Why I’m worried about BEPs when it comes to funds | KPMG | LU

Why I’m worried about BEPs when it comes to funds

Why I’m worried about BEPs when it comes to funds

Georges Bock, Managing Partner at KPMG Luxembourg, comments on the OECD initiative to tackle tax evasion by multinationals – BEPs – and the unforeseen impact it will have on the European asset management industry.


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“I feel compelled to write this blog while there is still time to act. The OECD initiative known as BEPs is gathering momentum and after dissecting, discussing and digesting the OECD BEPS report (PDF, 1.45 MB) on the topic, I fear there may be unfortunate side-effects lurking in this initiative. While the objective is to guarantee that multinationals pay their fair share of tax – one particular rule has set alarm bells ringing as it does not only affect international corporations. It will harm, too, the small investor on the street.  

The rule I am speaking of aims to tackle ‘treaty shopping’, where some multinationals cherry pick the tax to be paid on their profits. This is done by creating structures which take advantage of tax treaties between individual states: money is channeled through countries or states which have treaties offering very low or even 0% tax. The proposed rules on treaty shopping seek to avoid this practice by checking whether a company has a legitimate reason to have X or Y country in their structure. If they don’t, the lower tax rate will not be applied.

What does all this have to do with investors? Well, my concerns arise from the fact that – under current proposals - the same logic will be applied to investment funds as multinationals. Authorities will be looking to see whether funds have a legitimate reason to be in a certain country.  

This is determined by looking at where the funds’ investors are domiciled, with 50% required in the country of the fund. But the logic here, simply doesn’t and can’t apply: in a single European market, aren’t investment funds cross-border by nature? Do we really wish to limit where people can invest based on their domicile? Because this is what the new rules will do, applying a look-through principle to see where investors are from and using this to decide what tax should be applied. The end result could be thousands or even millions of investors seeing taxes rise on their funds and being forced to choose their investments based on where they live, rather than a funds’ potential.

Should BEPS go forward, investors will be deterred from putting their pension pot in otherwise sustainable funds – funds that would have ensured them a solid retirement - for fear of being taxed punitively. Such a rule is also baffling for the European investment industry, which plays a role worldwide as a centre of excellence, expertise and skills in funds and, more specifically, cross-border distribution. It makes sense for funds to be sold from a country or city that has a cluster of expertise and a solid economic and political environment: Luxembourg, Ireland, Paris and London are natural choices for distribution. Yet the BEPS proposal would penalize cross-border funds that attract money from all over Europe, as most do not have 50% of investors from the country of the fund.  Somehow, I feel an injustice is being done. Isn’t it time for a rethink?”

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