2010 Branch Capital Attribution Tax Survey_Final

8/6/2019 2010 Branch Capital Attribution Tax Survey_Final

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INANCIA SICS

Branch Capital

AttributionTax Survey

A survey o international practice

kpmg.com
http://www.kpmg.com/http://www.kpmg.com/


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Contents

Introduction 1

Survey highlights 3

What does it mean or you? 4

Well actually its a bit more complicated 6

Insights and concluding thoughts 8

Detailed results by country 9

2010 KPMG International. KPMG International is a Swiss cooperative. Member frms o the KPMG network o independent frms are afliated with KPMG International. KPMG International provides no clientservices. No member frm has any authority to obligate or bind KPMG International or any other member frm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind anymember frm. All rights reserved.


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Branch Capital Attribution Tax Survey | 1

Introduction

There has been

considerable variation

across countries regarding

the taxation o Permanentstablishments (Ps)

The fnancial crisis and subsequent economic downturn has led many

fnancial institutions to re-evaluate their business models and activities

to try to enhance the use o increasingly scarce resources. Many are

currently analyzing their overall balance sheets, capital positions, liquidity,

and unding sources. Meanwhile, the global regulatory environment orfnancial institutions is tending towards increased regulations and capital

requirements.

Basel III rules or banks to set aside ar more Tier 1 capital and hold a

minimum level o liquid assets are set to come into orce by the end o

2012, although banks will have until 2019 to comply ully. At the same

time, or the insurance industry, Solvency II is bringing about greater

harmonization o regulations and legislation in the uropean Union (U).

Capital requirements are to be tied to a comprehensive risk defnition

including underwriting and market risks. In response to Solvency II

many insurance companies in the U are using the passport systemi.e. branches (operating under reedom o stablishment)1.

In some instances, government bailout o the banks may have contributed

to turning the fnancial crisis into a sovereign debt crisis. The G-20 set

out a deadline or the advanced economies to halve defcits by 2013 and

stabilize the ratio o debt to Gross Domestic Product (GDP). Countries

with serious fscal challenges may need to act aster. iscal tightening has

become central to a variety o austerity measures. Tax authorities are working

harder and smarter to protect their revenue bases. Not surprisingly, there is an

increased ocus on the issue o taxation o branches o overseas banking and

insurance entities.

Continued

1 The principle o reedom o establishment enables an economic operator (whether a person or a company) to carry on an economic

activity in a stable and continuous way in one or more Member States.



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2 | Branch Capital Attribution Tax Survey

There has been considerable variation across countries regarding the

taxation o Permanent stablishments (Ps). The issue has eatured

prominently in Organisation or conomic Co-operation and Development

(OCD) guidance and discussion. In its 2008 eport on the Attribution o

Profts to Permanent stablishments (P eport), the OCDs Committeeon iscal Aairs (CA) provided extensive guidance on how the profts

should be attributed to a P under tax treaties ollowing Article 7 o the

Model Convention. According to the P eport, capital is attributed to

support the assets and risks attributed to the branch. Assets and risks are

attributed according to the location o Key ntrepreneurial isk Taking

(KT) unctions associated with not only the origin o the assets and

risks but also with their on-going management.

The CA intended the 2008 report to build on previous OCD discussion

drats in providing a better and broader consensus regarding the interpretation

and practical application o Article 7. One o themes or the industry was toallow a bank or insurance entity to apply a single method o capital attribution

across its branches globally while reducing the risk o mismatches that may

result in double, or less than single, taxation (top-down approach).

In view o the 2008 OCD report, KPMG decided to update our previous

survey o branch capital attribution produced in 2005. KPMG member frms

in 33 countries provided inormation concerning the rules and approach

adopted by the tax authorities in their country. espondent countries

were asked to provide details o domestic tax law and practice so as to

help assess the degree o variation between the principles outlined in

the OCD report and the current local position in the countries covered,while also seeking to identiy what practical problems currently exist or may

be anticipated. The survey was extended to cover branches o insurance

companies in the participating countries, given the ocus on branches

ollowing Solvency II.



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Survey highlights

1.Most countries surveyed generally accept the OCDs separate entity

and arms length principles and the guidance given in the P eport.

On P proft (and capital) attribution, countries surveyed all into the

ollowing three categories:

Countries with no specifc domestic rules or P proft (and capital)

attribution and/ or which closely ollow the OCD guidelines (e.g.

UK, Australia, Netherlands, and rance), but which may apply the

authorized OCD approach in dierent ways.

Countries with some domestic provisions that may dier rom the

authorized OCD approach (e.g. Germany, Italy, and Korea).

Countries that have detailed domestic rules that do not allow or the

application o the authorized OCD approach (e.g. Argentina, Hong

Kong, Brazil and Mexico).

