ASSET MANAGEMENT 2020 AND BEYOND TRANSFORMING YOUR BUSINESS FOR A NEW GLOBAL TAX WORLD - PWC
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By 2020, how an asset management firm deals with tax risk will be viewed as a competitive advantage or
disadvantage. Investors will expect robust and efficient tax infrastructure and will have minimal tolerance
of tax uncertainty or tax adjustments. As a result, tax will be a key operational and business activity,
requiring specialist resources, a new approach and integration into front, back and middle office activities.
So what will be the drivers for this new global tax world? And how will investment firms transform to meet
these challenges as the industry becomes an even more significant part of the financial services sector?
Asset Management 2020
and beyond
Transforming your business
for a new global tax world
Report
www.pwc.com/amtax2020
2 PwC Asset Management 2020 and beyond
3 PwC Asset Management 2020 and beyond
Contents
Introduction 4
Executive summary 8
The tax game changers 12
The tax function in 2020 and beyond 26
Contacts 30
4 PwC Asset Management 2020 and beyond Introduction By 2020, how an asset management firm deals with tax risk will be viewed as a competitive advantage or disadvantage. Investors will expect robust and efficient tax infrastructure and will have minimal tolerance of tax uncertainty or tax adjustments. As a result, tax will be a key operational and business activity, requiring specialist resources, a new approach and integration into front, back and middle office activities. So what will be the drivers for this new global tax world? And how will investment firms transform to meet these challenges as the industry becomes an even more significant part of the financial services sector?
5 PwC Asset Management 2020 and beyond
Figure 1: Global Assets under management (AuM) to reach above USD100trn by 2020
In 2020, investors’ expectations will
include a robust and efficient tax
infrastructure. And zero tolerance of
= Compound Annual Growth Rate (CAGR) AuM in USD trn
= Growth tax uncertainty or tax adjustments.
120
In addition, as many countries
struggle with deficit reduction and
the need to invest, the whole of the
102.3
100 financial services industry, including
12.5% 13.6 asset management, will be expected
1.4%
16.8% to play its part in policing the global
80 financial system and ensuring that
71.9 tax authorities have the correct tax
63.9 7.9
47.5
information on taxpayers.
59.4
60 6.4
5.3 Total transparency of investor
33.7 residency and identity will be the
40 37.3 28.8
30.4 norm. Asset managers will have to
2.5 demonstrate the highest standards
18.7
of anti-money laundering (AML)
20 41.2 and know-your-customer (KYC)
25.4 27.0 30.3 responsibilities, plus reporting to
16.1 tax authorities and to taxpayers on
0 the returns flowing from their funds.
2004 2007 2012 2013 2020 Politicians, regulators, the media and
the public will all expect nothing less.
n Mutual funds n Mandates n Alternative investments
Source: PwC analysis
However, tax should not be
Note: We have revised our estimates for Alternative investments in 2020 upwards to USD13.6trn given
considered solely as a risk to manage
strong market performance in 2013 and H1 2014. – it is also an opportunity. Managing
tax risks and leakages well at all levels
(investments, funds and investors)
While the asset management can distinguish asset managers
industry will grow rapidly in the from their peers. While managers
coming years (see Figure 1), growth have traditionally been tasked with
for individual asset management generating performance ‘alpha’ for
Tax should not be considered firms will not be automatic. The their investors, ‘service alpha’ in
solely as a risk to manage – it is risks will change, as the tax and 2020 will be a key differentiator.
also an opportunity. regulatory environments continue to The concept of service alpha implies
develop. Tax, in particular, will be a an entirely new challenge for asset
key operational and business activity, managers: how to communicate with
requiring specialist resources, a investors about tax matters. Service
new approach, and integration into alpha will require the asset manager
front and middle office activities – to first explain it and then help
including data reporting, product investors recognise its benefits.
development, distribution and brand
strategy. Tax and reputation will To help asset managers plan for the
be inseparable concepts. Taxes will future, in the last section of this
now be viewed as an operational paper PwC has set out a vision of
risk, joining the ranks of other key what the tax landscape should look
risks which senior management like in 2020 to adequately address
takes a keen interest in, and one that the new tax environment.
needs a strategically planned risk
The issues addressed by the CEO
management programme integrated
of our fictional firm, Investar
into all aspects of their business
Asset Management1 (on page 6
operations. How a firm deals with tax
and throughout our paper) give
risk will be viewed as a competitive
an indication of the challenges
advantage or disadvantage.
1 N
one of the information or facts about the fictional investment
the industry faces in putting the
firm, Investar Asset Management, are sourced from PwC management of tax risk at the heart
clients or PwC client engagements. The examples have been
developed solely to illustrate key points in this paper.
of all strategic business change.
6 PwC Asset Management 2020 and beyond
Sunday
22 MARCH
From: Angus Moreland, CEO, Investar Asset Management
To: All department heads
CC: Charlene Ho, Head of Tax, Investar Asset Management
Date: Sunday 22 March 2020 15.00
Subject: Preparing for the week ahead
Dear all.
