Keeping up with tax Asset management

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1 Keeping up with tax Asset management February 2018 Click to launch

2 Introduction The start of March means we are nearing the end of the first quarter of 2018, with much already having happened in the world of Brexit, asset management and tax more widely. Brexit is still very much front of mind and receiving the daily attention of the press. However, as the options to be in or out of the Customs Union dominate the media coverage, the financial services agenda has received less attention this month. Whilst the impact of Brexit on asset management continues to be unclear, the economic value of our industry to the UK is not. The Investment Association s 2017 Asset Management survey highlighted that 93,500 people are employed in activities related to asset management, 37,700 of which are directly employed by asset management firms. As the second biggest asset management centre worldwide, after the US, the UK s assets under management total 6.9 trillion, 2.6 trillion of this is managed in the UK on behalf of overseas investors. In our report Asset and Wealth Management Revolution: Embracing Exponential Change, we forecast global assets under management will almost double by 2025 from US$84.9 trillion in The UK would significantly benefit from securing mandates to manage this capital in the coming years post Brexit. Click here for our report. However, in early February, the EU Commission issued a notice to UK asset managers and wider industry stakeholders that stated unless a ratified transition arrangement is put in place by 30 March 2019, then UK UCITS management companies and AIFMs will lose their passporting rights and become treated as 'third country' AIFMs, and UK UCITS and AIFs will become non-eu AIFs that can only be marketed to EU investors through national private placement regimes. This loss or temporary suspension of regulatory equivalence for the UK is of primary concern to many asset managers and could lead to the loss of ability of UK entities to provide both portfolio management activities and management company functions to EU UCITS funds and AIFs. But Brexit is also an opportunity for asset management in the UK. Robert Mellor, a in our team has contributed to the discussion on the place of the UK as a preferred domicile for hedge funds after Brexit day. The UK s diverse talent pool of fund directors offer funds a robust level of scrutiny to alternative investment funds thus offering a gold standard of fund operation and governance. However, now is the time to act in relation to offering a UK onshore fund vehicle if the UK is not to lose out to jurisdictions such as Luxembourg and Ireland which already have well-established vehicles. If additional legal, accounting and fund administration jobs are to be created from the attraction of funds to the UK there is no time to wait. Asset management conference 2018 Brexit is undoubtedly a topic that will feature in discussions at our annual conference, scheduled for 9 May This event is designed for tax professionals working right across the asset management industry. Registrations will be opened on 28 March Spaces will be limited so to make sure you don t miss out please contact Meela Caine or your usual PwC contact to ensure you are on our distribution list. Details of the final agenda will be released shortly. Topics for this month Based on our most recent conversations we bring you articles on the following hot topics this month: 1. Uptick in HMRC activity on LLP members status; 2. asset and wealth managers; 3. ; 4. Belgian Net Asset Tax; 5. Automatic Exchange of Information ; and 6. Collective Investment Vehicle. We hope that you find this edition helpful and, as always, your usual PwC contact or one of our colleagues listed on the contacts page, will be more than happy to discuss the finer details of any topics that grab your attention. James Stewart Director Asset Management Tax T: +44 (0) M: +44 (0) E: james.w.stewart@pwc.com 2 Keeping up with tax PwC

