Alternative Investment Management Association

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Alternative Investment Management Association

  1. 1. Alternative Investment Management Association AIMA’s response to questions 1 to 26 in the Expert Group Working Document on Review of the operation of the Council Directive 2003/48/EC on taxation of income from savings – Issued 2 October 2007 Introduction – AIMA The Alternative Investment Management Association Limited (“AIMA”) is – some 16 years after its establishment - the only global, not-for-profit, professional trade association representing the hedge fund industry. It is also the only such association which represents all practitioners in the alternative investment management industry – whether managers of hedge funds, future funds or currency funds or those providing other specific services such as prime brokerage, administration, legal or accounting, auditing and tax advisory services. Its membership is corporate and now comprises, globally, over 1,100 firms, approximately 60% of which are based in Europe. AIMA’s growth has been commensurate with the development of the hedge fund industry worldwide. The three ‘pillars’ of AIMA are education, regulation and sound practices. AIMA’s objectives specifically include increasing investor education and the use and application of transparency, best practices and due diligence in the industry, as well as the promotion of the responsible development of alternative investments. AIMA seeks to ensure the representation and integration of skill-based investments in mainstream investment management and works closely with national securities’ regulators, other interested regulatory and fiscal bodies, investors and all parties to achieve its objectives. Questions and responses Articles 2 & 3: Beneficial ownership and identification rules Q1: For interest payments made to legal entities, located in or outside the EU, would it be possible to refer, where appropriate, to the individual beneficial ownership as established for the purposes of the Third anti-money laundering Directive (“AMLD”), for establishing beneficial ownership also for the purposes of the savings directive? Where the administrators/paying agents are required to comply with the provisions of the AMLD then references to the AMLD for beneficial ownership purposes would be possible. Where, however, paying agents are not subject otherwise to the AMLD or the EUSD requirements do not exactly follow the AMLD requirements, this may represent a significant additional compliance burden. Q2: Would it be wise or practicable to make the above procedure conditional on the absence of any evidence (to be provided e.g., before the end of the fiscal year of the interest payment) that the legal entity is subject to yearly taxation on its income (including interest income) in its country of establishment under the local general arrangements for taxation of such kind of legal entities? In the alternative asset management industry, our members distribute investment products (including investment funds) through various distribution channels, including intermediaries, which may be established as corporates. These corporates may be multinational at one end of the scale or single office specialist boutiques at the other. At present it is a relatively straightforward exercise for the administrators to the funds (who will generally be the paying agent for EUSD purposes) to establish where payments are made to legal entities and are therefore non-reportable. The Alternative Investment Management Association Limited 167 Fleet Street, London, EC4A 2EA Tel: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381 E-mail: info@aima.org Internet: http://www.aima.org Registered in England as a Company Limited by Guarantee, No. 4437037. VAT registration no: 577 5913 90. Registered Office as above
  2. 2. Alternative Investment Management Association If the requirements are amended, it would place additional burdens on administrators/paying agents to obtain and retain evidence in respect of legal entities who may be acting as distributors (as opposed to investors). In addition, our members may distribute products to high net worth individuals who invest via personal holding companies (“PHCs”). These PHCs may be established for various reasons. They would be established with appropriate consideration given to relevant tax issues (for example, residence, management and control, permanent establishment are all factors which impact on the application of UK taxation). Most Member States will have in place legislation enabling the authorities to levy appropriate taxes on the PHC. In the UK, specific legislation addresses such issues as transfer pricing, controlled foreign companies and closely controlled companies whilst more general anti-avoidance legislation could be relevant to some structures. The UK authorities could seek to apply this legislation at any time in the life cycle of the PHC. This is a complex and highly specialised area. It is not wise to impose on paying agents/ administrators in this industry any burden to obtain and therefore in effect validate evidence as to the tax status of such PHCs. The paying agent would be at the risk of penalties for incorrect assessment/retention of such evidence although it is highly unlikely that the paying agent has the expertise to determine whether or not the PHC/legal entity is subject to tax on its income. Therefore no conditions should be attached to the use of the AMLD provisions as considered in Q1. In addition we do not consider that it would be practical within the Directive to define the terms “yearly taxation” and “income” in a manner that could be consistently applied throughout the Member States, dependent territories etc. These are terms/definitions which, despite the lengthy history of UK tax legislation and tax case law still carry a degree of