Private equity fund 2021 year-end global updates

This alert covers certain key 2021 global developments that may impact tax planning with respect to private equity funds in 2022.

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Private equity fund 2021 year-end global updates

TAX ALERT | January 31, 2022 | Authored by RSM US LLP

Private equity fund 2021 year-end global updates

The year of 2021 was a year of significant tax proposals and changes. Particularly, throughout 2021 many jurisdictions have either proposed or introduced rules that appear to advance the goals of the OECD’s anti-tax avoidance and profit shifting pillars. Below is a summary of recent global developments that may impact tax planning with respect to private equity funds going forward into 2022:

OECD and European Union Global Minimum tax expected implementation

Consistent with the OECD’s Base Erosion and Profit Shifting (BEPS) initiative and motivated by the economic downturn resulting from the COVID-19 pandemic, jurisdictions throughout the world are working together to discourage multinational entities from shifting profits to low-tax jurisdictions. In particular, the OECD described Global anti-Base Erosion Rules (GloBE) within its Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (Oct. 8, 2021) (the OECD Statement), and those rules call for the imposition of a minimum tax rate of 15%. This minimum tax would apply to multinational enterprises that generate EUR 750 million (approximately USD 853 million) in annual global revenue. The OECD Statement mentions that jurisdictions are free to implement the GloBE rules to multinational enterprises even if such entities do not meet the threshold. The Inclusive Framework on BEPS, comprised of 137 member jurisdictions, have agreed with the above OECD Statement as of Nov. 4, 2021.

A draft Model Framework for the global minimum tax rules was released by the OECD on Dec. 14, 2021 (see, Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS). While the specifics of the rules are beyond the scope of this article, the rules will act as a technical guide for the application of the GloBE by jurisdictions that have agreed to enact a 15% global minimum tax as part of their own local law.

The OECD is an international organization that issues policies, analysis and statistics for the purposes of promoting global policies. The European Union (EU), a political and economic union of 27 member states that are primarily located in Europe, will likely issue a Directive designed to implement the GloBE by mid-2022 in order to meet a 2023 deadline for the rules to take effect. Based on statements made by an EU executive, the European Commission is expected to publish a Directive by December 2022, which each EU member state must implement into their own legal code. The Directive is expected to set minimum standards that each state must comply with. A proposed Directive is to be discussed by the EU finance ministers in early 2022. Under EU Directives, tax proposals require unanimous agreement from all 27 member states.

Recent changes in Hong Kong taxes

In recent years, the Hong Kong government has promoted the private equity and venture capital industry by adopting a “three-step approach”: (i) new limited partnership fund regime; (ii) tax concessions; and (iii) its re-domiciliation mechanism. It is anticipated that the “three-step approach” would enhance the competitiveness of Hong Kong’s market, and promote Hong Kong as one of the top global destinations for the operation of private equity and venture capital funds.

The Limited Partnership Fund Ordinance, which came into operation on Aug. 31, 2020, enables funds to be registered in the form of limited partnership in Hong Kong by utilizing the Company Registry. A limited partnership should benefit from contractual flexibility in Hong Kong under these rules. Over 300 funds registered under the new regime since its launch. 

In line with the “three-step approach,” legislation was also passed to offer a 0% tax rate for qualifying carried interest distributed by eligible private equity funds operating in Hong Kong. The reduced tax rate applies to eligible carried interest received by, or accrued to, qualifying carried interest recipients on or after April 1, 2020. For the application of tax concessions, the qualifying carried interest recipients must meet substance requirements in Hong Kong, including the number of qualified full-time employees and operating expenditures incurred in Hong Kong. The legislation also expands the classes of assets that may be held and administered by a special purpose entity on behalf of a fund. 

The final step in the government’s plan allows for a fund created in corporate or limited partnership form under the law of a jurisdiction outside Hong Kong to be eligible to be registered as an open-ended fund company (OFC) or limited partnership fund (LPF) in Hong Kong under the re-domiciliation mechanism, which came into effect on Nov. 1, 2021. The continuity of the fund, including contracts made and property acquired are expected to be preserved, and would have the same rights and obligations as any other newly established OFC or LPF in Hong Kong.   

