why not, indeed? - pwc: audit and assurance, … not, indeed? a pwc viewpoint on creating a new...

www.pwc.com/sg

Why not, indeed? A PwC viewpoint on creating a new platform for Singapore’s asset management industry

2 Why not, indeed? A PwC viewpoint on creating a new platform for Singapore’s asset management industry

A future redefined?

Today, Singapore is viewed globally by industry players and regulators as a pre-eminent asset management centre. As an entry point for the West into Asia, it also has a robust regulatory framework and a business-minded government. In a fast-changing landscape, there is increasing pressure for Singapore to continually up its game and to re-invent itself to remain at the forefront of the industry.

Investors and product developers at asset management firms increasingly look for solutions in the form of investment vehicles and domiciles which prove to be the

most advantageous to them. This would encompass considerations in terms of flexibility of structures, pragmatic regulations, availability of quality resources and strength of infrastructure, marketability and tax optimisation. At the same time, regulators around the world are also demanding that asset managers demonstrate substance around their structures and provide investors with sufficient transparency and protection through using established international investment fund centres.

In a fast-changing landscape, there is increasing pressure for Singapore to continually up its game and to re-invent itself to remain at the forefront of the industry.

Photo courtesy of Singapore Tourism Board

3Why not, indeed? A PwC viewpoint on creating a new platform for Singapore’s asset management industry

The inevitable evolution of asset management and servicing eco-system would contribute significantly to the economy in terms of higher employment, enhanced productivity and growth in fund flows through new product ranges created and managed in Singapore.

This industry need for varying investment structures, vehicles and flexible frameworks to cater for different investment strategies and investor preferences now opens the door for Singapore to take a fresh look at what it can do to secure its future as the asset management hub in Asia, and whether improvements can be made to its existing investment fund framework to allow for a broader spectrum of choice to different segments of the asset management industry.

In recent years, there has been an increasing trend towards setting up Singapore-domiciled investment vehicles. This is primarily driven by the fact that Singapore offers a place where substantive fund management activities and investment vehicles can co-exist. In addition to tax treaty benefits, Singapore also offers an unparalleled location where asset managers, investment banks and capital introducers can mingle in a business-friendly environment overseen by a highly respected and pragmatic regulator. This is wrapped with world-class infrastructure for travel and internet together with a large selection of securities service providers and professional services providers.

Notwithstanding this increasing interest, one key observation is that Singapore does not currently have an investment fund platform which caters to the specific needs of hedge funds, private equity, securitisation or cross-border investment funds. In order to compete with investment centres such as Hong Kong, Luxembourg, Dublin and Cayman Islands, Singapore needs to be able to offer a variety of investment fund platforms beyond the current structures available today. Such a framework would not only help dispense with the drawbacks of the current regime but would anecdotally lead to an increase in the number of funds and asset managers setting up in Singapore. In the bigger picture, the inevitable evolution of asset management and servicing eco-system around such a change would contribute significantly to the economy in terms of higher employment, enhanced productivity and growth in fund flows through new product ranges created and managed in Singapore, among others.

It is in this frame of thought that PwC Singapore has developed a white paper to consider the various aspects of what is needed to bring the Singapore asset management industry to the next level – the establishment of a comprehensive investment fund law framework which would cater to the needs of all asset managers and investors, regardless of strategy or distribution channel.


What the market told us

To support our hypothesis on the acceptability and interest in the concept of a new investment fund law framework, PwC Singapore conducted a high level survey of the asset management community in Singapore in July and August 2013 to gather industry insights and feedback. The target audience consisted of registered or licensed asset managers of Singapore and a few foreign groups, spanning all the sub-sectors (traditional funds, private equity, real estate and hedge funds).

The overarching concensus from the survey was that a new investment fund law would be deemed appropriate and would actually be required to gain more share of the global fund market. It was seen as a huge catalyst for the industry and that Singapore would do a much better job of providing confidence to the global investment community through bringing about a regime which is comprehensive, yet robust and flexible to meet future demands. Examples of this would include variable capital structures that enable investors to enter and exit the investment vehicle without the current corporatised vehicle pitfall, flexibility in choosing the appropriate reporting framework to cater to the needs of the international investment community, investor and investment strategy confidentiality as well as the ability to access tax treaty benefits, among many others.


Over the past decade, Asia has become an area of interest for many investment houses. The widening of the middle income class, outstanding talent and abundant natural resources have contributed to this growth. What is of striking importance is that the region is not only being eyed as an investee destination but countries such as Singapore, Hong Kong, Taiwan and Japan have also firmed up their infrastructure to cater to this upswing.

For many asset managers, selecting a country to set up an investment vehicle is equally a business decision as it is a tax planning one. Legal vehicles are important for structuring investment pooling vehicles which should not be subjected to additional levels of taxation. There should be a good mix of investment vehicles in an aspiring investment centre that caters to the various investment objectives. The current regulatory framework in Singapore caters mainly to investment funds set up as unit trusts only, which do not grant access to the privileges offered in double tax treaties, or a corporate vehicle which comes with may restrictive components which make it investor unfriendly.

From a pure products perspective, what is seen as the immediate need in Singapore is a corporatised investment vehicle such as SICAV (French acronym which translates to “a company with variable capital”), or Open Ended Investment Companies (“OEIC”).

The recipe for a successful funds centre

• Legal, tax & regulatory advisors, auditors, custodians, administrators etc.

• Investment professionals

• Highly-skilled labour force

• Investment vehicles and legal structures:

• Unit trust• Partnerships

Investors Asset Managers

Service Providers

Products & Structures

• Institutional investors• Government and

sovereign• HNWIs and retail

investors


o

Wishlist: What would an ideal investment funds framework for Singapore look like?

A move towards growth Building a successful investment fund centre of the future requires a lot of thought, co-ordination among the different stakeholders at government and private levels, a deep understanding and appreciation of where the industry is moving towards, as well as having the hunger to get there before anyone else does.

