[Congressional Record Volume 142, Number 115 (Wednesday, July 31, 1996)]
[Senate]
[Pages S9313-S9314]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                       IT'S TIME TO END DEFERRAL

 Mr. DORGAN. Mr. President, it's time to end the perverse $2.2 
billion U.S. jobs export subsidy called deferral that our Tax Code 
provides to big U.S. companies that move their manufacturing plants and 
U.S. jobs to tax havens abroad, and then ship back their tax-haven 
products into the United States for sale. Since 1979, we have lost 
about 3 million good-paying manufacturing jobs in this country, in 
part, because of this ill-advised subsidy.
  Presidents Kennedy, Nixon, and Carter all tried to curb this 
misguided tax subsidy. In 1975, the Senate voted to end it. In 1987, 
the House voted to stop it. But in each case, high-powered lobbyists 
for the big corporations were able to derail it before such action 
could be enacted and signed into law.
  In July, Robert McIntyre, Director of the Citizens for Tax Justice, 
offered compelling testimony in support of the effort to pull the plug 
on this misguided tax break at a recent Families

[[Page S9314]]

First forum on paycheck security issues. He thoroughly debunks the 
lobbyist-driven myths that repealing this $2.2 billion U.S. jobs export 
subsidy will somehow prevent large U.S. multinational firms from 
competing in the global economy. I think that you will find his 
testimony provides an excellent perspective on this subject, and I hope 
that you will read it.
  I ask that the text of Mr. McIntyre's recent testimony be printed in 
the Record.
  The material follows:

Statement of Robert S. McIntyre, Director, Citizens for Tax Justice, In 
    Support of Legislation To Curb Tax Subsidies for Exporting Jobs

       Citizens for Tax Justice strongly supports legislation to 
     limit current federal tax deferrals that subsidize the export 
     of American jobs. Such reform legislation is embodied in S. 
     1355, Senator Byron Dorgan's ``American Jobs and 
     Manufacturing Preservation Act.'' Similar legislation has 
     been approved by the House of Representative in the past. We 
     urge the full Congress to pass S. 1355 and send it to the 
     President to sign.


 tax breaks for exporting jobs should be eliminated--we shouldn't pay 
    our companies to make goods for the American market in foreign 
                               countries

       In its 1990 annual report, the Hewlett-Packard company 
     noted: ``As a result of certain employment and capital 
     investment actions undertaken by the company, income from 
     manufacturing activities in certain countries is subject to 
     reduced tax rates, and in some cases is wholly exempt from 
     taxes, for years through 2002.'' In fact, said Hewlett-
     Packard's report, ``the income tax benefits attributable to 
     the tax status of these subsidiaries are estimated to be $116 
     million, $88 million and $57 million for 1990, 1989 and 1988, 
     respectively.''
       This is not an isolated instance. An examination of 1990 
     corporate annual reports that we undertook a few years ago 
     provided the following additional examples.\1\
     Footnotes at end of article.
       Baxter International noted that it has ``manufacturing 
     operations outside the U.S. which benefit from reductions in 
     local tax rates under tax incentives that will continue at 
     least through 1997.'' Baxter said that its tax savings from 
     these (and its Puerto Rican) operations totaled $200 million 
     from 1988 to 1990.\2\
       Pfizer reported that the ``[e]ffects of partially tax-
     exempt operations in Puerto Rico and reduced rates in 
     Ireland'' amounted to $125 million in tax savings in 1990, 
     $106 million in 1989 and $95 million in 1988.
       Schlering-Plough said that it ``has subsidiaries in Puerto 
     Rico and Ireland that manufacture products for distribution 
     to both domestic and foreign markets. These subsidiaries 
     operate under tax exemption grants and other incentives that 
     expire at various dates through 2018.''
       Becton Dickinson reported $43 million in ``tax reductions 
     related to tax holidays in various countries'' from 1988 to 
     1990.
       Beckman noted: ``Certain income of subsidiaries operating 
     in Puerto Rico and Ireland is taxed at substantially lower 
     income tax rates,'' worth more than $7 million a year to the 
     company over the past two years.
       Abbot Laboratories pegged the value of ``tax incentive 
     grants related to subsidiaries in Puerto Rico and Ireland'' 
     at $82 million in 1990, $79 million in 1989 and $76 million 
     in 1988.
       Merck & Co. noted that ``earnings from manufacturing 
     operations in Ireland [were] exempt from Irish taxes. The tax 
     exemption expired in 1990; thereafter, Irish earnings will be 
     taxed at an incentive rate of 10 percent.''
       In fact, under current law, American companies often are 
     taxed considerably less if they move their manufacturing 
     operations to an overseas ``tax haven'' such as Singapore, 
     Ireland or Taiwan, and then import their products back into 
     the United States for sale.


