LIMITED IMPACT SEEN FROM U.S. TAX ACCORD ACTION
A U.S. decision ending a forty-year
tax treaty covering the Netherlands Antilles was unlikely to
have a major impact on the Eurobond market, tax experts said.
    Most U.S. firms stopped using financial subsidiaries
incorporated in the Netherlands Antilles to sell to the
Eurobond market in July, 1984, the experts said.
    But the decision affects Eurobonds issued before July 1984
involving principal worth an estimated 30 billion dlrs and will
probably mean those bonds will be called before their maturity
date, they said.
    Since most of the bonds are currently trading at a premium,
calling them in early will mean a loss in market value for the
bondholders, according to a Treasury official who asked not to
be identified.
    The official said the Treasury Department was currently
unsure about the impact of the move on the Eurobond market.
    "We are monitoring the situation and receiving reports from
investors and issuers," the official said.
    Earlier, the Treasury said it notified the Netherlands of
the termination of the treaty effective January 1, 1988.
    For years, U.S. firms seeking to avoid a 30 pct withholding
tax used financial subsidiaries incorporated in the Netherlands
Antilles to sell Eurobonds, which are bonds issued abroad by an
overseas financial subsidiary.
    But most companies have since taken advantage of a 1984
change in the law known as the exemption for portfolio interest
that allows them to sell directly in the Eurobond market and
avoid the withholding tax.
    The 1984 tax change sharply reduced the number of U.S.
companies using the Netherlands Antilles to sell Eurobonds,
said Steven Hannes of accounting firm Touche Ross and Co.
    Ending the tax treaty will mean that some foreigners
investing in the U.S. through the Netherlands Antilles will
lose tax benefits and probably change their portfolios, Hannes
said.
    He said the decision would mainly affect foreign investors
who sought tax advantages because they reside in countries
which do not have a tax treaty with the United States.
    These investors typically reside in countries in the Middle
East, Central and South America, he said.
    Some of them may withdraw their U.S. investments or seek
tax relief through the Netherlands itself or Switzerland, but
the choices are limited, Hannes said.
    "It is conceivable their investment may stay here. They
would bear some of the tax that has not been borne in the
past," Hannes said.
    U.S. domestic bonds are not affected by the change.
    U.S. companies with Eurobonds issued through the
Netherlands Antilles are expected to call them early to avoid
the tax liability, a Treasury Department spokesman said. But
they could refinance at lower rates because of the general
decline in interest rates, so the Department does not expect
U.S. firms to be hurt by the decision, the spokesman said.
Negotiations between the United States and the Netherlands
continued without success since the late 1970's. The
differences centered on U.S. concern over residents of third
countries avoiding U.S. taxes by using the treaty with the
Netherlands Antilles.
 Reuter
