United States

Investment Industry Awaits Clarification on NII Tax

Year-End Tax Strategies and FATCA Dominate Tax Discussion


Attendees at RSM’s 5th Annual Investment Industry Summit held in New York City last month got to explore the latest developments inside the investment industry’s ever- changing tax environment, alongside some of RSM’s top tax experts.

First up, RSM Partner Moshe Metzger delved into Section 1411 of the Internal Revenue Code (IRC), which imposes a new 3.8 percent on the Net Investment Income (NII) of individuals, estates and trusts that have incomes above certain threshold amounts. "The new tax has caused no shortage of confusion since its formulation," Metzger commented.

"The way we need to be thinking about this is, ‘I’ll pay my 3.8 percent tax on whatever my hedge fund’s net bottom line is, but I don’t want to be taxed on my gains," explained Metzger, who suggested that a contrary outcome is very possible in light of how the current regulation is written.

"The government is now aware that the statute’s wording was not as articulate as it needs to be when it comes to applying this rule to the investment industry, and I think that we will see a fix put in place before the end of the year," Metzger told attendees of the summit’s tax update session.

Still, Metzger characterized the addition of the 3.8 percent tax as significant and informed attendees of different paths designed to minimize its impact.

Next up, RSM Partner, Marcia Rennie, served up some year-end tax planning strategies involving a number of different tax adjustments, including wash sales, constructive sales and straddles. She was followed by Irina Kimelfeld, a director within RSM’s tax practice, who sought to highlight and clarify a number of changes to the Foreign Account Taxpayer Compliance Act (FATCA).

FATCA, which was included as part of the HIRE Act of 2010, has been closely monitored by the investment industry because it requires foreign financial institutions, including hedge funds, to report the holdings of U.S. taxpayers to the IRS or else face stiff penalties.

"One of the things that I would like you to take away from this discussion today is that FATCA is not a withholding regime — FATCA is really an information-reporting regime that uses withholding as a penalty to ensure enforcement," commented Kimelfeld, who said that the U.S. has moved into a number of Intergovernmental Agreements (IGAs) with different countries using two different models.

"As a result of these IGAs, some of these FATCA data-gathering requirements have shifted from one country to another, essentially, but they haven’t been relieved of the requirements to gain all of the data. It’s more a question of where they get to report it," Kimelfeld explained.

Batting clean-up for the summit’s tax update session was RSM Partner Richard D. Nichols, who quickly delved into the realm of international tax reform and the recent proposal by House Ways and Means Committee Chairman Dave Camp (R-Mich.).

Camp has called for the structure of partnerships to be more in line with that of S corporations in the way that they allocate income and expenses among partners. The idea is to eliminate some of the complexity related to partnership structures or so-called pass-through entities, Nichols explained.

In the context of Camp’s international proposals, Nichols said the proposed reforms signal a shift from worldwide to territorial taxation, and a reduced worldwide corporate tax rate of 25 percent, coupled with certain exemptions on foreign income. Nichols further mentioned the proposed reforms could build momentum for earlier proposals to eliminate pass through treatment for partnerships as well as S corporations, given the current top individual tax rate of 39 percent.

"For the moment, the big takeaway here is that there is a push to eliminate pass-throughs," said Nichols.

For more information, please contact a RSM professional or Richard Nichols, Partner, 212.372.1135