[Congressional Record Volume 153, Number 158 (Thursday, October 18, 2007)]
[Senate]
[Pages S13089-S13090]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. KERRY:
  S. 2199. A bill to amend the Internal Revenue Code of 1986 to provide 
for the treatment of certain foreign nonqualified deferred 
compensation; to the Committee on Finance.
  Mr. KERRY. Mr. President, today Representative Emanuel and I are 
introducing the Offshore Deferred Compensation Reform Act of 2007 which 
would put an end to the practice of allowing unlimited amounts of 
income to be deferred offshore. Recently, it was brought to our 
attention that U.S. hedge fund managers were deferring millions of 
dollars of compensation offshore. Less generous deferrals have been 
used by corporate executives for years.
  Recent Internal Revenue Service data shows that the richest 
Americans' share of national income has hit a postwar record. The 
wealthiest one percent of Americans earned 21.2 percent of all income 
in 2005. At a time when our personal savings rate has reached a 73-year 
low and CEOs are paid 349 times as much as the average worker and the 
top twenty-five hedge fund managers earned a total of $14 billion in 
2006, we should not be providing a tax advantage to allow income to be 
deferred offshore and invested on a tax-free basis. Low-income and 
middle class families who are struggling are the ones who need tax 
incentives to save for retirement.
  Taxpayers can defer paying taxes immediately on their compensation, 
either through ``qualified'' or ``nonqualified'' deferral arrangements. 
Most taxpayers make qualified deferrals such as contributions to 401(k) 
plans and individual retirement accounts, IRAs. Nonqualified deferred 
compensation arrangements are usually used by senior executives or 
other high-income taxpayers who want to defer amounts in the excess of 
the qualified plan or IRA limits.
  There are no limits on the amount on nonqualified deferred 
compensation that can be deferred. Offshore nonqualified compensation 
arrangements have the potential to be more abusive than similar 
arrangements in the U.S.
  U.S. companies that grant nonqualified deferred compensation to their 
employees are unable to receive a tax deduction equal to the deferred 
compensation until the compensation is paid to the employee. By 
contrast, offshore employers can locate in no-tax jurisdictions, 
provide deferred compensation to their U.S. employees, and suffer no 
economic loss, since the timing of the deduction is not relevant when 
the employer does not have any tax liability. Accordingly, there is a 
preference in the Code for U.S. taxpayers to defer compensation in 
certain offshore jurisdictions: it provides a significant tax benefit, 
without any tax disincentive/disadvantage to their offshore employer.
  There is a fundamental difference between middle class Americans who 
can defer up to $15,500 of income into a 401(k) and $4,000 into their 
IRAs and higher-income taxpayers who can defer unlimited amounts 
offshore. The Offshore Deferred Compensation Reform Act of 2007 would 
eliminate the ability of U.S. taxpayers to defer nonqualified deferred 
compensation in offshore tax havens. Offshore nonqualified deferred 
compensation paid by a foreign corporation will be taxable income when 
there is no substantial risk of forfeiture to the compensation. A 
substantial risk of forfeiture exists where the receipt of compensation 
is conditioned upon the future performance of substantial services in 
order to receive that compensation. Individuals who currently take 
advantage of such tax planning and who wish to make deferrals would be 
limited to making deferrals under qualified arrangements which are 
subject to annual limitations.
  The Offshore Deferred Compensation Reform Act of 2007 is not intended 
to prohibit a foreign deferred compensation arrangement if the foreign 
corporation entering into the arrangement is subject to tax on 
substantially all of its income and denied an immediate deduction for 
compensation that is deferred. For purposes of the legislation, a 
foreign corporation would be any foreign corporation unless 
substantially all of its income effectively connected to a trade or 
business in the U.S. or is subject to an income tax imposed by a 
foreign country that has a comprehensive tax treaty with the U.S., and 
a deduction is allowed for compensation under rules that are 
substantially similar to the way in which the U.S. provides deductions 
for compensation. In addition, the Secretary of the Treasury is given 
authority to determine whether a foreign corporation that operates in a 
country without a formal tax treaty with the U.S. can qualify for the 
exemption.
  There are many different ways to structure an offshore deferral 
arrangement. A prototypical structure would be an executive who elects 
to defer his or her year-end bonus in an offshore investment fund for a 
period of time, typically, 5 to 10 years. The bonus and any associated 
earnings would not be taxable until the end of the term of the 
arrangement, assuming it complies with the Code Section 409A 
requirements. This legislation only affects compensation which is 
earned, vested, and deferred after 2007.
  The Offshore Deferred Compensation Act of 2007 only addresses 
offshore nonqualified deferred compensation because these arrangements 
have the potential to be more abusive than onshore arrangements. This 
does meant that I believe that we should not continue to look at 
limiting all nonqualified deferred compensation. I will continue to 
work with the Finance Committee on this issue.
  This legislation will put an end to offshore deferral arrangements 
being used as unlimited IRAs. I look forward to working will my 
colleagues to address this issue.
  Mr. President, I ask unanimous consent that the text of the bill 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. 2199

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

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Offshore Deferred 
     Compensation Reform Act of 2007''.

     SEC. 2. SPECIAL RULE FOR CERTAIN FOREIGN NONQUALIFIED 
                   DEFERRED COMPENSATION.

       (a) In General.--Subpart B of part II of subchapter E of 
     chapter 1 of the Internal Revenue Code of 1986 (relating to 
     taxable year for which items of gross income included) is 
     amended by inserting after section 457 the following new 
     section:

[[Page S13090]]

     ``SEC. 457A. CERTAIN FOREIGN NONQUALIFIED DEFERRED 
                   COMPENSATION.

       ``(a) In General.--Any compensation which is deferred under 
     a nonqualified deferred compensation plan (within the meaning 
     of section 409A(d)) of a nonqualified foreign corporation is 
     includible in gross income for purposes of this chapter when 
     there is no substantial risk of forfeiture of the rights to 
     such amount.
       ``(b) Nonqualified Foreign Corporation.--For purposes of 
     this section, the term `nonqualified foreign corporation' 
     means any foreign corporation unless substantially all of the 
     income of such corporation--
       ``(1) is effectively connected with the conduct of a trade 
     or business in the United States, or
       ``(2) is subject to an income tax imposed by a foreign 
     country, but only if--
       ``(A)(i) such corporation is eligible for benefits of a 
     comprehensive income tax treaty which such country has with 
     the United States which the Secretary determines is 
     satisfactory for purposes of this section and which includes 
     an exchange of information program, or
       ``(ii) the Secretary determines that such income tax is a 
     comprehensive income tax satisfactory for purposes of this 
     section, and
       ``(B) a deduction is allowed for compensation described in 
     subsection (a) under rules substantially similar to the rules 
     of this title.
       ``(c) Application of Certain Rules.--Rules similar to the 
     rules of paragraphs (4), (5), and (6) of section 409A(d) 
     shall apply for purposes of this section.
       ``(d) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section, including regulations 
     disregarding a substantial risk of forfeiture in cases where 
     necessary to carry out the purposes of this section.''.
       (b) Clerical Amendment.--The table of sections of subpart B 
     of part II of subchapter E of chapter 1 of such Code is 
     amended by inserting after the item relating to section 457 
     the following new item:

``Sec. 457A. Certain foreign nonqualified deferred compensation.''.

       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to amounts deferred in taxable years beginning after 
     December 31, 2007.
       (2) Earnings.--The amendments made by this section shall 
     apply to earnings on deferred compensation only to the extent 
     that such amendments apply to such compensation.
                                 ______