A hidden beneficiary from the border-adjustment tax could be hedge fund managers, who might see a savings of tens of billions of dollars a year, according to tax experts.
Here's why hedge funds also could benefit: A large number are domiciled abroad — in places such as the Cayman Islands or Bermuda — with most of their investment professionals in the U.S. Under the new rules, which have not been finalized, both exported goods and services are expected to be exempt from taxation.
Because the investment professionals could be exporting their "service" of managing a portfolio to the foreign fund, they, too, would receive the benefit. Hedge fund fees, which were previously taxed as income at rates as high as 45 percent, could be exempt from taxation.
"Part or all of the services the managers render to a hedge fund I would expect to be exempt from U.S. taxes under the border-adjustment tax," said Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, and a former tax lawyer advising financial institutions. "How large those services are depends on the drafting and how clever the investment managers are at restructuring their operations."
Rosenthal said it is unlikely that the drafters of tax reform would enact a border-adjustment tax while exempting services, such as those rendered by hedge funds.