Category: Uncategorized

Changes to Cayman Investment Funds  Classified as Private Funds and Mutual Funds 

Overview:

The Cayman Islands Government Ministry of Financial Services and Home Affairs, together with other associated authorities (in particular, the Cayman Islands Monetary Authority “CIMA”) has notified the financial services industry of several pending changes to the regulation of investment funds. On January 8, 2020, the government published a draft Private Funds Bill, 2020 (the “Private Funds Bill”) and a draft Mutual Funds (Amendment) Bill, 2020 (“Mutual Funds Bill,”), both of which seek to enhance the oversight of closed-ended and open-ended funds (“Investment Funds”). These new bills were presented to the Legislative Assembly on January 30, 2020, where they were passed into law with only minor changes. The amendments came into force on February 7, 2020 (the “Commencement Date’)

Purpose:

The Private Funds Bill seeks to establish a framework for monitoring closed-ended funds, which are currently beyond the scope of the existing Mutual Funds Law (MFL). The Mutual Funds Bill, an amendment to the existing MFL, will enhance the regulatory and supervisory framework for mutual funds. Perceived Purposes: (1) Strengthen investor confidence in Cayman Islands investment funds vehicles, and (2) Ensure that the Cayman Islands remains the preeminent jurisdiction for investment funds formation.

The bills account for the need to update the investment funds framework while staying mindful of industry realities. The bills also address EU suggestions for investment fund oversight as set forth in a report dated May 27, 2019 from the EU Code of Conduct Group (Business Taxation).

Details:

Private Funds Bill: The Private Funds Bill has three key pillars: (a) registration; (b) operational regulation; and (c) supervision and enforcement.

Registration – All existing vehicles falling within the scope of the private funds definition and section 3(1) of the Private Funds Bill must register with CIMA by August 7, 2020 and, once so registered, will be subject to regulatory obligations.  The Private Funds Bill sets out exemptions to the registration requirement for the following entities: regulated mutual funds and regulated EU-connected funds, non-fund arrangements, and certain overseas private funds that solicit the Cayman Islands public for investments.

Private Funds must provide information upon registration, pay an annual registration fee, comply with annual audit and return requirements, retain accessible records and comply with certain ongoing obligations in relation to valuation of fund assets, safekeeping of fund assets, cash monitoring and identification of securities. Private funds that are not yet registered with CIMA cannot, pending registration, carry on or attempt to carry on business in the Cayman Islands by receiving capital contributions from investors. However, they may still solicit eligible investors, including receipt of subscription documents, pending registration. That said, such private funds must make their registration application to CIMA within 21 days of accepting capital commitments from investors and must be registered with CIMA before receipt of capital contributions.

Operating Conditions for Registered Private Funds – Once registered, the Private Funds Bill requires private funds to comply with certain ongoing obligations in order to meet best practices and the needs of sophisticated global institutional investors.

The Private Funds Bill also contains requirements for valuation, safekeeping, title verification, and cash monitoring and offers flexibility by permitting private funds to choose the service provider(s) who will provide any required valuation, safekeeping, title verification, and cash monitoring services, provided that any administrator, custodian, or other independent third party appointed is independent from the fund’s manager or operator, or, where any manager or operator or their affiliates is appointed, they identify, manage, monitor, and disclose any conflicts of interest.

Supervision and Enforcement – The Private Funds Bill authorizes CIMA to administer the law. CIMA’s duties include examining registration applications and determining application parameters and other informational requirements.

In cases where CIMA determines that a private fund is not in compliance with its obligations, it may enforce special measures, such as the performance of an audit or one-off or periodic reports as appropriate. CIMA also has the power to impose administrative fines, varying in level depending on the provision(s) breached.

In certain instances — for example, when a private fund is carrying on business in a fraudulent or detrimental manner that harms investors — CIMA may take additional special measures, including imposing operational restrictions, appointing an adviser or controller to direct fund management, or deregistering the fund.

CIMA has notified industry that it will apply a risk-based approach to the regulatory oversight of private funds.

Mutual Funds Bill: The Mutual Funds Bill brings within the scope of regulation certain mutual funds not currently covered by MFL. Funds that meet the 15 or fewer investor criteria exemption set out in section 4(4)(a) of the MFL will now be required to register with CIMA and, once so registered, will be subject to regulatory obligations.

The exemption to the registration requirement for certain overseas private funds that solicit the Cayman Islands public for investments under the MFL will remain in place.

