Download Investment Funds and Treaty Entitlement

Investment Funds and
Treaty Entitlement
ABA Tax Section Meeting
Investment Management Committee
May 12, 2017
Panel
Keith Lawson, Moderator
Deputy General Counsel – Tax Law
Investment Company Institute/ICI Global
Quyen Huynh
Associate International Tax Counsel
U.S. Department of the Treasury
Michael Plowgian
Principal
KPMG LLP
Introduction into CIV Treaty Entitlement
• What is a collective investment vehicle?
• An investment fund that is widely held, subject to investor protection
regulation, and invested in a diversified portfolio of securities
• What are the “big” issues for CIVs?
• Does the CIV meet the requirements for treaty relief? Specifically, is the CIV:
• a “person”
• a “resident” and
• the beneficial owner of its income?
• How does the CIV prove treaty entitlement, particularly if entitlement is
conditioned on the tax residences of its owners – including those whose
shares are held through nominees (such as brokers)?
• Impact on fund net asset value (NAV) of uncertain status of tax receivable
OECD Consideration (pre-BEPS) of CIVs
• Collective Investment Vehicle (CIV) Report
• Developed by OECD Informal Consultative Group during 2007 - 2009
• Final report agreed in 2010 and incorporated in 2010 Update to OECD Model Tax Convention
• Report concludes that:
• CIVs, in most cases, should be treaty entitled
• Administrative mechanisms should be provided for other CIVs to claim on behalf of investors
• Discusses government concerns about treaty shopping and deferral
• Suggests that certain CIVs (like U.S. RICs) that are subject to tax on undistributed income and
that withhold on distributions to nonresidents generally should not raise concerns about
treaty shopping or deferral
• Limitations
• Does not address non-CIVs: real estate, private equity, hedge, infrastructure
• Recommendations not widely adopted
Treaty Relief and Compliance Enhancement
(TRACE)
• OECD Attempt to Address Financial Intermediation
• Inspired by QI regime
• Key elements
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Approval of intermediary by source country
Investor self-certification
Treaty claims made on pooled basis
Payee-specific reporting to source country
Independent review of compliance
• No Country Has Adopted TRACE, But FATCA and CRS Help Address Concerns
• Financial institutions (including investment entities) collect self-certifications from,
and report on, investors and account holders
• Linking with treaty benefits may improve compliance by account holders
OECD Issues – BEPS Action 6
• BEPS Action 6 deliverable’s recommendation: a “minimum standard”
for treaties that prevents “unwarranted” tax relief
• Two alternative tests advanced:
• Limitation on benefits (LOB) provision – an objective test
• An LOB test generally requires a claimant to be publicly traded or 50+% owned by treatyeligible investors; or
• Principal purpose test (PPT) – a subjective test
• A PPT denies relief if “one of the principal purposes of the transaction or arrangement”
is to obtain treaty benefits
OECD Issues – BEPS Action 6
• BEPS Action 6 recommendation details:
• Preserves recommendations made by OECD in the 2010 CIV Report for
ensuring that all fund investors have avenue for receiving treaty relief
• Agrees that TRACE is important for practical implementation of CIV Report’s
recommendations
• Includes a narrow example of a fund that satisfies the principal purpose test
• widely held, but more than 50% owned by same-country residents, less than 15%
invested in State S securities, annually distributes almost all income
OECD Issues – BEPS Actions 6 and 15
• Issues for incorporating LOB and/or PPT into Multilateral Instrument:
• LOB
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Many investment vehicles (and even CIVs) are not regularly traded
Ownership/base erosion (must identify owners)
Derivative benefits (more than 7 owners?)
Not active trade or business
Pension funds
Potential special category for CIVs?
• PPT
• Inherently subjective
• Investment vehicles formed for non-tax purposes, but tax often is important in
determining location
• Draft examples for Non-CIVs suggest a look-through/equivalent beneficiaries approach
Overarching Industry Themes
• Certainty
• Neutrality (between direct and CIV investors)
• Neutrality/Reciprocity between funds
• Support for CIVs and their investors
• CIV Report and TRACE Implementation
• PRACTICAL solutions
Government Concerns
• Double taxation
• Double Non/Reduced Taxation
• Providing treaty benefits to third-country investors
• Are fund investors treaty-entitled?
• Relevance, if any, of lack of control
• Deferral
• Larger residence-country foreign tax credits if treaty benefits denied
• RELIABLE solutions
Potential Framework (Approaches)
• Fiscally transparent entities
• Most theoretically pure; new Article 1(2) of OECD Model
• But lenders and investors often insist on entities that are not fiscally
transparent
• Practical issues with accounting and reporting for funds that are widely held
or if investors from multiple jurisdictions
• Fiscally opaque entities
• Need to identify owners (TRACE principles, leveraging FATCA/CRS?)
• Need to address third country owners (equivalent beneficiaries)
• Need to address deferral
U.S. Treaty Policy
• CIVs
• Need to agree with treaty partners on mechanism to grant treaty benefits to RICs
and treaty partner CIVs
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Technical Explanation addresses RIC residence, but generally not binding on treaty partners
Extent of “proof” of ownership needed?
Potential to implement TRACE principles to establish ownership?
Equivalent beneficiaries?
• Non-CIVs
• Fiscally Opaque – difficulties qualifying under U.S. Model LOB
• Need for expanded derivative benefits provision
• Article 1(6) of the U.S. Model
• Need for other countries to allow investors to treat entities as fiscally transparent?
• Foreign partnerships able to act as non-withholding QIs?
Thank you!