With global assets under management predicted to grow to more than $100 trillion by 2020, asset managers will become more influential and, as a result, will attract increased scrutiny from tax authorities and clients alike.
According to a recent report published by PricewaterhouseCoopers, “Asset Management 2020 and Beyond: Global Tax Gets Competitive,” tax will take on far greater importance for asset managers in terms of risk management, investment strategy and as a selling point for clients.
Will Taggart, Global Tax leader, Asset Management at PWC explains:
“Taxes will now be viewed as an operational risk, joining the ranks of other key risks which senior management takes a keen interest in, and one that needs a strategically planned risk management program integrated into all aspects of their business operations. How a firm deals with tax risk will be viewed as a competitive advantage or disadvantage.”
One of the primary drivers of this growing importance is the proliferation of transparency standards, both domestically and, particularly, internationally, the report states. FATCA and other similar reporting requirements have made many offshore products and vehicles that previously offered easy tax protection and privacy less attractive, as it’s now easier for tax authorities to identify the initial investor.
As such, the report predicts that the next five years will see a trend back toward on-shore products, with various regions competing in a race to the bottom to offer investment vehicles with the most attractive tax treatments. This environment of constantly shifting laws and the new specialized products that will be developed to take advantage of them will bring hitherto unseen tax and compliance complexity for asset managers. Firms will have to increase and redistribute their strategic tax resources to ensure that all aspects of the organization have access to real-time expertise.
This highly complicated tax environment will be a burden for asset managers, but it will also represent an opportunity to differentiate oneself from the pack. Clients will be more aware of just how much potential tax risk to which they’re exposed, and how a firm handles the tax questions and compliance issues that inevitably crop up around a portfolio will become as much a part of its reputation as investment performance. Firms that can successfully get the word out to potential clients about their abilities to answer such questions could experience a competitive advantage.
Taggart notes, “The ability to deliver 'service alpha' or value added to performance via infrastructure will become a core metric and differentiator in a highly competitive landscape.”
Technology will, as with everything, play an important role in this evolution. Obviously, the firm who develops the most efficient platforms and databases to handle the myriad potential tax issues will reap the benefits. However, the real game changer, according to PwC, is the continuing adoption of technology by regulatory authorities. The days of paper reporting, and reporting in general, are numbered, as authorities may someday soon be able to connect directly to asset managers’ IT systems to simply take whatever data they require instead of relying on the managers to communicate it to them.
Overall, the report notes that tax functions will increasingly move from the margins of technical assessments and compliance to adopt a more central, everyday role for asset managers. Managers will need to achieve an increased understanding of these issues personally as well as ensuring that skilled tax specialists are in place, and their opinions heard, to remain competitive in the new marketplace.
