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Welcome everyone to the IA's Talks Innovation Podcast.
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And as you'll probably have guessed from my voice, I'm not James King.
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James has earned himself a well-deserved break from hosting today, and luckily for him, because today we're talking about tax and tax's role in innovation across the investment management industry.
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My name is Chris Hewitt, and I'm the head of tax here at the Investment Association, and it's my pleasure to introduce our guests today.
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We have John Poulton, Head of Investment Management Tax at M ⁇ G, and Gavin Kahn, partner in the Asset Management Tax Team at KPMG, also formerly at MG.
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So you two gents are two heavyweights of tax, metaphorically speaking, of course.
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And you're here today to discuss the role that tax has to play as our sector continues to innovate, and whether we've reached an inflection point whereby the technology development in tokenization, digital assets, digital wallets, fractionalization, et cetera, is now beginning to undercut many of the key tenants which the industry has for generations been built on.
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Concepts like collective investment schemes, the vehicles that we've traditionally used for collective investment, and core concepts like double taxation and tax neutrality.
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But before we jump into that, um, gentlemen, would you like to introduce yourselves?
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Thanks very much for the introduction, Chris.
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And uh it's a uh pleasure to be here at the Investment Association.
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I'm John.
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Um as you said, I've been with MNG for approximately eight years now, where one of my colleagues, his former colleagues, is now sat across the table from me, Gavin Caen.
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Prior to MG, I worked at a Middle Eastern Sovereign Wealth Fund.
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And before that, I worked with Deloitte in Luxembourg, and prior to that in London, where I also worked with a colleague named Gavin Kahn.
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Thanks, Charlie.
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I should introduce myself then.
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Yes, I am Gavin Kahn.
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Uh, and as you can tell, I've flipped from going from practice to industry and then back to practice again.
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I recently listened to someone talk about how you should introduce yourself.
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You shouldn't label yourself with a job title.
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So instead, I'm going to stick my purpose, you know.
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I'm going to say that I help create a better financial future for people.
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So I spend my time working with investment managers to create fund products for those who want to invest for the future.
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I work with institutional investors such as pension schemes and insurance companies on the investments they make on behalf of their pensioners and policyholders, or with the objective of ensuring that the right tax is paid at the right time by the right person.
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Thank you both.
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And and Gavin, I'm loving your purpose there.
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Um and for the benefit of the audience, uh everyone, he's a massive grin on his face as he's as he's been going through that.
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So, okay, we we talked about the tenets of collective investment schemes, of the industry as a whole.
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This isn't the rest is history podcast, right?
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But I think before we get into the sort of the future and the tech and the innovation, it is probably worth talking about some of the history of collective investment and taxes' role in shaping the industry, right?
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Because when I joined the IA within the first week, the CEO said something to me which made me feel right at home.
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He said, we are a tax-driven industry.
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And that made me realize that he understood taxes' role within that space.
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So we we talked uh in the introduction there about tax neutrality.
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Gents, do you want to give a quick overview for the audience around what tax neutrality actually means and what it means for you and your businesses?
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Yeah, I'll take that one to start with, Chris.
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Thank you.
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The uh tax's role and the concept of tax neutrality in our industry is all about the idea that really you should be paying tax once on your returns from the underlying investments.
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And part of the challenge that you have when you try and meet in the middle between the concept of collective investment, i.e., a range of investors who may have different tax profiles coming together to essentially pool their money to invest in underlying assets, is that this confuses the tax system.
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The tax system wants to see a single taxpayer and tax them in accordance with their status.
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But here you've got an intermediary vehicle of some description, and then a whole range of different investors behind it.
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And so an awful lot of the time that I spend at our place and that Gavin spends trying to sell to the market is around ensuring those ultimate investors only suffer tax to the extent they're meant to, and that you don't have additional leakage in the middle.
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This isn't about tax abuse, it's not about tax avoidance.
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It's about trying to ensure that in in collectively investing, the investors remain taxed once on their ultimate return.
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Gavin, would you you would add anything to that?
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Yeah, I mean 100%.
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That's that's the fundamental principle, right?
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An investor should be taxed as if they held the underlying investment directly.
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You know, investing in a fund vehicle is about professional management, it's about diversification, you know, reducing the admin every time you have your hundreds of lines of um investments that uh that may be held.
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But I think different investments and different investors always means that your box in the middle or your fund vehicle can be different.
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You know, you have different regulatory status, you have different legal entity types from your partnerships to your companies to your trust vehicles.
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And then overlaying that, you've got these different flavors of tax regimes applicable to those legal entities.
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And so, you know, if you have a uh mainly a debt investment strategy, there's one tax regime for that, or if you have a property strategy, there's another one available for that.
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And all of this becomes uh a bit of a puzzle to solve.
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I think that's a really good point, Gavin.
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And part of that puzzle with the point about taxing it once, it sounds relatively simple.
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So presumably we put a thing in the middle that's subject to tax, it pays tax once, and maybe you get an exemption on the other side.
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Now, the problem, of course, is lots of the clients that um Gavin deals with as an advisor and I deal with as a representative manager themselves are entitled to tax exemptions, they want to access that.
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Okay, easy answer.
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Why don't you put a transparent vehicle in the middle?
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The problem with that, of course, is where you have multi-jurisdictional investment, I can guarantee you no pension fund on earth wants to be filing tax returns in all of the 20 jurisdictions that you've filed made investments in underneath the vehicle.
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So what starts out as a relatively straightforward concept very quickly becomes, as you say, a really challenging puzzle of how you slot together legal entities in between specific assets and specific jurisdictions for particular investor types.
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Where do you see the biggest challenges in that, Gavin?
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I think the thing to think about, if we go back also to some of the basics, that what are tax rules based upon?
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And each country has its own set of tax rules.
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Now, the way tax rules evolve is that you start off with the law, you overlay that with certain regulations, that brings sort of the technical what is tax, what are the rules.
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And then you have to overlay that with interpretation, and that comes through the courts, comes through case law.
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And then finally, there might even be that bit around market practice where you get into that granular detail of how you do things in real life and how you interpret those rules.
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So, you know, you can look at rules literally, see what they say.
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Or you can think more through the purpose of what the rules are trying to achieve.
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And I think it's important to note that, you know, the tax rules are not always designed with that fundamental principle that we describe where funds should be neutral.
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You know, we've seen global minimum tax being introduced recently, you know, trying to establish a 15% minimum tax across large groups.
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And you know, the industry, the investment association has been great in identifying where this can cause a problem to that fundamental principle, that neutrality, uh, and see changes for those rules.
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But I think you know, governments know investment management is an important sector.
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We've seen UK, Ireland, Luxembourg all establish themselves as fun hubs and create tax rules that are designed to make them attractive locations for setting up funds.
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And and fund managers, you know, they they evolve and they work out what it is they want to invest in and who they want to attract by way of investors.
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I think you made a really important point there about the and just expanding it slightly, into the ecosystem of being able to deliver a tax answer.
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So if we think about the innovation side, we've all seen, and one of the core parts of of me and and my colleague's role at M ⁇ G, is to ensure that tax structures that may appear to be innovative and keeping pure to the principle of tax it once are actually capable of implementation.
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Because, as Gavin rightly says, you've got this complex interlinking of regulation, legislation, market practice.
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But a really critical one on top of that is the actual operational implementation.
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And do you have capability, either yourself or in your outsource service providers, the fund administrators, to deliver what's required to make sure you're compliant from a tax perspective and actually able to deliver to investors data that they need, tax reporting they may need, depending on their own requirements.
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And that is a I think an interesting limiting factor on innovation.
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So we do from time to time get advisory reports that look great, very shiny, promise that we achieve tax neutrality.
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Excellent, thank you very much, guys.
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But it requires instantaneous reporting of data through, let's say, three tiers of transparent vehicles in two different countries, and you know what?
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No one can do it.
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So if we think about the core principle of that innovation, you can come with innovative structures, but the constraint sometimes is your ability to then uh deliver that side.
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Do you do you experience this much in practice, Kevin?
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I think the world has evolved a bit.
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Yeah, so certainly I see tax professionals, tax teams in house tax scenes having a seat at the table from the outset, you know, through the product development stage, assisting in that design.
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I'm sure, John, you've seen that in your organization as well, right?
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You participate in those discussions, those meetings, and that's the opportunity for you to flag your experience of that operational complexity and how those challenges need to be considered and managed over time.
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Technology, innovation, they're easing some of that, I'm sure.
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And I think there's a lot to look more uh to the future in terms of how that can help.
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And there's innovation coming from from all over the place to support that.
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But I think what what's important is that these different stakeholders involved, whether it be tax authorities, whether it be managers, whether it be the operational and the service providers there, they need to be aligned in what they're doing.
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They need to be keeping up with the same pace as each other to manage that.
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And and to that point, Gavin, in terms of standardization, what role then do you think that uh the government, uh supernatural supranational organizations like the OECD, you know, what roles do they have to play in terms of that standardization across tax, whether it be in terms of tax structuring, like John's mentioned, in terms of tax neutrality or the you know, the the the operational aspects that we've kind of moved on to?
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For me, and it'll be again useful to hear from you, John, because I am a few years out of industry.
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I think the starting point when it comes to policymakers and tax authorities, you've got to have a a strong, stable, and predictable regime.
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You know, that foundation and that certainty is what everyone needs.
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I think with that start a starting point, you can then overlay it with how people think and evolve their businesses and the innovation that comes from new opportunities to invest in new different types of asset classes, um, which again is uh constantly evolving and changing as well.
