U.S. tax policy: implications for multinationals.

• Author: Kies, Kenneth J.
• Position: International Taxation

A host of issues and pending legislation is bringing wide attention to the U.S.' international tax system--and changes being hotly debated in Congress could greatly impact the competitiveness of U.S. businesses. That could make venues like Bermuda, pictured here, less attractive.

The U.S. regime (system) for taxing international business operations--long an area of debate largely limited to academics, corporate tax directors and think tanks--hit the front pages of newspapers in 2002, and may well stay there for some time.

The European Union (EU) has been authorized to hit U.S. goods with up to $4 billion in tariffs if the U.S. does not comply with a World Trade Organization (WTO) ruling outlawing a U.S. tax subsidy for American exports. (See "Washington Insights," September 2002.) Meanwhile, reports of U.S. companies moving headquarters offshore for tax reasons have played into the November elections, where control of both the House and Senate are up for grabs.

While much of the rhetoric to date has tended toward the sensationalist (questioning the "patriotism" of corporations), events and the media focus have touched off a healthy tax policy debate in an area that has for too long suffered from neglect. Sweeping modifications to the U.S. regime for taxing multinational operations are now squarely on the table for consideration by Congress and the Bush Administration.

For companies involved in international business, the stakes are considerable: Exporters face the loss of billions of dollars in tax breaks. U.S. companies operating in overseas markets see the possibility of real reforms that could enhance their competitiveness. Foreign-owned U.S. firms fear collateral damage. All are girding for what promises to be a pivotal debate, which will be fully engaged in 2003.

The perfect storm

A remarkable confluence of events has created today's highly combustible international tax policy environment. In 1998. the EU brought a suit before the WTO arguing that the U.S. foreign sales corporation (FSC) provisions, which since 1984 had provided beneficial tax treatment for U.S. exports, constituted a prohibited export subsidy under international trade law. At the time, few could have predicted the momentous implications of this challenge. After the WTO upheld the EU challenge, the U. S., in 2000, replaced the FSC provisions with a similar regime--the extraterritorial income tax (ETI) rules--that was also found by the EU to violate international trade law.

Four years after the EU challenge, Congress and the Bush Administration are now faced with the challenge of establishing compliance...