[This article appears in our December 2017 issue of ETF report.]
Jeremy Held is senior vice president and director of research at ALPS Advisors, issuer of the Alerian MLP ETF (AMLP), the world's largest MLP exchange-traded fund, with $9.8 billion in assets under management. ETF.com recently spoke with Held to discuss what impact U.S. tax reform could have on MLPs and other topics related to the industry.
ETF.com: Do you expect the coming tax reform will impact the pass-through tax advantage MLPs currently enjoy?
Jeremy Held: First, I have to say it's too early to determine with any kind of certainty what we think the impact of tax legislation will be. That being said, we don’t anticipate any major changes to the MLP pass-through status.
What most investors are scared about is the 'Halloween massacre' in Canadian royalty trusts that happened 11 years ago, where they lost their pass-through status overnight, and investors are wondering whether the same thing could happen to the MLPs in the U.S. We think it's unlikely. Even prior to the election of Trump, MLPs have had very benign oversight from a federal standpoint.
It’s something we keep a very close eye on. If you listen to conversations from the House Ways and Means or Senate Finance committees, you’ll hear that MLPs have never been singled out for tax reform. There has always been a discussion about tax reform that would broaden the base and lower the rate, but MLPs have never been part of that conversation specifically.
More importantly, we think MLPs have the advantage that they are viewed quite favorably in Washington. Many in Congress see the sector as beneficial to national security, energy independence and job creation.
In fact, there's a bipartisan, co-sponsored bill before Congress called the MLP Parity Act that would apply the tax preference of MLPs to other parts of the energy landscape.
At the end of the day, there’s always a small chance that tax reform impacting MLPs could occur. We don't think the chance is any greater now than it has been in the past. We think it’s a remote possibility, and one that could impact MLPs if implemented, but we don't see it as being highly likely.
ETF.com: Something that’s almost certain to be included in any tax reform bill is a cut in the corporate tax rate. How will that impact MLP ETFs, which are structured as C-corporations?
Held: There are two potential impacts. If, for example, the corporate tax rate goes from 35% to 20%, there would be an immediate benefit to all MLP funds―not just ETFs, but also open-end funds, closed-end funds and any MLP mutual fund that's taxed as a corporation. All of these funds would receive a lift because they’d be accruing tax-deferred liabilities at a lower rate as opposed to a higher one.
The other potential impact, which is harder to forecast, is the impact on the MLP structure itself. Part of the reason companies structure their pipeline operations as MLPs is to take advantage of the federal tax preference.
With a reduction in the corporate tax rate, the federal taxation they're avoiding has decreased. Does it incentivize companies to keep the corporate structure as opposed to the MLP structure? That's hard to say. A 0% tax rate is still less than 20%, but the incentive is not as great as a 35% corporate tax rate.
We believe the MLP structure will continue to be very viable regardless of whether the tax rate gets lowered, but if it does, it could make for a higher hurdle rate to adopt the MLP structure.