3 members' members status Uptick in HMRC activity on LLP members status As you may know, Finance Bill 2014 introduced the Salaried Member legislation, which came into effect from 6 April 2014 to ensure that members of Limited Liability ships ( LLPs ) who are, in effect providing services on terms similar to that of an employee are treated as employees for tax purposes. These rules apply only to LLPs formed under the LLP Act 2000 and are tax legislation independent of employment law and vice versa. Over the last month, HMRC have started to issue standard letters asking about salaried members and we understand the intention is that substantially all trading LLPs are likely to receive such a letter over the next couple of months. The letters are not part of a formal enquiry but are being used to notify firms of these rules and ensure they have fully considered their implications. The letters encourage firms to check their systems to ensure that salaried members are being properly identified. No reply is required unless the firm finds that they have failed to operate pay as you earn ( PAYE ) and national insurance contributions ( NIC ) on salaried members, although we do expect this to result in increased focus from HMRC as part of their enquiry activities on LLPs. By way of background, the Salaried Member Rules treat an individual member of an LLP as an employee for tax purposes only if the following three conditions are all met: Condition A this condition is met if at least 80% of the total amounts payable to the member of the LLP will be disguised salary i.e. fixed or not affected by the overall profits of the LLP; Condition B this condition is met if a member does not have significant influence over the business; and Condition C this condition is met if the individual has made a capital contribution to the LLP that is less than 25% of their expected disguised salary for the relevant period. The legislation sets out when the above tests need to be satisfied and when they need to be re-tested. These re-tests are important because if an individual becomes a salaried member then PAYE and NIC will need to be operated from that point until they again fail one or more of the above conditions. Where it has not been operated there will also be interest charges that will need to be considered considered as the NIC rates applicable to an employee and member is different. Furthermore, an individual may have to refile their tax returns from selfemployed income to employment income. The legislation focuses on the results of the testing and not on the systems that a firm has. However, with new joiners, annual pay reviews, changes to packages mid-year, etc. having a good process In line with the guidance, asset managers may want to review their systems to identify whether they have any members that meet all three conditions. If there are no members that meet all three conditions then no further action is required. in place is the only practical way of managing the Salaried Member Rules. If the process only considers matters once a year then issues may arise. Similarly, if the process does not lead to contemporaneous evidence of each member s position being retained then it will be harder to demonstrate to HMRC that everything is under control. Further, asset managers will need to consider their position in light of the new Corporate Criminal Offence for the failure to prevent the facilitation of tax evasion. That is, do they have sufficient controls in place to prevent an LLP member falsely claiming that they are not a salaried member? Over the last four years, we have worked with many clients on the Salaried Member Rules, both in helping them design their systems and in responding to HMRC s enquiries. Some of the issues that we have seen include: A lack of documentation to support the position taken; Documentation showing that there is an issue (e.g. all three conditions being satisfied) but no action being taken; Re-tests not being carried out where there is a change of circumstance; Profit shares that are variable being treated as good for Condition A where they vary by some factor not related to the profits of the firm; Changes of staff since 2014 not passing their knowledge on, so that processes that were originally introduced are no longer being followed; Delays in money being received by the firm to increase capital contributions (e.g. after an annual pay rise rather than before); Changes to packages that are agreed at short notice (e.g. to retain someone who was about to resign) but which are not communicated to those dealing with the Salaried Members Rules; Sign on bonus and guaranteed bonuses being offered to partners that join late in the tax year (which can lead to surprisingly high levels of capital being required to fail Condition C); No evidence being retained as to why Condition B has been failed; Relying on all the partners having a vote on partnership matters as evidence of significant influence; and Condition A being relied on where the firm s profits are effectively calculated on a cost-plus basis. If it was identified that PAYE/NIC have not been operated, asset managers may wish to make a disclosure to the Charities Large, ship and International Employer Duties Team. Tim Hill Director Asset Management Tax T: +44 (0) M: +44 (0) E: tim.hill@pwc.com Diya Wilson T: +44 (0) M: +44 (0) E: diya.wilson@pwc.com PwC Keeping up with tax 3

