The government-chartered Federal National Mortgage Association set up a subsidiary in the offshore tax haven of the Netherlands Antilles to help foreign investors avoid paying U.S. withholding taxes, Rep. Benjamin S. Rosenthal (D-N.Y.) charged yesterday.
The Caribbean subsidiary, FNM Overseas Capital Corp., was organized in 1974 and was never used, but it is still in existence, FNMA officials confirmed.
FNMA, known as Fannie Mae, was chartered by Congress to provide money for home mortgages. It buys mortgages from lenders, using money that it raises by selling bonds to investors.
Rosenthal said Fannie Mae decided to organize the Antilles subsidiary so that it would sell bonds to foreign investors.Foreigners were reluctant to buy the bonds directly from FNMA because the U.S. government withholds 30 percent of the interest for taxes.
Residents of many foreign countries do not have to pay the U.S. tax, but the government withholds it anyway, then gives the money back at the end of the year.
Rosenthal aides said foreign investors objected not only to the U.S. government holding their money for a year -- while they lost interest on it -- but also to filing U.S. tax returns that revealed their American investments.
Fannie Mae, the Federal Home Loan Bank Board and the Farm Credit Administration all studied setting up offshore tax havens to let foreign investors escape U.S withholding, Rosenthal charged.
But the others dropped the idea and only Fannie Mae went so far as to incorporate a Dutch Antilles subsidiary, he said. Rosenthal staff members uncovered the Antilles connection while researching a bill that would end the withholding of taxes on interest earned in the United States by foreign investors.
The measure is backed by the Treasury Department, but Rosenthal opposes it, claiming the government should not end withholding for foreign investors at the same time it is trying to start withholding taxes on interest earned by U.S. citizens.
Fannie Mae press officer Beth Van Houton insisted yesterday that FNMA was not trying to get mortgage money at the lowest possible cost.
She said the Antilles corporation was organized because it appeared at the time the bonds could be sold at a lower interest rate overseas than in the United States. The offshore company never sold any bonds, she said, because "market conditions changed," making foreign sales less attractive.
The Netherlands Antilles -- a group of islands just north of South America -- are used as a tax haven by many investors. A tax treaty betwen the tiny islands and the United States allows Antilles corporations to avoid paying most taxes on money they earn in the United States. Rosenthal wants the treaty renegotiated.