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Statement on factors affecting U.S. international competitiveness.

Tax Executives Institute (TEI) is the principal association of corporate tax executives in North America. Our approximately 4,700 members represent more than 2,000 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. As a professional association, 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 Internal Revenue Service can effectively perform its audit function. TEI is pleased to submit the following comments in response to the Committee on Ways and Means hearings on the factors affecting the international competitiveness of U.S. companies.




In announcing the hearings on international competitiveness, Chairman Rostenkowski signalled the Ways and Means Committee's intent to "examine our Nation's ability to meet the challenges of aggressive international competition" and to "assess the relative competitiveness of the U.S. economy and to examine long-term trade and tax strategies which might be taken to improve our country's competitive position." Thus, the Committee has undertaken an initiative quite similar to the quality processes that have been championed by leaders in the business community: it has sought to address the question of the Nation's productivity by establishing benchmarks, setting standards, and empowering managers and workers to identify and take remedial steps.

TEI commends the Committee for undertaking to analyze the effect of U.S. tax law on foreign investment and the use of the foreign tax credit to promote competitive parity between U.S. and foreign-based corporations. The Institute has long been concerned that the complicated U.S. tax system impairs the ability of U.S. corporations to compete domestically and abroad. In crafting tax legislation, Congress must balance myriad, sometimes conflicting interests: national goals with respect to international trade, competitiveness, and economic growth; prevailing economic conditions; revenue considerations; and a healthy respect for what is "do-able" (by both the government and taxpayers). Regrettably, the current tax system contains numerous examples where the fulcrum has been misplaced and an improper balance struck. Too often, the burdens generated have been disproportionate to the relative policy and revenue goals served by the statutory provisions.

Although attention has recently been focused on the complexity of the tax law, previous efforts to simplify the tax code for business taxpayers -- particularly in the international tax area -- have not been especially effective. The current provisions embody a hodgepodge of policy decisions made over the past 45 years. During the last decade in particular, lip service has been paid to avoiding the incidence of double taxation, but legislation has chipped away at the primary weapon for safeguarding that principle: the foreign tax credit. In addition, a vast array of provisions has been enacted without adequate thought to their long-term effect on the economic viability of U.S. businesses competing in a global marketplace. For example, U.S. taxpayers must grapple with essentially two systems of taxation: the regular tax and the alternative minimum tax. Each year, taxpayers must struggle with the problems encompassed by the two taxing schemes -- problems that are not faced by foreign corporations. (1) Such duality represents a failure of both tax policy and administration, which is exacerbated by similar (but not always identical) rules at the state and local level.

Where U.S. tax rules restrict the ability of U.S. companies to operate in a cost-efficient manner, the overall competitive position of the Nation suffers. In a perfect world, taxing regimes would not influence a decision to operate a business in a certain country or under a certan form. The world and the U.S. tax system, however, are far from perfect. U.S. tax rules can -- and do -- skew the manner in which U.S. corporations operate overseas. Congress must recognize that taxpayers often adjust their activities to minimize their tax liability and that the adjustments not infrequently lead to their engaging in inefficient activities. (2) We submit that tax laws should not drive business decisions.

Stated simply, foreign corporations do not have to contend with the plethora of administrative and tax compliance burdens shouldered by U.S. corporations. Major substantive differences between U.S. and foreign tax laws include:

* U.S. tax law limits the use of the foreign tax credit by requiring taxpayers to allocate their foreign-source income to multiple "baskets" for purposes of section 904 of the Code. In contrast, foreign-based corporations are generally not subject to such severe restrictions on the use of their foreign tax credits.

* U.S. tax law requires certain deductions (such as general and administrtive, interest, and research expenses) to be allocated between domestic and foreign sources and among the foreign tax credit "baskets" under section 861 of the Code; because many corporations have "excess" foreign tax credits, the allocated expenses effectively become nondeductible. In contrast, foreign-based corporations are permitted a full deduction for such expenses by their home countries; moreover, because they are subject to U.S. tax only on their U.S.-based income, foreign-based companies are not shouldered with the adverse administrative and tax effects that the Code's international provisions (in particular, those relating to the allocation and apportionment of interest) have on the domestic operations of U.S. companies.

