Tax Neutrality is defined as a “provide benefits and do no harm” approach to taxation. Those benefits are numerous, but perhaps one of the most unexpected is the positive impact that Tax Neutrality has on ordinary citizens.
Consider UPS delivery drivers, teachers, first responders, nurses, or aircraft engineers. Employers frequently invest the pension plans of these individuals in hedge funds in Tax Neutral jurisdictions. Let’s examine three reasons why investors choose to domicile their funds in Tax Neutral jurisdictions and how these have an unexpected effect on the lives of actual people.
1. Reduced investment risk
To ensure fund performance, it’s common practice for institutional investors to pool funds into collective investment vehicles in Tax Neutral jurisdictions. By aggregating capital from multiple investors and spreading it over a diversified portfolio, these vehicles maximize returns for pension fund managers while minimizing risk. These returns are then passed onto pensioners. In fact, a study found that even a modest allocation to hedge funds could improve returns of U.S. pension plans by approximately $15.67 billion annually. This distinguishes Tax Neutral jurisdictions from tax havens that offer investors little protection and put their financial assets at risk.
2. Lower administrative costs
A further benefit of domiciling investment funds in Tax Neutral jurisdictions is reduced administrative costs. When investors pool capital in a collective investment vehicle, they only pay administrative fees for that investment in exchange for access to a broad portfolio of investments and a dedicated team of risk management experts. Any other administrative costs are shared among all investors, reducing the costs for each individual investor. The alternative is to invest directly into various assets in different countries around the world – such as a sustainable forestry program in one country and a telecom system in another – and bear the entire legal and administrative costs fee for each, reducing returns and shrinking retirement accounts.
3. Tax efficiencies
International finance has a history of being incredibly complex. One reason for this is the concept of international double taxation. With double taxation, investors’ capital is taxed twice – once where they invest their money and a second time when they realize any profits in their home countries. Each layer of taxation reduces ROI for everyone.
Tax Neutral jurisdictions ease the burden of double taxation for investors and their clients through a policy of Tax Neutrality – meaning they don’t impose additional taxes on collective investment vehicles or corporations whose capital is domiciled in those jurisdictions. Pension fund managers still pay any taxes required by their home countries when they realize their returns, but those profits are not taxed by the intermediate jurisdiction as well. As a result, they benefit from tax certainty and ensure a higher return on investment for their funds and the pensioners who depend on them.
Indeed, Tax Neutrality is a globally accepted best practice that supports the free flow of investment capital and financing – without posing harm to other countries tax bases. To quote the managers of New Zealand’s €21.7bn NZ Super Fund: “The use of collective investment funds domiciled in locations such as…[Tax Neutral jurisdictions] is legal, common and widely considered best practice portfolio management…The collective investment fund provides a tax-neutral jurisdiction to ensure its collective income does not pay a second layer of foreign tax in relation to income on which all applicable taxes have already been paid at source.”
The empowering impact of Tax Neutrality
Tax Neutrality isn’t as well-known as it should be. But it touches all our lives. It empowers millions of individuals to achieve their retirement savings goals and retire with confidence and peace of mind.
But it isn’t just retirees who benefit. A parent whose college education fund is domiciled in a Tax Neutral jurisdiction can rest easy knowing that their investment is protected by a sound legal system and a tax regime that won’t tax levy multiple taxes on the same investment. Tax Neutrality also has a positive impact on healthcare. Reinsurance programs enabled by Tax Neutral jurisdictions help insurance carriers minimize the impact of high-cost cases and increase affordability for individuals and businesses.