Hot Topics from Deloitte’s European Financial Services TP Conference

During the European Financial Services Transfer Pricing conference, hosted by Deloitte in Zurich on 18 January 2024, industry leaders, tax administrations and our global tax experts discussed the latest trends and developments. There are growing challenges for tax practitioners as a global patchwork of ever more complex rules develops. Tax law has not yet caught up with remote working – including cross-border. TP is and will remain a major topic, and with additional complexities in financial services.

Financial Services Tax Update – Pillar Two and Beyond

Thomas Hug, Partner and head of Deloitte Switzerland's National Tax Office, opened the conference with a tour d'horizon of the latest developments in tax policy, both internationally and in Switzerland. He identified a clear trend towards a two-tier tax system, with a turnover of EUR 750m as the "demarcation line". As soon as taxpayers reach this threshold, they are subject to numerous complex regulations (e.g., Pillar II, EU Public CbCR). At the same time many new tax policies are based on international accounting standards, such as Pillar II and the proposed EU BEFIT Directive. In-depth knowledge is becoming increasingly important for tax practitioners. Although the OECD is establishing itself as a global tax standard-setter, implementation of new rules at the jurisdictional level remains a challenge due to the OECD's lack of legislative competence, and political realities in different countries. Therefore a global patchwork of unharmonized rules is evolving.

Constant Dimitriou, Director in Deloitte Switzerland's VAT practice, addressed the issue of VAT on intra-group transactions, which have so far received little attention but are of particular importance in the financial services sector, where banks and insurance companies are often unable to fully reclaim input taxes. While transfer pricing (TP) tends to focus on arm's length remuneration of activities performed and risks assumed, the VAT qualification of the compensation tends to focus on the nature of the service. An example is year-end TP adjustments, where it is often unclear from a VAT perspective whether there is also an underlying service. Another example is the profit-sharing model commonly used in the financial services industry, which requires, from a VAT perspective, identification of the different services provided between the parties.

Updates from the OECD Centre for Tax Policy & Administration

Ralf Heussner, Partner Transfer Pricing in the German firm, gave an update on projects in the OECD pipeline. Remote working is becoming increasingly important; employees now expect to work from home, including across- borders. Unfortunately, the current international tax framework does not reflect this new economic reality. The OECD is planning to launch a project on this topic soon. It goes hand in hand with the issue of global mobility, which is no longer driven by employers but by employees.

Tax Developments Around Future of Work and New Hybrid Working Models

Geoff Gill, Partner Deloitte Australia, Luka Pallai, Partner Deloitte Ireland, and Natasha Reuta, Deloitte Italy, discussed how the new ways of working could be addressed from a TP perspective. Several practical cases were analysed, but the key takeaway was that there is no "one size fits all" TP solution. The OECD is committed to revising its commentary on this issue (see above), but at present the lack of well established rules requires groups to implement various measures now (e.g., robust tracking of days spent overseas and the location where work is performed).

Interview with the Swiss Federal Tax Administration

Georgy Galumov, Partner Transfer Pricing of Deloitte Switzerland, interviewed Thibaut Urbain, a TP expert at the Swiss Federal Tax Administration (SFTA), who confirmed that the practice of having tax expenses as well as FX gains/losses as part of the cost base will be abolished in order to align the Swiss practice with the OECD TP guidelines. FX gains and losses need to be considered  on a case by case basis.  

Tax Controversy Update

Representatives of the Deloitte network gave a quick overview of the latest trends in different European countries:

• Italy: There has been a clear trend towards an increasing amount of TP auditing in the past 10 years, with a strong focus on intangibles and restructuring. The main topics in recent TP court cases were the creditworthiness of the borrower and implicit support, cash pooling, and the remuneration of sales activity in a context of investment banking/global trading.
• Luxembourg: The Luxembourg Inland Revenue (ACD) launched a campaign in September 2020, focusing on financial transactions. Deloitte observes an evolution in ACD’s info requests towards increased TP documentation, loan agreements, board minutes, and examination of the economic rationale of the transactions in scope.
• Netherlands: The Dutch tax administrations are currently mainly focusing on remuneration for general/administrative expenses vs. core business services. The devil is not only in the detail, but also in the evidence of the benefit test. Another hot topic in the Netherlands is the interaction between VAT and TP due to the Danske Bank case written into law as of 1 January 2024. Dealings between the head office and branches, which is common in the FS industry, could attract VAT.
• Switzerland: The cantonal tax administrations, especially in Geneva and Zurich, are taking up more and more TP cases and are approaching them in a more technical manner. In recent court cases, asset management offshore structures characterised by low level of substance as well as post M&A-transactions were scrutinised. 

TP is and will remain one of the key issues in the tax and risk strategy of international groups in the coming years. In the FS sector, however, this topic is associated with other challenges, e.g., additional regulatory requirements and costs resulting from non-recoverable VAT.

Deloitte’s next TP conference, the Global Transfer Pricing Summit, will take place on 17 – 18 June 2024 in London.

If you would like to discuss more on this topic, please reach out to our key contacts below.

• Thomas Hug - Partner, National Tax Office
  
• George Galumov - Partner, Transfer Pricing Financial Transactions Leader