Proprietary Investment Structures AND Governance, Risk and Compliance

3rd January 2019 

Proprietary Investment Structures AND Governance, Risk and Compliance

(Penned by Benoy Philip, Singapore)

Introduction

(1) The need for Governance, Risk and Compliance (GRC) at a commensurate level may not have received much attention in the past in many countries, more so for proprietary investment structures. A proprietary structure could be used to establish single family office, family trust using corporatized private trustee arm or an investment holding entity and other types of private investment vehicles.   

Regulators’ ever-growing tentacles and offshore structures

(2) In recent years, regulators and tax authorities across the globe have become more active in bringing regulatory changes, having significant impact on cross-border investment structures. There is heightened level of co-operation between governments on a bilateral and multi-lateral basis on sharing of information and data. This is further augmented using technology to drive ongoing surveillance and law enforcement getting stricter. This trend is bound to continue and will further accelerate as we move forward in 2019 and beyond.

(3). We have FATCA driven by the US, Common Reporting Standard driven by OECD and the resultant automatic exchange of information among participating countries, OECD’s active pursuit on tax transparency, fair taxation and implementation of anti-base erosion profit shifting measures, to mention a few. These developments globally are driving the need to conduct business in a more compliant manner with demonstrable economic substance.

The message is louder and clear, if we wish to take note of it.

(4) The location of an investment structure in the past was mainly driven by tax considerations. The legislative changes in several no-tax/low tax jurisdictions during 2018, requiring certain prescribed level of economic substance will make treaty-shopping far less attractive and investment structuring, less complex. Those offshore structures currently not having a desired level of economic substance may consider either infusing economic substance or co-locate/re-locate the structure to the jurisdiction which happens to be its place of effective management.

Government, the “Caesar”

(5) I am reminded of this biblical quote: –

“Render unto Caesar the things which are Caesar's, and unto God the things that are God's”. 

Let us look at the first part and it means- what is reasonably due to Caesar, give it to Caesar.

The word “Caesar” here is apt for Governments across the globe and the respective tax departments. To have an efficient commercial structure is desirable but it should have GRC framework with well-defined policies, processes and procedures to enable the structure to demonstrate economic substance.

Proprietary Investment Structures

(6) The fundamental aspect of a proprietary structure is that it holds, or it is meant to hold proprietary monies and assets which are proprietary in nature. By the very definition, proprietary structures are not required to pass the tests required of licencing regimes. The onus is squarely on the owner or sponsor of the proprietary structure to insist on having commensurate level of GRC which underpins economic substance. 

What can stack up better?

1. Evaluate the need to get rid of “cost-centre” mentality while looking at governance, risk and compliance aspects.  

2. Inbibe an organisational culture to refrain from cutting-corners and not to take liberal interpretation of regulatory requirements, as it is MOST UNLIKELY to sail across various jurisdictions in the days to come.

3. Regulators’ tentacles have become longer, sharper and tighter.

4. At the first board meeting/management meeting, formally adopt a GRC Standard which is HIGHER of, (i) prescribed regulatory requirement or (ii) a standard that is better for the business conduct. The higher of the two should be the minimum standard.

5. From the start, have suitable mechanism in place to deal with conflict of interests/related party transactions and adopt a management style that truly reflects fiduciary mindset.

6. Conduct physical board meetings/management meetings in a formal manner at periodic intervals. Maintain elaborate documentation for all important business decisions.

7. Ensure economic substance, economic substance and more economic substance in line with the business activity and the revenue earned. Be reminded that Regulators will continue to have considerable discretion. The place of effective management & control as well as the domicile of investment structure be co-located in the same jurisdiction, making it easier to demonstrate economic substance.

8. Simple investment structures are better understood by tax authorities and other regulators.

9. The pertinent questions to ask are-

 “What is the DNA of one’s own business?

“Will the structure stand the test of regulatory scrutiny?”

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Benoy Philip, Singapore CA

Senior Adviser to MD & CEO of Tricor Singapore &

Director, Taproot Family Offices, Singapore

Tricor Singapore is a leading corporate services provider in Singapore to assist clients in incorporation of entities, corporate secretarial, accounting, payroll, tax compliance and other back office matters.

Taproot assists international clients on structuring and project manage the establishment of investment structures and not-for-profit entities in Singapore. Such structures would include investment holding entity, single family office, family trust using private trust company structure, venture capital fund management, multi-family office, boutique fund management and foundation.