ASSET MANAGEMENT 2020 AND BEYOND TRANSFORMING YOUR BUSINESS FOR A NEW GLOBAL TAX WORLD - PWC

 
ASSET MANAGEMENT 2020 AND BEYOND TRANSFORMING YOUR BUSINESS FOR A NEW GLOBAL TAX WORLD - PWC
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
ASSET MANAGEMENT 2020 AND BEYOND TRANSFORMING YOUR BUSINESS FOR A NEW GLOBAL TAX WORLD - PWC
2 PwC Asset Management 2020 and beyond
ASSET MANAGEMENT 2020 AND BEYOND TRANSFORMING YOUR BUSINESS FOR A NEW GLOBAL TAX WORLD - PWC
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
ASSET MANAGEMENT 2020 AND BEYOND TRANSFORMING YOUR BUSINESS FOR A NEW GLOBAL TAX WORLD - PWC
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?
ASSET MANAGEMENT 2020 AND BEYOND TRANSFORMING YOUR BUSINESS FOR A NEW GLOBAL TAX WORLD - PWC
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.
ASSET MANAGEMENT 2020 AND BEYOND TRANSFORMING YOUR BUSINESS FOR A NEW GLOBAL TAX WORLD - PWC
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.
ASSET MANAGEMENT 2020 AND BEYOND TRANSFORMING YOUR BUSINESS FOR A NEW GLOBAL TAX WORLD - PWC
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.
ASSET MANAGEMENT 2020 AND BEYOND TRANSFORMING YOUR BUSINESS FOR A NEW GLOBAL TAX WORLD - PWC
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.
ASSET MANAGEMENT 2020 AND BEYOND TRANSFORMING YOUR BUSINESS FOR A NEW GLOBAL TAX WORLD - PWC
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                                         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
ASSET MANAGEMENT 2020 AND BEYOND TRANSFORMING YOUR BUSINESS FOR A NEW GLOBAL TAX WORLD - PWC
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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