U.S. Proposes to Exempt Some Bonds From Taxes

The Reagan Administration, which created a furor in worldwide bond markets when it announced Monday that it was terminating a 1948 tax treaty with the Netherlands Antilles, said Thursday that it would seek to overturn part of that action.

The Administration said it will propose legislation to exempt from withholding taxes bonds issued before June 22, 1984, by U.S. corporations using subsidiaries in the Netherlands Antilles.

The action seeks to repair the damage caused by the Treasury Department’s announcement Monday that it was terminating the Netherlands Antilles tax treaty as of Jan. 1, 1988, because of a breakdown in negotiations between the two countries over a new treaty. The new treaty is needed to reflect the massive overhaul of the U.S. tax law passed by Congress last October.

The announcement sent shock waves through bond markets worldwide because it would mean that some $32 billion in bonds U.S. corporations had sold through their Antilles subsidiaries before June 22, 1984, would be subject to a 30% withholding tax.

But in Thursday’s announcement, the Administration said it would seek congressional action to exempt those bonds from the withholding clause, regardless of the status of the treaty between the two countries.

Critics charged that Monday’s Treasury Department action had seriously undermined foreign investor confidence in U.S. debt securities issued overseas in the huge $650-billion Eurobond market.

Prices of hundreds of pre-1984 Eurobond issues by U.S. companies fell as much as 20 points, or $200 for each $1,000 in face value, after Monday’s announcement. U.S. companies often sell debt on European markets because of lower interest rates.

Treasury Department spokesman Sam Richardson said the Administration was proposing the legislation to avoid an unintended effect from canceling the tax treaty.

“The proposed legislation is an attempt to be fair. We did not want to adversely affect any market,” he said.