The Base Erosion and Profit Shifting (BEPS) 2.0 initiative represents a significant global effort to address tax avoidance and harmonize international tax regulations by introducing a 15% global corporate minimum tax rate.
Launched by the Organization for Economic Co-operation and Development (OECD) in 2019, this initiative aims to create a more transparent global tax system by closing international tax loopholes that allow corporate profits to be shifted to low or no-tax jurisdictions where businesses conduct very little activity.
Although BEPS 1.0 has been in circulation since 2015, implementation globally has been uneven. Jurisdictional compliance remains a significant challenge, especially in key markets like the U.S. BEPS 2.0 addresses these challenges through two pillars:
- Pillar One: This addresses the challenges of the digital economy by reallocating taxing rights to markets where businesses have significant consumer-facing activities, ensuring a fairer distribution of profits and taxation.
- Pillar Two: This establishes a global corporate minimum tax rate to prevent the shifting of profits to low or no-tax jurisdictions, reducing the incentive to engage in aggressive tax planning practices.
While these changes will likely have a significant impact on the private capital fund management sector, awareness of the changes remains low. CSC’s recent proprietary research of private markets professionals found 56% of respondents said they were only “slightly” familiar with BEPS 2.0, while just 40% considered themselves “very” familiar.
How are private fund managers impacted by the BEPS 2.0?
Increased compliance and reporting requirements
The effect of the new tax initiative on fund operations is expected to be significant. BEPS 2.0 introduces more stringent reporting requirements, meaning fund managers will need to enhance their systems, personnel, and processes to comply effectively.
Investments: impact on portfolio companies
The potential increased compliance costs and higher tax liabilities under BEPS 2.0 could affect the profitability and valuation of many portfolio companies. Private capital fund managers may need to consider these factors when evaluating new investment opportunities and for the ongoing management of existing portfolios.
Reassessment of investment structures
Pillar Two of BEPS 2.0 could require fund managers to reassess their investment structures. Investments routed through lower tax jurisdictions may become less attractive, prompting a reevaluation of the tax implications for current and future investments. This reassessment may lead to a shift in investment strategies.
Jurisdictional considerations: relocation may be necessary
The importance of the jurisdiction in which a fund is domiciled is likely to increase under BEPS 2.0. Fund managers may need to consider relocating funds to jurisdictions that offer a more favorable tax environment under the new framework. This strategic shift will require careful consideration of the current and future tax regulations and compliance requirements of potential jurisdictions.
Timelines for BEPS 2.0 implementation vary
While more than 140 countries have announced their intent to adopt Pillar One and Pillar Two, implementation timelines vary. The EU mandates that all member states must incorporate these rules into domestic law. In the U.S., questions remain about convergence and jurisdictional compliance. Some jurisdictions have chosen to implement their own corporate tax laws rather than adopt Pillar Two, such as the United Arab Emirates. Meanwhile, numerous African countries are opposing adoption due to concerns about its impact on developing nations.
What comes next?
Ultimately, the full impact of BEPS 2.0 on private capital markets will become clear over the next few years. Market participants should be monitoring developments and preparing for the anticipated changes. Firms that proactively adapt to the new tax landscape will be better positioned to navigate the challenges and seize opportunities.
Private capital fund managers need to evaluate their structures and entities to meet BEPS 2.0 compliance requirements while remaining tax efficient. This evaluation will require additional technology, personnel, and robust data management processes. CSC is a strategic partner for fund managers, helping to transform impending regulations into competitive advantages by ensuring compliance and optimizing operations.
For more detailed insights and support, visit CSC’s Fund Solutions.
