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The banking sector is subject to extensive regulation, for instance, capital, liquidity and leverage requirements, ability to transact with particular customers and reporting. Seeking to protect customers and ensure financial stability, regulation actively and constantly shapes and controls how banking business is undertaken. The EBF welcomes the acknowledgment of the importance of regulation and risk management in the Discussion Draft. In this respect, the EBF would also appreciate that the Discussion Draft mentions that flexibility should be given to Multinational Entreprises (MNEs) as far as the application of the separate entity approach for the risk assumption is concerned.
Banks undertake financial transactions in huge numbers and volumes. Financial transactions are effectively the stock in trade of banking businesses. Therefore, the EBF believes that the accurate delineation of financial transactions should not be subjected to higher scrutiny than other intra-group transactions. In this respect, the transaction-by-transaction approach suggested in the Discussion Draft would be impractical for both banks and tax authorities.
The OECD 2010 Report is well-researched, thoroughly considering the manner in which such banking businesses are conducted. The 2010 Report considered all aspects of banking business including regulation and is respected by both banks and EBF believes tax authorities, addressing the transfer pricing challenges presented by cross-border banking businesses. EBF would urge that it be made clear that the Discussion Draft is not intended to override the existing transfer pricing rules applicable to banks in the profit allocation between a branch and its head office, nor the 2010 Report.
Where, in addition to permanent establishments (PEs), bank groups operate subsidiaries that mostly conduct similar business activities under the same or similar conditions in the host jurisdiction, EBF would recommend that, in line with the Authorised OECD Approach (AOA) principles, financial transactions with affiliated subsidiaries should be treated equally for tax purposes with respect to their delineation and pricing. These principles are appropriate and transferrable.