A regular briefing for the alternative asset management industry.
In a special Alternative Insights to mark the publication of the Autumn edition of our Asset Management Tax Checklist, our "need to know" guide to topical tax issues facing the industry, Travers Smith's Elena Rowlands, was interviewed by Tosin Adeyeri.
Elena is a partner in our Tax Team whose practice focuses on the taxation of asset managers, investment funds and their investors, and tax authority disputes, and Tosin is a partner in our Funds Team.
Tosin Adeyeri:
Hello Elena and thank you for joining me today.
In the forthcoming Autumn edition of our Asset Management Tax Checklist, we set out the key tax developments of which asset managers should be aware and suggest what we think they should be doing now to prepare. I was hoping that today you would be able to provide an overview of some of the highlights.
Elena Rowlands:
Hi Tosin. There is certainly a lot going on at the moment. I'll start with a global initiative. Asset managers, like many other businesses, are working through what the introduction of the OECD's Global anti-Base Erosion, or GloBE, rules means for them. This is the project to establish a global minimum corporate tax rate of 15% for multinational enterprises that meet a €750m turnover threshold. The UK, like several other jurisdictions, is introducing the main rules from 31 December. Whilst, we do not expect investment funds themselves to be subject to top-up taxes, the rules may be relevant to portfolio companies and to the house affairs of large fund managers.
Domestically, we are seeing further progress with the government's on-going review of the UK's fund landscape, designed to improve its international competitiveness.
Tosin:
What else should fund managers have on their radar from a tax perspective?
Elena:
A key issue is the outcome of last winter's consultation on the VAT treatment of fund management fees, although the current direction of travel suggests that any changes may be limited to clarifying in UK legislation what the UK tax authority, HMRC, already consider to be the scope of the fund management VAT exemption.
There are also a number of cases highly relevant to the asset management sector working their way through the UK courts. On Wednesday, the Supreme Court delivered its judgment in the eagerly anticipated case of Vermillion. By way of reminder, this is the tax case which looks at the rule that deems an award of securities to be "employment related", and therefore potentially pulls that award into the ambit of the UK's employment tax code. The Supreme Court has ruled in favour of HMRC – the case has some potentially important implications for asset managers, in particular on the circumstances in which awards of securities (including carry and coinvest) could be caught by the UK's employment tax code and we are talking to a number of clients about this. There is also the case of BlueCrest - where it was held that HMRC's interpretation of when the salaried members anti-avoidance rules apply is too broad. HMRC has had more success in persuading the courts that the long-standing "miscellaneous income" tax charge has a wide ambit, and it will be interesting to hear what the Court of Appeal has to say on the matter in two cases that it is due to hear.
Tax has also been in the political news. The Labour Party has said it would abolish what it calls the "carried interest loophole" as well as the existing non-dom regime. Given Labour's lead in the polls, now is a good time for asset managers to start thinking about what impact these changes could have on their businesses. In addition, in June, the Good Law Project started legal proceedings against HMRC to challenge the current tax treatment of carried interest. HMRC have robustly pushed back on this, and it is unclear whether the challenge has been dropped.
Our tax checklist contains more information on all these measures, plus a number of others, including the status of ATAD 3, which is the EU's anti-shell company initiative, and the government's proposal to expand the definition of "permanent establishment" and the possible introduction of the reserved investor fund which is expected to be primarily of interest to funds investing in real estate.
Tosin:
Thanks Elena. Moving away from specific tax measures, a current hot topic for our asset manager clients is the international mobility of executives. What's the background to this trend?
Elena:
As we know, fund managers have always been internationally mobile, but mobility has significantly increased in recent years. A key reason for this is the COVID pandemic which resulted in individuals and businesses getting used to remote working. This is a global phenomenon. However, from a UK perspective, Brexit has undoubtedly also had an impact, with fund sponsors needing, for regulatory reasons, to carry out certain activities from within the EU. This has led to those carrying out certain functions, such as investor relations or those making final investment decisions, often working all or part of their time in an EU country.
This trend is not driven by tax, but it does raise some really important tax issues. These include whether the presence of a team member in a country could lead to the fund manager being taxed on an element of its profits there, typically due to it being considered to have a "permanent establishment". This can be the case if the individual's presence leads to the fund manager having a fixed place of business or being deemed to have an agent who carries out transactions on behalf of the fund manager.
Employment taxes, including payroll issues, are another key issue, and can be very complex. I think it's fair to say that the established international tax framework for dealing with cross-border employment hasn't caught up with modern working practices, and can really creak when it is applied in the real world of fund executives. An industry specific issue here, is the tax treatment of carry awards, which will require careful thought.
Tosin:
So how are fund managers dealing with this in practice?
Elena:
There is definitely no simple "one size fits all" answer, with everything turning on interaction between the rules of the relevant jurisdictions. We see various arrangements being used, depending on the particular facts. Setting up a local subsidiary to employ the individual is fairly common. Alternatively or additionally there may be secondment arrangements. Dual employment contracts are also occasionally helpful. But, it is important to remember that tax is just one aspect that needs to be considered, and solutions must work from all perspectives, in particular, regulatory and immigration and work visa. As you can imagine, this is an issue that's been keeping the team very busy, but it is crucial for a firm to get it right and to think about the question before re-location happens, not when the tax returns arrive a year or so later!
For those interested in this area, we have plenty of practical information on the Global Mobility section of our website and we will be holding a training session on global mobility on 1 November as part of our Travers Smith Tax Alternatives Academy 2023 series.
Tosin:
Understood, there are certainly a number of factors to consider, which require some customisation. As you say, it is not a "one size fits all" approach.
This has been an insightful discussion, Elena. Thank you for speaking to me today.
