID-19 landscape, it is more important than ever that fintech activities and their tax costs and implications are properly factored into the business’s due diligence on deals and overall  strategy. Best practice would be for the tax department to work closely with the business, becoming a strategic partner in decision-making.

Ideally you should be able to articulate your story clearly, ensure that it considers and aligns across all aspects of tax, and factor tax considerations into every stage of the growth of your fintech operations.

This article is featured in Pulse of Fintech H1’20.

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