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One of the biggest challenges if we look back over the last 20 years or so, and where we see a number of different initiatives that have either enabled or challenged innovation in in structuring and the ability to deliver product, uh, is let's take a couple of examples, right?
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Is the UK has been strong in recent years in uh discussing with industry, it'd be interesting to hear Chris's view on this as well, around what do we need to make the UK a great place to invest.
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And for example, the REIT regime in the UK has gone through a series of modernisations over the last decade that have enabled greater utilization of the structure and has eliminated some of the barriers to it being deployed in a cost-efficient way.
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As a really good example, when it was first launched, the REIT regime was really targeted at the big property companies that were listed on the stock exchange and were invested in by lots of retail investors.
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And as a consequence, one of the one of the requirements for the REIT regime was to be listed.
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Now, over time, the ability for REITs to be utilised by private investors of certain uh definition and and um status was enabled, but the listing requirement remained.
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And what that meant was you had a whole series of REITs that had to run off to the Channel Islands to be listed with the full knowledge and awareness and approval of HMRC, simply to tick a box on qualification.
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Now, with liaison with industry and discussions with uh organizations like the IA, government authorities have looked at that and said, you know what, that's actually stifling use of an onshore investment structure that we're perfectly comfortable with, the government like the REIT structure.
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You know, it is one that's well understood, it's one where they get great data reporting out of it, it's when they have good control over the tax status of the structure.
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And actually the innovation there is the legislator looking at it and saying, okay, what makes this better for industry to use?
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And they've taken exactly the right steps to remove things like the listing requirement in certain circumstances, to relax uh certain limitations on holdings by certain types of investor.
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Again, not this doesn't open the door to a wild west of tax avoidance, but it enables this structure to be utilized much more widely by investors.
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Now the challenge is that commercially the world moves at a faster pace than legislation can.
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So as a great example, in the real estate world, lots of investment is no longer simply buying a building and renting it out.
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It might be buying a building, putting loads of solar panels on the roof and selling some electricity back to the grid.
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Well, is that sale of real estate business or not?
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Dunno.
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But the rules may or may not know.
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And therefore the challenge with innovation, we see some steps forward, but then we see the commercial world moving in advance of both the politicians and the legislative structures.
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And that's where I think tanks as a topic and as a tool that's utilized by the politicians can be a stifling aspect on innovation, even if they have the best intentions in seeking to expand the use of something like a read.
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I think Chris, maybe as a as a leading proponent of the interaction with the um with government on these kind of topics, how how do you see that those two things interplay?
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I think it's about partnership.
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I think it's about ensuring that uh we've got lines of communication with government to be able to communicate these problems, right?
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Because you're not going to get a system perfect, you know, first time off, right?
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There's always going to be frictions.
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And you need the the the ability to be able to work with policymakers to to fix them.
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You know, to your point around the REITs, there have been X number of statutory instruments, and it's the same for funds, right?
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You you know, it is a constantly evolving process and partnership to get this right.
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And that's where certain jurisdictions do pretty well.
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I think it's safe to say that Luxembourg and Ireland are very much on the sort of front foot.
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They're very much supportive of the industry.
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The UK, yeah, yeah, I would I would include them in the same bucket.
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I suppose the UK system is, by its very nature, more complicated, and that makes that engagement more difficult.
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But all the same, the UK is is very much sort of on the front foot in terms of that partnership piece.
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Um that doesn't mean that there aren't issues that uh need to be resolved, but I I think it probably is worth calling out the success stories of those partnerships.
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And you mentioned REITs, I would say ACSs as well.
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That's another an engagement with the government that took time to sort of build up.
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But I if you look at the the the ACS structure, the authorized contractual schemes, you know, that is a success story for the UK.
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Um would you guys would you gentlemen sort of care to offer any other examples of success stories with you know government engagement, whether it be in the UK or or elsewhere?
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I'd say, Chris, it's not it's also not about rules changing and evolving to deal with new situations.
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You know, I think there are tools in the toolkit, some from well, a little while back, where as the world evolves, you can bring these back in and use it.
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You know, just like I keep in my house uh you know a tool just for that day I might need it in the future.
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You know, we've we've seen situations where today we had the tax-selected fund regime.
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You know, this is a regime that was created back in 2009.
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You know, the idea was to move the point of tax to the investor based on when distributions are made by a fund vehicle.
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No one really uses for a variety of reasons, but you know, 16, 17 years later and today is becoming relevant for long-term asset funds.
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And just to say there, Gavin, I'd actually forgotten TEFS existed until you reminded me the other day.
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Yeah.
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Now look, is it is it is it perfect?
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Does it work exactly how you want it?
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I think that there's issues that we need to run through, and I've seen with that as well.
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But you know, the uh the the role of being a tax advisor is being able to think about what what tools are there, what can you use to employ as the world around it evolves?
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And this I think that's a great example actually of the you know, the big elephant in the room on on innovation in the context of tax is the use of technology.
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And part of the challenge that Tefs had back in the day was challenges for the administrators in actually being able to deliver the information required and the system capabilities to allow that it could actually be deployed and utilized.
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Gavin, how do you, as a advisor to the market, how do you see the rate of change and take up of technology in being able to deliver things that perhaps previously were were incapable of being operationally implemented?
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I think the role of technology can cover different aspects for operating a fund and uh and the success of it.
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You know, at a very basic level, it could just be used to reduce risk.
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You know, if I think back to an earlier podcast that has been in this series, you know, Simon Sword spoke about the product he's created, and you know, I used that in my previous life, and it was great to reshape a bit of the tax landscape I was dealing with because it increased efficiently, reduced risks, helped compliance with the law by having all of that data in a single place and having that that golden source.
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So I don't see a world yet where we can have a wholesale single technology that's gonna revolutionize the world and change everything in the short term.
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But I think there's different components to it that in aggregate can make a difference.
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And then the the, you know, I guess the the nirvana is that all the bits of the puzzle and all the dots join up and maybe we end up in a world where, you know, I know there's debate around fundless funds, right?
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Can we get to uh that that point?
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And and looking to the future, John, I mean, Gavin's mentioned fund of uh fundless funds.
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Uh, you know, well, what are your thoughts?
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Uh you know, Gavin sort of thinks that it's going to be incremental change.
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You know, do you think that there is the opportunity now in terms of the technology, you know, for revolution, you know, for a tax disruptor, some sort of, I don't know, some fintech maybe to step in and completely revolutionize either the tax neutrality point, probably not in terms of the structuring, you know, you would think that would need to be a bit more bespoke, but in terms of your you know, your your point around sort of operations, you know, and tax reporting and the flow through of information of all that stuff, do you do do you think there's scope there for revolution over evolution?
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Well or is it going to be incremental, like Gavin mentioned?
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Yeah, I mean if you know uh the email address and phone number of that innovator who can fix those real-time uh requirements, then please do pass them on.
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The reality is you need the entire ecosystem to move forward.
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And that you know, it speaks to a few themes that we've covered already, which is the support environment, the network of administrators and accountants and and you know, true back office administration.
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Um you need legislation to be right, and you need the regulatory environment, which is very closely aligned to tax uh in our world, which is so heavily regulated, to all be aligned and advanced at a similar pace.
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But back to the core of your question, my firm prediction, uh which may or may not come to pass before I retire, is that we will end up towards real time tax education.
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And that will be supported by the very close to real-time data transparency and data sharing between both tax authorities but also between managers with tax authorities, which ultimately, my view, will lead to situations where the return on any given investment is immediately known and understood to be allocated to a particular investor and therefore is capable of being taxed at point of source.
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Much more so than the present cumbersome withholding tax regimes.
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This is I foresee that you will end up with genuine real-time taxation.
00:22:36.640 --> 00:22:44.720
And that will be a revolutionary event when it arrives, but we're not going to get there in a in one single leap, obviously.
00:22:44.960 --> 00:22:53.839
But the attraction to it is enormous because the cost loss on the way through for investors right now is dramatic with the various administration that's required.
00:22:54.000 --> 00:22:59.759
I mean it's still a net good for them to invest collectively, but there's significant friction on the way through.
00:23:00.000 --> 00:23:04.079
Tax authorities will love it because acceleration of cash receipts.
00:23:04.319 --> 00:23:11.200
Investors, I think, will love it in the sense that you end up with your net return and goodbye to the days of annual tax compliance.
00:23:11.759 --> 00:23:20.079
It will be very much real time based on data, based on data sharing and technologically enabled systems of withholding and remittance.
00:23:20.400 --> 00:23:21.920
How far are we from that?
00:23:22.640 --> 00:23:23.279
I don't know.
00:23:23.920 --> 00:23:25.279
15, 20 years?
00:23:25.839 --> 00:23:31.680
I think it's worth picking up that point about friction and withholding tax and different jurisdictions as well, right?
00:23:31.759 --> 00:23:34.400
Because what is it that's causing the biggest problem?
00:23:34.880 --> 00:23:40.160
I think we forget that a lot of tax is still paper-driven.
00:23:40.240 --> 00:23:44.559
You know, you need to fill in a form, you need to tick a box, you need to send that in.
00:23:45.039 --> 00:23:52.160
And it's easy to think too big a picture and forget that granular detail, but that's often where things go wrong.
00:23:52.400 --> 00:23:54.160
So yeah, totally agree.
00:23:54.240 --> 00:24:08.079
You need everything to change in a place of change, but if you've got investments in 70 different jurisdictions with seventy different tax authorities, and at the end of that is an inspector who's an individual who's making the decision on whether or not you get your money back.
