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Proposed regulations from the Internal Revenue Service that aim to prevent tax evasion by Americans with offshore accounts may hurt U.S. asset managers that offer funds to investors abroad.
Portfolio managers of global funds may not want to purchase U.S. securities because the funds would be subject to Fatca, or the Foreign Account Tax Compliance Act, if they invest in U.S. securities, Harris Horowitz, head of global tax for BlackRock Inc. (BLK), said in a telephone interview. Foreign investors may also choose not to invest in funds that have U.S. securities because if they work with a foreign broker who isn’t compliant, they could be penalized, Horowitz said.
“We’re concerned about the reputation of the U.S. asset- management industry and the products that we offer impairing our relative competitiveness to others,” said Horowitz, who’s also a managing director at the New York-based firm, which is the world’s largest money manager. “We think it could change investor behavior.”
Horowitz is testifying at a hearing today held by the IRS on Fatca, which is scheduled to take effect in phases beginning Jan. 1, 2013. The IRS could amend how and when some aspects of the rules are implemented. It can’t rescind the law.
The 2010 law requires financial institutions based outside the U.S. to obtain and report information about income and interest payments accrued to the accounts of American clients. Foreign financial institutions that hold U.S. securities are subject to Fatca as are foreign investors who buy funds with U.S. securities in the portfolios.
The 2010 Fatca law generally applies a 30 percent witholding tax on payments on U.S. securities to foreign financial institutions that don’t comply.
Foreign investors will be more likely to choose local funds over U.S. funds, even if they’re cross listed on local exchanges and have better performance, because they won’t want to file the onerous paperwork, said Horowitz. That could reduce the liquidity of products like U.S. exchange-traded funds, he said.
Fatca may also result in jobs being exported overseas because U.S. asset managers such as BlackRock would rather create, list and organize funds abroad since there will be separate funds for foreign investors who invest in non-U.S. securities, said Horowitz.
“We just think the way the IRS is going about it should be considerate and more focused on high risk,” Horowitz said. “It’s like shooting a mouse with an elephant gun -- it’s a little overbearing.”
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