4 asset and wealth managers There has been an increasing focus on cryptocurrencies recently as the ease of access through online platforms, the absence of cost to enter/exit and the rise of blockchain technology have made it an attractive investment for both funds and private investors. An investment in cryptocurrencies can mean many things; buying/selling a currency itself and speculating on its future value; buying/selling a derivative over a digital currency, or cryptocurrency mining (allowing the miner to obtain a currency without having to buy it by using computers to solve mathematical equations). As asset managers look to this asset class as means of generating investment alpha, many are also questioning what the correct tax treatment is and regulators are giving them their focus. HMRC s view on taxation of cryptocurrencies In the UK, HMRC set out their position in a short brief that clarified the tax treatment of income received from, and charges made in connection with activities involving cryptocurrencies. In general, HMRC provides that cryptocurrencies should be treated in the same way as a traditional currency. Click here for HMRC s brief. For UK VAT purposes, the treatment is relatively straightforward, VAT is generally not applicable to: The creation of the currency (i.e. mining ); Services to verify specific transactions; Transactions where a cryptocurrency is exchanged for any traditional currency; and Charges to arrange or carry out any transaction with the cryptocurrency. However, VAT should be applied to any payment made in consideration for goods or services and applied in sterling at the time the transaction takes place. For corporate tax, income tax and capital gains tax ( CGT ) purposes, the tax treatment of income and charges received from cryptocurrency activities will depend upon specific circumstances. Cryptocurrencies are both innovative and complex and as such is its generating a lot of debate and scrutiny. At the moment, regulatory reactions to cryptocurrencies are evolving, including in the UK. Furthermore, the European Securities and Markets Authority ( ESMA ) are also looking very closely at the eligibility of cryptocurrencies For individuals, if a transaction is deemed to be highly speculative then the income is not taxable and the losses are not relievable. In terms of CGT, as the use of cryptocurrencies have exponentially increased, in particular by investors in order to make currency trading, HMRC have published a section within the Capital Gains Manual on cryptocurrencies in March Click here for HMRC s manual. Broadly for CGT purposes, a cryptocurrency will be a chargeable asset if it is capable of being owned and its value must be capable of being realised. Of perhaps greater interest to asset managers is how cryptocurrencies are treated for the purposes of the UK Investment Manager Exemption ( IME ). Whilst most in the industry consider that cryptocurrencies do qualify as an investment transaction for IME purposes, HMRC are yet to comment on this topic. Industry bodies, such as AIMA, however are working with HMRC to get some clarity regarding the issue. In addition, there is likely to be a marked difference between trading cryptocurrency (or variations of it) compared to the activity of mining of the currency. The regulators view In both the UK and the US, the Financial Conduct Authority ( FCA ) and the US Securities and Exchange Commission ( SEC ) have made public statements on cryptocurrency regulation. In the UK, the FCA recently issued warnings to remind investors that the cryptocurrencies are not currently regulated in the UK and there is no protection for individuals. This means that the high volatility of the currency is a threat that should be considered by investors before entering into such transactions. In the US, SEC chair Jay Clayton recently said that he wants regulatory surveillance of the exchanges trading cryptocurrencies such as bitcoin, and investor protection rules for those doing the trading. and also how to regulate cryptocurrency funds. Asset managers looking to expand their offerings to include cryptocurrencies will need to consider a wide range of areas including, tax, legal, regulatory, strategy, its brand and reputation, and business-operating model. James Stewart Director Asset Management Tax T: +44 (0) M: +44 (0) E: james.w.stewart@pwc.com Steve Davies T: +44 (0) E: steve.t.davies@pwc.com 4 Keeping up with tax PwC