00:24:09.039 --> 00:24:26.960
On that point, on the 29th of December, 2025, me and two colleagues spent approximately four and a half hours signing in excess of 300 pieces of paper that then had to be either physically posted halfway around the world or scanned and sent halfway around the world and to different places.
00:24:27.200 --> 00:24:46.240
Now, the idea that that represents good value for either a tax authority, a taxpayer, or a manager or an investor in the sense of the cost that's directly or indirectly incurred by virtue of that, you know, clearly there's there's no question that has to be consigned to to history.
00:24:46.400 --> 00:24:48.079
But we're a long way from that, as you say.
00:24:48.240 --> 00:25:12.000
There's many, many jurisdictions where it's still required physical copies, counter-signed, you know, numerous evidence-based documentary requirements, which when we get to, you know, dare I say a tokenized identity that can be shared on a on a on a understood platform between tax authorities and investors, you know, that's where the real win will come.
00:25:12.400 --> 00:25:13.440
Yeah, love that.
00:25:13.920 --> 00:25:19.279
So certainly room for a disruptor, but probably nothing that we can think or do, otherwise we wouldn't be sat here.
00:25:19.599 --> 00:25:24.559
Again, if anyone in the audience knows of one, please get in touch with Chris Hewitt at the Investment Association.
00:25:24.960 --> 00:25:28.319
I I'm sure the audience is absolutely horrified by that story, John.
00:25:28.480 --> 00:25:38.640
Uh you know, and the the opportunity for innovation uh given that you're sending paper copies of uh at tax asset stations around the world.
00:25:38.960 --> 00:25:44.480
Um moving forward then, we talked about fundless funds.
00:25:44.640 --> 00:25:52.240
It'd be interesting to know your thoughts on that because the IA has obviously done a huge amount of work in terms of digital assets and tokenization.
00:25:52.640 --> 00:25:55.039
Where do you sort of see the the issues?
00:25:55.519 --> 00:26:00.400
You know, is it going to be the technology, or do we think that the technology is already there?
00:26:00.559 --> 00:26:08.799
It's the tax authorities, it's regulation, it's basically all of the problems that we've kind of already mentioned as being the blocker.
00:26:09.119 --> 00:26:10.960
I I think you've summarised it, Chris, actually.
00:26:11.119 --> 00:26:14.960
The the the idea of the fundless fund, uh I like it.
00:26:15.119 --> 00:26:17.599
Uh and again, it's about time horizon, isn't it?
00:26:17.839 --> 00:26:22.319
As of today, it just doesn't exist for a multitude of reasons.
00:26:22.480 --> 00:26:33.920
Uh a combination of the legal, regulatory tax, piercing of corporate veils, uh liability ring fencing, you know, any one of a number of things that you can you can think of and bring together.
00:26:34.160 --> 00:26:35.759
But I think that's where we end up.
00:26:35.920 --> 00:26:41.359
I do think it's where we end up, because people would be attracted by the frictionless ability to invest.
00:26:41.920 --> 00:26:44.000
So I see it as an inevitability.
00:26:44.079 --> 00:26:50.880
Um I don't see it as a near-term outcome, but it is an absolute game changer when you eventually get there.
00:26:51.200 --> 00:26:52.319
Yeah, I totally agree.
00:26:52.400 --> 00:26:54.160
Uh that time horizon, who knows?
00:26:54.319 --> 00:26:58.720
But then who would have thought we're at a world where we have agentic AI?
00:26:58.799 --> 00:27:03.200
I think some people thought we were still a couple of years away from that, but is is is here today.
00:27:03.519 --> 00:27:04.319
No, it's a great point.
00:27:04.400 --> 00:27:05.759
And that's that's the issue, isn't it?
00:27:05.839 --> 00:27:18.960
Is that the rate of change, I think that's what surprised me most is we all knew AI was coming, and two years ago every conference would mention it in passing, and now suddenly every conference is 80% about AI.
00:27:19.759 --> 00:27:30.079
And that's not just a passing trend, you know, that is innovation and change in real time right in front of us, week by week, I think, at the moment.
00:27:30.160 --> 00:27:34.160
And it's that rate of change that's quite astonishing from my perspective.
00:27:34.559 --> 00:27:34.880
Okay.
00:27:35.200 --> 00:27:37.440
Well, we're running up against time here.
00:27:37.599 --> 00:27:42.400
Uh I I think it's probably worth wrapping up there in terms of the main bit.
00:27:42.480 --> 00:27:47.440
But before we do finish, I wanted to move on to some rapid-fire questions for the audience.
00:27:47.680 --> 00:27:49.119
I've got some here.
00:27:49.599 --> 00:27:58.160
So to both of you, question number one: what is your most underrated cross-border risk when it comes to tax?
00:27:58.640 --> 00:28:04.319
I'll go back to the point around filing bits of paper, ticking the box, making an election.
00:28:04.400 --> 00:28:07.119
You know, what looks and sounds like admin.
00:28:07.440 --> 00:28:17.839
If you have a non-resident lender making a loan to UK borrower, often there's a treaty passport, a number that shows that the lender's entitled to gross payment.
00:28:18.079 --> 00:28:26.799
But that borrower needs to file a piece of paper, fill out a form to HMRC to confirm they don't need to withhold 20% tax on interest payment.
00:28:27.039 --> 00:28:29.599
But that does get miss and there's a risk there.
00:28:29.680 --> 00:28:37.200
The result is that the borrower needs to pay or potentially needs to pay that tax, um, which otherwise it wouldn't need to.
00:28:37.279 --> 00:28:42.799
So I think the admin operational element is still a big risk that people need to think about.
00:28:43.200 --> 00:28:48.000
And for me, the underrated underrated cross-border risk is assumption.
00:28:48.319 --> 00:28:55.279
The number of times we have conversations where somebody says, Well, I did this last year, surely it's uh the same treatment, isn't it?
00:28:55.440 --> 00:28:57.279
Or I did it with this asset class.
00:28:57.440 --> 00:28:59.119
Is it the same in this context?
00:28:59.359 --> 00:29:08.240
And the assumption that something is probably the same because some of the features are the same of the transaction, I'd say is my most underrated cross-border risk.
00:29:08.400 --> 00:29:09.440
Never assume, folks.
00:29:10.000 --> 00:29:11.279
Thank you for that.
00:29:11.519 --> 00:29:12.240
Next question.
00:29:12.559 --> 00:29:13.759
Portfolio managers.
00:29:13.920 --> 00:29:18.799
Uh one thing that portfolio managers should know about withholding tax.
00:29:19.359 --> 00:29:21.519
On that one, I would say timing.
00:29:22.000 --> 00:29:31.599
Always build in some slack for the fact that you might need to get some, to Gavin's point before, some paperwork in the hands of a payer in advance of receiving the payment.
00:29:31.920 --> 00:29:37.039
And that might need to be stamped by your domestic tax authority before it is sent to the payer.
00:29:37.200 --> 00:29:47.279
And therefore, always, always try and build in a time lag in between deciding you're deploying into jurisdiction where you know there's a withholding tax issue, and actually going off and doing it.
00:29:47.680 --> 00:29:49.039
Yeah, 100% agree with that.
00:29:49.200 --> 00:29:55.440
And also the point that you know, the rules, the interpretation, the application can change.
00:29:55.680 --> 00:29:58.000
It's uh I think it's been seen in the past.
00:29:58.160 --> 00:30:06.079
Tax authorities may change their approach on whether or not whether or not they believe you're entitled to that reduced tax rate.
00:30:06.240 --> 00:30:11.599
Uh they may introduce more requirements that you need to satisfy in order for you to get that recovery.
00:30:11.759 --> 00:30:15.759
So that all can impact the withholding tax you get back and the return to your investor.
00:30:16.319 --> 00:30:16.559
Okay.
00:30:16.640 --> 00:30:18.160
And and next question then.
00:30:18.400 --> 00:30:24.079
So one tool or one prof process that you would like to see improved?
00:30:24.559 --> 00:30:29.359
Mine would be the ability to communicate in real time with the tax authority.
00:30:29.680 --> 00:30:41.359
Our main focus in terms of tax uh energy is to use the phrase that Gavin used early on, is to pay the right amount of tax at the right point in time by the right person.
00:30:41.920 --> 00:30:50.400
And often there's ambiguity or there's there's uncertainty about maybe who is the taxpayer or how should an individual item of return be actually treated.
00:30:50.640 --> 00:30:57.680
And the ability to have constructive and open discussion with a tax authority is something that would be wonderful across the world.
00:30:57.759 --> 00:31:06.079
Uh in the UK, we have a very good system with the CCM for large businesses, and we utilize that um very frequently.
00:31:06.319 --> 00:31:12.799
It would be great if you could have more constructive and open conversation in other parts of the world uh along the same lines.
00:31:13.119 --> 00:31:25.119
So, Chris, I'm thinking more about technology and to a point that John made earlier, we think about a world where we have fundless funds and the requirements in order to achieve that.
00:31:25.759 --> 00:31:33.680
Yeah, that investor identification, that sort of golden source of almost a digital profile or tax certificate.
00:31:33.920 --> 00:31:42.720
You know, so that not only can you ease that KYC process, but you know their tax attribute, you know what they're entitled to.
00:31:42.880 --> 00:31:52.480
I think that would be a great tool, process, resource that will lay the foundations for the industry to innovate.
00:31:52.880 --> 00:31:53.200
Okay.
00:31:53.279 --> 00:31:54.400
Uh next question.
