ASSET MANAGEMENT 2020 AND BEYOND TRANSFORMING YOUR BUSINESS FOR A NEW GLOBAL TAX WORLD - PWC
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By 2020, how an asset management firm deals with tax risk will be viewed as a competitive advantage or disadvantage. Investors will expect robust and efficient tax infrastructure and will have minimal tolerance of tax uncertainty or tax adjustments. As a result, tax will be a key operational and business activity, requiring specialist resources, a new approach and integration into front, back and middle office activities. So what will be the drivers for this new global tax world? And how will investment firms transform to meet these challenges as the industry becomes an even more significant part of the financial services sector? Asset Management 2020 and beyond Transforming your business for a new global tax world Report www.pwc.com/amtax2020
3 PwC Asset Management 2020 and beyond Contents Introduction 4 Executive summary 8 The tax game changers 12 The tax function in 2020 and beyond 26 Contacts 30
4 PwC Asset Management 2020 and beyond Introduction By 2020, how an asset management firm deals with tax risk will be viewed as a competitive advantage or disadvantage. Investors will expect robust and efficient tax infrastructure and will have minimal tolerance of tax uncertainty or tax adjustments. As a result, tax will be a key operational and business activity, requiring specialist resources, a new approach and integration into front, back and middle office activities. So what will be the drivers for this new global tax world? And how will investment firms transform to meet these challenges as the industry becomes an even more significant part of the financial services sector?
5 PwC Asset Management 2020 and beyond Figure 1: Global Assets under management (AuM) to reach above USD100trn by 2020 In 2020, investors’ expectations will include a robust and efficient tax infrastructure. And zero tolerance of = Compound Annual Growth Rate (CAGR) AuM in USD trn = Growth tax uncertainty or tax adjustments. 120 In addition, as many countries struggle with deficit reduction and the need to invest, the whole of the 102.3 100 financial services industry, including 12.5% 13.6 asset management, will be expected 1.4% 16.8% to play its part in policing the global 80 financial system and ensuring that 71.9 tax authorities have the correct tax 63.9 7.9 47.5 information on taxpayers. 59.4 60 6.4 5.3 Total transparency of investor 33.7 residency and identity will be the 40 37.3 28.8 30.4 norm. Asset managers will have to 2.5 demonstrate the highest standards 18.7 of anti-money laundering (AML) 20 41.2 and know-your-customer (KYC) 25.4 27.0 30.3 responsibilities, plus reporting to 16.1 tax authorities and to taxpayers on 0 the returns flowing from their funds. 2004 2007 2012 2013 2020 Politicians, regulators, the media and the public will all expect nothing less. n Mutual funds n Mandates n Alternative investments Source: PwC analysis However, tax should not be Note: We have revised our estimates for Alternative investments in 2020 upwards to USD13.6trn given considered solely as a risk to manage strong market performance in 2013 and H1 2014. – it is also an opportunity. Managing tax risks and leakages well at all levels (investments, funds and investors) While the asset management can distinguish asset managers industry will grow rapidly in the from their peers. While managers coming years (see Figure 1), growth have traditionally been tasked with for individual asset management generating performance ‘alpha’ for Tax should not be considered firms will not be automatic. The their investors, ‘service alpha’ in solely as a risk to manage – it is risks will change, as the tax and 2020 will be a key differentiator. also an opportunity. regulatory environments continue to The concept of service alpha implies develop. Tax, in particular, will be a an entirely new challenge for asset key operational and business activity, managers: how to communicate with requiring specialist resources, a investors about tax matters. Service new approach, and integration into alpha will require the asset manager front and middle office activities – to first explain it and then help including data reporting, product investors recognise its benefits. development, distribution and brand strategy. Tax and reputation will To help asset managers plan for the be inseparable concepts. Taxes will future, in the last section of this now be viewed as an operational paper PwC has set out a vision of risk, joining the ranks of other key what the tax landscape should look risks which senior management like in 2020 to adequately address takes a keen interest in, and one that the new tax environment. needs a strategically planned risk The issues addressed by the CEO management programme integrated of our fictional firm, Investar into all aspects of their business Asset Management1 (on page 6 operations. How a firm deals with tax and throughout our paper) give risk will be viewed as a competitive an indication of the challenges advantage or disadvantage. 1 N one of the information or facts about the fictional investment the industry faces in putting the firm, Investar Asset Management, are sourced from PwC management of tax risk at the heart clients or PwC client engagements. The examples have been developed solely to illustrate key points in this paper. of all strategic business change.
6 PwC Asset Management 2020 and beyond Sunday 22 MARCH From: Angus Moreland, CEO, Investar Asset Management To: All department heads CC: Charlene Ho, Head of Tax, Investar Asset Management Date: Sunday 22 March 2020 15.00 Subject: Preparing for the week ahead Dear all. Apologies for emailing on a Sunday night, but we’ve got a big week ahead. As we strive to be a cutting-edge global asset management business, we are moving forward with a raft of new products, new distribution opportunities, changes in performance reporting and an overhaul of our global technology platform. Each of these developments has tax implications, so please run all initiatives past Charlene before you action them. Events during the past week illustrate perfectly why this is critical. Two new product offerings to pension funds were launched after almost a year of intensive work with great success. Increased certainty on the funds’ withholding and capital gains tax risks and leakage has attracted much interest and commitments. Great stuff! Unfortunately, Charlene had to spend a significant amount of time to get one of our fund directors out of serious trouble with some tax administrations in Asia. Tax compliance for your products is not only a matter for the specialists at headquarters; the situation in Asia illustrates that you can run into tax trouble personally if your products fail to comply with local tax rules. I would also like to emphasise that the use of the Travel Tracker system is an obligation for everyone – uncoordinated and uncontrolled travelling around the world can put you and our company at risk. If we all work together, we can capitalise on this new tax environment, and use our superior infrastructure as a competitive advantage. Regards Angus.
