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The Luxembourg Investment Fund Association (ALFI) welcomes the opportunity to submit its comments on the OECD Public Discussion Draft “BEPS Action 11: establish methodologies to collect and analyse data on BEPS and actions to address it” (hereafter referred to as “Discussion Draft”).
ALFI fully supports the OECD’s work and shares the OECD’s point of view that action is needed in order to prevent double non-taxation, as well as cases of no or low taxation created by artificial arrangements.
However, we consider that it is imperative that the OECD’s work on the items of the BEPS Action Plan addresses the particular situation of Collective Investment Vehicles (CIVs) and manages to balance appropriately all competing considerations to make sure that the actions undertaken in this respect are proportionate and do not go beyond their objectives.
General comment on CIVs within the context of BEPS
Although the BEPS works is clearly mainly focused on multinational enterprises (MNEs), ALFI is concerned that the recommendations developed to address BEPS behaviours might impact, deliberately or inadvertently, CIVs which must however be left out of the scope of the BEPS work for a certain number of reasons.
Indeed, CIVs are primarily put in place in order to allow portfolio investors to pool their funds rather than investing directly, and thus benefit from economies of scale and other commercial advantages (including better risk-spreading).
The crucial role played by CIVs in the economic growth (notably by giving the ability to small and medium enterprises to have more easily access to financing) has also long been recognised by the European commission that has taken a series of steps and regulations over the past years in order to facilitate cross-border fundraising and investments for CIVs within the Single market.
In order to facilitate the international diversification of CIVs and eliminate barriers to cross border investments, most countries have therefore set out a specific tax regime for CIVs that provides for quasi tax neutrality between direct investments and investments through a CIV, so that taxation only arises at the level of the investors.
Consequently, the purpose of CIVs is, by essence, not to avoid tax. Furthermore, as CIVs are mostly widely-held, diversified and regulated, they should almost never effectively be used as a tool for tax avoidance or treaty shopping.
In the fifteen actions identified by the OECD to address BEPS, the OECD is typically targeting structures where the interaction of different tax regimes from different countries leads to the non-taxation of MNEs profits. The BEPS work is indeed built on the recognition that profit-shifting behaviours by MNEs, through certain corporate structures, are a significant concern that must be addressed. CIVs should therefore rarely, if never, be concerned by these cases of aggressive tax planning. As a result, ALFI is of the opinion that all BEPS actions, including BEPS Action 11, should not apply to CIVs. If necessary, the situation of CIVs should rather be dealt with separately, taking into account their particular nature.
Difficulties for CIVs to meet the requirements of Action 11
The Discussion Draft on Action 11 does not expressly mention the situation of CIVs which could mean that its recommendations could apply indistinctly to both MNEs and CIVs.
As mentioned above, ALFI believes that CIVs should expressly be left out of the scope of Action 11. Should it not be the case, we anticipate practical difficulties for CIVs that would mainly be due to the impossibility to collect data (notably due to the fact that CIVs do not always have access to information about their investors or because investors in a CIV may change daily). In practice, the impediment to the collection of appropriate data would mainly result from the fact that the international CIV industry is built around financial intermediaries which imply that there may be a number of layers between the issuer of a security and the beneficial owner, and that interests in CIVs are often registered at the CIV level through nominee/omnibus accounts.
Moreover, collecting and analysing data would inevitably create an additional burden that would be contrary to the fundamental objective of CIVs and would reduce the advantages of CIVs over direct investments.
In its previous work, such as in the Report on the treatment of Collective Investment Vehicles (2010) or in the TRACE implementation package (2013), the OECD took into account the particular challenges CIVs have to face. As an example, one of the objectives of the TRACE work on procedural problems for claiming treaty benefit was indeed to “develop systems that are as efficient as possible, in order to minimise administrative costs and allocate the costs to the appropriate parties”. Consequently, BEPS Action 11, if applied to CIVs without any further distinction, could contradict the past objectives pursued by the OECD. Any proposal should therefore consider the specific position of CIVs.
ALFI is also concerned that some commercially sensitive information may have to be disclosed. This might be harmful to investors’ financial interests, compromising their investment performance, or could lead to a breach of contractual confidentiality.
Finally, ALFI would like to stress the importance of ensuring that the indicators and tools that will assist in the monitoring of the impact of BEPS, are effectively designed so as to keep the compliance costs on taxpayers to a minimum, maintain the confidentiality of data and taxpayers, and are also easy for tax authorities to administer.
Action 11 should thus, at least, reflect the commitment to the principle that any measure of the effectiveness and economic impact of the actions taken to address BEPS will be, first, based on exploitation of existing data (including new transfer pricing and country-by-country information) rather than imposing additional reporting burdens on taxpayers
The ALFI therefore recommends that CIVs are expressly excluded from the scope of Action 11 or that, at least, their particular nature is taken into account. The OECD should seek to avoid unnecessary additional administrative burdens and related costs on CIVs. Furthermore, any measure of the effectiveness and economic impact of the actions taken to address BEPS should, first, be based on exploitation of existing data rather than imposing additional reporting burdens on taxpayers.