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Funds May Get Shorter Transition To Proposed US Tax Regime

by Mike Godfrey, Tax-News.com, Washington

22 June 2007


Senate Finance Committee Chairman Max Baucus may shorten the transition period towards a new tax regime for private equity and hedge funds proposed in a bill recently introduced into the Senate.

Baucus said on Wednesday that he has received much feedback in support of the new bill, but noted that a number of people have argued that the proposed five-year transition period for currently traded and SEC-filed publicly traded partnerships is too long and should be shortened.

Baucus stated that he was "open to discussing that possibility".

The Finance Committee Chairman's statement came in response to the introduction of similar legislation in the House of Representatives by Rep. Peter Welch (D-Vt.) which would require corporate taxation of publicly traded partnerships that derive their income from investment adviser or asset management services. However, unlike the Baucus bill, it would allow no transition period for firms currently traded, or for firms that have already filed with the SEC as to their intention to be traded publicly.

The new legislation is aimed at private equity and hedge funds, which derive most of their income directly or indirectly from investment adviser or asset management services, but which then pay investment taxes at 15% rather than income tax at rates of up to 35%.

"It’s unfair to allow a publicly traded company to act like a corporation but not pay corporate tax, contrary to the intent of the tax code," argued Sen. Chuck Grassley, ranking Republican on the Finance Committee, who introduced the bill along with a dozen other Senators.

"We don’t have a workable tax code if we don’t have structural integrity. If left unaddressed, the tax concerns presented by the public offerings of investment managers, like private equity and hedge fund management firms, could fundamentally erode the corporate tax base," he stated.

In addition to filing this legislation, Baucus and Grassley have written to Treasury Secretary Paulson, asking for the Treasury’s views on this issue, and enquiring as to what plans Treasury and the Internal Revenue Service have to issue guidance and enforce Congressional intent.

A comprehensive report in our Intelligence Report series examining offshore investment, offshore stock exchanges, trusts and hedge funds is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report9.asp

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