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Base Erosion and Profit Shifting

Update April 2016

Pension funds and non CIV funds

A consultation document on the treatment of non-CIV funds was published on 24th March 2016.

 

Action Plan 6 seeks to counter this through "limitation-on-benefits" (LOB) and/or "principal purposes test" (PPT) provisions. The first proposal is to introduce US style LOB provisions. This is designed to limit treaty benefits to companies with sufficient presence in the relevant country, based on their legal nature, ownership and activities. PPT provisions provide a subjective anti-abuse rule within treaties aimed at removing treaty benefits where one of the principal purposes of arrangements or transactions is to obtain treaty benefits. The report does not favour one or the other and concludes that combinations of the two would be possible. Implementation will therefore vary country by country. The treatment of CIVs and non CIVs is much more crucial under LOB provisions and the consultation document concentrates on this.  

 

The proposals are highly complex and it is evident that considerable further work is needed.

 

The consultation period ran to 22nd April 2016.

 

The draft can be found here.

 

Next steps

 

We will provide further updates once the results of the consultations are known.

The OECD has issued two important documents for the ivestment management industry in 2016 as part of its Base Erosion and Profit Shifting (BEPS) proposals.

 

Treaty Residence of Pension Funds

 

An outstanding point from Action 6 of the BEPS Action Plan (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances) was that a dditional work was needed to ensure that a pension fund should be considered to be a resident of the State in which it is constituted regardless of whether that pension fund benefits from a limited or complete exemption from taxation in that State. This will be done through changes to the OECD Model Tax Convention, to be also finalised in the first part of 2016, that will ensure that outcome for funds that will meet a definition of “recognised pension fund”. A discussion draft was published on 29th February 2016. Ths included draft changes to Articles 3 and 4 of the OECD Model Tax Convention, and to the Commentary on these Articles, that will ensure that a pension fund is considered to be a resident of the State in which it is constituted for the purposes of tax treaties.  The consultation period ran to 1st April 2016.  The key questions for comment related to the efinition of “recognised pension fund”.

 

The draft can be found here.

 

Treaty entitlement of non-CIV funds

 

A second outstanding point from Action 6 of the BEPS Action Plan related to the treaty entitlement of non-CIV funds. Our earlier brief comments on CIV and non CIV funds can be found here..

Our general information on BEPS can be found here.