Baucus Works To Shut Down Tax Loophole
Bill Cracks Down on Those Unfairly Taking Advantage of Dividend Break
(WASHINGTON, D.C.) U.S. Senator Max Baucus, ranking member of the Senate FinanceCommittee, introduced legislation that would shut down a loophole in the 2003 dividend tax cutsthat allows shareholders of some foreign companies to get a lower tax rate on dividend incomeeven though the companies pay little or no corporate tax. The tax break was created to end socalled‘double taxation,’ as income is taxed by the corporation and then again by the shareholderwhen dividends are paid.
Senator Baucus is concerned that the definition of qualifying foreign companies is toobroad and dividends from companies headquartered in tax haven countries with little or no taxsystem are considered eligible for the lower tax rate. Senator Jeffords and Kerry joined Baucusin co-sponsoring the legislation.
Senator Baucus’ floor statement on the legislation follows:Dividends from Tax Havens CompaniesBill introduction by Senator Max Baucus
MR. PRESIDENT. Today, I am pleased to be joined by my two friends and Finance Committeecolleagues, Senator Jeffords and Senator Kerry, in filing legislation to close a loophole in the2003 tax cut bill. The Jobs and Growth Tax Relief and Reconciliation Act of 2003 provided forlower rates of taxation on dividend income. Formerly, taxpayers paid ordinary income rates ondividend income. Now, individuals who receive dividends are taxed at either a 15% for upperincometaxpayers, or a 5% rate for lower-income taxpayers. Further, in 2008, this lower ratebecomes zero before the whole provision expires in 2009.
Mr. President, the demand for lower rates was premised on the claim that dividend income wassubject to double taxation; that is, taxed once by the corporate entity and then again by theshareholder. Assuming that is the case, then if we are sure the corporate entity is not subject totax, the dividend should not be afforded the special rate. In fact, we heard testimony today in theTaxation Subcommittee that corporations with little or no taxes at the entity level really receivean additional benefit from the dividend tax break.
Current law, however, allows dividends from “qualified” foreign corporations to benefit fromthese lower rates if the company is based in a U.S. possession, or based in a country with whichthe U.S. has a tax treaty, or has stock which is traded on a U.S. stock exchange. SenatorJeffords, Senator Kerry, and I have become concerned that the definition of qualifying foreigncorporations is overly broad and may encompass companies in tax haven countries with little orno tax system. Providing this special benefit for such companies simply because its stock istraded on a U.S. exchange does not meet with the original intent of the legislative change. Ourbill would shut down this loophole by modifying the “stock exchange” test to only allow thisspecial rate for companies based in countries with a comprehensive income tax system. Bydoing this, we will address a current inequity between dividend-paying stocks and make sure thatonly stock of companies subject to tax at the corporate level enjoys this preferential rate.With every tax bill we enact, it is important to review the provisions from time to time to makesure the law works as intended. Here, I believe we have found a significant and unintendedloophole. Certainly, as we debate whether to extend, expand, or eliminate these preferentialrates, we should also be open to improvements in the current law. I encourage my colleagues tojoin with us in working for such an improvement.
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