International companies could pack up and leave Bermuda because of plans to repeal tax exemptions to US citizens as part of a new tax bill approved last week by the US Senate Finance Committee, said a leading tax expert.

James Paul Sabo, president of ETS Ltd., a Bermuda tax consulting company, said that companies may have to increase pay to their US employees to keep them on-Island - and it may ultimately work out cheaper to move away from Bermuda.

"Because of the bill they may have to re-think about the advantages of being in Bermuda," said Mr. Sabo. "It may be of corporate advantage if they can't attract the right people at the right price."

Companies could face their wage bills going up by hundreds of thousands of dollars after the Senate Finance Committee last week proposed scrapping ending a 57-year old exclusion allowing Americans abroad to deduct $80,000 plus housing costs from income they report to the US Internal Revenue Service.

This exemption has been attractive enough to lure US citizens to the Island - but companies may now have to pick up the tax bill to keep their key employees happy and on-Island.

"It could be that the savings made by the corporate tax would be offset by the personal tax saving," said Mr. Sabo. "And this may affect some of the smaller companies who may decide to leave."

He said another effect could be that companies look elsewhere other than the US for their employees to get cheaper employment out of Canada or Europe.

Mr. Sabo added: "Will the local employer be willing to make up the short fall? If this bill passes can they afford to do this?"

He said that most employers bring US employees to Bermuda on the same salary at they were in the States - but the tax benefits are the lure, adding $24,000 in tax savings to every person on $120,000.

"They will lose the tax benefit of staying in Bermuda and if the employee is going to have to pay this, they will look to the employer to make up the difference."

He added there is still a small benefit to US employees here, by saving $5,000 on social security and between $1,500 and $3,000 on Medicare.

He said the higher the salary of the executive, the more impact it would have, with someone on a salary of $300,000 and getting $10,000 a month for rent, they will have a tax saving of $120,000 for the housing allowance, plus the $80,000 exemption - leaving just $100,000 to pay tax on.

"It will mostly affect the single person on between $100,000 and $120,000 a year. That $20,000 to $24,000 exemption works out at between 15 and 20 percent of their total income."

According to the 2000 Bermuda Census, there are about 4,263 US citizens living in Bermuda, but only about half of these file tax returns. The others have either duel nationality or are married to Bermudians and may not know that they are supposed to file their returns.

"Employers need to start thinking if they are going to grant pay increases for some if not all of their US workers," said Mr. Sabo.

The bill, which is due to go to the Senate floor, is part of a tax-cutting package backed by US president George W. Bush. As part of the tax saving measures, the repeal of the tax deductions for US citizens working overseas would raise $32 billion to help pay for a dividend tax cut in the Senate bill.

Amendments are expected to be made before the bill is passed into law - and some believe that the expatriate exemption may end up being deleted from the bill at the last minute.

"A lot of companies are pushing to get it deleted," added Mr. Sabo, who said that there were a lot of political reasons behind the bill being put forward in this form.