Determining whether to apply US tax withholding is a complex undertaking for investment firms, regardless of size or sophistication. Part of the reason for this dates back to 1980 when the Foreign Investment in Real Property Tax Act (FIRPTA) authorized the United States government to tax foreign persons on the sale of US real property interests (USRPI). Since then, if a company discloses that it is a United States Real Property Holding Company (USRPHC), there are significant tax implications.
For example, if a large global asset manager takes a position in Ovintiv Inc., which is classified as a United States (US) energy producer, it may be a surprise to find out that Ovintiv is a USRPHC per information disclosed via a SEC filling on November 21, 2023. Further examination of this disclosure would show that the issuer says, “We believe that we currently are….a USRPHC.” This has potential tax withholding requirements for the asset managers’ international investors and this small quote may be difficult to identify absent a time-consuming manual document review process.
If a US domestic company is classified as a USRPHC, its stock is generally considered to be a USRPI in the hands of a foreign shareholder. Consequently, distributions by the company may be treated as gains and subject to FIRPTA taxation. However, in May 2023, the IRS issued new guidance for determining whether a foreign partner in a partnership owning US real estate assets is subject to FIRPTA. The new guidance laid out that the five percent ownership threshold, (10% for Real Estate Investment Trusts), for regularly traded stock should be tested at the partnership level, instead of at the partner level. This move potentially subjects the non-US partners to addtional withholding and reporting requirements.
It’s not uncommon for USRPHC disclosures to be hidden away in company filings, which may require manual document review to uncover these statements. This can be a challenge for investors who need to know if they hold, trade or are planning to invest in a company that is considered by tax authorities to be a USRPHC. Enforcement by the Internal Revenue Service (IRS) is becoming more systematic and automated, which means firms need to have their own streamlined processes in place to ensure compliance with regulations like FIRPTA.
How can Bloomberg help?
Bloomberg provides a regulatory enterprise data solution that identifies USRPHC designated companies. This dataset differentiates between companies that have stated they are not a USRPHC, as well as those that indicated they may become one in future. The solution utilizes document reading technology to scrape all company filings from Bloomberg’s vast entity database, ensuring the data is accurate and correctly reflects a company’s status as a USRPHC. This eradicates manual processes for clients and helps them to navigate the complexities of US tax obligations in a scalable, reliable way.
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