[Congressional Record Volume 142, Number 101 (Wednesday, July 10, 1996)]
[Senate]
[Pages S7674-S7675]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BAUCUS (for himself, Mr. Gorton and Mrs. Murray):

  S. 1942. A bill to amend the Internal Revenue Code of 1986 to provide 
tax treatment for foreign investment through a U.S. regulated 
investment company comparable to the tax treatment for direct foreign 
investment and investment through a foreign mutual fund; to the 
Committee on Finance.


               THE INVESTMENT COMPETITIVENESS ACT OF 1996

 Mr. BAUCUS. Mr. President, the U.S. mutual fund industry has 
become a dominant force in developing, marketing, and managing assets 
for American investors. Since 1990, assets under management by U.S. 
mutual funds have grown from $1 trillion to more than $3 trillion in 
1995. Yet, while direct foreign investment in U.S. securities is 
strong, foreign investment in U.S. mutual funds has remained relatively 
flat.
  Mr. President, today I am introducing, along with Senators Gorton and 
Murray, the Investment Competitiveness Act of 1996. This legislation, 
which I have had the honor of cosponsoring in each of the last two 
Congresses, would eliminate a major barrier to attracting foreign 
capital into the United States while improving the competitiveness of 
the U.S. mutual fund industry.

[[Page S7675]]

