Baucus Proposes Repeal of Portfolio Interest Exemption for Corporate Issuers

Senator Max Baucus, Chairman of the Senate Committee on Finance, recently released an International Tax Reform discussion draft prepared by the staff of the Finance Committee that contains a proposal to repeal the portfolio interest exemption for interest on debt issued by U.S. corporations. Originally enacted in 1984, the portfolio interest exemption eliminates a potential 30% withholding tax on interest paid to non-U.S. holders of debt issued by U.S. companies, thus encouraging investment by such persons in the United States. The exemption generally benefits residents and entities in countries such as the Cayman Islands, the British Virgin Islands and many Latin American, Middle Eastern and Asian countries (including Saudi Arabia and Singapore) that do not have a double income tax treaty with the United States. Treaties with major trading partners of the United States, such as the United Kingdom, Germany, France, and Canada, provide for a zero rate of withholding on interest received by residents in such jurisdictions from the United States. The proposal would not impact exemptions from the withholding tax for debt issued by the U.S. government. The Finance Committee is seeking comments from the public on the discussion draft by January 17. The repeal proposal is contained in Section 84 of the discussion draft that includes numerous other international tax reform proposals, including eliminating "check-the-box entity classification" for entities owned by controlled foreign corporations, reform of foreign tax credit rules, and changes to Subpart F and the Passive Foreign Investment Company provisions. A copy of the Discussion Draft is linked below, as well as a Technical Explanation prepared by the Joint Committee on Taxation.

See: Technical Explanation of the Senate Committee of Finance Chairman's Staff Discussion Draft of Provisions to Reform International Business Taxation; Draft Bill.