uncertainty. Q3: Could the savings directive be clarified in order to refer to concepts of the Third AMLD for establishing the individual beneficial owners of a discretionary trust or other similar arrangement, so as to consider the interest payment as made to those beneficial owners, notably in cases such as the one where no evidence is provided within a reasonable time (e.g., before the end of the fiscal year of the interest payment) that the income arising to the trust or other similar legal arrangement (including interest income) is taxed on a yearly basis? Investors may invest in our members’ products/investment funds through trust vehicles. However, given the additional complexities of trust law, together with the complexities which exist in the taxation rules applicable to trusts, it would not be practical to impose any requirement upon the paying agent to collate, assess and file tax information related to trusts (whether on an annual basis or otherwise). Such obligations would represent a significant additional burden for the paying agent. Q4: Should the savings directive be amended in order to refer systematically to the identity and permanent address resulting from the Customer Due Diligence performed under the requirements of the Third AMLD and its possible future modifications, with the only exception of those cases where there are no such requirements (e.g., The Alternative Investment Management Association Limited 167 Fleet Street, London, EC4A 2EA Tel: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381 E-mail: info@aima.org Internet: http://www.aima.org Registered in England as a Company Limited by Guarantee, No. 4437037. VAT registration no: 577 5913 90. Registered Office as above
  3. 3. Alternative Investment Management Association transactions not exceeding Eur 15,000 carried out in the absence of contractual relations)? Such an amendment would require paying agents to implement systems and processes to capture the relevant information and to allow for the exceptions. We would question whether there are any benefits in such an amendment, as opposed to having a single set of rules for the collection, verification and retention of identity and permanent address details. Q5: If yes... Refer to response to Q4. Q6: Would you agree that it is desirable to introduce into the Savings Directive (preferably in its Article 2) explicit common rules providing for a proportional attribution of interest payments to all the holders of joint accounts, or other jointly owned assets, according to their actual proportion of beneficial ownerships, or in equal shares in the absence of such information? This amendment would reduce the uncertainty as to how such accounts should be reported. As the EUSD is a reporting regime (generally) it may be an option to report each holder and leave it for them to deal with the relevant tax authorities to demonstrate actual beneficial ownership. Q7: Would it be acceptable for paying agents to have reference to those official documentary proofs of tax residence of the beneficial owner which are already in their possession, rather than to his permanent address, for establishing residence for the purposes of the Savings Directive? Yes, however see Q8 Q8: If yes…. This is an arduous process and requires the individual or the paying agent to obtain the information directly from the tax authority. We query also whether the domestic tax authority would have appropriate resources to comply with a request for proof of residence within a timely manner in all cases. In addition, this would require the paying agent to perform tax investigative procedures for which they are unlikely to be qualified or to have the resources. Article 4: Definition of Paying Agent Q9: What would be the impact on economic operators making interest payments of an amendment to Article 4(2) of the Savings Directive, according to which all such payments made to a transparent entity (with the only exclusion of UCITS) established in another Member State would have to be submitted to the simplified reporting of the last phrase of Article 4(2), or to withholding tax under Article 11(5) of the same Directive? The Alternative Investment Management Association Limited 167 Fleet Street, London, EC4A 2EA Tel: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381 E-mail: info@aima.org Internet: http://www.aima.org Registered in England as a Company Limited by Guarantee, No. 4437037. VAT registration no: 577 5913 90. Registered Office as above
  4. 4. Alternative Investment Management Association This would impact the economic operators/paying agents by: · Increasing the level of work required in the application/investment process; · Increasing the level of reporting; and · Imposing costs and additional administrative burdens. Q10: Would the establishment of a “positive” list of the categories of transparent entities for which such provisions would apply, help make such an amendment acceptable? See response to Q11. Q11: Could the establishment of a “negative” list of the categories of the entities certainly excluded from the “paying agent on receipt” provisions be considered a valid alternative to the “positive” list in question 10, if such “negative” list is coupled with the establishment of a common model of certificate to be issued by the tax administrations in favour of those individual entities which do not belong to the categories included in such “negative list”, but are nevertheless actually taxed on their own income, included interest income, on a yearly basis? It is our view that in the absence of a central list, the amendment could not work in practice. This is because there are a number of questions that would need to be addressed in the Directive in order to capture “transparent entities” including for example, how is the term defined and is the definition to be considered by reference to the laws/practices in the domicile