The Base Erosion and Profit Shifting Package is the next major regulatory headwind fund managers will face, according to industry sources.
“Quite a few private equity funds are large and have global operations. It’s more than just regulating private equity firms’ tax affairs. Although BEPS is aimed at the biggest companies, there is flowdown, and it affects PE firms’ investments as well,” David Bailey, director at fund administrator Augentius said.
The regulation is also expected to affect where funds are domiciled and how funds are structured. While BEPS will apply internationally, there is some uncertainty around US implementation. “Whether BEPS will be accepted by the US is something else, but the EU is taking it quite seriously. There’s so many unquantifiable issues around it,” said Bailey.
pfm’s general counsel roundtable last year highlighted BEPS’s impact on fund managers’ costs. “The [BEPS] policy will have an immediate cost around how interest is going to be deductible, so managers will work that into how much they price assets and what their expected return is,” said Geoffrey Bailhache, managing director and head of EMEA legal & compliance at Blackstone.
And it has long been argued BEPS may not suit the private equity structure, having initially targeted global corporations who were perceived to be avoiding tax by basing subsidiary companies in tax-efficient locations.
“With respect to certain BEPS-related reporting requirements, a concern is that private equity may be treated by various countries’ tax authorities… as one consolidated group,” said Doug Puckett, deputy national tax leader for private equity at Deloitte.
The 15 BEPS Actions were finalised last year and will form the basis for G20 countries’ tax legislation. The OECD will also allow non G20 countries to become signatories. But parts of the regulation, including Action 6 on tax treaty abuse, are being lobbied against by industry stakeholders including PwC.