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JUNE 30, 1999, WEDNESDAY

SECTION: IN THE NEWS

LENGTH: 1972 words

HEADLINE: PREPARED TESTIMONY OF
PROF. WARREN L. DEAN, JR.
REPRESENTATIVE OF THE SUBPART F SHIPPING COALITION
PARTNER, THOMPSON COBURN LLP
BEFORE THE HOUSE COMMITTEE ON WAYS AND MEANS

BODY:

Good morning, Chairman Archer and distinguished Members of the Committee. On behalf of the Subpart F Shipping Coalition, I commend the Committee for examining U.S. international tax policy and its impact on the competitiveness of the U.S. economy. The coalition appreciates the opportunity to appear before you today.
The Subpart F Shipping Coalition is a group of U.S.-controlled foreign-flag shipping companies that are adversely affected by U.S. international taxation policy. Our members include General Ore International Corporation Limited, Seaboard Marine (a wholly-owned subsidiary of Seaboard Corporation), and Tropical Shipping (a wholly- owned subsidiary of NICOR, Inc.). Our members support the Shaw- Jefferson bill, H.R. 265, which is pending before the Committee, and they are submitting statements on the record in support of that legislation.
Mr. Chairman, I chair the Transportation Group at Thompson Coburn LLP and represent the interests of transportation companies engaged in foreign commerce. For the last ten years I have also been an Adjunct Professor of International Transportation Law in the Graduate Program of Georgetown University Law Center. I have taught and written extensively on the effects of U.S. tax and regulatory policy on the competitiveness of U.S. enterprise. My statement will, therefore, be general and policy-oriented.
At the outset, let me clarify one very important point. Amending Subpart F to reinstate the deferral of foreign-base company shipping income will not adversely affect the competitive position of the remaining subsidized U.S.-flag shipping companies that operate in our foreign commerce. In fact, as reflected in written statements submitted to this Committee, it would substantially improve their ability to compete in foreign commerce, since they also operate foreign-flag vessels.
In sum, if the United States wants a shipping industry of any kind-- U.S.-flag or foreignflag--then the application of Subpart F has got to go. It is just that simple.
My testimony focuses on three key issues that are of great concern to U.S. shipping companies and U.S. manufacturers and exporters. First, I will discuss the impact of U.S. international tax policies on the competitiveness of the U.S. shipping industry. Next, I will describe how the shipping industry's worldwide consolidation has exacerbated this decline. And finally, my testimony will describe the impact that this decline in U.S. shipping capability is having on U.S. exports.Competitiveness of the U.S. Shipping Industry
International shipping is a highly competitive industry. Foreign-flag operators that are relatively unburdened by direct or indirect national taxes determine its rate structure. Most maritime nations, including those in the European Union, have adopted tax policies that ensure that their operators are able to compete with ships operated under flags of convenience. The United States has taken no such action. Instead, in response to the liberalization of international shipping taxes by the world's great shipping nations, it has increased its taxes. As a result, the United States is no longer a major force in international shipping.
Of course, the tax I am referring to is Subpart F of the Internal Revenue Code, which imposes taxes on U.S.-owned businesses abroad as if they were operating in the United States. Before Subpart F was extended to shipping--it was extended partially in 1975 and fully in 1986-American citizens and corporations owned or controlled more than 25 percent of the world's fleet. Now that figure has slipped to less than 5 percent, and is falling fast. As U.S.-controlled investment in shipping has declined, so have U.S. sealift capability and U.S. Treasury revenues from shipping. This anti-competitive tax regime has also reduced new ship acquisition by U.S.controlled companies, and it has resulted in U.S. owners becoming minority participants in vessels they once owned and operated.
The National Foreign Trade Council's recently completed study, titled "The NFTC Foreign Income Project: International Tax Policy for the 21 st Century," confirms these findings. The study showed that the U.S.- controlled foreign fleet cannot afford to compete effectively in the international market against trading partners that have adopted tax policies and incentives to support their international shipping industries.
Let me give you an example. Assume an American-controlled shipping company needs, for competitive purposes, to offer service between Indonesia and Japan. U.S.-flag services by a U.S. corporation is not an option. The expense of flying crews back and forth alone would be prohibitive. Subpart F, the purpose of which is to prevent tax- motivated earnings through foreign corporations, reaches this transportation service and taxes it more onerously than it would tax U.S.-flag service--- yen though this transportation is not within any rational definition of U.S. commerce. There is no legitimate tax policy foundation for this absurd result.
Sadly, the U.S. government has gained nothing from extending Subpart F to shipping income. While the tax imposed upon this industry was originally designed to generate revenues, it has cost the U.S. Treasury millions of dollars. Shipping industry tax revenues have decreased from approximately $90 million a year before 1975 ($250 million in today's dollars) to less than $50 million today.
Worldwide Consolidation
The marketplace for transportation services is increasingly global, as international trade responds to the liberalization of commerce under new multilateral trade agreements. In response, the ocean shipping industry has been consolidating to take advantage of worldwide service networks. These actions are not unique to ocean shipping. The international airline industry is experiencing a comparable evolution.
This worldwide consolidation is leaving the United States with significantly diminished shipping capacity, due in large part to U.S. international tax policy. Take, for example, American President Lines, one of the premier U.S.-flag operators for nearly 150 years with terminal and transportation facilities on the West Coast that are extraordinarily valuable, both economically and militarily. It is also one of the major participants in the Maritime Security Program. American President Lines relies in part on its foreign-flag fleet to compete on a global basis.
To survive in the increasingly competitive international markets, transportation enterprises like American President Lines must be able to expand their operations, often through combinations with other carriers. Assuming a suitable foreign-flag carrier can be identified, the only question then is the form of the merged entity, i.e., whether the U.S. carrier is the acquired or the acquiring company. That decision should be a marketplace decision, even though there are national interests at stake in preserving U.S. control over subsidized U.S.-flag operators. Subpart F's application to the foreign-base company shipping income of companies like American President Lines ensures that the surviving company cannot be a U.S. taxpayer. If a foreign corporation acquires American President Lines and rationalizes its operations, none of its foreign-flag vessels will be subject to U.S. taxation. If American President Lines were to acquire a foreign company, on the other hand, all of the foreign-flag vessels of the combined enterprise would be subject to U.S. taxes.

