As part of the ongoing work of the OECD/G20 Inclusive Framework on BEPS to implement the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, the OECD announced on May 6, 2022 that it is seeking public comments on the Regulated Financial Services Exclusion under Amount A of Pillar One. The consultation period runs until May 20, 2022.
The Regulated Financial Services Exclusion will exclude from the scope of Amount A the revenues and profits from Regulated Financial Institutions. The defining character of this sector is that it is subject to a unique form of regulation, in the form of capital adequacy requirements, that reflect the risks taken on and borne by the firm. It is this regulatory driver that generally helps to align the location of profits with the market. The scope of the exclusion derives from that requirement, meaning that Entities that are subject to risk-based capital measures (and only those) are excluded from Amount A.
There are six types of Regulated Financial Institution defined in this document: Depositary Institution; Mortgage Institution; Investment Institution; Insurance Institution; Asset Manager; a Mixed Financial Institution. A seventh category is added, for a limited type of service entity that exclusively performs functions for a Regulated Financial Institution (RFI Service Entity).
The definition for each type of Regulated Financial Institution generally contains three elements, all of which must be satisfied: a licensing requirement; a regulatory capital requirement; and an activities requirement. These conditions recognise the uniquely regulated nature of financial services. Where the conditions are met, the revenues and profits of the Entity are wholly excluded from Amount A.
However, commentators should note that this does not reflect the final or consensus views of the Inclusive Framework and that some members hold the view that reinsurance and asset management ought not to be excluded from Amount A.
The schedule for the Regulated Financial Services Exclusion contained in this document provides a description and explanation of the envisaged draft rules. Other than the definitions for the scope of the Regulated Financial Services Exclusion, which are presented in draft Model Rules format, this document is in narrative format. This is because other parts of the Model Rules on Amount A, on which corresponding provisions for the Regulated Financial Services Exclusion would be based, are pending finalisation.
The relevant sections on Scope (currently Title 2), as well as relevant definitions (currently included in Title 9), and which were the subject of an earlier public consultation document released on April 4, 2022 are included in the Annex for context. In addition, explanatory footnotes are included in the document to assist public commentators in reviewing the substantive proposal, and to note where further material is expected to be included in Commentary.
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