Apologies for emailing on a Sunday night, but we’ve got a big week
ahead. As we strive to be a cutting-edge global asset management
business, we are moving forward with a raft of new products, new
distribution opportunities, changes in performance reporting and an
overhaul of our global technology platform. Each of these developments
has tax implications, so please run all initiatives past Charlene before
you action them.
Events during the past week illustrate perfectly why this is critical.
Two new product offerings to pension funds were launched after almost
a year of intensive work with great success. Increased certainty on the
funds’ withholding and capital gains tax risks and leakage has attracted
much interest and commitments. Great stuff!
Unfortunately, Charlene had to spend a significant amount of time
to get one of our fund directors out of serious trouble with some tax
administrations in Asia. Tax compliance for your products is not only a
matter for the specialists at headquarters; the situation in Asia illustrates
that you can run into tax trouble personally if your products fail to
comply with local tax rules.
I would also like to emphasise that the use of the Travel Tracker system
is an obligation for everyone – uncoordinated and uncontrolled travelling
around the world can put you and our company at risk.
If we all work together, we can capitalise on this new tax environment,
and use our superior infrastructure as a competitive advantage.
Regards
Angus.
7 PwC Asset Management 2020 and beyond
By 2020 tax and
reputation will
be inseparable
concepts. Taxes
will be viewed as
an operational
risk, joining the
ranks of other key
risks which senior
management takes
a keen interest in,
and one that needs
a strategically
planned risk
management
programme
integrated into
all aspects of
their business
operations.
8 PwC Asset Management 2020 and beyond Executive summary Asset managers adapt to new role at centre stage As banks and insurers retreat from many investment business lines, asset managers will be more influential across a range of products by 2020. A new breed of global mega-managers will attract huge focus from tax authorities, which will have specialist teams with the capabilities to carry out much more detailed enquiries than in the past and the powers to request real-time investor-related information. Asset managers will respond by dispersing their strategic tax resources throughout their business operations to give front, middle and back office staff access to real-time expertise. The in-house tax team will have developed to deal with perpetual audits and to engage with tax authorities on a frequent basis to influence policy and help guide the implementation of tax rules. Transparency: firms leave no stone unturned Tax transparency will be a fact of life in financial markets by 2020 as the Common Reporting Standard (CRS) and global tax reporting become reality. Post the examination by the Organisation for Economic Co- operation and Development (OECD) of the basis of taxation for a permanent establishment, many tax authorities will focus on the economic nexus of an asset management contract and the ultimate investor, rather than just the physical nexus of the asset manager, its property, and its staff, in determining the location of taxation of the asset manager’s business. Through political pressure, investor demand and regulatory change, many offshore financial centre products will have moved onshore into a range of new registered products as jurisdictions and regional blocks will continue to compete to offer attractive investment vehicles for cross-border and domestic investment. Many of these onshore vehicles will themselves be tax exempt, obtain double tax treaty access and suffer no withholding tax on distributions or redemptions as countries will continue to compete to attract vital inward investment. New specialist platform investment products like securitisation regimes and real estate investment trust (REIT) funds will be created as part of this competitive landscape. All of which will bring new complexity to product design and fund structuring.
9 PwC Asset Management 2020 and beyond
Portfolio taxation a core control objective. As asset
managers’ portfolios become larger,
will become a key internal audits of the tax function
battleground will be carried out to evidence
By the early 2020s, the OECD their own standard of tax risk
Base Erosion and Profit Shifting management.
(BEPS) action on hybrid
Asset managers and their clients,
instruments, interest deductibility
keen to avoid being tainted
and treaty access will have led
by association with inefficient
to an environment where some
and potentially inaccurate tax
degree of tax leakage is a fact of
compliance, will have become
life for many funds. Performance
highly proactive on the issue.
evaluation and attribution will focus
Asset management PR efforts in
predominantly on post-tax yields.
the 2020s will focus not just on
Prospective investors will ask about
fund performance, but on tax
tax disclosures even taking their
and compliance, with detailed
individual tax charge into account
statements released into the
before they consider investing in
public domain on tax policies,
a fund. They will be seeking more
remuneration and reward
certainty with respect to tax issues.
structures, the amount of tax paid
With more transaction taxes, local
and where it is paid.
withholding and self-assessment
capital gains regimes, every asset
purchase and sale will have to be
Tax technology
carefully examined from a tax risk will be key to
and reporting perspective, requiring performance and
asset managers to have real-time
access to data on global tax regimes.
client satisfaction
When launching new products, asset By 2020 and beyond, the
managers will routinely carry out overwhelming trend will be to move
full assessments to make products the tax process to a technology-
competitive in all channels. Investors enabled environment that
will gravitate towards managers that connects existing technologies to
offer products reflecting investor- tax-sensitised databases that are
specific tax profiles. By 2020, a connected via a centralised tax data
number of integrated businesses hub. Technology for tax will enable
combining asset management, investment firms to make timely tax-
wealth management and private informed investment decisions and
banking activities will be able to provide investors and tax authorities
provide a full tax advisory service to with the transparency and reporting
clients. that they demand. It will also enable
tax uncertainty minimisation.
