TEI comments on repeal of the FSC/ETI provisions and other international and corporate reform and simplification proposals.

• Position: Tax Executives Institute, foreign sales corporation, extraterritorial income tax

March 10, 2004

On March 10, 2004, Tax Executives Institute sent the following letter to the tax-writing committees of the Senate and House of Representatives on legislation to repeal the FSC/ETI provisions of the Internal Revenue Code and effect other changes to the international provisions of the Code.

On behalf of Tax Executives Institute, I submit the following comments relating to repeal of the FSC/ETI provisions of the Code and other international and corporate reform and simplification proposals contained in H.R. 2896, the "American Jobs Creation Act of 2003" and S. 1637, the "JOBS Act of 2003," currently before the House and Senate. These bills contain a number of very important proposals that would address raised by repeal of the FSC/ETI provisions and other international tax rules of the Code, significantly benefit U.S. businesses, and improve the operation of U.S. international tax laws. Given the imposition of trade sanctions by the European Union, we urge the Congress to address the concerns described in this letter and then complete its work on this important legislation as soon as possible.

Tax Executives Institute

Tax Executives Institute was established in 1944 to serve the professional needs of business tax professionals. Today, the broad membership of the Institute is organized into 53 chapters in the United States, Canada, and Europe. Our diverse membership of more than 5,400 accountants, attorneys, and other business professionals work for 2,800 of the leading companies in North America and Europe. As a professional organization, the Institute 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 costs and burdens of administration and compliance to the benefit of taxpayers and government alike. The Institute is committed to maintaining a system that works--one that builds upon the principle of voluntary compliance and is consistent with sound tax policy, one that taxpayers can comply with, and one in which the IRS can effectively perform its audit function without unduly burdening taxpayers. Our background and experience enable us to bring a unique and, we believe, balanced perspective to the subject of international complexity and simplification.

Executive Summary

The FSC/ETI provisions accord significant benefits to U.S. exporters that to some degree balance the tax treatments afforded by other trading nations to their exports (e.g., territorial systems and VAT exemptions). Finding a replacement for these rules is critically important to the country.

Certain provisions in the international sections of the Code impose costly tax burdens on U.S. multinationals, and are among the most complicated provisions in the tax law. Likewise, many Code provisions that affect international transactions go beyond the norm established by major U.S. trading partners or are significantly out of date. They contain a number of anomalies that place international businesses at a disadvantage. TEI believes that the Code's foreign provisions need significant reform and simplification.

* The repeal of the FSC/ETI provisions will impose a significant tax increase on those currently benefitting from the provisions, and the inclusion of replacement provisions like those under consideration, with broad transition relief of at least three years, will help to lessen the effects of such a significant tax increase.

* Overall, the anti-deferral rules of the United States are broader and more burdensome than those of its major trading partners. A number of the provisions in the House and Senate bills address these concerns. In particular, TEI supports:

() Elimination of the Foreign Base Company Sales and Services Rules, or at least the House proposal allowing for the treatment of the European Union as one country for the FBCSI rules.

() Creation of a meaningful de minimis exception.

() Repeal of the FPHC and FIC Rules.

() Limited tax-favored repatriation for certain dividends received from a CFC.

* U.S.-based multinationals confront double taxation in situations where their foreign-based competitors do not, in many cases because of anomalies in the U.S. foreign tax credit system. Because of layers of limitations and adjustments made over the decades since its adoption, the present foreign tax credit system fails to eliminate double taxation in a number of circumstances. Provisions in the House and Senate bills address these concerns, and TEI believes that enactment of these provisions will greatly improve the U.S. tax system. In particular, TEI supports:

() Elective adoption of worldwide interest allocation rules.

() Extension of the foreign tax credit carryover period from 5 years to 20 years.

() Recharacterization of Overall Domestic Losses.

() Reduction of the number of foreign tax credit limitation baskets from 9 to 2.

() Elimination of 90 percent limitation on the use of foreign tax credits and use of NOLs against alternative minimum tax and expansion of exemption amounts.

() Look-through rules for dividends from noncontrolled section 902 (10/50) companies.

() Election not to use average exchange rate for foreign tax paid in a nonfunctional currency.

() Limited application of uniform capitalization rules to foreign persons.

() Significantly narrowed limitations on the deductibility of interest.

Repeal of the FSC/ETI Provisions

Like many other countries, the United States has long provided export-related benefits under its tax law to enhance the global competitiveness of U.S...