Based on the above, and from a U.S. tax perspective, if U.S. investors consider entering into the Hong Kong market, it is important to note that the U.S. and Hong Kong have not entered into a bilateral income tax treaty. Thus, the benefits that investors often expect from income tax treaties (e.g., reduced withholding rates, mechanisms to resolve double tax issues may not be available).

Recent changes in Ireland taxes

Over the last number of years, the Irish tax measures relating to M&A have been gradually evolving. This trend has been continued in Finance Bill 2021, which was published by the Minister of Finance in October 2021. The Finance Bill is passed through the various legislative stages and the Finance Act 2021 was signed into law in December 2021.  

One of the key pillars of the Irish Budget process has been continuing the adoption of international tax reforms and several other new measures. As part of the international tax reforms, Ireland is introducing new anti-reverse-hybrid rules and a new interest limitation ratio which are expected to sit alongside Ireland’s existing rules regarding tax deductions for interest. These new measures come into effect in January 2022 and are based on the EU’s Anti-Tax Avoidance Directive (ATAD). It will be a key aspect of structuring any M&A transactions involving Ireland to consider these new measures, particularly in cross border transactions. In addition, in line with the ATAD, Ireland amended its exit tax rules in 2018 and 2019 to bring into tax any unrealized gains on certain capital assets where there is a transfer outside of Ireland. The tax rate for the exit charge is set at 12.5%, rather than the capital gains tax rate of 33%; however, consideration should be given to the impact of future changes in legislation resulting from any EU GloBE Directive may have on the above tax rate on exit charges.

Recent changes in Dutch taxes

The European Commission launched an initiative on May 20, 2021 to address the use of shell companies in international arrangements to reduce income taxes. The initiative aims to define substance requirements for arrangements operating in the EU. The draft measures of the EU will be published by the end of 2021 and are expected to result in a proposal for a third Anti-Tax Avoidance Directive (ATAD 3), to be adopted by the beginning of 2022. The EU defines shell companies as “legal entities with no or only minimal substance, performing no or very little economic activity and they continue to pose a risk of being used in aggressive tax planning structures.” 

Economic substance has become a key element in the international context and is relevant for the application of national tax laws, double tax treaties and to avoid the application of national anti-abuse rules. Accordingly, taxpayers are required to maintain a significant level of assets, employees, functions, assume risks and use and enjoy the income received to be entitled to the benefits of certain double tax treaties and EU tax Directives. Business substance is a combination of many elements which include human and material resources. 

If the substance requirements are not met by a shell company, certain benefits otherwise available to such company may be denied. The denial of tax benefits would likely include denial of double tax relief, application of treaty benefits, or deductibility of costs, participation exemption, domestic withholding tax exemptions and residence certificate issuance, among other items. Public disclosure of information about the shell entity and sanctions on the entity, directors and/or beneficiaries are also being considered. This proposal, if adopted, is expected to reinforce the pressure regarding the use of intermediate holding companies. To mitigate costs, multinational groups may need to select one single jurisdiction to establish their holding companies and build up the necessary level of substance. 

Recent changes in UK taxes

In October 2021 the UK government released a policy paper for a new Asset Holding Companies regime, which is a proposal in the UK’s Finance Bill 2021-22 intended to be a competitive tax regime with typical holding company jurisdictions such as Luxembourg and Ireland, supported by the UK’s comprehensive financial infrastructure and large treaty network. The Asset Holding Companies regime applies to most unlisted investment funds, including private equity funds, that mainly carry out investment activity, and are at least 70% owned by diversely owned funds, charities, long-term insurance businesses, sovereign immune entities and pension schemes.

The above regime is not intended to affect the taxation of profits from trading activities, UK land or intangibles. The proposed legislation was introduced in Finance Bill 2021-22 and is expected to establish a tax regime that includes the exemption of gains on disposals of certain shares and overseas property by Asset Holding Companies and allowing deductions for certain interest payments that would usually be disallowed as distributions (along with changes to the hybrid rules), among other changes. If approved, many of the changes proposed in the UK’s Finance Bill 2021-22 are expected to come into effect with respect to the UK’s next tax year beginning in April 2022.

