OECD: tax avoidance rules must avoid "collateral damage" on fund management industry

In a background document published alongside its first seven proposals last week, the Paris-based body said that its tax treaty anti-abuse provisions required "careful consideration to make sure that no collateral damage emerges" that could unfairly impact on funds. The concession came after trade body the Investment Management Association (IMA) warned that end investors could end up being taxed twice on dividends from shares.

Raffaele Russo, head of the OECD's work on base erosion and profit shifting (BEPS), told Financial News that a consultation on a possible exemption for the fund management industry would take place "in the near future".

"Effectively we carved out, for the time being, collective investment vehicles," he told the website. "The rules are meant to curb abusive practices but should not affect situations where there is no such abuse which may well be the case for funds."

The OECD published the first set of "deliverables" as part of its project to create a single set of international tax rules and prevent multinational companies from artificially shifting profits to low-tax jurisdictions last week. The proposals deal with seven of the 15 actions identified by the OECD as part of its BEPS project last year. It intends to report on a further eight possible actions in the first half of 2015, before presenting its final rules to the G20 finance ministers before the end of the year.

Part of the OECD's proposals target 'hybrid mismatches', which allow companies to claim tax relief for the same expense in two jurisdictions or which allow a company to claim tax relief in one jurisdiction without a corresponding tax charge in another. Last week's proposals would prevent companies from entering into these arrangements without reporting a corresponding taxable profit, and prevent them from using the reliefs set out in various double taxation agreements if their principal reason for doing so was to avoid tax.

In an early submission to the OECD, the IMA highlighted the possibility that limiting the use of tax treaties could effectively result in those investors that pay income tax on dividends being taxed twice. This would occur if the fund through which the share had been acquired had already paid tax on that dividend. The OECD intends to prevent companies from claiming tax treaty benefits in "inappropriate circumstances". However, its report recognises that this work may "reveal a need for improvements of existing policies in order not to hamper investments, trade and economic growth".

"For example, policy considerations will be addressed to make sure that these rules do not unduly impact collective investment vehicles (CIVs) and non-CIVs funds in cases where countries do not intend to deprive them of treaty benefits," the OECD said in its report. "Further work on these model treaty provisions and relevant commentary and with respect to the policy considerations relevant to treaty entitlement of CIVs and non-CIVs funds will be finalised by September 2015."