Tax simplification and reform.

On March 25, 1997, Tax Executives Institute submitted the following proposals for tax simplification and reform to the US. Department of the Treasury, the Senate Committee on Finance, the House Committee on Ways and Means, the Joint Committee on Taxation, and the Internal Revenue Service. The comments were also filed with the National Commission on Restructuring the Internal Revenue Service.

Summary

Domestic

Simplification Issues

Repeal of AMT Depreciation: In the absence of the repeal of the entire alternative minimum tax (AMT) regime, the AMT depreciation method should be conformed to the regular tax method.

Filing of Forms 3115: Taxpayers that are required to change their method of accounting under a statutory mandate should be relieved from the burden of filing separate Forms 3115 for each subsidiary.

Charitable Contribution Substantiation Exemption: Corporations should be exempted from the charitable contribution substantiation rules.

International

Simplification Issues

Passive Foreign Investment Company Rules: Controlled foreign corporations should be exempted from the reach of the PFIC provisions.

Use of GAAP for E&P Calculations: Taxpayers should be generally permitted an election to use U.S. GAAP in computing the E&P of foreign corporations.

Same-Country Exception: EU Countries and Hong Kong/China: Countries in the European Union should be treated as a single country for purposes of the same-country exception of the Subpart F rules. Moreover, Congress should clarify that after July 1, 1997, Hong Kong and China will also be treated as a single country.

Translation of Foreign Taxes: Foreign taxes should be translated at the average exchange rate in effect for the year that the foreign taxes accrue for foreign tax credit purposes.

Dividends from Noncontrolled Foreign Subsidiaries: All dividends from noncontrolled section 902 corporations should be aggregated and placed in a single basket for purposes of the foreign tax credit limitations.

Increase in Filing Thresholds: The ownership requirement for filing under section 6046(a) of the Code should be increased from five to ten percent.

Capitalization of Interest in the Foreign Context: Section 263A(f) and section 263A(i) should be amended to specifically exempt controlled foreign corporations from the reach of the related-party rules (and the IRS's rulemaking authority).

Sourcing of the ACE Adjustment: The alternative minimum tax rules should be amended to provide a simplifying rule with regard to the adjusted current earnings preference, similar to that provided in respect of the BURP preference of former section 59(a)(1)(C).

Reform of the

Foreign Tax Credit Rules

Extension of FTC to Lower-Tier CFCs: In recent years, there have been several legislative proposals to expand the foreign tax credit to sixth-tier subsidiaries. TEI endorses these proposals, but suggests that there is no sound policy reason for not expanding the indirect credit to encompass indefinite tiers.

Expansion of FTC Carryovers: The foreign tax credit carryover rules should be conformed to those allowed for net operating losses (i.e., three years back and fifteen years forward).

"Quickie" Refunds Attributable to FTC Carrybacks: Section 6411 should be amended to treat foreign tax credit carrybacks in the same manner as other loss and credit carrybacks for purposes of the "quickie" refund procedures.

As the premier organization of corporate tax professionals in North America, Tax Executives Institute has long been concerned about the complexity of the tax law. The process of simplifying the Internal Revenue Code is overwhelming -- so much so that many would shrink from undertaking the task. Although TEI recognizes that provisions relating to consolidated returns of affiliated groups of corporations, mergers and acquisitions, and the foreign operations of U.S. corporations will never be truly simple, Congress can take action to ease recordkeeping and compliance burdens. On a project-by-project basis, strides can be made. Discrete issues can be attacked and victories achieved. It is with this in mind that we offer the following recommendations to simplify and bring more equity to the Internal Revenue Code.

Background

Tax Executives Institute is the principal association of corporate tax executives in North America. Our 5,000 members represent more than 2,700 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 that taxpayers can comply with in a cost-efficient manner.

For more than 15 years, the budget rules and political imperatives have placed a premium on tax law changes that raise revenues without raising rates. Hence, recent legislation has added penalties and engrafted other compliance provisions on to the Internal Revenue Code to raise money. Congress has also chosen to change the Code's accounting rules, not necessarily to achieve a better tax policy result, but to satisfy the insatiable appetite to raise revenue. For example, the 1980s saw a greater separation of the tax law concepts of income and expenses from the related financial accounting principles. Deviations between financial accounting (GAAP) definitions of income and expenses and income tax definitions of the same terms concededly may generate additional tax dollars in the short term, but often the increases are transitory in nature. Hence, the added revenue is fleeting, whereas the increased complexity is forever.

One way to ensure more administrable tax laws in the future would be to place greater emphasis on the administrability of particular provisions during the legislative process. Thus, TEI recommends that the Internal Revenue Service be asked to testify before Congress to address specifically the administrative aspects of proposed legislation, including the cost of compliance for both the government and the taxpayer. In addition, the IRS should be requested whenever possible to develop necessary tax forms and schedules before a proposal is enacted. Finally, the IRS should be required to prepare -- and Congress review -- so-called administrability impact statements in respect of pending legislative proposals. Congress, the IRS, the affected taxpayers, and the public at large should have the opportunity to assess the consequences of proposed tax law changes before it is too late. Minimizing complexity should no longer be an afterthought.

TEI recognizes that Congress and the Clinton Administration are in the midst of a debate on the basic structure of the U.S. tax system. We also recognize that, in light of the impetus for a major overhaul, some may question the efficacy of proceeding with targeted, incremental changes. The Institute believes, however, that the prospects for major reform -- however real or remote -- should not detract from the important and attainable goal of bringing immediate and constructive reform to the tax code.

Domestic

Simplification Issues

Overview

Over the past decade, the Code's departure from accounting concepts has required the creation and maintenance of separate accounting systems and different sets of books, the need to reconcile the multiple systems, and the consequent expenditures of additional funds. For example, section 263A imposes complex capitalization rules for all costs incurred in manufacturing or constructing tangible property. These "uniform capitalization" rules are fictive in nature. In respect of interest, for example, they require the application of "avoided cost" principles, whereby any interest expense that the taxpayer would have avoided if the production expenditures had been used to repay debt of the taxpayer is treated as allocable to the production of property.

Another example of excessive complexity is the alternative minimum tax (AMT), which is, in effect, a separate and independent tax system that not only operates parallel to, but also undermines tax and economic decisions reflected in the regular tax system. The dual systems engender horrendous administration and compliance burdens. To the extent the AMT rules are justified, they are a confession that the (regular) tax system does not work: The AMT regime takes away with one hand the tax treatment given by the other. Well, confession may be good for the soul, but it is absolutely terrible in terms of tax policy and administration. The AMT imposes myriad additional burdens on taxpayers, requires them to maintain at least two sets of books for tax purposes, and has the...