According to HMRC, the general aim of the above measure is to facilitate the flow of capital, income and gains between investors and underlying investments where there are intermediate holding companies, to tax investors broadly as if they invested in the underlying assets and that intermediate holding companies pay no more tax than is proportionate to the activities they perform.

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This article was written by Ramon Camacho, Lynn Ellenberg, Anthony Reda and originally appeared on 2022-01-31.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2022/private-equity-fund-2021-year-end-global-updates.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

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Proposal: Disclosure of supplier finance program obligations

A proposed FASB ASU would require a buyer that uses a supplier finance program to disclose certain information about the program.

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Proposal: Disclosure of supplier finance program obligations

ARTICLE | January 04, 2022 | Authored by RSM US LLP

Supplier finance programs (also referred to as reverse factoring, payables finance or structured payables arrangements) allow a buyer to offer its suppliers the option to be paid by a third-party finance provider or intermediary in advance of an invoice due date, based on invoices that the buyer has confirmed as valid. Stakeholders have observed that there is a lack of transparency about supplier finance programs because (a) there are no explicit disclosure requirements in U.S. generally accepted accounting principles for the programs and (b) a buyer may present obligations covered by those programs in the same balance sheet line item as accounts payable or in another balance sheet line item depending on the facts and circumstances of the arrangement.

To address these issues, the Financial Accounting Standards Board (FASB) recently issued a proposed Accounting Standards Update (ASU), Liabilities – Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. If finalized, the proposed ASU would require a buyer that uses a supplier finance program in connection with the purchase of goods and services to disclose sufficient information about the program to allow an investor to understand the program’s nature, activity during the period, changes from period to period and potential magnitude. These disclosures would include the key terms of the program and the following information about the amount of obligations outstanding at the end of the reporting period that the buyer has confirmed as valid to the finance provider or intermediary under the program (i.e., the amount of obligations confirmed under the program that remains unpaid by the buyer):

  • A description of where those obligations are presented on the balance sheet
  • A rollforward of those obligations showing, at a minimum, all of the following:
    • The amount of those obligations outstanding at the beginning of the reporting period
    • The amount of those obligations added to the program during the reporting period
    • The amount of those obligations settled during the reporting period
    • The amount of those obligations outstanding at the end of the reporting period

The amendments in the proposed ASU would not affect the recognition, measurement or financial statement presentation of obligations covered by supplier finance programs.

The proposed ASU would be applied on a retrospective basis for each period in which a balance sheet is presented. The effective date will be determined after the FASB considers feedback on the proposed ASU. Early application would be permitted.

The proposed ASU is available for comment until March 21, 2022.

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This article was written by RSM US LLP and originally appeared on 2022-01-04.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/financial-reporting/proposal-disclosure-of-supplier-finance-program-obligations.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

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(541) 773-6633

Idaho Office:
(208) 373-7890

U.S. households are drawing down savings as the economy booms

After building up prodigious savings during the pandemic, American households are starting to spend that cash.

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U.S. households are drawing down savings as the economy booms

ARTICLE | January 04, 2022 | Authored by RSM US LLP

After building up prodigious savings during the pandemic, American households are starting to spend that cash, our analysis of consumer savings and checking deposit data shows.

This drawdown is an encouraging sign that households, buoyed by ample employment opportunities and rising incomes, feel confident enough to spend some of those savings.

And it’s another sign that consumers are returning to more normalized spending and saving patterns, which should continue to boost overall economic activity even as risks around inflation and the omicron variant loom.

This reduction in savings will no doubt affect families’ decisions about work and spending. And when the fading fiscal support is added in, the demand that is playing a role in the current surge in inflation will ease during 2022.

Throughout the ups and downs of the pandemic, household savings have provided a vital cushion to the economy and American households. After peaking in the middle of 2021, the savings stashed away during the pandemic provided a bridge through the slowdown in the third quarter and are now helping fuel a growth rate that will exceed 7% to close out the year.