of the paying agent, the entity or the underlying investor? A consistent methodology would be need to be applied by all Member States, dependent territories, etc, to provide certainty to the paying agents. It is our view that only a “positive” list could work in practice; i.e. a list of entities which, under the law/practice applicable in the territory in which the entity is domiciled, are treated as transparent. Each Member State would, of course, need to be bound to report payments to those entities on the list (i.e. in effect a “home country rule” would need to apply). A “negative” list is not a practical or manageable alternative given the number of countries involved and the number of entities (the majority) which would be non- transparent. Q12: If the “look-through” approach for establishment of beneficial ownership described in ss2.1.1 is adopted, would upstream economic operators making interest payments be able to apply the provisions of article 4(2) of the Directive only to those payments for which an individual beneficial owner cannot be identified at their level? We believe that this would add costly complexities to the reporting process. Q13: What would be the impact for both the upstream economic operators and the professional trustees of possible amendments to Article 4(2) of the savings directive aiming at extending the “paying agent on receipt” provisions to the interest payments The Alternative Investment Management Association Limited 167 Fleet Street, London, EC4A 2EA Tel: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381 E-mail: info@aima.org Internet: http://www.aima.org Registered in England as a Company Limited by Guarantee, No. 4437037. VAT registration no: 577 5913 90. Registered Office as above
  5. 5. Alternative Investment Management Association made to those discretionary trusts (or other legal arrangements) whose income (including interest income) is not taxed on a yearly basis in its Member state establishment, whenever the AML provisions cannot be used by the upstream economic operator to identify the beneficial owner? Would it be possible to prepare a negative list, by Member State of establishment of the trust, of those categories of trusts or similar legal arrangements whose income (including interest income) is always subject to yearly taxation in their Member State of establishment? As noted above in our response to Q10 and Q11 it is our view that a “positive” list (of reportable trusts) would be the only practical solution. Q14: Would it be legally and practically feasible to impose an obligation on the head offices established within the EU to report (or to withhold) on interest payments made through non EU branches, provided that such head offices have access to the information about the beneficial owner and the interest payment? We do not believe that it would be practically feasible to impose this obligation. We would question the legality of such an imposition and it would lead to conflict with privacy laws in non-EU jurisdictions. We would also note that the decision to use a branch outside of the EU may be made by reference to a number of factors, of which tax would only be one and EUSD would be only one of the tax considerations. It would be oppressive and also not feasible to impose obligations on such operations where the branches may be far removed from the geographical scope of the Directive (some of our members operate in Australia for example) where the incidence of payments to EU residents would be exceptional. We consider that there would be limited value for what would seem to be a substantial alteration to the Directive to target a limited area of perceived avoidance. Q15: Can the above objective be achieved by a common broad interpretation of Article 1(2) of the Savings Directive or should the Directive provide specific rules for cases of EU paying agents deliberately routing payments through their non-EU branches? We consider that the objective could not be achieved by a common broad interpretation of the relevant article. A “broad interpretation” would not provide the clarity and certainty that paying agents require in order to establish/amend necessary systems and procedures to meet their obligations under the Directive. Q16: Does the current general exclusion of innovative financial products from the scope of the Savings Directive lead to distortion in financial markets? If so, can experts provide examples or demonstrations? Which kind of structured or derivative financial products could be considered as generating interest payments under a substance over form approach? Would it be desirable to slightly amend the savings Directive in order to confirm that such an approach applies? We do not have any evidence as to whether the general exclusion has lead to distortion in financial markets. In our view, it would not be feasible to define “innovative financial products” nor “substance over form” in the Directive in a manner that would ensure clarity and consistency across the EU member states. We believe that any attempt to broaden the scope of the Directive under this heading would most likely lead to member states, The Alternative Investment Management Association Limited 167 Fleet Street, London, EC4A 2EA Tel: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381 E-mail: info@aima.org Internet: http://www.aima.org Registered in England as a Company Limited by Guarantee, No. 4437037. VAT registration no: 577 5913 90. Registered Office as above
