Tax Executives Institute-U.S. Department of Treasury Liaison Meeting.
Tax Executives Institute is pleased to have this opportunity to meet with Assistant Secretary Samuels, Deputy Assistant Secretary Beerbower, and other senior officials of the U.S. Department of Treasury's Office of Tax Policy. Our periodic meetings give both organizations an opportunity to articulate policy and administrative concerns and considerations. We are especially pleased that the timing of the meeting has been advanced from February to December. By scheduling the meeting earlier in the government's (and the Institute's) fiscal year, there will be ample opportunity for productive follow-through on various agenda items. The scheduling of this year's meeting may be especially propitious given the monumental changes worked by the 1994 election and what they may portend for tax policy and administration. During the liaison meeting, we hope to identify a number of items (relating to the guidance and legislative process) on which we can arrange follow-up meetings and pursue real progress.
In a recent speech before the New York State Bar Association, Deputy Assistant Secretary Beerbower outlined six fundamental issues that affect, and cannot help but circumscribe, the further development of the tax law: (1) the burgeoning irrelevancy of legal ownership; (2) the differentiation of capital (or principal) from the income on that capital; (3) the hoary distinction between debt and equity; (4) the treatment of limited liability companies and other emerging business structures; (5) the differing tax treatment of financial intermediaries; and (6) the characterization of technological developments (such as customized software). She called on taxpayers to help Treasury fiesh out and, ultimately, resolve these issues.
TEI agrees that the time is ripe - indeed, overdue - to address "real world" changes in entity structures and other emerging issues and how the tax treatment of those structures and issues affect the ability of business to do business. We strongly believe that tax laws should not erect artificial barriers to conducting business, especially abroad, and the rules must be flexible enough to accommodate structures (like corporate joint ventures) effectively dictated by foreign law or similar requirements. Because of the maturity of the U.S. market, U.S. companies must be able to compete in the global marketplace. When U.S. tax laws restrict the ability of U.S. companies to operafe in a cost-efficient manner, the overall competitive position of the Nation as a whole - and the generation of income subject to tax - suffers.
TEI commends the Treasury Department for highlighting these issues and offers its assistance in reaching solutions that make sense from both a business and tax policy perspective. During the liaison meeting, we invite the Treasury Department to join us in discussing how Treasury and TEI (and other outside stakeholders) can most productively work together. On a more general basis, we invite Treasury to share its legislative and regulatory agendas with us (including any plans to renew the push for tax simplification proposals and technical corrections), so we can be better prepared to respond to the Treasury's needs.
II. Improving the
Taxpayers frequently complain about the complexity of the tax law. They blame the Treasury Department and Internal Revenue Service - even though the target may more properly be Congress - for the uncertainty and instability that flow from complicated, incomplete, even incomprehensible provisions. They reproach the government for being insensitive to the demands of the real world, for myopically looking at only one side of an issue, for imposing unrealistic substantive requirements that increase transaction costs and impede competitiveness, and for spawning impossible recordkeeping burdens.
Sometimes the temptation may be great to dismiss such criticisms as so much bunk. And sometimes giving in to that temptation may seem justified. Other times, however, the comments offered by taxpayers and their representatives contain more than a seed of truth. The challenge, of course, is to judge correctly which criticisms are valid and which are not. The goal should be to improve, first, the provisions of the Internal Revenue Code and, second, the guidance provided to taxpayers on what the Code means, without imposing unnecessary barriers to how they conduct their affairs.
It is from this perspective that TEI must register its frustration and disappointment over the process used to develop proposals to fund the Uruguay Round accord of the General Agreement on Tariffs and Trade (GATT).(1) Indeed, we submit that the truncated process presents a prime example of how legislation should not be developed.
To the Institute's knowledge, no showing of compelling need was made for any of the proposed changes. No written analysis was prepared by the Treasury Department, Internal Revenue Service, or tax-writing committees on the policy basis for certain of the proposed changes; no hearings were held; no legislative language was released for public comment; no opportunity was provided to affected taxpayers to understand the proposal and to present arguments (pro or con) on its merits. Rather, the legislative process was marked by skeletal descriptions of proposed changes and media reports on what was (and was not) adopted and why. This is clearly not the proper way to consider and adopt legislative changes.
TEI submits that it is only by airing such proposals - by letting them, quite candidly, pass or flunk the smell test - that Congress can "get it right." Concededly, opening up the process may require more time, but we believe it would produce better results than those that emerge from behind closed doors.(2) For example, if hearings were held on the proposal to amend the corporate understatement penalty (to push it toward what could be a no-fault rule in respect of deemed "tax shelters"),(3) IRS and heasury officials (as well as the congressional leaders who led the reform effort that culminated in the 1989 penalty reform) could address whether they have changed their view on the purposes of the Code's penalty provisions and, if not, how the GATT penalty proposal can be squared with the philosophy underlying the reform.(4)
Moreover, TEI does not believe that opposition to specific proposals should facilely be dismissed merely because taxpayers decline to suggest alternative funding arrangements. A bad idea remains just that - a bad idea - regardless of the alternatives available. Taxpayers should not be required to "prove" the validity of their criticisms (or the righteousness of their cause) by throwing another idea on the funding pyre. Taxpayers' reluctance to engage in such an exercise may be due in no small part to a fear that the funding alternative will come back to burn them.(5)
Congress and the Treasury Department have an obligation to the American people to formulate and enact rational, necessary, and effective legislation. We suggest that part of that obligation is listening to the concerns of the people affected by a given proposal and thereby vivifying their right to petition the government for redress of grievances. Without such involvement, the legislative process suffers. During the liaison meeting, we invite discussion of ways in which the business community can offer constructive criticism of proposed legislation and can advance salutary changes (such as tax simplification).
