Enhancing Returns: Asset Pooling & Common Contractual Funds. Thursday 4 th December 2014

Transcription

1 Enhancing Returns: Asset Pooling & Common Contractual Funds Thursday 4 th December 2014

2 Welcome 2 Liam Stanbridge, Chair of IFIA Tax Steering Committee and Head of Tax, State Street International (Ireland) Donal O Sullivan, Wealth and Asset Management Tax Lead, EY Conor Begley, Managing Director, Head of Tax Services Ireland, BNY Mellon Asset Servicing Carmel Jordan, Head of Operations Europe, Mercer Fiduciary Management Patrick Rooney, Regulatory Affairs Manager, IFIA

3 Agenda 3 1. A practical overview of Asset Pooling and the CCF 2. Tax transparency - what it means and the benefits of the CCF in meeting investors needs? 3. Operational considerations - an Administrator and Custodian s perspective 4. An Asset Manager s view - practical Case Studies 5. Q & A

4 Common Contractual Funds 4 A practical overview Asset Pooling & Common Contractual Funds Liam Stanbridge Chair of IFIA Tax Steering Committee and Head of Tax, State Street International Ireland

5 Asset Pooling 5 The pooling of assets in a tax transparent vehicle (i.e. CCF) for multiple underlying investors ( Entity Pooling ). Investor 1 Investor 2 Investor 3 Investor 1 Investor 2 Investor 3 CCF Global Equity Asset Pool Global Equity Asset Pool Global Equity Asset Pool Global Equity Asset Pool Underlying investors own units in the tax transparent vehicle and are treated on a look through basis and deemed the beneficial owner of the underlying pool of assets for tax purposes

6 CCF regulatory overview 6 A CCF is an unincorporated body (co-ownership scheme) established by a management company where each investor is deemed to hold an undivided co-ownership interest in the underlying assets of the CCF CCFs established as UCITS or AIFs are authorised and regulated by the Central Bank of Ireland It can be set up a single fund structure or a umbrella fund with multiple subfunds Single or multi-manager fund structures Formed by deed of constitution between the manager and trustee All types of investors can hold units in the CCF with the exception of natural persons

7 Common Contractual Funds 7 Tax transparency - what it means and the benefits of the CCF in meeting investor needs Donal O Sullivan Wealth and Asset Management Tax Lead EMEIA FSO EY

8 Tax Considerations for Pooling 8 Direct Investment Investment via Tax Opaque Fund Investment via Tax Transparent Fund UK Pension Plan US dividend payment with 0% WHT UK Pension Plan Tax Opaque Fund Distribution amounting to 85%/ 70% of gross dividend UK Pension Plan CCF Distribution amounting to 100% of gross dividend US dividend payment with 15%/30% WHT US dividend payment with 0% WHT US Equities US Equities US Equities Relevant tax treaty to be applied Principle applies to other markets supporting tax transparency

9 Tax considerations for Pooling 9 Character, source and timing of income should not change Tax transparent in; country of domicile country of investor country of investment No withholding taxes on distributions or deemed distributions from the pooling entity No other taxes such as subscription taxes, net asset value taxes etc.

10 Tax considerations 10 The CCF benefits from Ireland s competitive tax regime providing certainty, stability and transparency It is transparent for Irish legal and tax purposes The CCF can avail of tax transparency in over 20 markets of investment including Australia, Canada, Germany, Italy, Switzerland and the US In addition, it is a key policy goal of the Irish tax authorities to enshrine tax transparency into all new double tax agreements Recent significant treaty examples include Hong Kong, Germany, South Africa, Switzerland, Qatar, Macedonia, Moldova, Botswana

11 Benefits of a CCF 11 Similar to all Irish regulated funds, the CCF benefits from a tax neutral regime; no withholding taxes no subscription taxes no financial transactions tax or other capital taxes no taxation of income/gains, and no net asset value tax VAT efficiencies can be created for institutional investors pooling assets in a CCF compared to maintaining assets in segregated or separately managed accounts

12 Tax Opinions/Rulings 12 US opinion Why is this required? If investing in US market, a tax opinion is only available if the investor source country also recognises CCF as tax transparent Required for each new investor entity type (tax profile) What is required for new investors? Tax ruling/opinion from investors home market multiple entity types can be included US opinion work if the same investor type/domicile is not already invested in the fund

13 Tax opinions/rulings 13 Not all investment markets will require opinions/rulings on transparency Some investment markets will have 0% withholding on dividends, interest and capital gains Some investment markets in the EU may treat a CCF similar to other domestic regulated funds which can result in a favourable domestic withholding tax rate and CGT exemptions; e.g. France

14 Removing the tax drag Example 1 US Equities 14 Considering the scale and relative importance of the US equity market (i.e. US equities constitute 54% of MSCI World Index), the benefits of using a CCF are clear Example - take an investment of $1bn in US equities with an annual dividend yield of 2% For UK, Dutch, Swiss, Canadian pension funds (for example) this creates withholding tax savings of between $3 to $6million per annum compared to investing via a corporate fund

