Recent changes to US tax legislation regarding the audit process for partnerships have important implications for CLO managers, as well as more generally in the asset management business. With entities filing as a US partnership for tax purposes now required by the Internal Revenue Service (“IRS”) to appoint a US-based “Partnership Representative”1 that will liaise with the IRS in the event of an audit and handle other relevant matters, we are seeing heightened interest from investment managers for our third party solution.
The Bipartisan Budget Act of 2015 replaced the IRS requirement for partnerships to designate a “Tax Matters Partner” with a Partnership Representative and an associated “Designated Individual” to be named in the 2018 tax return and filed this year. While we expect a large number of US-based institutions will be able to assume this role for their structures, we have found that the appointment of an experienced professional service provider for Partnership Representative services can prove highly optimal in three key scenarios.
Managers Without a Material US Presence
The new rules set out that the Partnership Representative need not be a partner, and may be an entity. If the Partnership Representative is an entity, however, then the Partnership must appoint a single individual to act on its behalf (the “Designated Individual”). Both the Partnership Representative (if an entity) and the Designated Individual must have a substantial presence in the US, including a US taxpayer ID number, a US street address and phone number. They must also actually be contactable and available to meet with the IRS, when required, at a reasonable time and place.
Without a substantial presence in the US and sufficient staff available to fulfil the above criteria, non-US managers may require the services of an established third party to act on their behalf.
Structural or Regulatory Considerations
Some investment structures we see have multiple managers or other characteristics that mean managers based in the US may not wish to control the governance and administration of the structure. In these more unusual circumstances a third party provider, such as the Maples Group, may be more convenient.
Ease of Allocating Resource
Given the clarification from the IRS that the Designated Individual should be contactable and available to meet with the IRS on reasonable notice, we are seeing some US managers now engage a third party to provide this resource. CFOs, tax directors and other senior managers often have extremely busy schedules and, given the expanded scope of the new regime, do not have time or are unwilling to deal with such matters on short notice.