MMF Taxation

European Money Fund Forum 201629th June - Millennium Hotel London

BREXITKeep 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 2016

http://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

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

alikazimi@hansukeconsulting.co.uk uk.linkedin.com/in/securitiestax +44 7818 522 779