* U.S. tax law imposes a current tax on certain types of income earned by foreign subsidiaries under Subpart F of the Code. In contrast, foreign-based corporations are permitted to defer tax on such income until it is repatriated to the home country. Indeed, many countries (such as Canada and the Netherlands) do not tax certain types of foreign source income at all.

The sheer complexity of these provisions places an horrendous administrative burden and cost of compliance on U.S. corporations and their worldwide staff (as well as the government) that are not borne by foreign-based corporations. Thus, even without regard to the tax effect of the rules, U.S. corporations must shoulder monstrously complex and expensive data collection and analysis burdens. The uncertainty and unpredictability resulting from the tax law's complexity magnifies the administrative problems. Taxpayers should be able to calculate the tax consequences of a given transaction. With more and more congressional delegations of authority to the Treasury Department and the resulting delays in guidance, however, such specificity may be literally impossible. That the administrative audit process involving the Internal Revenue Service, as well as the guidance process, drags on for years only compounds the lack of certainty.

TEI believes that the professed desire to close "tax pinholes" does not of itself justify the substantive, transactional, andtransitional complexity set forth in the tax code. We further submit that the complicated nature of some provisions (e.g., the foreign tax credit separate "basket" rules) should give their advocates pause, for the policy justification for a provision may well collapse under the weight of the administrative and compliance burdens. Congress can -- and must -- take steps to reduce the heavy compliance burden imposed on U.S.-based multinational corporations.

The changing global economy has impelled U.S. corporations to review each and every aspect of their own operations with an eye on productivity and competitiveness, thereby assuring that each step in the process "adds value" to the finished product. The Nation's international tax rules could also benefit from this quality analysis. Policymakers must identify, and adhere to, clear principles of sound taxation, rather than clinging to band-aid legislation to address fanciful abuses. The Commitee's hearings are a salutary step in the battle against complex and anti-competitive tax rules.

TEI is pleased to have this opportunity to offer its recommendations for a simpler and more competitive tax system. Our goal is simple: to make the tax legislative process more sensitive to "real world" limitations and constraints. Stated simply, we believe that tax proposals must be screened for their administrability and ease of compliance and that, in this endeavor, the views of both taxpayers and the IRS must be sought. Congress and the Administration alike must recognize that compliance is not without its costs and cannot be achieved instantaneously by a flick of the computer switch. TEI fervently hopes that by scrutinizing the administrability of tax law proposals in advance, Congress can minimize compliance problems and thereby enhance the ability of U.S. corporations can compete more effectively in the international marketplace.


The tax law's complexity can best be attacked on an incremental basis. Discrete issues can be tackled and progress made by according administrability and compliance concerns a higher priority in the legislative process. Although provisions such as the foreign tax credit rules will never be truly simple, compliance burdens can be eased considerably through the enactment of safe harbors, de minimis rules, and provisions that alleviate the volume of paperwork and technical computations. As Chairman Rostenkowski recognized in the introduction to the publication of the Committee's simplification study last year:

Although efforts to simplify discrete sections of the tax code do not create headlines, I remain convinced that the Committee on Ways and Means and the Congress have a responsibility to pursue meaningful tax simplification, both to ease the compliance burdens facing many taxpayers and to maintain the viability of our voluntary system of taxation.

In the comments that follow, TEI focuses on two areas where steps could be taken to increase U.S. competitiveness by reducing taxpayer compliance burdens: the foreign tax credit provisions and the tax deferral rules. We submit the adoption of TEI's recommendations would benefit not only taxpayers, but also the government without sacruficing sound tax policy goals. (3)

A. The Erosion of the

Foreign Tax Credit

Because the United States taxes U.S. corporations on their worldwide income, the Internal Revenue Code permits the U.S. parent to claim a credit against U.S. tax for any tax paid to a foreign government on its foreign income up to the U.S. tax liability on that type of income. A foreign tax credit (FTC) is allowed for foreign taxes paid not only on income derived from direct operations (conducted through a branch office), but also on dividends from foreign subsidiaries paid out of earnings that have been subject to foreign taxes (the deemed-paid or indirect credit). The goal of the FTC is simple: to avoid double taxation of the same income by the country of origin and the United States.