Below we set out some thoughts around why a refresh of an investment fund framework would be desirable to an ambitious fund centre such as Singapore.

Cross-border marketsAt the end of Q1 2013, the total funds under management across Asia was approximately USD6.34 trillion – this represents 21% of the global funds under management. Asian economies contribute approximately 40% of the global real GDP and this is forecast to grow to USD24.6 trillion by 2015. This is a growth rate that is almost double the rest of the world.

The Asia Region Funds passport being promoted under APEC today is intended to provide an efficient mechanism for funds to be sold across jurisdictions, and thus support the development of regional capital markets. In addition, the recently announced ASEAN cross-border framework for Collective Investment Schemes (“CIS”) also seeks to achieve the same purpose, albeit for different jurisdictions. As the various discussions around an Asian fund passporting regime take shape, having a proven track record of investment fund structures and supporting service industry at the time of launch will be fundamental to the success of the initiative.



o

Other territories’ investor preferencesA principal concern when structuring an alternative fund is to provide the most favourable tax result for the investors. Today, US investors are the largest set of investors globally.

48%

21%

26%

11%

North America

Europe

Asia-Pacific

Rest of the World

Because US corporations are subjected to tax on investment income as well as business income, tax exempt US investors prefer to invest through non-US corporations. Taxable US investors generally prefer to invest through US-domiciled pass-through entities.

Investment fund laws should govern the business of investment funds and not the pooling vehicles legal entities. Therefore, having fund laws that understand and cater to the relevant sub-sectors such as private equity, real estate, hedge funds and retail-distributed funds would be a better way to govern and protect the investors while regulating the managers.

7

Photo courtesy of Singapore Tourism Board

Sources: Lipper July 2013 & PwC Analysis


Wishlist: What would an ideal investment funds framework for Singapore look like? (continued)

More funds lead to more managersA sophisticated investment funds platform is one of the ingredients of the success stories of Luxembourg, Ireland, and the Channel Islands. While they do not host the world’s asset managers, the global trend of ensuring substance and justification for spanning one’s operations/management across the globe will be a key element in determining the location of asset management entities.

If the infrastructure to cater to investment funds is well developed, then those looking to establish a presence in Asia might well locate their asset management arms in Singapore. The key driver would be the safe harbour rules, which is essentially an extended transfer pricing rule protection offered to the asset management industry. Today, only the United States, United Kingdom, Switzerland, Singapore, Hong Kong, Japan and Australia have these broad exemptions made available to the industry.

Tax efficiencyPortfolio investors in securities frequently make and hold those investments by pooling their funds with other investors in a Collective Investment Scheme (“CIS”), rather than investing directly. Most countries have dealt with domestic tax issues arising from groups of small investors who pool their funds in CISs. In many cases, this is reflected in legislation that sets out specific tax treatments that may have significant conditions. The primary result is that most countries now have a tax system that provides for neutrality between direct investments and investments through a CIS, at least when the investors, the CIS and the investment are all located in the same country. One of the primary purposes of tax treaties is to reduce tax barriers to cross-border trade and investment. Treaties do this by allocating taxing jurisdiction over a person’s income between that person’s country of residence and the country of source of the income – in order to avoid double taxation.


Boost to the domestic economyThere is no doubt that an increase in funds domiciled in Singapore would lead to an increase in domestic business activity. The fund industry is a very scalable business, and the extensive use of service providers to create, develop and support the industry provides a valuable eco-system which will grow around the industry. This would come in the form of increased activity in legal and accounting services, fund administration and reporting, distribution and growth of alternative channels for product development and marketing – which all ultimately lead to a more vibrant employment market as well as the need for services that support the resulting increased economic activity such as nightlife, hospitality, food & beverage, etc.

If the infrastructure to cater to investment funds is well developed, then those looking to establish a presence in Asia might well locate their asset management arms in Singapore.


The ideal structure

In line with other investment centres, Singapore should also seek to introduce legislation that offers regulated fund products to all types of investors. This would mean catering to the retail market (which needs a lot more regulatory intervention) and to the non-retail market (which needs a tone to be set with high-level intervention to prevent any systemic failures).

The retail funds regime would need detailed guidance and regulatory oversight as the ultimate goal would be the protection of investors. The non-retail funds regime should ensure that the investment fund business is adequately governed with little or no room for fraud or circumvention of laws (money laundering, tax evasion, Ponzi schemes, etc).

The proposition in this case would be a framework of investment fund laws that marry the legislations that govern legal entities (partnerships, companies and trusts) with the necessary laws that govern the business of fund investment.

One leading argument to not disrupt the fundamentals of the existing Companies Act, Partnership Act, nor the Trust Act is that a new overhaul of legislation would negate or force superseding years of precedence and case laws that work as solid third line of support in the legislative process. PwC’s proposition also suggests introducing a framework for sub-industry types such as real estate, private equity and hedge funds, as there has been an increase in demand for such industry sub-sectors to be regulated.

This is by no means a one-shot game. A systematic and meticulously planned implementation in phases would be the most prudent way to see this to success. The first phase of implementation could be in the form of a fund law that could be used over the company legislation only, which would help plug the current gap.

This will also give Singapore a competitive edge over other jurisdictions by aiding in the attraction of the future flow of funds which would want to re-domicile from offshore to on-shore jurisdictions – the next forecasted wave of funds in the future.

Investment Fund Law

Retail Accredited

Unit Trust Public companyLimited

PartnershipTrust

Private Company

Views from the industryPerspectives on the need for a new investment fund framework in Singapore

Why not, indeed?A PwC viewpoint on creating a new platform for Singapore’s asset management industry

Chapter 2

As part of the research and evaluation of the industry need for a new investment fund framework to boost Singapore’s asset management industry, PwC Singapore conducted a high level survey of the asset management community in July and August 2013. This survey was intended to get a sense of the industry demand for new structures and flexibility in an investment fund framework, and what features would be deemed desirable and lead to more interest in Singapore as a fund domicile. From the survey, it is clear that all the respondents were highly receptive to the idea of a new investment funds law framework which could bring in all the aspects needed to propel Singapore’s asset management industry to the next level.

