UK Hedge Funds Electrnic Newsletter

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UK Hedge Funds Electrnic Newsletter

  1. 1. INVESTMENT MANAGEMENT AND REAL ESTATE Rain or shine? UK Hedge Funds Electronic Newsletter* Close document Previous page Next page Contents Print MARCH 2007
  2. 2. UK Hedge Funds Electronic Newsletter // March 2007 Contents Click on the links below to navigate through the document Close document Previous page Next page Contents Print Click on the links below to navigate directly to each article 3 Accounting for uncertain tax positions – How prepared are you? 6 Residence – Gaines-Cooper v HMRC (Spc 568) 8 Limited Liability Partnerships – HMRC are now actively reviewing LLP conversions in the hedge fund sector 10 Proposed revisions to Statement of Practice 1/01 (“SoP 1/01”) 13 Offshore funds update 15 Hedge Fund Transfer Pricing – How robust is your policy? 18 PwC Bespoke Equity Research 21 The Indofood decision – Do your overseas operations have enough local presence?
  3. 3. UK Hedge Funds Electronic Newsletter // March 2007 Accounting for uncertain tax positions How prepared are you? Close document Previous page Next page Contents Print Click on each authors’ name to contact them directly via email by Debbie Payne 7213 5443, Richard Cox 7213 5564, Rebecca McGerty 7804 2272 Read this article Previous article Skip article
  4. 4. UK Hedge Funds Electronic Newsletter // March 2007 Accounting for uncertain tax positions How prepared are you? Close document Previous page Next page Contents Print Click on each authors’ name to contact them directly via email by Debbie Payne 7213 5443, Richard Cox 7213 5564, Rebecca McGerty 7804 2272 FIN 48 is amongst the most significant accounting for tax Many hedge funds implement tax efficient investment developments in a number of years and has important structures via offshore jurisdictions. Under FIN 48 companies implications for many companies. It is a new US accounting must assess their view of the likely outcome of any tax rule that affects all companies reporting under US GAAP positions which have been taken around the world. Tax including subsidiaries of US companies, UK companies with position denotes any position taken or expected to be taken a US listing or US listed debt, and UK subsidiaries of non-UK in a tax return and includes the decision not to file a tax return companies with a US listing or US listed debt. in a particular jurisdiction. It may include consideration of the impact of tax-advantaged transactions/structures, financing It is effective for accounting periods beginning after 15 arrangements and incentive compensation. December 2006 therefore in most cases it first applies to accounts for the year to December 2007. Historically hedge Where there is a tax position the basis for this position must funds were structured to attract US investors which included be considered to be “more likely than not” to be sustained a corporate fund for US tax exempt investors. Consequently based on technical merits for it not to be recognised in the many hedge fund managers will be managing funds which accounts. For these purposes is must be assumed that the produce accounts under US GAAP and will therefore have to relevant tax authority has full knowledge of all relevant comply with the accounting standard. information, there is no scope for considering the probability of being audited/investigated as part of the assessment of whether or not a tax liability will arise.
  5. 5. UK Hedge Funds Electronic Newsletter // March 2007 Where there is a tax position the basis for this position must be considered to be “more likely than not” to be sustained based on technical merits. Close document Previous page Next page Contents Print Click on each authors’ name to contact them directly via email by Debbie Payne 7213 5443, Richard Cox 7213 5564, Rebecca McGerty 7804 2272 If this test is not satisfied then the benefit of the tax position can not be reflected in the accounts and the various disclosure requirements contained within FIN 48 must be followed. This will mean that the tax position of the company is far more transparent to tax authorities, regulators and investors. Whilst companies will need to identify and assess all material positions existing at the date of implementation it is essential to undertake an assessment of any new positions as part of the structuring/implementation process for future transactions or fund launches to determine whether disclosure will be required under the accounting standard.
