2. BREXIT
Keep calm and carry on...
"Firms must continue to abide by their obligations
under UK law, including those derived from EU law
and continue with implementation plans for legislation
that is still to come into effect," the statement from the
FCA.
3. Agenda
Systematic tax analysis
Investor Taxation
Fund Taxation
Investment Taxation
Current tax landscape
EU FTT
AEOI (FATCA, CDOT & CRS)
BEPS
6. Investor taxation
Most European investors are taxed only on the actual distributions
received (e.g. Italy, Spain), or on deemed investment returns from funds
(Germany, Austria)
To distribute across EU, fund promoters have to comply with myriad of
regulatory tax regimes which is seen as a barrier to the cross-border
distribution of funds
2 June 2016 – EC consultation on main barriers to cross-border
distribution of ‘EU passported’ investment funds (UCITS and AIFs) –
Consultation deadline is 2 Oct 2016
http://ec.europa.eu/finance/consultations/2016/cross-borders-investment-funds/docs/consultation-document_en.pdf
7. Investor taxation - MMFs
Investors based in a jurisdiction which taxes income differently to capital
gains will differentiate between CNAV (distributing) and VNAV
(accumulating) funds
8. Investor taxation – UK Reporting Fund Regime
Since 2009, non-UK funds are not required to distribute but have to
report all its income
Offshore funds that are not Reporting Funds – any capital gain on
disposal for UK retail investor is recharacterised as income and taxed on
that basis
Recharacterisation – may not benefit from the Annual Exemption, any
capital loss relief and lower CGT rates 18%/28% cf 40%/45%
9. Investor taxation – Bond Funds
Bond funds – broadly hold over 60% of assets in bonds, cash or cash
equivalents
Bond fund distributions are taxed as interest income in the UK
Corporate investors taxed under loan relationship regime
Interest distributions – normal marginal rates apply (20%, 40% and 45%)
Dividend distributions – after 6 April 2016, £5,000 annual tax free
dividend allowance, excess taxed at 7.5% (basic rate), 32.5% (higher
rate) and 38.1% (additional rate)
10. Investor taxation – UK domestic bond funds
UK Bond fund distributions treated as interest income and were subject
to 20% basic rate tax at source
Complications arose following introduction of Personal Savings
Allowance and abolishment of at source tax on savings interest
HM Treasury amended rules enabling OEICS, unit trusts and investment
trusts (invested in fixed income securities) to distribute without deducting
income tax
12. Fund Taxation
Taxation of the fund
Residency/substance and permanent establishment risks (IME)
Tax leakage and neutrality (intermediated vs direct returns)
Tax registration, reporting and filings by the fund
Outsourced operationally yet legally responsible
FIN 48 (US GAAP) accounting for uncertain tax positions
Tax disclosures in prospectuses etc. need to be kept up to date
Rise of the Tax Middle Office
13. AEOI (FATCA, CDOT & CRS)
Financial Institutions (FIs) must be compliant
Funds will be FIs – classified as an ‘investment entity’
Classification of investors – based on documentation (W8, self
certifications) or procedures
Upgrade on-boarding of new investors
Due diligence procedures for existing investors
Institute monitoring of investors for change in status
Reportable investor accounts need to be flagged and reported
14. AEOI Practical issues
Complex set of rules (including judgement calls)
Unrealistic timeframes
Tactical solutions worked for FATCA – CRS is a different beast...
Everyone is an expert and sells solutions
In a fund complex – who does what? Needs careful wiring
Who is paying for it and how is it being charged
Who is carrying the risk if it goes wrong
16. Investment Taxation
Need to ensure that portfolio level taxation exposures are minimised -
WHT, capital gains and local market registration
JGB Book-Entry System
Challenge is the multitude of portfolio investment instruments and
locations – tax defined investible universe
Most fixed income securities and money market instruments tend be
gross paying ie no WHT
Repo/SL transactions (collateral arrangements)
17. Investment Taxation – horror story
Did I tell you the one about the Swiss bond, Middle Eastern
investor and the IMA from hell...
19. MMFs and EU FTT
EU FTTs disproportionate impact on MMF industry
Short-term securities results in higher portfolio turnover
Particularly harsh for MMFs domiciled in EU jurisdictions
Cost of FTT is estimated to reduce annual investment performance by as
much as 100bp
Lobbying efforts working...
Trumped by CMU
20. EU FTT Developments I
31 December 2015 deadline missed...2017?
Down from 11 member states to 10
Split between shares and derivatives...broadly silent on bonds...
Shares – exemption for agents and market maker exemption
Derivatives – to be taxed on widest possible basis
21. EU FTT Developments II
17 June 2016 – EU participating states
renew commitment
3 June 2016 – briefing note from the EU
Council Note lays bare the lack of
progress on EU FTT – only one meeting
of working party in 2016 and deep
divisions within the participating Member
States
Austria is mediating, September deadline
to reach a deal https://www.linkedin.com/pulse/ftt-meandering-ali-kazimi?trk=mp-author-card
22. BEPS Project
2008 global financial crisis, the media focused attention and criticism on
corporate tax avoidance undertaken by multinational enterprises (MNEs)
2012-13 G20 boosts OECD
15 Actions broadly covering
- Jurisdiction to tax (digital)
- Transfer pricing (intangibles, documentation)
- Leverage (debt financing)
- Anti-avoidance (CFC, hybrids)
Action 6: Preventing Treaty Abuse: impact on CIVs and non-CIV Funds
23. Action 6 – Preventing Treaty Abuse
Recommendation to counter treaty abuse through Limitation on Benefits (LOB) rule
and/or Principal Purpose Test (PPT)
Further consideration needs to be given to exception to LOB and PPT for certain CIVs
and non-CIV funds
CIVs are “funds that are widely-held, hold a diversified portfolio of securities and are
subject to investor-protection legislation in the country in which they are established”
which would includes regulated investment funds such as UCITS or Mutual Funds.
Other funds such as alternative funds and private equity funds, Sovereign Wealth
Funds (“SWFs”), Pension Funds and REITS are likely to be considered “non-CIV
funds.”
24. Other Projects
2010 OECD Committee on Fiscal Affairs released a Report on “The
Granting of Treaty Benefits with respect to the Income of CIVs”
2014 clarification of “BENEFICIAL OWNER” in the OECD Model Tax
Convention
the recipient is the “beneficial owner” of the payment in question when he has the right to
use and enjoy the dividend unconstrained by a contractual or legal obligation to pass on the
payment received to another person; this in effect rules out the possibility of considering as
“beneficial owners” persons acting as fiduciaries, agents, or nominees.
25. Take away points
Tax regimes to distribute and EC Consultation (2 Oct 2016)
Treatment of fund distributions (character, withholding taxes)
Tax Middle office
AEOI (FATCA, CDOT and CRS) – legal responsibility is with the fund
Not all MM investments are tax free
EU FTT unlikely but keep a watching brief
