Responding to Sovereign Funds: Are We Looking in the Right Place?

8 Pages Posted: 4 Jun 2009 Last revised: 28 Jul 2011

See all articles by Wei Cui

Wei Cui

University of British Columbia (UBC), Faculty of Law

Abstract

At a superficial glance, Internal Revenue Code Section 892 appears to favor sovereign wealth funds (SWFs) over foreign private investors by exempting the former from tax on a significant range of US investments. This has recently led to calls for its abolition. Several authors, however, have challenged this view by pointing out that the impact of US tax on the relative competitiveness of SWFs and private investors should be analyzed in terms of the investors’ comparative, not absolute, advantage. And such analysis hinges on whether foreign private investors are taxed by their home countries on a worldwide basis, as well as on how SWFs are taxed in other countries where they invest. In support of these challenges, I discuss two hitherto under-noticed facts: the prevalence of the practice of worldwide taxation among countries generating the most investments into the US, and the fact that SWFs themselves may be taxed at home. Both buttress the conclusion that current US tax law is unlikely to have disadvantaged private investors. Moreover, the institutional characteristics SWFs imply that they lie in between foreign government pension funds and commercial state-owned enterprises. Changing current US tax law would unjustifiably hurt the former group of foreign investors, while having no policy effect on the latter, more controversial group of investors.

Keywords: sovereign wealth funds, Section 892, tax and competitiveness

JEL Classification: H2, H25, K34

Suggested Citation

Cui, Wei, Responding to Sovereign Funds: Are We Looking in the Right Place?. Tax Notes, Vol. 123, p. 1237, June 8, 2009. Available at SSRN: https://ssrn.com/abstract=1413137

Wei Cui (Contact Author)

University of British Columbia (UBC), Faculty of Law ( email )

1822 East Mall
Vancouver, British Columbia V6T1Z1
Canada
6048274765 (Phone)

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