12 Why not, indeed?

The respondentsThe respondents to the survey were selected from a focused group comprising both registered or licensed asset managers in Singapore as well as a few foreign groups who had expressed interest in Singapore as a domicile for their future activities. They spanned across all the sub-sectors namely traditional funds such as retail unit trusts, as well as the alternative funds like private equity, real estate and hedge funds.

We received responses from asset managers which represent a good mix of retail alternative investment funds. The respondents include 5 out of the top 10 asset managers in Singapore.

A salient point to note is that the sample of asset manager respondents manage approximately USD 1.2 trillion in assets under management (AUM) globally, almost the size of the AUM of Singapore.

The survey The survey was conducted with a preliminary meeting to explain the subject matter at hand, and to also gauge the level of acceptability of the proposals for a new investment funds law framework in Singapore. The meeting was followed by a tailored set of questions created to elicit focused responses to the topic in hand, particularly around legal set-ups, structure flexibility and conditions, tax benefits, open-ended variable capital, comparison against other jurisdictions as well as preferred reporting standards, among others.

At the preliminary meetings, we received highly positive responses to the proposed idea of a new investment funds law framework.

In the following pages, highlights from the responses to the survey questionnaire are set out and linked to various salient issues and challenges in the framework’s current form, which lead us to certain conclusions that helped shape our ideas around the need for a new investment fund framework.

Key findingsA summary of the major findings of the survey is as follows:

• The current investment fund regime is not conducive to efficient operation of investment funds. The common pitfalls include lack of alternative financial statement reporting frameworks, lack of investor privacy, and lack of variable capital structure, etc.

• While tax incentives can be credited with the growing number of asset managers domiciling in Singapore, there are also other factors that lead to this increased confidence in Singapore’s asset management industry that extend beyond the regulatory framework.

• Approximately 90% of the respondents agree to having an Open-Ended Investment Company (OEIC) structure.

• An overwhelming majority of the respondents were open to launching their next fund in Singapore if such a new framework was introduced.

• A substantial majority requested for the creation of sub-fund/umbrella like structures under the new regime.

A PwC viewpoint on creating a new platform for Singapore’s asset management industry 13

63% of respondents agree that the current tax exemption scheme (13R & 13X of Income Tax Act) is effective in encouraging fund managers to set up in Singapore.

The success of the tax exemption regime (13R and 13X of the Income Tax Act) introduced by IRAS in 2006 and 2009 demonstrates the appetite and demand for tax-exempt investment vehicle structures. The election of the tax incentives have, to date, been useful but more so in the alternative investment industry sector which would have limited capital activity. Most investment managers (that have funds in foreign jurisdictions) currently avail of another exemption which is commonly known as “Safe – Harbour” regulations. However, the respondents also credit the growth of the asset management industry to other factors such as tax rates for managers, financial centre reputation, talent pool, etc.

Noteworthy point: The upcoming investment fund law should allow the investment vehicle/structure to continue enjoying the section 13R or 13X tax incentive schemes currently in place.

The survey

“It was not only these incentives that have been effective in encouraging fund managers to set up in Singapore, rather [it is] an interplay of tax and non-tax areas such as good infrastructure, reputation as a financial centre, ease of getting talents, etc. that had attracted fund managers to set up base in Singapore.”

From our respondents

“It is a cumbersome process to have an Enhanced Tier Fund structure similar to a company and it does not work for funds operationally.”

Highlights

63%Yes, current tax

exemption regime is effective

14 Why not, indeed?

The response level further substantiates the lack of a viable platform in Singapore and the drawbacks of the current system. The common pitfalls are limitations on capital activity, investor privacy, financial instruments inflexibility, limitations on distributions, etc. The overwhelming response of “yes” to OEIC structure shows the need for such a regime.

Noteworthy point: As recommended and as per popular demand; the recommended investment vehicle should be free from current drawbacks such as lack of variable capital structures, difficulties in distribution of dividends, challenges with financial reporting and privacy issues, etc.A variable capital structure that enables investors to enter and exit the investment vehicle without current pitfalls is highly needed.

“The most complexity created by the legal regime are the burdensome policy requirements for fund managers and funds that are understandable if a fund manager or fund has significant scale, but they become more onerous for a smaller, single-strategy fund.”

“We foresee issues with regards to public disclosure of investor and investment portfolio information, and access to the fund financial statements and shareholders’ registers for non-public retail funds.”

“The company law rules are not suitable for a ‘fund’ company.”


An overwhelming 84% of respondents think that the current company law rules create complications for funds and 89% feel that Singapore should have a corporate form of Open-Ended Investment Company (OEIC) structure.

89%Yes to OEIC

structure

84%Feel that current

company law rules create

complications


The concept of legal entity structure and investment funds law vehicle should be distinct and separate. Both are needed to co-exist to yield the ultimate result of a successful investment fund centre. Thus, a step further would only help customise and serve the diverse investment community better as is currently the case in progressive jurisdictions such as Dublin, Luxembourg and Channel Islands. The overwhelming response of 95% justifies the need to have an investment funds law framework catered to every sub-sector of the asset management industry.

Almost 80% of respondents indicate that there is a need for a separate legal fund framework to cater to various investment funds, for example a separate funds law for traditional (retail investors) and non-traditional (hedge, private equity, real estate) strategies, and 95% feel that if the OEIC structure were adopted in Singapore, there should be a comparable law to cater to close-ended investment pooling vehicles (non-traditional).

“Separate fund laws would be ideal.”

“An investment funds law framework would only help to further increase the attractiveness of Singapore as an Investment Management location given the already strong legal and regulatory framework.”

“This would depend on the fund laws. If very onerous for retail products (traditional) we would want to see something different for non-traditional, institutional arrangements.”


