Statement on H.R. 5270: the Foreign Income Tax Rationalization and Simplification Act of 1992.

On July 22, 1992, Tax Executives Institute testified before the House Committee on Ways and Means on H.R. 5270, the Foreign Income Tax Rationalization and Simplification Act of 1992. The Institute's testimony was presented by its International President, Reginald W. Kowalchuk of the Bank of Nova Scotia. H.R. 5270 was introduced by Committee Chairman Dan Rostenkowski and Congressman Willis Gradison on May 27, 1992. TEI's written statement on the legislation is reprinted below. The statement was prepared under the aegis of its International Tax Committee, whose 1991-1992 chair is Raymond G. Rossi of Intel Corporation.

Tax Executives Institute (TEI) is the principal association of corporate tax executives in North America. Our approximately 4,800 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 to the Committee on Ways and Means on H.R. 5270, The Foreign Income Tax Rationalization and Simplification Act of 1992.

Overview

H.R. 5270 was introduced by Chairman Rostenkowski and Representative Gradison on May 27, 1992, in response to 10 days of public hearings on the factors affecting international competitiveness. In announcing these hearings on the bill, Congressman Rostenkowski stated that "[tlhe relief provided to U.S.-based multinational corporations and the important simplification contained in this legislation would provide significant assistance to companies competing in the global marketplace." The legislation has three goals: (1) to improve international competitiveness of U.S.-based multinationals; (2) to improve and simplify the international tax rules; and (3) to ensure that foreign persons doing business in the United States pay their "fair share" of taxes. As Congressman Gradison correctly observed in introducing H.R. 5270, changes in the international tax area are needed because "foreign source income is not undertaxed. If anything, it may face a higher tax burden than domestic source income."

TEI commends Chairman Rostenkowski and Congressman Gradison for recognizing that the international tax provisions are sadly in need of revision. 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. For far too long, the focus has been on revenue and on closing "tax pinholes" to the exclusion of symmetry, simplification, common sense, and the need to integrate U.S. tax and trade policies. The current provisions embody myriad policy decisions made over the past 50 years - decisions that regrettably may have been made without a full appreciation of their long-term effect on the economic viability of U.S. businesses operating overseas. This myopia especially manifests itself in the Tax Reform Act of 1986, where the international tax provisions were advanced in large measure to pay for fundamental changes in other areas of the tax law. The use of that funding mechanism exacted a severe cost from U.S. multinationals. The 1986 Act changes - including the interest allocation rules, the exponential increase in the number of the foreign tax credit limitation "baskets," and the introduction of the passive foreign investment company provisions - imposed a heavy burden on U.S. companies, not only with respect to the tax revenue raised but also in terms of increased compliance costs. The 1986 Act's bottom line for multinational corporations is indisputable: the tax law changes severely affected the ability of U.S. companies to operate overseas.

TEI applauds the recognition inherent in H.R. 5270 that the pendulum must swing in the other direction. Where U.S. tax rules restrict the ability of U.S. companies to operate in a cost-efficient manner, the competitive position of the Nation as a whole suffers. That the Committee is attempting to restore balance in the international arena, therefore, is laudable. Indeed, the Committee's simplification efforts have already had one positive effect. Specifically, the Treasury Department recently announced an 18-month extension of the congressional compromise on the allocation of research and development expenses under section 861 of the Internal Revenue Code, albeit with further study of the underlying issues. The administrative resolution of this "on again/off again" issue on a permanent basis will bring a modicum of certainty and stability to a complex area.

Moreover, many of the provisions contained in H.R. 5270 will enhance U.S. competitiveness. TEI is pleased that the bill includes several provisions long advocated by the Institute: the allocation of interest expense on a worldwide asset basis, the recharacterization of overall domestic losses, the extension of the foreign tax credit carryback and carryforward provisions, and the repeal of the 90-percent limitation on the use of the foreign tax credit to offset the alternative minimum tax. Adoption of these provisions will reduce complexity and foster international competitiveness.

We question, however, whether a true balance can be struck as long as the beneficial changes in the international tax provisions are required to be funded by adverse changes in other international tax provisions. Simplification and "rationalization" of the international tax rules are worthwhile national goals. Given the harsh, unequal, and counterproductive treatment of U.S. multinational corporations under the 1986 Act, the search for funding should not necessarily be limited to the international provisions.

Moreover, the revenue-raising...