In recent years, U.S. tax laws have eroded the effectiveness of the FTC in alleviating double taxation. The Tax Reform Act of 1986 substantially restricted the availability of the FTC by requiring certain types of income to be separated into several "baskets" for purposes of calculating the FTC limitation. The use of multiple baskets has adversely affected the ability of the FTC to eliminate -- or, at least, minimize -- double taxation.

In addition, the separate limitations have increased the complexity of calculating the FTC, thereby substantially increasing the burden on U.S. corporations to comply with the law. Although we appreciate the revenue constraints facing the nation, we believe that significant reforms are necessary in this area not only to lessen compliance burdens, but to make U.S. companies more competitive. Examples of areas that are ripe for reform follow.

1. Dividends from Noncontrolled Corporations. The tax law now requires that dividends from each 10-percent to 50-percent owned foreign subsidiary (a so-called noncontrolled section 902 company) must be separately calculated and placed in a separate FTC limitation "basket." See I.R.C. [section] 904(d)(1)(E). Consequently, taxpayers face hundreds (or, in some instances, even thousands) of separate FTC calculations for both corporate and minimum tax purposes in respect of their noncontrolled foreign corporations. What's more, because of the relationship between all the baskets, the adjustment of a single item (e.g., a nominal adjustment in the earnings and profits (E&P) of one company) will have a rippling, flow-through effect on all the others -- not only for the current year, but for carryback and carryforward purposes as well. With respect to large U.S. multinational groups, the number of potential adjustments is mind-boggling. (4)

To alleviate these burdens, TEI recommends that the tax law be amended to permit all dividends from noncontrolled section 902 corporations to be aggregated and placed in a single basket. Alternatively, only two baskets should be required in respect of such dividends: one for dividends from noncontrolled section 902 corporations whose underlying earnings are subject to a local country statutory rate equal to or greater than 90 percent of the U.S. rate on ordinary income and another for all other noncontrolled section 902 corporation dividends. Another approach would be to allow taxpayers to elect to place any dividends in the general limitation basket subject to a look-through rule similar to that in section 904(d)(3) (in respect of controlled foreign corporations). (5)

2. Translation of Deemed-Paid Credit. Section 986(a)(1) of the Code provides that, for purposes of determining the FTC, foreign taxes are translated into dollars using the exchange rate in effect when the foreign taxes are paid. This rule applies generally to both direct and indirect credits.

Prior to the enactment of the Tax Reform Act of 1986, deemed-paid foreign taxes arising with respect to dividends from foreign corporations were translated at the exchange rate in effect on the date of distribution, in accordance with the decision in Bon Ami Co., 39 B.T.A. 825 (1939). Accumulated profits were translated using the spot rate on the dividend date. By using the same rate to translate foreign taxes and accumulated profits, the Bon Ami approach preserved the historical ratio between those two items.

Section 986(a)(1) was added to the Code to eliminate a perceived inconsistency between the rules applicable to taxpayers operating through branches and those operating through foreign subsidiaries. In addition, Congress believed that "the purpose of the FTC would be served more properly by fixing the dollar cost of foreign taxes when those taxes are paid." Staff of the Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, 99th Cong., 2d Sess. 1091 (1987). Although foreign taxes are translated into dollars as of the date the taxes are paid, accumulated profits are still translated using the spot rate on the dividend date.