  This legislation would remove a barrier to the sale and distribution 
of U.S. mutual funds outside the United States. The bill would change 
the Internal Revenue Code to provide that foreign investors in U.S. 
mutual funds be accorded the same tax treatment as if they had made 
their investments directly in U.S. stocks or shares of a foreign mutual 
fund.
  Under current law, most kinds of interest and short-term capital 
gains received directly by an investor outside the United States or 
received through a foreign mutual fund are not subject to the 30-
percent withholding tax on investment income. However, interest and 
short-term capital gain income received by a foreign investor through a 
U.S. mutual fund are subject to the withholding tax. This result occurs 
because current law characterizes interest income and short-term 
capital gain distributed by a U.S. mutual fund to a foreign investor as 
a dividend subject to withholding.
  The Investment Competitiveness Act would correct this inequity and 
put U.S. mutual funds on a competitive footing with foreign funds. The 
bill would correctly permit interest income and short-term capital gain 
to retain their character upon distribution.
  Current law acts as a prohibitive export tax on foreign investors who 
choose to invest in U.S. funds. That is why the amount of foreign 
investment in U.S. mutual funds is small.
  Mr. President, it is time to dismantle the unfair and unwanted tax 
barrier to foreign investment in U.S. mutual funds. The American 
economy will benefit from exporting U.S. mutual funds, creating an 
additional inflow of investment into U.S. securities markets without a 
dilution of U.S. control of American business that occurs through 
direct foreign investment in U.S. companies. Moreover, the legislation 
will support job creation among ancillary fund service providers 
located in the United States, rather than in offshore service 
facilities.
  Mr. President, I very much appreciate the efforts of Senators Gorton 
and Murray in cosponsoring this legislation and I urge my colleagues to 
support this bill and help to move it forward.
 Mr. GORTON. Mr. President, I am pleased to join my 
distinguished colleagues, Senators Baucus and Murray, in introducing 
the Investment Competitiveness Act of 1996, a bill that will make the 
tax treatment for foreign investment through a U.S. regulated 
investment company comparable to the tax treatment for direct foreign 
investment and investment through a foreign mutual fund.
  The service industry continues to grow rapidly as a vital form of 
trade for the United States. While the United States continues to 
suffer a trade deficit in merchandise, exports of services ran at a 
surplus of $63 billion in 1995. In my home State of Washington, 
services such as financial investments and telecommunications are 
integral to job creation and economic growth.
  Improving the international competitiveness of the United States is 
of the utmost importance, and encouraging capital investment in U.S. 
companies is a critical component of improving our international 
competitiveness. Increasingly, foreign capital has been drawn into U.S. 
securities markets. We need to permit that capital to be invested in 
U.S. companies through U.S. mutual funds. This legislation will help 
ensure that U.S. mutual funds become a leading export for the United 
States and the leader in providing worldwide mutual fund services that 
attract more capital to the United States. Putting U.S. funds on a 
level playing field with foreign-based funds or foreign investments 
made directly in U.S. securities, produces a worldwide market for U.S. 
mutual funds and releases a flow of international capital into U.S. 
investments.
  The U.S. mutual fund industry is clearly the most technologically 
advanced in the world, and thus is the most cost efficient in 
delivering services to its client. Current law, however, imposes a 30-
percent withholding tax on mutual fund distributions, a tax that does 
not apply in the case of comparable foreign-based funds or to direct 
investments in the United States. The withholding tax, which 
effectively imposes an export tax on the U.S. mutual fund industry, 
makes U.S. funds less attractive from a pricing standpoint and creates 
an administrative burden for foreign institutional investors. This tax 
discourages global institutional investors and the managers who invest 
their funds from using U.S.-based mutual funds, thus providing a 
competitive disadvantage to foreign-based funds.
  The Investment Competitiveness Act of 1996 addresses this disparate 
treatment by making the tax treatment of foreign investment in U.S. 
mutual funds comparable to that afforded to foreign investments made 
directly in U.S. securities or indirectly through foreign based funds.
  Without this change, U.S. mutual funds would have a strong incentive 
to establish offshore funds in order to compete with foreign-based 
funds and satisfy the demand for U.S. securities in world markets. This 
has the unsatisfactory effect of moving U.S. mutual fund jobs and 
expertise to offshore facilities. Instead, we should be working to 
increase the demand for the fund services provided by U.S. fund 
managers, custodians, accountants, transfer agents, and others based in 
the United States, rather than locate those jobs offshore. This 
legislation will benefit our capital markets by exporting U.S. mutual 
funds, while creating and maintaining mutual fund jobs in the United 
States.
  I encourage my colleagues to support this important piece of 
legislation.
 Mrs. MURRAY. Mr. President, I am pleased to join Senator 
Baucus in cosponsoring the Investment Competitiveness Act of 1996, 
legislation that will correct a provision in the Internal Revenue Code 
that currently makes it difficult to sell mutual funds outside the 
United States.
  I believe Congress has an obligation to implement public policies 
that encourage investments in U.S. companies. These investments are 
essential to raising capital, initiating research and development, 
expanding our Nation's economy and ultimately improving our 
international competitiveness.
  Our current Tax Code deters foreign investors from investing in U.S. 
mutual funds by treating interest income and short-term capital gain as 
a dividend that is subject to a 30-percent withholding tax. On the 
other hand, a foreign investor can invest in other foreign funds or 
directly in U.S. securities without paying this tax.
  Mr. President, the U.S. mutual fund industry has grown significantly 
over the past 6-years. Since 1990, U.S. mutual fund assets have grown 
from $1 trillion to more than $3 trillion. This rapid growth has 
occurred despite the fact that foreign investment in U.S. funds has 
stayed roughly the same.
  Rather than dissuading foreign investment, we should be encouraging 
foreign investment in U.S. funds and companies. Quite simply, American 
companies are put at a disadvantage by a Tax Code that encourages 
foreign investors to invest in other countries and other companies.
  More importantly, our Tax Code forces U.S. mutual fund companies to 
set up subsidiary funds overseas in order to reach the world 
marketplace. For instance, the Frank Russell Co. in Tacoma, WA, is a 
highly successful and innovative mutual fund company that employs more 
than 1,000 people. Unfortunately, in order to serve the world market, 
the company has been forced to move its expertise and some jobs 
overseas. In doing so, foreign investors can avoid the U.S. withholding 
tax.
  Mr. President, it makes no sense to continue a tax policy that both 
encourages our companies to move jobs overseas and hampers our ability 
to attract foreign investment and raise capital in the United States.
  I am pleased to be working with Senators Baucus and Gorton on this 
important legislation, and I am hopeful Congress can act quickly on 
this legislation.

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