  6. 6. UK Hedge Funds Electronic Newsletter // March 2007 Residence: Gaines-Cooper v HMRC (Spc 568) The Special Commissioners’ decision has raised questions about HMRC’s practice in determining Close document Previous page a taxpayer’s status Next page Contents Print Click on each authors’ name to contact them directly via email by Richard Hutchinson 7212 8403, Mark Waddilove 7213 5786 Read this article Previous article Skip article
  7. 7. UK Hedge Funds Electronic Newsletter // March 2007 Residence: Gaines-Cooper v HMRC (Spc 568) The Special Commissioners’ decision has raised questions about HMRC’s practice in determining Close document Previous page a taxpayer’s status Next page Contents Print Click on each authors’ name to contact them directly via email by Richard Hutchinson 7212 8403, Mark Waddilove 7213 5786 The recent Special Commissioners’ decision against Mr Robert Gaines-Cooper (“Gaines-Cooper”) has raised The case sounds a questions about HMRC’s practice in determining a taxpayer’s UK taxation status in relation to the calculation of the number note of caution on of days spent in the UK. HMRC’s practice in this respect is explained in more detail in the guidance booklet IR 20. This practice allows a taxpayer to ignore, for the purposes UK residence. of calculating whether he has spent 91 days on average The decision is not a binding precedent, and Mr in the UK, both days of arrival in and departure from the Gaines-Cooper may be considering a judicial review of UK, and any days spent in the UK for circumstances HMRC decision not to follow IR20, so it is not clear how beyond his control. far-reaching the Commissioners’ decision will be in practice. The case concerned Mr Gaines-Cooper, a Commonwealth It is also worth noting that the decision did not suggest, as citizen who had been both resident and ordinarily resident in some press comment has, that days of arrival and departure the UK, and who claimed that he had subsequently ceased to will always need to be considered in the 91 day calculation, be UK resident and had abandoned his domicile of origin in as the appropriate method will always depend to some the UK. The Commissioners found as a matter of fact that he extent on the taxpayer’s circumstances. had not, in the light of all his circumstances.
  8. 8. UK Hedge Funds Electronic Newsletter // March 2007 Limited Liability Partnerships HMRC are now actively reviewing LLP conversions in the hedge fund sector Close document Previous page Next page Contents Print Click on each authors’ name to contact them directly via email by Richard Clarke 7213 5778, Debbie Payne 7213 5443, Mark Waddilove 7213 5786, Joanne Klaentschi 7804 3869 Read this article Previous article Skip article
  9. 9. UK Hedge Funds Electronic Newsletter // March 2007 Limited Liability Partnerships HMRC are now actively reviewing LLP conversions in the hedge fund sector Close document Previous page Next page Contents Print Click on each authors’ name to contact them directly via email by Richard Clarke 7213 5778, Debbie Payne 7213 5443, Mark Waddilove 7213 5786, Joanne Klaentschi 7804 3869 Hedge fund managers have, for some time, been receiving • The structure of your business and the implementation particularly close attention from an HMRC specialist team of steps from Limited company to Limited Liability domestic and international specialists for tax and accounting Partnership – they may even ask for copies of enquiries. An emerging area of interest is the process of the implementation papers. converting to an LLP structure via the transfer of the • Self-employed status of the members – HMRC are business of an existing UK corporate manager to an LLP. concerned that many members may have retained their employment status. With many LLP conversions now bedding down, our experience indicates that HMRC want to understand the • Capital gains treatment of the transfer if the business – drivers behind the conversion and to check the particularly where the shareholders of the original company documentation and procedures both at the time of conversion are also members of the LLP. and going forward. HMRC’s Serious Civil Investigation office • Methodology of valuations and the commercial background has led many such enquiries and they look at both the of the profit sharing arrangements. personal tax positions of the members (partners) and the A review of your filing position may identify any possible risk LLP structures used. areas and provide valuable time to manage these risks before HMRC are likely to show interest in the following areas in the next HMRC enquiry notice arrives. checking whether the business is correctly transferred and run through a “mature” LLP.