95%There should be a law to cater to alternative

investment funds

79%Yes to a separate

funds law framework

Noteworthy points: There should be malleable legal entity structures along with investment fund laws to regulate the diverse investment vehicles right from retail products (traditional) to alternative structures(non-traditional) for accredited or institutional investors. The distinction between legal entity structures and investment funds law that is meant to govern the business of investment funds will make it possible to govern the diverse sub-sectors.

16 Why not, indeed?

Though the response to this question is positive and overwhelming, the comments below do suggest that efforts should also be made for investor awareness and education of Singapore domiciled funds and the framework. The game of asset management has changed from laissez-faire to high regulation and thus substance is key. If the investment fund platform attracts foreign attention, then the need for substance would automatically also lead to an increase in asset managers being registered in Singapore.

Noteworthy point: A customised/flexible framework followed by a good governance model will act as ambassadors to attract funds to Singapore. However, effort must be made to popularise the regime just like the other investment fund centres such as Luxembourg, Dublin, etc., as that would be a good catalyst to attract more asset managers to Singapore.


89% of fund managers, when inquired, indicated that they would likely launch their next fund in Singapore if a new investment fund legal framework were implemented, and that the new framework would encourage other fund managers without existing operations to set up in Singapore.

“Yes, if the investment law framework is introduced then this will encourage them also to set up their operation alongside their funds. At present fund managers are setting up offices in Singapore but their fund vehicles are domiciled in some other offshore locations. The reason why they are setting up offices is primarily due to excellent infrastructure, emergence of Singapore as a financial center and other world class facilities available in the country.”

89%Would set up fund

in Singapore if new framework was

implemented

“To save cost and ease the administrative burden of dealing with multiple jurisdictions.”

“We would certainly consider Singapore as a location to domicile future funds. From a retail fund perspective we would also need to ensure that the fund can be sold in multiple jurisdictions to obtain economies of scale and clear rules and certainty of treatment from tax, legal and accounting standpoints.”


A seemingly high acceptance of the Luxembourg model only further testifies our basic concept of keeping the approach to investment fund law regime to two distinct mechanics – legal entity framework and investment fund laws. Luxembourg follows that same model and was the pioneer to the idea.

Noteworthy point: When doing further assessment of jurisdictions and legal framework, a careful evaluation of the Luxembourg model should be done, as the many years of hindsight and evidence of its success will help in developing and implementing a new funds law framework in Singapore.

8%

46%

8%4%

33%

“We would suggest a ‘best of breed’ approach.”

“Luxembourg has a good legal framework for UCITS and non-UCITS funds, which has led it to become the largest financial centre in Europe.”

“Fund structure will depend on the type of clientele. For retail clients we are increasingly seeing demand to have funds domiciled in jurisdictions which are deemed to have a strong and transparent regulatory environment and which can be sold in multiple jurisdictions to ensure economies of scale which not only benefit investors but minimises the fund due diligence that needs to be performed e.g. review one fund as opposed to multiple fund structures of the same investment strategy. We would therefore recommend modeling investment funds laws with Luxembourg or Dublin.”


Most respondents (46%) alluded /recommend to follow the Luxembourg model.

Luxembourg

Ireland

Others

Cayman

BVI

18 Why not, indeed?

The respondents all showed awareness and acceptability of IFRS, however, the option of adoping other internationally acceptable financial reporting frameworks would only further the appeal of this fund domicile centre.

Noteworthy point: The leading jurisdictions such as Ireland, Luxembourg, Channel Islands and even Cayman Islands, all allow the option of choosing one of the leading financial reporting standards. This option should be made available to cater to diverse investor preferences.

ALL respondents feel that there is a need for investment funds to have their own financial reporting framework, and the majority of them also feel that investment funds should be allowed the option of utilising any of the current international reporting standards.

19%US GAAP 24%

SFRS

14%RAP7

43%IFRS


Almost all of the respondents (95%) think that the proposed investment fund law should allow for umbrella-like structures with underlying sub-funds, and that those sub-funds should be given a distinct legal entity character.

The umbrella like structure is an important consideration. as it leads to a lot of economies at various levels. It is also a growing practice and a proven appeal amongst investors.

Noteworthy point: A careful evaluation of whether to use the “protected company cell” model or the “incorporated company cell” model would be required to ensure that a sufficiently broad choice is available to suit the needs of the industry and investors.


“Maximum flexibility should be allowed in order to satisfy investor/manager requirements for different structures.”

“However, should seek to avoid overtly complex structures that can mask anti-money laundering/tax avoidance issues.

“Having an umbrella structure will enable funds with different strategies or that are designed for different types of investors to be established within the same legal structure, which can reduce the funds’ costs.”

95%Yes to umbrella-like

structures

20 Why not, indeed?

Industry commentsBelow are some of the recommendations that have been included verbatim.


“I am not sure if we (Singapore) have marketed itself enough.”

From the survey responses, it is clear that there needs to be a holistic approach to the development of the fund industry. There are many components to this and it will have a pervasive impact on other regulations that touch the capital market and financial intermediaries market. All needsshould be carefully considered.

“Special Purpose Vehicles set up to hold individual investments should not be subject to the provisions of minimum capital, number of employees and expenses. It is fine to stipulate those for fund managers/fund advisers but not investment SPVs (much like other offshore jurisdictions).”

“Tax is a very important consideration when choosing a fund domicile location to ensure structures are as tax efficient as possible for the investors. Therefore to make Singapore an attractive place to domicile funds, we would also recommend ensuring it has tax treaties which are similar to other jurisdictions which are recognised global fund domicile locations eg Dublin, Luxembourg and Cayman Islands”

1. Fund reporting should be simplified.2. Tax exemption schemes should be simplified

and made automatic (once minimum criteria is fulfilled) – currently takes long time and effort to receive MAS approval.”


“A new investment fund law that is separate from existing companies act.

1. Ensure investment funds laws are consistent with internationally accepted best practice.

2. Approval process – speed up turnaround time for applications.”“The investment fund law should

be compatible with tax treaties signed by Singapore with other countries. It should not happen that companies incorporated under the investment fund law are not eligible for tax benefit under the Double taxation avoidance treaties (DTAT).”

