LEXIS-NEXIS® Congressional Universe-Document

Search Terms: interest w/5 allocation w/5 tax, House or Senate or Joint

Document 5 of 11.

JUNE 30, 1999, WEDNESDAY

SECTION: IN THE NEWS

LENGTH: 2252 words

HEADLINE: PREPARED TESTIMONY OF
RICHARD C. GREEN, JR.
CHAIRMAN AND CEO
UTILICORP UNITED
BEFORE THE HOUSE COMMITTEE ON WAYS & MEANS
SUBJECT - IMPACT OF U.S. TAX RULES
ON INTERNATIONAL COMPETITIVENESS

BODY:

Mr. Chairman ... members of the Committee, my name is Rick Green and I am the Chief Executive Officer of UtiliCorp United, an international energy company based in Kansas City, Missouri. Much of the business community is already grateful for the efforts of this Committee to resolve some of the more critical issues facing our country in dealing with increasingly sophisticated and vigorous international competition.
Therefore, I welcome this opportunity to address a very serious problem that unfairly constrains the international growth aspirations of American companies -- the inequity of interest allocation rules in the U.S. Tax Code that limit the ability of American businesses to compete.
Let me emphasize that this problem looms large over many American companies doing business abroad. I can best describe the nature and extent of this threat to our competitiveness by reference to the industry that I know best - regulated energy suppliers. And as will become evident, this industry offers an especially poignant example of the problem.
Although my comments have a utility industry focus, at UtiliCorp we've identified a possible remedy to this inequity for your consideration which we think would apply to allU.S. businesses. I'll discuss that more later, but I must emphasize that the problem is particularly onerous for the U.S. regulated utility industry.
The current tax law does not give companies the ability to efficiently bring cash generated from foreign investments back to the U.S. -- therefore, when UtiliCorp makes a foreign investment, it is evaluated as a "cash invested offshore" strategy. This obviously does not provide the best answer to the U.S. economy, or to our shareholders.
I thought it also might be helpful if I could provide some context by offering a closer look at how one U.S. utility company views the emerging reality of the global energy marketplace. For it is the rigorous demands of this marketplace that are pointing to the fault lines in our tax rules which impair the otherwise strong competitive instincts of American companies.
UtiliCorp has been pursuing investments overseas since 1987 - first in Canada, and later in Great Britain, New Zealand and Australia. To date we have invested $1.4 billion in international projects and plan to seek additional opportunities. We're currently taking steps to participate on the European Continent as the markets in those countries open to competition.
Driving all this is the creation of a new global energy industry that is creating immense global opportunities for American companies willing to change the way they think and do business.
It' s very clear to us at UtiliCorp that if we and the U.S. economy are going to continue to be successful competitors, all of our people, policies, systems, processes and tools will have to adapt to reflect the best-of-class global standards that are shaping this new industry. Global markets are developing, customers are becoming available, and the competitive instincts of American business are creating a sense of urgency to capture those customers.In fact, in an industry not typified in the past by venturing much beyond the monopolyprotected confines of highly regulated U.S. turf, we were one of the first-if not the first to begin more than a decade ago to prepare for this new reality by exploring overseas markets as pathways to growth and greater opportunities for our shareholders and employees.
Achievement of these goals means UtiliCorp has to reinvent itself nearly every day, changing those things under our control to meet the demands of a constantly churning global marketplace, or coming here to Washington as I am today, to point to changes needed on matters beyond the control of the private sector.
The global need for energy is poised for explosive growth. Throughout the world, one third of humanity does not even have access to energy as we know it. As many as two billion people still meet their daily energy requirements by burning wood or cow dung. Some 80% of energy used around the world is not renewable.
So, the challenge that needs to be recognized by companies, governments and markets is that in order to meet these growing energy needs they must dramatically alter the way they do business. In the U.S., we need to adopt a philosophy of growth based on rational tax policies that enhance rather than impede the deployment of capital in order to create competition and develop emerging markets.
We must also continue to develop energy supply and efficient delivery system while pushing the boundaries to make renewable energy sources more economical and commercially viable as American companies move forward.
There are, of course, many places around the globe that don't have anything near the kind of energy infrastructure that would support a thriving competitive market, and American companies can capitalize on that. On the other end of the spectrum, there are a number of "gold plated" infrastructures out there, constructed when cost-plus regulation was a reality, that need to be simplified to take advantage of today's market.Huge amounts of capital will be required to take advantage of these emerging opportunities. Unfortunately, outdated U.S. tax laws act as a strong disincentive, literally trapping American corporate funds in foreign countries where they cannot be efficiently utilized.
When U.S. companies doing business overseas prepare their returns under present law, tax on foreign income is paid in the foreign country and again in the U.S. - but without full credit. That's double taxation, pure and simple.
Many of our foreign competitors have no such burden. Their profits from U.S. investments are free to go home to strengthen operations on their own turf, or to fund other international ventures, possibly even including additional U.S. acquisitions. As an American CEO, I'd love to have that choice. As it is, we have but one choice - to leave such funds overseas or take the double tax hit.
UtiliCorp has closely examined a number of investment opportunities in Portugal, the United Kingdom, South America, Canada and other parts of the world. In cases where we were competing against foreign buyers with tax laws more favorable than our own, it has been impossible to compete.
In some respects, the concerns I've raised would apply to many U.S. corporations doing business internationally, but my operating arena- the utility industry - is especially hurt by existing interest allocation rules.

