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Arab Governments Concerned over Effects of U.S. Tax Reforms

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Arab governments are concerned over the effects of the Tax Reform Act of 1986 on investments by foreign governments in U.S. enterprises, according to Boycott Report, a bulletin on developments and trends affecting the Arab boycott of Israel and Arab influence in the U.S., published here by the American Jewish Congress.

The oil-rich Persian Gulf state of Kuwait is a case in point. It may lose its tax-exempt status on so-called passive investments in the United States. Kuwait, a heavy investor, was exempt under Section 892 of the old Internal Revenue Code from federal taxes on stocks, bonds or other domestic securities it owned and interest from deposits in American banks.

The old code declared as taxable, income derived from commercial activities including that earned by a “controlled entity” of a foreign government. Commercial activities were defined as those “ordinarily conducted with a view toward the current or further production of income,” the Boycott Report said.

Section 892, as amended in the new tax law, makes taxable income derived from the conduct of any commercial activity “whether within or outside the United States.” If the foreign government owns at least 50 percent of the stock of the enterprise engaged in such commercial activity, the exemption on its “passive investments” in the U.S. could be jeopardized. The Kuwaitis could thereby lose their exempt status on the passive investments of the Kuwait Petroleum Co. in Santa Fe International, an American oil exploration company it purchased several years ago for $2.5 billion, the Boycott Report said.

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