  10. 10. UK Hedge Funds Electronic Newsletter // March 2007 Proposed revisions to Statement of Practice 1/01 (“SoP 1/01”) The updated statement makes it clear that HMRC are seeking to accommodate the newer Close document Previous page investment strategies Next page Contents Print Click on each authors’ name to contact them directly via email by Robert Mellor 7804 1385, Debbie Payne 7213 5443, Elizabeth Stone 7804 9678 Read this article Previous article Skip article
  11. 11. UK Hedge Funds Electronic Newsletter // March 2007 Proposed revisions to Statement of Practice 1/01 (“SoP 1/01”) The updated statement makes it clear that HMRC are seeking to accommodate the newer Close document Previous page investment strategies Next page Contents Print Click on each authors’ name to contact them directly via email by Robert Mellor 7804 1385, Debbie Payne 7213 5443, Elizabeth Stone 7804 9678 The Investment Manager Exemption (“IME”) is a set of safe Whilst there has been considerable speculation in recent harbour rules which exempt from UK taxation the profits of a press articles our understanding is that HMRC’s position non-resident entity, such as an offshore hedge fund, derived remains largely unchanged namely that it is not seeking to from assets managed by a UK based investment advisor. drive the UK hedge fund industry offshore simply to ensure HMRC have been in discussion with industry bodies for that profits generated by hedge fund managers from UK sometime regarding updating SoP 1/01 which sets-out their based activities are calculated in accordance with UK tax interpretation of certain aspects of the IME. This culminated in legislation and subject to UK tax. the publication of an open letter and revised draft of SP1/01 Clearly we need to await the outcome of the consultation for consultation in October 2006. process which is expected to be released later this month but The draft of SP 1/01 makes it clear that HMRC are seeking to it is hoped that a number of the concerns raised by the accommodate newer investment strategies being employed industry during the consultation process particularly around by UK managers whilst at the same time maintaining a the “independence test” will, at least in part, have been balance between the hedge fund industry and other sectors addressed. However, there are a number of issues, such as such as banking and commodity trading. the so called “cliff edge” nature of the safe harbour rules, which strictly means the whole of the profits of the fund are exposed to UK tax in the event of the fund entering into a single tainted transaction which does not fall to be treated as an investment transaction within the safe harbour, which
  12. 12. UK Hedge Funds Electronic Newsletter // March 2007 HMRC have been in discussion with industry bodies for sometime regarding updating SoP 1/01 which sets-out their interpretation of certain aspects of the IME. Close document Previous page Next page Contents Print Click on each authors’ name to contact them directly via email by Robert Mellor 7804 1385, Debbie Payne 7213 5443, Elizabeth Stone 7804 9678 will require amending legislation and hence will take time to amend. It would be useful if HMRC could be persuaded to adopt some form of interim solution to cover the period up to time when revised legislation can be introduced. In summary whilst we do not expect the updated SP1/01 to address all the issues which commentators have raised it is anticipated that there will be an ongoing dialogue to ensure that the remaining issues which can only be addressed by either primary or secondary legislation are dealt with. However, managers will need to review fund structures, and in particular their transfer pricing documentation, once the new guidance is published to ensure that that the IME can still be relied on for future periods.
  13. 13. UK Hedge Funds Electronic Newsletter // March 2007 Offshore funds update 2006 pre-budget report, alternatives, IFRS and loan relationships Close document Previous page Next page Contents Print Click on each authors’ name to contact them directly via email by Elizabeth Stone 7804 9678, Gauri Devidayal 7804 2171 Read this article Previous article Skip article
  14. 14. UK Hedge Funds Electronic Newsletter // March 2007 Offshore funds update 2006 pre-budget report, alternatives, IFRS and loan relationships Close document Previous page Next page Contents Print Click on each authors’ name to contact them directly via email by Elizabeth Stone 7804 9678, Gauri Devidayal 7804 2171 2006 Pre-Budget Report The increased ability of UCITS III funds to invest in derivatives (and therefore pursue “hedge fund” type strategies) and the A key announcement in the Chancellor's 2006 Pre-Budget 2004 changes which allow all funds to follow the accounting Report was the Government's statement that it will consult treatment of income and capital of such derivatives where with the investment management industry to ensure tax rules certain conditions are met, has also resulted in the in the offshore funds regime do not act as a barrier to development of new “hedge fund” like products. In some commercial development of multi-tiered funds, and to cases this has enabled investors to access wider asset legislate in this respect in the Finance Bill 2007. Favourable classes and strategies (ie. alternatives) and has facilitated amendments to the investment restriction limits within these the distribution of these funds within the UK. rules would certainly be welcomed by the investment management industry and promoters of offshore funds. IFRS and loan relationships Alternatives The UK SORP has converted to IFRS effective for accounting periods beginning 1 January 2007 in relation to loan relationships. As a result of the Finance Act 2004 changes which allowed Fund managers that rely on the comparability of local fund offshore funds to apply for UK distributor status on a share GAAP and UK GAAP to prepare their UK distributor status class basis, we are seeing an increasing number of funds applications will need to consider how the accounting policies (including private equity funds, and certain funds adopting of the offshore fund will be affected by this change, as the “hedge fund” type strategies) seeking UK distributor status fund is unlikely to be applying IFRS. This is particularly (with the attendant UK tax benefits for investors). relevant to bond funds established in Luxembourg.
