As an exercise in the politics of bill labeling, the Stop Tax Haven Abuse Act stands right up there alongside No Child Left Behind and the Patriot Act. Senator Carl Levin, the influential Michigan Democrat who is sponsoring the proposed law, seems to have the rhetoric in his favor. “It is unacceptable that [hedge funds] utilize U.S. offices, personnel, laws and markets to make their money but then stiff Uncle Sam,” Levin said in introducing the bill in March.
It is the latest version of a bill he first proposed in 2005 primarily to make it harder to shelter personal wealth in offshore banks. The bill had a less incendiary name then: the Tax Shelter and Tax Haven Reform Act. But after a series of public hearings last year amid the credit crisis, the stock market crash and the corporate bailout and executive compensation controversies, it was rechristened and expanded to include language aimed specifically at hedge funds.
“The problem is that U.S.-based multinationals have very extensive profits that are booked in the tax havens without any real operations there,” explains Reuven Avi-Yonah, a University of Michigan Law School tax professor. “But the hard part is drawing the line between what is illegal and what is merely tax avoidance. It is just tax policy. Sometimes this distinction gets blurred.”
Of special interest to hedge fund managers is a provision that would impose higher taxes on firms with assets worth more than $50 million. The bill has opponents, of course.
“There is a distinction between trying to target actual individual tax abuse and targeting the perceived abuse that would fundamentally alter how hedge funds are set up,” says Jeremy Naylor, a New York–based partner at law firm White & Case. He asserts that the Levin bill could scare foreign investors away from U.S. hedge funds also because it would challenge the way hedge funds feed offshore and onshore investments into the same portfolio.
He also notes that the Levin bill is one of many efforts to further rein in hedge funds, including a European Union drive toward tighter regulation (see “Law of the Land: Ruling Frenzy”).
