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Fri, May 09, 2003 - Page 12 News List

Senate Republicans may eliminate tax exemption overseas

RAISING REVENUES Policymakers are starting to consider the repeal of the half-century old law that exempts portions of foreign pay from taxation


Senate Republicans may turn to Americans working abroad to help pay for a dividend tax cut by repealing a longstanding tax exemption, a Republican aide said.

One of the ideas being discussed to offset the cost of the dividend tax reduction is ending a law that exempts from taxes the first US$80,000 earned by US citizens who work overseas, said the aide, speaking on the condition of anonymity.

Senate Republican leaders are searching for ways to raise revenue after coming up with a compromise tax plan that includes most of the cuts US President George W. Bush sought and stays within the US$350 billion limit the chamber set for itself last month. The dividend tax cut would cost about US$80 billion more, though the details of how to pay for it haven't been settled.

Repealing the overseas income exemption "in effect is a tax increase for corporations," said Rick Grafmeyer, a tax lawyer and former deputy chief of staff on the congressional Joint Committee on Taxation. "If you're involved in international work, your taxes would go up."

The Senate Finance Committee is scheduled to vote on the tax bill today and send it to the full Senate for debate. A spokeswoman for committee Chairman Charles Grassley did not return calls seeking comment on the exemption repeal Wednesday.

The exemption has been part of the US tax code in one form or another for about 50 years. Eliminating it would generate US$34 billion in revenue over 10 years, the nonpartisan Joint Committee on Taxation has estimated.

To qualify for what is known as a Section 911 exemption, you must be a US citizen and live outside the country for an entire tax year, or 330 days in any 12-month period.

Proponents of repealing the law say that the exemption gives foreign-based workers an unfair advantage over employees in the US, according to a Congressional Budget Office analysis.

Grafmeyer predicted it would run into strong opposition. Many corporations pay taxes for their overseas workers as an incentive to take on assignments, he said.

"It is one of the most important provisions affecting American workers and US companies overseas," said David Hamod, executive director of the Section 911 Coalition. "We would consider it short-term thinking" to approve the repeal.

Hamod declined to name members of the coalition because it has been less active recently. In 1999, when the group was lobbying to remove restrictions on the exclusion, it included Caterpillar Inc, Deloitte & Touche LLP, Foster Wheeler Ltd, Hughes Saudi Arabia Ltd and overseas units of Lockheed Martin Corp, McDonnell-Douglas Corp and Oracle Corp.

Grassley has said the Senate also may raise money for the dividend provision by plugging loopholes that encourage companies and individuals to relocate overseas and exploit tax shelters.

Some fees, such as those paid for customs, may also be raised.

Republican leaders said they expect the tax bill approved by the Finance Committee will be modified in the full Senate.

"Everything is subject to change on the floor," said Senator Rick Santorum, the No. 3 ranking Republican in the chamber.

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