MMF Taxation

European Money Fund Forum 201629th June - Millennium Hotel London

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.

Agenda

Systematic tax analysis

Investor Taxation

Fund Taxation

Investment Taxation

Current tax landscape EU FTT

AEOI (FATCA, CDOT & CRS)

BEPS

INVESTOR LEVEL

FUND LEVEL

INVESTMENT LEVEL

Systematic Tax Analysis

Investor Taxation

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 2016http://ec.europa.eu/finance/consultations/2016/cross-borders-investment-funds/docs/consultation-document_en.pdf

Investor taxation - MMFs

Investors based in a jurisdiction which taxes income differently to capital

gains will differentiate between CNAV (distributing) and VNAV

(accumulating) funds

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%

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)

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

Fund Taxation

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

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

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

Investment Taxation

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)

Investment Taxation – horror story

Did I tell you the one about the Swiss bond, Middle Eastern

investor and the IMA from hell...

Current tax landscape

- EU FTT

- BEPS

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

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

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

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

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.”

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.

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

Contact

Ali KazimiHansuke ConsultingUnited House, North Road, London N7 9DP

alikazimi@hansukeconsulting.co.uk

uk.linkedin.com/in/securitiestax

+44 7818 522 779