This blog is the first in our series exploring the tax and regulatory landscape, which was presented at the Annual EMEA Tax and Regulatory Client Forum.
The tax and regulatory landscape continues to evolve as efforts to address problems revealed in the most recent financial crisis resulted in focused efforts around money market fund reform, greater investor protections, and additional supervision over the governance of credit institutions.
At the same time, there is a challenging geopolitical landscape escalating protectionism competing forces of globalization and anti-globalization causing uncertainty. Overlaying this are structural forces, such as climate change, digitization and innovative technology.
A new legislative cycle begins this year in the EU where parliamentary elections in May could result in a vastly different membership resulting in different priorities and proposals for the next five years.
Meanwhile, Brexit raises important questions. The UK is currently a major provider of financial services to Europe; when it becomes a third country for financial services this role may be compromised.
The focus of EU public policy in the coming year will likely include a focus on: prudential regulation, operational resilience, data and cybersecurity. The Capital Markets Union could increase in influence post-Brexit while sustainable finance, will also receive attention.
Meanwhile new regulations are taking shape. These regulations are likely to be invasive in nature and could include onsite supervision. For example, the Money Market Reform and securities Financing Transactions Regulation, the Shareholders Rights Directive highlight how Investor protection and transparency of fees and costs will be an important themes.
Further, the presumed GDPR grace period is over, regulators will want to see controls and reporting are embedded in business processes.
A major change will be the transition from interbank borrowing rates to new reference rates - as much as $300 trillion of funds reference LIBOR.1 Regulators appreciate the scale of the challenge, but need to be confident that banks have made necessary investments and conducted impact and risk assessments across all affected markets and products. Exposure to LIBOR-referenced instruments (and the risks associated with transfer) should be monitored continually until migration is complete.
Brexit, LIBOR-migration, Qualified Financial Contract rules and many other challenges rely on client reference data. Investment in client reference data could significantly lower remediation and reconciliation costs by replacing the current scattergun approach with greater targeting.
It is important that market participants look to these new regulations as opportunities to identify and improve efficiency through automation and scalability. Enhanced risk management can even facilitate the development of new products.
Tax risk management, tax uncertainty, and digitalization are the key drivers of tax change. The focus on tax evasion through the implementation of tax transparency initiatives will continue. The EU introduced stronger obligations around tax avoidance reporting. In addition, tax authorities in Denmark, Germany, the Netherlands, and Poland are implementing strengthened tax relief requirement.
Geopolitical instability has tax implication due to the inherent uncertainty the instability causes. Brexit will have implications. Further, there are ongoing changes to tax relief, for example, as France and Poland recently introduced new withholding tax procedures. The U.S. introduced significant tax reform in 2018. Introduction of new capital gains tax is also evolving, recent changes in India required implementation within six weeks. There are concerns that an EU financial transaction tax, which the UK thwarted, could gain acceptance in the EU following Brexit.
Public authorities have invested significantly in technology, which will have impacts to tax filings. HMRC introduced digitized VAT record-keeping and income tax initiatives. Elsewhere, an EU code of conduct for withholding tax, published in December 2017, pushes digitization; the Netherlands introduced e-filing; Australia now uses artificial intelligence for taxpayer communications, and Thailand has introduced blockchain for VAT. As governments turn to technology, it will be imperative for the private sector to respond to these new digital requirements.
We will continue our Tax and Regulatory blog series, exploring additional topics, to help navigate the evolving tax and regulatory landscape. Bookmark this page to stay on top of the related content.