At present, US citizens do not pay tax on the first US$80,000 they earn a year or on housing expenses.

The package, approved by the US Senate Finance Committee last week, also calls for prohibiting American companies from avoiding US taxes by incorporating in offshore tax havens such as Bermuda. The move would help to fund the Senate's plan for US$350 billion in tax cuts, which include reducing a levy on stock dividends. The House of Representatives is proposing US$550 billion in tax cuts, less than the US$726 billion President George W. Bush is seeking.

Lobbyists opposed to the Senate version said it would mean fewer employment opportunities for US nationals, while US companies would be compelled to hire foreign employees to avoid spiralling costs. A smaller overseas US population would ultimately drive down demand for US goods and services, prompting a drop in exports.

Frank Martin, president of the American Chamber of Commerce in Hong Kong, said most major US multinationals used tax equalisation policies, footing the bill for excess taxes that their employees incurred by living and working overseas. Cutting the exemption would drive up the costs of doing business for corporations. 'There are also hundreds of American entrepreneurs who run their own companies around the globe who would be faced with a rather substantial increase in the tax burden,' Mr Martin said, adding that the chamber had been lobbying for years to have the exclusion amount raised to US$150,000.

Patrick Yip, tax partner at Deloitte Touche Tohmatsu, said excluding the expatriate exemption was a last-minute addition to the Senate version of the bill and had taken many by surprise.

The Senate Finance Committee approved the bill last Tuesday by the same 12-9 margin as it did on May 8. The Senate and the House now need to agree on a compromise bill before it can be finalised by the president, targeted to be done before the Memorial Day holiday on May 23. Those opposed to the measure are hoping their voices will be heard this week and the plan to cut the exemption for overseas workers will be thrown out.

'It would hurt multinationals which would, in turn, hurt a lot of the US expat population,' Mr Yip said.

'There would be less cross-border exchange of information and ideas which is bad for international trade. No one knows what will happen, but the conventional wisdom is that it is not very likely that this proposal will go through as it has a lot of ramifications for multinational corporations.'

US Asia Tax & Business Services managing director Jill Elsner said with existing exclusions, a single US taxpayer living in Hong Kong with an annual salary of US$80,000 and US$100 in dividend income who spent US$12,000 a year on housing would pay no US tax. Without the exclusions, their tax liability would be about US$7,300, after factoring in Hong Kong tax.

She said it was difficult to know if the proposal would make it into law, but the local American population should voice their concerns before it was too late.

Guy Ellis, tax partner at PricewaterhouseCoopers, said the exclusion policy had changed in the past but had never been completely repealed. If it was cut, he predicted it could be offset in some way, thus lessening the overall dollar impact. US citizens would be able to claim more relief on their Hong Kong taxes if their US bills increased, but there would be an incremental cost as US tax rates were higher, he said.

William Ramirez, director of Asia-Pacific taxes for Philip Morris, said the proposal was short-sighted. About 1,000 of his company's 100,000 workforce is employed overseas, a large proportion of whom are American.

'It is penny wise and pound foolish,' he said. 'The US is the only major trading economy that taxes its citizens living outside the US. While it might collect some revenue, it will place US companies at a competitive disadvantage.

The US consulate estimates that there are about 50,000 US citizens living in Hong Kong, although it is difficult to estimate the taxable pool due to income variations and work status.

REVENUE ROW

The move would help fund the plan for US$350 billion in tax cuts, which includes reducing a levy on stock dividends

At present, US citizens living abroad do not pay tax on the first US$80,000 they earn a year or on housing expenses