2.or countries in the frst two categories, mismatches in proft or capital

attribution may be resolved by accessing the relevant Double Tax

Treaty (DTT) or invoking the relevant Competent Authority procedure

such as an Advance Pricing Agreement (APA), or Mutual Agreement

Procedure (MAP). In urope disputes may also be resolved through the

U Arbitration Convention. or countries in the third category, it may be

difcult or potentially impossible to use the authorized OCD approach

to resolve issues o double taxation.

3.P proft attribution, itsel, has not been an issue that has generally

been raised by many tax authorities in the past. However, the OCDreport has increased awareness o the issue. Capital attribution has

been challenged more actively particularly around the issue o the

deductibility o interest.

4.There is some divergence with regard to P capital attribution. While

most countries have limited provisions in domestic tax legislation, there

are dierences in the minimum capital required or regulatory purposes.

There is also divergence in the choice o OCD method countries have

applied (thin capitalization vs. capital allocation approach). Countries are

considering a more exible approach to accommodate dierences in

the application o the OCD model.

Key points:

1. General acceptance o the OECDsseparate entity and arms length

principles

2. Resolution o proft/capitalattribution mismatches

3. Increased awareness o PE proftattribution

4. Variance in PE capital attribution



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What does itmean for you?

The potential beneft to abank or insurance entitycan be measured by theirability to apply a top-downapproach to the attributiono capital

One o the objectives o the P eport was to set out a better and

more consistent approach than had previously been available, providing

tax administrations and taxpayers with a greater degree o certainty as to

how profts (and capital) should be attributed to a P under DTTs ollowing

the OCD Model. or taxpayers, greater awareness and certainty aroundtax liabilities that a common approach provides is crucial in managing their

tax exposure.

The potential beneft to a bank or insurance entity can be measured

by their ability to apply a top-down approach to the attribution o capital

i.e. a single method determined by head ofce with a goal o not incurring

double taxation. rom the results o the survey we can see the extent to

which this may be achievable. Consider the case study shown in igure 1

opposite.



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Figure 1

rench bank branching out

France(Head Ofce)

UK

(Branch) Australia(Branch)

Poland

(Branch)

A bank with head ofce in rance initially

opens branches in the UK and Australia.

It allocates total capital according to the

capital allocation approach. It wishes toapply this approach across its branches.

The UK, although avouring the thin

capitalization rule, accepts other OCD

methods such as the capital allocation

approach. Australia too, allows or the

use o this approach. In this case the

rench bank can consistently apply

a single method o capital attribution.

This is the frst best scenario.

Now consider the scenario where a

branch in Poland is also opened. Poland

applies a thin capitalization approach. Asa result there is a potential mismatch in

the capital attributed across branches.

The bank has two possible options:

Apply the domestic rules and acceptthat they could result in double

taxation; or

I the double taxation impact is too

large then decide whether to appeal

and seek to apply the treaty position

and i this ails then to invoke a MutualAgreement Procedure (MAP) (i this

is available). In this example the MAP

is available and the company can

also at the same time invoke the U

Arbitration Convention to help ensure

that the issue is resolved the results

o the arbitration are binding on both

tax authorities.

This is the second best scenario.

The bank may or may not be able

to apply a single method (i the tax

authority will not apply the treatyposition without invoking the MAP

or entering into an Advance PricingAgreement (APA) across its branches,

but, the MAP or APA procedures should

at least resolve any mismatches in

allocations and so help to eliminate

double taxation.

inally, suppose the bank opens abranch in Hong Kong. Given that this

is a non-OCD country that does not

apply the authorized OCD approach,it may not be possible to apply a top-

down method as described above.

Since there is not a comprehensive

DTT between Hong Kong and rance,

there is a high risk o potential double

taxation.

Source: KPMG, November 2010



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Well actually its a bitmore complicated

This years survey alsohighlighted a number ocountries or which theOCD report appears notto have much o an impact

The OCD report has succeeded in promoting a wider consensus

regarding P proft and capital attribution. Since our previous survey, most

o the countries are now indicating, to varying degrees, an acceptance o

OCD guidelines. This closer alignment o thinking has helped reduce the

risk o double taxation.However, in practice the picture is complicated by the act that only a

ew countries allow or a exible application o the OCD approach that

would acilitate the frst best scenario or the taxpayer described above.

Consulting the relevant treaty position and/or invoking a Competent

Authority procedure may help achieve this outcome, or at least the

second best outcome.

This years survey also highlighted a number o countries or which the

OCD report appears not to have much o an impact. Domestic legislation

in such jurisdictions takes precedence with varying results. This makes

it difcult or a bank or insurance entity to apply a top-down method dueto the uncertainty o double taxation should one o these jurisdictions be

involved. This may result in the least avoured outcome.

igure 2 summarizes the present environment acing a bank or insurer

looking to branch out in the modern world, on the basis o the results o the

survey, and country responses to Article 7 o the Model Tax Convention

(Model Tax Convention on Income and Capital Condensed ersion).