7 PwC Asset Management 2020 and beyond By 2020 tax and reputation will be inseparable concepts. Taxes will be viewed as an operational risk, joining the ranks of other key risks which senior management takes a keen interest in, and one that needs a strategically planned risk management programme integrated into all aspects of their business operations.
8 PwC Asset Management 2020 and beyond Executive summary Asset managers adapt to new role at centre stage As banks and insurers retreat from many investment business lines, asset managers will be more influential across a range of products by 2020. A new breed of global mega-managers will attract huge focus from tax authorities, which will have specialist teams with the capabilities to carry out much more detailed enquiries than in the past and the powers to request real-time investor-related information. Asset managers will respond by dispersing their strategic tax resources throughout their business operations to give front, middle and back office staff access to real-time expertise. The in-house tax team will have developed to deal with perpetual audits and to engage with tax authorities on a frequent basis to influence policy and help guide the implementation of tax rules. Transparency: firms leave no stone unturned Tax transparency will be a fact of life in financial markets by 2020 as the Common Reporting Standard (CRS) and global tax reporting become reality. Post the examination by the Organisation for Economic Co- operation and Development (OECD) of the basis of taxation for a permanent establishment, many tax authorities will focus on the economic nexus of an asset management contract and the ultimate investor, rather than just the physical nexus of the asset manager, its property, and its staff, in determining the location of taxation of the asset manager’s business. Through political pressure, investor demand and regulatory change, many offshore financial centre products will have moved onshore into a range of new registered products as jurisdictions and regional blocks will continue to compete to offer attractive investment vehicles for cross-border and domestic investment. Many of these onshore vehicles will themselves be tax exempt, obtain double tax treaty access and suffer no withholding tax on distributions or redemptions as countries will continue to compete to attract vital inward investment. New specialist platform investment products like securitisation regimes and real estate investment trust (REIT) funds will be created as part of this competitive landscape. All of which will bring new complexity to product design and fund structuring.
9 PwC Asset Management 2020 and beyond Portfolio taxation a core control objective. As asset managers’ portfolios become larger, will become a key internal audits of the tax function battleground will be carried out to evidence By the early 2020s, the OECD their own standard of tax risk Base Erosion and Profit Shifting management. (BEPS) action on hybrid Asset managers and their clients, instruments, interest deductibility keen to avoid being tainted and treaty access will have led by association with inefficient to an environment where some and potentially inaccurate tax degree of tax leakage is a fact of compliance, will have become life for many funds. Performance highly proactive on the issue. evaluation and attribution will focus Asset management PR efforts in predominantly on post-tax yields. the 2020s will focus not just on Prospective investors will ask about fund performance, but on tax tax disclosures even taking their and compliance, with detailed individual tax charge into account statements released into the before they consider investing in public domain on tax policies, a fund. They will be seeking more remuneration and reward certainty with respect to tax issues. structures, the amount of tax paid With more transaction taxes, local and where it is paid. withholding and self-assessment capital gains regimes, every asset purchase and sale will have to be Tax technology carefully examined from a tax risk will be key to and reporting perspective, requiring performance and asset managers to have real-time access to data on global tax regimes. client satisfaction When launching new products, asset By 2020 and beyond, the managers will routinely carry out overwhelming trend will be to move full assessments to make products the tax process to a technology- competitive in all channels. Investors enabled environment that will gravitate towards managers that connects existing technologies to offer products reflecting investor- tax-sensitised databases that are specific tax profiles. By 2020, a connected via a centralised tax data number of integrated businesses hub. Technology for tax will enable combining asset management, investment firms to make timely tax- wealth management and private informed investment decisions and banking activities will be able to provide investors and tax authorities provide a full tax advisory service to with the transparency and reporting clients. that they demand. It will also enable tax uncertainty minimisation. Tax branding will Technology will also create the ability to differentiate between be at the heart of the alpha created by the portfolio marketing and manager and the alpha created reputation (indirectly) by the capability of the tax team to manage tax leakage and By 2020 and beyond, tax will be tax risk. just another operational business risk in the same way that valuation Funds that demonstrate tax and regulatory reporting came to be efficiency at the fund level relative viewed as operational business risks to their peers will create a distinct years before. Control reports over advantage when fundraising in a outsourced services by custodians, highly competitive environment. administrators and transfer agents Technology tools will also enable will routinely include tax risk workflow management, allowing management and governance as fund managers to monitor tax
10 PwC Asset Management 2020 and beyond services internally and at their service providers in real time. Technology will not only be close to the heart of asset managers – the tax authorities will have made significant investments by 2020 too. As a result, the age of selected paper- based reporting by asset managers to the tax authorities will be over – perhaps even annual reporting will Tax authorities will request be over. Tax authorities will request whatever information they whatever information they want want from asset managers from asset managers through having through having direct access direct access to their IT systems rather than asset managers pushing to their IT systems rather than data to them. asset managers pushing data to them. The tax function of the future As a result of these considerable changes to the tax environment, the tax function in 2020 and beyond will be significantly different from what we know today. The tax function will play a key role in the day-to- day management of operational risks and will no longer only deliver compliance and make tax technical assessments. The assessment of complex data and its implication in business and product development decisions will be the new normal. Consequently, the profile and composition of the tax function will have changed. It will be critical for asset managers to decide to what extent they want to rely on internal sources. The increased complexity of the tax function will require that it spends significant periods of time with operational activities in order to be able to act as a trusted adviser internally and to key executives. Asset managers will need to ensure that highly skilled tax people are brought into the heart of the business. The tone needs to be set at the top. The tax function is critical to the entire operation and senior management will need to make sure that this is well understood throughout the ranks.
