SET THE GRC FRAMEWORK IN PLACE
The need for governance, risk and compliance (GRC) at a commensurate level, especially for proprietary investment structures, may not have received much attention in the past in many countries, although it should. A proprietary structure is typically used when establishing a single family office, or a family trust using a corporatised private trustee arm or an investment holding entity, and other types of private investment vehicles.
REGULATORS’ EVER-GROWING TENTACLES AND OFFSHORE STRUCTURES
In recent years, regulators and tax authorities across the globe have become more active in initiating and implementing regulatory changes, which have a significant impact on cross-border investment structures. There is a heightened level of cooperation between governments on a bilateral and multilateral basis on the sharing of information and data. This is further augmented with the use of technology to drive on-going surveillance and law enforcement is also getting stricter. This trend is set to continue and will further accelerate as we move forward in 2019 and beyond.
We have the Foreign Account Tax Compliance Act (FATCA) driven by United States of America; Common Reporting Standard driven by Organisation for Economic Cooperation and Development (OECD) and the resultant automatic exchange of information among participating countries; OECD’s active pursuit on tax transparency, fair taxation and implementation of anti-base erosion profit shifting measures, to mention a few. These global developments are driving the need to conduct business in a more compliant manner, with demonstrable economic substance. The message is loud and clear, if we wish to take note of it.
The location of an investment structure in the past was mainly driven by tax considerations. The legislative changes in several no-tax/low-tax jurisdictions during 2018, requiring certain prescribed levels of economic substance, will make treaty shopping far less attractive and investment structuring, less complex. Those offshore structures that do not currently have a desired level of economic substance may consider either infusing economic substance or co-locating/re-locating the structure to the jurisdiction which happens to be its place of effective management.
GOVERNMENT: THE “CAESAR”
I am reminded of this biblical quote, “Render unto Caesar the things which are Caesar’s, and unto God the things that are God’s.”
Let us look at the first part which can be paraphrased as, “What is reasonably due to Caesar, give it to Caesar.”
The word “Caesar” here can refer to governments across the globe and the respective tax departments. To have an efficient commercial structure is desirable but it should have a GRC framework with well-defined policies, processes and procedures to enable the structure to demonstrate economic substance.
PROPRIETARY INVESTMENT STRUCTURES
The fundamental aspect of a proprietary structure is that it holds, or is meant to hold, monies and assets which are proprietary in nature. By its very definition, proprietary structures are not required to pass the tests required by licensing regimes. The onus lies squarely on the owner or sponsor of the proprietary structure to insist on having the commensurate level of GRC which underpins economic substance.
WHAT CAN STACK UP BETTER?
1) Evaluate the need to get rid of a “cost-centre” mentality while looking at GRC aspects.
2) Inculcate an organisational culture where employees refrain from cutting corners.
3) Avoid liberal interpretation of regulatory requirements, as it is most unlikely to sail across various jurisdictions in the days to come.
4) Regulators’ tentacles have become longer, sharper and more powerful.
5) At the first board meeting/management meeting (while setting up a new venture), formally adopt a GRC standard (i) which is higher than the prescribed regulatory requirement, or (ii) which is better for its business conduct; the higher of the two should be the minimum standard.
6) From the start, have a suitable mechanism in place to deal with conflicts of interest/related party transactions and adopt a management style that truly reflects a fiduciary mindset.
7) Conduct physical board meetings/management meetings in a formal manner at periodic intervals. Maintain comprehensive documentation for all important business decisions.
8) Ensure economic substance, economic substance and more economic substance in line with the business activity and revenue earned.
9) Be reminded that regulators will continue to have considerable discretion. The place of effective management and control, as well as the domicile of investment structure, should be co-located in the same jurisdiction, to make it easier to demonstrate economic substance.
10) Simple investment structures are better understood by tax authorities and other regulators.
11) The pertinent questions to ask are, “What is the DNA of one’s own business?” “Will the structure stand the test of regulatory scrutiny?”
Benoy Philip is Senior Adviser to MD & CEO of Tricor Singapore, and Director, Taproot Family Offices, Singapore.