• Service: Tax, Corporate Tax, Global Transfer Pricing Services
  • Type: Regulatory update
  • Date: 11/06/2014

Tax Insights

KPMG's analysis of tax issues and developments.

Steven Economides

Steven Economides
Partner, International Corporate Tax

+61 2 9335 8876

Hybrid CIVs and the need for tax reform 

by Steven Economides, ASPAC Regional Leader GICT

On 23 April 2010, the Organisation for Economic Co-operation and Development (OECD) published The Granting of Treaty Benefits with Respect to the Income of Collective Investment Vehicles. During September 2013 the OECD and G20 jointly published High-Level Principles on Long-Term Investment Financing by Institutional Investors. Both papers set out cogent reasons for governments to encourage investment from long term institutional investors.

In particular paragraph 1.4 of the joint paper states:


“Governments should ensure that capital markets and financial intermediaries are subject to an appropriate and predictable regulatory and supervisory framework within and across jurisdictions. Tax neutrality towards different forms and structures of financing should be promoted. Investment frameworks should as far as possible be made consistent across countries to facilitate the cross-border flow of long-term financing”


It is within the context of the above papers that I wish to refer back to the decision in RCF III LP v FCT 2014 FCAFC 37 (The RCF Case) and contrast the outcome in the case with the result in TD 2011/25. On the 29th of May the taxpayer in the RCF Case applied for special leave to appeal to the High Court.


The Full Federal Court held that for the purposes of Australian tax law, the Respondent, a Cayman Islands Limited Partnership (RCF), must be treated as a company. Therefore in the context of that case the Commissioner was able to assess RCF to Australian tax. The Federal Court stated:


“It may be open to argument by the United States (US) partners that they should obtain the benefits of the double tax agreements (DTA) on the basis that it was appropriate for Australia to view the gain as derived by the partners resident in the US, and to apply the provisions of the DTA accordingly, as discussed in the OECD commentary (about which we express no view) but that consideration is a separate issue to the question of whether the effect of the provisions of the DTA was to allocate the liability for the tax on the gain differently to the Assessment Act.”


It is difficult to interpret clearly what the Full Court means. On the one hand it is clear that under domestic law (1) a limited partnership is defined as a company and (2) the definition applies to foreign limited partnerships (hence the need for Division 830). Therefore it appears clear that absent any international obligation otherwise, RCF was subject to tax on any profit sourced in Australia. It was also clear under the terms of Australia’s DTA with the US that RCF was not a US resident. In my view the Full Court was alluding to the US partners of RCF seeking the assistance of the competent tax authority to resolve an issue of Australia improperly taxing a US resident. Whilst theoretically feasible this solution will not encourage global investment into Australia.


The question posed by TD 2011/25 was whether the business profits article (Article 7) of Australia’s tax treaties applied to Australian sourced business profits of a foreign limited partnership (LP) where the LP is treated as fiscally transparent in a country with which Australia has entered into a tax treaty (tax treaty country) and the partners in the LP are residents of that tax treaty country? The answer to the question posed by TD 2011/25 was: “Yes”. In particular in paragraph 9 of that ruling the Commissioner determined,


“Article 7 of the relevant tax treaty prevents Australia from imposing tax on profits of an enterprise of the other country unless such profits are attributable to a permanent establishment in Australia. Although the profits in this example are derived by Cayman LP, these profits are treated as the profits of the limited partners under their home country's tax law and are not taxed in the Cayman Islands. The profits of Cayman LP will not be subject to tax in Australia to the extent the profits are treated as the profits of the limited partners in the treaty country.”


How do we reconcile the cited passages above? Whilst it is intellectually open to reconcile the treaty analysis in both the RCF Case and the TD the complexity of the analysis does not satisfy the criteria set out in paragraph 1.4 of the 2013 OECD paper. Both the 2010 and 2013 OECD papers strongly endorse the benefits of collective investment vehicles providing cross border investment capital. As an importer of capital Australia needs certainty, transparency and neutrality in its laws. Given Australia’s substantial requirements for foreign capital to fund its infrastructure requirements, the failure to treat limited partnerships as tax transparent for treaty and other issues can only harm Australia’s attractiveness as a source location without actually raising additional revenue.


A simple solution would be to amend the International Tax Agreements Act and the Managed Investment Trust rules to allow transparency of all CIVs.


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