IMA proposes ‘local exemption’ to bypass US tax hit

The Investment Management Association (IMA) has proposed a solution to help UK investors escape an “impossible” set of US tax rules due to come into force in 2013.

Last week the deadline passed for responses to the second notice from the Inland Revenue Service (IRS) on FATCA, or the Foreign Account Tax Compliance Act, designed to prevent offshore tax evasion. 

Stephen Lynam, the head of tax at the IMA, said the association is lobbying for changes which would see funds that use local distributors exempt from the rules.

He said the latest notice on FATCA from the IRS outlined a potential exemption for local banks. “We are saying, why limit it to banks that are only selling to locals? Why not widen it out?”

The IMA’s submission to the IRS reads: “A solution for the UK funds industry would be to afford platform operators similar treatment to that of ‘certain local banks’, ie for provisions to be extended to include local distributors. Such a change would see funds treated as ‘deemed compliant’ foreign financial institutions.”

The FATCA regime, due to come into force in January 2013, will force individual investors in funds holding any US assets to prove they are not US citizens or face a 30% witholding tax on any returns from these assets.

FATCA will be a costly administrative nightmare for funds and pension funds with any degree of US exposure, including those with global and UK mandates, and will also hit investors through brokers and platforms.

US expatriates are furious at the proposals, with a coalition of groups representing Americans abroad condemning the rules as “one of the most self-destructive programs for the economic welfare and future of the US ever devised by Congress.”

Jeremy Soutter, Aviva Investors’ global head of products, said fund groups are pushing for European UCITS funds to escape FATCA completely. 

“The industry is working very hard to get a carve-out for UCITS funds. If that can happen, we will rest easy, as most mutual funds in Europe would be out of scope. If UCITS funds are in scope, this piece of regulation will come down very hard on everyone.”

Lynam said a broad exemption for European UCITS funds is unlikely, but he hopes the IMA’s proposals will make the US authorities take a more pragmatic approach.

“If the US agrees with what we are proposing, the UK fund industry problems would largely go away – not completely, but it would become something that could be complied with at a cost,” he said.

“At the moment, it is impossible, unless you rip up the whole UK distribution rule book and rebuild the industry.”

Toby Hogbin, head of product development at Martin Currie, said the challenge for fund groups will be to come up with a way to protect investors, but he warned it could lead to more paperwork for clients, and ultimately more cost.

“Where it becomes tremendously difficult is when you look at how investments are made. They can be made through platforms or by US investors that are seconded overseas for an extended period.

“These people could be captured by the legislation but be unaware of it, so it becomes extremely difficult to keep track of,” he said.

“This is not great news for anyone – it will have an onerous implication, but it is just a matter of how extreme that implication becomes.”