(Finance) – A US tax rule has the potential to create disastrous effects for Italian savers who invest in mutual funds of Italian managers, which in turn have financial assets issued by US “partnerships” in their portfolios. In fact, according to US tax regulations, partnerships with one or more foreign partners are obliged to apply a withholding tax of 37.5% on the accrued profits, and therefore not already distributed, of the foreign partner. This is the warning launched by president of ExportUSA, Lucio Miranda that advises Italian savers to check this aspect with the manager of the Italian fund who follows their operations.
Why did this criticality emerge only this year?
“The rule that profits received by a foreign partner of a partnership are subject to a withholding tax is not new but something that has always existed. What is new is the emphasis on enforcement. For the 2021 fiscal year we had to apply for an extension to the deadline for submitting the tax return of all the partnerships that had a foreign partner internally because at the beginning of the year the US tax authorities had not yet published the implementing regulations of this new chapter regarding partnerships. In the 2021 fiscal year, two new forms have been provided to be completed when filing partnership income tax which, when one or more partners are not US tax residents, are quite complicated. And they become even more complicated when the shareholder of the American partnership is, in turn, a transparent foreign company: in this case we are entering, in fact, a tax and accounting year. The emphasis of the IRS is on partnerships that include foreign partners. They have probably identified this area as one of those in which avoidance or evasion is higher than in others, the fact is that starting from the 2021 tax year, with a tax return to be presented by 15 April 2022, the declarations of income from American partnerships with a foreign partner have become very complicated due to the introduction of two new forms to fill out which require a lot of work at an accounting level: in fact, it is necessary to align the Italian accounting data with American accounting standards. A procedure that is often not very simple as in the case of untaxed reserves that do not exist in America. Among other things, all transparent companies such as LLCs are treated as partnerships. The LLC is a transparent company so when it has more partners it is, by default, treated as a partnership by the American tax authorities. Unless the partner requests to be treated otherwise, the LLC remains a partnership. We became aware of this problem because we were contacted by some Italian savers who told us that they had bought shares in a fund from an Italian manager and that they had received a letter from the same manager received in turn by the American manager , in which the ITIN (the tax number for non-residents) is requested to be presented within two weeks, otherwise additional penalties would have been deducted: 37.5% withholding tax, a 10% penalty and the 26% net of the border by the Italian tax authorities. A bloodbath.”
How long does it take to get the ITIN?
“Before Covid, it took 4 to 6 weeks to obtain an ITIN. Now it takes no less than 8 weeks. Since it is impossible to obtain an ITIN in such a short time, the net result is that the Italian saver sees the benefits reduced of your investment with expropriation percentages.
How to get the ITIN on time?
“In the case of these savers, this problem can be solved: the ITIN request can be attached to the tax return. In this way, the American taxman, while processing my file, also assigns me the ITIN. The problem is, however, that the American manager requires Italian savers to submit the ITIN by 31 December and the tax return cannot be filed before 10-15”-
Upstream, is there a problem of lack of transparency on the part of the managers?
“I don’t think so. I believe that the Italian operators were also taken aback by this letter, they weren’t aware of it before. For the American operator, the ITIN request is not a problematic one and, therefore, he did not feel the need to give adequate notice. The truth is that the American operator, the Italian operator and also the legislator do not know or do not experience situations of this type on a daily basis. The American operator probably doesn’t even know that it takes 8 weeks to request an ITIN”.
What are the consequences for savers who find themselves in this situation?
“These savers find themselves having to pay a withholding tax of 37.5% plus a 10% penalty and in Italy also 26% on the net border which, if the Meloni government rule is extended, should drop to 14% throughout 2023. The other problem is that of having to file tax returns in America. The foreign partner of a partnership is, in fact, required to file tax returns in America even if they have no taxes to pay. This is a significant administrative and bureaucratic burden especially for those who have not invested large sums and – to obtain a refund of the taxes paid in excess – find themselves having to request the ITIN and make a tax return.It can happen that you have 50 thousand euros invested in a fund and 10,000 of these are invested in an ETF managed by an American partnership. For the small saver, it is an unjustified blow compared to the size of the investment. They have made a rule aimed at reducing avoidance and evas ion without thinking that they would have drawn even small savers into the tight links of this legislation”.