Lessons learnt from othersAn analysis of the successes and pitfalls of established fund centres


Chapter 3

Following the executive summary and previous chapter on our Asset Manager survey, in this chapter we summarise findings of a jurisdictional benchmarking study on how Singapore fares vis-à-vis other established international fund centres, and what Singapore needs to take into account when creating its own future-proof investment fund framework. The analysis will help us learn from the “successes” and the “pitfalls” of other investment centres. The pitfalls should be carefully evaluated, as a correction of them would give Singapore a competitive advantage in the form of the implementation of a robust investment fund law framework.

The established investment fund centres analysed are those who have reached a level of success relatively quickly, and have also stayed ahead of the curve by periodically updating their laws and regulations to keep up with the demands and changes in the industry.

Now let’s take a quick trip around the world to examine which territories have seen success in traditional and non-traditional fund structures.

23 Why not, indeed?

Sources: Olivier Wyman, Domiciles of Alternative funds & PwC Analysis

Successful fund centres

45% of global hedge funds aredomiciled in Cayman Islands because of flexible regulations and wide array of investment vehicles. BVI – ranks fourth in the number of hedge funds

Guernsey and Jersey arethe second most populardomiciles of RE funds(22%), PE funds (15%),hedge funds (12%)

Luxembourg is a globalleader in regulatedproducts – 64% of cross-border UCITS. The worlds leader in real estate funds

UK: $ 1.1 trillion in AUM and one of the first countries to adopt the OEIC structure

64% of global private equity,45% of real estate and 20% ofhedge funds are domiciled inthe State of Delaware – USinland fund domicile centre

Ireland is the fastest growingcentre for regulated fundsdomiciliation and administration.17% of cross-border UCITS areIrish domiciled


Figure 2. Hedge funds

Figure 4. Investment funds (retail)

An analysis

Figure 1. Real estate funds

Figure 3. Private equity funds

Delaware 62%

Cayman11%

Guernsey 7% BVI

0.6%

Ireland3%

Isle of Man<1%

Jersey6%

Malta1%

Luxembourg 9%

Bermuda<1%

Cayman45%

Delaware19%

BVI10%

Bermuda6%

Malta5%

Luxembourg 4%

Ireland8%

Jersey2%

Guernsey 1%

Source: Preqin 2013

The above statistics in Figure 4 are drawn from the Investment Companies Institute as of December 2012 suggest that the United States (US) is the leader in the number of retail investment funds followed by Luxembourg, the global fund centre of UCITS structures.

Analysing the non-traditional sectors which are broadly

Estate (Figure 1), Private Equity (Figure 3) and Hedge funds (Figure 2), there too the US takes the clear lead. In the hedge fund world, however, the Cayman Islands has taken the lead. They, with the addition of Jersey and Guernsey (Channel Islands) are leading contenders in the private equity market. Again, Luxembourg and the Channel Islands are leaders in real estate funds.

Although the US is a leading investment market, we have excluded them from the following analysis as the US corporate law framework is unique to the US, being essentially a federation of many individual states which have a shared legal framework and laws. Singapore on the

Luxembourg 16%

Guernsey 10%

Malta2%Bermuda

1%BVI

<1%Ireland

3%

United States49%

Luxembourg 10%

Australia 6% Others 10%

Ireland 5%

France 5%

Brazil4%

United Kingdom

4%

Canada3%

Japan3%

China2%

Cayman 8%

Jersey12% Isle of Man

3%

other hand, follows the English common law concept, and being a one state nation, operates quite differently.

As the premise of our White Paper is to highlight the need, the void, the advantages, and the proposed broad solution, we look at the fundamentals and concepts that should be considered when implementing such a regime in Singapore. We believe the following analysis on the broad concepts most commonly found in Investment Fund structures is of paramount importance to allow us to assess their feasibility and track record in the jurisdiction of dominance.

These include considerations on how to bring about variable capital structures under the company law framework; authorisation/registration of funds; governance and independence of investment decision makers; multiple compartments/sub-funds and their characteristics; regulated alternative investment fund structures and distributions or redemptions that are made freely, among many others.

Source: Statistics from Investment Companies Institute (ICI) – Dec 2012

Delaware 45%

Source: Preqin 2013

Source: Preqin 2013

25 Why not, indeed?

Of the jurisdictions we analysed, only the UK and the Channel Islands have a stand-alone legislation that allows the incorporation of a variable capital company , also known as “Open-Ended Investment Company” (OEIC). Conversely, in Luxembourg and Ireland, the variability of capital is conferred by the investment fund law which is wrapped around the corporate structure. The other investment fund centres such as Cayman Islands and British Virgin Islands confer the variability of capital structure in the investment companies legislations not through authorised shares or minimum share capital but

In Luxembourg and Ireland, the variability of capital is conferred by the investment fund law which is wrapped around the corporate structure.

How should the concept of variability of capital be introduced?

Almost all the jurisdictions have investment funds regulated by the respective regulatory bodies who have the responsibility of protecting the industry and investors. This is typically achieved by the regulators in those jurisdictions putting a mark of approval or authorisation over the prospectus or private placement memorandum. At present, non-retail products in Singapore do not go through the same process of protection. Whether or not such structures under the proposed new fund regime

Board of Directors or independent management company?

How are the investment funds regulated in the various jurisdictions?

should come under the regulatory purview in Singapore remains a matter of debate. However, judging by global trends, especially in the European Union’s Alternative Investment Fund Manager Directive, the days of unregulated products appears to be coming to an end, and it may not be a choice for Singapore should global regulatory and governmental expectations be imposed on fund domiciles to reign in the industry to include not just manager regulation but also product regulation.

