FOREIGN PIPELINE TRANSPORTATION INCOME -- HON. JIM McCRERY (Extensions of Remarks - March 16, 1999)

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HON. JIM McCRERY OF LOUISIANA IN THE HOUSE OF REPRESENTATIVES TUESDAY, MARCH 16, 1999

Mr. MCCRERY. Mr. Speaker, today with my colleague, WES WATKINS from Oklahoma, I am introducing legislation that will clarify the U.S. tax treatment of foreign pipeline transportation income.

This legislation is needed because current tax law causes active foreign pipeline transportation income to be unintentionally trapped within anti-abuse tax rules. These rules were originally established to prevent avoidance of tax on easily movable and passive income, not on active pipeline income. In fact, when these rules were first enacted, U.S. pipeline companies were not even engaged in international activities. Now, as opportunities in the international arena arise, pipeline companies are unfairly caught within the scope of the anti-abuse rules. As such, U.S. pipeline companies are finding themselves at a competitive disadvantage, vis a vis foreign companies. In order for U.S. companies to remain competitive, it is essential that U.S. tax law not unfairly tax U.S. companies' foreign operations. The legislation that Mr. WATKINS and I are introducing today will correct this injustice.

Under the Subpart F anti-abuse rules, current taxation is imposed on certain types of earnings whether or not a dividend is actually paid. The policy behind these rules is to currently tax income which is passive in nature or which is easily moved from one jurisdiction to another. One type of Subpart F income is foreign based company oil related income (FORI). FORI includes income derived outside the U.S. from the transportation of oil and gas. This general rule, in many cases, causes current income taxation on income that is not passive or manipulable. This adverse result is slightly mitigated by two narrow exceptions, the extraction exception and the consumption exception.

Pipeline transportation income is neither passive nor easily movable, and therefore, should not be subject to these rules. Pipe location is based on where the natural resources and energy needs exist. Pipes cannot be placed just anywhere, nor once they are in place, can they be easily moved. Consequently, applying these anti-abuse rules for passive and manipulable income to active and hard to move income just doesn't make sense.

In looking at the legislative history, it is clear that Congress intended the anti-abuse rules to reach the significant revenues derived by highly profitable oil related activities that were
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sourced to the low-taxed country as opposed to the country in which the oil and gas was extracted or ultimately consumed. The intent of these rules was not to target pipeline transportation income. In fact, when the rules were being considered and then put in place, pipeline companies were not engaged in international development activities. Rather, they were focused solely on domestic infrastructure investment.

Today pipeline companies are continuing to actively pursue all development opportunities domestically. These opportunities, however, are somewhat limited. The real growth for the U.S. pipeline companies is not occurring in the international arena. These opportunities stem from fairly recent activities by foreign countries to privatize their energy sectors. Increased U.S. involvement in energy infrastructure projects will have tremendous benefits back home. More U.S. employees will be needed to craft and close these transactions. To build plants and pipelines, and to operate the facilities. New investment overseas will also result in new demands for U.S. equipment. Before these benefits can be realized, however, U.S. companies must be able to defeat their foreign competitors and win the projects. Unfortunately, current U.S. tax laws significantly inhibit the ability of U.S. companies to win such projects.

It is time we change these laws if we are to ensure that U.S. companies remain competitive players in the international marketplace. A complete review and rewrite, however, will take a significant amount of time--time we can not afford to lose. In the interim, we believe there are incremental reforms to the international tax regime that we can and should take. One step in the right direction, and one that would have a minimal impact on the FISC, is to pass our legislation that would clarify the U.S. tax treatment of foreign pipeline transportation income.

I ask my colleagues to join us in this effort to bring the current law in line with good tax policy. Let's ensure we keep America competitive in the global economy.
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