International businesses based in Bermuda are tracking the progress of a US piece of legislation which could have a major impact on their American employees.

On Thursday, the Senate passed a proposal to repeal a foreign earned income exclusion, the so-called “Section 911 exclusion”. Americans working overseas will lose income tax exclusions for $80,000 of earned income and certain housing costs if this becomes law.

Catherine Sheridan-Moore, a tax partner with KPMG, said this measure would mean that Americans living in Bermuda could be forced to pay thousands of dollars in extra taxes.

She said she had received several calls from Americans in Bermuda who said that if the provision was repealed, they may have to relocate to the US. In most cases it would be too expensive for companies to compensate US employees for the extra tax liabilities they would incur, so the burden would fall on the employee.

To illustrate the potential impact of the provision, Ms Sheridan-Moore provided an example using a senior executive with a monthly housing allowance of $10,000. That person would currently get to exclude approximately $110,000 per year for housing costs plus $80,000 of earned income. Removal of the “911” provision would cause the executive's taxable income to increase by $190,000 per year.

“Upper tax rates may go as high as 39 percent. Assuming the highest tax rate and no alternative minimum tax implications, in the above example, the executive would incur an additional tax liability of $74,000 per year.”

In the US, attention is focusing on the bill's main objectives of eliminating tax on dividends and job creation.

Both the House and the Senate have proposed dividend tax cuts that they hope will stimulate the US stock market and bring some welcome relief to US investors who have seen the value of their stock portfolios and pensions slide.

But the Senate version of the tax includes the elimination of the expatriate tax exclusion in an effort to offset the loss of revenue from the dividend tax cut.

The Senate version also includes measures aimed at preventing US companies from relocating to domiciles like Bermuda.

According to Ms Sheridan-Moore, if it forced some of the millions of Americans working overseas to return home, a repeal of Section 911 would be counter-productive in terms of generating jobs.

“I believe that if they repeal this provision, it's going to jeopardise opportunities for Americans working overseas,” she said.

The proposal has been criticised in several quarters in the US. Free trade lobbyists lambasted the proposal saying it would decrease the competitiveness of US corporations.

Andrew F. Quinlan, president of the Center for Freedom and Prosperity, stated: “It is bad policy to tax Americans who live and work overseas. Unfortunately, instead of fixing the problem by protecting all overseas income from double-taxation, the Senate Finance Committee has made the tax code less competitive by eliminating the protections afforded by Section 911.”

Heritage Foundation tax expert Daniel J. Mitchell commented that: “The United States is the only industrialised nation that taxes its overseas workforce. Even countries like France and Sweden don't make this mistake. By making the law even more punitive, the Senate Finance Committee will increase unemployment, reduce American exports, and make it more difficult for US-based companies to compete in the global economy.”

“Veronique de Rugy of the Cato Institute added: “There is a reason why almost no governments tax citizens who live and work in other nations. Taxing overseas income is fundamentally inconsistent with sound tax policy. Gutting Section 911 puts America in the same category as Jamaica and the Philippines.”

A separate proposal, headed by Democratic Sen. John Breaux of Louisiana to exclude the repeal of Section 911 from the bill had strong support, but was defeated by a 51-49 vote in the Senate on Thursday.

The bill will now move to a House-Senate conference. Representatives of both the Senate and the House must try to reach a compromise over the costs of their respective bills before the bill can proceed for presidential approval. The House is willing to spend $550 billion on the tax cuts while the Senate is limited to a $350 billion ceiling.

Observers are predicting that the Senate may seek to compromise with a package of $350 billion plus revenue generators of a further $80 billion.

That is why the 911 provision is being eyed so eagerly by Republican Senators, who believe its repeal would generate some $35 billion.

Ms Sheridan-Moore said she and other US tax colleagues are surprised that there has not been a greater outcry over this proposal: “They have looked at repealing this provision in the past, but it has never got this far along. Many believe the reason is the lack of objections being raised.”

According to Ms Sheridan-Moore, it is possible that the bill may be finalised this week.

“If people want to do something about it, they need to inundate the Senators that have been assigned to this conference committee immediately.”

The House has yet to appoint their conferees that will sit but the Senate has now appointed Republican Senators Charles Grassley, Orrin Hatch, Don Nickles and Trent Lott and Democrats Max Baucus, Jay Rockefeller and John Breaux to debate the bill with the House.

The Senate is basically divided on party lines on this package, but Republican Sen. Lott, from Mississippi is known to be deeply opposed to the repeal of Section 911 because he has a lot of oil and energy companies in his constituency.

The oil and energy sector have high levels of employees working overseas and are lobbying furiously to avoid the loss of the exclusion for their expatriates.