11 PwC Asset Management 2020 and beyond
12 PwC Asset Management 2020 and beyond The tax game changers The landscape for asset managers in the coming years is set for radical change. This change was set out in a paper PwC published in early 2014 – Asset Management 2020: A Brave New World2 – which predicted the global trends impacting the industry in the coming years and identified their consequences. These trends included a huge rise in assets and fundamental changes in the investor base, while cost pressures rose. Significantly for the tax function, there would be a step-change increase in transparency, changing the perception of tax and making it a key operational issue. So what do these predicted shifts mean for the evolution of tax processes that will allow firms to survive and remain competitive in the years to 2020 and beyond? To find out, let’s take a look at a week in the life of Investar Asset Management. It’s Monday 16 March 2020…. 2 Asset Management 2020: A Brave New World – PwC, 2014.
13 PwC Asset Management 2020 and beyond Monday Asset managers adapt to new role at centre stage 16 MARCH From: Charlene Ho, Head of Tax, Investar Asset Management To: All department heads Date: Monday 16 March 2020 07:30 Subject: Analysis of tax-related data – your help required Dear all. Please ensure that you assist the embedded tax specialists in each of your teams in the analysis of all tax-related data by the end of the week so that our 2019/2020 tax report is ready for audit at the end of next month. Remember that any omissions or inaccuracies may result in considerable financial and/or criminal penalties and the company being placed on the tax authorities’ ‘non-compliant’ lists. In addition, investors are looking for tax foot faults as they consider where to invest. I am particularly interested in seeing how we have managed the tax risks in our new Asian peer-to-peer lending platform. Regards Charlene. By 2020, non-bank finance will no As a result, by 2020 and beyond longer be in the shadows. Under economies of scale will become pressure from regulators and from paramount and a new breed of demands on regulatory capital, mega-manager will have emerged, banks and insurers will have with a footprint in all geographies retreated to their core businesses. and distribution channels. Some Asset managers will have become of these mega-managers will providers of a far broader set of attract a great deal of focus from products than in 2015. They will be policymakers, regulators and tax dominant across a range of products authorities. and activities, including: Equally, many new non-finance • Pension and lifetime savings boutiques will have emerged as products specialists in the new non-bank finance areas. The complexity • corporate financing, such as of these strategies will attract direct lending, trade receivables attention from tax authorities as and invoice factoring they look to stay abreast of industry • distressed assets and developments. commodities The growing size and importance • peer to-peer lending and crowd- of the asset management industry funding means that tax authorities will be • infrastructure funding interested in every aspect of the asset management industry and • money market strategies. its participants. Specialist teams at many tax authorities will have the capabilities to carry out much
14 PwC Asset Management 2020 and beyond more detailed enquiries and asset The calculation will be either right managers will have to be able to – or wrong. Fines and penalties respond. Access to records is not for wrong, late or missed self- an issue: tax authorities will have assessments will be significant direct access to asset managers’ IT and by far exceed fines for wrong platforms. This started with VAT declarations as in 2015. Fines will (SAF-T)3 and quickly became a relate to both failure to comply and Dealing with derivatives global standard. As yet, only some failure to comply completely with global businesses are subject to information requests. It will not The tax landscape relating to synthetic perpetual tax audits across the globe be enough to pay the appropriate and derivative type transactions will get increasingly complex as more of these by their home tax authority, with amount of tax – the supporting transactions become centralised on regional coordinated assistance from local information and calculations will exchanges and tax authorities look to the tax authorities. also have to be presented in the underlying substance of the synthetic to appropriate formats. In the future, all investment determine the tax attributes of the yield. activity will be reported in some How will asset Uncertainty of treatment will create uncertain way by a counter-party, financial tax positions within some portfolios and intermediary, fintech provider or managers respond? funds will have to be carefully managed broker. Tax authorities will routinely The responses to far greater scrutiny and positions disclosed in fund accounts. access such data from regulators will take place at a number of levels International Financial Reporting Standards and market operators and will be within asset management firms. (IFRS) and US Generally Accepted Accounting Principles (GAAP) will have become aligned in able to routinely test these new First, the huge increase in the this respect. non-bank finance investment areas volume of tax reporting will for compliance with transaction have put cost pressures on asset taxes, withholding taxes and self- management tax team budgets. assessment capital gains taxes. At By 2020 many firms will be focusing present, tax rules in each country on their tax costs and will be keen have not kept pace with new to extract more from existing investment strategies and quirks, resources. This places an emphasis and anomalies have to be carefully on using technology to increase navigated to avoid tax traps. efficiency, tighten compliance procedures and avoid regulatory Zero-tolerance tax penalties. environment Self-assessment – already common Tax resource will have become more in 2015 – will have become the dispersed throughout the business dominant model for global tax operations of the asset manager to collection by 2020. This reflects give front, middle and back office growing pressures on the tax staff access to embedded real- authorities themselves. Many time expertise and respond to tax authorities, unable to deal with authority demands. increased complexity and volumes, The in-house tax team will have will have recalibrated their systems developed technology tools to deal to shift the burden of calculation with complying with perpetual and tax collection to funds and audits and closer scrutiny in general. fund management firms. Some tax IT systems will deal with many Self-assessment – already common in authorities will download financial processes that were manual or 2015 – will have become the dominant statements directly from investment semi-automated in 2015, leaving model for global tax collection by 2020. firms and create automatic tax stretched tax teams with more time calculations. and resources to focus on higher value activities. 3 S AF-T (Standard Audit File for Tax) is an OECD standard for the electronic exchange of accounting data from organisations to a national tax authority or external auditors. The standard is used by some European countries to file tax returns electronically.