As shown in igure 2 the majority o countries surveyed are yellow,

indicating that the second best scenario (previously described) is

generally the likely outcome. Some countries are still considering whichOCD method to apply. It is hoped that dispute resolution mechanisms in

place such as the MAP and the U Arbitration Convention will help provide

greater understanding and exibility, allowing or countries to progress

rom yellow to green in igure 2.



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Figure 2

Branching out in the modern world

Applies the OCD Model and allows

exibility in choice o method.

Applies the OCD Model (less exibly)

or only through DTT/MAP/APA.

The OCD Model cannot be applied.

Source: KPMG, November 2010



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Insights andconcluding thoughts

The survey highlightedgenerally wider acceptanceby tax authorities o OCDguidelines or P proft andcapital attribution

The survey highlighted generally wider acceptance by tax authorities o

OCD guidelines or P proft and capital attribution.

It is an issue that is being raised more actively by tax authorities ollowing

the OCD report, while in the past this was generally not the case in most

countries. As a result, there is a greater need or branches o banks andinsurance entities to thoroughly review their business models and capital

structure. vidence rom respondents suggests that many have yet to do

so. The OCDs concept o KTs will likely have some bearing on where

assets and capital are attributed or tax purposes.

While our survey has captured the issues acing the direct taxation o

branches, there are signifcant headwinds on the indirect tax side. In April

2010 the International Monetary und (IM) proposed two types o global

levies on bank branches. The simple version is a straight tax on a banks gross

profts, beore deducting compensation. A fnancial stability contribution,

would initially be at a at rate; this would eventually be refned so that riskierbusinesses paid more. The second version, a more complex tax, aims directly

at excess bank proft and pay. These are being applied unilaterally by certain

countries, which will add urther complications or branches.

Against this background, tax directors o banks and insurance entities need

to consider undertaking detailed unctional analysis to identiy the KTs and

thus appropriately attribute assets and capital to their branches. As well as

reducing the risk o double taxation, such an exercise oten helps to identiy

opportunities or tax planning. A combination o KPMG member frms global

and local knowledge in fnancial service (S) tax and our S transer pricing

networks can provide taxpayers with a broad-ranging risk review and essentialtax planning advice. Our frms have successully helped taxpayers negotiate

APAs and MAPs with tax authorities to oer our clients improved certainty

amidst a challenging business environment.



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Detailed resultsby country

Argentina Denmark India

Poland Switzerland

Australia inland Ireland

Portugal UK

Austria rance Italy

Singapore US

Belgium Germany Japan

Korea

Slovakia

Brazil Greece

Mexico

uxembourg

South Arica

Canada Hong Kong

Netherlands Spain

China Hungary

New Zealand Sweden



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Fernando Quiroga LafargueKPMG in Argentina

T: +54 11 4316 5965

E: [email protected]

Argentina

As a non-OCD member there is limited impact o the OCD report thus ar.Branches o oreign-owned entities must keep their accounting records separate rom

their parent companies. Thin capitalization rules apply to determine the deductibility

o interest (based on a fxed debt-equity ratio). Some o the tax treaties signed byArgentina establish a MAP. In practice, there were very ew cases that applied this

procedure which tends to be a lengthy process.

Jenny ClarkeKPMG in Australia

T: +61 2 9335 7213


Geoffrey H. GirvanKPMG in Australia

T: +61 2 9335 7462


Australia

Australia complies to a large extent with OCD principles. Detailed legislation deals

with proft attribution to Ps. The separate enterprise principle is recognized or the

sourcing o income and allocation o deductions to a P. Capital is attributed according

to the quasi-thin capitalization approach. oreign banks conducting business in Australia

at or through a branch are required to hold a fxed percentage o risk-weighted assets.

Australia accepts the symmetry principle. Australia will respect the capital attribution

rules o the host country or Australian entities with overseas branches. or countrieswith which Australia has a double tax agreement, a MAP article will apply.

Johann MuehlehnerKPMG in Austria

T:+43 1 31 332 292


Liane KarnerKPMG in Austria

T: +43 1 31 332 203


Austria

No detailed guidance on P proft attribution, but usually ollows OCD guidelines.

ecent drat guidelines on capital attribution also conorm to the BIS ratio approach

(a capital allocation approach based on risk-weighted assets). This is likely to lead to

an increased compliance burden. Austrian tax authorities have generally tried to avoiddierences in the method o allocating capital by accepting the oreign jurisdictions

application o rules i the outcome seemed to be reasonable. Austria allows or

application o MAP. U Arbitration Convention is also applicable.

Paul Op de BeeckKPMG in Belgium

T: +32 2 708 42 11


Paul-Yves BernardKPMG in Belgium

T: +32 2 708 4439

E:[email protected]

Belgium

The separate enterprise principle is applied with regard to P proft attribution.

Belgian legislation only provides or a limited number o provisions with regard to

capital attribution Adoption o OCDs proposals is likely to have implications on

compliance as well as tax liabilities. The ocus o insurance branch enquiries has

primarily been the allocations keys used in order to attribute investment income and

premiums to the branch and capital structure (given the notional interest deduction).

