The impact of the OECD Base Erosion and Profit Shifting (BEPS) project is being considered by the Irish funds industry.
In July 2013, the OECD published an action plan identifying 15 actions to address BEPS in a comprehensive manner. One of the actions identified was to develop model treaty provisions and recommendations to prevent treaty abuse (BEPS Action 6 (Prevent Treaty Abuse)). In its March 2014 consultation on BEPS Action 6, the OECD recommended the inclusion of a limitation of benefits (LOB) clause and general anti-abuse rules in international tax treaties. LOB clauses are a feature of treaties negotiated primarily by the United States and can deny access to treaty benefits for residents of the State that is party to the treaty where those residents do not fall within a “qualified person” category.
The BEPS proposal outlines circumstances whereby companies would fall within the “qualified person” category and therefore the LOB provisions would not apply. Such circumstances include the imposition of a narrow ownership test for companies. This is of concern for collective investment vehicles (“CIVs”) as they would generally be unable to meet this narrow ownership test and therefore would not have access to treaty benefits as a result of the LOB provisions. Currently CIVs can benefit from reduced or nil rates of tax on investments in foreign jurisdictions where there is a treaty in place between the country of investment and the country where the fund is located. Due to Ireland’s broad treaty network, Irish domiciled CIVs have good treaty access to minimise foreign tax suffered on investments.
The investment fund industry in Ireland and elsewhere has been lobbying against this LOB proposal and it is understood that there may be some form of exemption for CIVs. This follows from earlier OECD papers which indicated that CIVs should be able to access treaty benefits. It has been proposed that the approach adopted in these earlier OECD papers should be applied and retained. However it remains to be seen if the definition of CIVs is broadened from earlier OECD papers whereby the term CIV is limited to funds that are widely-held, hold a diversified portfolio of securities and are subject to investor-protection regulation in the country in which they are established.
The Irish investment fund industry has responded to the OECD consultation paper. The Industry argues that CIVs should be excluded from the scope of BEPS Action 6 as it is inappropriate to include these vehicles within the remit of specific actions aimed at multi-national enterprises. It has been suggested that CIVs should be included in the category of “qualified persons” in the proposed LOB provisions. A key issue with these recommendations is how broad any proposed carve out would be and how CIVs are defined for this purpose.