Dividend Tax Change May Be Unwelcome To Technology Companies

by Mike Godfrey, Tax-News.com, New York

10 January 2003

US telecommunications and technology companies have not reacted well to President Bush's proposal to eliminate taxes on stock dividends, seeing it as a bad way to stimulate their bombed-out sectors, which have historically rewarded investors with high stock prices (or punished them with low ones) but have seldom resorted to what many of them see as 'old-fashioned' dividends, believing that surplus cash is better re-invested in the company than given to shareholders.

Publicly, industry associations put on a smiling face: "We think these proposals will be good for the overall economy by encouraging consumer spending and investment," said Rick White, chief executive of Silicon Valley lobbying group TechNet; but in private their Washington lobbyists were antagonistic, saying that they would work to dilute the administration's proposals.

Technology lobbyists have long been crying for more permissive depreciation rules, to encourage innovation and hardware purchasing by firms in general. Those that export or have overseas subsidiaries were hoping for relief from taxation on repatriated or retained overseas profits.

Some of the more successful technology companies, which sit on large cash balances, have tended to use the cash to re-purchase shares, but will now find it hard to argue that this is tax-efficient. Other technology companies which do pay dividends do so because mutual funds otherwise refuse to buy their shares; they will now come under pressure to increase the level of dividend payments.

For a company whose share price has benefited from its growth prospects more than from sustained income levels, paying dividends can seem like an admission that it belongs among the ranks of mature industries such as mining, food or packaging. And that's anathema to the Silicon Valley Wunderkind!

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