Funds industry experts gathered in São Paulo and Rio de Janeiro to discuss the pain points that local asset managers in Brazil are suffering. Jon Roney, Director of Fiduciary Services at Intertrust, rounds up his observations.
The elephant in the room? The UBO issue.
It was clear from the start that the UBO issue - in essence, the Brazilian IRS's requirement to look through structures for Brazilian UBOs - was top of mind. This initiative is driven by the concern that taxable gains are not being properly reported.
I can imagine critical eyebrows arching at this point. At least initially, this doesn't appear to be a governance drive similar to Cayman's regulatory environment experience, but it would be impossible to write this article without devoting a few column inches accordingly; this topic is as hot as a Brazilian summer. At this point I'd like to remind readers that the Cayman funds industry is founded upon two basic tax principles: tax neutrality and tax transparency.
Tax neutrality is the concept whereby a collective investment vehicle is established in a tax neutral jurisdiction, such as the Cayman Islands, allowing global investors to aggregate capital without the need for complex and costly tax advice and structuring considerations. In terms of transparency, Cayman is a model 1 jurisdiction for the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS). Accordingly, the directors of Cayman funds are responsible for reporting taxation information on each investor to the Cayman Islands Tax Information Authority (CIMA) who in turn report the investors' taxation information to the relevant countries' tax authorities. The important consideration here is that the taxable gains are reported to the jurisdiction where the investor is tax resident.
The disappointing point from a Cayman perspective? The introduction of CRS reporting was specifically established to address this issue. And as Cayman is on the Brazilian blacklist, the Brazilian IRS is imposing a different standard in Cayman funds than those based in Canada or Delaware.
Somewhat unsurprisingly, for an industry renowned for innovation, managers are looking at addressing the issue in a number of novel ways:
Investor look through: Identifying the tax residency of all the investors in your fund, which can be tricky. Especially where fund of funds or pension funds are the investors and the IRS requires you to look up and through to the ultimate beneficial...