BlackRock Kicks Up A Fuss On New Tax-Evasion Law That Will Hurt US Managers

BlackRock (NYSE:BLK) is not very happy about the Internal Revenue Service’s (IRS) proposed Foreign Account Tax Compliance Act (FATCA) which is slated for implementation in phases beginning next year. The asset management giant believes that the new law which seeks to curb tax evasion by Americans using offshore accounts will inadvertently lead to a loss in competitiveness for the country’s largest asset managers. ^[1]

BlackRock opines that the law will make funds offered by it and other U.S.-based competitors like State Street (NYSE:STT) less attractive to foreign investors. The asset managers may consequently be forced to move some of their operations overseas to avoid any adverse impact on their assets under management, once the law comes into force.

We maintain a $217 price estimate for BlackRock, which is about 22% above its current market price .

See our complete analysis of BlackRock’s stock here

The FATCA brings foreign financial institutions and investors who hold or buy U.S. securities directly or indirectly (as part of a fund’s portfolio) under its purview starting January 1, 2013. It requires foreign financial institutions to maintain and periodically file a report detailing the accounts of American clients. ^[1] Institutions that do not comply with this requirement would face a 30% withholding tax on their U.S. securities payment. And the law is here to stay, with the only possible amendments being the manner and timing of implementation.

This clearly impacts foreign investors in more than one way. Firstly, not all financial institutions would be interested in doing the extra paperwork this law requires – especially when they can find alternative investment options locally. So, investor money coming into global funds by the U.S. asset managers would see a decline. To add to that, those interested in investing would also be forced to rethink their options given the huge withholding tax their investment is likely to attract.

BlackRock expects Exchange Traded Fund (ETF) products to be hurt the most once the law comes into effect. This is bad news for the company which draws a large chunk of its value from these products. Also, BlackRock has been shifting focus to ETFs in the recent past. (see BlackRock Focuses on ETFs as Active Strategy Inflows Decline)

This leaves the company with just one alternative if it wants to retain its leadership in the global asset management space. It will have to move more of its business to locations outside the U.S. As funds from these locations will not be subject to FATCA, investors would not have to worry about the impact of this tax. But this solution, in turn, is bound to add to BlackRock’s costs – further squeezing the already low margins due to extreme competition in the asset management industry.

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1. Tax-Evasion Law Will Harm U.S. Asset Managers, BlackRock Says, Bloomberg, May 15 2012 [↩] [↩]