WASHINGTON, DC – Today, U.S. Senator John Kerry (D-Mass.) and U.S. Representative Rahm Emanuel (D-Ill.) introduced legislation to curb the ability of high-income taxpayers to defer unlimited amounts of offshore compensation.  The Offshore Deferred Compensation Reform Act creates a new section in the Internal Revenue Code that eliminates the ability of U.S. taxpayers to defer nonqualified compensation in offshore tax havens.    

"I've been focused for a long time on the 'separate and unequal' system in America, where those at the very top get all the benefits and loopholes to avoid paying their fair share of taxes, and working families get stuck with the bill,” said Kerry. “I fought to make tax fairness an issue in 2004 as a presidential candidate, and now as a Senator I'm fighting to make reform a reality. I'm working with Rahm Emanuel to fix the tax code to help more families save for college and retirement, not help millionaires hide their money offshore."

“Middle-class taxpayers that are saving for college or their retirement can’t avoid paying taxes by deferring millions offshore,” said Emanuel.  “Congress needs to reform the tax code to assure all Americans that they are on a level playing field regardless of their income level.  This legislation takes an important step toward achieving that goal.” 

Most Americans can defer income through a qualified retirement plan (e.g. 401k) and an Individual Retirement Account (IRA).  In 2007, an individual can defer up to $15,500 in income into a 401(k), or similar account, and an additional $4,000 in an IRA.  By contrast, according to press accounts, U.S.-based hedge fund managers who operate offshore investment funds can defer unlimited amounts of their compensation.  While the deferrals technically comply with current law, there is a clear inequity between the amounts that middle-class Americans can defer through mainstream tax incentives for retirement and what high-income taxpayers can defer through offshore corporations.

According to an annual ranking of the top 25 hedge fund earners by Institutional Investor’s Alpha magazine in 2006, the average amount earned was $570 million.  In total the top 25 earned a combined $14 billion, equivalent to the GDP of Jordan or Uruguay. 

 
Specifically, Kerry and Emanuel’s bill will:

Creates a new Section 457A of the Internal Revenue Code that eliminates the ability of U.S. taxpayers to defer nonqualified deferred compensation in offshore tax havens.  Offshore nonqualified deferred compensation paid by a foreign corporation will be taxable income when there is no substantial risk of forfeiture to the compensation.[1] 
 
A foreign corporation is defined as any foreign corporation unless “substantially all” of the income of the corporation meets the following exemptions:
 
Effectively Connected Income to the United States: Income is effectively connected with the conduct of a trade or business in the United States; or
 
Tax Treaty with the United States:  Income is subject to an income tax imposed by a foreign country that has a comprehensive income tax treaty with the United States, the corporation is eligible for benefits of the treaty, and a deduction is allowed for compensation under rules that are substantially similar to the way in which the United States provides deductions for compensation; in addition, the Secretary is given authority to determine whether a foreign corporation that operates in a country without a formal tax treaty with the United States can qualify for the exemption.