Tax transparency: the panacea for asset managers?
November 2015

Fund managers face an upcoming fee compression tidal wave which is driving a re-think of their entire business model. One key aspect is a review of fund structures. Getting a fund to a certain size becomes essential, in order to achieve the economies of scale necessary for a firm to compete and survive. Master-feeder arrangements to pool institutional and retail assets are expected to become the norm.

For many years now, multinational groups – with pension funds spread across many countries – have entertained arrangements for pooling of their investments to reduce investment management and operating costs. In the 1990s, Chase Manhattan (now J.P. Morgan) worked with IBM to establish an administrative arrangement which allowed for some centralisation of investment management. In 2005, IBM went on to establish an arrangement to pool assets – establishing the IBM Diversified Global Equity Fund. Later in the same year, Unilever implemented a similar arrangement. With pension funds in 42 countries, of which 25 held cross-border assets, it set up Univest – initially pooling 2.3bn in assets from their UK and Dutch plans before rolling this out to several pension funds for its international subsidiaries. As a result, multinationals can deliver on longstanding goals to simplify their pensions investment management and administration. Furthermore, their smaller funds can gain access to new asset classes and best-in-class asset managers, while the entire group can improve governance and, especially, the management of exposures.

"In the majority of cases, the only way for pension funds to pool assets in an efficient manner is through a tax transparent vehicle – one which does not impair a fund's tax privileges and penalise its members," says Ed Turner, Head of Tax Product at HSBC Securities Services. The crux is use of a legal vehicle which is tax transparent for income. Each pension fund must retain the benefit of reduced withholding tax rates on income, typically under double tax treaties between the fund's home country and a country of investment. IBM achieved this with a Common Contractual Fund (CCF) in Dublin. Unilever used a Luxembourg-based Fond Commun de Placement (FCP).

Asset managers have picked up on this. To build a fund of large scale and attract asset owners which enjoy preferential income withholding tax rates, a tax-transparent master fund is a prerequisite. Insurance companies in the UK have sought to do the same, looking to simplify their investment structures. This led to representations being made to the Inland Revenue's policy division by a group including large asset managers, life companies and industry bodies, culminating in the launch of a tax transparent fund vehicle in the UK: the Authorised Contractual Scheme (ACS).

Leading the field in the adoption of the ACS was BlackRock in 2014. There are currently some $30bn of assets in ACS structures, with significant growth anticipated as managers and administrators become increasingly comfortable with ACS-based master-feeder structures.

There are actually two types of ACS vehicle:

  • Partnership structure: This has not been adopted. It does not allow sub-funds and is tax transparent for capital gains – so that an investor must account for gains and losses on every disposal of investments made by the fund.
  • Co-ownership structure: This has the advantage of allowing sub-funds. Importantly, while tax transparent for income, it is tax opaque for gains – so preferential income withholding tax rates pass through but accounting for disposals by the master fund does not.
In implementing tax-transparent funds, asset managers are spoilt for choice, with the ACS in the UK, the CCF in Ireland and the FCP in Luxembourg. "As managers look to create a structure which preserves the advantageous tax treatment of investors, I believe the selection of domicile for a tax-transparent fund will be incidental," says Karthik Iyer, Asset Management Sector Lead for UK Trade & Investment. "It should come down to access to the best people and support, the choice of regulator, and a master fund and management location which best suits the feeders and underlying investors. We believe the UK has the critical mass, extensive tax treaties and support structure to provide these."




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Fund managers face an upcoming fee compression tidal wave which is driving a re-think of their entire business model. One key aspect is a review of fund structures. Getting a fund to a certain size becomes essential, in order to achieve the economies of scale necessary for a firm to compete and survive. Master-feeder arrangements to pool institutional and retail assets are expected to become the norm.

For many years now, multinational groups – with pension funds spread across many countries – have entertained arrangements for pooling of their investments to reduce investment management and operating costs. In the 1990s, Chase Manhattan (now J.P. Morgan) worked with IBM to establish an administrative arrangement which allowed for some centralisation of investment management. In 2005, IBM went on to establish an arrangement to pool assets – establishing the IBM Diversified Global Equity Fund. Later in the same year, Unilever implemented a similar arrangement. With pension funds in 42 countries, of which 25 held cross-border assets, it set up Univest – initially pooling 2.3bn in assets from their UK and Dutch plans before rolling this out to several pension funds for its international subsidiaries. As a result, multinationals can deliver on longstanding goals to simplify their pensions investment management and administration. Furthermore, their smaller funds can gain access to new asset classes and best-in-class asset managers, while the entire group can improve governance and, especially, the management of exposures.

"In the majority of cases, the only way for pension funds to pool assets in an efficient manner is through a tax transparent vehicle – one which does not impair a fund's tax privileges and penalise its members," says Ed Turner, Head of Tax Product at HSBC Securities Services. The crux is use of a legal vehicle which is tax transparent for income. Each pension fund must retain the benefit of reduced withholding tax rates on income, typically under double tax treaties between the fund's home country and a country of investment. IBM achieved this with a Common Contractual Fund (CCF) in Dublin. Unilever used a Luxembourg-based Fond Commun de Placement (FCP).

Asset managers have picked up on this. To build a fund of large scale and attract asset owners which enjoy preferential income withholding tax rates, a tax-transparent master fund is a prerequisite. Insurance companies in the UK have sought to do the same, looking to simplify their investment structures. This led to representations being made to the Inland Revenue's policy division by a group including large asset managers, life companies and industry bodies, culminating in the launch of a tax transparent fund vehicle in the UK: the Authorised Contractual Scheme (ACS).

Leading the field in the adoption of the ACS was BlackRock in 2014. There are currently some $30bn of assets in ACS structures, with significant growth anticipated as managers and administrators become increasingly comfortable with ACS-based master-feeder structures.

There are actually two types of ACS vehicle:

  • Partnership structure: This has not been adopted. It does not allow sub-funds and is tax transparent for capital gains – so that an investor must account for gains and losses on every disposal of investments made by the fund.
  • Co-ownership structure: This has the advantage of allowing sub-funds. Importantly, while tax transparent for income, it is tax opaque for gains – so preferential income withholding tax rates pass through but accounting for disposals by the master fund does not.
In implementing tax-transparent funds, asset managers are spoilt for choice, with the ACS in the UK, the CCF in Ireland and the FCP in Luxembourg. "As managers look to create a structure which preserves the advantageous tax treatment of investors, I believe the selection of domicile for a tax-transparent fund will be incidental," says Karthik Iyer, Asset Management Sector Lead for UK Trade & Investment. "It should come down to access to the best people and support, the choice of regulator, and a master fund and management location which best suits the feeders and underlying investors. We believe the UK has the critical mass, extensive tax treaties and support structure to provide these."