Introduction of Dividends Proposal

Floor Speech

INTRODUCTION OF DIVIDENDS PROPOSAL

* Mr. NEAL of Massachusetts. Mr. Speaker, since 2003, certain qualified dividends from corporations have been eligible for a lower rate of tax. This lower rate of tax is 15 percent for higher income taxpayers and 5 percent for lower income taxpayers, specifically those in the 10 and 15 percent brackets. The rate of tax for lower income taxpayers becomes zero in 2008 and beyond. At the end of 2010, these special rates expire and dividends will be once again taxed as ordinary income.

* This special rate was first proposed by President Bush on January 7, 2003. The proposal was described in a document released later that month by Treasury entitled, ``Eliminate the Double Taxation on Corporate Earnings.'' Treasury explained the reason for the change was the double burden of a corporate level tax on top of the individual tax on dividends. The proposal would apply only to income that had been subject to U.S. income tax at the corporate level. But the proposal was terribly complicated.

* The House then proposed a simpler cut in the dividend rate to 15 percent for any dividends received from domestic corporations. However, the final conference report did allow some dividends from foreign corporations to qualify as well. In a statement on the Senate floor, one of the Senate negotiators, Finance Chairman CHUCK GRASSLEY, expressed reservation that shareholders of foreign corporations that had completed inversions to tax havens would benefit from this new rate.

* I share that reservation. That is why today I am filing legislation to close several loopholes in this provision.

* My legislation would amend Section 1 of the Internal Revenue Code to provide that dividends from certain foreign corporations which are not subject to an entity-level tax would not be eligible for the special, lower rate of tax. Since 2003, some banks have promoted ``hybrid'' debt instruments from foreign corporations as they may qualify for the special rate. Now, these hybrid instruments appear to be debt in the host foreign country, so the entity actually takes a deduction as if it was an interest payment. But in the U.S., they are classified as equity so the ``dividend'' may be eligible for the special, lower rate of tax. Clearly, this was not intended by Congress and needs to be shut down.

* My bill also disallows the preferential dividend rate if the payment is received from an entity not subject to or is exempt from corporate tax in the foreign country. And, if the entity is a passive foreign investment company, or PFIC, this bill would not allow the special dividend rate even if the entity was also classified as a controlled foreign corporation, or CFC. Currently, another section of the Code treats a foreign corporation that is both a CFC and a PFIC as only a CFC, inadvertently undermining the current PFIC limitation in Section 1. My bill would ensure that this tightener works as intended.

* Finally, the current law allows dividends from foreign corporations with stock registered on a U.S. exchange to be eligible for the enhanced dividend rate. Of course, if companies are headquartered in a tax haven, then there is little or no corporate level tax paid. So, my bill would provide that only dividends from foreign companies which are located in countries with a comprehensive income tax and which are traded on a U.S. exchange may qualify. This section is modeled after another section in current law providing the special rate for dividends from companies located in countries which the Secretary of Treasury determines has a comprehensive income tax treaty.

* I believe these changes carry out the original intent of the President and Congress in attempting to limit double taxation. In each of these circumstances, double taxation does not exist. Whether one supported the 2003 rate cut on dividends or not, we should all support reasonable changes to current law to make sure tax benefits only accrue to those intended. I urge my fellow colleagues to support this bill.

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