The Organisation for Economic Co-operation and Development’s (OECD) highly-anticipated tax proposal’s carried a mixed message for private fund managers.
The proposals, which were published on Tuesday, form part of the think-tank’s base erosion and profit shifting (BEPS) project and act as the blueprint for how the G20 group of rich nations will tackle tax avoidance.
The positive news for fund managers is that the OECD recognizes that “investment funds are a specific situation and do not want them to be adversely affected by the rules,” said Brenda Coleman, tax partner at law firm Ropes & Gray.
“A separate working group has been formed to review the impact on investment funds. This should provide some comfort although it is disappointing that such policy considerations will not be finalized until September 2015, creating uncertainty for investment funds and their investors,” Coleman added.
The private funds community had been concerned that the OECD’s proposals may prevent GPs from domiciling funds and holding vehicles in certain jurisdictions, like Luxembourg or the Netherlands, that feature extensive networks of double tax treaties.
The target of the OECD’s proposals is “double non-taxation” and it regards so-called “treaty shopping” as a key issue. Put simply, the OECD wants to stop companies and other financial firms from using special purpose vehicles to bridge the gap between two countries which do not have a double tax treaty in place.
Private funds use these structures for practical reasons, not for tax avoidance purposes. For instance, a fund which has investors from, and invests in, a wide range of countries saves itself a compliance headache by channeling investments through a central treaty-eligible structure.