If such investment vehicles therefore are to be set up as corporate bodies, then what would the typical governance structure be like? Would it be self governed as to having

Governance of an investment fund is an important topic particularly post-crisis

a board of directors or would it be governed by an independent corporation which is typically labelled as a ‘management company’? The Channel Islands and British Virgin Islands have self governing structures, while the rest of the jurisdictions that were analysed have both; their own board and also allows for management by independent management companies.

rather through the use of redeemable preferred shares as an investing instrument – this has fairly less onerous buy-back/redemption procedures.


All the jurisdictions that were analysed allow for the creation of multiple compartments. The question to ask here is whether those compartments have mere segregation or do they have legal identities separate and distinct from each other? All the jurisdictions, other than Ireland, Channel Islands and the United Kingdom, have

A flexibility that an investment fund can offer is the ability to create multiple compartments

segregation of assets and liabilities in contractual form but not legal separation of identities. The need for legal separation of compartments within a single structure needs to form a key ingredient in the development of a new fund structure in Singapore, in order to provide certainty to investors.

27 Why not, indeed?

Distribution of returns and capital: The variability of capital would be a commercial impossibility without the ability to freely distribute dividends and return of capital with minimal legal and administrative hurdles

It is important to note that Luxembourg and Ireland allow free distribution of returns and capital provided the funds maintain a minimum net asset/capital size.

Almost all these jurisdictions have regulations governing alternative investment funds of specific sub-sectors such as hedge, private equity and real estate funds.

With the shift towards a higher demand for regulated investment vehicles, it is also important to understand whether alternative investment funds of specific sub-sectors – hedge, private equity and real estate funds – should be regulated or not.

Almost all these jurisdictions have regulations governing these sub-sectors.

Alternative investment funds: to regulate or not?

Our analysis has revealed that Ireland, Luxembourg and British Virgin Islands allow free distributions. It is important to note that Luxembourg and Ireland allow free distribution of returns and capital provided the funds maintain a minimum net asset/capital size. The rest of the jurisdictions, such as the United Kingdom, Cayman Islands and Channel Islands do not allow free distribution and some allow distributions out of reserves only after being subject to solvency tests.


Lessons from other jurisdictionsJurisdiction matrixOur analyses of key attributes of these jurisdictions ranges from determination of tax residency requirements, taxation, regulatory filing obligations, definition of accredited/sophisticated/qualified investors, multiple share classes, financial statements reporting flexibility, assets eligible for investments or diversifications, etc. These attributes have been summarised in a table in the following pages.

29 Why not, indeed?

Criteria Objective Ireland Jersey Guernsey UK Cayman Island British VirginIslands Luxembourg

Does the investment center have an investment fund law framework catering to the investment funds industry?

To understand if there are investment fund laws distinct from legal entity laws.

Does the investment fund law framework cater to different investment industry sub-sectors such as retail, private equity, real estate, hedge funds, etc.?

To understand if there are investment fund laws for each sub-sector of investment industry.

Does the investment fund law allow for capital structure to be variable?

To understand if the provision for variability of capital is within the investment fund law or the Companies law.

Variable status is given by the Company law

Do the investment funds have to maintain minimum net assets/capital to incorporate and retain their character as investment funds?

To understand if there are minimum net assets/capital provisions.

No minimum net assets/capital requirement exists

No other than regulated Mutual Fund

No other than Professional Mutual Fund

Are the investment funds governed via board of directors of the fund or via a separate management company/governing body?

To understand if funds are self managed or need an external management company? Both BoD only Both Both BoD only Both

Can the investment funds distribute all of their net assets, irrespective of the distribution, being out of profits or retained earnings?

To understand if there are any distribution restrictions.

Yes – but subject to solvency tests if paid out of reserves

Does the prospectus of the investment fund have to be reviewed or lodged with regulator prior to launching a fund?

To understand launching of funds process. Yes – though the “Investor Fund’s” investors must sign an undertaking if prospectus not lodged

Required for Public but not

for others

Does the investment fund law allow for multiple sub-funds or segregated cells within the umbrella?

To understand if the investment funds can be compartmentalised.

If yes to above, then is the individual sub-fund or segregated cell have a separate legal identity and can a separate tax identification number be obtained for it?

To understand the legal status of the compartment.

ICC does have separate legal entity status but not PCC

Each sub-fund would have segregated

status; just as PCC

SPC is a single legal entity and the portfolios are not independent

legal entities

Each sub-fund would be considered a

separate legal entity status just as PCC

If yes to the above, are there specific rules that prohibit or allow investment by one sub-fund into another?

To understand cross contamination issues of the compartment.

Yes – within limits set



Does the investment fund law prescribe to use local service providers? (i.e. administrators, custodians, auditors, etc.)

To understand the regulatory framework of the asset management industry.

Yes for all but unregulated

Eligible Investor Fund

Administered funds need local administrators. CIMA registered funds need local auditors. Other

than the above no other local service providers needed

No – Other than

Authorised representative

Are there specific liquidation/dissolution/termination provisions for the investment fund in the law or do they default to the ones prescribed for the legal entity structure’s law. (eg. Does the investment fund follow the dissolution provisions of the companies act or there are specific provisions for the same in the investment fund law).

To understand if the liquidation/winding up/termination provisions of the fund are governed by the legal entity law or are built in the investment fund law.

Legal structure law applies


Does the investment fund law incorporate any re-domiciliation provisions?

To understand if there is a framework to facilitate bringing over funds to Singapore without disturbing their legal character.

No – It is prescribed in the Company law

and restricted to only a few jurisdictions and

corporate structures

Redomiciliation provisions are mentioned in the Company law for

jurisdictions that allow or have same reciprocal legislation

No – It is prescribed in the Company law and restricted

to only a few jurisdictions and corporate structures

It is a widely followed industry “practice” but it is

not prescribed in any legislation


To understand launching of funds process.

Is there a fund promoter concept and does it need to be licensed or authorised?

To understand who ultimately launches a fund.

Yes for UCITS but AIFMD managers need to register


Criteria Objective Ireland Jersey Guernsey UK Cayman Island British VirginIslands Luxembourg

Does the investment center have an investment fund law framework catering to the investment funds industry?

