Alternative Investment Fund International Tax Developments - Issue 2
INDIA: 2012 BUDGET AND IMPACT ON VODAFONE DECISION
Recently, the India 2012-2013 Budget was released. The Budget contains proposed legislation that will effectively reverse the recent taxpayer victory in Vodafone and will apply retroactively to 1962. The proposed legislation raises serious issues as to whether it is constitutional. In addition it could result in significant issues for funds which have invested in India, sold their investments and distributed the proceeds. We understand the Indian government may reconsider this legislation.
The proposed legislation will likely put a large damper on investments into India.
UNITED STATES: FORM 8938 AND SPECIFIED FOREIGN FINANCIAL ASSET REPORTING FOR ALTERNATIVE FUNDS UNDER §6038D
Section 6038D was enacted and added to the Internal Revenue Code by the Hiring Incentives to Restore Employment Act (the “HIRE Act”) passed in March 2010. This legislation requires any individual holding specified foreign financial assets (“SFFAs”) to report with their income tax return information about each such asset. To have a filing obligation, the taxpayer’s SFFAs must have an aggregate value for the year exceeding the applicable threshold, which currently varies based on an individual’s filing status and residency. Reporting is required for assets held in taxable years beginning after March 18, 2010.
In December 2011, the IRS issued a final version of Form 8938, Statement of Specified Foreign Financial Assets, along with instructions. Form 8938 is devised to facilitate the SFFA reporting requirements of §6038D, and requests information on account owner, type and value, among other items. The reporting is similar, but more detailed, than that currently done on Form TDF 90-22.1, Report of Foreign Bank and Financial Accounts (also known as FBAR).
Although funds will in general not be required to report, investors may be asking funds for additional information to complete their required filings. Below is a short overview of the current filing requirements and the type of assets that are required to be reported.
- When is the Form 8938 due?
Form 8938 is required to be attached to the taxpayer’s annual income tax return and filed by the due date (including extensions) of that return.
- Who currently needs to file?
Currently only “specified individuals” are required to file Form 8938. Specified individuals include U.S. citizens, and resident aliens in the U.S. under IRC §7701(b) for any part of the year.
- Do U.S. corporations and partnerships need to file?
There are no Form 8938 filing requirements for domestic entities, including alternative funds, at this time. The proposed regulations would apply to domestic entities formed or availed of for the purposes of holding, directly or indirectly, specified foreign financial assets. Such entities are referred to as “specified domestic entities” and include certain closely held corporations and partnerships that meet certain passive income/asset tests.
- What assets are reported?
§6038D requires SFFAs to be reported once certain reporting thresholds have been met. SFFAs are defined under 2 broad categories:
- Any financial account maintained by a foreign financial institution (FFI):
- Any depository or custodial account maintained by a foreign financial institution;
- Any debt or equity interest in a foreign financial institution (other than interests regularly traded on an established securities market).
- Other foreign financial assets held for investment that are not in an account maintained by a U.S. or foreign financial institution, including:
- Stock or securities issued by someone other than a U.S. person
- Any interest in a foreign entity
- Any financial contract that has an issuer or counterparty that is other than a U.S. person.
- What information will investors be required to report?
Filers will need to report a description of the asset, the date the fund interest was acquired or disposed, maximum value during the year, exchange rate used to convert the value to USD if the fund does not use USD as it functional currency, name of fund, address, entity type and entity’s PFIC status. Investors will also need to report the amount and character of taxable income attributable to the fund in Part III of the form.
Generally, investors in hedge and private equity funds will need to report their interest in the fund itself, but not the assets of the funds. There is no “look-through” required for investors.
- How should the reporting requirements and necessary information be communicated to investors?
Much of the information may already be provided to investors through existing investor communications and documents (i.e., Schedule K-1, PFIC statements, NAV reports, subscription documents, etc.); funds will vary in their approach to providing any additional information required by investors or in summarizing information their investors may already have.
Where the reporting obligation lies with investors in a foreign partnership that files a U.S. tax return, funds may notify investors of the filing obligation and provide information to complete the filing by adding an additional footnote to the K-1. Where the reporting obligation lies with investors in a foreign corporation, funds may provide the information through a letter/statement to investors. Footnotes and statements can be simple notifications of a potential filing obligation, or more detailed summaries with the information needed to complete the form. Alternatively, funds may choose to wait for investors to request additional information and respond on an as needed basis. Where funds choose a simple notification or choose to deal with requests on an as needed basis, they should consider gathering and reviewing the necessary reporting information as part of the overall tax reporting process, facilitating the response to any subsequent investor request.
- Where do investors report interest in funds?
In Part II, Other Foreign Assets on the Form 8938.
- What if the investor already files Form 8621, 8865 or 5471 with respect to the fund?
To avoid duplicative reporting, if the investor already files an informational form with respect to an asset, the asset does not need to be reported in detail on Form 8938. Instead, Part IV of Form 8938 should be completed on which the taxpayer should indicate what other informational Form was filed. See Part IV of Form 8938 for a full listing of qualifying forms.
- Is there an overlap between Form 8938 and Form TDF 90-22.1 – do investors still need to file the FBAR?
Yes, filing Form 8938 does not relieve you of the requirement to file the FBAR or vice-versa.
SWEDEN: WILL IMPOSE RESTRICTIONS ON PRIVATE EQUITY FINANCING
The Swedish Finance Ministry on March 22 announced that it is taking steps to end a tax-avoidance practice used by private equity companies that involves borrowing capital from related companies located in low-tax jurisdictions and then using the interest payments to offset profits.
Under the new rules, interest payments will be deductible only if the lender is subject to at least a 10 percent local tax rate, and even in this scenario, the deductions will be disallowed if the sole purpose of the transaction is judged to be tax avoidance.