Cross-border logistics investment taxes: Crucial insights for fund managers
In the rapidly evolving global economy, fund managers face a significant challenge when it comes to taxation in cross-border logistics investments. This article offers insights into the key considerations for fund managers to navigate this complex landscape.
The OECD's Two-Pillar Solution, a landmark initiative aimed at addressing tax issues in the digitalized economy, presents implications for funds where logistics are heavily dependent on digital or e-commerce. Pillar One of this solution seeks to redistribute taxing rights to market jurisdictions, potentially affecting funds with logistics heavily dependent on digital or e-commerce. Meanwhile, Pillar Two proposes a minimum corporate tax rate of 15 percent on large multinational companies globally.
The international logistics industry, encompassing warehouses, distribution centers, ports, and transport systems, is a property-heavy industry. Consequently, it introduces property taxes such as property taxes, transfer taxes, capital gains tax, and VAT/GST. Withholding taxes may be imposed on income earned by a logistics property, and can differ significantly across countries.
To manage these tax complexities, fund managers need to understand the difference between direct investment and portfolio investment, as they are taxed differently. The most important step for fund managers is to select the appropriate legal structure of the fund, often pass-through entities like limited partnerships or limited liability companies.
Fund managers should also keep up with the Base Erosion and Profit Shifting (BEPS) project, which seeks to reduce tax avoidance efforts. It is crucial for them to continuously observe new rules and changes in international tax reform to prevent surprises and adjust strategies accordingly.
In the face of double taxation, where the same income or gain can be taxed by more than one country, fund managers should leverage tax treaties. Learning about the system of Double Taxation Treaties (DTTs) and their terms can help reduce withholding taxes on distributions and be tax-efficient for fund investors.
Fund managers should perform adequate tax due diligence, involving tax specialists early to determine the tax implications of each possible deal and structure. Optimising fund and investment structures is key, selecting a legal structure that is tax-neutral to investors, minimises tax leakage, and ensures adherence to all local regulations.
Lastly, the regulations of Pillar Two may impact portfolio companies and their local operations through the fund. Fund managers should be aware of these potential impacts and adjust their strategies accordingly to ensure long-term success in cross-border logistics investments.
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