International banking groups continue to face problems of double taxation relating to their networks of overseas branches despite the broad acceptance of a new set of principles proposed by the Organisation for Economic Cooperation and Development (OECD). This report shows there are increased compliance burdens in countries where detailed rules have been introduced, but wide differences in approach have confused the situation. The survey, of 35 countries, suggests that cases of double and ‘less than single’ taxation are still common.
Jane McCormick, global industry leader in banking tax at KPMG in the UK, told The Banker that although many countries have adopted the OECD principles, their practical implementation differs. “What taxpayers want is consistency of approach, to eliminate the possibility of double tax on their overseas branches. Despite the efforts of tax authorities, there is still concern among the banking industry that a common approach is a long way off,” she said.
To streamline the situation, the OECD has devised two main principles of guidance, the ‘separate entity’ and the ‘arm’s length’ principles.
Two rules are emerging as the main methods for applying the arm’s length principle; actual capital allocation and thin capitalisation.
The first allocates the total capital of a bank among its branches, usually based on the assets of the branches. The second method seeks to calculate the amount of capital the branch would require if it were a stand-alone bank. Variations on these themes can produce different results and may lead to double tax or ‘less than single’ tax.
The report concludes that there is concern by the banking industry that a common approach may not emerge: “Although all these approaches are designed to achieve the same ‘arm’s length’ objective, they can produce very different answers in practice, which in some cases could add or subtract tens of millions of pounds to or from post-tax profits,” it says.
