The New Zealand Superannuation Fund (NZS) has joined a US$1.5 trillion global coalition in calling for greater clarity in proposed international tax agreements for pension funds.
In a submission on draft changes to the Organisation for Economic Development (OECD) ‘Model Tax Convention’ (MTC), 14 large global funds – including NZS and Australian mega-fund QIC – argue for a looser definition of which entities meet the international tax treaty criteria.
According to a January 2016 EY report, some of the global tax proposals – mooted last October in the OECD Action Plan on Base Erosion and Profit Shifting (BEPS) – “have the potential to impact [sovereign wealth and pension fund] current investment returns and future investment behavior”.
Following the BEPS plan targeting non-collective investment vehicles, the OECD published draft rules for pension funds under the MTC this February.
In a March 2016 release, EY says under the current MTC “in certain cases pension funds are being denied access to treaty benefits for [a number of reasons]”.
“Access to treaty benefits to reduce or eliminate withholding taxes on the return on and of capital with respect to foreign investments is important for pension funds seeking stable cash yields in order to meet their obligations to their beneficiaries,” the EY report says.
While the draft OECD paper attempts to resolve those issues, the NZS-signed submission says a number of details need to be amended.
“We consider this additional work to ensure that a pension fund should be considered a resident of the State in which it is constituted for tax treaty purposes to be of great importance,” the submission says.
The paper says current wording in the OECD draft on the “treaty residence of pension funds” could prevent a range of players – including sovereign wealth funds and some super funds – from accessing potential global tax benefits.
For example, the submission says the draft proposal requiring pension funds to be considered “separate persons” in their home country legal systems is too restrictive.
“We are confident that even with the omission of the word ‘separate’ the phrase should sufficiently address situations in which income of a pension fund may be treated as income of another person for tax purposes, considering that the definition requires that entity or arrangement to be considered a person ‘under the taxation laws of that State,’ the submission says.
The paper also says the OECD draft should explicitly exempt government-owned funds and other special case entities that may fall outside the legal definition of ‘separate persons’.
“… we recommend amending the Commentary to include additional examples, such as superannuation funds, government sponsored pension schemes designed for its citizens, UK trusts and other dedicated trusts/funds…,” the submission says.
Additionally, the global fund coalition says the OECD proposal defining pension funds as “constituted and operated exclusively to administer or provide retirement or similar benefits” should be toned down to “almost exclusively” to reflect the broader range of activities many such funds engage in.
The submission says the examples of ‘similar benefits’ identified in the OECD draft should also be expanded to include activities such as “healthcare packages, activities related to providing affordable housing, worker’s compensation program benefits, administrative services in the field of occupational health, allowing for amounts to be withdrawn and lent to cover major expenses of a beneficiary such as unexpected medical costs, etc”.
Submissions on the OECD proposals closed on April 1 this year.
While it is a non-binding agreement the almost 60-year old Model Tax Convention forms the basis of more than 3,000 global tax treaties, including for non-OECD states.
According to an OECD publication, the MTC “has established itself as the means of settling the most common problems that arise in the field of international taxation”.
“By enabling a certain harmonisation of double tax treaties, it guides bilateral negotiations and helps settle disputes on a uniform basis,” the OECD article says.
The MTC is updated regularly with a 2014 rewrite including a review of global tax rules for collective investment vehicles.