The Hedge Fund Tax Practices Conference was held on December 2-3, 2010 at Princeton Club, New York. The industry event organized by Financial Research Associates was well attended as it covered recent Tax and Regulatory changes affecting the industry: The Dodd-Frank Act, SEC Tax Extenders Bill of 2009, and HIRE Act of 2010. The panel included industry experts from law and accounting firms. GlobalRisk Community was present at the event as a media partner increasing its visibility with the Hedge Fund community.
Impact of Dodd Frank act, Title VII, Subtitle A on Derivatives: Swaps will no longer be treated as a Section 1256 contract for federal income tax purposes as the Act requires swaps entered into after 7/21/2010 to be cleared and traded on an exchange. Payments from equity swaps and other derivatives made to foreign persons would be treated as dividend equivalent payments and subject to income tax withholding. The effective date is 180 days after 9/14/2010 and applies to specified notional principal contracts. There is also a proposal to file short selling (Regulation 13F).Twenty Wall Street banks are requesting the U.S.Treasury to exempt foreign exchange derivatives from the government oversight.
SEC Tax Extenders Bill would convert carried interest, qualified dividends and long-term capital gain to ordinary income subject to self-employment and unlimited Medicare tax. The Congress was careful to leave investors unaffected and Senate is favoring an exemption from the carried interest legislation for venture capital firms.
The HIRE Act was enacted on 3/20/10 after the UBS scandal accentuated problem of US persons investing in offshore bank and securities accounts. The Act imposes a 30% withholding tax on bearer paper, payments of dividends, interest and gross proceeds from sales of property made after 12/31/2012 to foreign financial and non-financial entities unless these entities enter into an agreement with the U.S. Treasury to identify the US account holder, the account, the account balance and the activity. Any US account holder that owns more than 10% of the foreign entity will need to identify the owner. The provision will affect private equity fund managers and real estate operators the most.
The new PFIC rules impose a significant additional tax on gains, interest and dividends derived from investments in PFIC or US Passive foreign investment company. The changes are designed to discourage US investors from deferring tax on investment income by holding passive investments through non-US companies that do not distribute their earnings. A US investor will not be subject to the tax charge rules if it makes a timely election to treat PFIC as QEF (qualified electing fund) or Mark-to-Market. QEF election can be made with respect to options, warrants or other right in a PFIC. An electing shareholder must attach form 8621 to its return. The MTM election may be made by a US person if the PFIC stock is regularly traded on an exchange.
Foreign Tax reporting (FBAR) imposes additional reporting for individuals with specified foreign financial assets (stocks, securities and accounts) if the aggregate value of the asset exceeds $50,000. The information is furnished as an attachment to the individual’s tax return. Foreign partnerships, foreign corporations and financial interests in or signature authority over offshore hedge funds and private equity funds are excluded from FBAR reporting for 2009 but not a foreign mutual fund. Congressional criticism of rules not requiring Form 1099 reporting by non-US payers if US person invested in non-US securities or bank account was the basis for this rule.
The last topic covered was triggers of FIN 48 rule that would require reporting and disclosure of reserves for uncertain tax positions. The activities of fund manager in non-safe harbor countries, such as Australia, Brazil, China, Germany, Poland, Portugal, Spain, etc., could create FIN 48 issue requiring offshore funds filing Form 1120-F to file the Schedule UTP if total assets are equal to or exceed 10 million.
In summary, the Conference had a very good technical content from engaging speakers, in particular Dean Zerbe, the former Tax Counsel of the US Senate Finance Committee and his address on the Politics of Hedge Fund Tax.
Please provide your comments on the article as these comprehensive and complex Tax changes have implications on US investors’ portfolio holdings in derivatives and foreign investments.
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