Cross-Border Portfolio Investment Through CIVs

1. OECD Committee on Fiscal Affairs Roundtable on Collective Investment Vehicles February 1-2, 2006 -- Paris, FranceSelected Treaty Issues Affecting Collective Investment Vehicles Investing in SecuritiesStephen E. Shay, Ropes & Gray LLP

2. Cross-Border Portfolio Investment Through CIVs • At June, 2005, mutual fund assets worldwide (in 41 countries) were $16.41 trillion.* • $8.2 trillion were held in the United States • $5.6 trillion were held in Europe * Investment Company Institute, Worldwide Mutual Fund Assets and Flows, Second Quarter 2005, Supplementary Tables, Table S1, “Total Net Assets in U.S. Dollars,” found at http://www.ici.org/stats/mf/ww_06_05.html#TopOfPage.

3. Cross-Border Portfolio Investment Through CIVs • Benefits of CIVs to investors. • Investors achieve economies of scale and reduced transactions costs. • Investors receive benefits of professional investment management. • Investors achieve diversification of investments. • CIVs are important source of investment capital for source countries.

4. Cross-Border Portfolio Investment Through CIVs • CIV structural imperatives. • CIVs must realize income and gains on a tax neutral basis compared with direct ownership of securities. • Unrelieved tax costs discourage co-mingling in a CIV with international investments diminishing cross border portfolio investment.

5. Legal and Tax Attributes of CIVs • CIV investors include: • Institutional investors, many of whom at tax-exempt. • Individual investors. • Funds may be marketed publicly or privately.

6. Legal and Tax Attributes of CIVs • CIVs legal form may be • Recognized as a separate taxable legal entity, or • Transparent for tax purposes.

7. Legal and Tax Attributes of CIVs • CIV tax characteristics. • Irrespective of the legal form of the CIV, there is little or no effective taxation of the CIV. • Low or no taxation of CIVs is accomplished in myriad ways. CIV may be • “Not a person” or transparent, • Exempt from tax, • Subject to tax at low or zero tax rates, • Subject to tax with the integration at the investor level.

8. Legal and Tax Attributes of CIVs • Home country or third country CIV. • United States, the United Kingdom, France, Germany and other countries have substantial national mutual fund or investment fund industries serve principally resident investors. • Other fund locations, including Luxembourg and Ireland, service investors primarily from third countries.

9. CIV Difficulties in Obtaining Source Country Treaty Relief • CIV-level treaty issues. • Whether the CIV is a person and a “resident” of the treaty country. • The CIV is the “beneficial owner” of income whether CIV satisfies any limitation on benefits provisions.

10. CIV Difficulties in Obtaining Source Country Treaty Relief • Practical tax reclaim issues. • Not practical for investors in a publicly offered or widely-owned CIV to claim treaty relief. • In summary, CIVs face lack of direct access to treaty benefits and an inability to implement refund claims for investors.

11. CIV Difficulties in Obtaining Source Country Treaty Relief • CIV treaty relief – dividends. • Resident CIV must be “liable to tax.” • CIV must be beneficial owner of dividends. • US-style limitation on benefits: • Exemption for publicly-traded companies does not apply to “open-end” funds. • Ownership test difficult to administer.

12. CIV Difficulties in Obtaining Source Country Treaty Relief • Pension plans and other tax-exempt investors • Some treaties allow pension plans, tax-exempt organizations exemption from source country taxation. • CIVs sometimes organize to pool these investors’ funds. • CIVs should be allowed to accommodate these funds.

13. Principles for Obtaining Source Country Treaty Relief • Principles for addressing CIV/Investor treaty issues. • Avoid double taxation, do not foster double non-taxation. • Treat economically similar investors similarly. • Preserve benefits of residence country tax-exemption. • Implementation of treaty relief at CIV level. • Do not expect a “one size fits all” solution.

14. Addressing CIV Treaty Issues • Consider modifying treaty rules for CIVs. • Residence issues. • Clear definitions for classification of CIV forms as transparent and non-transparent. • Clear rules for whether CIV is eligible to claim treaty relief directly. • If CIV subject to tax, it should be allowed to claim treaty relief.

15. Addressing CIV Treaty Issues • Consider modifying treaty rules for CIVs (cont’d) • Transparent CIV entities. • To the extent possible, consistent with treaty purposes, identify transparent CIV entity may claim treaty relief on behalf of its investors. • For example, treaty relief allowed at the level of the CIV if investors are from qualifying countries that treat the CIV as transparent.

16. Addressing CIV Treaty Issues • Consider modifying treaty rules for CIVs (cont’d) • Beneficial owner and limitation on benefit issues. • If income taxed to the investor through withholding or directly, treaty eligibility should be allowed at entity level. • Tax-exempt entities. • Consider special CIV treaty rules

17. Improve Treaty Reclaim Process • Relief at source should be the objective. • Streamline procedures for standardize documentation requirements. • Permit use of omnibus accounts (pooling of assets). • Documentation by intermediary with a “know-your customer” relationship with investor. • Documentation should be “verifiable” by the source country. • See G30 Proposal

18. Next Steps • Consider convening advisory group including representatives from industry to further examine issues and alternative solutions.