15 PwC Asset Management 2020 and beyond In the illiquid space, investors will Full transparency will be a fact of Tuesday continue to demand that investment professionals invest meaningfully life in financial markets by 2020 as global tax reporting becomes reality. in their own investment strategies. Many tax authorities will attempt Transparency: firms leave no stone Remuneration, reward, carry to collect what they see as rightfully unturned and co-investment structures will theirs by focusing on the economic continue to be ever more complex as value chain of the asset manager’s investment teams are based in more activities rather than solely on the and more geographies with differing physical nexus of employees of employment, payroll, corporate the asset manager. In 2015, within 17 and personal taxes. The public’s the US, economic nexus taxation perception of the relatively high has grown from ten states4 to be levels of reward within the industry commonplace by 2020 and beyond. MARCH will continue to attract the attention As a concept of taxation it has also of politicians, the media, regulators caught on globally. So, for instance, and tax authorities. a Singapore-based asset manager From: Ayo Okonjo, Head of Private Equity, servicing a US pension fund could Investar Asset Management Regulators in most jurisdictions will be subject to double taxation – from have the technology, but not always both the local US state and the To: Charlene Ho, Head of Tax, Investar Asset the necessary authorisations, to Singaporean tax authority. This is Management make demands for information – despite the fact that the Singaporean Date: Tuesday 17 March 2020, 08:30 such as the submission of travel data manager does not have a physical Subject: Questions from Asian tax for key investment firm executives. presence in the US. authorities To get ahead of the game and align themselves – where appropriate – In 2020 and beyond, investment Hi Charlene. A few Asian tax authorities have asked why our Swiss private equity guys with the aims of regulators, some firms will need timely access to all are spending so much time in Asia talking asset managers will have decided to their accounts in every jurisdiction to target companies. They are aware of our do this unilaterally. The exchange and be able to make comparisons presence from immigration records and are of information between tax at group level. They must be able to asking whether we are there for information authorities will be no longer limited report this in every country in which only or to do deals. How should we react? to groupings of jurisdictions known they operate in order to provide a Regards in 2015 (e.g. the EU, G20, the US), snapshot of profits, revenues, supply countries will have formed clusters chains, organisation structure and Ayo. independently from those groupings compensation. BEPS-driven country- to exchange a variety of tax-related by-country reporting and exchange From: Charlene Ho information. of information will be used by tax To: Ayo Okonjo authorities to put together a full Date: Tuesday March 17 2020, 16:45 Finally, education will be able picture of organisations and to share to mitigate policy mistakes. Tax this information with each other. Subject: Questions from Asian tax authorities will often not possess authorities the same breadth of perspective Hi Ayo. It is essential to identify what your on the industry as participants, guys are actually doing there. Too much and will have come to recognise presence can trigger a local tax presence or that a collaborative approach to permanent establishment. And, that could the industry is more productive mean that Investar (and perhaps our PE than a strict, adversarial posture. Funds) is already in breach of its tax filing Asset managers will, in some cases, obligations. Please ask your teams to check be able to assist tax authorities by all their entries in Travel Tracker and send me frequent interaction to apprise them the records on who was where, when, how of new developments and complex long and for what purpose. tax dynamics. The nature of fund Regards managers’ business will afford them Charlene. a global view, which may not be available to the local tax authority. 4 As of 1 September 2015.