In fact, Neptune Orient Lines, a Singapore corporation, acquired American President Lines. As a result, American President Lines' foreign-flag operations are effectively exempt from U.S. taxation. (Singapore does not tax the shipping income of its nationals, whether from Singaporean or non-Singaporean vessels.) The U.S. government has lost in terms of both a potential dividend revenue base and the realization of its taxpayer-subsidized national security objectives.
If our tax laws had been more competitive--meaning the United States had maintained a policy to allow vessels to compete in the tax-free environment that determines the rate structure for international shipping--American President Lines might have acquired Neptune Orient Lines instead. Examples like American President Lines, or the acquisition of Lykes Steamship Co. by a Canadian corporation, demonstrate that Subpart F substantially harms the competitiveness of U.S.-owned foreign-flag shipping, fails to raise revenue to the U.S. Treasury, adversely affects U.S. national security, and costs American workers their jobs.
U.S. Exports
Sir Walter Raleigh once observed that whoever commanded the sea commanded the trade of the world and hence the world itself. More recently, Tom Clancy wrote a novel describing a world eventually dominated by a third-world nation that gained control of ocean shipping. Simply put, our tax laws effectively prohibit Americans from owning and operating the shipping companies that carry the world's commerce. This means lost tax revenue, diminished presence in international markets, and an increased threat to the nation's economic security.
Subpart F has cost Americans jobs and export opportunities in related industries as well. As the once significant U.S.-owned fleet expatriated to remain competitive, related industries, including insurance brokers, ship management companies, surveyors, ship brokers, technical consultants, and many others who provided services to the maritime industry, followed. Further, Subpart F's application to shipping adversely affects the export opportunities of U.S. enterprises. U.S.-owned and controlled transportation companies are much more likely to identify and promote export opportunities for both related and unrelated U.S. manufacturers and their employees. They are also more likely to offer jobs to American citizens, such as ships' officers, who are not already employed on U.S.-flag shipping. That's how real economic opportunities for Americans are developed and marketed in a global economy.
If we act like isolationists on tax policy, it should be no surprise that the American public may turn isolationist on trade policy by rejecting further liberalization of international trade.
Conclusion
The Subpart F Shipping Coalition urges the Committee to level the playing field so that U.S.-shipping companies can once again be viable competitors in the international market. We encourage the Committee to approve H.R. 265, sponsored by Congressmen Shaw and Jefferson. It would restore the competitive opportunities for U.S.-controlled foreign-flag corporations by excluding shipping income from Subpart F. Under the proposed legislation, .taxes would be deferred, not exempted, and would eventually be paid into the U.S. Treasury.when repatriated.
Mr. Chairman, we live in a global marketplace, with formidable challenges and opportunities. Americans, I believe, are prepared to embrace those challenges--provided Washington doesn't get in the way. We have seen too many Americans recently lose their jobs in shipping, and other important industries, just because poorly conceived tax policies inadvertently dictated that they would lose in this era of worldwide consolidation. In this regard, I refer you to the compelling statement of Crowley American Transport, Inc. submitted to this Committee on June 24, 1999. If we want to be competitive in world commerce, we must start here in Washington.
If Subpart F is not amended, companies like the ones I am representing today will eventually be forced out of business or driven into partnerships with foreign companies, having been weakened over the years by unnecessary tax obligations. We look forward to working with you and the Ways and Means Committee to address this important issue.
END

LOAD-DATE: July 1, 1999

Document 41 of 113.


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