A new international tax simplification bill has drawn widespread attention -- and not a little criticism -- for its competitiveness provisions. These provisions would radically rewrite many international tax provisions in the U.S. Code in ways that would benefit U.S. multinationals but would also eliminate the Extraterritorial Income (ETI) Act regime that currently provides targeted tax relief to U.S. exporters.
The American Competitiveness and Corporate Accountability Act of 2002 (HR 5095) was introduced in July by House Ways and Means Committee Chairman William Thomas (R-Calif.). The legislation has three sections: Section 1 addresses "competitiveness" issues; Section 2 deals with corporate inversions, which occur when a U.S. corporation decides to reincorporate in an offshore tax haven; and Section 3 covers tax shelters.
The inversion and tax shelter provisions generated little notice, primarily because both the House and Senate are already weighing several such measures. Likewise, the Administration has stated repeatedly that the President will sign any reasonable inversion/tax shelter legislation that hits his desk. In other words, everyone in Washington supports these reforms, and Thomas' bill added little to the mix.
Why would Thomas, a staunch proponent of minimal taxation, introduce legislation eradicating a tax break for U.S. companies doing business abroad? Because the World Trade Organization (WTO) recently concluded that the ETI framework provides American exporters with prohibited export subsidies that violate U.S. treaty obligations. If the U.S. ignores the WTO decision, the European Union will almost certainly impose sanctions on U.S. exports totaling more than $4 billion. This could precipitate a prolonged trade war that would harm all countries involved.
The U.S. finds itself at odds with its trading partners primarily because it employs a worldwide system of taxation, which means the United States taxes its corporate and individual citizens 'income wherever it is earned.
Because taxes are levied on income earned outside U.S. borders, the U.S. tax system provides some relief from double taxation of foreign income. This relief comes in two forms: (1) limited deferral of U.S. taxation of active income earned abroad until it is paid to the U.S. parent company; and (2) foreign tax credits for income tax paid to a foreign country to offset, at least partially, the U.S. tax on the same foreign income. However, these deferral and...