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Democrats To Fire Another Anti-Offshore Volley

by Mike Godfrey,, Washington

10 September 2007

US Representative Rahm Emanuel (Illinois - Dem), a member of the House Ways and Means Committee, announced on Thursday his intention to introduce legislation to curb the ability of hedge fund managers to defer unlimited amounts of offshore compensation. “Hedge fund managers and average Americans should be treated equally when it comes to the taxation of deferred income,” said Emanuel.

Most Americans can defer income through a 401(k) and an Individual Retirement Account (IRA). In 2007, an individual can defer up to $15,500 in income into a 401(k), or similar account, and an additional $4,000 in an IRA.

US-based hedge fund managers who operate offshore investment funds usually arrange that their fees and profits-related compensation can be deferred within the funds' offshore assets, meaning that they are not liable to US taxation until and unless they are remitted to the US or into the hands of the managers.

Democrats say that this is inequitable; but others point out that the hedge fund managers would simply leave if their tax advantages were removed, and that any US-based manager of an offshore corporation, hedge fund or no, has equivalent treatment. Corporations frequently point out to Congress that it is only the existence of 'offshore' that permits them to compete with foreign companies that are not hobbled by rules as complex and punishing as those of the US tax code.

Hedge fund managers, like private equity managers, attract plenty of attention because of their high earnings, especially in an election year. According to an annual ranking of the top 25 hedge fund earners by Institutional Investor’s Alpha magazine in 2006, the average amount they earned was $570 million. In total the top 25 earned a combined $14 billion.

“Congress needs to reform the tax code to assure all Americans that they are on a level playing field regardless of their income level. This legislation takes an important step toward achieving that goal,” said Emanuel.

Specifically, Emanuel’s bill would:

  • Limit the ability of US taxpayers who earn compensation offshore to defer income received in connection with the performance of services to the combined amount that US taxpayers can defer through 401(k), or similar accounts, and IRA accounts.
  • Create an exception for employees of US companies who are working abroad and qualifying for an exclusion in the tax code that allows these workers to avoid double taxation of their income. The intent of the exception is to prevent the legislation from impacting US citizens working abroad who are entering into modest deferred compensation arrangements that are similar to ones that their US-based co-workers are using.

If Emanuel's bill passes his Committee, it is likely to be incorporated in a portmanteau tax bill being prepared by Rep. Charles Rangel (New York - Dem), chairman of the House tax panel, who has said he plans to hold hearings delving into the offshore-deferral issue.

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