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Potential Impact of the BEPS Project on Financial Products and Services (video)

September 4, 2015 | In this video, Michael Plowgian—a principal in KPMG LLP’s Washington National Tax practice—discusses what impact the OECD and G20 BEPS Project recommendations may have on the taxation of cross-border financial products and transactions. In particular, he notes how the actions to address hybrid mismatch arrangements, to restrict deductions for interest, and to revise the transfer pricing rules may be significant.


Michael Plowgian: Hi, I’m Michael Plowgian and I’m a principal in KPMG’s Washington National Tax office. In this video, I will highlight some of the potential impacts of the OECD and G20 BEPS Project on the financial services industry and financial products.

The BEPS Project is a major initiative in international tax, intended to substantially revise the existing international tax standards. It is driven by a public and political perception that those standards may allow some multinational businesses to avoid tax by shifting profits away from the jurisdictions in which value is created. Final recommendations from the BEPS Project are expected in early October this year.

The recommendations that result from the BEPS Project will have a substantial impact on the taxation of cross-border financial products and transactions. In particular, the actions to address hybrid mismatch arrangements, to restrict deductions for interest, and to revise the transfer pricing rules will be significant.

Action 2: Hybrid Mismatch Arrangements

First, let’s discuss the recommendations regarding hybrid mismatch arrangements. These recommendations seek to prevent income from “disappearing” or being indefinitely deferred due to a mismatch in different countries’ tax systems, for example where a payment is treated as a deductible payment of interest in the payor country and as an exempt dividend in the recipient’s country. The recommendations generally would deny a deduction for a payment if it is not included in taxable income by the recipient, or would require an otherwise exempt amount to be included in taxable income if the payment is deductible by the payor. In other words, the recommendations would impact a transaction if either the payor’s country or the recipient’s country adopts the recommendations, and in certain cases can apply even if the mismatch is routed through a third country. Importantly for the financial services industry, the anti-hybrids recommendations also are intended to apply to structured arrangements, and so could be implicated where a financial institution helps its clients develop structured financing arrangements that take advantages of differences in tax treatment.

The anti-hybrid recommendations may also apply to certain cross-border repos and securities lending transactions, where those transactions are treated differently in different jurisdictions. An exception may apply for “on-market” repos and securities lending transactions, and we hope to get further guidance on that when the final recommendations are approved by the G20 in October 2015.

Action 4: Interest Deductions and Other Financial Payments

The OECD will also issue recommendations for countries to limit the deductibility of interest. The OECD’s draft recommendations suggest that the rules should also apply to all payments that are economically equivalent to interest payments, and many types of financial products may therefore be swept into the scope of the rules. In particular, certain derivatives and leasing transactions may be subject the limitations. The draft recommendations acknowledge that special issues are raised by banking and insurance companies, and suggest separate rules may apply in that context. Exactly what special rules will be provided for the financial services sector is not clear, but discussions are ongoing at the OECD and with member governments.

Actions 8 through 10: Transfer Pricing

The BEPS recommendations related to transfer pricing could also impact the financial services industry. In particular, the draft guidance suggests that tax administrations will be scrutinizing much more closely the allocation of risk in related-party transactions in determining the appropriate transfer price. At the same time, financial regulators, including the Federal Reserve in the U.S., are also looking very closely at the allocation of risk within a financial group, and it is not yet clear whether and to what extent the concerns of financial regulators must or can be reconciled with those of tax administrators. Given the importance of risk allocation and management to the business of financial services firms, transfer pricing changes coming out of the BEPS Project could have a major impact on the industry.

The final BEPS recommendations are expected to be released in early October. Not all countries will adopt all of the recommendations, but some countries will begin implementing the recommendations during 2016. Financial services firms should continue to monitor these changes and develop a plan to address them. You can obtain further information by talking to a KPMG professional.

Visit KPMG's Base Erosion and Profit Shifting (BEPS): Tax Transparency site for more insights.


This information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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