  6. 6. Alternative Investment Management Association associates and third countries issuing their own guidelines as to how such terms should be interpreted. This is a complex and ever changing area in which specialist providers operate. It would not be wise or practical to place a burden on the paying agents (in particular “final” paying agents in a chain, ie. those who distribute but do not necessarily design such products) any burden to obtain and analyse information in respect of such instruments. We do not therefore believe that it would be feasible to implement a substance over form approach in the Directive. This would lead to widespread issues in terms of consistency and practical application in the various jurisdictions. Q17: Does the current exclusion from the scope of the Savings Directive of all benefits from pensions and insurance contracts lead to distortions in financial markets? To what extent is the competition between UCITS and life-insurance driven by the Savings Directive and not by other economic, commercial, legal, tax, etc factors? How many individuals with an account in another Member State do put their savings in life insurance contracts rather than in UCITS just to avoid the Savings Directive obligations? Which amount of assets under management does this represent in the EU? This is not typically an area in which our members operate and we do not have any evidence as to whether the general exclusion has lead to distortion in financial markets. Q18: Depending on your reply to the different elements of question 17, would it be desirable to amend the Savings Directive in order to include in its scope part or all of the benefits from revocable life-insurance, pension or annuity products when the underlying prevailing investment is directly or indirectly made of interest generating financial products? Providers of such products (“pension providers”) as those noted in Q17 may invest in our member’s products. An extension of the scope of the Directive as proposed in this question would lead to pension providers requiring information in respect of the underlying product in order to meet any new obligations imposed on them. The proposal would therefore increase the burden on the administrators in the pensions industry and therefore in turn, in the savings/investment industry and lead to an increase in the cost of providing retirement products throughout the EU. This would not be a desirable result. It is our view that the Directive is correct to distinguish (as it effectively does at present) between pension/retirement products ie those intended to provide a long term benefit at a point some time in the future and other savings/investment products which are more likely to be designed as liquid investments to cater for a shorter investment term for individuals. [Could you not exempt from the EUSD all payments to and by authorised product providers?] Q19: If an extension of the “paying agent on receipt” to all transparent entities (see above §3.1 and question 9) turned out not to be feasible, should interest income obtained through non-UCITS established The Alternative Investment Management Association Limited 167 Fleet Street, London, EC4A 2EA Tel: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381 E-mail: info@aima.org Internet: http://www.aima.org Registered in England as a Company Limited by Guarantee, No. 4437037. VAT registration no: 577 5913 90. Registered Office as above
  7. 7. Alternative Investment Management Association within the EU be included within the scope of Article 6 of the Savings Directive in order to avoid distortions? To what extent is the competition within the EU between UCITS and non-UCITS driven by the Savings Directive and not by other economic, commercial, legal, tax, etc factors? How many individuals with an account in another Member State do put their savings into non-UCITS rather than in UCITS just to avoid EUSD obligations? How much assets under management does this represent in EU? It is not possible within our membership to comment on the number of individuals who invest in a non-UCITS fund in order “just to avoid EUSD obligations”. This is a question of motive which our members are not obliged to address when considering subscriptions from investors. Our members would in general establish non-UCITs funds to make use of the wider investment powers and the lighter regulation applying in comparison to UCITS funds. Whilst EUSD issues are relevant they are not a key driver. However, although non-UCITS funds are not generally marketed as widely as UCITS funds and arguably are not primarily intended for the retail investor market in Europe, the current distinction between UCITS/non-UCITS funds is not logical. Whilst it is unlikely in practice, a non-UCITS fund could be established with an identical investment portfolio to a UCITS funds and a comparable geographical distribution but not be within the scope of the Directive. We therefore believe that the current distinction should be removed. Q20: Should the definition of “undertakings for collective investment established outside the territory [to which the Treaty applies]” be improved/clarified in the Savings Directive in order to avoid market distortions or tax evasion? It is our view that the definition of “undertakings for collective investment established outside of the territory” should be improved/clarified. We believe that the lack of clarification has led to uncertainty for product providers, administrators and investors as to whether investment funds are within the scope of the Directive which leads to administrative and marketing difficulties. Q21: What are the views of the Expert Group on the definition of collective investment funds or schemes provided by the 2002 OECD Model Agreement? Do the Experts see any definition which encompass all different investment funds (irrespective of their legal type, their distribution mode, their clients, their domicile) paying interest to their beneficial owner? Which definition of investment funds, either established inside or outside the EU, would the Experts suggest for the purposes of the Savings Directive? It is our view that a definition should be adopted which provides greater clarity in the Directive itself as to those funds which are and which are not within the scope of the Directive. The main objective should be to ensure clarity in the EU law so that there is no need to refer to local guidelines or interpretations issued by member states which only leads to inconsistency. Our view is that such a definition should include references to the following: 1. The location of the fund: funds which are domiciled/resident in particular geographical areas [eg those territories which are not EU members, associates/dependents or third countries etc ] should be outside of the scope of the Directive; The Alternative Investment Management Association Limited 167 Fleet Street, London, EC4A 2EA Tel: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381 E-mail: info@aima.org Internet: http://www.aima.org Registered in England as a Company Limited by Guarantee, No. 4437037. VAT registration no: 577 5913 90. Registered Office as above
