Presentation by Stephen Shay


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Presentation by Stephen Shay

  1. 1. OECD Committee on Fiscal Affairs Roundtable on Collective Investment Vehicles February 1-2, 2006 -- Paris, France Selected Treaty Issues Affecting Collective Investment Vehicles Investing in Securities Stephen E. Shay, Ropes & Gray LLP
  2. 2. Cross-Border Portfolio Investment Through CIVs <ul><li>At June, 2005, mutual fund assets worldwide (in 41 countries) were $16.41 trillion .* </li></ul><ul><ul><li>$8.2 trillion were held in the United States </li></ul></ul><ul><ul><li>$5.6 trillion were held in Europe </li></ul></ul><ul><li>* Investment Company Institute, Worldwide Mutual Fund Assets and Flows, Second Quarter 2005, Supplementary Tables, Table S1, “Total Net Assets in U.S. Dollars,” found at . </li></ul>
  3. 3. Cross-Border Portfolio Investment Through CIVs <ul><li>Benefits of CIVs to investors. </li></ul><ul><ul><li>Investors achieve economies of scale and reduced transactions costs. </li></ul></ul><ul><ul><li>Investors receive benefits of professional investment management. </li></ul></ul><ul><ul><li>Investors achieve diversification of investments. </li></ul></ul><ul><ul><li>CIVs are important source of investment capital for source countries. </li></ul></ul>
  4. 4. Cross-Border Portfolio Investment Through CIVs <ul><li>CIV structural imperatives. </li></ul><ul><ul><li>CIVs must realize income and gains on a tax neutral basis compared with direct ownership of securities. </li></ul></ul><ul><ul><li>Unrelieved tax costs discourage co-mingling in a CIV with international investments diminishing cross border portfolio investment. </li></ul></ul>
  5. 5. Legal and Tax Attributes of CIVs <ul><li>CIV investors include: </li></ul><ul><ul><li>Institutional investors, many of whom at tax-exempt. </li></ul></ul><ul><ul><li>Individual investors. </li></ul></ul><ul><li>Funds may be marketed publicly or privately. </li></ul>
  6. 6. Legal and Tax Attributes of CIVs <ul><li>CIVs legal form may be </li></ul><ul><ul><li>Recognized as a separate taxable legal entity, or </li></ul></ul><ul><ul><li>Transparent for tax purposes. </li></ul></ul>
  7. 7. Legal and Tax Attributes of CIVs <ul><li>CIV tax characteristics. </li></ul><ul><ul><li>Irrespective of the legal form of the CIV, there is little or no effective taxation of the CIV. </li></ul></ul><ul><ul><li>Low or no taxation of CIVs is accomplished in myriad ways. CIV may be </li></ul></ul><ul><ul><ul><li>“Not a person” or transparent, </li></ul></ul></ul><ul><ul><ul><li>Exempt from tax, </li></ul></ul></ul><ul><ul><ul><li>Subject to tax at low or zero tax rates, </li></ul></ul></ul><ul><ul><ul><li>Subject to tax with the integration at the investor level. </li></ul></ul></ul>
  8. 8. Legal and Tax Attributes of CIVs <ul><li>Home country or third country CIV. </li></ul><ul><ul><li>United States, the United Kingdom, France, Germany and other countries have substantial national mutual fund or investment fund industries serve principally resident investors. </li></ul></ul><ul><ul><li>Other fund locations, including Luxembourg and Ireland, service investors primarily from third countries. </li></ul></ul>
  9. 9. CIV Difficulties in Obtaining Source Country Treaty Relief <ul><li>CIV-level treaty issues. </li></ul><ul><ul><li>Whether the CIV is a person and a “resident” of the treaty country. </li></ul></ul><ul><ul><li>The CIV is the “beneficial owner” of income whether CIV satisfies any limitation on benefits provisions. </li></ul></ul>
