The first quarter of 2021 has been one of the busiest quarters I can recall. The work has been varied but a significant portion focused on private equity and establishing investment fund platforms for real estate and debt investments.
If you could make one change to tax, what would it be?
I would like to see some universal recognition for the tax treatment of investment fund vehicles. For example, whilst we now seem to have reached a general consensus on the application of the anti-hybridity rules to many investment fund structure, at least from a UK fund context (and the changes to be introduced in the UK by Finance Bill 2021 are certainly a helpful step in the right direction), we nevertheless still encounter unexpected issues from time to time when dealing with overseas investors or structures because of the difference in the classification of the fund or other entities in the fund structure.
What do you know now that you wish you’d known at the start of your career?
That tax professionals do not simply focus on tax: they need to know and understand every aspect of any transaction or structure on which they are advising. This not only means that we give more precise and focused technical advice on transactions and structures, but ultimately we can strive to give advice that is commercially helpful.
Are there any new rules that are causing a particular problem?
Whilst I appreciate that the anti-hybridity rules are not necessarily ‘new’ rules, we continue to encounter issues with the implementation of the rules as introduced by the EU Anti-Tax Avoidance Directives (ATAD) I and II in the European fund structures on which we are involved. Of particular concern is the way in which certain EU member states are looking to introduce (or have introduced) legislation to implement the reverse hybridity rule as part of ATAD II. There are many existing fund structures with investors likely to view funds which are transparent in the jurisdiction in which they are established as opaque in the investor jurisdiction (a reverse hybrid). Where the carve out for ‘collective investment schemes’ from the reverse hybridity rule is not on point, we are having to have conversations with investors to determine if there will be any adverse consequences, and if so, what steps need to be taken to deal with any such consequences.
Has a recent tax case caught your eye?
Blackrock Holdco 5 LLC [2020] UKFTT 443 (TC), where HMRC sought to refuse deductions on the intragroup loans under the transfer pricing and unallowable purpose rules. The First-tier Tribunal allowed the taxpayer’s appeal, finding: (i) on the transfer pricing issue, that independent parties would have entered into the loan agreements on the terms agreed, with the addition of relevant covenants; and (ii) on the unallowable purpose point, that the taxpayer had a commercial purpose for the financing.
This case reinforces certain practical matters when looking at the financing arrangements for transactions: namely, ensuring that there is both proper consideration of the transactions by directors and supporting contemporaneous documentation. The case also shows the importance of obtaining at the outset expert input into transfer pricing the terms of any intragroup financing arrangement.
Is there anything we should we be looking out for later this year?
The outcome of the review into the UK funds regime, which combined with the asset holding company consultation shows the UK is looking to take a step in the right direction when it comes to investment fund structures. We should also keep close attention to the development of the global minimum corporate income tax rate now that the US is onboard with the initiative.
And finally, you might not know this about me but...
I used to DJ and still do, albeit to make my mixtapes for myself – and yes, you read that right, I’m still using tapes!
The first quarter of 2021 has been one of the busiest quarters I can recall. The work has been varied but a significant portion focused on private equity and establishing investment fund platforms for real estate and debt investments.
If you could make one change to tax, what would it be?
I would like to see some universal recognition for the tax treatment of investment fund vehicles. For example, whilst we now seem to have reached a general consensus on the application of the anti-hybridity rules to many investment fund structure, at least from a UK fund context (and the changes to be introduced in the UK by Finance Bill 2021 are certainly a helpful step in the right direction), we nevertheless still encounter unexpected issues from time to time when dealing with overseas investors or structures because of the difference in the classification of the fund or other entities in the fund structure.
What do you know now that you wish you’d known at the start of your career?
That tax professionals do not simply focus on tax: they need to know and understand every aspect of any transaction or structure on which they are advising. This not only means that we give more precise and focused technical advice on transactions and structures, but ultimately we can strive to give advice that is commercially helpful.
Are there any new rules that are causing a particular problem?
Whilst I appreciate that the anti-hybridity rules are not necessarily ‘new’ rules, we continue to encounter issues with the implementation of the rules as introduced by the EU Anti-Tax Avoidance Directives (ATAD) I and II in the European fund structures on which we are involved. Of particular concern is the way in which certain EU member states are looking to introduce (or have introduced) legislation to implement the reverse hybridity rule as part of ATAD II. There are many existing fund structures with investors likely to view funds which are transparent in the jurisdiction in which they are established as opaque in the investor jurisdiction (a reverse hybrid). Where the carve out for ‘collective investment schemes’ from the reverse hybridity rule is not on point, we are having to have conversations with investors to determine if there will be any adverse consequences, and if so, what steps need to be taken to deal with any such consequences.
Has a recent tax case caught your eye?
Blackrock Holdco 5 LLC [2020] UKFTT 443 (TC), where HMRC sought to refuse deductions on the intragroup loans under the transfer pricing and unallowable purpose rules. The First-tier Tribunal allowed the taxpayer’s appeal, finding: (i) on the transfer pricing issue, that independent parties would have entered into the loan agreements on the terms agreed, with the addition of relevant covenants; and (ii) on the unallowable purpose point, that the taxpayer had a commercial purpose for the financing.
This case reinforces certain practical matters when looking at the financing arrangements for transactions: namely, ensuring that there is both proper consideration of the transactions by directors and supporting contemporaneous documentation. The case also shows the importance of obtaining at the outset expert input into transfer pricing the terms of any intragroup financing arrangement.
Is there anything we should we be looking out for later this year?
The outcome of the review into the UK funds regime, which combined with the asset holding company consultation shows the UK is looking to take a step in the right direction when it comes to investment fund structures. We should also keep close attention to the development of the global minimum corporate income tax rate now that the US is onboard with the initiative.
And finally, you might not know this about me but...
I used to DJ and still do, albeit to make my mixtapes for myself – and yes, you read that right, I’m still using tapes!