But questions remain regarding the expiration of the pandemic assistance programs. Will their positive impact on overall economic growth continue, and will increases in the cost of food, energy and rent eat into those gains?

The pandemic, after all, continues to affect workers in certain areas of the economy more than others.

The leisure and hospitality occupations, for example, were still 1.3 million jobs below their pre-pandemic levels as of November 2021. Education and health services were 800,000 jobs short, and state and local governments were still 1 million jobs below pre-pandemic levels.

For the economy in general, the discussion on getting people back into the workforce centers on low-wage employees, ranging from teachers to hotel staff to senior-care workers. Will those workers of more limited means be more likely to return to work as cash savings dwindle?

Cash and savings among those out of work

The argument has been that those workers will not return to jobs until the spigot of government largesse is turned off and household balance sheets are depleted.

If anything, funds in checking accounts and savings accounts plateaued before the pandemic benefits expired.

We attribute this surge in deposits to the need for precautionary savings. Households held onto cash and savings out of fear that the economy would worsen during the pandemic.

This is not the first time this has happened. Checking deposits surged during the shock of the 2008-09 financial crisis and then again in 2011.

The savings rate, though, was another story. During the 2008-09 recession, savings dropped, most likely as households dipped into their reserves to maintain spending.
But in 2020, savings jumped as government support boosted household balance sheets. Savings has remained at that higher level, not only because of the threat of the pandemic but also because of the limitation of spending opportunities during the pandemic.

In a study conducted by the Institute at JPMorgan Chase in September 2021, researchers found that checking account balances in the lowest quartile of households—those earning $12,000 to $30,000—were 70% higher than two years earlier but were still holding an insufficient cash buffer of only $1,000.

When looking at households that did not receive child tax credit payments, checking balances were 50% higher than two years earlier, but still insufficient at $1,600. For high-income groups, $4,000 checking balances in September were 40% higher than two years earlier.

It makes mathematical sense for low-income households to have the largest percentage change in their cash balances because of pandemic assistance, and for their checkable holdings to be depleted more quickly as reported in the JPMorgan report.

Conversely, the percentage increases for higher-income households during the pandemic were not as large, but their rates of depletion were slower.

In our estimation, that accounts for the persistence of savings still to be spent by higher-income households. It also implies that there is policy space to address the needs of low-income workers who are still dealing with the economic fallout from the pandemic.

And it also makes sense that lower-income households would apply government benefits for essential expenses. That was borne out of surveys by the Census Bureau in the weeks immediately following the receipt of the first monthly child tax credit payments in the summer of 2021, and then repeated during the fall when the children were back in school.

An overwhelming majority of those who received child tax credits applied those funds to food, clothing and school supplies. Smaller percentages of households allocated a portion of their benefits to rent, child care, vehicle payments and debt repayments.

And as would be expected, 85% of those responding to the survey were 25 to 55 years old, in their prime working age.

Policy considerations

The drop in checking and savings deposits is telling a different story for different income groups.

It’s not realistic to think that parents of children not yet in school will risk their children’s health and suddenly return to work. For as long as the pandemic persists and until a vaccine is formulated for infants, someone in those families will remain at home. And for as long as schools are threatened by frequent COVID-19 outbreaks and closures, at least one parent will remain out of the labor force.

And it’s incorrect to think that the working class is sitting on top of a pile of savings. Yes, their savings rate has increased, but it is now being drawn down. The data shows that whatever money that was given to low-income families was and is being spent on food and clothing and school supplies.

Policymakers are keenly aware that the end of pandemic assistance will become a drag on consumption. This is why one area of the policy debate of the Build Back Better legislation revolves around making the enhanced child tax credit permanent.

Whether that assistance comes in the form of food stamps or rent assistance, or in direct payments through the monthly child tax credit, a strong economic argument can be made. Government transfers that augment the income of low-income households are spent on essential goods and services, with downstream multiplier effects that benefit every strata of incomes.

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Call us at (541) 773-6633 (Oregon), (208) 313-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by Joe Brusuelas and originally appeared on 2022-01-04.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/economics/us-households-are-drawing-down-savings-as-the-economy-booms.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890