By Robert Mellor (pictured) and Gary Burr, PwC – With the Christmas season only recently behind us, thoughts don’t easily turn to matters of taxation. However, changes to tax rules in various jurisdictions around the world, both proposed and already legislated for 2012 and beyond, are likely to demand hedge fund managers’ attention sooner rather than later.
A trend that began as far back as 2010, continued in 2011 and is likely to continue unabated in 2012 is the increased focus on tax reporting. With the potentially onerous reporting and ultimately, withholding, obligations to be imposed by the US’ Foreign Account Tax Compliance Act (FATCA) looming in the near future, hedge fund managers should have considered the impact the new rules will have on them, their processes and their investors. With the release of the regulations the hedge fund industry will be better placed to understand the implications of the rules and how to comply.
The Italians have also introduced a new reporting regime for Italian resident funds. The new regime is applicable from 1 January 2012 and the changes in tax rates and reporting requirements for Italian funds and non-Italian funds with Italian investors are likely to have an impact for those hedge funds invested there.
Another area of focus in 2012 is likely to be increased scrutiny of both hedge fund managers and the funds they manage by cash strapped tax authorities. The UK authorities are as active as ever in examining both the hedge fund manager’s business structure (both direct tax and VAT related) and the personal affairs of the key individuals. Luxembourg is facing increased pressure from Europe to make its fund structures more EU tax compliant, as evidenced by recent changes to Luxembourg transfer pricing rules for funds.
The Indian authorities are also increasingly scrutinising the robustness of Mauritius-based fund structures. Further, the tax authorities in New York City have recently sought to disallow certain expenditure to NYC resident asset managers by arguing that the expenditure is in fact that of the (non-NYC resident) general partner. This could lead to greater taxable income (or lower allowable losses) for the manager in NYC. There is also anecdotal evidence that the NYC authorities are increasing their focus on asset managers in general.
From a UK personal tax perspective, the recently released Finance Bill seeks to increase by GBP20,000 the amount payable by long term resident but non-UK domiciled individuals to retain the favourable remittance basis of taxation. In a move to increase investment into the UK, the Bill also proposes that certain investments by non-UK domiciled individuals in UK resident unlisted trading companies will not constitute a remittance when non-UK money is used. We are currently investigating whether this could be utilised for investment in the corporate member of a trading limited liability partnership. However, the Bill did not include the previously announced implementation of a statutory residence test which has been deferred to 6 April 2013.
If not already started in 2011, 2012 should be the year that hedge fund managers review all their and their funds’ arrangements from a tax perspective to ensure that their methods of operating and business structures compliment, rather than detract from, the robustness of their tax arrangements. In this world of increasing scrutiny of tax, it should be ensured that all arrangements can be robustly defended.
Robert Mellor and Gary Burr are both partners at PricewayterhouseCoopers
Please click here to download a copy of the Hedgeweek Special Report: London Hedge Fund Services 2012