16 PwC Asset Management 2020 and beyond As new cross-border distribution How will asset In an increasingly complex hubs have developed, such as the Asian passport regime, managers managers respond? world it may not be possible to will increasingly be required by local The most tangible change will be operate simple, global reward where fund managers domicile regulators to have real substance and retention structures. and a local presence in each of their their products and their employees. overseas territories. In order to be Investment firms will have revisited able to distribute widely, ‘boots how they operate and have on the ground’ will be required, established new guidelines for their including local distribution teams, staff. Many previously unregulated local fund managers and local tax products will have opted for the tax and regulatory experts. In addition, certainty of regulated status. local regulators will often require Tax efficiency in terms of product regulatory capital to be held locally, development, distribution and leading to cross-border funding rewarding key talent will be and interest deductibility issues for thereby redefined. As mobile global asset managers. employees move from jurisdiction As asset managers will need to to jurisdiction, the risk of double relocate key staff to lead and operate or even triple taxation will arise Fly-in, fly-out days are over these new local businesses, dealing on them individually or from with global mobility issues will be an employer’s perspective as One of the main impacts of the BEPS reform key. Having clear strategies for pay, different countries seek to tax agenda is a lowering of the permanent benefits and allowances will be vital reward features, such as deferred establishment threshold. The days of running as will frequent communication bonuses, carry or share-based a main office in a single jurisdiction are between HR and the central tax reward structures, under different soon to be over. Operating on fly-in, fly-out in some jurisdictions won’t be acceptable function. Global reward and rules. Firms will have to decide, in 2020. Following the work of the OECD retention structures like carry, co- for example, whether employees on permanent establishment threshold in investment and Long Term Incentive in local markets should share in a 2014 and 2015, many countries treat fly-ins Plans will need to accommodate global bonus pool or whether they as if they were permanently established in local tax requirements to avoid should structure rewards differently the country. This means an increased level double taxation risks. As employees depending on the jurisdiction. of cross-border supplies triggering more become more mobile, these may Many firms will have decided that a transfer pricing and VAT topics to deal with. arise, for example, on the granting In addition, compliance with local payroll greater level of engagement with tax and vesting of an equity award and social security obligations adds to the authorities is advantageous. While if these events take place in two global complexity of issues which the asset some firms would be worried that different jurisdictions. manager’s HR and tax teams have to monitor engagement would invite excessive and comply with. Individuals will also have to In an increasingly complex world scrutiny, others will have realised be mindful of their own personal tax situation it may not be possible to operate that the release of a large body of and their own tax residency status. simple, global reward and retention information into the public domain structures, leading to a wide requires engagement in order to patchwork of reward structures manage it sensitively. across global businesses and thereby Organisations will have become heightening the risk of inadvertent more PR savvy about their tax mistakes and errors. Reliance on affairs. The advent of BEPS will local outsourced payroll providers have led to increased media scrutiny will not be a defence when tax of the sector, with a spate of – not authorities come knocking about always positive – headlines about local payroll audits. the asset management sector. Given the option of the PR agenda being driven by the organisation itself or the tax authorities, most will have preferred the former.
Wednesday Portfolio taxation becomes a key battleground 18 MARCH From: Manish Agarwal, Product Development Director, Investar Asset Management To: Charlene Ho, Head of Tax, Investar Asset Management Date: Wednesday 18 March 2020, 12:20 Subject: New pan-Africa product Morning Charlene. The investment and PR teams are ready to fly out and get the Investar Africa Infrastructure Bond Fund off the ground. Any last tax thoughts before they go? Regards Manish. From: Charlene Ho, Head of Tax, Investar Asset Management To: Manish Agarwal, Product Development Director, Investar Asset Management Date: Wednesday 18 March 2020, 19:50 Subject: New pan-Africa product Have you thought about the transaction charges Manish? For a start, with a French bank structuring the bonds, FTT will apply, so we need to factor that into our target return projections in the prospectus and pitch-books. And withholding taxes are now applicable to many transactions originating in Africa. I propose that we also check carefully responsibilities for monitoring withholding and capital gains tax charges, including the filing of reclaims where possible in our (sub-) custody arrangements. We had recent surprises in South America. Overall, the sub-custodian we use over there renders a great service – but we missed including an obligation for them to manage our withholding tax monitoring in the SLA. Result: 3m of tax reclaim opportunities have been lost. Regards Charlene.
18 PwC Asset Management 2020 and beyond At one time, investors, service managers will have a developed providers and fund ratings methodology. This will be disclosed companies largely ignored the to investors and constantly updated impact of tax on performance and as a response to changes in the tax management fees. Capital gains tax, legislation. for instance, was not on the radar of many investors in 2015. Not because In the years between 2015 and 2020, the rates were insignificant – they as the BEPS agenda impacts hybrid tended to converge at around 10% – structures, interest deductibility but because the rates were opaque in and tax treaty access, there will be some markets and the responsibility increased demand from investors for reporting them was unclear. to facilitate the understanding of the impact of tax on underlying By the early 2020s, performance portfolio returns. This will dovetail evaluation and attribution will focus with a demand to report after-tax predominantly on post-tax yields. returns so investors can compare In the years between 2015 and Prospective investors will ask about funds across investment firms and 2020, as the BEPS agenda tax disclosures and after-tax returns across geographies. impacts hybrid structures, even before considering their interest deductibility and individual tax charge – before they A new raft of tax treaty access, there will consider investing in a fund. transaction taxes be increased demand from Investors will expect the asset Why will investors’ expectations investors to facilitate the manager to indicate tax charges change? One of the major themes understanding of the impact from their investments on their in the years to 2020 will be the of tax on underlying portfolio individual level. Furthermore, tax authorities’ desire to align the asset managers will disclose the taxation of income from investments returns. tax charge on investor level for with increased taxes on businesses most relevant investor types in the and ordinary taxpayers. As a result, respective region of distribution, funds in 2020 will have to contend such as individual investors, with both higher withholding taxes corporate investors, family and higher capital gains taxes. offices, pension funds, insurance Local tax authorities will be aware companies, etc. that most investment vehicles The actual charge on investor are domiciled abroad, and will level will depend on many factors increasingly seek to take a slice of specific to the asset manager, as the asset management cake from transactions. So there will be a proliferation of local transaction taxes that will be led by increased Impact of MSCI rebalancing withholding taxes on dividends The MSCI World Index will be significantly re-balanced by 2020 to reflect and capital gains proceeds. The the increase of GDP in China and other emerging countries. As a result, reverse is also true: in some cases index trackers will have increased their weightings to emerging market transaction taxes will be applied to assets, which means they will incur significant transaction and capital local investment vehicles buying gains taxes, particularly where there is no double tax treaty. assets abroad. Alternative strategies will be particularly impacted. Some tax authorities in 2020 and beyond will treat a number of alternative investment fund strategies as financial trading (commercial activity) rather than as (passive) investment activity. This will trigger the taxation of fund investors and the fund itself.