  10. 10. CIV Difficulties in Obtaining Source Country Treaty Relief <ul><li>Practical tax reclaim issues. </li></ul><ul><ul><li>Not practical for investors in a publicly offered or widely-owned CIV to claim treaty relief. </li></ul></ul><ul><ul><li>In summary, CIVs face lack of direct access to treaty benefits and an inability to implement refund claims for investors. </li></ul></ul>
  11. 11. CIV Difficulties in Obtaining Source Country Treaty Relief <ul><li>CIV treaty relief – dividends. </li></ul><ul><ul><li>Resident CIV must be “liable to tax.” </li></ul></ul><ul><ul><li>CIV must be beneficial owner of dividends. </li></ul></ul><ul><ul><li>US-style limitation on benefits: </li></ul></ul><ul><ul><ul><li>Exemption for publicly-traded companies does not apply to “open-end” funds. </li></ul></ul></ul><ul><ul><ul><li>Ownership test difficult to administer. </li></ul></ul></ul>
  12. 12. CIV Difficulties in Obtaining Source Country Treaty Relief <ul><li>Pension plans and other tax-exempt investors </li></ul><ul><ul><li>Some treaties allow pension plans, tax-exempt organizations exemption from source country taxation. </li></ul></ul><ul><ul><li>CIVs sometimes organize to pool these investors’ funds. </li></ul></ul><ul><ul><li>CIVs should be allowed to accommodate these funds. </li></ul></ul>
  13. 13. Principles for Obtaining Source Country Treaty Relief <ul><li>Principles for addressing CIV/Investor treaty issues. </li></ul><ul><ul><li>Avoid double taxation, do not foster double non-taxation. </li></ul></ul><ul><ul><li>Treat economically similar investors similarly. </li></ul></ul><ul><ul><li>Preserve benefits of residence country tax-exemption. </li></ul></ul><ul><ul><li>Implementation of treaty relief at CIV level. </li></ul></ul><ul><li>Do not expect a “one size fits all” solution. </li></ul>
  14. 14. Addressing CIV Treaty Issues <ul><li>Consider modifying treaty rules for CIVs. </li></ul><ul><ul><li>Residence issues. </li></ul></ul><ul><ul><ul><li>Clear definitions for classification of CIV forms as transparent and non-transparent. </li></ul></ul></ul><ul><ul><ul><li>Clear rules for whether CIV is eligible to claim treaty relief directly. </li></ul></ul></ul><ul><ul><ul><li>If CIV subject to tax, it should be allowed to claim treaty relief. </li></ul></ul></ul>
  15. 15. <ul><li>Consider modifying treaty rules for CIVs (cont’d) </li></ul><ul><ul><li>Transparent CIV entities. </li></ul></ul><ul><ul><ul><li>To the extent possible, consistent with treaty purposes, identify transparent CIV entity may claim treaty relief on behalf of its investors. </li></ul></ul></ul><ul><ul><ul><li>For example, treaty relief allowed at the level of the CIV if investors are from qualifying countries that treat the CIV as transparent. </li></ul></ul></ul>Addressing CIV Treaty Issues
  16. 16. <ul><li>Consider modifying treaty rules for CIVs (cont’d) </li></ul><ul><ul><li>Beneficial owner and limitation on benefit issues. </li></ul></ul><ul><ul><ul><li>If income taxed to the investor through withholding or directly, treaty eligibility should be allowed at entity level. </li></ul></ul></ul><ul><ul><ul><li>Tax-exempt entities. </li></ul></ul></ul><ul><li>Consider special CIV treaty rules </li></ul>Addressing CIV Treaty Issues
  17. 17. Improve Treaty Reclaim Process <ul><li>Relief at source should be the objective. </li></ul><ul><li>Streamline procedures for standardize documentation requirements. </li></ul><ul><ul><li>Permit use of omnibus accounts (pooling of assets). </li></ul></ul><ul><ul><li>Documentation by intermediary with a “know-your customer” relationship with investor. </li></ul></ul><ul><ul><li>Documentation should be “verifiable” by the source country. </li></ul></ul><ul><li>See G30 Proposal </li></ul>
  18. 18. Next Steps <ul><li>Consider convening advisory group including representatives from industry to further examine issues and alternative solutions. </li></ul>