Organization for International Investment

Bloomberg

By Ryan Donmoyer
May 7, 2003

Foreign Stocks Lose Tax Cut

Washington, May 7 (Bloomberg) -- U.S. investors in DaimlerChrysler AG, Nestle SA, Royal Dutch Petroleum Co. and other non-U.S. companies won't get a cut in dividend taxes under a $550 billion tax cut pending in the House of Representatives.

Republican Representative Sam Johnson of Texas said lawmakers who support the provision were surprised to discover the bill's 15 percent rate on dividends contains a caveat: It only applies to companies based in the U.S.

That has angered foreign-owned companies with many U.S. shareholders and Johnson, whose north Texas constituents work for units of France's Alcatel SA, Sweden's Ericsson AB and Canada's Nortel Networks Corp. that are 20 percent, 33 percent and 60
percent owned, respectively, by American shareholders.

``What we're doing is penalizing American citizens, not foreign corporations,'' Johnson said. ``I just know it's not the right way to do business in this country.''

That provision excludes companies with more than $1.5 trillion in U.S. investment, according to the Organization for International Investment, which represents the interest of U.S. subsidiaries of foreign companies. In total, Americans own 20 percent of the 100 largest publicly traded non-U.S. companies, the group said.

House Votes Friday

The plan is an alternative to President George W. Bush's proposal to abolish the tax on dividends for U.S. and non-U.S. companies. The measure was approved Tuesday along party lines by the House Ways and Means Committee and scheduled for consideration
by the full House on Friday.

The 10 foreign companies with the most revenues in the U.S. include automakers DaimlerChrysler, Toyota Motor Corp., Honda Motor Co. Ltd. and Nissan Motor Co. Ltd., as well as oil companies BP PLC and Royal Dutch Petroleum, electronics makers Sony Corp. and Nortel, Swiss financial services firm Credit Suisse Group, and
Dutch grocer Koninlijke Ahold NV.

On the New York Stock Exchange, the daily volume of trading in non-U.S. stocks averaged 117.2 million shares in 2001, a 16.6 percent increase from the previous year, according to the trade group. The combined global market capitalization of non-U.S.
companies on the NYSE was $4.9 trillion at the end of 2001, or the equivalent of the world's second-largest stock market.

Thomas: Saves Money

Ways and Means Committee Chairman Bill Thomas, a California Republican, excluded shareholders in non-U.S. companies from the tax cut to hold down the cost of the $277 billion provision, said Christin Tinsworth, the panel's spokeswoman. The provision also punishes U.S. companies that move outside the U.S. in an effort to
cut their tax bill, a recent political target.

In lieu of Bush's proposal to exempt dividends from taxation, which would have reduced government revenue by $396 billion, the bill creates a new 15 percent rate for appreciated assets held longer than a year and for dividends, currently taxed at ordinary
income rates of up to 38.6 percent. Lower-income Americans would pay a 5 percent tax on long-term capital gains and dividends.

The exclusion means that capital gains and dividends from non-U.S. companies would be taxed at rates up to 35 percent.

The $550 billion, 10-year bill also accelerates income tax cuts slated for later years and extends tax breaks to businesses.

Unequal Treatment

The exclusion of companies based outside the U.S. creates a situation where a DaimlerChrysler worker in Wisconsin Representative Paul Ryan's district would pay twice the tax on his or her company's dividends as would an investor in the General
Motors Corp. plant in the same district.

``We're in the middle of trying to fix it right now,'' Ryan said. ``Whether it gets fixed now or later remains to be seen. The point is it needs fixing.''

Brian Kelly, senior vice president for government relations at the Electronics Industry Association, which represents 2,500 companies including Nortel, Philips Electronics and Sony, said House Republican leaders have promised to consider the matter during tax negotiations with the Senate. That means the House will likely pass the bill on Friday with the exclusion intact.

Reducing taxes on dividends paid by non-U.S. corporations would add about $10 billion to the cost of the tax bill, Ryan and Johnson said.

The Organization for International Investment cited a 2001 Federal Reserve study that says Americans have $1.5 trillion invested overseas. Organization spokeswoman Nancy McLernon said the bill would discourage Americans from buying shares of
international companies.

``We are concerned that Americans that have taken advice of millions of financial advisers to internationally diversify their portfolios are being penalized for doing so,'' McLernon said.

--Ryan J. Donmoyer in Washington (202) 624-1887