19 PwC Asset Management 2020 and beyond As product solutions proliferate, By 2020, Total Tax Ratio will asset managers will get used to become a standard alongside the dealing with a wider range of Total Expense Ratio: funds will different fund regimes and legal determine the actual tax leakage on structures. Often, tax-transparent portfolio level. In addition, funds funds will be more tax efficient, will determine the individual tax but will give rise to complex tax leakage for some key investor types. questions at the same time. Both figures together will become Total Tax Ratios which investors The proliferation of portfolio-level can compare across different fund taxation will have fundamentally offerings for target markets and also Up until 2015, changed the way that asset see in relation to the performance. allocation and portfolio construction tax calculations are performed. Portfolios in 2020 When launching new products, were performed and beyond will be frequently asset managers in 2020 and beyond only at the end of structured to achieve competitive will carry out full assessments of each tax year. The post-tax yields. A number of pre- how to make products competitive implications were and post-tax fund ranking tables in all channels. For this to happen, will have emerged to allow investors tax will need to permeate the entire often assessed to compare funds. Some of these organisation and tax departments too late. rankings will measure absolute will need to make it a priority to returns, while others will provide keep abreast of global developments a barometer on the certainty of tax around the world (in real-time). results. However, this emphasis on This may require a local presence, after tax-performance may create not only to stay ahead of local tax fiduciary issues because not all changes, but also to have access to investors will have the same tax and influence local tax authorities. requirements as each other or as the manager. Cross-border transactions and taxes will have increased the Due to the high impact, taxation need for local paying agents, tax positions will need to be assessed representatives and tax agents. in real time to avoid the risk they Services such as reclaiming evolve into a net asset value error. withholding taxes, often bundled in 2015, will have become standalone How will asset services, commanding material managers respond? fees. Funds will have also begun Increased transaction taxes have to purchase tax insurance more meant a move to real-time tax regularly – as some did at the clearance for portfolio-level introduction of FIN 485 – to assure structuring. Up to 2015, tax tax certainty. Due to the added calculations were performed only complexity and specialisation at the end of each tax year. The required, as well as the significant implications were often assessed investment in tax technology, many too late. In 2020 and beyond, in custodians and fund administrators the wake of continued accounting will have either exited the tax disclosures changes which demand reporting business completely or co- that businesses disclose income tax partnered with a tax firm to provide risks, they will be assessed on an this service. Those that will have upfront basis. continued to provide the service will have significantly changed their Every asset purchase and sale will delivery model and invested heavily be tax optimised. In 2015, the in tax process and technology. taxation of securities lending, for instance, penalised fund investors in some countries. Funds were less inclined to change this practice because it enhanced their reported performance through the fees that 5 F IN 48 requires businesses to analyse and disclose income securities lending generated. tax risks, and applies to all entities adhering to US GAAP.
20 PwC Asset Management 2020 and beyond Tailor-made funds MiFID II will have led to an In 2015, a fund explosion of differently priced share with local focus classes. Although costs will have would typically The sales process will be impacted have risen, so will after-tax yields on be based in as much as asset allocation by funds, pleasing clients and helping Luxembourg the shift to after-tax performance funds with client retention. or Dublin and reporting. Investors will put much As managers generate greater would be targeted more pressure on asset managers to awareness of an investor’s tax at a wide range optimise the tax costs and risks of position – through the onboarding funds, so after-tax yield becomes a of European key sales argument. This will impact process and the need to continually investors. assess an investor’s ongoing tax risk the focus of investors’ due diligence profile – they will be able to work on funds. with investors around investment Investors will have gravitated product design, including towards managers who offer philanthropic giving, planning differentiated products reflecting for inheritance taxes and inter- investor-specific tax profiles and generational wealth transfer. So for who can fulfil the requirements of high-net-worth (HNW) and ultra relevant tax regimes. In particular high-net-worth (UNHW) investors, the boundaries between asset managed accounts or funds of one management, wealth management Build, buy or borrow will have continued to be demanded and discretionary private banking By 2020 and beyond, firms will explicitly by pension funds, to ensure that will be blurring. This process will be choose a growth strategy in order to remain their preferential double tax treaty supported by the widespread ban competitive. To develop the chosen business access is not tainted by other of inducements, which will have model, firms will pursue one or more of investors; and by Sovereign wealth encouraged asset managers to build three growth strategies: building, buying or funds, which do not want any out their capability to deal directly borrowing. Builders will grow by building reputational attachment to funds with the end-customer in the out their internal organisations, leveraging that might be found to have retail space. By 2020 and beyond, and developing their existing capabilities tax issues. integrated businesses combining and investment talent. Buyers will expand Tax-tailored products will exist for asset management, wealth their capabilities across asset classes and different clients and geographies. management and private banking strategies by acquiring talent, track record and skills will be able to provide a full In 2015, a fund would typically be scale overnight. Borrowers will partner with tax advisory service to clients. These based in Luxembourg or Dublin and other institutions, including asset managers, businesses will have been built by would be targeted at a wide range wealth managers, private banks and fund-of- building, buying or borrowing of European investors. This would funds, to expand their investment capabilities (see box, opposite). be deemed logical in order for firms and distribution