“When there is an income tax, the just man will pay more and the unjust less on the same amount of income.”
- Plato

Raising revenues through taxes has been a key feature in fiscal policy, and coming under the spotlight has been the topic of ‘tax morality’, particularly how more can be done to prevent tax not being paid as a result of evasion and aggressive avoidance schemes.

The public perception is that financial institutions have been complicit in facilitating such tax evasion and avoidance schemes, but financial institutions have not been alone in such criticism. Jurisdictions have also come under scrutiny. The ‘Luxembourg leaks’ exposed favorable tax deals with corporations in an attempt to entice business to Luxembourg, and Ireland is currently disputing claims that tax deals they have offered to some large corporations are deemed to be ‘state aid’ under EU rules. In addition, high profile individuals were exposed in the so-called Mossack Fonseca ‘Panama Papers’ as their tax avoidance and evasion secrets were revealed to the world.

This has resulted in recent increased public and political pressure to reform the global tax landscape so that it reflects business in the 21st century. This in turn has led to the rapid emergence of complex tax regimes designed to prevent and detect tax evasion and aggressive avoidance, with the regimes focusing on increased tax reporting, revisions to the global tax system and the broadening of the scope of payments subject to tax. In 2017 we will see several requirements coming into force for key regimes:

  • Common Reporting Standard (CRS)
  • Base Erosion & Profit Shifting (BEPS)
  • U.S. tax changes

Asset Managers will need to cope with executing the requirements of these regimes and monitoring for further developments through the year.

2017 Key Tax Items


The Organisation for Economic Co-operation & Development (OECD) and the G20 have been influential in introducing global regimes to resolve issues in the global tax system. 2017 marks an important milestone as it is the year in which the first CRS reports are due to be filed for early adopter jurisdictions (such as Ireland, Luxembourg, UK and Cayman). Similar to the Foreign Account Tax Compliance Act (FATCA) filings, this will require Asset Managers to report information for their funds, including investor and transaction information for reportable investors. For Asset Managers and Transfer Agents (TAs), they will need to grapple with the volume and complexity of reporting needed in parallel to FATCA, as well as subtle differences to each country’s requirements.

In addition, certain late adopter jurisdictions, such as Hong Kong, have gone live with the CRS which means that the account due diligence requirements came into effect on January 1, 2017 for financial institutions located in these jurisdictions. First reporting for these jurisdictions is expected in 2018.

The CRS has led to changes in the European Union (EU) with the CRS effectively replacing the European Savings Directive (EUSD). The CRS was introduced via the Directive of Administrative Co­operation (DAC) in the EU and it imposes a more comprehensive reporting regime compared to the EUSD, with a much broader set of investor and transaction data required to be reported.


The BEPS initiative, a huge undertaking by the OECD, has been gradually coming into effect since 2015. For large asset managers, on the calendar for 2017 is the first country by country (CbC) reporting, which is due at the end of 2017 for the 2016 calendar year, and aims to provide transparency of transfer pricing arrangements within groups.

Asset Managers should also be monitoring for the OECD and jurisdictions refining the other action plans within the BEPS initiative. For example, in late 2016 a group of more than 100 jurisdictions concluded negotiations on a multilateral instrument that will modify the application of existing bilateral tax treaties to implement the tax treaty measures developed under BEPS. Also, in January 2017, the OECD released a discussion document containing three examples of how non-CIVs would meet the principle purpose test under action plan 6, and more information on this topic is expected. These action plans are important as they lay the foundations for how investment vehicles get access to tax treaties for preferential tax rates on payments in the future.


The U.S. tax regime is becoming extremely complicated for non-US investors. In an attempt to circumvent the use of financial instruments (such as derivatives) to avoid U.S. withholding tax of dividends, the IRS has tightened the U.S. tax rules further from 2017 with the introduction of s871(m) which looks to tax dividend equivalents paid on derivatives that reference U.S. equities.

In addition, the IRS has proposed rules for s305(c), which imposes U.S. withholding tax on certain deemed distributions arising on assets that have the right to acquire U.S. equities (e.g. U.S. convertible debt), when such distributions are paid to Non Residents. In the absence of final rules, many U.S. withholding agents have begun applying the required withholding tax and reporting on such s305(c) deemed distributions whist the IRS looks to finalise these rules. Many portfolio managers are assessing the potential impact to the viability of using such financial instruments as part of the fund’s investment portfolio.

Impact to Asset Managers

CRS and BEPS will introduce even more tax reporting required by Asset Managers. 2017 will be the first year of operating such reporting and therefore there will be inevitable risk associated with incorrect reporting that will need to be monitored and controlled. Tax teams and specialization at Asset Managers is growing to deal with this, harnessing a range of skills from technical to practical. To assist, many Asset Managers are looking to their service providers to perform key requirements of these regulations, including fully outsourcing the account due diligence and reporting for FATCA and CRS to their TAs.

For Asset Managers investing in the U.S. through derivatives or convertible instruments, there will be a need to familiarise themselves with complicated rules, and then to consider the potential impact to their fund’s portfolio of using derivatives referencing U.S. equities and U.S. convertible instruments. As these rules are a departure away from traditional U.S. tax rules for Non-Resident investors, Asset Managers will need to be clear what their withholding agents policy is for these rules as interpretations and policy may change between market participants.

Looking Forward

Continuing to monitor developments with these regulations will be imperative as certain requirements are to be finalized by rule makers. BEPS is still in development and it is possible that the suite of CRS data points to be reported will be expanded. In the U.S., the IRS is looking to finalise rules on s305(c) and there could well be further developments on s871(m), such as further guidance.

Given the breadth, dynamism and complexity of the tax regulatory landscape, it is hard to be fully prepared for 2017. With jurisdictions beginning to announce penalties for non-compliance with tax regimes such as FATCA and CRS, Asset Managers should not take these regulations lightly, and ensure that they or their TA(s) (where outsourced) are capable to meet their reporting obligations.

As the debate about tax morality continues and rule makers look to refine these regimes and their tax systems, Asset Managers should be prepared for more tax developments in 2017 and beyond.

Brown Brothers Harriman (BBH) offers an outsource service for FATCA and CRS account due diligence and reporting to its TA clients, and in our capacity as a U.S. Withholding Agent and Fund Accountant we continue to monitor and implement solutions for U.S. tax withholding and reporting regulations. As we are committed to sharing insights on global tax regulatory developments, please contact your local Relationship Manager or Global Tax Services representative if you would like to discuss any of these items further.


For more information,  please contact your relationship manager or the Global Tax Services Group.


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