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Common Denominators

This week, I would like to continue my look at the consultation on offshore funds. A close examination of the document and some of the possibilities for new rules reveals the perhaps inevitable likelihood of an increase in the amount of information that would need to be provided to the UK authorities in connection with offshore funds.

I say inevitable in the light of the greater amount of information exchange and provision that is now such a feature of EU financial services, the most obvious example being the need for deposit-takers to provide information to the authorities of the countries in which investors are resident.

Turning, however, to the proposals in the consultation document, one of the suggestions for reform is that a common tax regime is established in the UK both for UK and offshore funds.

If this reform, based on creation of a common regime, were implemented, then the Inland Revenue identifies the following as some key issues:

•The principle of an investor being taxed on his share of income regardless of whether it is received or accumulated/reinvested would have to continue. Would this cause a problem for offshore funds?

•When identifying/calculating fund income in offshore funds, would it be sufficient to rely on the accounting standards of foreign funds?

•How would the owner of the investment be identified when, as is the case for many non-UK funds, the holdings are held through nominees?

•Would offshore funds agree to submitting to some kind of clearance as “information-providing” funds? The provision of information is an important factor for the Inland Revenue.

•The Inland Revenue restates its concern over tax deferral and stresses that it would be essential that investors are given sufficient information by the fund manager to report their share of income on an annual basis. If such information is not provided, then one alternative would be to expose holdings in such funds to an annual income tax charge calculated on some form of mark to market basis.

For investment advisers and providers, perhaps the most worrying aspect of all this is the apparent Inland Revenue concern over tax deferral, even though the current tax regime specifically incorporates provisions for dealing with this, by subjecting the gains of non-distributor funds (even internal capital gains) to income tax when an encashment is made.

All the Inland Revenue&#39s suggestions for reforming and replacing the current regime appear to incorporate the expectation that there would be some annual charge to tax on income arising.

The dynamics at play here seem to be similar to those that drove the original attack on personal bonds which resulted in rules providing for the taxation of offending bonds on deemed chargeable event gains arising on an annual basis.

However, in the context of non-qualifying offshore funds, there appears to be no condition that, to be taxed on an annual basis, there would have to be some form of personalisation. That is the worry. Despite this, it should be borne in mind that the result of the personal bond attack was a very penal annual tax charge on deemed chargeable event gains, which is most unlikely to be the result of this consultation. Where the main deferral concern is in respect of income only, it would seem that, if the fund were prepared to submit to the conditions for “information-providing” funds, then an investor would only be taxed on his share of the underlying income of the fund. The accruals basis would only apply to “non-informationproviding” funds.

If such an accruals charge were introduced for funds, is there a risk or an opportunity for “non-highly-personal” offshore bonds? The consultation should be watched (and contributed to) with interest.

If changes were introduced providing for a tax charge on attributed income or on another accruals basis on offshore funds, and this principle were not extended to offshore bonds, such bonds would represent a comparatively tax-attractive environment for investors.

Another point to note with all this is that, if the concept of an “information-providing” fund is introduced, this would bring offshore funds more into line with the offshore life insurance companies, many of which have to declare information on UK-resident policyholders in certain circumstances, normally via a tax representative.

One could justifiably ask whether the possible offshore funds legislation is also designed to ensure that more information on such investments is made available to the Inland Revenue.

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