Legislative Proposals To Revise the 30-Percent Withholding Tax on U.S.-Source Interest Income Paid to Foreign Persons

GAO testified on proposed revisions to the 30-percent withholding tax on U.S. source interest income paid to foreigners, focusing on the potential for abuse of the U.S.-Netherlands Antilles tax treaty. In its work, GAO identified three factors to be considered in deliberations over the 30-percent withholding tax: 1) U.S. corporations make extensive use of the Eurobond market to finance their business operations; 2) offshore financial activities have grown in their importance to the economy of the Netherlands Antilles; and 3) the U.S. tax treaty with the Netherlands Antilles has been subject to abuse by third-country persons and perhaps by U.S. citizens. GAO presented five of the possible courses of action to address the issue of U.S. corporate reliance on the Eurobond market: 1) seeking to maintain the status quo by deciding to take no legislative action; 2) eliminating foreign tax credits for payments made by subsidiaries of U.S. corporations to the Antilles Government; 3) enacting H.R. 4029 which removes the 30-percent withholding tax on Eurobonds; 4) enacting that portion of H.R. 2163 which phases out the 30-percent withholding tax over a period of years; or 5) enacting H.R. 3025 which immediately repeals the 30-percent withholding tax. It was noted that in choosing from among these options, Congress necessarily will address issues relating to U.S. corporate access to the Eurobond market, the economy of the Netherlands Antilles, and tax treaty abuses.