The Financial Times

By Deborah McGregor
May 14, 2003

Key Senate moderates signalled yesterday that they will try to slash the modest dividend tax proposal in the Senate's $350bn tax-cut bill by seeking to remove a controversial provision that would end a tax exemption for US workers overseas.

John Breaux, an influential Louisiana Democrat, said he would offer an amendment on the Senate floor to decrease the legislation's dividend tax-cut proposal by $32bn - the amount earmarked in the Senate bill as a way of raising revenues from Americans abroad to help offset the cost of the dividend tax cut.

Business lobbyists have also raised concerns about the provision, particularly oil and gas companies with employees abroad. Mr Breaux suggested he expected to garner some Republican support for his amendment, an assertion that sent Republican vote-counters scurrying to see if they could prevent the move. If Mr Breaux is successful, it could mean the unravelling of the Senate bill, which Republican leaders are struggling to push through this week.

Once the Senate passes its bill, House and Senate negotiators will work to finalise a compromise bill. But with the chambers - both Republican-led - still far apart on many details, it will be a difficult conference.

Several provisions in the House bill are likely to meet Senate resistance, including a controversial proposal that would favour shareholders in US-owned corporations in the tax treatment of dividends.

Yesterday, Bill Thomas, the chairman of the House ways and means committee, told the FT that he was weighing concerns expressed by business lobbyists and some lawmakers - including Republicans - about the provision's impact on shareholders of foreign-owned corporations. Only investors in US-owned corporations would be eligible for the 15 per cent rate on dividend taxes provided in the House bill. Dividends are currently taxed at up to 38.6 per cent and investors in foreign-owned corporations would continue to be taxed at the higher rate.

"We're looking at that," said Mr Thomas. "I don't think there was any motive in doing it that way. It just wound up that way because that's the way the US law was [in 1986]."

He emphasised the complexity of the issue at a time when lawmakers are wrestling with a multitude of international tax concerns. "We're looking at a number of things that don't exacerbate the underlying disadvantage US corporations have."