Tax treaties

Update on Collective Investment Vehicles project


Update on the work of the informal consultative group on the taxation of Collective Investment Vehicles and procedures for tax relief for cross-border investors 


18 July 2008


In 2006, the Committee on Fiscal Affairs (“CFA”) established the Informal Consultative Group on the Taxation of Collective Investment Vehicles and Procedures for Tax Relief for Cross-Border Investors (the “ICG”). This is an update on the work of the ICG over the past year. For a summary of the first meeting and for the mandate of the ICG, please see,3343,en_2649_33747_39251660_1_1_1_1,00.html.

The ICG held its second and third meetings in Kyoto in October 2007 and Washington in April 2008.  In addition, members of the ICG have held several informal meetings in conjunction with the European Commission, which is pursuing a similar project relating to procedural issues.

Current Status of the work

The mandate of the ICG has two aspects:  (1) legal and policy issues, primarily relating to the extent to which either the vehicles or their investors are entitled to treaty benefits; and (2) procedural aspects regarding claims for treaty benefits when assets are held indirectly, whether through CIVs or through nominees and custodians. Over the past year, the ICG has made substantial progress on both aspects of the work.

Technical Issues regarding the Ability of a CIV or its Investors to claim Benefits

The ICG should be able to make a comprehensive set of recommendations regarding the legal and policy issues specific to CIVs in its final report to be presented to the CFA in January 2009. The ICG has made substantial progress with respect to the technical questions of whether a CIV should be considered a “person”, a “resident of a Contracting State”, and the “beneficial owner” of the income it receives under treaties that, like the OECD Model, do not include a specific provision dealing with CIVs (i.e. the vast majority of existing treaties).  It is expected that the final report of the ICG will include proposed changes to the Commentary to the OECD Model Tax Convention to reflect the conclusions of the ICG with respect to these issues.


Although the proposed changes to the Commentary discussed above will clarify the treatment of CIVs, it is clear that at least some forms of CIV in some countries will not meet the requirements to claim treaty benefits on their own behalf. Accordingly, the ICG has considered the appropriate treatment of such CIVs under both future treaties and existing treaties.


With respect to existing treaties, the ICG members agreed that, if a CIV is not entitled to claim benefits in its own right, its investors should in principle be able to claim treaty benefits. Different views were expressed, however, regarding whether such a right should be limited to investors who are resident in the Contracting State in which the CIV is organised, or whether that right should be extended to treaty-eligible residents of third States.  In any event, administrative difficulties in many cases effectively prevent individual claims by investors. Accordingly, further work is being done to examine whether procedures could be adopted to allow the CIV to make the claim, and if so how.


With respect to future treaties, the ICG is in the process of drafting a proposed provision for potential inclusion in the Commentary on the Model as an option for countries to consider in their future treaty negotiations. The favoured approach for such a provision would treat a CIV as a resident of a Contracting State and the beneficial owner of its income, rather than adopting a full look-through approach.  Under the proposal, countries could choose whether to give benefits only in the proportion that the CIV’s investors are themselves entitled to treaty benefits, or to give benefits with respect to all of the CIV’s income as long as a certain threshold of treaty-eligible investors is met. Again, different views were expressed on the issue of whether treaty-eligible residents of third countries should be counted in making these determinations. The ICG also agreed to include in the proposed Commentary an alternative provision that would adopt a full look-through approach. The look-through approach would be appropriate in cases where the investors, such as pension funds, would have been eligible for a lower, or zero, rate of withholding had they invested directly in the underlying securities.


The ICG also considered several ancillary issues, including the procedures that could be adopted to determine the proportion of treaty-eligible investors under either existing treaties or a future treaty provision. It is expected that these procedures will be set out in some detail in a model mutual agreement in an annex to the report.  In addition, the ICG considered a proposed provision that would allow an investor in a CIV to claim foreign tax credits for withholding taxes suffered at the level of the CIV. The ICG agreed that whilst the issue should be addressed in its final report in the interest of completeness, nothing on this topic needed to be included in the Commentary on the Model.

Procedural Issues Affecting All Intermediated Structures, Including CIVs

The core of the ICG’s work on procedures has been developing a series of recommendations regarding “best practices” with respect to the granting of treaty benefits. The objective has been two fold:  (i) to develop systems that are as efficient as possible, in order to minimise administrative costs and allocate the costs to the appropriate parties; and (ii) identify solutions that do not threaten, and that ideally enhance, countries’ abilities to ensure proper compliance with tax obligations, from the perspective of both source and residence countries. The starting point for these discussions was a proposal made by BIAC (the “ICG business proposal”), which relies heavily on the proposed tax relief model issued by the International Securities Services Association (“ISSA”) in January 2005. A similar model for tax relief was proposed in October 2007 by the EU Clearing and Settlement Fiscal Compliance Experts’ Group (“FISCO”), which was created in March 2005 to give advice on the removal of fiscal compliance barriers to the clearing and settlement of EU cross-border securities transactions.


These proposals share characteristics of a number of systems that have been adopted by governments within the last decade or so. From a business perspective, one of the major benefits of these systems is that information regarding the beneficial owner of the income is maintained by the intermediary at the bottom of the chain, rather than being passed up the chain of intermediaries. Accordingly, intermediaries in the chain can facilitate treaty claims for their customers, without passing proprietary customer information to potential competitors (i.e. the other intermediaries), by instead passing “pooled” information up the chain.  The systems also eliminate the time and expense of handling large amounts of paper. By reducing inefficiencies, the systems make it more likely that investors will in fact receive treaty benefits in a timely manner.


Although a country may be willing to provide benefits on the basis of pooled information, it may want to maintain the ability to confirm that benefits that have been provided were in fact appropriate.  For that reason, and in order to encourage compliance in the residence State, the ICG is also considering in conjunction with these proposals an approach that would require those financial institutions that wish to make use of the “pooled” treaty claim system to report directly to source countries (i.e. not through the chain of intermediaries), investor-specific information regarding the beneficial owners of the income. In that regard, the ICG is also identifying the improved processes that would be necessary to ensure the administrability and cost effectiveness of such a system. This type of reporting would allow the source country to provide such information to the relevant residence countries through normal exchange of information programs, thereby allowing residence countries to apply effective matching programs to ensure taxation of that income.


The next meeting of the ICG is scheduled to be held in Paris in October 2008.  At that meeting, it is expected that the ICG will finalise its recommendations regarding “best practices” for inclusion in the final report of the ICG. The report will probably propose further work on the technical issues that would need to be resolved if the best practices were to be adopted widely. Among other things, it will likely require efforts to be made to harmonise, to the extent possible, the declarations that countries require investors to complete in order to benefit from treaty relief, and to make those forms capable of electronic submission.

Timetable, Mandate and Possible Future Work

The work contemplated by the ICG’s initial mandate is to be completed by November 2008, when the recommendations of the ICG will be forwarded to the CFA for further consideration.  The CFA will make a decision on whether and how to take the work forward, including whether to refer portions of the work to one or more of the CFA’s subsidiary bodies.

For example, the anticipated recommendations from the ICG relating to proposed changes to the Commentary clearly lie within the purview of Working Party No. 1. By contrast, the work on procedures for claiming treaty benefits, and perhaps instituting more widespread automatic reporting, is also closely aligned with existing work in Working Party No. 8. The CFA will therefore decide which groups or combinations of groups will be involved in any ongoing work in this area.

The OECD will continue to provide periodic updates on on-going work in this area.