The 1986 law change exponentially increased a U.S. corporation's administrative burdens in respect of translating foreign taxes. Under prior law, taxpayers were required to convert tax payments only when the foreign affiliate paid a dividend (which frequently may not even be on an annual basis) or when there was deemed income under Subpart F of the Code. Section 986(a)(1), however, requires taxpayers to collect and analyze the information necessary to compute the dollar values for each and every payment and refund of tax. Multinational corporations may have hundreds of foreign subsidiaries and operate in countries (such as Japan and Germany) requiring hundreds of income taxes payments. In addition, the application of section 986 in respect of foreign income taxes paid after the end of the U.S. taxpayer's taxable year will retroactively affect the calculation of the U.S. pool of earnings and profits. For example, some jurisdictions provide that a corporation's taxes in respect of a given year are not due until the following or subsequent years. Under section 986, the foreign income tax liability is to be translated using an unknown future rate (i.e., the rate in effect in the subsequent year). At a minimum, therefore, U.S. law requires the continual recalculation of the earnings and profits pool and potentially the filing of amended returns.

Multinational corporations find it difficult, if not literally impossible, to comply with the statutory requirements for translating their myriad foreign tax payments. To our mind's eye, the administrative burdens engendered by section 986 are totally disproportionate to any practical or policy purpose that may be served. The simplest and easiest way to remedy this problem would be to return to the Bon Ami rule -- a solution that would translate taxes in the same manner as all other costs of doing business.

Last year, the staff of the Joint Committee on Taxation asked the Institute to suggest a possible "compromise" position between the Bon Ami rule and section 986. Because of our desire to bring some (albeit not a full measure of) simplification to the area, we suggested that foreign income taxes be translated for purposes of the deemed-paid credit at the rate in effect on the last day of the corporation's taxable year in respect of which the tax is paid. For taxpayers operating in a hyperinflationary country, we recommended that an election be provided to use an average of the rates in effect on the first and last day of the corporation's taxable year.

Since TEI submitted its recommendation to the Joint Committee staff, other solutions have been proposed. In the Senate, Senator Baucus has introduced the Foreign Tax Simplification Act of 1991 (S. 936) which would require foreign taxes to be translated at the same exchange rate as the income to which the taxes relate. Another approach would to translate foreign income taxes at the average exchange rate in effect for the year that the foreign taxes accrue for FTC purposes.

Any one of these proposals would be preferable to the current "date-of-payment" system. (TEI would be pleased to comment on other possible approaches.) In our view, the key is not which of these alternatives is adopted, but rather that the translation of foreign taxes be simplified. Stated simply, section 986 is an area where an uncomplicated, administrable rule is desperately needed and clearly available.

3. Uniform Capitalization Rules. One area that increases the compliance and competitive burdens of all U.S. corporations is the uniform capitalization rules which require the capitalization of costs incurred in manufacturing or constructing tangible property. These accounting rules, which were enacted in 1986, are the most comprehensive costing provisions ever approved by Congress, and the price taxpayers have had to pay to comply has been staggering. The provisions require the allocation and apportionment of items such as costs incident to purchasing inventory; repackaging, assembly, and other costs incurred in processing goods; costs of storing goods; and the portion of the general and administrative costs allocable to the foregoing functions. I.R.C. [section] 263A. In addition, interest costs are subject to capitalization where the interest is allocable to the construction of real property or to production of personal property that is long-lived property or requires an extended period to produce. See I.R.C. [section] 263A(f). The uniform capitalization rules apply to production costs incurred by all domestic corporations; although the statute is silent on whether and the extent to which section 263A applies in the foreign context, the IRS and Treasury have explicitly extended the rules to overseas operations (though some limited relief is possible where a taxpayer's domestic and foreign operations are similar).

The uniform capitalization rules create tremendous administrative and compliance burdens for U.S. companies, principally in the computation of indirect foreign tax credits under section 902 of the Code. This is especially the case with respect to the capitalization of interest under section 263A(f). (6) Because all post-1986 earnings are pooled for purposes of this section -- and capitalization only postpones the deduction -- the section 263A amount becomes increasingly insignificant over time. The existence of excess FTCs has a further averaging effect. Thus, the application of the rules in the foreign context produces relatively little revenue -- certainly not enough to justify the astounding cost of compliance on taxpayers. Indeed, for some corporations the application of the uniform capitalization rules in the foreign context may actually reduce their tax liability, even without regard to the deductibility of the cost of compliance.

