BEPS: issues for private equity and real estate funds

The Base Erosion and Profit Shifting (BEPS) project of the Organisation for Economic Cooperation and Development (OECD) has reached key milestones, and there are areas that require special attention from global private equity and real estate funds. 

The BEPS project, which intends to increase tax transparency and combat abusive fiscal practices, centres around 15 action points (listed right), each with its own implementation timeline. 

In particular, the following action points have immediate relevance:

  • 6 – preventing tax treaty abuse 
  • 13 – country by country reporting and transfer pricing documentation 
  • 15 – multilateral instrument (see box).

Action 6

Action 6 combats tax treaty shopping, a technique in which a tax resident company that does not have tax treaty access interposes a holding company in a tax treaty country to access tax treaty benefits.

The OECD recommends countries include: 

  • a limitation of benefits (LOB) clause or 
  • principal purpose test (PPT) or 
  • a combination of both. 

Under a PPT, tax treaty benefits could be denied if one of the main purposes of establishing a holding company was to obtain the benefits of the treaty.

There is still an ongoing OECD public discussion draft on the treaty entitlement of non-collective investment vehicle funds (non-CIV funds include global private equity and real estate funds) and if exemptions would be applicable under LOB and/or PPT. No final decision has been taken yet and the impact on master holding companies is unclear.

Action 13

Action 13 is seeking to increase multinationals’ transparency on transfer pricing processes for tax authorities in OECD member countries. In order to achieve this objective, there is a three-tiered requirement of: 

  • country-by-country reporting (CbCR) 
  • a master file and 
  • a local file. 

The CbCR requirement only applies to multinationals with a global consolidated annual turnover of €750 million or more (the threshold). Funds should follow their consolidation accounting rules to determine whether their investee companies should be included in this group. Where investee companies under accounting rules should not be consolidated, the threshold may not be met.

A fund that does not meet this threshold may still be subject to lower master file and/or local file threshold requirements in certain OECD countries.

Three areas for current focus

While this overview is not exhaustive, it clearly indicates the need for global private equity and real estate funds to prepare for BEPS and to focus especially on the following:

  • review existing global holding structures to confirm whether these meet the anti-treaty shopping rules and/or monitor if possible exemptions apply to non-CIV funds;
  • evaluate applicable action 13 requirements; 
  • assess whether and how the multilateral instrument, once in force, impacts foreign tax treaties that apply to current holding structures.

8th March 2017