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Real Estate Roundtable Seeks Guidance on Foreign Pension Funds

AUG. 23, 2016

Real Estate Roundtable Seeks Guidance on Foreign Pension Funds

DATED AUG. 23, 2016
DOCUMENT ATTRIBUTES

 

August 23, 2016

 

 

The Honorable Mark J. Mazur

 

Assistant Secretary (Tax Policy)

 

U.S. Department of the Treasury

 

1500 Pennsylvania Avenue, NW

 

Washington, DC 20220

 

 

The Honorable William J. Wilkins

 

Chief Counsel, Internal Revenue Service

 

U.S. Department of the Treasury

 

1111 Constitution Ave., NW

 

Washington, DC 20224

 

Re: The PATH Act and the Qualified Foreign Pension Fund Exemption to the Foreign Investment in Real Property Tax Act (REG-101329-16)

 

Dear Assistant Secretary Mazur and Chief Counsel Wilkins:

As you know, last December, President Obama enacted a key component of his Rebuild America Partnership by signing into law changes to the Foreign Investment in Real Property Tax Act (FIRPTA). In recent weeks, the Treasury Department has received a number of formal comment letters from large foreign pension funds ready to invest in U.S. real estate and infrastructure projects but in need of greater regulatory certainty regarding the applicable rules. In order to maximize the new law's impact on capital formation, job growth, and infrastructure modernization, The Real Estate Roundtable respectfully asks that you move quickly to issue tax guidance clarifying the definition of qualifying investors.

The Protecting Americans from Tax Hikes (PATH) Act of 2015 included a proposal that the President initially put forward to spur greater investment in U.S. infrastructure by exempting foreign pension funds from FIRPTA altogether. When the President first unveiled the proposal in a speech in Miami on March 29, 2013, the White House fact sheet explained the Administration's reasoning:

 

Infrastructure assets can be attractive investments for long-term investors such as pension funds that value the long-term, predictable, and stable nature of the cash flows associated with infrastructure. Under current law, gains of foreign investors from the disposition of U.S. real property interests are generally subject to U.S. tax under FIRPTA, and foreign investors including large foreign pension funds regularly cite FIRPTA as an impediment to their investment in U.S. infrastructure and real estate assets. With U.S. pension funds generally exempt from U.S. tax upon the disposition of U.S. real property investments, the Administration proposes to put foreign pension funds on an approximately equal footing: exempting their gains from the disposition of U.S. real property interests, including infrastructure and real estate assets, from U.S. tax under FIRPTA.1

 

Thanks in large part to the leadership of Members of Congress, such as Representatives Kevin Brady and Joseph Crowley and Senators Mike Enzi and Robert Menendez, as well as numerous others, the FIRPTA foreign pension fund exemption was one of the most significant and meaningful changes to the tax code included in the PATH Act, which generally contained extensions of current or recently expired tax law.

Once the final regulatory rules are issued, the FIRPTA foreign pension fund exemption will have a transformational impact on foreign investment in U.S. real estate and infrastructure. A recent survey of global pension assets identified $13.6 trillion in pension assets under management in 18 foreign countries.2 More importantly, the survey found that pension funds were allocating a growing share of their assets to real estate and infrastructure. Between 1996 and 2015, investment in alternative assets had increased from 7 percent of assets under management to 24 percent in the seven countries with the largest amount of pension assets.3 The FIRPTA changes are aimed at creating a tax environment that no longer deters foreign pension plans from investing in the United States.

A major theme of the recent comments is the need for tax certainty and predictability in light of the conservative nature of foreign pension fund investors, who are often subject to strict fiduciary standards. Today, the principal area of uncertainty relates to the definition of a "qualified foreign pension fund" in section 897(l)(2). Pension systems outside the United States are often constructed under sets of rules and workplace arrangements that differ significantly from those in the United States. Nonetheless, these countries frequently have well-developed pension programs that generate large pools of capital that are invested around the world. The FIRPTA foreign pension fund exemption is designed to attract this growing pool of capital to the United States, where it can be deployed in the U.S. domestic economy -- improving our infrastructure, upgrading our commercial real estate, and creating well-paying jobs in construction, engineering, and dozens of other professions.

The statutory definition of a qualified foreign pension fund understandably does not address all of the possible fact patterns that arise in a foreign country, leaving eligibility for the FIRPTA exemption largely unsettled. Fortunately, the PATH Act directs the Treasury Secretary to prescribe such regulations as may be necessary or appropriate to carry out the purposes of the foreign pension fund exemption.4 Moreover, the Joint Committee on Taxation General Explanation of Tax Legislation Enacted in 2015 (Bluebook), issued shortly after enactment of the PATH Act, clarifies that Congress intended Treasury to embrace a broad interpretation of the foreign pension fund definition. According to the Bluebook, "Foreign pension funds may be structured in a variety of ways, and may comprise one or more separate entities. The word 'arrangement' encompasses such alternative structures." The Bluebook continues, "Multi-employer and government-sponsored public pension funds that provide pension and pension-related benefits may satisfy this prong of the definition. For example, such pension funds may be established for one or more companies or professions, or for the general working public of a foreign country."