TEI believes that the extension of section 263A to foreign subsidiaries is unwarranted. For these reasons, we recommend that the statute be amended to specifically exempt controlled foreign corporations from its reach.

B. The Erosion of the Tax

Deferral Principle

1. Subpart F. The United States generally does not tax the foreign income of foreign subsidiaries of U.S. corporations when earned. Rather, the tax on foreign income is "deferred" until the income is repatriated through the payment of dividends to the parent corporation. There are, however, several exceptions to the deferral rule. Under Subpart F of the Code, certain types of income received by controlled foreign corporations (CFCs) will be currently taxed as a constructive dividend to U.S. shareholders. Subpart F income is generally income that is considered relatively "movable" from one taxing jurisdiction to another and that is subject to low rates of tax. An example of Subpart F income is "foreign base company income" (FBCI) which includes "foreign base company sales income" and "foreign base company services income." "Foreign base company sales income" is income derived from a related party involving a sale or purchase of a product that is manufactured, produced, grown, or extracted outside the CFC's country of incorporation for use or consumption outside that country. "Foreign base company services income" is income derived from a related party from services performed outside the CFC's country of incorporation. See I.R.C. [subsection] 954(a), (d), and (e). Thus, sales and services income earned outside the CFC's home country is taxable, while such income earned inside a CFC's home country is exempt from current taxation under Subpart F (the "same-country exception").

There are other exceptions to Subpart F's anti-deferral provisions. Prior to the Tax Reform Act of 1986, the tax law provided that certain categories of FBCI otherwise subject to current taxation under Subpart F may be excluded if the taxpayer establishes that reducing taxes was not a "significant purpose" of earning the income through a CFC. The subjective "significant purpose" test was supplanted in 1986 by an objective test; section 954(b)(4) now provides that income otherwise taxable under Subpart F may be excluded if the taxpayer establishes that such income was "subject to an effective rate of tax imposed by a foreign country greater than 90 percent" of the U.S. tax rate. This "high-tax exception" was deemed appropriate inasmuch as Subpart F was designed to prevent taxpayers from shifting income into tax-haven countries.

As a result of the 1986 Act amendment to section 954(b)(4), many corporate groups not previously taxable on their foreign base company sales and services income are now subject to taxation under Subpart F. Although these companies may be operating in countries with high statutory rates of tax, they may not qualify in any given year for the high-tax exception because of differences between tax and accounting rules applicable in foreign countries (e.g., with respect to depreciation methods or loss carryforwards). The limited scope of this statutory provision is exacerbated by the temporary regulations providing that income is subject to the high-tax exception only if the income was subject to creditable taxes imposed by the foreign country at an effective tax rate greater than 90 percent of the U.S. rate and such taxes were paid or accrued with respect to the item of income. See Temp. Reg. [section] 1.954-1T(d). Thus, income subject to a high statutory rate of tax in a foreign country may be currently taxed under Subpart F because the effective tax rate on such income is less than 90 percent of the U.S. rate. Because the determination of the effective tax rate is made on a yearly basis, taxpayers generally cannot accurately predict whether they will satisfy the high-tax exception each year. This uncertainty alone adds to U.S. taxpayers' compliance burdens and compounds the anti-competitive nature of Subpart F.

The limited nature of the relief provided by the same-country and the high-tax exceptions is underscored by the changes now occurring in Europe. By the end of 1992, the European Community (EC) will have created a single market comprised of 12 countries that will inevitably result in the consolidation of European business opportunities. The resulting reduction of operating costs will almost certainly enhance the competitiveness of EC-based corporations. Because of the rigidity of the same-country exception and limited scope of the high-tax exception, however, U.S. multinationals may be forced to choose between cost-efficient consolidation of operations in Europe or loss of their deferral of taxation on income earned in the EC. See J. Salmon and F. Gander, Refining Subpart F for the European Community, 45 Tax Notes 1011, 1011-12 (Nov. 20, 1989).