The current interest apportionment formula harms an industry such as mine because a disproportionate amount of U.S. interest is allocated to foreign source income, thereby reducing or eliminating the foreign tax credit and creating the double tax.
Contributing factors include:
U.S. utility assets are older and more fully depreciated than our foreign assets. Since interest is allocated based on the ratio of foreign assets to total assets, and foreign assets would be newer and less depreciated, an increased amount of interest isallocated to foreign source income which reduces the foreign tax credit and creates the double tax situation.
- U.S. utility assets are amortized using accelerated depreciation rules, while foreign assets are amortized using slower straight-line depreciation rules which again creates a disproportionately higher foreign asset base. This increases the amount of interest allocated to foreign income and further compounds the problem.
- Utilities are capital-intensive businesses holding long-lived assets and they tend to be more highly leveraged than companies in other industries. The greater the leverage, the greater the interest expense, thus creating a larger pool of interest to be allocated. This factor, coupled with the preceding points, causes an increased amount of interest to be allocated to foreign source income, thereby decreasing the foreign tax credit.
- Foreign utility companies generally are not subject to the same regulatory restrictions as U.S. utility companies in making foreign investments, thus creating a serious competitive disadvantage. U.S. tax law should not further compound this problem.
- Because the era of opportunity for U.S. investment in foreign utilities is relatively new, a federal tax stumbling block to exploitation of investment opportunities by U.S. utilities today will have long-lasting effects on our future competitiveness in foreign markets.
- Because of the inability to transport electricity or gas over long distances, particularly over the ocean, U.S. utilities must establish a taxable presence where the utility customers reside. This means that U.S. utilities generally do not have the ability to generate a low-tax foreign income to offset the disadvantage caused by the interest allocation rules. By contrast manufacturing, transportation, and communications industries generally can make cross-border sales and thereby generate low tax foreign source income.- U.S. utility companies generally are not able to generate low-tax foreign source income through licensing of intangibles offshore, such as intellectual property. For example, utilities generally own little or no intellectual property, trademarks, trade names, and so on.
The proposed solution we'd like you to consider eliminates double taxation by changing the allocation rules to take into account foreign interest in the interest allocations formula. As I have stated, we believe the solution should be available to all U.S. companies eligible for the foreign tax credit. However, Mr. Chairman we understand there may be revenue constraints and if it is not possible to enact this with an immediate effective date, we hope you will consider a phased-in approach, a phase-in across all American industries with an initial focus on those most negatively impacted.
To sum up, Mr. Chairman, for our industry the market's expectations are a lot tougher today. In times past, in that earlier model in which we operated, we would just deliver safe, reliable, energy in our local monopoly territories- that was it. We could go home. Job done. Not so any more. That's just entry-level performance, and a far cry from global best-of-class.
To achieve that distinction we must consistently, each and every day, strive for the opportunity to reach and serve the global customer and make that customer more comfortable at home and more efficient in the workplace. That means we have to go beyond just delivering the energy. We have to understand our customers far deeper and better than we ever have before and make significant investments overseas and in the improved products and services the global customer base needs, expects and deserves.
If American companies don't do it, our foreign counterparts will. That's what competition is all about. The companies - and countries - that make this fundamental shift will thrive and grow at the leading edge of these global changes. The ones that do not will be swept aside to tumble in the wake of the leaders.The people who run utilities and other companies overseas are savvy international business people. They realize that to be effective players on the global energy stage they've got to have a solid presence in the U.S. marketplace, the most advanced and lucrative in the world.
And one of the reasons our market is so attractive is that perhaps its most valuable asset is the skills and knowledge embedded in the experience of the Americans we employ. We don't export jobs, Mr. Chairman -- but we do export that knowledge. It's a tremendously valuable commodity.
Mr. Chairman, American know-how, capital and muscle have built a truly "First Tier" energy system that's the envy of the world. That's why foreign investors already are moving aggressively to buy U.S. utilities, such as the acquisition of PacifiCorp by Scottish Power and the U.K.'s National Grid acquisition of New England Electric System.
Earlier this month when approving the Scottish Power and National Grid acquisitions, FERC Chairman James Hoecker said the deals, and I quote, "illustrate(s) how attractive U.S. utility assets are to international markets."
But I hope you understand that I am not advocating protectionism. I am not asking for a bailout or special breaks or loop-holes. All I am seeking are straightforward tax rules that recognize this new global marketplace and help to provide an equitable solution for American companies and the U.S. economy.
There should be no question that U.S. enterprise knows how to compete, but it is absolutely vital that our government act to let us play to our strengths. If you don't, then the U.S. utility industry, which presently occupies the First Tier among the world's utilities, could quickly be relegated to a position on the second or third tier behind our foreign competitors.U.S. tax policy should not unduly disadvantage U.S. companies in their efforts to expand internationally. We respectfully request relief from the double taxation we presently face under the existing interest allocation rules, which create an impediment to the ability of American enterprise to compete.
Acting now to sweep these tax impediments aside before a crisis develops is vastly preferable to coming back later to shore things up after the damage to the U.S. economy and U.S. companies is done.
Thank you for this opportunity to appear before you, Mr. Chairman. Now, I'd be pleased to address whatever questions you or the Committee may have.
END

LOAD-DATE: July 1, 1999

Document 5 of 11.


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