5 The Indian Finance Minister presented the 2018 Union Budget on 1 February 2018, which will be the last full budget of the current Government. Overall, the Finance Minister largely refrained from making any big ticket tax changes and presented a Budget focused towards furthering the aspirations of a New India. We have set out below the key tax proposals impacting on the Asset Management industry. Key tax proposals New regime for taxation of Long Term Capital Gains ( LTCG ) Currently, LTCG arising on the transfer of equities (e.g. shares in a company; or a unit of an equity oriented fund; or a unit of business trust), on which Securities Transaction Tax ( STT ) has been paid are exempt from income-tax. This exemption is proposed to be withdrawn with effect from 1 April Instead, any LTCG will be subject to tax at the rate of 10% (excluding surcharge and cess). The rate of 10% will be applicable, if; In the case of an equity share company, STT has been paid at the time of both acquisition and transfer; and In the case of unit of an equity oriented fund or unit of business trusts, STT has been paid at the time of transfer. As part of the proposals, any gains accrued up to 31 January 2018 will be grandfathered. This will be achieved by re-basing the cost of a holding with its Fair Market Value ( FMV ) as at 31 January 2018 (with FMV to be determined under a prescribed method). While the announcements in the Budget itself were ambiguous, it has since been clarified that the grandfathering provisions will be applicable to Foreign Portfolio Investors ( FPIs ) as well. Measures to promote International Financial Services Centre ( IFSC ) It is proposed that transactions by a non-resident (provided the consideration is paid or payable in foreign currency) in the following types of assets on a recognised stock exchange located in IFSC, shall not be regarded as a transfer and therefore no income-tax, CGT, STT or other transfer tax should be applicable: Bond or Global Depository Receipt ( GDR ); or Rupee denominated bond of an Indian company; or Derivatives. Other provisions The 3% education cess will be replaced with a 4% health and education cess on income-tax including surcharge; The definition of 'Business Connection' under domestic legislation (the equivalent of a Permanent Establishment) has been widened to align it with the Dependent Agent Permanent Establishment definition ( DAPE ) under India s tax treaties, as amended by the Multilateral Instrument ( MLI ); The definition of business connection will be amended to include business activities carried on through persons who, acting on behalf of a non-resident, habitually play the principal role leading to the conclusion of contracts by the non-resident; and Further, to combat the implications of the growing digital economy, any significant economic presence' in India may also constitute a 'business connection'. This would be determined based on certain prescribed parameters such as the quantum of transactions including download of data or software and solicitation of business in India through digital means. The LTCG taxation regime may impact offshore funds investing in India. Asset managers should evaluate the need to provide for potential long term capital gains tax exposure for financial statement purposes from 1 April The Budget proposals also bring investment restructure opportunities for managers who wish to gain exposure to the Indian market through the use of American Depositary Receipts, GDRs or derivatives, in particular through the IFSC, as a more tax efficient investment route. Nehal D. Sampat Executive Director, PwC, Mumbai, India T: M: E: nehal.d.sampat@pwc.com Terence Yeung Senior Manager T: E: terence.c.yeung@pwc.com PwC Keeping up with tax 5

6 Belgian Net Asset Tax Have you met the 31 March 2018 deadline? For foreign investment funds that are registered for marketing in Belgium, they may be liable to the Belgian Net Asset Tax ( NAT ). Broadly the annual tax on undertakings for collective investment (the Belgian NAT ) imposes the following measures: The NAT must be reported and paid by foreign funds registered in Belgium. The tax liability lies with the funds; not with the Belgian investors; The NAT reporting is due by 31st March of the year following the year during which the foreign funds are registered in Belgium. Therefore for funds registered with the Belgian regulator as at 31 December 2017, the deadline is 31 March 2018; The NAT is applicable on the net amounts outstanding in Belgium. The current standard rate is %. Specific rules apply to shares dedicated to institutional investors; If the net amounts outstanding in Belgium is nil, a nil return is still required to be filed with the Belgian tax authority. This means that the mere registration in Belgium is sufficient to trigger the mandatory reporting obligation; and The penalties and interest thereon (where any tax is due but not paid) can be quite punitive. For none or late reporting, a fine of 250 per week (13k per year) may apply. For funds that are registered for marketing in Belgium as at 31 December 2017, if not already done so asset managers will need to complete the Belgian NAT return and if applicable pay the tax by 31 March Sven Kiebooms Senior Manager T: E: sven.kiebooms@pwc.com Terence Yeung Senior Manager T: E: terence.c.yeung@pwc.com 6 Keeping up with tax PwC

