Investment Funds and Treaty Entitlement ABA Tax Section Meeting Investment Management Committee May 12, 2017

Panel Keith Lawson, Moderator Quyen Huynh Michael Plowgian Deputy General Counsel – Tax Law Investment Company Institute/ICI Global Quyen Huynh Associate International Tax Counsel U.S. Department of the Treasury Michael Plowgian Principal KPMG LLP

Introduction into CIV Treaty Entitlement What is a collective investment vehicle? An investment fund that is widely held, subject to investor protection regulation, and invested in a diversified portfolio of securities What are the “big” issues for CIVs? Does the CIV meet the requirements for treaty relief? Specifically, is the CIV: a “person” a “resident” and the beneficial owner of its income? How does the CIV prove treaty entitlement, particularly if entitlement is conditioned on the tax residences of its owners – including those whose shares are held through nominees (such as brokers)? Impact on fund net asset value (NAV) of uncertain status of tax receivable

OECD Consideration (pre-BEPS) of CIVs Collective Investment Vehicle (CIV) Report Developed by OECD Informal Consultative Group during 2007 - 2009 Final report agreed in 2010 and incorporated in 2010 Update to OECD Model Tax Convention Report concludes that: CIVs, in most cases, should be treaty entitled Administrative mechanisms should be provided for other CIVs to claim on behalf of investors Discusses government concerns about treaty shopping and deferral Suggests that certain CIVs (like U.S. RICs) that are subject to tax on undistributed income and that withhold on distributions to nonresidents generally should not raise concerns about treaty shopping or deferral Limitations Does not address non-CIVs: real estate, private equity, hedge, infrastructure Recommendations not widely adopted

Treaty Relief and Compliance Enhancement (TRACE) OECD Attempt to Address Financial Intermediation Inspired by QI regime Key elements Approval of intermediary by source country Investor self-certification Treaty claims made on pooled basis Payee-specific reporting to source country Independent review of compliance No Country Has Adopted TRACE, But FATCA and CRS Help Address Concerns Financial institutions (including investment entities) collect self-certifications from, and report on, investors and account holders Linking with treaty benefits may improve compliance by account holders

OECD Issues – BEPS Action 6 BEPS Action 6 deliverable’s recommendation: a “minimum standard” for treaties that prevents “unwarranted” tax relief Two alternative tests advanced: Limitation on benefits (LOB) provision – an objective test An LOB test generally requires a claimant to be publicly traded or 50+% owned by treaty- eligible investors; or Principal purpose test (PPT) – a subjective test A PPT denies relief if “one of the principal purposes of the transaction or arrangement” is to obtain treaty benefits

OECD Issues – BEPS Action 6 BEPS Action 6 recommendation details: Preserves recommendations made by OECD in the 2010 CIV Report for ensuring that all fund investors have avenue for receiving treaty relief Agrees that TRACE is important for practical implementation of CIV Report’s recommendations Includes a narrow example of a fund that satisfies the principal purpose test widely held, but more than 50% owned by same-country residents, less than 15% invested in State S securities, annually distributes almost all income

OECD Issues – BEPS Actions 6 and 15 Issues for incorporating LOB and/or PPT into Multilateral Instrument: LOB Many investment vehicles (and even CIVs) are not regularly traded Ownership/base erosion (must identify owners) Derivative benefits (more than 7 owners?) Not active trade or business Pension funds Potential special category for CIVs? PPT Inherently subjective Investment vehicles formed for non-tax purposes, but tax often is important in determining location Draft examples for Non-CIVs suggest a look-through/equivalent beneficiaries approach

Overarching Industry Themes Certainty Neutrality (between direct and CIV investors) Neutrality/Reciprocity between funds Support for CIVs and their investors CIV Report and TRACE Implementation PRACTICAL solutions

Government Concerns Double taxation Double Non/Reduced Taxation Providing treaty benefits to third-country investors Are fund investors treaty-entitled? Relevance, if any, of lack of control Deferral Larger residence-country foreign tax credits if treaty benefits denied RELIABLE solutions

Potential Framework (Approaches) Fiscally transparent entities Most theoretically pure; new Article 1(2) of OECD Model But lenders and investors often insist on entities that are not fiscally transparent Practical issues with accounting and reporting for funds that are widely held or if investors from multiple jurisdictions Fiscally opaque entities Need to identify owners (TRACE principles, leveraging FATCA/CRS?) Need to address third country owners (equivalent beneficiaries) Need to address deferral

U.S. Treaty Policy CIVs Non-CIVs Need to agree with treaty partners on mechanism to grant treaty benefits to RICs and treaty partner CIVs Technical Explanation addresses RIC residence, but generally not binding on treaty partners Extent of “proof” of ownership needed? Potential to implement TRACE principles to establish ownership? Equivalent beneficiaries? Non-CIVs Fiscally Opaque – difficulties qualifying under U.S. Model LOB Need for expanded derivative benefits provision Article 1(6) of the U.S. Model Need for other countries to allow investors to treat entities as fiscally transparent? Foreign partnerships able to act as non-withholding QIs?

Thank you!