STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS -- (Senate - October 18, 2007)
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Mr. KERRY. Mr. President, today Representative Emanuel and I are 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. Recently, it was brought to our attention that U.S. hedge fund managers were deferring millions of dollars of compensation offshore. Less generous deferrals have been used by corporate executives for years.
Recent Internal Revenue Service data shows that the richest Americans' share of national income has hit a postwar record. The wealthiest one percent of Americans earned 21.2 percent of all income in 2005. At a time when our personal savings rate has reached a 73-year low and CEOs are paid 349 times as much as the average worker and the top twenty-five hedge fund managers earned a total of $14 billion in 2006, we should not be providing a tax advantage to allow income to be deferred offshore and invested on a tax-free basis. Low-income and middle class families who are struggling are the ones who need tax incentives to save for retirement.
Taxpayers can defer paying taxes immediately on their compensation, either through ``qualified'' or ``nonqualified'' deferral arrangements. Most taxpayers make qualified deferrals such as contributions to 401(k) plans and individual retirement accounts, IRAs. Nonqualified deferred compensation arrangements are usually used by senior executives or other high-income taxpayers who want to defer amounts in the excess of the qualified plan or IRA limits.
There are no limits on the amount on nonqualified deferred compensation that can be deferred. Offshore nonqualified compensation arrangements have the potential to be more abusive than similar arrangements in the U.S.
U.S. companies that grant nonqualified deferred compensation to their employees are unable to receive a tax deduction equal to the deferred compensation until the compensation is paid to the employee. By contrast, offshore employers can locate in no-tax jurisdictions, provide deferred compensation to their U.S. employees, and suffer no economic loss, since the timing of the 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: it provides a significant tax benefit, without any tax disincentive/disadvantage to their offshore employer.
There is a fundamental difference between middle class Americans who can defer up to $15,500 of income into 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 would eliminate the ability of U.S. taxpayers to defer nonqualified deferred compensation in offshore tax havens. Offshore nonqualified deferred compensation paid by a foreign corporation will be taxable income when there is no substantial risk of forfeiture to the compensation. 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. Individuals who currently take advantage of such tax planning and who wish to make deferrals would be limited to making deferrals under qualified arrangements which are subject to annual limitations.
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 effectively connected to a trade or business in the U.S. or is subject to an income tax imposed by a foreign country that has a comprehensive tax treaty with the U.S., and a deduction is allowed for compensation under rules that are substantially similar to the way in which the U.S. 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 U.S. 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, 5 to 10 years. The bonus and any associated earnings would not be taxable until the end of the term of the arrangement, assuming it complies with the Code Section 409A requirements. This legislation only affects compensation which is earned, vested, and deferred after 2007.
The Offshore Deferred Compensation Act of 2007 only addresses offshore nonqualified deferred compensation because these arrangements have the potential to be more abusive than onshore arrangements. This does meant that I believe that we should not continue to look at limiting all nonqualified deferred compensation. I will continue to work with the Finance Committee on this issue.
This legislation will put an end to offshore deferral arrangements being used as unlimited IRAs. I look forward to working will my colleagues to address this issue.
Mr. President, I ask unanimous consent that the text of the bill be printed in the Record.
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