00:31:54.480 --> 00:32:02.640
Uh given that tax is renowned as being a bit of a blocker for all things innovation and everything else for that matter.
00:32:02.960 --> 00:32:08.559
One reason for optimism in the tax world, what would it be?
00:32:08.880 --> 00:32:21.200
My my optimistic view of the tax world is, and I'm going to shout out for the team here, tax professionals get a bad rep because the word tax involved in the job title generally.
00:32:21.359 --> 00:32:30.240
But we have an incredible collection of incredibly smart people involved with tax whose breadth of understanding is wildly, wildly underrated.
00:32:30.559 --> 00:32:42.160
And there's members of our team, for example, at MNG, who understand how the business operates far better, far better than I would say almost any other single function does, because tax touches everything.
00:32:42.400 --> 00:32:48.160
So my reason for optimism is the depth and breadth of quality of people we have who are in the tax world.
00:32:48.240 --> 00:32:57.920
Uh, and that includes um others in the ecosystem, like groups like the Investment Association and others, who are focused on making a better tax environment for everyone.
00:32:58.079 --> 00:33:01.599
And I would include the tax authorities in many cases in that as well.
00:33:01.920 --> 00:33:03.599
So my optimism is the people.
00:33:04.160 --> 00:33:04.400
Yeah.
00:33:04.559 --> 00:33:06.559
And I think uh totally agree with that.
00:33:06.720 --> 00:33:20.160
Tax people get involved from the start of a fund to the end of the fund through the value chain, um, having conversations with investors just as much as you do with the portfolio managers who made the investments.
00:33:20.319 --> 00:33:26.240
And given how quickly the world is changing, I think tax professionals are in for a fun ride.
00:33:26.640 --> 00:33:27.279
Good stuff.
00:33:27.440 --> 00:33:40.160
Uh I and that is an optimistic uh yeah, that is a fantastically optimistic view of the value that uh both the Investment Association and tax professionals provide to the industry as a whole.
00:33:40.559 --> 00:33:40.960
Yeah.
00:33:41.279 --> 00:33:41.599
Okay.
00:33:41.759 --> 00:33:43.759
Uh final, final question then.
00:33:44.079 --> 00:33:57.200
If you were Prime Minister for the day, not that the Prime Minister gets involved in uh laying statutory instruments or or changing HMRC guidance, but if you could change one tax policy, if you had the power, what would it be?
00:33:57.680 --> 00:34:08.960
If I think short term, if I think something for today, just maybe it's just because it's on my mind, I think bringing in a tax exempt fund, particularly for LTAS, would be brilliant.
00:34:09.119 --> 00:34:12.960
You know, I've worked with setting up these long-term asset funds.
00:34:13.119 --> 00:34:15.519
I've come across the complexities.
00:34:15.599 --> 00:34:30.559
I mean we spoke about the tax-elective fund regime, which does something, but I think one tool we don't have in the bag from a UK tax perspective is an exempt fund that could make life easier for everyone.
00:34:31.519 --> 00:34:37.920
And for me, can I promote myself from Prime Minister to joint prime minister and president of the EU Commission?
00:34:38.239 --> 00:34:38.960
Well why not?
00:34:39.199 --> 00:34:39.519
Why not?
00:34:39.679 --> 00:34:40.159
Okay, good.
00:34:40.320 --> 00:34:41.199
Just for a day.
00:34:41.440 --> 00:34:54.239
And and what I would seek to achieve from that position, it'd be a busy day, granted, but what I would seek to achieve is I would plow through with the common consolidated corporate tax base, both on a pan-European basis.
00:34:54.400 --> 00:34:55.679
Uh it's not popular anymore.
00:34:55.840 --> 00:34:57.519
BFIT is now the new word for it.
00:34:58.159 --> 00:35:05.039
But uh I would introduce that uh across both the UK as a non-EU member and the European Union.
00:35:05.280 --> 00:35:21.599
And in the afternoon, I would then plonk on top of that a proper pan-European, both fund but also a REIT-style vehicle in the real estate space and another, I haven't quite thought this through entirely, but alternatives-focused vehicle in the other alternative space.
00:35:21.760 --> 00:35:45.920
And the point of that being allowing you to move through to a world where we get closer to my previously frictionless structure, where you don't end up with 200 SPVs in your fund structure, and you then have a mechanism for distributing withholding tax across the underlying member states, plus the Europe the UK, in proportion to the assets that are held by the fund.
00:35:46.159 --> 00:35:50.480
It's a wonderful future world that I would invite all of those governments to join me in.
00:35:51.119 --> 00:35:52.880
A busy day, for sure.
00:35:53.199 --> 00:36:04.559
And speaks to the point that we talked about before around standardization and the role that government has to promote the industry and promote innovation across it.
00:36:04.880 --> 00:36:08.559
Gentlemen, uh, we are at time uh today.
00:36:08.719 --> 00:36:13.599
Uh I would just genuinely like to thank both of you for your contribution.
00:36:13.760 --> 00:36:15.440
I think it's been really, really useful.
00:36:15.599 --> 00:36:22.960
I think you made tax interesting and made tax optimistic, which is an incredible challenge.
00:36:23.679 --> 00:36:36.159
Um so for the audience, uh, if you are interested in hearing anything more on any of the issues that John and Gavin have discussed today, then please do reach out to the Investment Association.
00:36:36.320 --> 00:36:38.159
We would love to hear from you.
00:36:38.559 --> 00:36:42.239
And uh I would like to uh close by saying thanks again.
00:36:42.480 --> 00:36:48.559
And we will see you soon for the next edition of the IA Talks Innovation.
00:36:48.719 --> 00:36:49.360
Thanks again.
00:00:11.519 --> 00:00:16.480
Welcome everyone to the IA's Talks Innovation Podcast.
00:00:16.640 --> 00:00:20.239
And as you'll probably have guessed from my voice, I'm not James King.
00:00:20.480 --> 00:00:33.679
James has earned himself a well-deserved break from hosting today, and luckily for him, because today we're talking about tax and tax's role in innovation across the investment management industry.
00:00:33.920 --> 00:00:41.520
My name is Chris Hewitt, and I'm the head of tax here at the Investment Association, and it's my pleasure to introduce our guests today.
00:00:41.679 --> 00:00:53.520
We have John Poulton, Head of Investment Management Tax at M ⁇ G, and Gavin Kahn, partner in the Asset Management Tax Team at KPMG, also formerly at MG.
00:00:53.920 --> 00:00:58.960
So you two gents are two heavyweights of tax, metaphorically speaking, of course.
00:00:59.119 --> 00:01:22.560
And you're here today to discuss the role that tax has to play as our sector continues to innovate, and whether we've reached an inflection point whereby the technology development in tokenization, digital assets, digital wallets, fractionalization, et cetera, is now beginning to undercut many of the key tenants which the industry has for generations been built on.
00:01:22.879 --> 00:01:33.519
Concepts like collective investment schemes, the vehicles that we've traditionally used for collective investment, and core concepts like double taxation and tax neutrality.
00:01:33.680 --> 00:01:38.079
But before we jump into that, um, gentlemen, would you like to introduce yourselves?
00:01:38.560 --> 00:01:41.040
Thanks very much for the introduction, Chris.
00:01:41.200 --> 00:01:44.560
And uh it's a uh pleasure to be here at the Investment Association.
00:01:44.799 --> 00:01:45.359
I'm John.
00:01:45.680 --> 00:01:55.439
Um as you said, I've been with MNG for approximately eight years now, where one of my colleagues, his former colleagues, is now sat across the table from me, Gavin Caen.
00:01:55.680 --> 00:01:59.599
Prior to MG, I worked at a Middle Eastern Sovereign Wealth Fund.
00:01:59.680 --> 00:02:07.840
And before that, I worked with Deloitte in Luxembourg, and prior to that in London, where I also worked with a colleague named Gavin Kahn.
00:02:08.240 --> 00:02:08.800
Thanks, Charlie.
00:02:08.879 --> 00:02:10.080
I should introduce myself then.
00:02:10.159 --> 00:02:12.080
Yes, I am Gavin Kahn.
00:02:12.240 --> 00:02:19.599
Uh, and as you can tell, I've flipped from going from practice to industry and then back to practice again.
00:02:20.080 --> 00:02:22.800
I recently listened to someone talk about how you should introduce yourself.
00:02:22.960 --> 00:02:25.039
You shouldn't label yourself with a job title.
00:02:25.120 --> 00:02:27.199
So instead, I'm going to stick my purpose, you know.
00:02:27.439 --> 00:02:31.199
I'm going to say that I help create a better financial future for people.
00:02:31.360 --> 00:02:37.599
So I spend my time working with investment managers to create fund products for those who want to invest for the future.
00:02:37.759 --> 00:02:51.759
I work with institutional investors such as pension schemes and insurance companies on the investments they make on behalf of their pensioners and policyholders, or with the objective of ensuring that the right tax is paid at the right time by the right person.
00:02:52.159 --> 00:02:53.039
Thank you both.
00:02:53.120 --> 00:02:56.159
And and Gavin, I'm loving your purpose there.
00:02:56.240 --> 00:03:03.120
Um and for the benefit of the audience, uh everyone, he's a massive grin on his face as he's as he's been going through that.
00:03:03.439 --> 00:03:09.599
So, okay, we we talked about the tenets of collective investment schemes, of the industry as a whole.
00:03:09.840 --> 00:03:12.240
This isn't the rest is history podcast, right?
00:03:12.319 --> 00:03:23.840
But I think before we get into the sort of the future and the tech and the innovation, it is probably worth talking about some of the history of collective investment and taxes' role in shaping the industry, right?
