OECD releases 33 comments to draft guidance on tax treaty access by non-CIV funds

The OECD on March 24 made public 33 letters commenting on draft examples issued last January that address the application of the principal purpose test in tax treaties to non-collective investment vehicle (non-CIV) funds.

The work is part of follow on work from the OECD/G20 base erosion profit shifting (BEPS) project. The draft examples are proposed to be added to paragraph 14 of the Commentary on the principal purpose test, as it appears in paragraph 26 of the OECD Action 6 report.

The Action 6 report suggests that countries add to their tax treaties a principal purpose test or other tests to prevent taxpayers from using the treaty for tax avoidance. When applicable, the test will exclude taxpayers from entitlement to tax treaty benefits, in particular reduced withholding taxes.

The three draft examples describe the application of the principal purpose test to non-CIV funds, such as regional investment platforms, securitization companies, and funds that invest real estate.

In their comment letter, the Business and Industry Advisory Committee to the OECD (BIAC) said that more examples are needed than the three provided in the draft guidance, including examples that provide clarity on what constitutes a non-CIV fund and guidance reflecting the application of the principal purpose test to fund-to-fund structures.

BIAC argues that example 1 of the draft, dealing with regional investment platforms, does not illustrate a real-world situation, instead providing an implicit safe harbor using facts and circumstances that don’t reflect the structure of the vast majority of non-CIV funds.

Further, the BIAC objects to the rules’ implication that no single investor in a non-CIV fund may obtain tax treaty benefits that are better than the benefits that would have been obtained if the same investment was made directly.

The Alternative Investment Management Association (AIMA) and the Alternative Credit Council (ACC) joined in commenting that the draft examples may unfavorably affect a wide range of uncontroversial arrangements.

The groups state that they generally disapprove of the subjective nature of a principal purpose test and suggest that the OECD add more examples addressing more controversial topics.

The examples ultimately adopted should be reviewed after two or three years so that their implications can be reviewed and assessed in the light of real world experience, the AIMA and ACC suggest.

The Association of the Luxembourg Fund Industry asked that the guidance make it clear that all conditions mentioned in the examples do not have to be met in practice to ensure treaty access is granted.

The BEPS Monitoring Group, comprised of tax experts representing civil society groups, argued that to be entitled to tax treaty benefits, an investment fund should be subject to regulation which includes know-your-customer requirements and obligations to participate in comprehensive, automatic exchange of information for tax purposes.

The group also suggests several iterations to the fact patterns in the examples to provide more complete guidance on the topic.

The BEPS Monitoring group said that, at a minimum, the OECD should include at least one example where the conclusion is that it is reasonable to deny tax treaty benefits. BIAC offered similar comments in its letter.

Comment letters were also received by following organizations and groups of organizations: the Association of Real Estate Funds; BlackRock; the British Property Federation (BPF); BVCA; the Commercial Real Estate Finance Council (CREFC) Europe; the Confédération Fiscale Européenne; Deloitte; The Dutch Association of Tax Advisors; EFAMA; EY; Arbeitsgemeinschaft kommunale und kirchliche Altersversorgung Corporation (AKA), APG Asset Management, PensionDanmark, and PGGM Investment Management; the Guernsey International Business Association; INREV; Invest Europe and the American Investment Counsel; The Investment Association; the Irish Debt Securities Association; Irish Fund; Jersey Funds Association and Jersey Finance Limited; M&G investments; the Managed Funds Association; Maples and Calder; The Master Limited Partnership Association (MLPA); The National Association of Publicly Traded Partnerships; Morri Rossetti; Osler, Hoskin & Harcourt LLP; PWC; New Zealand Superannuation Fund and Queensland Investment Corporation (QIC); Taxand; and Caisse de dépôt et placement du Québec, OMERS, Alberta Investment Management Corp., British Columbia Investment Management Corporation, Canada Pension Plan Investment Board, Public Sector Pension Investment Board, and Ontario Teachers’ Pension Plan Board.

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