Don't Mess With Taxes

Congress is still trying to rake in all the money -- an estimated $100 billion a year -- that it's sure the Treasury is being cheated out of via abusive tax shelters.

The initial focus was on American taxpayers who are getting away with improperly sheltering income. You can read my blog item on that July hearing here. Now Capitol Hill wants to make sure that nonresidents don't dodge their U.S. tax responsibilities.

"Foreigners who invest in the United States already enjoy a minimal tax burden. For example, non-U.S. persons who deposit money with a U.S. bank or securities firm pay no U.S. taxes on the interest earned. They pay no U.S. taxes on capital gains. U.S. citizens do pay taxes on that income, but the tax code lets foreign investors operate without tax in an effort to attract foreign investment.," Said Carl Levin (D-Mich.), chairman of the Subcommittee, in a statement prefacing the hearing.

"But there is one tax on the books that even foreign investors are supposed to pay. If they buy stock in a U.S. company, and that stock pays a dividend, the non-U.S. stockholder is supposed to pay a tax on the dividend," Levin added.

At a hearing today, the Senate Permanent Subcommittee on Investigations heard from global money managers, academia and the IRS commish himself about how this tax money from nonresidents is slipping away.

That's happening, lawmakers believe, via "abusive practices that benefit only non-U.S. persons" and which "have been developed and facilitated by leading U.S. financial institutions, and have been utilized by offshore hedge funds and others to dodge payment of billions of dollars in U.S. taxes owed on U.S. stock dividends."

Those quoted segments are from the Subcommittee's report, Dividend Tax Abuse: How Offshore Entities Dodge Taxes on U.S. Stock Dividends, that was issued in conjunction with today's hearing.

Lawmakers are hoping that increased scrutiny -- or possibly new, tougher laws -- will ensure that non-U.S. investors do pay all their due dividend taxes. Currently, the tax law requires the person or entity paying a stock dividend to a non-U.S. person to withhold the tax owed Uncle Sam before any part of the dividend leaves the country.