00:03:24.000 --> 00:03:30.639
Because when I joined the IA within the first week, the CEO said something to me which made me feel right at home.
00:03:30.800 --> 00:03:33.599
He said, we are a tax-driven industry.
00:03:33.840 --> 00:03:38.960
And that made me realize that he understood taxes' role within that space.
00:03:39.120 --> 00:03:43.599
So we we talked uh in the introduction there about tax neutrality.
00:03:43.919 --> 00:03:51.759
Gents, do you want to give a quick overview for the audience around what tax neutrality actually means and what it means for you and your businesses?
00:03:52.080 --> 00:03:53.840
Yeah, I'll take that one to start with, Chris.
00:03:53.919 --> 00:03:54.240
Thank you.
00:03:54.479 --> 00:04:08.879
The uh tax's role and the concept of tax neutrality in our industry is all about the idea that really you should be paying tax once on your returns from the underlying investments.
00:04:09.120 --> 00:04:27.759
And part of the challenge that you have when you try and meet in the middle between the concept of collective investment, i.e., a range of investors who may have different tax profiles coming together to essentially pool their money to invest in underlying assets, is that this confuses the tax system.
00:04:28.000 --> 00:04:32.319
The tax system wants to see a single taxpayer and tax them in accordance with their status.
00:04:32.480 --> 00:04:38.319
But here you've got an intermediary vehicle of some description, and then a whole range of different investors behind it.
00:04:38.560 --> 00:04:53.199
And so an awful lot of the time that I spend at our place and that Gavin spends trying to sell to the market is around ensuring those ultimate investors only suffer tax to the extent they're meant to, and that you don't have additional leakage in the middle.
00:04:53.600 --> 00:04:57.120
This isn't about tax abuse, it's not about tax avoidance.
00:04:57.360 --> 00:05:04.639
It's about trying to ensure that in in collectively investing, the investors remain taxed once on their ultimate return.
00:05:04.959 --> 00:05:06.639
Gavin, would you you would add anything to that?
00:05:06.959 --> 00:05:07.920
Yeah, I mean 100%.
00:05:08.319 --> 00:05:10.639
That's that's the fundamental principle, right?
00:05:10.800 --> 00:05:15.759
An investor should be taxed as if they held the underlying investment directly.
00:05:16.079 --> 00:05:27.600
You know, investing in a fund vehicle is about professional management, it's about diversification, you know, reducing the admin every time you have your hundreds of lines of um investments that uh that may be held.
00:05:27.839 --> 00:05:35.759
But I think different investments and different investors always means that your box in the middle or your fund vehicle can be different.
00:05:35.920 --> 00:05:43.360
You know, you have different regulatory status, you have different legal entity types from your partnerships to your companies to your trust vehicles.
00:05:43.519 --> 00:05:49.759
And then overlaying that, you've got these different flavors of tax regimes applicable to those legal entities.
00:05:49.920 --> 00:05:59.199
And so, you know, if you have a uh mainly a debt investment strategy, there's one tax regime for that, or if you have a property strategy, there's another one available for that.
00:05:59.439 --> 00:06:02.879
And all of this becomes uh a bit of a puzzle to solve.
00:06:03.120 --> 00:06:04.639
I think that's a really good point, Gavin.
00:06:04.720 --> 00:06:10.399
And part of that puzzle with the point about taxing it once, it sounds relatively simple.
00:06:10.560 --> 00:06:16.319
So presumably we put a thing in the middle that's subject to tax, it pays tax once, and maybe you get an exemption on the other side.
00:06:16.560 --> 00:06:27.439
Now, the problem, of course, is lots of the clients that um Gavin deals with as an advisor and I deal with as a representative manager themselves are entitled to tax exemptions, they want to access that.
00:06:27.600 --> 00:06:28.800
Okay, easy answer.
00:06:28.959 --> 00:06:31.360
Why don't you put a transparent vehicle in the middle?
00:06:31.600 --> 00:06:44.879
The problem with that, of course, is where you have multi-jurisdictional investment, I can guarantee you no pension fund on earth wants to be filing tax returns in all of the 20 jurisdictions that you've filed made investments in underneath the vehicle.
00:06:45.120 --> 00:07:02.079
So what starts out as a relatively straightforward concept very quickly becomes, as you say, a really challenging puzzle of how you slot together legal entities in between specific assets and specific jurisdictions for particular investor types.
00:07:02.319 --> 00:07:04.720
Where do you see the biggest challenges in that, Gavin?
00:07:05.120 --> 00:07:11.040
I think the thing to think about, if we go back also to some of the basics, that what are tax rules based upon?
00:07:11.199 --> 00:07:13.680
And each country has its own set of tax rules.
00:07:13.839 --> 00:07:24.480
Now, the way tax rules evolve is that you start off with the law, you overlay that with certain regulations, that brings sort of the technical what is tax, what are the rules.
00:07:24.639 --> 00:07:30.240
And then you have to overlay that with interpretation, and that comes through the courts, comes through case law.
00:07:30.480 --> 00:07:38.720
And then finally, there might even be that bit around market practice where you get into that granular detail of how you do things in real life and how you interpret those rules.
00:07:38.879 --> 00:07:43.040
So, you know, you can look at rules literally, see what they say.
00:07:43.279 --> 00:07:47.519
Or you can think more through the purpose of what the rules are trying to achieve.
00:07:47.839 --> 00:07:57.759
And I think it's important to note that, you know, the tax rules are not always designed with that fundamental principle that we describe where funds should be neutral.
00:07:57.839 --> 00:08:06.000
You know, we've seen global minimum tax being introduced recently, you know, trying to establish a 15% minimum tax across large groups.
00:08:06.160 --> 00:08:17.040
And you know, the industry, the investment association has been great in identifying where this can cause a problem to that fundamental principle, that neutrality, uh, and see changes for those rules.
00:08:17.360 --> 00:08:21.199
But I think you know, governments know investment management is an important sector.
00:08:21.360 --> 00:08:31.920
We've seen UK, Ireland, Luxembourg all establish themselves as fun hubs and create tax rules that are designed to make them attractive locations for setting up funds.
00:08:32.240 --> 00:08:40.960
And and fund managers, you know, they they evolve and they work out what it is they want to invest in and who they want to attract by way of investors.
00:08:41.759 --> 00:08:49.519
I think you made a really important point there about the and just expanding it slightly, into the ecosystem of being able to deliver a tax answer.
00:08:49.679 --> 00:09:07.840
So if we think about the innovation side, we've all seen, and one of the core parts of of me and and my colleague's role at M ⁇ G, is to ensure that tax structures that may appear to be innovative and keeping pure to the principle of tax it once are actually capable of implementation.
00:09:08.320 --> 00:09:15.679
Because, as Gavin rightly says, you've got this complex interlinking of regulation, legislation, market practice.
00:09:15.840 --> 00:09:20.240
But a really critical one on top of that is the actual operational implementation.
00:09:20.879 --> 00:09:38.240
And do you have capability, either yourself or in your outsource service providers, the fund administrators, to deliver what's required to make sure you're compliant from a tax perspective and actually able to deliver to investors data that they need, tax reporting they may need, depending on their own requirements.
00:09:38.399 --> 00:09:42.080
And that is a I think an interesting limiting factor on innovation.
00:09:42.240 --> 00:09:49.600
So we do from time to time get advisory reports that look great, very shiny, promise that we achieve tax neutrality.
00:09:49.759 --> 00:09:51.440
Excellent, thank you very much, guys.
00:09:51.759 --> 00:10:00.320
But it requires instantaneous reporting of data through, let's say, three tiers of transparent vehicles in two different countries, and you know what?
00:10:00.480 --> 00:10:01.360
No one can do it.
00:10:02.240 --> 00:10:10.720
So if we think about the core principle of that innovation, you can come with innovative structures, but the constraint sometimes is your ability to then uh deliver that side.
00:10:10.799 --> 00:10:14.159
Do you do you experience this much in practice, Kevin?
00:10:14.720 --> 00:10:17.039
I think the world has evolved a bit.
00:10:17.200 --> 00:10:28.480
Yeah, so certainly I see tax professionals, tax teams in house tax scenes having a seat at the table from the outset, you know, through the product development stage, assisting in that design.
00:10:28.639 --> 00:10:32.320
I'm sure, John, you've seen that in your organization as well, right?
00:10:32.480 --> 00:10:47.039
You participate in those discussions, those meetings, and that's the opportunity for you to flag your experience of that operational complexity and how those challenges need to be considered and managed over time.
00:10:47.440 --> 00:10:51.600
Technology, innovation, they're easing some of that, I'm sure.
00:10:51.840 --> 00:10:56.720
And I think there's a lot to look more uh to the future in terms of how that can help.
00:10:56.799 --> 00:11:00.960
And there's innovation coming from from all over the place to support that.
00:11:01.200 --> 00:11:12.960
But I think what what's important is that these different stakeholders involved, whether it be tax authorities, whether it be managers, whether it be the operational and the service providers there, they need to be aligned in what they're doing.
00:11:13.039 --> 00:11:17.679
They need to be keeping up with the same pace as each other to manage that.
00:11:18.000 --> 00:11:45.440
And and to that point, Gavin, in terms of standardization, what role then do you think that uh the government, uh supernatural supranational organizations like the OECD, you know, what roles do they have to play in terms of that standardization across tax, whether it be in terms of tax structuring, like John's mentioned, in terms of tax neutrality or the you know, the the the operational aspects that we've kind of moved on to?