channels. These relationships to take advantage of harmonisation Asset managers, along with the rest include distribution arrangements, joint measures and consolidate their fund of the financial services world, will ventures and sub-advised relationships.6 ranges. However, by the 2020s the have to demonstrate their social increased focus on tax and bespoke utility. Asset management firms, as structures will have reversed the is the case for all corporate citizens, process of standardised comingled will be expected to pay their fair products, and will have led to more share towards the taxes of the customised products. countries in which they operate. Although in the period up to 2015 Furthermore, by 2020 and beyond, asset managers sought to aggregate asset managers and industry bodies investors into fewer fund products in will be regularly engaging with order to manage costs, in the period politicians, the public and the media to 2020 more funds and specific to explain the social usefulness of products will have subsequently an industry which supports savings been required to serve the tax and investment and which will have and regulatory needs of different helped to create the investment investor groups (institutional, products for recovery and growth: private, banks, insurance companies from the financing of small- and and retail). This is particularly true medium-sized enterprises (SMEs) in Europe where the removal of in Europe to the building of vital 6 S ource: Alternative Asset Management 2020 – Fast Forward infrastructure in Africa. to Centre Stage. PwC June 2015. distribution-linked fees under
21 PwC Asset Management 2020 and beyond Thursday Tax branding is at the heart of marketing and reputation 19 MARCH From: Sue Plimmer, Head of Media Relations, Investar Asset Management To: All Staff Date: Thursday 19 March 2020, 09:00 Subject: Tax branding Dear All. Please note that our media pack released today highlights the tax paid by Investar at corporate level and by all our local funds and offices. As you know, this information is important not just for regulatory purposes, but also for assuring clients of our commitment to paying our fair share, to global tax compliance and to their tax needs. It’s a vital part of our By 2020 and distribution strategy, so please feel free to discuss our tax-aware and beyond, asset tax-transparent policies with clients. managers will Regards sponsor education Sue. programmes to ensure that future generations Tax uncertainty will be minimised interest. In Europe, by 2020, understand the through robust controls, strong regulation will have been in force range of investment governance, and risk management for some time, which will require all products open to processes. Accounting standards European asset managers to defer requiring provision for uncertain a significant part of bonuses into them, understand tax positions and continued equity and to cap bonus levels. This risk and the need investor pressure to avoid surprises will necessitate enhanced reporting for savings in will have led to new more robust and functionality within tax teams. a world where tax governance functions asset longevity continues managers firms. As a result, tax will Even in Asia, where pay disparity be viewed as an operational business is not as high and political and to increase. risk in the same way that valuation social pressure on firms is less and cyber came to be viewed as pronounced, fees, compensation and operational business risks years ‘tax branding’ will be a live issue in before. 2020 and beyond. Alignment with tax authorities will be important The asset management firm itself for both asset management firms is not the sole focus of scrutiny. and key staff, and should be a key Founders, senior executives and the consideration before a product highest-paid portfolio managers and launch. Reward and tax will be high analysts will also be the subject of up the political agenda for firms, increased tax authority and media just as they were for banks and attention, with relative pay in the high-profile industrial and retail sector being an area of particular companies in 2015.
22 PwC Asset Management 2020 and beyond How will asset industry, some managers will go PR gets involved with tax beyond the new country-by-country managers respond? report obligations and will instead Asset managers and their clients, keen to Control reports and internal audits report on the ‘total tax’ contribution avoid being tainted by association with of the tax function will be carried out which they and the funds they inefficient and potentially inaccurate tax by many asset managers in 2020. For manage contribute to the local compliance, will have become highly proactive the first time, auditors will review and economies in which they operate. on the issue. Asset management PR efforts in place their stamp of approval on tax For the manager, this will cover 2020 and beyond will focus not just on fund functions. Larger investors will begin corporation tax, VAT, employer and performance, but also on tax and compliance, to rely on these audits and make them employee-related payroll and social with detailed statements released into the part of their overall due diligence on taxes, plus miscellaneous taxes such public domain on tax policies, the amount of asset managers. Then service alpha, as stamp duty, air travel duty and tax paid and where it is paid. which adds value to the performance local taxes. of a fund through the quality of the infrastructure, will be a factor in Indirect alpha investors’ selection of an investment manager. created by the tax team The concept of nominee accounts By 2020 and beyond, technology in investor registers of funds will be will have created the ability to under considerable pressure and differentiate between the alpha many asset managers reject nominee created by the portfolio manager accounts, despite the resulting and the alpha created – indirectly loss of business. Consequently, the – by the capability of the tax number of accounts held by investors team to optimise tax leakage and directly with asset managers will have proactively identify and minimise dramatically increased. tax risk. Funds that demonstrate tax As tax authorities and regulators efficiency at the fund and investor increasingly look to outsource level relative to their peers will responsibility for policing tax and have a distinct advantage when regulatory systems, there will be no fundraising in a highly competitive no way for funds to accept investor environment. capital without assurance that it Rankings of tax infrastructure will is not sourced from the proceeds Alignment with tax still be immature, but will be gaining of tax evasion. This will involve a authorities will be massive change of responsibility traction among investors and fund important for both rating agencies. Some rankings for asset management onboarding will award grades so investors can asset management teams. If clients