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Favorable Tax Treatment of International Government Bonds & U.S. Government Savings Bonds

International Government Bonds

Today is . . . There are many governments in developed and many developing countries who have introduced favorable tax treatment for interest on international government bonds, in some cases by fully exempting this source of income from taxation. Presumably these special rules reflect the perception that favorable tax provisions will facilitate the placement of "international government bonds" in other cases, objectives are to subsidize specific public or quasi-public activities. Similar to most other tax provisions, tax relief pertaining to interest on government bonds has potentially important implications for economic efficiency and distributional fairness.

The increasing globalization of economies and financial markets has added important complexities to the impact of taxation on financial flows, including on international government debt instruments. This paper surveys present provisions for taxation of interest on government bonds in OECD countries and then proceeds to identify the main economic implications on efficiency and equity grounds of exempting interest on government bonds.

It demonstrates the consequences of taxation may differ significantly in closed and open economies, and that in the latter situation the impact of taxation depends, among other things, on whether residence or source-based income tax is the international norm. The conclusion is that, on economic grounds, there are no reasons for exempting interest from government bonds, and that only administrative difficulties in capturing other forms of interest in the tax net may provide a rationale for doing so.

Introduction to Absolute Return Funds

Absolute Return Funds are internationally known as Hedge Funds. Hedge Funds are often deemed high risk/high return investment products. This is because they have gained notoriety for making rich investors, like George Soros, John Henry & others, very rich. Hedge Funds use diverse investment strategies, so are typically deemed out-of-reach to the average investor. In fact, Absolute Return Funds are deemed to have the same volatility of bonds but with a much higher rate of return.

   Below you'll Discover:

  • What is an Absolute Return Fund?
  • How Absolute Return Funds play a part in your portfolio

   What is an Absolute Return Fund?

Absolute Return Funds are actively managed investments that aim to produce returns in both rising and falling markets through the use of a broad range of investment techniques. Traditional investment funds tend to invest directly into stocks, which may go either up or down. Absolute Return Funds have greater scope to use derivatives, short positions, and non-traditional securities to ensure their positions are protected in bearish markets.

Absolute Return Funds are massively diverse in size, scope and philosophy. The investment strategy employed by the fund manager will dictate whether investors receive returns in the form of income, capital appreciation, or both. The risk profile of absolute return funds can also range from very conservative to very aggressive. The difference in return and risk profile is determined by the exact instruments used by the fund manager. These methodologies will be highlighted in the fund’s Product Disclosure Statement or Prospectus.

   The Main Characteristics of Absolute Return Funds are:

  • Non-traditional investment techniques such as short-selling, derivatives, warrants

  • Performance incentives to align investor and manager interests

  • The use of gearing to increase investment positions and potential returns

  • Accepting of new investments to effectively implement their complete investment strategy

  • Minimal exposure to potential market actions

   How Absolute Return Funds Play a Part in your Portfolio

All fund managers try to achieve the best performance they can. Their entire reason for being is to maximize your return on investment. An Absolute Return Fund uses various investment instruments to derive the best consistent performance to you. Benefits of investing in an Absolute Return Fund are:

   Returns in Rising and Falling Markets

Absolute Return Funds main advantage over regular stocks is that they aim to give you return in both rising and falling markets. One of the keys to successful wealth accumulation is to continually move forward. Absolute Return Funds ignore bearish and bullish trends to be consistent performers in your portfolio.

   Diversification in Non-traditional Investment Instruments

Diversification in your investment portfolio is a key to your financial success. Your investment portfolio should already contain stocks, a good and "easy savings program", real estate properties, cash and fixed interest-rate investments, etc. Absolute Return Funds offer another weapon in your wealth accumulation armory. You are able to diversify your portfolio further which gives you more security and, over time, a better return on investment.


Units in Absolute Return Funds are often available directly from the fund manager but are easily found, and traded, on the stock exchange. This makes your investment highly liquid. You have the ability to increase, or decrease your investment stake, in a particular fund at the click of a button.

   Returns from Both Income and Capital

Absolute Return Funds can give you both returns in both income and capital. This spread will assist your tax position as you are not overly exposed to any one kind of return.

   Risk Management

Absolute Return Funds are actively managed. The managers also tend to have large amounts of their own personal wealth invested to reassure the investors that the managers are always trying to maximize their return on investment.

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