US takes look at hedge funds and a tax perk
Tuesday, August 14, 2007 : PermalinkWall Street Journal- U.S. lawmakers are examining yet another tax perk enjoyed by hedge funds: Many of these funds lend money like banks, but unlike traditional lenders, often don’t pay U.S. taxes onthe profits.
Hedge funds, which control liquid pools of capital with little regulatory oversight, are a growing presence in the lending business. They increasingly take part in lending syndicates with traditionalbanks, often indirectly, and also make direct loans, frequently to riskier or smaller companies that may have difficulty obtaining traditional financing. Indeed, the additional liquidity provided byhedge funds has helped contribute to the boom of easy credit that is now coming to a halt.
But many hedge funds have found clever ways to avoid paying U.S. corporate income taxes on the profits from this business. They do this by using offshore affiliates and transactions designed to takeadvantage of a murky area in the tax law that differentiates between lending and investing activities.
While some tax lawyers contend that these types of transactions are proper, others argue that many variants are legally dubious and that tax laws should be changed to clarify what is permissible. Itisn’t clear how much the current tax treatment of hedge-fund lending could be costing the U.S. Treasury, but it is likely in the billions of dollars.
The Senate Finance Committee is examining whether the current tax treatment is correct, and whether the law needs to be changed, according to a Senate tax aide.