  15. 15. UK Hedge Funds Electronic Newsletter // March 2007 Hedge Fund Transfer Pricing How robust is your policy? Close document Previous page Next page Contents Print Click on each authors’ name to contact them directly via email by Aamer Rafiq 7212 8830, David McDonald 7212 3736 Read this article Previous article Skip article
  16. 16. UK Hedge Funds Electronic Newsletter // March 2007 Hedge Fund Transfer Pricing How robust is your policy? Close document Previous page Next page Contents Print Click on each authors’ name to contact them directly via email by Aamer Rafiq 7212 8830, David McDonald 7212 3736 As taxing authorities have focused more and more on transfer Despite the growing scrutiny from the tax authorities, hedge pricing in the financial sector their specialist skills and fund managers continue to be in a good position to take experience in these fields have grown. Some, including the advantage of transfer pricing to manage their effective tax UK, now have specialist teams focusing on the tax affairs of rate. The key value drivers (or to borrow an OECD phrase, the hedge fund managers. HMRC has been especially vigilant in key entrepreneurial risk taking (“KERT”) functions) are often assessing and imposing penalties for incorrect self the activities of a small number of people performing core assessment due to their perception of egregious transfer portfolio management or distribution functions. As these value pricing arrangements. However, a potentially more hazardous drivers are concentrated in a few personnel it is arguably consequence is that the transfer pricing failure can lead to a easier to legitimately tax optimise a hedge fund business than breach of the customary rate test within the investment businesses in a lot of the other financial sectors. Many hedge manager exemption (“IME”), potentially exposing the offshore funds have already done exactly this by locating a significant fund to UK tax. portion of their overall functions in more tax efficient locations such as Cayman, Channel Islands, Ireland, Switzerland or Hong Kong. Although the benefits are obvious, to be successful arrangements of this type must be robustly evidenced and documented, and real value driver functions, assets or risks must be located in the more tax-efficient jurisdictions.
  17. 17. UK Hedge Funds Electronic Newsletter // March 2007 ...it is arguably easier to legitimately tax optimise a hedge fund business than businesses in a lot of the other financial sectors. Close document Previous page Next page Contents Print Click on each authors’ name to contact them directly via email by Aamer Rafiq 7212 8830, David McDonald 7212 3736 Given the context above the transfer pricing policies in the The Hedge Fund Survey took almost a year to complete and hedge fund sector often focus on ways of allocating is drawn together from detailed interviews with more than 100 revenues/profits to the key value driver functions of: hedge fund managers and independent distribution agents. In addition, the Survey also incorporates reviews of industry • Portfolio Management, covering asset allocation, investment publications and publicly available filings of US hedge fund research, investment decisions, position risk management managers. We believe that this benchmark is unique in the and performance related brand/reputation); and marketplace and provides a robust basis upon which to either • Distribution/Capital Raising, covering targeting investors to support existing arrangements or to plan new structures. and selling the fund. Traditionally, benchmarking the distribution function directly in the hedge fund context has been difficult due to the unavailability of third party benchmarks or lack on internal comparables. Given these problems of comparability between industries and recognising that there can be significant tax and/or penalties at stake for most hedge fund managers PwC undertook research and analyses to develop a benchmark for this function (known as the “The Hedge Fund Survey”).