III. Improving the Tax
The U.S. tax treaty network is an important part of the country's framework for international trade. Bilateral treaties play a critical role in bringing certainty to the global marketplace and safeguarding multinational businesses from the threat of double taxation. TEI has long been concerned that arbitrary tax rules restrict the ability of U.S.-based companies to compete effectively abroad and deter foreign investment in the United States. In a perfect world, tax rules would not drive business decisions, but the world is far from perfect. Thus, tax rules can - and do - affect the decisions of multinational corporations, and the affected governments must respond accordingly. Well-crafted tax treaties can enhance the competitiveness of U.S. businesses abroad and foster a favorable investment climate in the United States for foreign businesses and investors, thereby creating substantial economic opportunities for all Americans.(6)
During our February 1994 liaison meeting, Assistant Secretary Samuels commented on the low level of activity by the business community in supporting several treaties that had been presented to the Senate Foreign Relations Committee for ratification in October 1993. He noted that Treasury had expended a significant amount of effort in negotiating the treaties - which, if ratified, would benefit a substantial number of taxpayers - and that Treasury itself could not lobby for the treaties. The support, he explained, had to come effectively from the grass roots.
TEI agrees that tax treaties generally mark an important step in reducing economic barriers that impede trade and that the affected businesses should make their views on the treaties known to the pertinent members of Congress. In this respect, the Institute recently urged the Senate Foreign Relations Committee to expeditiously ratify seven treaties and protocols in respect of the following trading partners of the United States: Canada, France, Kazakhstan, Mexico, Portugal, Sweden, and Ukraine. Lowering the withholding rates on interest, dividends, and royalties - which these treaties will effect - will reduce the influence of tax considerations on decisions regarding the capital structures of multinational companies.
(1) TEI filed comments on three specific funding proposals: the reduction in the amount of interest to be paid on corporate tax refunds; the modification of the substantial understatement penalty; and the amendment of the longstanding export-source rule. Those comments are set forth in Appendix I. (2) We recognize that the problems with the process were exacerbated by the "fast track" procedures the Administration invoked in referring the GATT accord to Congress, but submit that the fast track is no better excuse for bad legislation than the PAYGO rules. (3) The amendment would provide that the amount of any corporate understatement for purposes of the penalty would not be reduced in respect of "tax shelters," even if the taxpayer disclosed its position and that position was supported by substantial authority. (4) The suggestion has been made that TEI and others overreacted to the penalty proposal because, after all, taxpayers could "penalty proof" any arrangement arguably falling within the amended penalty provision by securing a legal opinion that the taxpayer satisfied the reasonable cause and good faith requirements of section 6664(c)'s waiver provision. (A similar argument has been made in respect of the partnership anti-abuse rule.) TEI believes that a statutory - or regulatory - regime that prompts such a defense is seriously flawed. (5) Consider, for example, the plight of the 1993 opponents to a reduction in the section 936 tax credit who suggested requiring estimated tax payments in lieu of reducing the credit. In spite of the opposition, the credit was reduced in the 1993 legislation and the suggested funding mechanism arose, phoenix-like, in 1994 to fund the GATT accord. (6) The desire for balanced rules in respect of foreign-based taxpayers and U.S.-based taxpayers plays itself out in other realms as well. For example, TEI understands that a question exists whether a foreign law bankruptcy (or insolvency) proceeding falls within the scope of section 382(l)(5) which provides an exception to the loss limitation rules in respect of a "title 11 and similar case." We agree with the senior members of the Senate Finance Committee who wrote Secretary Bentsen in September that, inasmuch as the loss limitation rules generally apply to foreign corporations that experience the requisite ownership change, the exception relief provision of section 382(l)(5) should be construed equally liberally. By applying the rules even-handedly in respect of U.S. and foreign insolvency proceedings, the Treasury can underscore the principle that the United States is "open for business" and will treat foreign-based companies fairly. (7) We urge that care be exercised in preparing the technical explanation of the protocol to ensure that the salutary reduction in the withholding tax on royalties is not so circumscribed that the core purpose of the protocol is undermined.
|Printer friendly Cite/link Email Feedback|
|Date:||Jan 1, 1995|
|Previous Article:||The advance earned income tax credit: IRS education effort picks up speed.|
|Next Article:||OECD Draft Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.|