00:11:45.919 --> 00:11:52.000
For me, and it'll be again useful to hear from you, John, because I am a few years out of industry.
00:11:52.480 --> 00:11:58.879
I think the starting point when it comes to policymakers and tax authorities, you've got to have a a strong, stable, and predictable regime.
00:11:59.039 --> 00:12:05.519
You know, that foundation and that certainty is what everyone needs.
00:12:05.759 --> 00:12:25.519
I think with that start a starting point, you can then overlay it with how people think and evolve their businesses and the innovation that comes from new opportunities to invest in new different types of asset classes, um, which again is uh constantly evolving and changing as well.
00:12:25.840 --> 00:12:44.320
One of the biggest challenges if we look back over the last 20 years or so, and where we see a number of different initiatives that have either enabled or challenged innovation in in structuring and the ability to deliver product, uh, is let's take a couple of examples, right?
00:12:44.639 --> 00:12:57.600
Is the UK has been strong in recent years in uh discussing with industry, it'd be interesting to hear Chris's view on this as well, around what do we need to make the UK a great place to invest.
00:12:58.240 --> 00:13:14.080
And for example, the REIT regime in the UK has gone through a series of modernisations over the last decade that have enabled greater utilization of the structure and has eliminated some of the barriers to it being deployed in a cost-efficient way.
00:13:14.240 --> 00:13:23.840
As a really good example, when it was first launched, the REIT regime was really targeted at the big property companies that were listed on the stock exchange and were invested in by lots of retail investors.
00:13:24.000 --> 00:13:28.399
And as a consequence, one of the one of the requirements for the REIT regime was to be listed.
00:13:28.639 --> 00:13:41.039
Now, over time, the ability for REITs to be utilised by private investors of certain uh definition and and um status was enabled, but the listing requirement remained.
00:13:41.200 --> 00:13:51.120
And what that meant was you had a whole series of REITs that had to run off to the Channel Islands to be listed with the full knowledge and awareness and approval of HMRC, simply to tick a box on qualification.
00:13:51.360 --> 00:14:06.799
Now, with liaison with industry and discussions with uh organizations like the IA, government authorities have looked at that and said, you know what, that's actually stifling use of an onshore investment structure that we're perfectly comfortable with, the government like the REIT structure.
00:14:07.039 --> 00:14:15.600
You know, it is one that's well understood, it's one where they get great data reporting out of it, it's when they have good control over the tax status of the structure.
00:14:15.840 --> 00:14:21.919
And actually the innovation there is the legislator looking at it and saying, okay, what makes this better for industry to use?
00:14:22.080 --> 00:14:32.159
And they've taken exactly the right steps to remove things like the listing requirement in certain circumstances, to relax uh certain limitations on holdings by certain types of investor.
00:14:32.320 --> 00:14:40.799
Again, not this doesn't open the door to a wild west of tax avoidance, but it enables this structure to be utilized much more widely by investors.
00:14:40.960 --> 00:14:46.559
Now the challenge is that commercially the world moves at a faster pace than legislation can.
00:14:46.799 --> 00:14:52.960
So as a great example, in the real estate world, lots of investment is no longer simply buying a building and renting it out.
00:14:53.200 --> 00:14:58.080
It might be buying a building, putting loads of solar panels on the roof and selling some electricity back to the grid.
00:14:58.320 --> 00:15:01.919
Well, is that sale of real estate business or not?
00:15:02.639 --> 00:15:03.120
Dunno.
00:15:03.840 --> 00:15:06.080
But the rules may or may not know.
00:15:06.399 --> 00:15:16.320
And therefore the challenge with innovation, we see some steps forward, but then we see the commercial world moving in advance of both the politicians and the legislative structures.
00:15:16.480 --> 00:15:32.159
And that's where I think tanks as a topic and as a tool that's utilized by the politicians can be a stifling aspect on innovation, even if they have the best intentions in seeking to expand the use of something like a read.
00:15:32.399 --> 00:15:42.399
I think Chris, maybe as a as a leading proponent of the interaction with the um with government on these kind of topics, how how do you see that those two things interplay?
00:15:42.960 --> 00:15:44.240
I think it's about partnership.
00:15:44.399 --> 00:15:52.720
I think it's about ensuring that uh we've got lines of communication with government to be able to communicate these problems, right?
00:15:52.879 --> 00:15:58.240
Because you're not going to get a system perfect, you know, first time off, right?
00:15:58.320 --> 00:16:00.080
There's always going to be frictions.
00:16:00.399 --> 00:16:06.000
And you need the the the ability to be able to work with policymakers to to fix them.
00:16:06.080 --> 00:16:12.320
You know, to your point around the REITs, there have been X number of statutory instruments, and it's the same for funds, right?
00:16:12.399 --> 00:16:16.960
You you know, it is a constantly evolving process and partnership to get this right.
00:16:17.200 --> 00:16:20.559
And that's where certain jurisdictions do pretty well.
00:16:20.799 --> 00:16:25.919
I think it's safe to say that Luxembourg and Ireland are very much on the sort of front foot.
00:16:26.000 --> 00:16:28.960
They're very much supportive of the industry.
00:16:29.200 --> 00:16:35.039
The UK, yeah, yeah, I would I would include them in the same bucket.
00:16:35.120 --> 00:16:40.080
I suppose the UK system is, by its very nature, more complicated, and that makes that engagement more difficult.
00:16:40.320 --> 00:16:47.679
But all the same, the UK is is very much sort of on the front foot in terms of that partnership piece.
00:16:47.919 --> 00:16:57.200
Um that doesn't mean that there aren't issues that uh need to be resolved, but I I think it probably is worth calling out the success stories of those partnerships.
00:16:57.279 --> 00:17:00.720
And you mentioned REITs, I would say ACSs as well.
00:17:00.879 --> 00:17:05.440
That's another an engagement with the government that took time to sort of build up.
00:17:05.519 --> 00:17:12.400
But I if you look at the the the ACS structure, the authorized contractual schemes, you know, that is a success story for the UK.
00:17:12.960 --> 00:17:22.000
Um would you guys would you gentlemen sort of care to offer any other examples of success stories with you know government engagement, whether it be in the UK or or elsewhere?
00:17:22.400 --> 00:17:28.319
I'd say, Chris, it's not it's also not about rules changing and evolving to deal with new situations.
00:17:28.400 --> 00:17:39.759
You know, I think there are tools in the toolkit, some from well, a little while back, where as the world evolves, you can bring these back in and use it.
00:17:39.920 --> 00:17:44.480
You know, just like I keep in my house uh you know a tool just for that day I might need it in the future.
00:17:44.640 --> 00:17:50.000
You know, we've we've seen situations where today we had the tax-selected fund regime.
00:17:50.160 --> 00:17:53.680
You know, this is a regime that was created back in 2009.
00:17:54.160 --> 00:18:01.359
You know, the idea was to move the point of tax to the investor based on when distributions are made by a fund vehicle.
00:18:01.519 --> 00:18:10.400
No one really uses for a variety of reasons, but you know, 16, 17 years later and today is becoming relevant for long-term asset funds.
00:18:10.640 --> 00:18:14.960
And just to say there, Gavin, I'd actually forgotten TEFS existed until you reminded me the other day.
00:18:15.359 --> 00:18:15.680
Yeah.
00:18:16.000 --> 00:18:18.319
Now look, is it is it is it perfect?
00:18:18.480 --> 00:18:20.880
Does it work exactly how you want it?
00:18:21.200 --> 00:18:25.440
I think that there's issues that we need to run through, and I've seen with that as well.
00:18:25.599 --> 00:18:36.559
But you know, the uh the the role of being a tax advisor is being able to think about what what tools are there, what can you use to employ as the world around it evolves?
00:18:36.960 --> 00:18:45.359
And this I think that's a great example actually of the you know, the big elephant in the room on on innovation in the context of tax is the use of technology.
00:18:45.599 --> 00:18:58.799
And part of the challenge that Tefs had back in the day was challenges for the administrators in actually being able to deliver the information required and the system capabilities to allow that it could actually be deployed and utilized.
00:19:00.400 --> 00:19:14.160
Gavin, how do you, as a advisor to the market, how do you see the rate of change and take up of technology in being able to deliver things that perhaps previously were were incapable of being operationally implemented?
00:19:14.720 --> 00:19:23.359
I think the role of technology can cover different aspects for operating a fund and uh and the success of it.
00:19:23.599 --> 00:19:29.519
You know, at a very basic level, it could just be used to reduce risk.
00:19:29.839 --> 00:19:56.640
You know, if I think back to an earlier podcast that has been in this series, you know, Simon Sword spoke about the product he's created, and you know, I used that in my previous life, and it was great to reshape a bit of the tax landscape I was dealing with because it increased efficiently, reduced risks, helped compliance with the law by having all of that data in a single place and having that that golden source.
00:19:56.799 --> 00:20:06.880
So I don't see a world yet where we can have a wholesale single technology that's gonna revolutionize the world and change everything in the short term.
00:20:06.960 --> 00:20:11.839
But I think there's different components to it that in aggregate can make a difference.
00:20:12.079 --> 00:20:23.680
And then the the, you know, I guess the the nirvana is that all the bits of the puzzle and all the dots join up and maybe we end up in a world where, you know, I know there's debate around fundless funds, right?
00:20:23.839 --> 00:20:26.000
Can we get to uh that that point?
00:20:26.640 --> 00:20:31.759
And and looking to the future, John, I mean, Gavin's mentioned fund of uh fundless funds.