Similar to private funds, all regulated mutual funds must provide CIMA with information upon registration, pay an annual registration fee, comply with annual return requirements, retain accessible records, and have annual audits issued or undertaken by a CIMA-approved local auditor and in accordance with International Financial Reporting Standards or the Generally Accepted Accounting Principles of the United States of America, Japan or Switzerland or any non-high-risk jurisdiction. There is no specification with respect to prior years’ unaudited reports, or if they will be required to be audited.

Implementation:

The Cayman Islands government has notified industry that it is mindful that a successful transition to the new regulations will require preparation and adequate time. New entities that are within the scope of these new requirements must adhere to the registration process prescribed with immediate effect. Existing entities will have a grace period of six months in which to comply with the registration requirements and should complete the registration requirements by August 7, 2020. Further, the Cayman Islands government has confirmed that the local audit requirement and electronic submission of the Fund Annual Return (FAR) will not be required to be filed with CIMA until six months following the first full fiscal year after registration (for most funds with a December 31 year end, this will mean their first filing will be due by June 30, 2022, in respect of the year ended December 31, 2021).

The Treasury Department and IRS announced on March 21, 2020 that the federal income tax filing due date has been extended by Presidential signature of the Families First Coronavirus Response Act (H.R. 6201).

The due date of April 15, 2020 has been postponed to July 15, 2020.

The IRS has now made official the March 20 announcement by the Treasury Secretary, that postpones until July 15, 2020, the filing date for 2019 federal income tax returns and 2020 federal income tax estimates that would otherwise be due on April 15, 2020.

Any person with a Federal income tax payment or a Federal income tax return due April 15, 2020 is an “Affected Taxpayer.” The term “person” includes an individual, a trust, estate, partnership, association, company or corporation, as provided in  Code Sec. 7701(a)(1).

For an Affected Taxpayer, the due date for filing Federal income tax returns and making Federal income tax payments due April 15, 2020, is automatically postponed to July 15, 2020. Affected Taxpayers do not have to file Forms 4868 or 7004 to obtain this relief.

The relief provided is available solely with respect to Federal income tax payments (including payments of tax on self-employment income) and Federal income tax returns due on April 15, 2020, in respect of an Affected Taxpayer’s 2019 tax year, and Federal estimated income tax payments (including payments of tax on self-employment income) due on April 15, 2020, for an Affected Taxpayer’s 2020 tax year.

No extension is provided in the Notice for the payment or deposit of any other type of Federal tax or for the filing of any Federal information return. As a result of the postponement of the due date for filing Federal income tax returns and making Federal income tax payments from April 15, 2020, to July 15, 2020, the period beginning on April 15, 2020, and ending on July 15, 2020, will be disregarded in the calculation of any interest, penalty, or addition to tax for failure to file the Federal income tax returns or to pay the Federal income taxes postponed by this notice. Interest, penalties, and additions to tax with respect to such postponed Federal income tax filings and payments will begin to accrue on July 16, 2020.

No limit on amount of payment that can be postponed.  Notice 2020-17 put limits on the amount of tax payments that could be postponed from April 15 until July 15.

 

References.  For extension of tax-related deadlines for taxpayers affected by disasters, see FTC 2d/FIN ¶ S-8502; United States Tax Reporter ¶ 75,08A4.  Thomson Reuters

The Internal Revenue Service (IRS) has issued new guidance for taxpayers engaging in transactions involving cryptocurrency.  The recent IRS Revenue Ruling 2019-24 focuses on the tax treatment of a cryptocurrency hard fork.  In addition, the FAQs on Virtual Currency Transactions address several topics and how to determine the fair market value.

The guidance in the recent Revenue Ruling addresses two questions:

• Does a taxpayer have gross income under §61 of the Internal Revenue Code as a result of a hard fork of a cryptocurrency the taxpayer owns if the taxpayer does not receive units of a new cryptocurrency?
• Does a taxpayer have gross income under §61 as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of new cryptocurrency?

A hard fork occurs when cryptocurrency on a distributed ledger undergoes a shift.  A hard fork may result in the creation of a new cryptocurrency.  Following a hard fork, transactions involving the new cryptocurrency are recorded on the new distributed ledger, and transactions involving the former cryptocurrency continue to be recorded in the prior distributed ledger.

