Bill Seeks To Prevent Offshore Firms Benefiting From Dividend Tax Break

by Leroy Baker, Tax-News.com, New York

07 July 2005

A bill drawn up by Sen. Max Baucus (D - Montana) seeks to prevent companies registered in low tax jurisdictions benefiting from a dividend tax break introduced in President Bush's 2003 tax cut package.

Under Baucus's plans, firms registered offshore for the purposes of reducing the amount of corporate tax they pay to the United States will not qualify for the 15% dividend tax rate designed to mitigate the effect of double dividend taxation. Instead, Baucus argued that these firms' dividends should be taxed at the shareholder's ordinary income tax rate, which can be as high as 35%.

The 2003 dividend tax break is available to shareholders of firms incorporated in the United States or which have shares traded on a US-based stock exchange. The legislation proposed by Baucus, the ranking Democrat on the Senate Finance Committee, would deny this tax break to firms incorporated offshore even if their shares were traded in the United States.

"I believe we have found a significant and unintended loophole," Sen. Baucus said in a statement.

Baucus hopes that his bill can be attached to measures extending the dividend and capital gains tax cut beyond their 2009 expiry date which are currently being considered by Congress.

However, his bill has yet to garner any support from Republicans, despite sympathy for his cause from Senate Finance Committee Chairman Chuck Grassley (R - Iowa), who is on record as a vocal critic of 'corporate inversions,' whereby a US firm establishes a parent company offshore, thus becoming a 'foreign' entity so it only pays US taxes only on the source income generated by its US subsidiary.

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