To understand if there are investment fund laws distinct from legal entity laws.

Does the investment fund law framework cater to different investment industry sub-sectors such as retail, private equity, real estate, hedge funds, etc.?

To understand if there are investment fund laws for each sub-sector of investment industry.

Does the investment fund law allow for capital structure to be variable?

To understand if the provision for variability of capital is within the investment fund law or the Companies law.

Variable status is given by the Company law

Do the investment funds have to maintain minimum net assets/capital to incorporate and retain their character as investment funds?

To understand if there are minimum net assets/capital provisions.

No minimum net assets/capital requirement exists

No other than regulated Mutual Fund

No other than Professional Mutual Fund

Are the investment funds governed via board of directors of the fund or via a separate management company/governing body?

To understand if funds are self managed or need an external management company? Both BoD only Both Both BoD only Both

Can the investment funds distribute all of their net assets, irrespective of the distribution, being out of profits or retained earnings?

To understand if there are any distribution restrictions.

Yes – but subject to solvency tests if paid out of reserves


To understand launching of funds process. Yes – though the “Investor Fund’s” investors must sign an undertaking if prospectus not lodged

Required for Public but not

for others

Does the investment fund law allow for multiple sub-funds or segregated cells within the umbrella?

To understand if the investment funds can be compartmentalised.

If yes to above, then is the individual sub-fund or segregated cell have a separate legal identity and can a separate tax identification number be obtained for it?

To understand the legal status of the compartment.

ICC does have separate legal entity status but not PCC

Each sub-fund would have segregated

status; just as PCC

SPC is a single legal entity and the portfolios are not independent

legal entities

Each sub-fund would be considered a

separate legal entity status just as PCC

If yes to the above, are there specific rules that prohibit or allow investment by one sub-fund into another?

To understand cross contamination issues of the compartment.




Does the investment fund law prescribe to use local service providers? (i.e. administrators, custodians, auditors, etc.)

To understand the regulatory framework of the asset management industry.

Yes for all but unregulated

Eligible Investor Fund

Administered funds need local administrators. CIMA registered funds need local auditors. Other

than the above no other local service providers needed

No – Other than

Authorised representative

Are there specific liquidation/dissolution/termination provisions for the investment fund in the law or do they default to the ones prescribed for the legal entity structure’s law. (eg. Does the investment fund follow the dissolution provisions of the companies act or there are specific provisions for the same in the investment fund law).

To understand if the liquidation/winding up/termination provisions of the fund are governed by the legal entity law or are built in the investment fund law.



Does the investment fund law incorporate any re-domiciliation provisions?

To understand if there is a framework to facilitate bringing over funds to Singapore without disturbing their legal character.

No – It is prescribed in the Company law

and restricted to only a few jurisdictions and

corporate structures

Redomiciliation provisions are mentioned in the Company law for

jurisdictions that allow or have same reciprocal legislation

No – It is prescribed in the Company law and restricted

to only a few jurisdictions and corporate structures

It is a widely followed industry “practice” but it is

not prescribed in any legislation


To understand launching of funds process.

Is there a fund promoter concept and does it need to be licensed or authorised?

To understand who ultimately launches a fund.

Yes for UCITS but AIFMD managers need to register

ICC - Incorporated Company CellsBoD - Board of DirectorsPCC - Protected Company CellsSPC - Segregated Portfolio Company

UCITS - Undertaking in Collective Transferable SecuritiesCIMA - Cayman Island Monetary AuthorityAIFMD - Alternative Investment Fund Managers Directive.

Abbreviation list:

31 Why not, indeed?

Conclusion: In evaluating all the different characteristics of the established fund jurisdictions worldwide, it is clear that there are many areas which Singapore should consider adopting if it is to create a new fund structure under the framework. The key is to understand the principles of each area, why it was created and whether they are enablers or disruptors to the overall fund regime. Only then can Singapore bring about a new fund structure which will have all the good points, and avoid the pitfalls seen in other jurisdictions. In this way, Singapore can gain a foothold and leapfrog the other jurisdictions, existing and upcoming ones, and find a competitve advantage for itself.

The Singapore Fund Making it a preferred option


Chapter 4

33 Why not, indeed?

Singapore is strategically located in the heart of Asia, and offers financial institutions excellent infrastructure, a highly skilled and cosmopolitan labour force, and access to investors. The Singapore government makes continual efforts to develop the fund management industry by providing a stable economic and political environment that is conducive to business operations. These factors make Singapore a choice location for setting up fund management operations focused on investments in Asia, particularly India and Southeast Asia.

However, the changing global environment is putting increasing pressure on financial centres, including Singapore, to re-invent themselves to remain at the forefront of the industry.

PwC Singapore has developed a white paper to consider the various aspects of a new investment fund framework to make Singapore the jurisdiction of choice for the fund management industry to set up funds. In support of the white paper, PwC Singapore has conducted a high level survey of representatives from the asset management community in Singapore and carried out a jurisdictional benchmarking study to compare Singapore with other established international fund centres. Following our previous chapters which summarise the results of the survey and key findings of the benchmarking study, we will now look at what changes may be introduced from a tax perspective to create even more opportunities for the asset management industry.


From a tax perspective, any investment fund structure should meet two key criteria. First, it should be tax neutral, i.e. as an investment fund essentially operates as a pooling vehicle it should not expose investors to a more burdensome taxation than if they were to invest directly. Second, it should provide certainty of taxation, i.e. it should be possible to determine the tax consequences at every level, from income from investments to the distributions to investors.

Generally, tax neutrality of a fund structure means the following:

• notaxationatthelevelofthefunditself;and

• notaxesondistributionsfromthefundtoitsinvestorsin the location of the fund.

