[Congressional Record Volume 153, Number 54 (Wednesday, March 28, 2007)]
[Senate]
[Pages S4053-S4054]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. KERRY:
  S. 1006. A bill to amend the Internal Revenue Code of 1986 to deny 
qualified dividend income treatment to certain foreign dividends; to 
the Committee on Finance.
  Mr. KERRY. Mr. President, today I am introducing legislation that 
will clarify which dividends are eligible for a lower rate of 15 
percent for upper-income taxpayers or a 5 percent rate for lower-income 
taxpayers. I am concerned that some foreign companies have a tax 
advantage over their American competitors.
  Since dividend rates were lowered in 2003, some banks have promoted 
hybrid debt instruments from foreign corporations that may qualify for 
the lower rate. These hybrid arrangements are treated as debt in the 
host foreign country and the entity takes a deduction. In the United 
States, these instruments are classified as equity and thus treated as 
dividends eligible for the lower rate.
  This was not the intention of Congress, and this abuse needs to stop. 
There should not be preferences in our tax code which make it easier 
for foreign corporations to raise capital at the expense of American 
companies. I believe that changes need to be made to our tax system to 
ensure that U.S companies can compete fairly in a global market place.
  The legislation that I am introducing today is the same legislation 
introduced by Ways and Means Subcommittee on Select Revenue Chairman 
Neal. This legislation amends Section 1 of the Internal Revenue Code to 
disallow the preferential dividends rate for payments from foreign 
entities not subject to tax in the foreign country, for payments that 
are deductible in the foreign country, or payments with respect to an 
instrument not treated as stock in the foreign country. In addition, 
the bill does not allow dividends from an entity not subject to or 
exempt from corporate tax in a foreign country to be eligible for the 
lower rate. If the entity is a passive foreign investment company 
(PFIC), the dividend would not be eligible for the lower rate even if 
the entity is also classified as a controlled foreign corporation.
  This legislation builds upon a bill that Senator Baucus and I 
introduced last Congress, S. 1363, which prevents dividends received 
from corporations in a tax haven from receiving the lower rate. This 
legislation was introduced in the 109th Congress out of concern that 
the definition of qualifying foreign corporations is overly broad and 
includes companies in tax haven countries with little or no tax system.
  The legislation that I am introducing today includes the provisions 
of S. 1363 which require that only dividends from foreign companies 
which are located in countries with a comprehensive income tax and are 
traded on a U.S. stock exchange may qualify for the preferential rate. 
In total, this legislation carries out the intent of the 2003 rate 
deduction on dividends.
  The initial proposal to address dividends taxation was designed to 
eliminate the double taxation of corporate earnings. Eventually, this 
proposal was modified to lower the tax rate on dividends. I believe 
that it was never the original intent of Congress to provide the lower 
rates to dividends which are not subject to double taxation.
  I urge my colleagues to support these common sense changes. I ask for 
unanimous consent that the text of the legislation be printed in the 
Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                S. 1006

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. CERTAIN FOREIGN DIVIDENDS NOT TREATED AS QUALIFIED 
                   DIVIDEND INCOME.

       (a) In General.--Clause (ii) of section 1(h)(11)(B) of the 
     Internal Revenue Code of 1986 (relating to certain dividends 
     excluded) is amended by striking ``and'' at the end of 
     subclause (II), by striking the period at the end of 
     subclause (III) and inserting ``, and'', and by adding at the 
     end the following new subclause:

       ``(IV) any nonqualified dividend from a foreign 
     corporation.''.

       (b) Nonqualified Dividend From a Foreign Corporation.--
     Paragraph (11) of section 1(h) of such Code (relating to 
     dividends taxed as net capital gain) is amended by 
     redesignating subparagraph (D) as subparagraph (E) and by 
     inserting after subparagraph (C) the following new 
     subparagraph:
       ``(D) Nonqualified dividend from a foreign corporation.--
     For purposes of subparagraph (B)(ii)(IV), the term 
     `nonqualified dividend from a foreign corporation' means any 
     dividend from a foreign corporation if--
       ``(i) any amount is allowable as a deduction to any person 
     at any time under the taxation law of any foreign country (or 
     any amount is otherwise creditable against the tax imposed 
     under such law) with respect to such dividend,
       ``(ii) for the taxable year of the corporation in which the 
     distribution is made, or the preceding taxable year--

       ``(I) such corporation is not treated as a corporation for 
     purposes of the taxation laws of any foreign country to which 
     it would be subject to tax if it were treated as a 
     corporation,
       ``(II) such corporation is exempt from tax under the 
     taxation laws of any foreign country to which (but for such 
     exemption) it would otherwise be subject to tax (except for 
     exemption on the basis of nonresidence, nondomicile, or 
     similar criteria), or
       ``(III) such corporation is a passive foreign investment 
     company (as defined in section 1297 (without regard to 
     subsection (e) thereof)), or

       ``(iii) such dividend is paid with respect to an instrument 
     which is treated as other than stock (or a similar equity 
     interest) under the taxation laws of any foreign country with 
     respect to which the payment is taken into account.''.
       (c) Conforming Amendment.--Subparagraph (C) of section 
     1(h)(11) of such Code is amended by striking clause (iii) and 
     by redesignating clause (iv) as clause (iii).
       (d) Effective Date.--The amendments made by this section 
     shall apply to dividends received after the date of the 
     enactment of this Act.

     SEC. 2. MODIFICATION TO THE DEFINITION OF QUALIFIED FOREIGN 
                   CORPORATION.

       (a) In General.--Clause (ii) of section 1(h)(11)(C) of the 
     Internal Revenue Code of

[[Page S4054]]

     1986 (relating to dividends on stock readily tradable on 
     United States securities market) is amended by striking ``by 
     such corporation if the stock'' and all that follows and 
     inserting ``by such corporation if--

       ``(I) the stock with respect to which such dividend is paid 
     is readily tradable on an established securities market in 
     the United States, and
       ``(II) such corporation is created or organized under the 
     laws of a foreign country which has a comprehensive income 
     tax system which the Secretary determines is satisfactory for 
     the purposes of this paragraph.''.

       (b) Effective Date.--The amendment made by this section 
     shall apply to dividends received after the date of the 
     enactment of this Act.
                                 ______