Copyright 1999 Federal Document Clearing House, Inc.
Federal Document Clearing House Congressional Testimony
June 30, 1999
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 1360 words
HEADLINE:
TESTIMONY June 30, 1999 SANDER M. LEVIN HOUSE WAYS AND MEANS
INTERNATIONAL TAX RULES
BODY:
Statement of the
Honorable Sander M. Levin, M.C., Michigan Testimony Before the House Committee
on Ways and Means Hearing on Impact of U.S. Tax Rules on International
Competitiveness June 30, 1999 Thank you Mr. Chairman for giving me the
opportunity to testify before this Committee. I am pleased to report to you on
the package of international tax simplification proposals that Mr. Houghton and
I, along with a number of our colleagues, have put together in this session.
This is the fourth such bill on which I have had the privilege to work with Mr.
Houghton, and our third with Senators Hatch and Baucus. The bill, H.R. 2018,
contains a long list of proposals unified by a common theme: The way we tax the
income of U.S. companies doing business abroad should reflect the economic
realities of doing business abroad and should facilitate the efficient
allocation of resources. Guided by that principle, our bill seeks to amend the
U.S. international tax regime in a way that will simplify the reporting burden,
enhance the competitiveness of U.S. businesses and their workers, and promote
exports. There has not been a major review of our international tax regime since
1986. The commercial landscape has changed significantly since then.
Increasingly, as international business transactions have become the norm, it
has been necessary to re-assess when rules designed to rein in tax avoidance
have the effect of deterring or severely burdening transactions undertaken for
legitimate and, from the point of view of American competitiveness, desirable,
economic reasons. Today, companies regularly take advantage of the gains in
efficiency that come from locating strategically in multiple points around the
globe. It is not uncommon for a U.S. company to rely on a support network based
in several different countries. This is how companies operate in today's
business environment. Not only does strategic location around the globe make
U.S. companies more competitive, it also can increase demand for U.S. exports,
since U.S. companies operating overseas are very likely to purchase U.S. goods
and services. Our International Tax Simplification bill seeks to update the U.S.
international tax regime by bringing it in to sync with the realities and
demands of the modern business environment. We made substantial progress towards
that end in the Taxpayer Relief Act of 1997 and in international tax
simplification measures enacted last year. Some of our changes were in the
following areas: Active Financing: Our Tax Code generally defers taxation of
manufacturing income of U.S. controlled foreign corporations (CFCs) until that
income is repatriated. This rule ensures that a German subsidiary of a U.S.
company will be taxed in the same way as other German-based companies with which
it competes. It will not be handicapped by current U.S. taxation of its income
in addition to German taxation of the same income. In enacting the Taxpayer
Relief Act of 1997, we recognized that the time has come to apply the same
common-sense policy to financial services companies--banks, brokers, insurance
companies, auto financing companies--that we apply to manufacturers. Reporting
by 10/50 Companies: A number of U.S. companies engage in business abroad through
joint ventures in which they hold more than 10% but less than 50% of the equity.
Prior to 1997, each so- called 10/50 venture was treated separately for purposes
of determining foreign tax credit limitations. This rule resulted in tremendous
reporting burdens for U.S. companies doing business through multiple 10/50
ventures with little impact on their ultimate tax liability. Thanks to reforms
enacted in the Taxpayer Relief Act, a "look-through" rule will kick in beginning
in 2003 that will allow U.S. companies to group income from 10/50 ventures,
greatly reducing their reporting burden. Overlap Between P-FIC and CFC Rules:
Prior to 1997, confusing and sometimes conflicting regimes applied when a
controlled foreign corporation (CFC) engaged in active business accumulated
enough income from passive investments to trigger rules regarding passive
foreign investment companies (P-FIC). The 1997 Act eliminated this problem by
providing that under most circumstances the P-FIC rules will not apply to CFCs
engaged primarily in active business. I am pleased by the progress we made in
the last Congress. But much work remains to be done. Our goal in this Congress
is to build on the accomplishments of the last Congress. Let me highlight a few
of the key provisions in H.R. 2018: Make Deferral of Active Financing Income
Permanent (Sec. 101): The rule that makes active financing income exempt from
current taxation (like manufacturing income) is due to expire at the end of this
year. As with other expiring provisions of the Tax Code (such as the R&D
credit), expiration of this provision and uncertainty as to whether it will be
extended impairs businesses' ability to plan ahead. The lack of predictability
is an unnecessary cost that reduces competitiveness. Accelerate Look-Through
Treatment for 10/50 Companies (Sec. 204): As I mentioned earlier, the
"look-through" rule that will simplify reporting for U.S. companies engaged in
10/50 joint ventures will not kick in until January 1, 2003. Our bill proposes
acceleration of this much-needed element of simplification to January 1, 2000.
Make Domestic Loss Recapture Rule Mirror Foreign Loss Recapture Rule (Sec. 202):
Currently, if a U.S. company experiences a loss in its foreign operations in a
given year, it may deduct that loss against U.S.-source income. If the foreign
operations turn a profit in a subsequent year, the loss is "recaptured"--i.e.,
the U.S. company is required to characterize a portion of that profit as
U.S.-source income (thus, effectively reducing its ability to
use foreign tax credits). This ensures that the company will
not receive a double benefit--first, the benefit of applying a foreign loss
against U.S. income, and second, the benefit of a
foreign tax credit on the subsequent
foreign-source income. A similar rule does not
currently apply when a U.S. company experiences a loss in U.S. operations in one
year and a profit in a subsequent year. Thus, a loss attributable to domestic
operations in a given year must be spread over worldwide income. This reduces
the loss carryover the company would have but for its foreign income, and it
reduces the limit against which the company may apply foreign tax credits. Our
bill proposes to correct this asymmetry by allowing a U.S. company in the latter
situation to characterize U.S. income in a subsequent year as foreign-source
income. Instead of suffering a double detriment as a result of a loss
attributable to U.S. operations, the detriment would be offset by an increase in
the company's foreign tax limitation in a subsequent year when U.S. operations
are profitable. In addition to the foregoing examples, and a list of other
proposals, our bill calls for the study of issues that are becoming increasingly
important as the commercial environment in which U.S. companies operate evolves.
These include: Treating the European Union as a Single Country for Tax Purposes
(Sec. 102): The anti-deferral regime in Subpart F is subject to certain
exceptions for transactions that take place within a single country. Our bill
would require the Department of Treasury to study whether the European Union
should be treated as a single country for such purposes. Interest Allocation
(Sec. 309): Our bill would direct Treasury to study current rules for allocating
interest expense between domestic and foreign operations and the effect that
those rules have on different industries. I am very encouraged by the progress
we have made to date in the area of international tax simplification. By
continuing this effort, we can bring our Tax Code up to date in a way that will
make U.S. companies and U.S. goods produced by American workers more
competitive. Those are goals on which I am sure we can all agree, and I am
committed to working with the Members of this Committee to advance those goals.
Thank you, Mr. Chairman.
LOAD-DATE: July 6, 1999