A MAP can be applied in case o double taxation. urthermore, the U Arbitration

Convention can also be applied.



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Ediberto SalgeKPMG in Brazil

T:+55 11 2183 3176E: [email protected]

Brazil

No specifc rules regarding P proft or capital attribution. General rule allowing or thedeductibility o certain expenses provided that these are necessary or maintaining

the source o income and are consistent with the activities o the company. Interest

expense o a loan rom a oreign related party is deductible up to the rate o IBOplus a 3 percent spread. As OCD rules are not applied, the report has not been seen

as an immediate concern. Under Brazilian legislation, insurance companies should be

incorporated in Brazil. Thus, it is not possible to open a branch o a oreign insurance

company.

Giulio VenneriKPMG in Canada


Nunzio TedescoKPMG in Canada


Canada

Canada endorses the OCDs separate enterprise principle, but as o yet has no

specifc rules or proft attribution. There is a specifc rule regarding attribution o capital

to a oreign bank branch (based on a fxed debt/equity ratio), but this is only implicit in

the determination o tax deductible interest. Tax authorities seem to primarily ocus

on P proft allocation issues relating to oreign branches o Canadian insurers, andthus there is potential issue o double taxation. Should the enterprise be challenged by

the Canadian tax authorities the enterprise could fle an objection to the assessmentwith the Canadian tax authorities. Should the objection to the assessment not be

successul, an enterprise resident in a country with which Canada has a tax convention

in orce could seek a ruling rom the Competent Authority.

Khoonming HoKPMG in China

T:+86 (10) 8508 7082E:[email protected]

Tracy ZhangKPMG in China

T:+86 (10) 8508 7509E: [email protected]

China

No legislation on P proft attribution or tax purposes exists. There are no specifc

rules to allocate a minimum amount o capital to branches o a oreign banking operating

in China. Branches o oreign insurance companies are required to hold a minimum

amount o operating capital, attributed to them ree o any interest charge. Previously,tax authorities did not actively question the capital structure o branches o oreign

banking/insurance entities, or the allocation o proft to a branch. The OCD report is

not considered to be a signifcant issue at this point in time, although tax authorities

reer to the OCD guidelines where necessary.

Peter Rose BjareKPMG in Denmark


Denmark

No detailed rules or proposed legislation regarding P proft attribution exist. The arms

length principle is endorsed. Capital attribution is determined by Danish thin capitalization

rules based on a fxed debt-equity ratio. Danish tax authorities have yet to decide on

which method to apply rom the OCD report. Generally the OCD rules are ollowed,

without speciying whether thin capitalization or quasi-thin capitalization approach should

be adopted. One possibility to avoid double taxation with respect to capital attribution isor the bank or insurance company to obtain an APA. A MAP can be applied in case o

double taxation. The U Arbitration Convention can also be applied.



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Timo MatikkalaKPMG in Finland

T: +358 20 760 3367


Timo Torkkel

KPMG in FinlandT: +358 20 760 3370


inland

P proft attribution does not appear to be a major issue at present and the absenceo specifc rules is not causing concern locally. ollowing the OCD report however,

inish tax authorities have started to raise issues concerning the capital allocation

to innish branches o banking entities. No specifc rules or P proft attribution andor the attribution o investment income. Tax authorities have limited experience in

the issue and seem to be exible with the approaches adopted in the OCD report.

Some innish branches o insurance entities have experienced an increased tax

burden due to the attribution o investment assets.

Yves RobertKPMG in France

T: + 33 1 55 68 15 76

E: yrobert@

fdalinternational.com

Jean-Pierre Dumazaud

KPMG in FranceT: + 33 1 55 68 14 70

E: jdumazaud@

fdalinternational.com

rance

No detailed rules on proft attribution exist in rance, but the tax authorities do take an

interest in the capital attribution issue and their approach bears a strong resemblance

to the OCDs capital allocation (BIS ratio) approach. Many banks have aced eective

double taxation due to the mismatch between the capital allocation required by the

rench Tax Authority and head ofce country rules. Some o them have obtainedan adjustment in the home country o the head ofce; others have invoked the U

Arbitration Convention to try to resolve the situation. Branches o insurance entitiesare not allowed to deduct interest charged by their head ofces or Ps. A tax treaty

procedure is in place (or elimination o double imposition) or insurers/reinsurers in

rance but there is no dierence in managing the procedure between the insurance

and banking industries.

Sandra GroteKPMG in Germany

T: +49 221 2073 1366


Hans-Jrgen FeyerabendKPMG in Germany

T: +49 69 9587 2348


Germany

Specifc administrative guidelines on P proft attribution, in particular capital

attribution, exist. Tax authorities accept the BIS ratio and the quasi-thin capitalization

approaches. The determination o the risk-weighted assets (including o-balancesheet positions) and market-risk position are becoming increasingly scrutinized.

