Organization for International Investment

National Journal's Congress Daily

By Keith Koffler, with Martin Vaughan contributing
May 8, 2003

Business Groups Stunned By Dividend Surprise In House Bill

A little noticed provision in the tax cut bill now moving through the House is causing an uproar on K Street, threatening to weaken business support for the legislation as it heads for a vote on the floor this week.

The provision would prevent shareholders in foreign-owned corporations from receiving the dividend tax benefit in the bill. The legislation would reduce dividend taxes to a top rate of 15 percent. Dividends are now taxed at the individual income tax rate, and most stockowners fall into the top bracket and currently pay 38.6 percent. Shareholders in foreign-owned businesses would continue to be taxed at the individual rate. According to K Street sources, even trade associations that fervently back the tax package are now faced with protests within their ranks from foreign-owned member companies. Sources said business lobbyists told House leaders during a meeting Wednesday that the problem needs to be fixed.

"This is really holding things up," said Todd Malan, executive director of the Organization for International Investment. OFII represents U.S. subsidiaries of foreign corporations, including major companies such as Nestle, DaimlerChrysler and BP Amoco.

Malan, who indicated he was uncertain if the provision was intentional or a mistake, said his group would be happy to support the legislation if the offending language was removed.

One top executive with a major trade association called the provision "a major problem" that has the attention of "a lot of people" in the business coalition lined up behind the tax package.

"We've asked them to fix it," the executive said, adding that the issue became a major focus of a meeting with House GOP leaders Wednesday afternoon. "This is going to have to be fixed, either at the Rules Committee or somewhere," the source said.

A House GOP aide defended the House bill's treatment of foreign corporations, saying that it was "in keeping with U.S. precedent and international precedent." The aide argued that all industrialized countries taxed foreign corporations differently than domestic corporation dividends.

Malan indicated that some trade groups that include foreign-owned firms now find their hands tied because they have unanimous voting restrictions that prevent them from backing the legislation. He said some companies within trade groups are trying to block letters of support for the bill from going out.

Malan said OFII is leading the charge against the provision. OFII is currently distributing talking points on Capitol Hill saying that in 2001, U.S. investors owned $1.5 trillion worth of foreign equities and that the volume or trading in non-U.S. stocks averaged 117.2 million shares a day.