The Revenue Ruling makes it clear that a taxpayer does not have gross income as a result of a hard fork if the taxpayer does not receive units of a new cryptocurrency. The Revenue Ruling also makes clear that a taxpayer does have gross income – characterized as ordinary income – if the taxpayer receives units of new cryptocurrency as the result of an airdrop following a hard fork.  In contrast, when a soft fork occurs (when a distributed ledger undergoes a shift that does not result in the creation of a new cryptocurrency), the soft fork will not result in income.

In the case of virtual currency, if the taxpayer doesn’t have control over the asset, meaning the currency is not immediately credited to the taxpayer’s account at the cryptocurrency exchange, a tax issue may arise. If the taxpayer later acquires the ability to transfer, sell, exchange, or otherwise dispose of the cryptocurrency, the taxpayer is treated as receiving the cryptocurrency at that time.

Finally, the FAQs make clear that taxpayers are required to maintain excellent records to establish positions taken on tax returns. This is always true, no matter whether you’re dealing with cryptocurrency, cash, or diamonds. You should maintain records documenting receipts, sales, exchanges, or other dispositions of virtual currency and the fair market value of the virtual currency.

The need for record-keeping is particularly acute since the IRS is targeting non-compliance through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.  In July of this year, the IRS began mailing letters to taxpayers who may have failed to report or misreported transactions involving virtual currency. Those taxpayers may be liable for tax, penalties, and interest. In some cases, taxpayers could be subject to criminal prosecution.

Spicer Jeffries’ tax department is available if you have questions regarding cryptocurrency and related tax regulations.

Investment performance tables and charts are an excellent way to track and showcase the success of your managed accounts and/or fund. Having a performance examination done on your monthly, annual and cumulative returns and comparing them to your benchmark provides valuable assurance to investors and an invaluable marketing tool for raising capital. There are several different levels of attestation service, each offering different advantages based on each specific client’s needs. Which level of service would serve your specific needs best? Please read on to learn how Spicer Jeffries LLP can help you.

“Agreed Upon Procedures” (AUP) Engagements

When all you need is internal assurance that an independent accountant has looked over your performance table, recalculated the returns, and agreed the data to the source documents, an AUP is the quickest and most cost effective way to get this done. The final report outlines the specific procedures performed and the results obtained.

Performance Examinations

Done in accordance with AICPA attestation standards, this is essentially an audit of your returns and culminates in a report in which we give a formal opinion on whether the performance table and accompanying disclosures are fairly stated. The exam includes confirming the source account statements with the brokers and involves a higher level of procedures over the source data, methods, and returns than an AUP typically covers. The exam provides assurance that industry standard criteria and accounting methods are used in calculating and presenting the returns, which explained in the footnotes. Performance examinations are invaluable for marketing purposes, especially for launching and raising additional capital for funds.

GIPS Verifications and Examinations

Global Investment Performance Standards, or GIPS® is a set of standards developed by the CFA Institute. GIPS is the widely recognized as the gold standard when it comes to investment performance reporting. In order to claim compliance with GIPS, the entire firm must comply with its structural, reporting, and procedural requirements on a firm-wide basis currently and for a minimum number of previous years. Specific GIPS-compliant presentations of returns must follow standards governing how investment returns are calculated and reported which are more detailed compared to typical performance reporting. GIPS standards are the most robust set of investment performance standards in the marketplace and compliance with them demonstrates a sustained level of commitment over the long term.

GIPS engagements are conducted on two different levels. The first level, called a “verification” is performed for the firm as a whole. The second level, called an “examination” is performed on a specific presentation of a composite. Typically, both levels are performed, but the examination is optional and can only be performed either after or concurrently with a verification. GIPS requirements for verifications and examinations are structurally similar to AICPA audit standards. Given that we are certified public accountants specialized in serving the securities industry, we offer a unique advantage in performing this service.

Don’t hesitate to contact us immediately to schedule a one-on-one call with our service professionals to discuss your needs and specific situation. It is our pleasure to answer your questions and bring the confidence and trust that you and your investors deserve.

Spicer Jeffries’ tax department prepares tax documents for individuals and entities across the United States, in the Cayman Islands, and around the globe.  Our client base spans numerous business segments and Spicer Jeffries understands that our client’s businesses and private financial decisions have a direct correlation to their tax liability.  Our in-depth understanding of your business allows us to offer ideas and implement the necessary planning that may result in significant tax savings.