Proposed GAAP-E & P regulations.

On October 8, 1992, Tax Executives Institute filed the following comments with the Internal Revenue Service on proposed regulations relating to the computation of the earnings and profits (E&P) of foreign corporations. The proposed regulations would simplify the computation of the foreign corporations' E&P by largely eliminating required book-to-tax adjustments attributable to depreciation and to the uniform capitalization rules of section 263A of the Code. The Institute's comments were prepared under the aegis of its International Tax Committee, whose chair is Lisa Norton of Ingersoll-Rand Company. Earlier comments on the subject were reprinted in the March-April 1991 and November-December 1991 issues of The Tax Executive.

On June 30, 1992, the Internal Revenue Service issued proposed regulations under sections 952 and 964 of the Internal Revenue Code, relating to the computation of the earnings and profits of foreign corporations. The regulations were published in the Federal Register on June 30, 1992 (57 Fed. Reg. 29246), and in the July 27, 1992, issue of the Internal Revenue Bulletin (1992-30 I.R.B. 24).

For simplicity's sake, the proposed regulations are referred to as the "proposed regulations." Specific provisions are cited as "Prop. Reg. [section]." References to page numbers are to the proposed regulations (and preamble) as published in the Internal Revenue Bulletin.

Background

Tax Executives Institute is the principal association of corporate tax executives in North America. Our 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 administrable and with which taxpayers can comply.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by the proposed regulations under sections 964 and 952 of the Code, relating to the computation of the earnings and profits of foreign corporations.

Overview

The proposed regulations eliminate the need to adjust financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) with respect to uniform capitalization (UNICAP) and depreciation for purposes of computing the earnings and profits (E&P) of a foreign corporation. In March 27, 1991, and October 21, 1991, letters to the IRS, TEI endorsed the proposal. We continue to believe that the use of readily available financial information to calculate a foreign corporation's E&P will substantially reduce complexity and result in a significant decrease in compliance burdens for the taxpayer and the government alike.

TEI commends the IRS for recognizing the need for simplification in this area. The proposed regulations provide what we hope is the first step in the development of a simplified method for computing E&P that will significantly

reduce the existing compliance burden. Hence, we believe that the ability to use the GAAP E &P method should be broadened beyond the limited items enumerated in the proposed...