7 Automatic Exchange of Information ( AEoI ) 2018 sees a further expansion of the number of jurisdictions participating in the Common Reporting Standard ( CRS ). More than fifty additional jurisdictions implemented CRS in 2017 with the first reporting due this year. The key jurisdictions this year are Canada; Australia; New Zealand, Hong Kong, China, Switzerland, Japan and Singapore. The impact is twofold: For funds with investors that are tax resident in these new jurisdictions asset managers may need to include them in their reporting population this year; and Asset managers will need to consider whether any legal entities in their structure in these jurisdictions have met their obligations under the CRS rules as implemented in each jurisdiction. Unfortunately, there is little alignment between jurisdictions. Some will require a nil return to be made. Others, such as Cayman Islands, will require asset managers to register all Financial Institutions ( Fis ) in that jurisdiction. Furthermore, the statutory filing dates are all different. Not correctly, reporting or failing to meet the obligations can result in significant monetary fines. For example, Luxembourg levy fines of 250,000 for failing to file a return. Moreover, both the UK and Ireland tax authorities intend to undertake compliance checks in 2018 to ensure that FIs are complying with FATCA and CRS. For funds with investors resident in the new jurisdictions, asset managers will need identify what changes they may need to make to be CRS compliant with their account holder due diligence and reporting to the local tax authorities. Asset managers will also need to ensure that they are preparing for their 2018 reporting obligations now. Paul Beeson Director, UK T: M: E: paul.beeson@pwc.com PwC Keeping up with tax 7

8 Draft laws for Australia s new corporate collective investment vehicles Late last year, the Australian Government released exposure draft legislation for comment in relation to the proposed tax treatment for two new Corporate Investment Vehicles ( CIVs ); the Corporate Collective Investment Vehicle ( CCIV ) and the limited partnership CIV. Broadly, the draft new rules propose a new group of attribution entities referred to as an Attribution Investment Vehicle ( AIV ) that is defined to include both an Attribution Managed Investment Trust ( AMIT ) and an Attribution CCIV ( ACCIV ). When introduced, we would expect that the legislation would also cover attribution limited partnerships. 1. Equivalence with domestic vehicles The new CIVs that are proposed seek to provide Australian fund managers with vehicles that will be more attractive to Asian investors. This presents a challenge for Australia, as local industry will now also need to take into account domestic investors seeking to invest in domestic assets. Consequently, these new CIVs also need to strike a point of equivalence with existing domestic vehicles, in particular, the Managed Investment trust (MIT)/AMIT regime. 2. Equivalence with international vehicles For Australian investors, it is essential for investment vehicles to have a flow through tax treatment in order to benefit from foreign income tax offsets as well as discounted capital gains treatment. It remains to be seen how foreign markets will respond to the differences in the flow through tax treatment of Australian investment vehicles versus foreign corporate vehicles. 3. Withholding taxes and non- Australian investors There has been some speculation as to whether an ACCIV regime would feature reduced withholding taxes for foreign investors. This could harm the marketability of such vehicles to wider Australian investors. The reality is that many ACCIVs will make distributions that largely do not attract any Australian withholding taxes. For example, franked dividends, widely held interest bearing debentures and non-taxable Australian property capital gains do not attract withholding tax. So this should be less of a concern. Click here for information on the key features of a CCIV. The new CIVs are designed to be internationally recognised vehicles to attract foreign investors including under the Asia Region Funds Passport. In its current form, the CCIV is a hybrid; a body corporate operated as a trust. This has therefore meant that some of its proposed features have created some anomalies between the traditional character of a body corporate and a trust. Asset managers wishing to expand into Australia will still need to understand the various attributed components in the new AIV and the corresponding withholding tax that could apply to certain Australian sourced income. Ken Woo PwC Australia T: E: ken.woo@pwc.com Elizabeth Stone T: +44 (0) M: +44 (0) E: elizabeth.j.stone@pwc.com 8 Keeping up with tax PwC

9 For additional information please contact Teresa Owusu-Adjei T: +44 (0) M: +44 (0) E: Elizabeth Stone T: +44 (0) M: +44 (0) E: Robert Mellor T: +44 (0) M: +44 (0) E: Lachlan Roos T: +44 (0) M: +44 (0) E: Hazell Hallam T: +44 (0) M: +44 (0) E: Diya Wilson T: +44 (0) M: +44 (0) E: Fiona Carpenter T: +44 (0) M: +44 (0) E: James Stewart Director T: +44 (0) M: +44 (0) E: Chi Ha Senior Manager T: +44 (0) M: +44 (0) E: Agnes Pigassou Manager T: +44 (0) M: +44 (0) E: PwC Keeping up with tax 9

10 This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details RJ-OS