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“We welcome
the opportunity to provide our views on the development of a comprehensive set
of rules for taxation of prepaid derivative contracts that are consistent,
administrable, fair and certain,” said Samuels in prepared testimony. “We are
concerned that H.R. 4912 would impose an overly complex tax regime that would
single out prepaid derivative contracts for unfavorable treatment by requiring
that investors include amounts in income that they have no right to receive and
may never receive.”
The mutual
fund industry has expressed concern that the availability of exchange-traded
notes to retail investors reduces the relative attractiveness of mutual funds
and puts them at a competitive disadvantage. But, SIFMA believes that these
arguments (that ETNs are substantially similar to mutual funds and that they
benefit from far superior tax treatment) are oversimplified.
In his
testimony, Samuels noted the differences between the two products, which currently
qualify them for different tax treatment:
1) ETN Investors Have No Right
to Receive Cash Distributions
A fundamental rule of tax law is
that an investor who has the full right to take cash income, but elects not to,
is subject to taxation on that cash as if it were received. Investors in mutual
funds have a current right to receive cash (through dividends); holders of ETNs
do not.
2) ETNs Do Not Represent
Ownership of Any Assets
Investors in mutual funds
effectively own the underlying securities held by the mutual funds. Upon a
liquidation of a mutual fund, investors will receive their pro rata share of
securities held by the fund. In contrast, a prepaid derivative is an unsecured
contract between the investor and the issuing company that provides for a
payment at maturity determined by an objective formula, subjecting ETN owners to
credit risk not associated with mutual funds.
“In light of
the complexity of the issues that will need to be resolved in order to arrive
at fair and administrable tax rules, we respectfully suggest that the legislative
review be coordinated with the Treasury’s consideration of these same issues,”
added Samuels. “We look forward to participating in this important dialogue.”
The full
written testimony can be found here:
http://www.sifma.org/legislative/testimony/pdf/derivative-ETNStatement03-05-08.pdf