  18. 18. UK Hedge Funds Electronic Newsletter // March 2007 PwC bespoke equity research By outsourcing parts of the Equity Research to PwC it enables you to free up time for you and your team to focus on investment decisions. Close document Previous page Next page Contents Print Click on each authors’ name to contact them directly via email by Louise von Blixen 7213 8981 Read this article Previous article Skip article
  19. 19. UK Hedge Funds Electronic Newsletter // March 2007 PwC bespoke equity research By outsourcing parts of the Equity Research to PwC it enables you to free up time for you and your team to focus on investment decisions. Close document Previous page Next page Contents Print Click on each authors’ name to contact them directly via email by Louise von Blixen 7213 8981 The PwC Global Equity Research Team is part of the Advisory The analysis is: practice of PricewaterhouseCoopers LLP. The team includes 12 Equity Research Analysts with extensive sector experience • High quality from working in the City at Investment banks and 4 • Objective and independent Economists with a broad set of micro and macro • Industry focused economic expertise. • Tailored Based on its experience and depth of resources the team • Idea generating is dedicated to providing insightful bespoke analysis of global By outsourcing parts of the Equity Research to PwC it stock markets, countries, regions, industries and enables you to free up time for you and your team to focus on specific companies. investment decisions. Our work is independent and is based on information in the public domain. All research is bespoke and tailored to meet each client's specific needs so none of our deliverables look the same. However our research can for example include:
  20. 20. UK Hedge Funds Electronic Newsletter // March 2007 Our work is independent and is based on information in the public domain. All research is bespoke and tailored to meet each client's specific needs so none of our deliverables look the same. Close document Previous page Next page Contents Print Click on each authors’ name to contact them directly via email by Louise von Blixen 7213 8981 • In-depth company research - initiating coverage style • Industry research – key trends and issues • Country specific economic reports • Forecast models - P&L, B/S and cash flow with forecasts and key drivers • Briefing notes ahead of meetings with the company management (highlighting key issues and questions to ask) • Analyst meetings/Investor day attendance and write-ups. If you would like to get more information around PwC’s Bespoke Equity Research please let us know.
  21. 21. UK Hedge Funds Electronic Newsletter // March 2007 The Indofood decision Do your overseas operations have enough local presence? Close document Previous page Next page Contents Print Click on each authors’ name to contact them directly via email by Robert Mellor 7804 1385, Lachlan Roos 7213 1309 Read this article Previous article Skip article
  22. 22. UK Hedge Funds Electronic Newsletter // March 2007 The Indofood decision Do your overseas operations have enough local presence? Close document Previous page Next page Contents Print Click on each authors’ name to contact them directly via email by Robert Mellor 7804 1385, Lachlan Roos 7213 1309 Following the Court of Appeal’s decision in the Indofood case is now part of UK law and also likely to be of persuasive force in March 2006, there was considerable uncertainty and where related issues for UK double taxation treaties are being concern as to how HMRC might seek to apply the case to considered. In other words, HMRC will seek to use the case transactions in which a double taxation treaty is relied on to to deny treaty relief where they perceive there to be some claim relief from UK withholding tax. form of abuse such as treaty shopping. The case concerned an international financing structure in Helpfully HMRC go on to give examples of certain which a Dutch company was interposed between a principal transactions that they consider will not be abusive, including company and a bond issuing company with a view to certain securitisations, issues of Quoted Eurobonds, claiming the benefit of a double taxation treaty to reduce syndication and sub-participations. withholding tax on interest. It was held that the Dutch However, when considering options for structuring company did not beneficially own the interest it received investments care should be taken to ensure that the company from the principal company so the treaty in question would has operational substance in the country where is it resident not apply. for tax purposes which would include giving consideration to HMRC published their draft guidance on the case in renting offices and employing staff. Clearly the lower the level November 2006. Although the case was predominantly of operational substance the greater the risk of a successful concerned with matters of contract law HMRC's view is that challenge by the relevant fiscal authority. this decision, as far as it relates to double taxation treaties,
  23. 23. UK Hedge Funds Electronic Newsletter // March 2007 Close document Previous page Next page Contents Print This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. ©2007 PricewaterhouseCoopers LLP. All rights reserved. ‘PricewaterhouseCoopers’ refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.

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