Written by: Sydney Shriver | Global Head Exchange Traded Funds Tax Solutions, BNY Mellon
Exchange Traded Funds (ETFs) tend to be tax efficient by nature when compared to traditional fund structures, because they can be transacted on an ‘in-kind’ basis, rather than in cash. In-kind transactions result in fewer capital gains incurred by the fund, and indirectly by the investors. This tax efficiency has traditionally been a key attraction of ETFs and many of their tax implications are well understood.
However, as the ETF industry continues to grow and expand into new markets, creating products that are increasingly innovative and complex, the tax implications and consequences are also increasing in complexity on a global level.
As part of an event series, BNY Mellon’s Global Tax Services team hosts ETF Tax Roundtables to support clients in understanding the current industry view. Key areas of focus include the following three topics:
The transfer tax landscape is comprised of over 40 transfer tax regimes globally, driven by the call from regulators for increased fee transparency from fund managers. In the current transfer tax landscape, these taxes can erode margin on equity ETFs. But, when considering any new launch, there are several competitive pricing opportunities that can be felt by ETF sponsors through global transfer tax management. By diligent structuring of both the ETF vehicle and legal contracts with authorised participants, fund managers can realize cost saving opportunities. Additionally, there are more areas in which business growth can be achieved through these nuance taxes, with reclaims and legislative exemptions for a number of developed and developing markets.
The German Investment Tax Act became effective on January 1, 2018, and abolished the previous burdensome German investor tax reporting for investment fund managers. The taxation rules under the new tax regime are much simpler and eliminate the need to calculate year-end and daily tax figures for German resident investors. All German resident ETF investors are taxed on any gross distributions on the capital gain derived from the sale of ETF shares, or in the case of non-distributing ETFs, they are taxed based on the lump sum assessment base which is calculated by the German custodian at the end of the calendar year. The new tax rules also enable German resident ETF investors to benefit from specific tax exemptions based on the amount of equity the ETF is invested in.
Additionally, the new rules introduced an opportunity for non-German investment funds (including ETFs) to benefit from domestic withholding tax relief on German dividends. If investment funds provide a German custodian with a “status certificate” then they are able to benefit from relief at source at a tax rate of 15% for all German dividends with pay date after December 31, 2017. The status certificate is a specific tax form which is issued by the German tax authorities and has a validity of up to three calendar years. This new domestic withholding tax relief is simpler and faster than filing a Double Taxation Treaty tax reclaim with the German tax authorities.
The Capital Gains Tax (CGT) landscape within capital markets continues to grow in complexity with new and more complex applications of capital gains tax being implemented globally. The evolving CGT landscape has made beneficial tax treatments a moving target, particularly in emerging and frontier markets such as Peru, Poland, and India. These markets often have incomplete or unclear legislation, tax systems that are not sufficiently developed to deal with gains for non-residents, and poor processes to calculate or pay CGT. Additionally, tax treaties in these markets make it difficult to apply for reliefs or exemptions. ETF managers are challenged with monitoring and dealing with retrospective change and staying competitive with competitors.
As ETFs continue to grow in popularity and complexity, BNY Mellon’s Global Tax Services team will research tax market changes to assist clients in meeting their regulatory tax obligations, and reduce tax leakage by assisting clients in identifying preferential tax rates.