Institute Urges Extension of Tax Treaty Benefits to Cover U.S. Mutual Funds

Washington, DC, December 19, 2001 - The United States and United Kingdom earlier this year signed a new income tax treaty that, among other things, reduces the withholding tax rate to zero percent for dividends paid to pension plans. However, the new treaty does not extend this zero withholding tax rate to dividends paid by U.S. mutual funds. A dividend paid by a U.S. mutual fund to a U.K. pension plan is instead subject to U.S. withholding tax at a 15 percent rate.

In a recent letter to the Treasury Department, the Institute requested that the zero withholding tax rate be extended to cover dividends paid by U.S. mutual funds to U.K. pension plans. As explained in the Institute's letter, there appears to be no policy rationale for providing an exemption from U.S. withholding taxes for dividends received directly by U.K. pension plans, without also providing a comparable exemption for dividends received by U.K. pension plans from U.S. mutual funds investing in the same corporations. In reply, the Treasury Department assured the Institute that it was not their intention to discourage investment by U.K. pension funds through U.S. mutual funds. Further, the Treasury Department stated that it hopes to be able to resolve this issue for U.S. mutual funds expeditiously.

The new U.S.-U.K. income tax treaty is expected to be ratified by the U.S. Congress and U.K. Parliament during 2002.