A Singapore fund set up as a company and approved under one of the existing tax exemption schemes, i.e. the Singapore Resident Fund Tax Exemption Scheme and the Enhanced-Tier Fund Tax Exemption Scheme, generally meets the above criteria. So what can be done to make Singapore a more attractive location for establishing investment funds? Some have raised the question as to whether such funds should automatically qualify for tax exemption in Singapore once they are regulated, so that there is no need to spend additional time going through the process of applying and waiting for approvals. The counter-questions to this are, is there really a downside, since the exemption will take effect from the date the application is submitted, regardless of the amount of timetakenforprocessing?Andistherereallyabenefittomaking it automatic?

Back to basics

35 Why not, indeed?

Substance is the word

The recent tax initiatives of the Organisation for Economic Cooperation and Development (OECD), such as the BaseErosionandProfitShifting(BEPS)reportandtheComprehensiveActionPlan(CAP)areredefiningtheparameters of international tax planning. The key message of these initiatives is to align taxation with operational and commercial substance, and to call for greater transparencytorestoretheintendedeffectsandbenefitsof international taxation standards.

Singapore has always respected the need for substance and has made it a basic requirement of its tax incentives. Even though Singapore has schemes that provide for tax exemption on income of funds set up in Singapore, such exemption is only granted if the funds meet certain conditions, such as minimum business spending and the existence of a fund manager with investment professionals. These conditions act as indicators of commercial substance and an anti-avoidance mechanism, effectively ruling out conduit vehicles lacking associated business activity in Singapore from the tax exemption schemes.

Given the BEPS and CAP developments, Singapore will need to demonstrate that its incentives continue to focus on substance and that its tax incentive framework for investment funds is compliant with the CAP objectives, suchasnottoencourageunsubstantiatedprofitshifting.Although Singapore is not a member of the OECD, it has already expressed its support for the BEPS initiative.

In this respect, it is not likely that Singapore would agree to exempt Singapore fund vehicles from tax unconditionally or would relax conditions dealing with commercial parameters. In fact, it may be counter-productive to do so against the current backdrop. Instead,continuingtofine-tuneitsexistingtaxincentiveswould help to better serve the requirements of the fund management industry.


Treaty benefitsOne of Singapore’s competitive advantages is its wide network of tax treaties, and in particular, a number of favourable tax treaties with Asian countries, such as India and China.

Tax treaties generally help to reduce withholding tax on dividends and interest, as well as provide for exemption from capital gains tax, imposedbyinvesteecountries.Toqualifyfortaxtreatybenefits,fundvehiclesneedtobeabletomeetthedefinitionofa“resident”.Inthelatestupdatetoitsmodeltaxconvention,OECDsuggeststhatfiscallytransparent (i.e. not liable to tax) fund vehicles should not be treated as residents for the purposes of tax treaties. By contrast, funds which are exemptfromtaxsubjecttofulfillingcertaincriteriawithregardtotheirpurpose or activities (e.g. source of income, minimum distributions, etc.) may be treated as residents.

In this respect, Singapore corporate funds enjoying tax exemption schemesshouldbeabletoqualifyfortreatybenefits,sincetheyhavetobe resident in Singapore (being one of the conditions for tax exemption) and are not transparent for tax purposes. However, the application oftreatybenefitswoulddependontheinterpretationoftherelevantarticles of the treaties by the investee countries. For the avoidance of doubt,itmaybeadvisabletoconsiderspecificallyincludingsuchfundentities in treaties to be entered into by Singapore. This should help avoid the drawbacks of Luxembourg and Irish fund vehicles (such as Luxembourg Specialised Investment Fund and Irish Qualifying Investor Fund)whicharenotalwayseligibleforbenefitsundertheirtaxtreaties.New treaties negotiated by Luxembourg for example include clauses to address the treatment of fund vehicles to avoid this uncertainty.

37 Why not, indeed?

Is the investment on the tax exemption list?

The most immediate improvement to the existing taxexemptionschemeswhichwouldbenefitfundsset up in Singapore would be revision of the list of investments qualifying for tax exemption.

Currently,taxexemptiononlyappliesto“specifiedincome”from“designatedinvestments”.Theexistinglistof“designatedinvestments”isstructuredasaninclusionlist;incomefrominvestmentswhichdo not fall within this list does not qualify for exemption.Thelistisdifficulttoapplyinpracticeand does not cover a range of assets in which investment funds now invest. Examples of such assets include precious metals, and loans or debt securities (that are not listed) issued by entities other than companies (e.g. trusts).

The industry is continually developing and looking at new investments that would generate the level orreturnsdesiredbyinvestors;andaninclusionlist would not be able to keep up with these market developments. For the schemes to be even more progressive, the government may wish to consideradoptinganexclusionlistfor“designatedinvestments”aswell.Regulatoryconsiderations(such as limitations on risky assets for certain types of funds) should be addressed separately through the investment fund regulations. If there is a need to impose restrictions on certain assets from a social policy or tax policy perspective, it can be done by wayofanexclusionlist,i.e.aspecificlistofassetswhich do not qualify for tax exemption.


Conclusion In the world of increasing pressure for tax transparency and commercial substance, Singapore is well positioned as a fund and fund management jurisdiction. It has traditionally granted tax incentives only in exchange for genuine business activities andwillcontinuetodoso.However,thereisroomforfine-tuningtheexistingtaxregime and making it more user-friendly for the industry.

If a new investment fund law framework which would cater to the needs of various assetmanagersandinvestorsweretobeintroduced,fine-tuningoftheSingaporetaxregime would certainly go a long way in complementing the framework and making the Singapore Fund a preferred option for the fund management industry.

Justin OngSingapore Asset & Wealth Management Leader+65 6236 [email protected]

Anuj KagalwalaSingapore Asset & Wealth Management Tax Leader+65 6236 [email protected]

Tan Hui ChengPartnerTax – Asset & Wealth Management +65 6236 [email protected]

Armin ChokseyDirector - Asset & Wealth Management Head of Asian Investment Fund Centre +65 6236 [email protected]

Contacts

why not, indeed? - pwc: audit and assurance, … not, indeed? a pwc viewpoint on creating a new...

Documents