House Bill To Block Foreign Company Dividends From Tax Break

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

27 March 2007

House Ways and Means Select Revenue Subcommittee Chairman Richard Neal has filed legislation to amend the Internal Revenue Code to ensure that dividends from certain foreign corporations are not eligible for the lower rate of tax on dividends.

“The changes in the bill I am filing today will carry out the original intent of Congress and the President in attempting to limit double taxation," Neal said on introducing the bill last Friday.

"It has come to my attention that in certain circumstances, double taxation does not exist because there is no tax on the foreign company. It only makes sense, then, that these dividends should not enjoy the lower preferential rate," he argued.

Neal’s bill amends title 1 of the Internal Revenue Code to disallow the preferential dividend rate for payments from foreign entities not subject to tax in the foreign country, for payments that are deductible in the foreign country, or for payments with respect to an instrument not treated as stock in the foreign country.

In addition, the Neal bill fixes the current limitation on the preferential dividend rate for payments from passive foreign investment companies. The bill also provides that dividends from companies based in tax havens will not enjoy the preferential lower dividend rate.

“Some banks have advertised this hybrid instrument loophole to clients, bragging that it is tax deductible in the foreign country and tax-preferenced in the US, thereby creating a competitive advantage in raising capital over US companies," Neal added.

"We should not allow such games to be played at the expense of our treasury and American businesses,” he concluded.

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