  8. 8. Alternative Investment Management Association 2. The ability for investors to redeem their investments on a regular basis; a fund should only be “in scope” if investors are unable to redeem their holdings from the fund at least once a month; and 3. Investment diversification; an “in scope” fund should only be one in which the manager is required to spread the investment risk for example by limiting the maximum exposure in a single investment. 4. Any fund which is bought into scope by its nature or location should then be considered in light of the underlying investment objective. A fund should only be included if its investment object (either as stated in the prospectus or similar offering document) or its actual investments mirror an interest only return. This could be defined as a fund directly or indirectly who’s income comes from the periodic payment of interest on capital invested and whose capital price varies only with changes in credit risk or base rate. Funds which borrow more than say 30% of their investor capital would also be excluded as not being in economic terms equivalent to an interest bearing deposit. It is important for AIMA members that a fund is not in scope simply by having a percentage of its investments on deposit. The investment strategy of hedge funds is often carried out via contracts for differences etc. Here assets are provided as collateral (hence the possibilities of assets being a deposit) with the CFD generating anything other than an interest return. Q22: Does the current text of the provision on annualisation of the Savings Directive lead to distortion in financial markets? See the response to Q23. Q23: Should annualisation be compulsory for those Member States that already apply the same method on interest payments made to their resident customers for domestic tax purposes? We do not have any evidence of any distortions in financial markets in relation to the provision of annualisation of interest payments and do not see any benefit in making annualisation compulsory. Q24: How could the current text of Article 6(8) and of the last sub-paragraph of Article 6(1) be better detailed, in order to convince all Member States to accept the “home country rule”, at least for investment funds established within the EU? We consider that the adoption of “home country rule” would reduce uncertainty in the application of the Directive. [Subject to the comments Q21 above] Article 6(8) could be detailed to permit a range of acceptable measures, for example, by reference to investment objectives or the average of assets at the beginning and end of the fund’s accounting period. With regards to Article 6(1), the reporting (or final) paying agent should be entitled to rely on information provided by the investment fund and/or its local administrators, without i) the need to re-calculate or ii) the ability to challenge that information. The Alternative Investment Management Association Limited 167 Fleet Street, London, EC4A 2EA Tel: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381 E-mail: info@aima.org Internet: http://www.aima.org Registered in England as a Company Limited by Guarantee, No. 4437037. VAT registration no: 577 5913 90. Registered Office as above
  9. 9. Alternative Investment Management Association Q25: Would paying agents find it burdensome to be requested to specify the quarter of the tax year during which the interest payment is made? It would be burdensome for paying agents to specify the quarter of the tax year of the tax year to which the interest payments corresponds them. It is understandable that there may be a need for such information in a jurisdiction which applies withholding tax to interest payments, however, where jurisdictions have opted to share information, this seems an unnecessary complication. We do not consider that it should in effect be made the responsibility of the paying agents to assist taxpayers with their own tax return compliance or in resolving any issues arising from a tax authorities’ investigation into an individual’s tax return. Q26: Does the procedure of Article 13(1)(b) function effectively? Do paying agents established in Austria, Belgium and Luxembourg face difficulties to get the related fiscal certificates from specific categories of beneficial owners (expatriates, diplomats or personnel of international institutions)? If yes, are there improvements which could be proposed (eg obliging Member States to involve their consulates in the issuing of certificates, provided that their tax authority is made aware of the information contained in the certificates)? Our members have not advised of any concerns in respect of this procedure. The Alternative Investment Management Association Limited 167 Fleet Street, London, EC4A 2EA Tel: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381 E-mail: info@aima.org Internet: http://www.aima.org Registered in England as a Company Limited by Guarantee, No. 4437037. VAT registration no: 577 5913 90. Registered Office as above

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