These are likely to increase the compliance burden. or insurance branches, the

attribution o investment assets and equity capital are based on the level o technical

reserves including unearned premiums and deposits retained. urther equity capital

needs to be attributed to the branch, amounting at least to the pro rata minimum

capital according to the supervisory law o the country the head ofce is located in.

rom a German perspective there is a potential risk o double taxation when applying

a single method or proft allocation between head ofce and its branches even i

this allocation is perectly in line with the OCD. The actual double tax treaties may

conict with the recent OCD interpretation. Germany, or many years, has adopted

specifc guidelines regarding how to calculate the appropriate proft share o an

insurance branch located in the country. Tax authorities are assumed to continueto apply this approach. Taxpayers may appeal to the U Arbitration Convention to

resolve double taxation issues.



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George MavraganisKPMG in Greece

T: +30 210 60 62 178


Greece

No detailed rules or practice or P capital and proft attribution exist. There is noobligation to attribute ree capital to Greek branches o U credit entities. Greek tax

authorities have yet to ocus on the implementation o the OCD report and as such

oreign banks operating in Greece have not experienced an increased complianceburden. Greek branches o insurance entities are not allowed to deduct interest

charged rom their head ofce or other Ps o their head ofce. Tax authorities are likely

start to ocus on the attribution o capital and investment assets to Greek branches.

or the application o a single method o capital attribution/attribution o assets across

branches, a bank or insurance entity in Greece would need to obtain an OCD treaty

position then the procedure that would be used would be either the U Arbitration

Convention or the MAP.

Chris AbbissKPMG in Hong Kong

T:+852 2826 7226


Darren BowdernKPMG in Hong Kong

T: +852 2826 7166

E: darren.bowdern

@kpmg.com.hk

Hong Kong

As a non-member, the OCD report has, to date, only had a limited impact. GenerallyP proft attribution is required to be consistent with the operations o the branch

as reected in the accounts. Hong Kong operates specifc provisions in calculating

taxable profts rom insurance operations. There are no specifc rules regarding capital

attribution. The Hong Kong tax authority would generally seek to apply the principles

in the OCD Transer Pricing Guidelines except where they are incompatible with

specifc local provisions. Hong Kong has only a limited double taxation agreement

network, which it is actively seeking to expand.

Gergely DemetrovicsKPMG in Hungary

T: +36 1 887 7366

E: gergely.demetrovics

@kpmg.hu

Csaba LaszloKPMG in Hungary

T: +36 1 887 7420


Hungary

OCD transer pricing guidelines and methods are generally accepted in Hungary.

The country endorses the separate entity approach. There are no restrictions on thecapital requirements or bank branches o U entities, but non-U entities are obliged

to hold at least a fxed amount o capital. The current approach o the HungarianTax Authorities is quite ormalistic (ocusing on the accounting documentation and

calculation o profts) and so the OCD report has had a limited impact on compliance

and tax burdens so ar.

The Hungarian tax authorities are challenging the capital structure o Hungarian

branches o oreign insurance companies. ecent legislation allows branches toobtain an APA with the Hungarian tax authority. In principle, given the airly simple

Hungarian approach to capital attribution, a procedure under the U Arbitration

Convention or a DTT/MAP should be accessible.



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Punit ShahKPMG in India

T: +91 22 3090 2681


India

General rules allow P proft attribution to be based on an accounting ormula(turnover/receipts). India does not have any ormal thin capitalization rules in place;

however these are expected to be introduced in April 2011. Tax authorities have

not challenged the capital structure o Indian branches o oreign banks in the past.The OCD report has not been seen as an immediate concern. oreign insurance

companies are not permitted to independently carry on business in India. They

typically set up joint ventures with Indian insurance companies where they are

allowed to hold up to a maximum o 26 percent.

Tax authorities have, on a limited basis, reerred to OCD guidelines. A bank or

insurance entity can apply or a MAP to address the issue o double taxation with

respect to capital attribution/attribution o investments. However, the tax authorities

have, so ar, not challenged the capital structure o oreign banks in India.

Brian Daly

KPMG in IrelandT: +35 31 410 1278


Sharon BurkeKPMG in Ireland

T: +35 31 410 1196


Ireland

No specifc rules regarding P proft or capital attribution exist. In the past, Irish tax

authorities have challenged the capital structure o Irish branches o oreign banks

based on the separate entity approach. However, these were unsuccessul in the

absence o any domestic provisions that denied relie or interest expense incurred

by the branch. The question o P proft allocation is not one which has been actively

raised by Irish tax authorities. Irelands low corporation tax rates relative to other

countries mean that Ireland is more likely to be a head ofce location rather than a

branch location.

In the case o an Irish branch, P proft attribution is an issue more likely to be raised by

the taxing authorities o head ofces located in higher taxed countries. The introduction

o a ormal transer pricing regime in Ireland is likely to see more ocus on the issue.

Ireland broadly adopts the OCD approach and allows or MAPs and the U ArbitrationConvention to resolve double taxation issues.

