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JUNE 30, 1999, WEDNESDAY

SECTION: IN THE NEWS

LENGTH: 1673 words

HEADLINE: PREPARED TESTIMONY OF
ALAN J. LIPNER
SENIOR VICE PRESIDENT - TAXES,
AMERICAN EXPRESS COMPANY
BEFORE THE HOUSE WAYS AND MEANS COMMITTEE
SUBJECT - IMPACT OF U.S. TAX RULES
ON INTERNATIONAL COMPETITIVENESS

BODY:

Good morning, Mr. Chairman and Members of the Committee. My name is Alan J. Lipnet, Senior Vice President- Taxes of American Express Company. I am pleased to have this opportunity to testify on the effect U.S. tax rules have on the international competitiveness of our business. In addition to my oral remarks today, I have prepared a written statement that, with your permission, I would like to have entered into the official record of today's hearing.
As the chief tax officer of one of the world's leading financial services companies, I am well aware of the profound impact tax issues have on our business. In my role as Chairman of the Board of The Tax Council and through other groups such as the National Foreign Trade Council, I have discussed tax issues of this nature with several of my counterparts at other major U.S. companies. My testimony today will not focus in detail on the technical tax rules. Instead, I will try to illustrate how those tax rules can have an impact upon how our business and other U.S. businesses compete against those whose headquarters are outside the U.S.
American Express has a long history of doing business outside the United States. This is well known by anyone who has traveled overseas and bought or cashed an American Express Travelers Cheque or used an American Express Card to charge a purchase. In fact, American Express has had a strong international business presence for more than a century - or well before the 16th Amendment to the Constitution was ratified and the Federal income tax was first enacted.American Express began in 1850 as a shipping company that transported currency and other valuable items swiftly and safely to their destinations. A sizeable foreign exchange and foreign remittance business developed in the late 19th century as a service for new Americans and laid the groundwork for the Company's eventual major role in the international financial arena.
A great step in the company's international expansion came with the introduction in 1891 of the American Express Travelers Cheque. This revolutionary financial instrument, with its now familiar signature and countersignature, allowed travelers to obtain access to funds without the inconvenience of letters of credit that could be honored only within normal banking hours at specified correspondent banks in a very time consuming process. The international business expansion that followed led to the establishment of a chain of American Express off.ices - or "homes away from home" - in key cities throughout the world around the turn of the century.
Today, American Express offers its products and services in some 200 countries and territories around the world. As in the early days of its international business, the company continues to serve U.S. customers whose personal or business affairs require our financial services to be available wherever they need them. Over the years, our business has expanded to focus also upon non-U.S, customers. This is illustrated by the fact that American Express Cards are now issued in 45 different currencies around the .. world. Our major competitors overseas are banks and other financial institutions that are incorporated and have their headquarters outside the United States.
The two major features of U.S tax rules that affect our international operations are the Subpart F rules and the foreign tax credit. Both these areas were modified substantially in 1986 in ways that adversely affected both the burdens of tax compliance and our competitive position vis-a-vis non-U.S, financial services firms.
Before 1987, the Subpart F rules permitted U.S. tax to be deferred on income derived in the active conduct of a banking or financing business until that income was distributed to a U.S. shareholder. In repealing deferral for active financing income,Congress focused on U.S.-controlled firms operating in tax havens and earnings that were manipulated for tax reasons. What Congress ignored was that the majority of U.S.controlled banks, finance and insurance companies operate overseas through a substantial presence in key markets rather than as tax haven "paper" companies. These firms compete head-to-head with foreign-controlled companies whose home countries do not impose tax on unremitted, reinvested earnings. Also ignored was the impact of foreign banking or insurance regulations that often require these businesses to be operated by a locally incorporated subsidiary subject to local regulatory control.
While U.S taxes might appear to be imposed at a relatively moderate nominal rate compared to the rates imposed by foreign countries, in practice U.S. taxes frequently exceed the effective foreign tax rate due to more generous foreign rules for such items as bad debt deductions or certain preferential income. When U.S-owned firms are subject to a higher tax burden than their foreign competitors, this can obviously affect such factors as how much to invest in business development, how products are priced and even whether or not to invest or continue to do business in a foreign market. Such tax factors have influenced some of my company's business decisions:
- American Express purchased a Swiss bank in 1983. Its business operations were exclusively outside the U.S. and its customers were not U.S. persons. Its effective tax rate of about 9% increased to 40% in 1987 when the changes in the Subpart F rules made its earnings subject to U.S. tax. Our subsidiary thus became subject to a much higher tax rate than our foreign competitors solely because of its U.S. ownership. We disposed of our controlling interest in the Swiss bank in 1990.
- We considered purchasing a U.K. life insurance company. Although its nominal local tax rate was about 34%, we were faced with the prospect of an effective tax rate of over 200% because of our inability to defer U.S. tax on its profits and disparities between the tax base under U.S. and foreign tax rules. We did not go forward with the purchase.Congress has recently made significant progress in addressing some of these concerns by restoring deferral of U.S. tax on certain active foreign financial services income. These new rules have specifically recognized that finance companies other than banks are eligible for deferral in appropriate cases. Unfortunately, the new rules expire at the end of this year. We hope Congress will enact a longer-term solution rather than a mere one-year extension of the current rules since our business planning and investment decisions require a stable set of rules without the uncertainty presented by year-to-year changes. We appreciate that a substantial number of the members of this committee have co-sponsored H.R. 681, legislation introduced by Representatives McCrery and Neal to provide greater certainty.
Turning to the foreign tax credit, the present separate limitation or "basket" rules often make arbitrary distinctions between certain types of income earned in an integrated business. For American Express, a noteworthy example concerns our Travel business, which the tax regulations consider to be separate from and not incidental to our Card and Travelers Cheque activities. As a result, a typical transaction with a single customer handled by a single employee in an American Express Travel office overseas is considered to give rise to income (and related taxes) in two separate foreign tax credit baskets. Another example is the so-called "high withholding tax interest" basket, which was intended to curb cross-border loans that were not economically sound on a pre-tax basis. By discouraging cross-border lending by U.S. financial institutions, the tax rules have given foreign-controlled lenders a tax-based competitive advantage in financing developing economies around the world. A third example is the separate basket for "joint ventures" or foreign corporations with between 10% and 50% ownership by U.S. firms. We support proposals to accelerate a repeal of these rules that inhibit U.S. firms from expanding business overseas by investing in strategic alliances with foreign partners.
Another area of concern to American Express is the excise tax on the purchase of frequent flyer mileage awards from airlines. Some have interpreted this tax to apply not only to frequent flyer points to be awarded to U.S. customers, but also to any points purchased anywhere in the world, from any airline, and for any customer, if there is a mere possibility that the points could be used to obtain an airline ticket to or from the U. S.Since foreign governments and companies have objected to this extraterritorial reach of the U.S. excise tax, the practical effect is that, absent rigorous global enforcement, the tax burden will fall only upon U.S. companies doing business overseas and the customers of U.S.-based airlines.
We appreciate the introduction earlier this month of H.R. 2018, the international tax simplification bill, by Representatives Houghton and Levin. This bill would address several of the problems I have highlighted above and would help simplify our complicated international tax rules and encourage competitiveness.
In conclusion, I would like to thank the Chairman and the Committee for their interest in addressing the impact of U.S. tax rules on international competitiveness. The business activities American Express conducts at its key locations in the United States, including New York, Minneapolis, Phoenix and Fort Lauderdale, serve our global operations and not just the U.S. market. Assuring a strong competitive position for our business overseas has a clear positive effect on our U.S. business and employment base. In addition, ensuring a strong position for the financial services sector reinforces a competitive strength for the U.S. economy as a whole, as indicated by the positive contribution the service sector makes to our overall balance of payments situation.
I would be pleased to respond to any questions the Chairman or Members of the Committee may have.

END

LOAD-DATE: July 1, 1999

Document 39 of 113.


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