The OECD's recent final reports on the 15 Actions in its Base Erosion and Profit Shifting (BEPS) project are expected to be (and to some extent, have already been) implemented through: (A) specific country domestic legislation or regulations; and/or (B) changes in bilateral treaties or the execution of a multilateral instrument to amend bilateral treaties. What does this mean for the asset management industry? While not specifically targeted at the asset management industry, the OECD's BEPS project certainly affects asset management businesses, as it affects multinational enterprises (MNEs) in general.

Business transparency — country-by-country reporting (CbC) and transfer pricing (for further discussion, see Tax Alerts 2015-1998, and 2015-1995) — Asset managers should be prepared to disclose more business information to more taxing authorities than they previously have. The OECD recommends CbC for MNEs, including asset managers, with annual gross revenues of EUR750MM or more, beginning in 2016, with the first information filing due in 2017. The UK, Ireland, Australia and Spain, among others, have already adopted CbC, while the US Internal Revenue Service has issued proposed regulations on CbC reporting in the United States.

CbC requires MNEs to provide the government with extensive data on their operations, including the revenue, taxes paid and operational details of every legal entity aggregated based on the entity's country of tax residence. Governments are then to exchange that information with one another under exchange-of-information agreements. CbC is supplemented by: (A) a "master file" requirement under which high-level information about the MNE's business, transfer pricing policies and agreements with tax authorities in a single document would be filed with each tax authority where the MNE has operations; and (B) a "local file" requirement where detailed information about the local business, including related-party payments and receipts for products, services, royalties, interest, etc ... would be filed with the tax authority of that specific local operation. In short, these new reporting requirements (including CbC) will require greater arms-length support for related-party transactions and will highlight the need for robust transfer pricing practices. Affected asset managers need to assess the logistical requirements and data sources needed well ahead of the 2017 deadline. Asset managers below the current revenue threshold for CbC reporting should keep in mind that governments could lower the threshold and modify the reporting requirements.

Limited hybrid use (for further discussion, see Tax Alerts 2015-1938, 2015-1547, 2015-395, and 2014-2200.) — Asset managers should expect the reports' recommendations to affect their existing hybrid arrangements and any hybrid arrangements considered for new transactions. To eliminate double non-taxation, the OECD generally recommends: (1) denying tax deductions in the source country for payments that are not subject to tax in the recipient country; or (2) denying tax exemptions in the recipient country for payments that were deductible in the source country. Based on similar amendments to the EU parent-subsidiary directive, EU member states have adopted into their domestic law: (A) provisions denying a dividend participation exemption at the parent level to the extent a subsidiary can deduct the profit distribution; and (B) a general "de minimis" anti-abuse rule. Luxembourg, for example, has adopted amendments of its parent-subsidiary directive that became effective on January 1, 2016. Asset managers, particularly those with EU operations, investments or investment platforms, should review their existing hybrid arrangements, the jurisdictions involved and the economic duration of those arrangements and assess the extent to which they could be adversely affected.

Deal sourcing and permanent establishment (PE) (for further discussion, see Tax Alert 2015-1989) — Asset managers who source deals locally (rather than remotely through their US-based trading terminals) or have affiliated entities performing research activity on the ground should review their local tax guidelines. The OECD recommends lowering the threshold by which a nonresident's limited activities in a particular state could create a taxable PE for the non-resident in that state. One potential effect of the recommended changes in the threshold is that a PE could be established if a non-resident's agents habitually function in a principal role leading to contracts that the nonresident executes, but does not materially modify.

Previously, local agents were generally not treated as creating a PE to the extent they were not concluding contracts on behalf of the non-resident. Depending on a variety of factors, including staff seniority and qualifications, and local affiliate dynamics with offshore headquarters, an increased PE risk may exist for certain asset managers and should be re-evaluated.

In addition to treaty changes, governments could decide to adopt domestic rules that potentially affect deal sourcing and research activities by asset managers in target investment jurisdictions. The UK has adopted, for example, the diverted profits tax, to address the artificial avoidance of a UK PE by certain nonresident enterprises. This trend also reinforces the need for appropriate transfer pricing among related entities to ensure that an entity located in a particular jurisdiction is compensated at arm's length for the functions it performs in that jurisdiction.

Tax rulings, substance and treaty shopping (for further discussion, see Tax Alerts 2015-1932; Tax Alert 2015-2002) — In addition to disclosing data about their business operations, asset managers should be prepared for a new focus on their tax rulings. To increase transparency, the OECD recommends sharing information regarding tax rulings under appropriate information exchange agreements. The OECD recommendations also include restricting access to treaties through inclusion in income tax treaties of a US-style "limitation on benefits" provision or a "principal purpose test" or some combination thereof, which could affect the treaty eligibility of entities set up in traditional treaty platform jurisdictions. Asset managers should: (A) review their existing rulings and current/proposed ruling requests in light of the new information exchange and reporting requirements; and (B) review the operational substance of any entities claiming treaty benefits.

Realigned and customized tax-planning approach (for further discussion, see Tax Alert 2015-1937, and the jurisdictional chart in Tax Alert 2015-395) — While the OECD is developing a multilateral instrument to expedite the amendment of bilateral treaties to implement its recommendations for PE issues and other treaty-related issues, the BEPS project already has affected specific country legislation. The UK, Spain and Ireland, among others, have begun implementing BEPS-related measures. The EU has also begun mandating its member countries to implement BEPs-related measures. Asset managers must focus on their jurisdictions of operation and their target investment jurisdictions to assess any adverse changes coming out of the BEPS project. Mitigating those effects will require a customized analysis of the relevant operations, investments and local country rules in conjunction with any applicable treaties. There will be no "one-size fits all" approach to tax-planning to address BEPs changes.

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