TEI endorses H.R. 1690, the International Tax Simplification and Reform Act of 1995.

On July 27, 1995, Tax Executives Institute filed the following comments on H.R. 1690, the International Tax Simplification and Reform Act of 1995, which was introduced by Representatives Amo Houghton and Sander Levin. TEI's comments, which were filed with the House Committee on Ways and Means, were prepared under the aegis of its International Tax Committee, whose chair is Philip J. Bergquist of Apple Computer, Inc.

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, especially with respect to the Internal Revenue Code's international tax provisions. We believe that the Code's foreign provisions are in need of fundamental reform and simplification, and for this reason we support H.R. 1690, the International Tax Simplification and Reform Act of 1995, which was recently introduced by Congressmen Houghton and Levin.

TEI believes H.R. 1690 represents a large step in the right direction by generally reducing the costs of preparing and auditing U.S. corporate tax returns for American companies engaged in international trade without any material diminution in tax dollars flowing to the Treasury. Enactment of the bill would not only reduce compliance costs -- thereby enhancing the country's competitiveness -- but it would also signal Congress's commitment to the simplification of the tax law generally. The bill will also bring long overdue reform to the foreign tax credit area.

TEI recognizes that Congress is 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 the targeted, incremental changes proposed in H.R. 1690. The Institute believes, however, the prospects for major reform should not detract from the important goal of bringing immediate and constructive reform to the international arena. With this in mind, we include our support for, or recommendations to improve, certain provisions of the bill.

Simplification of the International Tax Provisions

The international provisions of the Internal Revenue Code have grown enormously in length and complexity during the past decade. Change has been piled upon change, with inadequate attention being paid to the administrative burdens spawned by the changes. H.R. 1690 would simplify the Code's international provisions by stripping away needless complexity in several areas:

* Reform of the PFIC Rules. When enacted in 1986, the passive foreign investment company (PFIC) rules were intended to limit the economic benefit of tax deferral available to U.S. investors in foreign investment funds, as well as to restrict the ability of such investors to convert ordinary income into capital gain. In addition, Congress was concerned that the tax rules not provide undue incentives to make investments outside the United States.

Unfortunately, when the PFIC provisions were enacted, the definition of a PFIC was so distended that it resulted in the classification of many corporations with active businesses as PFICs. The PFIC rules stand as an excellent example of overkill -- taxing not only passive income but also the operating income of controlled foreign corporations (CFCs), which are already subject to tax on their passive income under Subpart F of the Code.(1)

Even a corporation with a modest number of active subsidiaries is required to devote substantial time to analyzing the applicability of the PFIC rules. Such a compliance burden is not warranted, particularly in connection with CFCs whose U.S. shareholders must include the CFCs' passive income in their taxable income under Subpart F's rigorous rules. H.R. 1690 would redress the legislative overkill of the current PFIC provisions by exempting controlled foreign corporations from those rules. The remedy offered by the legislation is overdue and should be promptly enacted.

* Use of...