cannot prove they make direct comparisons, while firms and key staff, are not compliant with their own tax others will be straightforward administration, asset managers will and should be a seals of approval, showing that a refuse to onboard them. This will key consideration have completely changed the skillsets firm has attained a certain level of before a product quality. These rankings and seals required within sales and marketing of approval in 2020 will be widely launch. teams. Tax professionals will be used on investment firms’ websites embedded within local sales and and in their company-wide and fund marketing teams to help address tax literature. onboarding issues, a key component of investor suitability assessments. Asset management Asset managers will sponsor enters the tech age – education programmes to ensure that future generations understand the the tax function must range of investment products open to follow them, understand risk and the need The smart use of technology will be for savings in a world where longevity instrumental for any asset manager’s continues to increase. tax function. We have already As part of demonstrating the social illustrated the high growth in the utility of the asset management number of tax items to be monitored
23 PwC Asset Management 2020 and beyond Friday Tax technology is key to performance and client satisfaction and the requirement to ensure monitoring is in real time. Meeting the challenges will be impossible 20 without a smart IT landscape. There will be a sea-change in how asset managers view the tax MARCH function and the associated costs. While the investment floodgates will not have opened in an unfettered From: Angus Moreland, CEO, Investar Asset Management way, there will be recognition of To: Chris Brown, CIO, Investar Asset Management the importance of a robust tax function, the impact tax issues can Date: Friday 20 March 2020, 13:20 have on the brand and the historic Subject: Fund Performance underinvestment in tax and tax Hi Chris. In your report to me this month, you said performance across technology, especially in the area of our fund range was up. reporting to investors. There will be a greater emphasis on the better use This is not reflected in the latest fund ratings. What’s going on? of technology to increase efficiency, Regards tighten controls around compliance Angus. procedures, avoid regulatory penalties and retain documents. From: Chris Brown Tax technology will have increased To: Angus Moreland the quality, timeliness, efficiency Date: Friday 20 March 2020, 14:00 and transparency of tax reporting. In addition, the better use of Subject: Fund Performance information and technology will Angus, our fall in the ratings reflects the new ratings criteria which have become a key value-add for incorporate the alpha created by our fund managers, our funds’ tax many asset managers and will leakage and an assessment of our ability to identify and address future be driving how they serve their tax exposures through our technology. The ratings guys just don’t think investors. our tax technology is up to scratch to successfully manage and report on tax risks and leakage compared to our competitors. Technology in 2020 will be critical for the delivery of operational Regards efficiency and for minimising the Chris. costs of the ever-increasing tax compliance burden with asset managers. Technology for tax will enable investment firms to make timely tax-informed investment Growth of flexible modelling tools decisions and to provide investors The pace of BEPS-related changes in the period from 2015 to 2020 will with the transparency and reporting mean that expected tax outcomes at the investment stage will often that they need. not be the same as that realised over the life of holding the investment. Real-time clearance of tax positions Private equity, real estate, infrastructure and debt fund managers will with tax authorities will become an have had to develop tax-flexible portfolio modelling tools to be able to essential risk management measure, manage and assess potential tax impacts of new Controlled Foreign especially for illiquid asset classes, Corporation (CFC), anti-hybrid, anti-avoidance regimes, transfer pricing and interest deductibility rules. Being seen to be on top of the changing where sophisticated investors tax impact for illiquid portfolios will be key for alternative asset managers. routinely undertake due diligence on the tax portfolio modelling capabilities of the investment teams at asset managers.
24 PwC Asset Management 2020 and beyond How will asset systems or their tax data hub. Using this information, most global tax managers respond? preparatory compliance and reporting By 2020 and beyond, fund activities, including data collection organisations have taken steps to and reconciliations, will be performed upgrade their technology, with within the company’s shared service solutions for compliance a given, centre or co-sourced with a third and new value coming from strategic party. As tasks and deliverables will be planning, data analytics and investor handled by geographically distributed reporting. The historically heavy resources, tax functions will use Data security will be high on reliance on spreadsheets will no real-time collaboration tools to the agenda of tax functions longer be acceptable. Organisations automate their workflow, document due to concerns over will decide to either build database management, calendaring and confidential information technology or buy into an outsourced internal controls. Data security will be vendor solution. This shift will have high on the agenda of tax functions being inadvertently released or forced many fund administrators to due to concerns over confidential shared publicly. maintain their focus on books and information being inadvertently record calculations and to either exit released or shared publicly. the tax administration business, or team up with a tax firm. Conversely, Tax-enabled to support this demand, a number of advisers to the industry will make databases material investments in technology The overwhelming trend will be to in order to meet compliance and move the tax process to a technology- reporting practices. enabled environment that connects existing technologies, including In addition, fund tax functions investor, legal entity management and will receive more information in financial systems, to tax-sensitised a tax-ready format from either databases which are connected to their enterprise-wide financial a central data hub (see Figure 2). Figure 2: The tax data hub: where technology and tax intersect Tax Finance Third parties Tax operations management Process management Document and workflow management Data collection Calendar Tax applications Tax data mappings Enterprise Tax data hub Key systems Tax deliverables sensitisation Tax data management Business intelligence and analytics
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