00:20:31.839 --> 00:20:33.519
Uh, you know, well, what are your thoughts?
00:20:33.680 --> 00:20:37.359
Uh you know, Gavin sort of thinks that it's going to be incremental change.
00:20:37.599 --> 00:21:09.759
You know, do you think that there is the opportunity now in terms of the technology, you know, for revolution, you know, for a tax disruptor, some sort of, I don't know, some fintech maybe to step in and completely revolutionize either the tax neutrality point, probably not in terms of the structuring, you know, you would think that would need to be a bit more bespoke, but in terms of your you know, your your point around sort of operations, you know, and tax reporting and the flow through of information of all that stuff, do you do do you think there's scope there for revolution over evolution?
00:21:10.000 --> 00:21:12.160
Well or is it going to be incremental, like Gavin mentioned?
00:21:12.480 --> 00:21:21.599
Yeah, I mean if you know uh the email address and phone number of that innovator who can fix those real-time uh requirements, then please do pass them on.
00:21:21.920 --> 00:21:24.960
The reality is you need the entire ecosystem to move forward.
00:21:25.119 --> 00:21:36.000
And that you know, it speaks to a few themes that we've covered already, which is the support environment, the network of administrators and accountants and and you know, true back office administration.
00:21:36.160 --> 00:21:49.440
Um you need legislation to be right, and you need the regulatory environment, which is very closely aligned to tax uh in our world, which is so heavily regulated, to all be aligned and advanced at a similar pace.
00:21:49.599 --> 00:21:59.839
But back to the core of your question, my firm prediction, uh which may or may not come to pass before I retire, is that we will end up towards real time tax education.
00:22:00.960 --> 00:22:26.880
And that will be supported by the very close to real-time data transparency and data sharing between both tax authorities but also between managers with tax authorities, which ultimately, my view, will lead to situations where the return on any given investment is immediately known and understood to be allocated to a particular investor and therefore is capable of being taxed at point of source.
00:22:27.119 --> 00:22:30.640
Much more so than the present cumbersome withholding tax regimes.
00:22:30.799 --> 00:22:36.240
This is I foresee that you will end up with genuine real-time taxation.
00:22:36.640 --> 00:22:44.720
And that will be a revolutionary event when it arrives, but we're not going to get there in a in one single leap, obviously.
00:22:44.960 --> 00:22:53.839
But the attraction to it is enormous because the cost loss on the way through for investors right now is dramatic with the various administration that's required.
00:22:54.000 --> 00:22:59.759
I mean it's still a net good for them to invest collectively, but there's significant friction on the way through.
00:23:00.000 --> 00:23:04.079
Tax authorities will love it because acceleration of cash receipts.
00:23:04.319 --> 00:23:11.200
Investors, I think, will love it in the sense that you end up with your net return and goodbye to the days of annual tax compliance.
00:23:11.759 --> 00:23:20.079
It will be very much real time based on data, based on data sharing and technologically enabled systems of withholding and remittance.
00:23:20.400 --> 00:23:21.920
How far are we from that?
00:23:22.640 --> 00:23:23.279
I don't know.
00:23:23.920 --> 00:23:25.279
15, 20 years?
00:23:25.839 --> 00:23:31.680
I think it's worth picking up that point about friction and withholding tax and different jurisdictions as well, right?
00:23:31.759 --> 00:23:34.400
Because what is it that's causing the biggest problem?
00:23:34.880 --> 00:23:40.160
I think we forget that a lot of tax is still paper-driven.
00:23:40.240 --> 00:23:44.559
You know, you need to fill in a form, you need to tick a box, you need to send that in.
00:23:45.039 --> 00:23:52.160
And it's easy to think too big a picture and forget that granular detail, but that's often where things go wrong.
00:23:52.400 --> 00:23:54.160
So yeah, totally agree.
00:23:54.240 --> 00:24:08.079
You need everything to change in a place of change, but if you've got investments in 70 different jurisdictions with seventy different tax authorities, and at the end of that is an inspector who's an individual who's making the decision on whether or not you get your money back.
00:24:09.039 --> 00:24:26.960
On that point, on the 29th of December, 2025, me and two colleagues spent approximately four and a half hours signing in excess of 300 pieces of paper that then had to be either physically posted halfway around the world or scanned and sent halfway around the world and to different places.
00:24:27.200 --> 00:24:46.240
Now, the idea that that represents good value for either a tax authority, a taxpayer, or a manager or an investor in the sense of the cost that's directly or indirectly incurred by virtue of that, you know, clearly there's there's no question that has to be consigned to to history.
00:24:46.400 --> 00:24:48.079
But we're a long way from that, as you say.
00:24:48.240 --> 00:25:12.000
There's many, many jurisdictions where it's still required physical copies, counter-signed, you know, numerous evidence-based documentary requirements, which when we get to, you know, dare I say a tokenized identity that can be shared on a on a on a understood platform between tax authorities and investors, you know, that's where the real win will come.
00:25:12.400 --> 00:25:13.440
Yeah, love that.
00:25:13.920 --> 00:25:19.279
So certainly room for a disruptor, but probably nothing that we can think or do, otherwise we wouldn't be sat here.
00:25:19.599 --> 00:25:24.559
Again, if anyone in the audience knows of one, please get in touch with Chris Hewitt at the Investment Association.
00:25:24.960 --> 00:25:28.319
I I'm sure the audience is absolutely horrified by that story, John.
00:25:28.480 --> 00:25:38.640
Uh you know, and the the opportunity for innovation uh given that you're sending paper copies of uh at tax asset stations around the world.
00:25:38.960 --> 00:25:44.480
Um moving forward then, we talked about fundless funds.
00:25:44.640 --> 00:25:52.240
It'd be interesting to know your thoughts on that because the IA has obviously done a huge amount of work in terms of digital assets and tokenization.
00:25:52.640 --> 00:25:55.039
Where do you sort of see the the issues?
00:25:55.519 --> 00:26:00.400
You know, is it going to be the technology, or do we think that the technology is already there?
00:26:00.559 --> 00:26:08.799
It's the tax authorities, it's regulation, it's basically all of the problems that we've kind of already mentioned as being the blocker.
00:26:09.119 --> 00:26:10.960
I I think you've summarised it, Chris, actually.
00:26:11.119 --> 00:26:14.960
The the the idea of the fundless fund, uh I like it.
00:26:15.119 --> 00:26:17.599
Uh and again, it's about time horizon, isn't it?
00:26:17.839 --> 00:26:22.319
As of today, it just doesn't exist for a multitude of reasons.
00:26:22.480 --> 00:26:33.920
Uh a combination of the legal, regulatory tax, piercing of corporate veils, uh liability ring fencing, you know, any one of a number of things that you can you can think of and bring together.
00:26:34.160 --> 00:26:35.759
But I think that's where we end up.
00:26:35.920 --> 00:26:41.359
I do think it's where we end up, because people would be attracted by the frictionless ability to invest.
00:26:41.920 --> 00:26:44.000
So I see it as an inevitability.
00:26:44.079 --> 00:26:50.880
Um I don't see it as a near-term outcome, but it is an absolute game changer when you eventually get there.
00:26:51.200 --> 00:26:52.319
Yeah, I totally agree.
00:26:52.400 --> 00:26:54.160
Uh that time horizon, who knows?
00:26:54.319 --> 00:26:58.720
But then who would have thought we're at a world where we have agentic AI?
00:26:58.799 --> 00:27:03.200
I think some people thought we were still a couple of years away from that, but is is is here today.
00:27:03.519 --> 00:27:04.319
No, it's a great point.
00:27:04.400 --> 00:27:05.759
And that's that's the issue, isn't it?
00:27:05.839 --> 00:27:18.960
Is that the rate of change, I think that's what surprised me most is we all knew AI was coming, and two years ago every conference would mention it in passing, and now suddenly every conference is 80% about AI.
00:27:19.759 --> 00:27:30.079
And that's not just a passing trend, you know, that is innovation and change in real time right in front of us, week by week, I think, at the moment.
00:27:30.160 --> 00:27:34.160
And it's that rate of change that's quite astonishing from my perspective.
00:27:34.559 --> 00:27:34.880
Okay.
00:27:35.200 --> 00:27:37.440
Well, we're running up against time here.
00:27:37.599 --> 00:27:42.400
Uh I I think it's probably worth wrapping up there in terms of the main bit.
00:27:42.480 --> 00:27:47.440
But before we do finish, I wanted to move on to some rapid-fire questions for the audience.
00:27:47.680 --> 00:27:49.119
I've got some here.
00:27:49.599 --> 00:27:58.160
So to both of you, question number one: what is your most underrated cross-border risk when it comes to tax?
00:27:58.640 --> 00:28:04.319
I'll go back to the point around filing bits of paper, ticking the box, making an election.
00:28:04.400 --> 00:28:07.119
You know, what looks and sounds like admin.
00:28:07.440 --> 00:28:17.839
If you have a non-resident lender making a loan to UK borrower, often there's a treaty passport, a number that shows that the lender's entitled to gross payment.
00:28:18.079 --> 00:28:26.799
But that borrower needs to file a piece of paper, fill out a form to HMRC to confirm they don't need to withhold 20% tax on interest payment.
00:28:27.039 --> 00:28:29.599
But that does get miss and there's a risk there.
00:28:29.680 --> 00:28:37.200
The result is that the borrower needs to pay or potentially needs to pay that tax, um, which otherwise it wouldn't need to.
00:28:37.279 --> 00:28:42.799
So I think the admin operational element is still a big risk that people need to think about.
