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ICI Calls for Enactment of Tax “Flow-Through” Legislation
Washington, DC, September 21, 2007 - Legislation that improves the ability of U.S. funds to attract foreign shareholders should be enacted, according to a recent ICI letter to Senate Finance Committee leaders. A similar letter was also sent to House leaders.
Most types of income received by funds (for example, dividends, interest, and short-term capital gains) historically have been treated for tax purposes as dividends upon distribution to shareholders. Such dividend treatment arises because mutual funds are corporations for tax purposes, and corporate distributions of earnings are treated as dividends (absent a special rule).
The American Jobs Creation Act of 2004 (AJCA) provided a special provision in the Internal Revenue Code concerning fund distributions attributable to interest and short-term gains. Under AJCA, a fund may elect to “flow through” to its foreign shareholders the character of these two types of income. Flow-through treatment is beneficial because interest and short-term gains received by foreign shareholders generally are exempt from U.S. withholding tax, while dividends are taxable. Absent a legislative extension, Internal Revenue Code section 871(k) will expire after 2007.
AJCA’s flow-through provision should be made permanent, according to remarks from ICI President and CEO Paul Schott Stevens. Stevens said that Code section 871(k) promotes tax fairness by permitting certain distributions by U.S. funds to retain their character as exempt from U.S. withholding tax when paid to foreign shareholders.
ICI believes that short extensions of the provision do not provide foreign investors with tax certainty, nor do they provide certainty to fund companies that have not yet incurred the costs required to implement this provision.