Transparency is the common thread underpinning the current significant global tax changes and lack of transparency, rightly or wrongly, is perceived as an indicator of tax evasion. The Irish funds industry, as a facilitator of global collective investment funds, is a key player in ensuring Ireland maintains its reputation as a globally tax transparent jurisdiction. Embracing transparency and ensuring compliance presents a real opportunity for our industry and for participants to differentiate themselves.
Ireland’s tax system is recognised as a global leader on transparency. The OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes gave Ireland the highest possible transparency rating following a second peer review that looked at Ireland’s compliance with international standards for the exchange of information between tax authorities.
Consider the following questions – what happens when a fund reports details to Revenue in connection with an investor and those details are passed on to the tax investor’s home jurisdiction and those details do not match that investor’s tax return? Most likely that investor will become subject to closer scrutiny from their home tax authority. Happy investor? Real business risk? Tax evasion? Inaccurate reporting? Lack of governance over tax data?
Exchange of information between tax authorities is already happening. The correct management of tax is increasingly linked to reputation. Companies and entities are asking if their brand and reputation is protected? The benefit of Directors becoming savvier in connection with tax risk being a real business risk is twofold. Organisations ensuring compliance, as well as protecting reputation, will be more attractive to tax aware investors. Increasingly investors only want to work with partners that are doing the right thing, and being seen to do the right thing, with regard to taxation, and want to avoid being tainted by association with inefficient and potentially inaccurate tax reporting. Getting to grips with transparency requirements allows organisations to go to clients with an affirmative view that they are fully engaged with, and highly proactive on, the issue of tax. Investors will have no tolerance for organisations that can’t deal with the demands of taxation authorities.
Getting the balance right between over managing and not managing tax risk is a challenge facing many Boards.
Effective implementation and governance of transparency is required to ensure we maintain our reputation as leading jurisdiction for facilitating global collective investment funds.
While the fund is ultimately responsible for its tax obligations, management of tax is generally outsourced to a third party provider as approved by the fund’s Directors. Directors need to ensure they are satisfied that the business risk associated with tax is identified and managed. In addition to legislative requirements how transparent is tax governance? As investors become more engaged with tax they will demand to understand the impact of tax on their investment portfolio. Tax uncertainties or tax adjustments will drive business towards providers that offer tax transparency as well as certainty and products that reflect investors’ tax profiles.
Quite simply the key question from a tax perspective should be, does your organisation have an up to date tax governance model in place? The response will indicate whether tax risk is being treated as real business risk. Best in class organisations will be able to produce a tax policy, a governance model, an operating manual that includes the obligations of the fund, mapped to responsible parties backed up by current service level agreements that clearly set out respective roles and responsibilities, a compliance calendar, risk assessment for new products and escalation procedures etc.
The current market response is highly fragmented. Many current fund structures were not set up with transparency as a consideration. We routinely ask clients for their tax policy and governance framework. The spectrum of responses is often telling. However it is encouraging to see more and more clients consider how this assurance can be achieved in practice and how this assurance can be provided to the various stakeholders – investors, boards of directors, tax authorities etc.
How your organisation chooses to handle tax risks should be viewed as an opportunity as it will be a key differentiator in attracting business. The quality of an organisation’s tax infrastructure should be seen as an alpha characteristic and key enabler of growth – this equally applies to funds, fund service providers and asset managers.
This article was originally published on IrishFunds.ie