00:28:43.200 --> 00:28:48.000
And for me, the underrated underrated cross-border risk is assumption.
00:28:48.319 --> 00:28:55.279
The number of times we have conversations where somebody says, Well, I did this last year, surely it's uh the same treatment, isn't it?
00:28:55.440 --> 00:28:57.279
Or I did it with this asset class.
00:28:57.440 --> 00:28:59.119
Is it the same in this context?
00:28:59.359 --> 00:29:08.240
And the assumption that something is probably the same because some of the features are the same of the transaction, I'd say is my most underrated cross-border risk.
00:29:08.400 --> 00:29:09.440
Never assume, folks.
00:29:10.000 --> 00:29:11.279
Thank you for that.
00:29:11.519 --> 00:29:12.240
Next question.
00:29:12.559 --> 00:29:13.759
Portfolio managers.
00:29:13.920 --> 00:29:18.799
Uh one thing that portfolio managers should know about withholding tax.
00:29:19.359 --> 00:29:21.519
On that one, I would say timing.
00:29:22.000 --> 00:29:31.599
Always build in some slack for the fact that you might need to get some, to Gavin's point before, some paperwork in the hands of a payer in advance of receiving the payment.
00:29:31.920 --> 00:29:37.039
And that might need to be stamped by your domestic tax authority before it is sent to the payer.
00:29:37.200 --> 00:29:47.279
And therefore, always, always try and build in a time lag in between deciding you're deploying into jurisdiction where you know there's a withholding tax issue, and actually going off and doing it.
00:29:47.680 --> 00:29:49.039
Yeah, 100% agree with that.
00:29:49.200 --> 00:29:55.440
And also the point that you know, the rules, the interpretation, the application can change.
00:29:55.680 --> 00:29:58.000
It's uh I think it's been seen in the past.
00:29:58.160 --> 00:30:06.079
Tax authorities may change their approach on whether or not whether or not they believe you're entitled to that reduced tax rate.
00:30:06.240 --> 00:30:11.599
Uh they may introduce more requirements that you need to satisfy in order for you to get that recovery.
00:30:11.759 --> 00:30:15.759
So that all can impact the withholding tax you get back and the return to your investor.
00:30:16.319 --> 00:30:16.559
Okay.
00:30:16.640 --> 00:30:18.160
And and next question then.
00:30:18.400 --> 00:30:24.079
So one tool or one prof process that you would like to see improved?
00:30:24.559 --> 00:30:29.359
Mine would be the ability to communicate in real time with the tax authority.
00:30:29.680 --> 00:30:41.359
Our main focus in terms of tax uh energy is to use the phrase that Gavin used early on, is to pay the right amount of tax at the right point in time by the right person.
00:30:41.920 --> 00:30:50.400
And often there's ambiguity or there's there's uncertainty about maybe who is the taxpayer or how should an individual item of return be actually treated.
00:30:50.640 --> 00:30:57.680
And the ability to have constructive and open discussion with a tax authority is something that would be wonderful across the world.
00:30:57.759 --> 00:31:06.079
Uh in the UK, we have a very good system with the CCM for large businesses, and we utilize that um very frequently.
00:31:06.319 --> 00:31:12.799
It would be great if you could have more constructive and open conversation in other parts of the world uh along the same lines.
00:31:13.119 --> 00:31:25.119
So, Chris, I'm thinking more about technology and to a point that John made earlier, we think about a world where we have fundless funds and the requirements in order to achieve that.
00:31:25.759 --> 00:31:33.680
Yeah, that investor identification, that sort of golden source of almost a digital profile or tax certificate.
00:31:33.920 --> 00:31:42.720
You know, so that not only can you ease that KYC process, but you know their tax attribute, you know what they're entitled to.
00:31:42.880 --> 00:31:52.480
I think that would be a great tool, process, resource that will lay the foundations for the industry to innovate.
00:31:52.880 --> 00:31:53.200
Okay.
00:31:53.279 --> 00:31:54.400
Uh next question.
00:31:54.480 --> 00:32:02.640
Uh given that tax is renowned as being a bit of a blocker for all things innovation and everything else for that matter.
00:32:02.960 --> 00:32:08.559
One reason for optimism in the tax world, what would it be?
00:32:08.880 --> 00:32:21.200
My my optimistic view of the tax world is, and I'm going to shout out for the team here, tax professionals get a bad rep because the word tax involved in the job title generally.
00:32:21.359 --> 00:32:30.240
But we have an incredible collection of incredibly smart people involved with tax whose breadth of understanding is wildly, wildly underrated.
00:32:30.559 --> 00:32:42.160
And there's members of our team, for example, at MNG, who understand how the business operates far better, far better than I would say almost any other single function does, because tax touches everything.
00:32:42.400 --> 00:32:48.160
So my reason for optimism is the depth and breadth of quality of people we have who are in the tax world.
00:32:48.240 --> 00:32:57.920
Uh, and that includes um others in the ecosystem, like groups like the Investment Association and others, who are focused on making a better tax environment for everyone.
00:32:58.079 --> 00:33:01.599
And I would include the tax authorities in many cases in that as well.
00:33:01.920 --> 00:33:03.599
So my optimism is the people.
00:33:04.160 --> 00:33:04.400
Yeah.
00:33:04.559 --> 00:33:06.559
And I think uh totally agree with that.
00:33:06.720 --> 00:33:20.160
Tax people get involved from the start of a fund to the end of the fund through the value chain, um, having conversations with investors just as much as you do with the portfolio managers who made the investments.
00:33:20.319 --> 00:33:26.240
And given how quickly the world is changing, I think tax professionals are in for a fun ride.
00:33:26.640 --> 00:33:27.279
Good stuff.
00:33:27.440 --> 00:33:40.160
Uh I and that is an optimistic uh yeah, that is a fantastically optimistic view of the value that uh both the Investment Association and tax professionals provide to the industry as a whole.
00:33:40.559 --> 00:33:40.960
Yeah.
00:33:41.279 --> 00:33:41.599
Okay.
00:33:41.759 --> 00:33:43.759
Uh final, final question then.
00:33:44.079 --> 00:33:57.200
If you were Prime Minister for the day, not that the Prime Minister gets involved in uh laying statutory instruments or or changing HMRC guidance, but if you could change one tax policy, if you had the power, what would it be?
00:33:57.680 --> 00:34:08.960
If I think short term, if I think something for today, just maybe it's just because it's on my mind, I think bringing in a tax exempt fund, particularly for LTAS, would be brilliant.
00:34:09.119 --> 00:34:12.960
You know, I've worked with setting up these long-term asset funds.
00:34:13.119 --> 00:34:15.519
I've come across the complexities.
00:34:15.599 --> 00:34:30.559
I mean we spoke about the tax-elective fund regime, which does something, but I think one tool we don't have in the bag from a UK tax perspective is an exempt fund that could make life easier for everyone.
00:34:31.519 --> 00:34:37.920
And for me, can I promote myself from Prime Minister to joint prime minister and president of the EU Commission?
00:34:38.239 --> 00:34:38.960
Well why not?
00:34:39.199 --> 00:34:39.519
Why not?
00:34:39.679 --> 00:34:40.159
Okay, good.
00:34:40.320 --> 00:34:41.199
Just for a day.
00:34:41.440 --> 00:34:54.239
And and what I would seek to achieve from that position, it'd be a busy day, granted, but what I would seek to achieve is I would plow through with the common consolidated corporate tax base, both on a pan-European basis.
00:34:54.400 --> 00:34:55.679
Uh it's not popular anymore.
00:34:55.840 --> 00:34:57.519
BFIT is now the new word for it.
00:34:58.159 --> 00:35:05.039
But uh I would introduce that uh across both the UK as a non-EU member and the European Union.
00:35:05.280 --> 00:35:21.599
And in the afternoon, I would then plonk on top of that a proper pan-European, both fund but also a REIT-style vehicle in the real estate space and another, I haven't quite thought this through entirely, but alternatives-focused vehicle in the other alternative space.
00:35:21.760 --> 00:35:45.920
And the point of that being allowing you to move through to a world where we get closer to my previously frictionless structure, where you don't end up with 200 SPVs in your fund structure, and you then have a mechanism for distributing withholding tax across the underlying member states, plus the Europe the UK, in proportion to the assets that are held by the fund.
00:35:46.159 --> 00:35:50.480
It's a wonderful future world that I would invite all of those governments to join me in.
00:35:51.119 --> 00:35:52.880
A busy day, for sure.
00:35:53.199 --> 00:36:04.559
And speaks to the point that we talked about before around standardization and the role that government has to promote the industry and promote innovation across it.
00:36:04.880 --> 00:36:08.559
Gentlemen, uh, we are at time uh today.
00:36:08.719 --> 00:36:13.599
Uh I would just genuinely like to thank both of you for your contribution.
00:36:13.760 --> 00:36:15.440
I think it's been really, really useful.
00:36:15.599 --> 00:36:22.960
I think you made tax interesting and made tax optimistic, which is an incredible challenge.
00:36:23.679 --> 00:36:36.159
Um so for the audience, uh, if you are interested in hearing anything more on any of the issues that John and Gavin have discussed today, then please do reach out to the Investment Association.
00:36:36.320 --> 00:36:38.159
We would love to hear from you.
00:36:38.559 --> 00:36:42.239
And uh I would like to uh close by saying thanks again.
00:36:42.480 --> 00:36:48.559
And we will see you soon for the next edition of the IA Talks Innovation.
00:36:48.719 --> 00:36:49.360
Thanks again.
