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

2. 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

3. 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

4. OECD Consideration (pre-BEPS) of CIVs
Collective Investment Vehicle (CIV) Report
Developed by OECD Informal Consultative Group during
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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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?

13. Thank you!