New draft OECD rules designed to combat Base Erosion and Profit Sharing (Beps) could have dire unintended consequences for cross-border funds, warned Roger Exwood, head of product tax for EMEA at Blackrock Investment Management (UK).
Speaking at the recent conference hosted by the Association of the Luxembourg Fund Industry (Alfi), Exwood noted that removing tax benefits for cross-border funds jeopardised the principle of tax neutrality between direct and indirect investing via commingled investment vehicles (CIVs). He suggested the effect could be a significant reduction in fund investment in Europe’s economies.
The OECD's 15 proposed "actions" to tackle Beps target strategies that seek mismatches in tax rules between different jurisdictions to reduce the overall corporate tax bill, for example by shifting profits to subsidiaries in low-tax jurisdictions where little business operations take place.
There is no firm timeline for the actions to be enforced, but all 44 countries involved have pledged to implement them once agreement is reached on how they should be formulated.
At present Ucits funds, most of which are registered in Luxembourg, can obtain tax benefits in certain jurisdictions. But since fund vehicles are a favoured way to achieve Beps, the rules propose removing tax benefits in many cases.
Exwood acknowledged there had been improvement in how the rules had been formulated over the past year. “We had feared we were heading to a scenario where no cross-border funds would be allowed to benefit from tax treaties,” he said.
However, he pointed out that while the industry was not in the state of panic it was in last year, “getting treaty relief for funds would still be hard under the current draft proposals."
Exwood recommended a blanket exemption for Uctis funds, regardless of domicile, echoing the current positions of both Alfi and the European Fund and Asset Management Association (Efama).
“In the big picture there are enough safeguards around Ucits that these investors should all be treated as the ‘right type’ of investors [i.e. non-tax evaders],” he said.
Raffaele Russo, head of Beps Project at the OECD Centre for Tax Policy and Administration in Paris, replied that there was already room in the draft rules to “exclude CIVs so that countries can stipulate in their bilateral relationships how they will treat them”.
“In most cases there are no big risks with CIVs,” he stated, “but there are lots of technical questions to resolve about how you can make that clear."
He re-stated the purpose of the rules, which he said were designed to resolve the question of how to make sure you give treaty benefits to those who are entitled to them and exclude those who are not.
Many in the industry – including Blackrock, Efama and Alfi – have been lobbying for CIVs to be left out entirely from the scope of Beps rules.
One problem for fund managers under the rules was the requirement to vouch that more than half of investors come from a jurisdiction that has a justifiable tax treaty, said Exwood. This is particularly hard when it comes to Luxembourg-based funds that contain investors from a number of countries.
“If Blackrock has to ensure it has 50% domestic investors in one of its domestic funds, it is easy to sign affidavits about who your investors are in the case of a domestic retail fund," he explained. "But Luxembourg funds are much harder. In many cases you can’t show that at least 50% come from any one country.”
Blackrock has proposed that the OECD link all three global tax transparency initiatives impacting cross-border investment - Beps, CRS and TRACE12 – each of which contain rules that apply to CIVs.