Michele RinaldiKPMG in Italy

T: +39 02 67 64 41


Sabrina NavarraKPMG in Italy

T: +39 02 67 64 41


Italy

There is no specifc legislation on P proft attribution in Italy. The quasi-thin

capitalization approach has been used by the Italian tax authorities when assessing

the adequacy o Italian branches capital. In the past there was no minimum capital

requirement applicable or the Italian branches o oreign banking entities. The Italianbranch o an U insurance company is not required to have a minimum statutory capital

but may be supplied with an endowment und large enough to carry out its business.

ollowing the OCD report, tax authorities are reerring to OCD guidelines to assess

the adequacy o endowment unds. As a result Italian branches o insurance entitiesare likely to ace an increased tax burden.



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James DoddsKPMG in Japan

T: +813 6229 8230


Japan

No specifc legislation or other rules regarding P proft to Ps exist in Japan, but theissue is regularly examined at tax audits rom the viewpoint o unctions and risks,

and whether the return is commensurate with these. Thin capitalization rules apply to

bank branches in Japan but rarely present a problem in practice or most banks. Thereis a restriction on interest paid to a head ofce by Japanese branches (payments up

to IBO are allowed). Japanese tax authorities, although rarely reerring to OCD

reports in the past, are becoming more exible in their approach, especially around

the issue o double taxation. Japan allows or APAs to resolve issues o double

taxation.

Jae Won LeeKPMG in Korea

T: +82 2 2112 0955


Korea

P proft attribution rules in Korea closely ollow OCD guidelines (the separate

entity principle, arms length principle). With regard to the attribution o capital, the

thin capitalization rule and the quasi-thin capitalization rules apply. P proft attribution

is an issue that is actively considered and challenged by the Korean tax authorities. Incases where there are dierences between the OCD report and the Korean tax law

regarding the allocation o capital or ree capital, the tax authorities might not allowthe taxpayer to reer to the OCD report in the tax audit or in APA/MAP. However,

Korean tax law allows a taxpayer to eliminate the double taxation through the tax

credit method.

Georges BockKPMG in Luxembourg

T: +352 22 51 51 5522


Claude PonceletKPMG in Luxembourg

T: +352 22 5151 5567


uxembourg

uxembourg accepts the separate entity principle with regard to P proft attribution.

No specifc rules or capital attribution exist. Generally, uxembourg tax authorities reer

to the OCD report especially concerning transer pricing policy. uxembourg applies a

thin capitalization approach to the application o capital allocation to Ps (a debt/equityratio based on the relevant insurance regulations). uxembourg has a DTT with most o

U countries, which allows or the use o Article 25 MAP to resolve mismatches.

Victor PerezKPMG in Mexico

T: +01 (55) 2487 8396

E:[email protected]

Mexico

The OCD report will have no impact in Mexico because branches o oreign banks are

not permitted under local laws. Only subsidiaries regulated by the National Banking

Commission and the Ministry o inance are permitted. In some cases the oreign

banks establish epresentative Ofces but do not create a P or the oreign bank. or

insurance branches, the revenues obtained by the home ofce or any o its branches

abroad are attributable to the P, in the proportion in which the P contributed to the

expenses incurred or obtaining such income. oreign resident Ps in Mexico mustcomply with basically the same obligations as any Mexican legal entity or accounting

and tax purposes. Tax authorities oten reer to the OCD report to support their

technical position.



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Bart JimminkKPMG in Netherlands

T: +31 20 656 1423


Niels Groothuizen

KPMG in NetherlandsT: +31 20 656 1192


Netherlands

No detailed rules covering profts or capital attribution exist, but Dutch tax authoritieshave generally adopted an approach very similar to the OCDs BIS ratio approach or

both inbound and outbound Ps. or insurance branches, investment assets and thus

the investment income are attributed to the branch where the insurance activity wasconcluded. A number o banks have experienced eective double taxation due to a

mismatch between the capital allocated under Dutch and head ofce country rules.

All Dutch tax treaties contain a MAP. Some tax treaties allow or the possibility o

arbitration (e.g. U Arbitration Convention).

Greg KnowlesKPMG in New Zealand

T: +64 9 367 5989


New Zealand

General P proft attribution rules exist in New Zealand and the country endorses

the arms length principle. Thin capitalization rules apply, and provide a sae harbour

based on a percentage o risk weighted assets. The OCD report has not been a

cause or concern thus ar. There is a potential problem or double taxation due to the

mismatch between dierent jurisdictions application o the rules as the New Zealandtax authorities do not allow notional internal charges.

Peter KayKPMG in Poland

T: +48 22 528 1150


Poland

No specifc tax rules regarding P proft attribution in banking institutions exist. OCD

guidelines are generally reerred to in Poland. ikewise, there are no specifc rules in

place that make it mandatory to allocate a minimum amount o capital to branches

o oreign banking or credit entities. Thin capitalization rules are generally applicableregarding the deductibility o interest expense. Poland is generally compliant with

OCD transer pricing guidelines and the U Arbitration Convention. MAP is generally

implemented in most o double tax treaties concluded by Poland.