Tax branding will Technology will also create the
ability to differentiate between
be at the heart of the alpha created by the portfolio
marketing and manager and the alpha created
reputation (indirectly) by the capability of the
tax team to manage tax leakage and
By 2020 and beyond, tax will be
tax risk.
just another operational business
risk in the same way that valuation Funds that demonstrate tax
and regulatory reporting came to be efficiency at the fund level relative
viewed as operational business risks to their peers will create a distinct
years before. Control reports over advantage when fundraising in a
outsourced services by custodians, highly competitive environment.
administrators and transfer agents Technology tools will also enable
will routinely include tax risk workflow management, allowing
management and governance as fund managers to monitor tax
10 PwC Asset Management 2020 and beyond
services internally and at their
service providers in real time.
Technology will not only be close
to the heart of asset managers –
the tax authorities will have made
significant investments by 2020 too.
As a result, the age of selected paper-
based reporting by asset managers
to the tax authorities will be over –
perhaps even annual reporting will
Tax authorities will request be over. Tax authorities will request
whatever information they whatever information they want
want from asset managers from asset managers through having
through having direct access direct access to their IT systems
rather than asset managers pushing
to their IT systems rather than
data to them.
asset managers pushing data
to them. The tax function
of the future
As a result of these considerable
changes to the tax environment, the
tax function in 2020 and beyond will
be significantly different from what
we know today. The tax function
will play a key role in the day-to-
day management of operational
risks and will no longer only deliver
compliance and make tax technical
assessments. The assessment of
complex data and its implication in
business and product development
decisions will be the new normal.
Consequently, the profile and
composition of the tax function will
have changed. It will be critical for
asset managers to decide to what
extent they want to rely on internal
sources. The increased complexity
of the tax function will require that
it spends significant periods of time
with operational activities in order
to be able to act as a trusted adviser
internally and to key executives.
Asset managers will need to ensure
that highly skilled tax people
are brought into the heart of the
business. The tone needs to be set at
the top. The tax function is critical
to the entire operation and senior
management will need to make
sure that this is well understood
throughout the ranks.11 PwC Asset Management 2020 and beyond
12 PwC Asset Management 2020 and beyond The tax game changers The landscape for asset managers in the coming years is set for radical change. This change was set out in a paper PwC published in early 2014 – Asset Management 2020: A Brave New World2 – which predicted the global trends impacting the industry in the coming years and identified their consequences. These trends included a huge rise in assets and fundamental changes in the investor base, while cost pressures rose. Significantly for the tax function, there would be a step-change increase in transparency, changing the perception of tax and making it a key operational issue. So what do these predicted shifts mean for the evolution of tax processes that will allow firms to survive and remain competitive in the years to 2020 and beyond? To find out, let’s take a look at a week in the life of Investar Asset Management. It’s Monday 16 March 2020…. 2 Asset Management 2020: A Brave New World – PwC, 2014.
13 PwC Asset Management 2020 and beyond
Monday
Asset managers adapt to new role at centre stage
16 MARCH
From: Charlene Ho, Head of Tax, Investar Asset Management
To: All department heads
Date: Monday 16 March 2020 07:30
Subject: Analysis of tax-related data – your help required
Dear all.
Please ensure that you assist the embedded tax specialists in each of
your teams in the analysis of all tax-related data by the end of the week
so that our 2019/2020 tax report is ready for audit at the end of next
month. Remember that any omissions or inaccuracies may result in
considerable financial and/or criminal penalties and the company being
placed on the tax authorities’ ‘non-compliant’ lists. In addition, investors
are looking for tax foot faults as they consider where to invest.
I am particularly interested in seeing how we have managed the tax risks
in our new Asian peer-to-peer lending platform.
Regards
Charlene.
By 2020, non-bank finance will no As a result, by 2020 and beyond
longer be in the shadows. Under economies of scale will become
pressure from regulators and from paramount and a new breed of
demands on regulatory capital, mega-manager will have emerged,
banks and insurers will have with a footprint in all geographies
retreated to their core businesses. and distribution channels. Some
Asset managers will have become of these mega-managers will
providers of a far broader set of attract a great deal of focus from
products than in 2015. They will be policymakers, regulators and tax
dominant across a range of products authorities.
and activities, including:
Equally, many new non-finance
• Pension and lifetime savings boutiques will have emerged as
products specialists in the new non-bank
finance areas. The complexity
• corporate financing, such as
of these strategies will attract
direct lending, trade receivables
attention from tax authorities as
and invoice factoring
they look to stay abreast of industry
• distressed assets and developments.
commodities
The growing size and importance
• peer to-peer lending and crowd- of the asset management industry
funding means that tax authorities will be
• infrastructure funding interested in every aspect of the
asset management industry and
• money market strategies.
its participants. Specialist teams
at many tax authorities will have
the capabilities to carry out much14 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 under21 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 monitored23 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
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