Clinton Administration's FY 2001 Budget Proposal Includes Tax Provisions

Washington, DC, February 11, 2000 - The Clinton Administration’s budget proposal for the fiscal year beginning October 1, 2000 includes provisions of interest to regulated investment companies (RICs) and their shareholders. Several of the provisions have been previously proposed by the Administration. More information about the provisions can be found in the Treasury Department’s "General Explanations of the Administration’s Revenue Proposals." (Ed. Note: links to a .pdf file of size 958k.)

Of particular interest to mutual funds and their shareholders, the Administration has again proposed to exempt from U.S. withholding tax all distributions made to foreign investors in certain bond funds. The proposal would apply to mutual fund taxable years beginning after the date of enactment.

Specifically, the Treasury explanation provides that all income received by a U.S. mutual fund "that invests substantially all of its assets in U.S. debt securities or cash" would be treated as interest exempt from U.S. withholding tax when distributed to the fund’s foreign investors. A fund would be treated as meeting this "substantially all" test "if it also invests some of its assets in foreign debt instruments that are free from foreign tax pursuant to the domestic laws of the relevant foreign countries." The Treasury explanation does not indicate what portion of a fund’s assets could be invested in foreign bonds without violating the "some" standard.

The Institute has previously supported this Administration proposal as an important first step toward eliminating all U.S. tax incentives for foreign investors to prefer foreign funds over U.S. funds. The Institute’s position on the Administration proposal remains unchanged.