Luis MagalhaesKPMG in Portugal

T: +351 210 110 087


Portugal

No specifc rules regarding P proft and capital attribution or U banking or credit

entities exist. However, Portuguese branches o non-U banking or credit entities

are required to hold a minimum amount o capital. Tax authorities have not previously

questioned the capital structure o Portuguese branches o oreign insurance entities.

As a result, Portuguese branches o U insurance entities have typically been debt-

unded. Since the publication o the OCD report, tax authorities have been more

ocused on challenging the capital structure o Portuguese branches o oreign banks,

applying the economic capital allocation approach to determine the minimum capital

requirements or branches. Other OCD methods may eventually be applied.



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Hong Beng TayKPMG in Singapore

T: +65 6213 2565


David Lee

KPMG in SingaporeT: +65 6213 2539


Singapore

No specifc provisions or P proft or capital attribution exist. Although not an OCDmember, Singapore endorses the arms length principle. Tax authorities have reerred

to the OCD guidelines, in the absence o legislation and have increased their scrutiny

with regards to transer pricing requirements and documentary evidence. Branches ooreign insurance entities must satisy minimum capital and und solvency requirements.

omeThere are no thin capitalization rules. Interest expenses are deductible rom inc

provided that they were incurred in the production o income.

To address the issue o elimination o double taxation, the taxpayer can generally look

at the ramework o co-operation under a Double Taxation Agreement (DTA) whereby

a credit or exemption may be granted subject to meeting the conditions. In addition,

there is also a special provision within the ramework o co-operation under a DTA

via the MAP Article whereby it provides a mechanism or resolving difculties arising

rom the application o the provisions o a DTA. The taxpayer may use his or her right

under this Article, to address him or hersel to the taxation authority o the state in

which he or she is a resident to resolve issues relating to the application o the DTA.

Robert KolarKPMG in Slovakia

T: +421 2 59984 314


Slovakia

No detailed rules on P proft attribution exist in Slovakia. There are no thin

capitalization rules or minimum capital requirements, although OCD methods could

be applied in the uture. Tax authorities, although yet to challenge the capital structure

o branches, are becoming increasingly interested in the issue. OCD principles have

been accepted, and thereore a more strict approach is likely leading to an increasedcompliance burden. The general treaty protection against double taxation applies

automatically, providing the conditions stipulated by the treaty are met.

Michael RudnickiKPMG in South Africa

T: +27 11 647 5725

E:[email protected]

Stephan MinneKPMG in South Africa

T: +27 21 408 7085

E:[email protected]

South Arica

No specifc regulations regarding P proft or capital attribution exist, thereore SouthArica generally ollows OCD guidelines. As with oreign-owned subsidiaries, fnancial

assistance to non-resident Ps is to be subject to thin capitalization rules. ollowing the

OCD report, tax authorities are likely to place a greater scrutiny on the issues o proft

and capital attribution. The only procedure available would be the MAP or countries

which South Arica has DTAs with.



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Victor MendozaKPMG in Spain

T: +34 91 456 3488


Spain

No detailed rules and practices or P proft or capital attribution exist. Spanishbranches o U banks and insurance entities have typically been mainly debt-unded.

Spanish tax authorities have already ocused on the implementation o the OCD

report. In certain cases they have applied the BIS solvency ratio to determine thehods

ully

nce

s.

ticle.

minimum capital requirements or branches, but in theory the other OCD met

could also be applied in uture. It should be noted that this new approach is not

consolidated and it is currently under discussion. Unlike banks, branches o insura

entities are not allowed to deduct interest charged by their head ofces to other P

Spain has DTTs with most OCD countries which allow the use o the MAP (Ar

25). U Arbitration Convention could be also invoked. inally, the Spanish domestic

law allows or unilateral or multilateral APAs to address transer pricing issues and

policies on a uture position.

Christer hman

KPMG in SwedenT: +46 8 723 9631


Sweden

There is no specifc legislation on P proft attribution or the attribution o fnancial

assets or capital to branches o banks in Sweden. oreign enterprises not otherwise

ew

ser

dits

liable to tax in Sweden are liable to tax or income arising rom a P in Sweden. N

legislation is currently not anticipated. The Swedish Tax Agency generally seeks tran

pricing guidance rom OCD reports. This is likely to result in an increase in tax au

ocused on the issue.

The standpoint o the Swedish Tax Agency (STA) is that Swedish tax residents should

not be subject to double taxation. The STA may thereore, upon request rom the

taxpayer, apply the U Arbitration Convention or MAP, in accordance with the applicable

double taxation treaty, to try to avoid double taxation.