There are several solutions to removing the artificial barrier of Subpart F. One proposal would be to exclude foreign base sales and services income from the definition of FBCI under Subpart F. This would allow U.S. corporations to compete on a level playing field in Europe and elsewhere.

Another solution (and perhaps the simplest) would be to treat the EC member countries as a single country for purposes of the same-country exception. This would permit U.S. multinationals to consolidate their European subsidiaries into one efficient operation for purposes of the single-country exception.

A third suggestion is to reduce the threshold in the high-tax exception from 90 to 80 percent. Legislation introduced in May by Congressman Gibsons (H.R. 2277) would effect this result. Under the bill, net operating losses occurring prior to the date of enactment would not be taken into account for purposes of calculating the 80-percent test. At a minimum, the high-tax exception should be changed from a test focusing on the taxpayer's effective rate of taxation to one focusing on the taxpayer's statutory rate of taxation. This amendment alone would bring a significant measure of certainty into the high-tax exception.

Each of these proposals recognizes that Subpart F creates tremendous practical and anti-competitive problems for U.S. companies and endeavors to ameliorate the problems to a greater or lesser extent (based in no small measure on the "price" Congress is willing to pay to enhance U.S. competitiveness). The underlying purpose of the Subpasrt F rules is, after all, to remove tax law considerations from business decisions. A rational revision of the tax laws to encourage competition abroad requires that the Subpart F rules be reevaluated and that creative solutions be explored. TEI would be pleased to assist the Committee in reviewing any proposals for their administratibility and compliance burdens.

2. Passive Foreign Investment Companies. Although the passive foreign investment companies (PFIC) provisions of the Code, contained in sections 1291 through 1296, are not technically part of the Subpart F provisions, they overlap with the Subpart F rules to tax active overseas business operations. The PFIC rules were intended to remove the economic benefit of tax deferral and the ability to convert ordinary income to capital gain which was available to U.S. investors in foreign investment funds. In addition, in enacting the PFIC rules Congress was also concerned that the tax rules not provide incentives to make investments outside the United States.

Unfortunately, when the PFIC provisions were enacted, the definition of a PFIC was so broad it resulted in the classification of many corporations with active businesses (and substantial passive income or assets) as PFICs (even in situations where the foreign corporation is subject to high rates of foreign tax). The PFIC rules stand as an excellent example of overkill -- taxing not only passive income but also the operating income of U.S.-owned foreign corporations. After all, controlled foreign corporations are already subject to tax on their passive income under Subpart F of the Code.

Pursuant to section 1296 of the Code, a foreign corporation is a PFIC if, for any taxable year, either (i) 75 percent of its gross income consists of passive income, or (ii) at least 50 percent of the average value of its assets produce, or are held to produce, passive income. In addition, section 1296(c)(1) contains a look-through rule providing that if a foreign corporation owns 25 percent of the value of the stock of another corporation, such foreign corporation is treated as if it held its proportionate share of the assets of such other corporation and received directly its proportionate share of the income of such other corporation.

Combined with the look-through rule, the gross-income and the assets tests create a tremendous compliance burden for corporate taxpayers. First, corporate taxpayers must analyze both the income and assets of their active foreign subsidiaries. In addition, because of the look-through rule, the income and assets of lower-tier subsidiaries must be attributed to higher-tier subsidiaries, thereby compounding and complicating the analysis process.

There are also definitional problems with respect to both tests. For example, the income test is based upon gross income. An operating company could realize a loss from operations but, because it has passive income, be classified as a PFIC. The asset test is cumbersome because corporate taxpayers must periodically analyze the assets of their foreign subsidiaries to see if such subsidiaries meet the definitional test. Since the test is one of "average percentage," this analysis cannot be done on a year-end basis.

