Industry Comment

Substance - Keep it real

Tuesday, September 25, 2012

You can never have enough tax or regulatory substance or so the argument goes. This, however, is to misunderstand to the point. To more effectively mitigate risk, promoters should focus on constructing something real with clear commercial logic. This will not only save a lot of time and money, but may also avoid accusations of artificiality.

It is generally accepted that businesses have the right to arrange their affairs in a way that makes most commercial sense.

Given the political implications though of establishing foreign vehicles that benefit from better operating environments elsewhere, authorities have sought to minimise any ‘loss’ of business by enacting special anti-abuse provisions and adopting restrictive practices when interpreting domestic laws. These anti-abuse provisions and practices often require that the foreign vehicle demonstrate real substance (as opposed to being simple postal addresses) in order to be recognised as genuine.

Precise substance requirements depend on whether they are regulatory or fiscal in nature (and if fiscal, whether they relate to direct or indirect taxes), but they all relate to demonstrating the existence of a real business presence in a foreign country. A real business presence does not consist though of simply insourcing the same-old administrative processes (as this adds nothing save cost), but rather in creating a real commercial enterprise. The enterprise itself should be value adding by nature and carried-out by those with appropriate experience, authority and discretion to do so. It should not be the disguised proxy of the promoter.

Unfortunately however, ‘demonstrating’ substance is often interpreted in a tick-the-box manner that lends towards artificiality. This is likely to be encouraged abroad, if anything, as it is used to promote local employment and service provision. Paradoxically, this combination of factors can result in promoters constructing exaggerated and inefficient business models that by nature undermine the existence of any credible commercial enterprise in the relevant jurisdiction. Taken too far, this approach could be construed as misrepresentative in an increasingly sensitive environment.

A properly considered and balanced approach should always be taken therefore to establishing foreign vehicles and a tick-the-box approach to substance should be avoided. These vehicles should carry on business independently in a way that is complimentary, efficient and value adding and does not misrepresent the commercial truth.

The Aztec Group has developed an operating platform to facilitate business in each jurisdiction in an efficient, scaleable and accountable manner. This platform is totally flexible and includes all the components necessary to facilitate investment enabling our clients to focus on those core value adding processes that they are measured on. It is the valid performance of these processes that determines real substance. Read more...

The depository artifice

Monday, February 18, 2013

The AIFM Directive changes the nature of fund administration much less than many are suggesting. This is because many private equity funds already operate within an IOSCO compliant framework without seemingly knowing it.


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Wait is over, Final Regulations are in

Monday, February 18, 2013

On 17 January 2013, the US Treasury issued final regulations under FATCA, building on intergovernmental agreements, phasing in due diligence and clarifying compliance and verification obligations of FFIs.

Along with the new regulations the Treasury Department also announced that Norway had joined the list of the countries as a country that signed or initialled model Intergovernmental Agreements for FATCA.

As per the final regulations a FATCA Registration Portal will be created, and t it will be the primary means for financial institutions to interact with the IRS.It should be accessible by July 15, 2013.

The IRS will begin issuing a Global Intermediary Identification Number (GIIN) to participating FFIs and deemed-compliant FFIs by October 15, 2013. FFIs will then use their GIINs to satisfy reporting requirements and to identify their status to withholding agents.

The final regulations align the effective date for FFI agreements with the date set forth in the IGAs.

The final regulations delivered the long-awaited substantive requirements for FFI agreements.It expands the grandfather rules, specifically the exemption from withholding of all obligations outstanding on January 1, 2014. The final regulations also expanded the categories of deemed compliant FFIs.These also clarify the types of financial accounts subject to FATCA and the persons that qualify as account holders.

For more details please refer to:

Final regulations 

Treasury and IRS press release 

PwC briefing

Deloitte briefing  Read more...

Don't jump too soon!

Monday, February 18, 2013

Dodd who?

Monday, February 18, 2013

Remember the Dodd Frank Act? The annual reporting deadline is rapidly approaching for registered exempt reporting advisers (“ERAs”) whose financial year ended on the 31 December and ERAs would do well to reconsider their compliance with this legislation carefully.

On 23 January 2013 in a speech delivered to the Private Equity International Conference in New York, Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit warned the private equity industry of increasing scrutiny over their operations.

This warning it seems, is driven by the SEC’s view that the private equity industry has a number of characteristics which means that it lacks transparency and therefore is open to abusive/fraudulent practices.

The warning came only a few months after the SEC issued a letter identifying five high risk areas which they would seek to focus on when conducting ‘presence exams’:

(a) marketing;

(b) portfolio management;

(c) conflicts of interest;

(d) safety of client assets; and

(e) valuation.

Although ERAs are not subject to the compliance rule set out in Rule 206(4)-7 under the Advisers Act, which would require them to adopt a comprehensive compliance program, ERA’s are subject to the anti-fraud provisions of the Advisers Act and as such should adopt reasonable compliance and oversight procedures to guard against a breach of the ERA’s fiduciary duty to clients and the relevant anti-fraud provisions.

It is still unclear to what extent the SEC will be prepared to conduct no fault presence visits for non US ERA’s, but notwithstanding this uncertainty, when dealing with any annual updating filings required under the Dodd Frank legislation, ERAs should take the opportunity to reconsider their compliance procedures to ensure that they adequately cover the areas identified above.

The deadline for filing annual updates for those ERAs whose fiscal year ended on 31 December is 31 March 2013.

Read more Sidley Austin LLP/ Read more...

New tax measures in Luxembourg

Monday, February 18, 2013