Graham SeymourKPMG in Switzerland

T: +41 44 249 4778


Charles HermannKPMG in Switzerland

T: +41 44 249 2122


Switzerland

P proft attribution is not a major issue in Switzerland. OCD guidelines are generally

ollowed and the separate entity approach is adopted. There is no specifc legislation

or attributing profts to Ps. The general rule or capital attribution ollows regulatory

requirements (in general at least 8 percent o the value o the assets should be allocated

to the P or tax purposes). However tax authorities accept other approaches i applied

to the insurance entity as a whole. Swiss tax authorities do not require transer pricingdocumentation or analyses to be fled with the tax return and appear to be pragmatic in

their approach in dealing with mismatches o dierent jurisdictions application o OCD

rules. Under existing Swiss double tax treaties there are normally provisions or a MAP

but they do not allow or the possibility o arbitration where agreement is not reached.



21/24


JaKP

T:

E: j

Hu

KPT:

E:

ne McCormickMG in the UK

+44 20 7311 5624

[email protected]

gh von Bergen

MG in the UK+44 20 7311 5570

[email protected]

UK

The UK introduced legislation in 2003 with regard to P proft attribution, enshriningthe separate entity principle. UK rules closely ollow the OCD report with respect to

the allocation o capital. The tax authority (HMC) applies a thin capitalization approach,

benchmarking capital allocations against the capital structure o comparable UK banks(where these exist), however it will accept the capital allocation approach in most cases.

The issue o P proft allocation is actively raised by HMC, and in particular the concept

o KTs is invoked to help sustain its technical position. Tax authorities apply the OCD

report when dealing with individual enquiries or under a MAP. The U Arbitration

Convention can also be applied.

Greg EngelKPMG in the US

T: +1 713 319 2105


Rema Sera

KPMG in the UST: + 1 212 872 6489E: [email protected]

US

P proft and capital attribution rules dier signifcantly rom OCD guidelines in the US

Internal laws do not recognize the branch operations o a oreign corporation as separate

entities or income tax purposes. However, the OCD report can be more applicable

under the treaty method or settling double taxation issues. Certain tax treaties (e.g. UK US) closely ollow the OCD Transer Pricing Guidelines in determining the profts and

capital attributable to a P, or instance, allowing or the use o risk-weighted assets todetermine branch capital. Although the US taxing authorities might not specifcally reer

to or invoke the OCD report, it is generally taken into consideration where the treaty

specifcally mentions the OCD report.



22/24


Extent of Approximation Current Anticipated

current rules/ to OECD issue? impact of

practice authorized OECD report

A=highly approach

developed

Australia A High Yes ow (existing rules)

Germany A Medium Yes Increased tax

UK A High Yes ow (existing rules)

US A Medium Yes ow (existing rules)

France B High Yes Increased documentation

Ireland B High No Uncertain

Netherlands B High Yes Increased tax

Canada C Medium No Increased tax

Denmark C High No Documentation increase

Luxembourg C High No ow

New Zealand C Medium No Increased tax

South Africa C High No ow

Spain C Medium Yes Compliance

Belgium D Medium Yes Increased tax / compliance

Portugal D Medium Yes Uncertain

Switzerland D Medium No Uncertain

Austria Medium Yes Compliance

Hong Kong ow No ow (non-OCD member)

India ow No ow

Italy ow Yes Increased tax

Japan ow No owKorea Medium No ow

Slovakia Medium Yes Increased tax / compliance

Sweden Medium Yes Increased tax

Argentina ow No ow (non-OCD member)

China ow No ow

Finland Medium Yes Increased tax

Poland High No ow

Brazil G ow No Uncertain

Greece G ow Yes Increased tax

Hungary G ow Yes Compliance

Mexico G ow No ow

Singapore G ow No ow (non-OCD member)

International Comparison



23/24



24/24

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frms are afliated with KPMG International. KPMG International provides no client services. No member frm has any authority to

obligate or bind KPMG International or any other member frm vis--vis third parties, nor does KPMG International have any such

authority to obligate or bind any member frm. All rights reserved. Printed in the United Kingdom.

The KPMG name, logo and cutting through complexity are registered trademarks or trademarks o KPMG International.

The inormation contained herein is o a general nature and is not intended to address the circumstances o any particular individual

or entity. Although we endeavour to provide accurate and timely inormation, there can be no guarantee that such inormation

is accurate as o the date it is received or that it will continue to be accurate in the uture. No one should act on such inormation

without appropriate proessional advice ater a thorough examination o the particular situation.

Designed by Mytton Williams

Publication name: Branch Capital Attribution Survey

Publicationnumber:314536

Contact us

Hugh von Bergen

Chairman Global FS Tax

T: + 44 20 7311 5570


John Neighbour

Global FS Transfer Pricing

T: + 44 20 7311 2252


Rema Sera

Americas FS Transfer Pricing

T: + 1 212 872 6489


John Kondos

ASPAC FS Transfer Pricing

T: + 85 22 685 7457


Documents

2010 Branch Capital Attribution Tax Survey_Final