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AIMA Warns UK To Preserve Investment Manager Tax Exemption

by Robert Lee,, London

18 January 2007

The Alternative Investment Management Association (AIMA), the leading global hedge fund and alternative investment industry association, has warned the UK tax authorities that continuing uncertainty over the country's Investment Manager Exemption, or IME, could lead to a "significant loss of business" for London as managers seek to base themselves in more tax friendly jurisdictions.

AIMA delivered its warning in a response to HM Revenue & Customs's consultation on the proposed revision of Statement of Practice (SP1/01), which includes changes to the IME.

AIMA says that the IME plays a crucial role in the industry as it enables offshore hedge funds, managed from the UK, to be largely exempt from UK taxation, allowing them to be globally competitive. Without this exemption, hedge fund managers may not be able to compete and may decide to relocate.

A key concern of investment managers is the whether they will meet the IME standards. AIMA worries that uncertainty will have significant implications on the industry, and has asked HM Revenue & Customs that the current certainty present in SP1/01 is maintained after the revision.

AIMA has also proposed that the scope of ‘investment transaction’ is broadened as widely as possible and should include asset classes (e.g., carbon emission credits) that are not specifically excluded by legislation. In addition, the risk that the IME could be withdrawn for a whole fund if it carried out a single transaction that falls outside the definition of an investment transaction, is seen as disproportionate and unreasonable.

Currently, the customary remuneration test is a test of gross fees received by UK investment managers, and given that there is no legislative basis for the HMRC proposal to move this to a net basis, AIMA has argued that the status quo should remain.

AIMA has also argued that the proposed removal of the existing ‘safe harbours’ for passing the independence test would be a retrograde step, rather than giving the certainty that fund managers need.

AIMA has proposed that any new Statement of Practice should not apply to existing funds for at least 12 months, to allow investment managers to adjust to its requirements.

Commenting on AIMA’s submission the HMRC, Neil Oliver, Chairman of AIMA’s Tax Committee observed:

“We have been in discussion with HMRC for some time and generally welcome their positive view of the hedge fund industry and the changes to make SP1/01 more relevant to the way hedge funds now operate. However there are a number of proposals in the draft Statement of Practice that give us concern and create a degree of uncertainty that has serious implications for the industry in the UK."

"The reality is that, while fund managers may like to live in London, they could work as effectively from other locations in Europe. Managers have left the UK, citing withholding tax as being a factor in their decision."

He concluded by cautioning that:

"There is a real danger that this could quickly escalate into a significant loss of business for the UK as others follow suit and that providers of services such as prime brokers correspondingly reduce their UK operations."

"We hope that our points and arguments are constructive and helpful to HMRC and that they will be adopted as part of their thinking. That way we can be assured that fund managers will continue to benefit from the certainty that they need.”

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