International complexity and simplification.

• Position: International tax

June 22, 1999

On June 22, 1999, Tax Executives Institute testified before the Subcommittee on Oversight of the House Committee on Ways and Means concerning international complexity and simplification. The Institute's testimony was presented by its President, Lester D. Ezrati of Hewlett-Packard Company, and was prepared under the aegis of TEI's International Tax Committee, whose chair is Michael P. Boyle of Microsoft Corporation. The Institute's written statement is reprinted below.

Good afternoon. I am Lester D. Ezrati, General Tax Counsel for Hewlett-Packard Company in Palo Alto, California. I appear before you today as the president of Tax Executives Institute, the preeminent group of corporate tax professionals in North America. The Institute is pleased to provide the following comments on international complexity and simplification.

Background

Tax Executives Institute is the preeminent association of corporate tax executives in North America. Our 5,000 members are accountants, attorneys, and other business professionals who work for the largest 2,800 companies in the United States and Canada; they are responsible for conducting the tax affairs of their companies and ensuring their compliance with the tax laws. Hence, TEI members deal with the tax code in all its complexity, as well as with the Internal Revenue Service, on almost a daily a basis. Most of the companies represented by our members are part of the IRS's Coordinated Examination Program, pursuant to which they are audited on an ongoing basis. TEI 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. Our background and experience enable us to bring a unique and, we believe, balanced perspective to the subject of international complexity and simplification.

The international provisions of the Internal Revenue Code are among the most complicated provisions in the tax law. The last several years have seen several small steps taken to reduce tax law complexity for multinational corporations. For example, three years ago, Congress repealed section 956A of the Internal Revenue Code, which in our view was ill-conceived when it was enacted in 1993. And in 1997, Congress rectified an inequity that has existed for the past decade when it eliminated the overlap between the controlled foreign corporation and passive foreign investment company rules. Although laudable, these actions represent only a small step on the journey of simplifying the international tax provisions of the Internal Revenue Code.

TEI believes that the Code's foreign provisions need fundamental reform and simplification, and for this reason we support H.R. 2018, the International Tax Simplification for American Competitiveness Act of 1999, which was introduced on June 7, 1999, by Oversight Subcommittee Chairman Arno Houghton and several other representatives. Enactment of this bill will generally reduce the costs of preparing U.S. corporate tax returns for American companies engaged in international trade without any material diminution in tax dollars flowing to the treasury. The bill will not only reduce compliance costs -- thereby enhancing the country's competitiveness -- but it will also signal Congress's continued commitment to the simplification of the tax law generally. In addition, the bill will bring long overdue, albeit partial, reform to the foreign tax credit area.

Any simplification efforts will need to comprehend the changing face of the business environment, owing, among other things, to the growth of electronic commerce and business technologies. As businesses become more global and as companies strive to manage their supply chains digitally, the need for meaningful tax reform will become more and more manifest. In addition, it will become increasingly important for governments and taxpayers to work together to resolve -- or forestall -- disputes in creative, cost-effective ways, such as advanced pricing agreements (APAs). Accordingly, TEI is very pleased that Congressman Houghton and other members have voiced support for preserving the confidentiality of APAs. TEI strongly believes that any compromise of taxpayer confidentiality will have a negative effect on the future of the APA program.

As Congressman Houghton noted in his introductory statement, H.R. 2018 seeks reform "in modest but important ways." We agree that, although a major leap forward, enactment of the bill will not obviate additional reform of the Code's international tax provisions -- for example, in respect of Subpart F, which Chairman Houghton himself has singled out as an extremely complex area of the law. Subpart F was initially enacted as an exception to the deferral principle in order to tax the types of income considered relatively "movable" from one taxing jurisdiction to another and therefore able to take advantage of low rates of tax. In the three decades since its enactment, however, Subpart F has been distended to capture active operating income. One solution to removing Subpart F's artificial barrier to competitiveness would be to exclude foreign base sales and services income from current taxation, allowing U.S. corporations to compete more effectively on a level international playing field.(1) Other areas that should be considered for simplification include the translation of the deemed paid tax credit under section 986, the aggregation of dividends from noncontrolled section 902 corporations in one basket, and the elimination of the interest allocation rules. These comments notwithstanding, we agree with Congressman Houghton and the other sponsors of H.R.2018 that the bill represents a "down payment on further reform."

H.R. 2018: A Good Start

1. Treatment of Controlled...