Even a corporation with a modest number of active subsidiaries is required to devote substantial time to analyzing the applicability of the PFIC rules. Such a compliance burden is not warranted, particularly in connection with CFCs whose shareholders must currently include the CFCs passive income in their taxable income under Subpart F Thus, TEI believes that CFCs should be exempted from the reach of the PFIC provisions. Another approach is set forth in S. 936 (Senator Baucus's bill), which would replace the gross income test with a gross receipts test.


Tax Executives Institute appreciates this opportunity to present its views on the competitiveness of the U.S. tax law to the Committee and would be pleased to answer any questions you may have about its positions. In this regard, please do not hesitate to call either Michael J. Bernard, TEI's President, at (703) 846-2359 or Timothy J. McCormally of the Institute's professional staff at (202) 638-5601.

(1) For example, taxpayers must deal with several depreciation schemes: regular tax, AMT, and adjusted current earnings, as well as ACRS, MACRS, and even ADR.

(2) For example, the Code's asymmetrical treatment of taxpayers (e.g., allocating certain types of income to U.S. sources but allocating associated expenses to foreign sources) may heighten the complexity by prompting the development of complicated financial products or the structuring of intricate transactions in order to minimize the harsh and unfair effects of such treatment. Those financial products or transactions in turn may spawn a further legislative or regulatory response, which gives rise to even more sophisticated products or transactions. Rather than perpetuating the vicious cycle of thrusts and barriers, Congress should enact even-handed provisions in the first instance.

That taxpayers modify their actions (or the structure of their enterprise) in order to avoid the harsh effects of the tax laws is not reflected in the revenue estimates developed to support tax law proposals. The behavioral and structural changes reduce the revenue generated by particular proposals; in other words, not only do the proposals often encourage inefficient taxpayer behavior, but they fail to raise the projected revenue.

(3) TEI has limited its comments to recommendations that would make the existing tax rules easier to comply with for U.S. corporations, thereby reducing their compliance costs and concomitantly enhancing their ability to compete internationally. We believe that these recommendations can be adopted without undermining the integrity of the tax system established by Congress. We have refrained from advocating fundamental changes in the Code, such as a repeal of the foreign tax credit limitation or the Subpart F provisions. It should be recognized, however, that either move would obviously make U.S. corporations measurably more competitive.

(4) Taxpayers could avoid the burdens associated with the "10-to-50" rules by electing to operate as a partnership rather than a corporation. Such a decision, however, would spawn its own set of complexities and necessitate the taxpayer's forgoing to limited liability inherent in the corporate form. More to the point, a taxpayer's decision to operate in partnership form may place it at a disadvantage in negotiating (and participating) with foreign-based partners since those partners would in no event have to concern themselves with the 10-to-50 regime.

(5) We note that Senator Baucus has introduced a bill in the Senate (S. 936) which would permit taxpayers to elect a look-through rule for dividends from noncontrolled section 902 companies; taxpayers not making the election would be permitted to aggregate such dividends in one basket.

(6) The IRS's interpretation of section 263(f) in the foreign context is doubly troublesome because it is based on a fiction. IRS Notice 88-99 presumes, for example, that a company borrowsw money when in fact the funds are borrowed by, and secured by the assets of a second related company; common ownership is deemed to override the disparate and unrelated nature of the two companies and their operations, including the fact they may be located in different countries, continents, or even hemispheres. The Notice also requires the allocation of interest incurred by foreign subsidiaries against production property of related foreign affiliates, frequently with little or no effect on the U.S. parent's tax liability in the United States. For example, assume that a U.S. parent owns foreign subsidiaries in Italy and Germany; the German company has substantial production property with no debt, whereas the Italian company incurs substantial interest expense of the Italian company must be allocated to, and capitalized over the life of, the German assets. Such calculations -- especially for multinational corporations that may have dozens (or even hundreds) of construction projects and debt instruments in numerous countries -- cannot be easily or instantaneously accomplished.
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Publication:Tax Executive
Date:Jul 1, 1991
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