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.

1. THE TAX LAW'S EFFECT ON

   U.S. COMPETITIVENESS

   AND PRODUCTIVITY

   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...