[Congressional Record Volume 153, Number 160 (Monday, October 22, 2007)]
[Extensions of Remarks]
[Pages E2192-E2193]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




   INTRODUCTION OF OFFSHORE DEFERRED COMPENSATION REFORM ACT OF 2007

                                 ______
                                 

                           HON. RAHM EMANUEL

                              of illinois

                    in the house of representatives

                        Monday, October 22, 2007

  Mr. EMANUEL. Madam Speaker, today I am 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. Middle-class taxpayers that are saving for college or their 
retirement can't avoid paying taxes by deferring millions offshore. 
Congress needs to reform the tax code to assure all Americans that, 
regardless of their income, they are on a level playing field. This 
legislation takes an important step toward achieving that goal.
  Either through ``qualified'' or ``non-qualified'' deferral 
arrangements, taxpayers can defer paying taxes on their compensation. 
Most taxpayers make qualified deferrals, such as contributions to 
401(k) plans and Individual Retirement Accounts (IRAs). Non-qualified 
deferred compensation arrangements are usually used by senior 
executives or other high-income taxpayers who want to defer amounts in 
excess of the qualified plan or IRA limits. In contrast to the 
contribution limitations that apply to 401(k) and IRA accounts, there 
are no limits on the amount that U.S. taxpayers can contribute to non-
qualified deferred compensation arrangements.
  U.S. companies that offer non-qualified deferred compensation plans 
to their employees

[[Page E2193]]

are unable to receive a tax deduction equal to the amount deferred 
until the compensation is received by the employee. This is a major 
financial drawback to these arrangements and constitutes a significant 
safeguard against their abuse. By contrast, foreign companies can 
locate in no-tax jurisdictions, provide deferred compensation to their 
U.S. employees, and suffer no economic loss, since the tax 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 since it provides 
a significant tax benefit to the employee without any tax disincentive 
to their offshore employer.
  There is a fundamental inequity between middle-class Americans who 
can defer up to $15,500 of income into qualified plans, like 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 seeks to rectify the inequity by eliminating the ability of 
U.S. taxpayers to defer non-qualified deferred compensation in offshore 
tax havens. Under this legislation, individuals who currently take 
advantage of such tax planning and who wish to make offshore deferrals 
would be limited to making deferrals under qualified arrangements which 
are subject to annual limitations. In this way, the legislation creates 
a level playing field for all U.S. taxpayers.

  The legislation specifies that offshore non-qualified deferred 
compensation paid by a foreign corporation will be taxable income when 
there is no substantial risk of forfeiture to the compensation by the 
employee. 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. 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 is 
effectively connected to a trade or business in the United States or is 
subject to an income tax imposed by a foreign country that has a 
comprehensive tax treaty with the United States, and a deduction is 
allowed for compensation under rules that are substantially similar to 
the way in which the United States 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 United States 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, five to ten years. Assuming it complies with 
the Code Section 409A requirements, the bonus and any associated 
earnings would not be taxable until the end of the term of the 
arrangement. These types of deferral arrangements comply with current 
law. But while they may be legal, they are not fair, and for this 
reason my legislation would change current law to make the offshore 
deferred compensation taxable immediately when the deferral arrangement 
is granted. However, because taxpayers should not be penalized for 
complying with current law, my legislation includes an effective date 
that only affects compensation earned, vested, and deferred after 2007.
  Finally, the New York Times published a story on April 17, 2007, 
entitled ``Managers Use Hedge Funds as Big I.R.A.'s.'' The story 
described the ability of hedge fund managers to defer unlimited amounts 
offshore, and contrasted this with the ability of middle-class 
taxpayers to defer up to $20,000 in a qualified plan, like a 401(k), 
and an IRA. While the New York Times article focused on the ability of 
hedge fund managers to use offshore deferral arrangements, other types 
of industries could use foreign corporations based in no or low-tax 
countries as vehicles for offshore deferred compensation. For this 
reason, my legislation does not single out investment firms, and 
applies broadly to any industry that might use this type of 
arrangement.
  I look forward to working with my colleagues, and specifically 
Senator Kerry who introduced the Senate version of this legislation, to 
address this issue.

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