business from Bermuda, back onshore.

The Treasury Department's tax simplification proposition affects the "stock and securities trading safe harbour'' for non-US persons, making it more attractive to conduct the administrative services of fund managers in the US.

Treasury officials estimate the proposal could raise an additional $10 million for the US government in the period up to the year 2002. The proposal would be back-dated to become operative in taxable years beginning last January.

Non-US parties, at present, can use a US-based investment fund to invest in US stock and securities, without becoming subject to US federal income tax on the trading gains recognised by the fund, provided the fund is not a dealer in stocks or securities and the fund does not maintain its principal business office in the US.

Current regulations have a ten-factor test to determine whether an investment fund's principal office is in the US.

The determination turns on the location of various back office and other ancillary functions relating to the fund's operation, including maintenance of the funds records and books of account, communication with investors and the general public, and solicitation of sales of fund interests.

It does not depend on the location of managers or other employees of the fund who are charged with conducting investment research or making day-to-day business and investment decisions on behalf of the fund.

Tax specialist, Patrick L. Hackenberg, with Ernst & Young Bermuda, said yesterday, "This has had the effect of shifting administrative jobs to foreign tax haven jurisdictions.

"But under Treasury's proposal, the principal office requirement would be eliminated. The main effect of this change would be to bring onshore, management of US-sponsored investment partnerships sold to foreign investors.'' Mr. Hackenberg said yesterday, "The impact on Bermuda, whether it's severe or not, really depends upon what the funds feel about bringing a physical presence into the United States and potentially being subject to US taxes.

"Although what the legislation is meant to do is to remove one of the requirements not to have physical presence in the US, a lot of our clients, I believe, do not want to have a physical presence in the US, because it brings you one step closer to the US tax structure.

"The initial ten requirements, what we call the ten commandments, were issued in 1966 (the Foreign Investors Tax Act 1966) and subsequent legislation has basically made it unnecessary to have all of those requirements.

"A lot of jobs have moved outside of the US because of it and Treasury believes if they move more jobs back into the US, they will have more taxpayers and increase the revenue the Treasury would receive.'' Mr. Hackenberg advised that fund managers would have to weigh whether or not it economically makes sense to be here in Bermuda, versus doing the administrative services in the US, including the potential tax ramifications that they may incur by moving to the US.

The practice has been that US-based investment funds designed to accommodate non-US investors, developed complex structures under which certain administrative activities of the funds are conducted outside the US, while research, trading and most other business activities of the funds are conducted within the US by US-based investment managers with discretionary authority to effect stock and securities transactions on behalf of the funds.

Treasury officials said that the "stock and securities trading safe harbour'' reflects a legislative purpose to promote foreign investment in US capital markets.

The principal office requirement served to address certain tax concerns that became obsolete with the 1986 enactment of new rules recognising passive foreign investment.

TAXES TAX