Miscellaneous international legislative proposals.

On June 23, 1993, Tax Executives Institute submitted the following comments to the Subcommittee on Select Revenue Measures of the House Committee on Ways and Means concerning several miscellaneous tax proposals affecting international operations. The Institute's comments were submitted in response to a request from Subcommitte Chairman Charles Rangel, and were prepared under the aegis of TEI's International Tax Committee whose chair is Lisa Norton of Ingersoll-Rand Company.

Background

Tax Executives Institute is the principal organization of corporate tax professionals in North America. Our approximately 4,900 members represent more than 2,400 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. TEI is firmly committed to maintaining a tax system that works - one that is consistent with sound tax policy, one that taxpayers can comply with, and one in which the IRS can effectively perform its audit function.

H.R. 1401: Modification of Subpart F Rules

Under section 954 of the Internal Revenue Code, a U.S. parent company is currently taxed on sales or services income earned outside a controlled foreign corporation's (CFC's) home country. Income earned within the CFC's home country, however, is generally exempt from current taxation under Subpart F of the Code (the "same country" exception).

Introduced on March 18, 1993, by Representative Sam Gibbons, H.R. 1401 would treat the unified European Community (EC) as a single economic unit for purposes of the same country exception. Under the bill, a U.S. parent company would not be subject to current taxation with respect to the earnings of a controlled EC-country subsidiary derived from sales to customers located within another EC country.

TEI endorses the proposal to treat the EC countries as a single country for purposes of the same-country exception. The consolidation of the 12 countries comprising the EC into one economic unit last year presented U.S. companies with a competitive challenge. The initiative allowed EC-based companies to consolidate their European business opportunities, leading to a reduction of operating costs. Because of the rigidity of the same country exception, however, U.S. companies have been forced to choose between cost-efficient consolidation of operations in Europe or the loss of their deferral of taxation on income earned in the EC.(1) Treating the EC countries as a single unit would permit U.S. multinationals to consolidate their European subsidiaries into one efficient operation in a cost-competitive manner.

Sourcing of State

Income Taxes

Section 861 of the Code generally requires taxpayers to allocate and apportion their taxable income and deductions among sources inside and outside the United States. Treas. Reg. [section] 1.861-8(e)(6)(i) provides that the deduction for state income and franchise taxes is definitely related, and thus allocable, to the gross income with respect to which those taxes are imposed. The Treasury Department's position is that activities in a state may generate both domestic- and foreign-source income, and thus the deduction for state income and franchise taxes must be allocated among that income. See Preamble to T.D. 8337 1991-1 C.B. 92, 93. This position, however, is very controversial on both constitutional and administrative grounds.

The Subcommittee is considering a proposal to permit corporations to allocate to U.S.-source income all deductions for tax payments made to the states.

TEI endorses this proposal. The workload burden created by the Treasury regulations is tremendous, requiring the collection and analysis of additional data that are not maintained for any other purpose. Moreover, the regulations are based on controversial theoretical assumptions. The basic premise of the regulations - that states may and do tax foreign source income - is wrong; the state income tax is imposed on domestic business activities and represents a cost of doing business within the state. The proposal before the Subcommittee is the proper tax and economic result and should be adopted.

Foreign Tax Credit Carryover

Section 904(c) of the Code currently provides that any foreign tax credits (FTCs) not used against U.S. tax in the current year may be carried back to two years and forward five. The rules for net operating losses under section 172(b), in contrast, provide for a three-year carryback and a fifteen-year carryforward.

The Subcommittee is considering a proposal to extend the period to which excess FTCs may be carried forward from five to fifteen years.

TEI endorses the proposal. In addition, we further recommend that the carryback period for such credits be extended from two to three years. The effect of the shorter time periods has been to cause FTCs to expire unused, thereby frustrating the purpose of the credit - the prevention of double taxation. There is no readily apparent policy reason for the harsher rules in the FTC area. For example, when originally enacted as part of the 1954 Code, the carryback/carryforward provisions in respect of net operating losses and the FTC were identical - two years back and five years forward. Although the rules have been liberalized several times for net operating losses since 1954, the FTC provisions have been ignored. The proposal would remedy this oversight and should be adopted.

Conclusion

Tax Executives Institute appreciates this opportunity to present our views on these international proposals. If you have any questions, please do not hesitate to call me at [phone] or Timothy J. McCormally of the Institute's professional staff at [phone].

(1) This situation is exacerbated by the proposed legislation to restrict the same country exception.