The recent comment letters from foreign pension funds seek guidance on a number of issues related to the FIRPTA foreign pension fund exemption.5 In line with these comments, The Roundtable encourages Treasury to adopt rules that carry out the objectives of the legislation by clarifying that qualified foreign pension funds can include: (1) arrangements that operate under a variety of legal frameworks governing the contribution, management, and disbursement of pension assets; (2) pension arrangements with multiple entities; (3) pension funds created by, or organized under, a State or political subdivision of a foreign country; (4) pension funds that cover single employers, multiple employers, or groups of employees (such as unions); (5) government-sponsored pension funds, including funds that are treated as governmental entities under section 892; (6) pension funds that provide other related benefits in addition to pension benefits, such as death, disability, or survivor benefits; (7) pension funds that provide benefits to the general working public of a foreign country; (8) pension funds that provide benefits to spouses, children, or other family members or dependents, notwithstanding the absence of an express designation by the employee; (9) pension funds that are subject to government regulation or report information to the government in a variety of different ways, directly or indirectly, depending on the jurisdiction's overall legal framework; (10) pension funds that are not subject to tax, or pension funds that have a small percentage of income or contributions that are not tax preferred; (11) funds that manage a limited amount of non-pension assets, provided substantially all of the amounts invested or managed by the fund are attributable to pension contributions or substantially all of the income accrues to one or more pension plans for the purpose of paying retirement benefits; and (12) an arrangement established by a foreign government in order to satisfy the obligations of a pension fund that would otherwise meet the definition.

The Roundtable also encourages Treasury to allow flexibility in how a foreign pension fund structures its holdings of U.S. real property interests, including the use of subsidiaries or aggregated investment vehicles. Lastly, in order to eliminate unnecessary uncertainty, we encourage Treasury to issue guidance that clarifies the steps partnerships must take to avoid FIRPTA withholding obligations with respect to qualified foreign pension funds.

Timely guidance that is consistent with the clear objectives of the legislation will resolve these issues and ensure that the President's infrastructure proposal fulfills its potential and drives a new wave of inbound investment in U.S. infrastructure. We appreciate your attention to this matter. Please do not hesitate to contact me, or Ryan McCormick of The Roundtable's staff, at (202) 639-8400 if we can provide any additional information or assistance.

Sincerely,

 

 

Jeffrey D. DeBoer

 

President and CEO

 

The Real Estate Roundtable

 

Washington, DC

 

CC:

The Honorably Kevin Brady, Chairman, House Committee on Ways and Means

The Honorable Sander M. Levin, Ranking Member, House Committee on Ways and Means

The Honorable Orrin G. Hatch, Chairman, Senate Committee on Finance

The Honorable Ron Wyden, Ranking Member, Senate Committee on Finance

 

FOOTNOTES

 

 

1See The White House Office of the Press Secretary, The "Rebuild America Partnership": The President's Plan to Encourage Private Investment in America's Infrastructure (March 29, 2013), available here: http://www.whitehouse.gov/the-press-office/2013/03/29/rebuild-america-partnership-president-s-plan-encourage-private-investmen.

2 Willis Towers Watson, Global Pension Assets Study 2016 (Feb. 2016), https://www.willistowerswatson.com/en/insights/2016/02/global-pensions-asset-study-2016.

3Id. at slide 25.

4 I.R.C. Sec. 897(l)(3).

5 Letter from Kristina Fanjoy, Managing Director, Head of Tax, Canada Pension Plan Investment Board to the IRS (May 20, 2016); Letter from David Taylor, General Counsel, U.K. Pension Protection Fund to the IRS (July 7, 2016); Letter from Steve Bosse, Vice President, Tax, Caisse de depot et placement du Quebec and Sylvain Dubois, Vice President, Tax, Ivanhoe Cambridge Inc. to Ass't Sec. Mazur, Comm'r Koskinen, and Chief Counsel Wilkins (July 15, 2016); Letter from Fiona Galbraith, Director Policy, The Association of Superannuation Funds of Australia to the IRS (July 21, 2016); Letter from Klas S.D. Holm, Curtis, Mallet-Prevost, Colt & Mosle LLP to Jason Yen, Treasury Office of International Tax Counsel (July 25, 2016).

 

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