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The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

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USA

Carried Interest and Enterprise Value Tax

In September 2011, renewed proposals to tax ‘carried interest’ and make changes to the enterprise value tax, were announced by President Obama. The American Jobs Act, which the President urged Congress to adopt, would cause carried interest to be treated as ordinary income. Primarily, the proposals would seek to tax as ordinary income, and make subject to self-employment tax, a service partner’s share of the income of an investment partnership attributable to a carried interest because such income would be considered to be derived from the performance of services. To the extent that a service partner contributes “invested capital” and the partnership reasonably allocates its income and loss between such invested, capital and the remaining interest, income attributable to the invested capital, would not be recharacterised.

The proposed change to the enterprise value tax sought to tax profits on the sale of an investment management partnership, for example a hedge fund or private equity firm, at ordinary income rates of 35%. Proceeds from the sales of these and other US businesses are currently taxed at a 15% capital gains rate.

The proposals are the subject of considerable controversy and, to date, have not been proposed for or passed into legislation.

Key legislative documents

The American Jobs Act (2011)

Other relevant documents

Letter from Sander Levin to Joint Select Committee on deficit reduction (October 2011)

White House analysis and supporting statement (September 2011)

Office of Management and Budget Report (September 2011)


 

Unincorporated Business Tax

In early December 2011, it became apparent that the New York City Department of Finance was considering a new audit position that could have the effect of increasing the annual New York City unincorporated business tax ("UBT") liability of investment managers operating there (through a partnership or an LLC) where an affiliate of the manager acts as the general partner of a fund and receives the incentive allocation from the fund (which is not subject to the UBT).

Such new audit position would treat a portion of the expenses incurred by the investment manager as being attributable to the incentive allocation earned by the general partner (and therefore not deductible by the investment manager). If this position were successfully asserted, the investment manager would have a greater amount of net income (or a lesser amount of net loss) subject to the UBT. It has also been suggested that the Department of Finance may look retrospectively and seek to challenge prior year expenditure.

The proposals are the subject of considerable controversy and, to date, have not been proposed for or passed into legislation.


 

Asia-Pacific

Australia

Investment Manager Regime (IMR)

The Australian Government reconfirmed in the May 2012 Budget its support for developing an IMR. Enabling legislation is in progress, with the purpose of seeking to make it easier for offshore funds to qualify for relief under the IMR (e.g., many typical master-feeder fund structures would not qualify under the current draft legislation and there are issues with using Australian investment advisers).

Amendments to the IMR were passed in Parliament on 23 August 2012 (see links to announcement and main provisions below), being the first two (of three) elements of the IMR and intended:

  • to address the impact of the application of 'FIN 48' (US accounting rules) on managed funds which invested in or through Australia in the 2010-11 and earlier income years;
  • to exclude from Australian tax, for 2010-11 and later income years, certain income of widely held foreign funds that is taxable only because the fund uses an Australian based agent, manager or service provider; and
  • to remove uncertainty as to the tax treatment of 'conduit income' of managed funds.

Although the legislation does not take into account changes which AIMA wishes to see, these statements by the Government are encouraging:

  • "Consultation with industry has highlighted that it is not possible at this stage to define in legislation all of the different investment entity structures operating in eligible offshore jurisdictions.”
  • “Where entities satisfy the policy intent of the measures in this legislation, the government will use the regulation-making power provided in the legislation to ensure that they benefit from the IMR.”

Ministerial announcement 23 August 2012

Main provisions of legislation here.

AIMA is, therefore, actively seeking ‘real life’ examples of funds for which the IMR as proposed presents problems and why - AIMA’s Note sets out the issues and discussions AIMA Australia has held with Treasury, including as to issues for foreign funds that will not meet the ‘widely held’ or ‘concentration’ tests as drafted.

Information and examples requested are:

  • Examples of actual funds that do not qualify as IMR foreign funds under the current wording but conceptually should be considered as being IMR foreign funds;
  • Actual examples of foreign funds that do not qualify as IMR foreign funds and as a consequence will not be entitled to the FIN 48 exemption and the Australian income tax liability in respect of past transactions will be a material amount requiring the fund to provide an amount in their financial accounts (this appears to be Treasury’s main current concern);
  • For actual foreign funds falling into categories (1) and (2) above, what are critical dates and why? A critical date could be the date the accounts need to be prepared in respect of redemptions or the date accounts need to be signed for audit purposes. Evidence of critical dates will enable Treasury to focus on delivering revised draft legislation prior to a critical date; and
  • What other consequences will arise, should Treasury not re-draft the tests prior to releasing IMR 3? Such consequences could be fund managers closing their Australian operations and relocating them to Hong Kong or elsewhere. On this point, Treasury is focused on things that will result solely because of a delay in the redrafting of the tests; they do not want comments regarding what may happen if the IMR 3 measures are not released soon. The current draft text for the ‘widely held test is here.

AIMA documents

Australian IMR3 February 2014 submission - Response to Consultation (17 February 2014)

AIMA / MFA joint submission to Australian Treasury (5 December 2012)

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      1. AIFMD
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      4. UCITS
        1. ETFs and Structured UCITS
      5. Venture Capital
    2. US Hedge Fund Adviser Regulations
      1. Registration and Reporting
      2. Incentive-Based Compensation
      3. JOBS Act
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      1. UK regulatory reform
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