International Tax Simplification and Investment Competitiveness Bills Introduced

Washington, DC, June 9, 1997 - Legislation to permit the character of US-source interest income and short-term capital gains to flow through a regulated investment company ("RIC") to foreign shareholders has been introduced as part of the bipartisan "International Tax Simplification for American Competitiveness Act"-introduced as S. 843 by Senators Hatch, Baucus and Mack and as H.R. 1783 by Representatives Houghton and Levin-as well as in a separate bill (S. 815) introduced by Senators Baucus, Gorton and Murray. These "flow through" provisions are comparable to those contained in the "Investment Competitiveness Act of 1997" (H.R. 707) introduced earlier this year by Representatives Crane, Dunn, and McDermott.

Under present law, US-source interest income and short-term capital gains are exempt from US withholding tax if received directly by a foreign investor, but not if the income flows through mutual funds and other RICs. The Institute supports this legislation because it would eliminate a US tax barrier that effectively encourages foreign investors to invest in US securities either directly or through foreign, rather than US, funds.

The bipartisan international tax simplification bills also would provide an election pursuant to which shares of "marketable" passive foreign investment companies ("PFICs"), including all PFIC shares held by RICs, could be marked to market. Comparable mark-to-market provisions were included in the tax simplification proposal advanced recently by the Clinton Administration. The Institute supports marking PFICs to market because it eliminates a RIC-level tax that otherwise could apply.