INTRODUCTION OF LEGISLATION -- HON. JIM McCRERY (Extensions of Remarks - April 14, 1999)

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HON. JIM McCRERY OF LOUISIANA IN THE HOUSE OF REPRESENTATIVES WEDNESDAY, APRIL 14, 1999

Mr. MCCRERY. Mr. Speaker, once again, I am introducing legislation to remedy a problem brought to my attention by the U.S. utility industry involving the taxation of foreign operations of U.S. electric and gas utilities. These firms were prohibited for many years from doing business abroad until the National Energy Policy Act (NEPA), enacted in 1992, removed that prohibition. With passage of NEPA, and as some foreign governments began privatizing their national utilities and increasing energy demands necessitated the construction of new facilities to fulfill the new capacity, U.S. utilities began to make foreign investments. Since 1992, U.S. utility companies have made significant investments in utility operations in the United Kingdom, Australia, Eastern Europe, and South America.

Foreign utilities are particularly attractive investments from a U.S. viewpoint. They are not ``runaway plants'', but rather stimulate job creation in the U.S. in design, architecture, engineering, construction and heavy equipment manufacturing. When the subsidiary of an U.S. utility builds generating plants, transmission lines, or distribution facilities to serve its foreign customers, these most often come from U.S. suppliers. Given that the U.S. energy market is mature, overseas investments are a good way for U.S. utilities to diversify and grow, to the benefit of their employees and their shareholders.

Unfortunately, the Internal Revenue Code penalizes these investments by subjecting them to double taxation. Under the foreign tax credit rules, the interest expense of a U.S. person is allocated in part to its foreign operations based on the theory of the ``fungibility of money.'' The allocation formula in Internal Revenue Code section 864 requires U.S. domestic interest expense to be allocated based on the value of the company's foreign and domestic assets. If a firm has mature (depreciated) U.S. assets and newly acquired overseas assets, like many U.S. utilities, a disproportionate amount of U.S. interest expense will be allocated abroad. The result is a very high effective tax rate on that foreign investment and a loss of U.S. foreign tax credits. Rather than face this double tax penalty, some U.S. utilities have actually chosen not to invest overseas and others have pulled back from their initial investments.

One solution to this problem is found in the legislation that I am introducing today. Our remedy is to exempt the debt associated with a regulated U.S. utility business (the furnishing and sale of electricity or natural gas) from the interest allocation rules of Internal Revenue Code section 864. The proposal would allocate and apportion interest expense attributable to qualified infrastructure solely to sources within the United States. ``Qualified infrastructure indebtedness'' would be defined as debt incurred in a corporation's trade or business of furnishing or selling electricity or natural gas in the United States. Further, the rates for such furnishing or sale of electrical energy must be regulated or set by the Federal Government, a State, the District of Columbia or a political subdivision thereof.

I am also aware that my colleagues on the Committee on Ways and Means, Congressmen HOUGHTON and LEVIN, together with Senators HATCH and BAUCUS, have been leading a multiyear effort to reform the international tax laws. I am a strong supporter of that effort, which is intended in part to rectify the disconnect between our Nation's favorable trade laws and our tax laws, which too often penalize American firms wanting to expand into foreign markets. The problem of interest allocation has not yet been addressed in the Houghton-Levin legislation, but I strongly urge that this provision be included in any foreign tax reform bill introduced in the next Congress. Further, because the process of getting legislation enacted into law properly involves consultation with Treasury, the affected industry, and the bar, we encourage those with subject matter expertise in this area to review our bill. I believe my bill reflects the best thinking now available on how to address this serious problem, but we are certain that further reflection will yield even better for U.S. utilities attempting to invest overseas.
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