Our neighbors to the North may have found a way to accomplish some U.S. tax reform. Canada is offering the U.S. the opportunity to gain much needed investment for public works such as U.S. freeways and bridges by using Canadian pension funds. The condition is – drop the 10% tax tagged onto foreigners selling U.S. property.
The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) was implemented in response to the growing fear of a takeover of domestic resources by foreign money. The law imposes a 10% tax of the sale price on U.S. real property owned and sold by foreigners. Because the law is so broad, it includes foreign pension funds.
President Obama has been pushing for changes to FIRPTA that would exempt foreign pension funds from paying taxes on U.S. real property sales.
In the U.S., public-private relationships, especially foreign ones, have traditionally been viewed with skepticism, and investment in public infrastructure has suffered because of this. Investment in public infrastructure by private funds is reported at 3.6% of the nation’s Gross Domestic Product, a significant shortfall compared to the estimated $3 trillion needed to bring the country’s public infrastructure up to standard.
If the proposals pass, foreign, including Canadian pension funds could invest in public works projects without investors worrying about the FIRPTA tax burden.
Canadian pension funds including the Canadian Pension Plan Investment Board, the largest in Canada, has been the biggest supporter for the change. Should the FIRPTA law include this exemption it will cost the U.S. government approximately $2 billion in lost tax revenue over the next decade. However, the flurry of foreign investment would far surpass the losses.
Klueger & Stein, LLP are keeping our international clients informed of any changes to FIRPTA that may affect their foreign pension funds and investment portfolios.