[Congressional Record (Bound Edition), Volume 153 (2007), Part 5]
[Extensions of Remarks]
[Page 7561]
[From the U.S. Government Publishing Office, www.gpo.gov]




                   INTRODUCTION OF DIVIDENDS PROPOSAL

                                 ______
                                 

                          HON. RICHARD E. NEAL

                            of massachusetts

                    in the house of representatives

                         Friday, March 23, 2007

  Mr. NEAL of Massachusetts. Madam 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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