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Leading pension funds warn OECD tax proposals could hit cross-border investment

Investors see unintended consequences of plans to curb aggressive corporate tax strategies

Leading pension fund investors from Canada and the Netherlands have made the case that proposals aimed at curbing multinational companies’ tax avoidance could hit institutional investors’ cross-border investment.

At issue are recommendations in a report launched last year by the Organisation for Economic Development and Cooperation (OECD) on ‘base erosion and profit shifting’ (BEPS) – which refers to tax planning strategies that exploit gaps and mismatches in tax rules to make profits ‘disappear’ for tax purposes or to shift profits to tax havens.

The investors partly base their argument on the socio-economic and public policy role of pension funds as well as their status as providers of “patient long-term institutional capital” for national investment needs. They also highlight their role as a barrier against systemic risk and contribution to the economic development of OECD countries.

In effect, the investors are trying to avoid being affected to rules aimed at curbing aggressive corporate tax behavior.

The plans “may have unintended adverse consequences” for public policy goals related to pension funds and similar government related funds, the Canadian funds say – adding that other private and public pension funds in other countries would also like to improve the policy framework that is being proposed.

“We support a broad exemption from source taxation from cross-border investment income earned by pension funds by enabling their ability to accumulate assets to fund growing future retirement obligations in the context of an ageing population and longevity trends,” the Canadians argue.Their response acknowledges the OECD’s aim to prevent “profit-oriented multinational enterprises from earning untaxed, ‘stateless’ income”.

The funds involved in the consultation (“Preventing the Granting of Treaty Benefits In Inappropriate Circumstances”) include seven Canadian public pension funds (list below) which issued a combined response, as did Dutch giants APG and PGGM.

“Pension funds differ in many respects from multinational enterprises and safeguarding tax neutrality for pension funds investing globally … is of paramount importance,” note the Dutch funds. They, too, point to the role that pension funds play in society and in promoting financial stability.

The consultation attracted a large range of responses (the response document runs to 754 pages). The responses from asset management bodies the Investment Association (the UK body formerly called the Investment Management Association), and the European Fund and Asset Management Association (Efama), focus on the tax treatment of collective investment vehicles (CIVs). Link

The Canadian funds which responded to OECD consultation:

Alberta Investment Management Co.
British Columbia Investment Management Co.
Caisse de depot et Placement du Quebec
CPP Investment Board
OMERS
Ontario Teachers’ Pension Plan Board,
Public Sector Pension Investment Board