Tax & Fiscal Policy Committee

The Tax and & Fiscal Policy Committee works to adopt international competitiveness as a key goal of tax policy makers at the national and state government level. Its programs include reviewing national and state tax laws and promoting awareness of tax policy as a trade competitiveness issue.

Chair:

Vice-Chair:

Bruen Tucker, Tax Adviser, KPMG

Greg Engrav, Partner, BTI International Law Office

2003 PNITA Tax Issues

International competitiveness is an important goal of U.S. trade policy and is crucial to the success of PNITA members. We believe this goal should transcend trade policy and be of equal importance in setting tax policy. PNITA believes that the U.S. should adopt international competitiveness as a key goal of tax policy and relegate capital export neutrality to a lower priority.

International Competitiveness and Tax Policy Goal:* U.S. international tax policy should encourage international trade by allowing U.S. multinational companies to compete evenly with their international counterparts. U.S. multinational companies are operating in more foreign countries than ever before. The evolution of the U.S. tax regime, however, has hindered this global expansion through the increased risk of double taxation, forcing the artificial structuring of operations to accommodate outdated tax laws (Subpart F), and the economic disadvantage resulting from an overall higher tax cost. PNITA supports the use of tax policy to encourage global commerce, business efficiency, and competitive equalization for U.S. multinationals. PNITA further supports the Administration’s and the Legislature’s international tax simplification reform efforts. By enacting international tax legislation that equalizes global opportunities for U.S. multinational companies, the U.S. economy will benefit through the expansion of international trade.

Homeland Investment Proposal:* Under the current United States tax structure, multi-national companies are discouraged from reinvesting in the U.S. earnings accumulated by foreign subsidiaries. The U.S. tax code encourages such earnings to be reinvested outside the U.S. or held in liquid investments offshore. As a result, U.S. based companies currently have substantial amounts of foreign sourced earnings that are not available for investment or other utilization inside the U.S. PNITA supports The Homeland Investment Act of 2003 (H.R. 767) because it would induce U.S. companies that have cash currently reinvested by foreign subsidiaries to distribute such cash for investment inside the U.S.

Foreign Tax Credit Simplification and Competitiveness:* PNITA believes that the foreign tax credit provisions contained in the Code are unnecessarily complex and disadvantageous to American businesses operating and competing abroad. The current law often fails to achieve its stated objective of preventing the double taxation of U.S.-based companies’ international income. PNITA supports the foreign tax provisions contained in proposed bills, such as the Thomas Bill, H.R. 5095, that attempt to reduce undue complexity, minimize double taxation, and improve the ability of U.S.-based multinationals to compete abroad.

Thomas Bill – International Tax Reform:* The Thomas Bill, H.R. 5095, introduced in July 2002 as The American Competitiveness and Corporate Accountability Act of 2002, contains many provisions that are supported by PNITA, and Chairman Thomas intends to introduce a similar bill this session. Overall, the Thomas Bill would dramatically simplify the international provisions of the Internal Revenue Code and remove tax impediments for multinational companies. However, as discussed in greater detail in the supporting public policy brief, PNITA has reservations with the following provisions that are currently part of the Thomas Bill: repeal of the EIE regime, modifying the earnings stripping rules, and specifically legislating inversion transactions.

Narrowing Subpart F for Tax Simplification and Competitiveness:* PNITA strongly supports the provisions of the Thomas Bill, H.R. 5095, that reduce the U.S. tax burden on MNCs by eliminating the concept of “Foreign Base Company Sales and Service Income” from the Subpart F scheme of the U.S. tax law. Such a change would make the MNCs more competitive in the worldwide market place by permitting the best business practices to determine the economics of the corporation’s operations instead of the best tax result. An additional benefit of narrowing the reach of Subpart F is the reduced incentive to move headquarters off-shore to achieve the best business practices.

Recognizing the European Union as One Country:* PNITA believes that U.S. tax law should recognize the countries comprising the European Union (EU) as one country for tax purposes. The EU group operates in many aspects as one country currently composed of 15 formerly independent states. By not recognizing the EU as one country, our tax law places U.S.-based companies at a significant competitive disadvantage compared to EU-based companies. It is clear that at some point in the future the EU will be treated as one country, so the question is one of timing. Accelerating the change for U.S. tax purposes would greatly benefit U.S. multinational companies ("MNCs") and reduce the incentive for MNCs to move their headquarters off shore.

Codification of the “Economic Substance” Doctrine:* PNITA believes that codifying the “economic substance” doctrine in the Care Act of 2003, as proposed by the Senate Finance Committee on February 5, 2003, will increase litigation and uncertainty in determining the tax consequences of transactions with a valid business purpose. PNITA understands Congress’ concern with abusive tax shelters; however, the better approach is to provide the IRS with more resources to enforce the existing rules and to require more disclosure by taxpayers.

*PNITA has prepared a public policy brief on this subject.