15 Removing the tax drag Example 2 Global Equities 15 Annual saving of $3.8m Fund Vehicle Investing in global equities An investment of $1bn with an annual dividend yield of 2.428% equates to a withholding tax cost of $0.6m for the CCF and $4.4m for the Corporate Fund Corporate fund withholding tax cost of 0.44% CCF annual withholding tax cost of 0.06%

16 Common Contractual Funds 16 Operational considerations - An Administrator & Custodian s perspective Conor Begley Managing Director, Head of Tax Services Ireland, BNY Mellon Asset Servicing

17 Investor Tax Relationship Difference between Opaque Fund and CCF 17 Opaque Fund Common Contractual Fund Investor Investor Fund CCF Investments Investments

18 Investor on-boarding 18 Tax profile of investor Unlike opaque funds, for CCFs the profile of the investor is critical Direct relationship formed between investments and the investor It drives the custody tax engine Each investor being on-boarded needs to be analysed in detail There are a number of different variables that can result in very different withholding tax outcomes for each investor, some of these include; Liable to tax or not Corporate entity type or non-corporate entity type Whether a ruling is in place or not Specific Tax Classification of the investor

19 Clear policies agreed with CCF Withholding Tax rules to be deployed 19 Three way discussions CCF CCF to obtain tax rulings or tax opinions if appropriate Withholding Tax tables established for each investor tax profile type Administrator Tax Advisor Formally communicate as an administrator to CCF; How the rulings/opinions will be operationally deployed Tax table for each country of investment for investor At source or reclaim basis Investor allocated to tax sleeve

20 Fund Accounting considerations 20 Rebalancing Communication of information between transfer agency, fund accounting and custody Specific investor reporting requirements in foreign jurisdictions

21 Custody considerations Account opening and processing of withholding tax 21 Account opening in market of investment considerations Unlike opaque funds where custody processes withholding at a fund level, for a CCF it is at the investor level Clear communication of what is agreed per investor Basis of reclaim at source or reclaim Direct link with fund accounting and transfer agency Rebalancing Track record in Ireland of administrators/custodians that have experience and operational platforms that are automated and can deal with the complexity

22 Ongoing governance of CCF 22 Pre and post Launch set-up Withholding tax is a very dynamic area It is very important to have ongoing governance by the administrator/ custodian, this should include; Monitoring countries of investment New investor analysis Creates an internal forum for operations to raise any questions they have outcomes formally deployed To ensure that CCF is maintaining its integrity and staying current with markets

23 Common Contractual Funds 23 An Asset Manager s view - Practical Case Studies Carmel Jordan Head of Operations Europe, Mercer Fiduciary Management

24 Fund structures CCFs in practice 24

25 Case Study Overview multi-national pension schemes 25 A global multi-national, with widespread European business operations and pensions schemes. They required an implementation framework to access a single global investment policy, cost savings and governance benefits. Their key challenges: 1. Leveraging their internal expertise & implementing a single global investment policy, with consistent global mandates and managers 2. Co-ordinating contrasting individual market decisions that simply increased cost and risk on the sponsor 3. Oversight and reporting - access to timely and accurate information 4. Cost reduction

26 Case Study Overview multi-national pension schemes 26 Irish Pension Scheme $600m UK Pension Scheme $1,400m Netherlands Pension Scheme $1,800m Additional Ex- US Schemes: Puerto Rico $200m Australia $100m Belgium $100m France $75m Others $125m Japan Pension Scheme $1,400m Global ex-us Pension Schemes Canadian Pension Scheme $500m German Pension Scheme $350m Switzerland Pension Scheme $220m

27 CCF in practice The role of the Asset Manager 27 Education - both internally & the client With the client, assess the appropriate regulatory/legal framework for investment Manage the tri-party relationship between Asset Manager, Custodian and Tax Adviser Support the client to make the case internally for a CCF including cost/benefit analysis on current arrangements including DWT leakage Obtain tax advice on behalf of the client/fund and seek relevant opinions/rulings and manage queries arising Actively review other markets of investment for DWT savings Ensure ongoing maintenance and integrity of the CCF

28 Common Contractual Funds 28 SUMMARY Liam Stanbridge Chair of IFIA Tax Steering Committee and Head of Tax, State Street International Ireland

29 Common Contractual Funds Benefits 29 Transparent for Irish legal & Tax purposes Ireland s Tax neutral regime VAT efficiencies NON TAX BENEFITS Investing via a pool is more cost effective for managers Economies of scale Asset diversification Fund rationalisation Reduced capital requirements Enhanced investor returns Increased distribution (more share classes investing into same mandate) Liquidity 20+ Markets Tax Transparency 10 years track record in tax transparency UCITS or AIFs Multi-Manager or Single Manager Ireland s IP and IT infrastructure EU Fund Level Tax relief Single Fund or multiple sub- Funds

30 Common Contractual Funds 30 Q & A

31 Contact Details: 31 Liam Stanbridge, State Street International (Ireland) (01) , Donal O Sullivan, EY (01) , Donal.OSullivan@ie.ey.com Conor Begley, BNY Mellon Asset Servicing (01) , conor.begley@bnymellon.com Carmel Jordan, Mercer Fiduciary Management (01) , carmel.jordan@mercer.com Patrick Rooney, IFIA (01) , patrick.rooney@irishfunds.ie

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