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- ICI Comment Letters
November 10, 2009
By Electronic Delivery
Stephen E. Shay
Deputy Assistant Secretary for International Tax Affairs
U.S. Department of Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Re: Extending Permanently the RIC Flow-Through Provisions of Section 871(k)
As we discussed today, the fund industry has a few unique issues relating to expiring provisions. These issues, the ICI submits, should be addressed by making permanent at the earliest opportunity the RIC “flow-through provisions” (discussed below). Alternatively, these provisions should be extended. In either case, legislation should be enacted before December 31, 2009.
Code section 871(k) exempts foreign investors in a RIC from U.S. withholding tax on “interest-related dividends” and “short-term capital gain dividends” (which are amounts attributable to interest and short-term capital gains and for which RICs have elected this “flow-through” treatment). As enacted by the American Jobs Creation Act of 2004, section 871(k) was effective for three years, beginning with a RIC’s first taxable years beginning on or after January 1, 2005. This section was extended once, for two years, in October 2008 (over nine months after it began to expire).
Section 871(k) is important for RICs seeking to compete with foreign funds for foreign investors. As you know, RIC distributions are treated as dividends unless the Code expressly provides character “flow-through” for amounts distributed “flows through” to the RIC’s shareholders. Thus, prior to enactment of section 871(k), foreign investors in RICs were incurring U.S. withholding tax on amounts (interest and short-term gains) on which U.S. withholding tax was not withheld if the investments instead were being made directly or through foreign funds.
The temporary nature of section 871(k), however, has limited its utilization. First, many RICs have been sufficiently unsure of the provisions’ long-term viability to incur the significant programming costs for the possibility of only temporary benefits. Second, foreigners have been unsure whether to make long-term investments in RICs without a long-term assurance that the flow-through benefits would be available. The nine-month delay (until October 2008) in securing the provisions’ two-year extension did little to assuage investors’ concerns. Indeed, many foreign investors have been asking their RICs for information regarding the likelihood that section 871(k) will be extended before December 31, 2009. RICs will be more likely to make the necessary programming changes, and foreign investors will be more likely to invest in RICs, if the provisions are made permanent.
Unless enactment of some extension occurs before the end of this year, foreign investment in RICs will be impacted. First, some foreigners will not invest in RICs until extension is enacted. Second, some foreign investors will redeem their RIC shares before receiving a distribution that, if section 871(k) has not been extended, becomes subject to withholding tax. Third, those foreigners who remain invested could suffer U.S. withholding tax on, and perhaps be forced to file U.S. tax returns to recover, amounts attributable to interest and/or short-term capital gains. Unlike most other expiring provisions, which generally need not be resolved until taxpayers are preparing to file tax returns, the flow-through provisions involve withholding taxes and should be extended before they expire.
Thus, as we have discussed, the fund industry urges that section 871(k) be extended and made permanent at the earliest opportunity. Please feel free to call me if you would like to discuss this further. Thank you.
Senior Counsel – Tax Law