              how we subsidize the export of american jobs

       The tax incentive for exporting American jobs results from 
     current tax rules that:
       1. allow companies to ``defer'' indefinitely U.S. taxes on 
     repatriated profits earned by their foreign subsidiaries; and
       2. allow companies to use foreign tax credits generated by 
     taxes paid to non-tax haven countries to offset the U.S. tax 
     otherwise due on repatriated profits earned in low- or no-tax 
     foreign tax havens.


              s. 1355 would end this wrong-headed subsidy

       Why should the United States tax code give companies a tax 
     incentive to establish jobs and plants in tax-haven 
     countries, rather than keeping or expanding their plants and 
     jobs in the United States? Why should our tax code make tax 
     breaks a factor in decisions by American companies about 
     where to make the products they sell in the United States?
       Why indeed? We believe that this tax break for overseas 
     plants should be ended. Profits earned by American-owned 
     companies from sales in the United States should be taxed--
     whether the products are Made in the USA or abroad.
       S. 1355 would end the current tax break for exporting 
     jobs--by taxing profits on goods that are manufactured by 
     American companies in foreign tax havens and imported back 
     into the United States. It would achieve this result by (1) 
     imposing current tax on the ``imported property income'' of 
     foreign subsidiaries of U.S. corporations; and (2) adding a 
     new separate foreign tax credit limitation for imported 
     property income earned by U.S. companies, either directly or 
     through foreign subsidiaries. \3\
       legislation identical to S. 1355 was passed by the House in 
     1987. Unfortunately, at that time the reform provision was 
     dropped in conference at the insistence of the Reagan 
     administration.


    spurious arguments against curbing subsidies for exporting jobs

       Of course, Congress has heard loud complaints from 
     lobbyists for companies that benefit from the current tax 
     breaks for exporting jobs. Some have apparently argued that 
     their companies will be at a competitive disadvantage in 
     foreign markets if this legislation were approved. But since 
     the bill applies only to sales in U.S. markets, that argument 
     makes no sense.
       Lobbyists also have asserted that if American 
     multinationals have to pay U.S. taxes on their profits from 
     U.S. sales for foreign-made goods, they might be 
     disadvantaged compared to foreign-owned companies selling 
     products in the United States. Perhaps. But as the House 
     concluded in 1987, it would be far better ``to place U.S.-
     owned foreign enterprises who produce for the U.S. market on 
     a par with similar or competing U.S. enterprises'' rather 
     than worrying about ``placing them on a par with purely 
     foreign enterprises.'' \4\
       Finally, lobbyists have made the spurious point that 
     overall, foreign affiliates of U.S. companies have a negative 
     trade balance with the United States, that is, they move more 
     goods and services out of the United States than they export 
     back in. To which, one might answer, so what?
       After all, S. 1355 does not deal with all foreign 
     affiliates of U.S. companies. Rather, it deals only with 
     U.S.-controlled foreign subsidiaries that produce goods for 
     the American market in tax-haven countries.\5\ When U.S. 
     companies shift what would otherwise be domestic production 
     to these foreign subsidiaries it most certainly does not 
     improve the U.S. trade balance; it hurts it.\6\


                               conclusion

       American companies may move jobs and plants to foreign 
     locations in order to make goods for the U.S. market for many 
     reasons--such as low wages or lack of regulation--that the 
     tax code can do little about. But we should not provide an 
     additional inducement for such American-job-losing moves 
     through our income tax policy.
       American multinationals should pay income taxes on their 
     U.S.-related profits from foreign production. Such income 
     should not be more favorably treated by our tax code than 
     profits from producing goods here in the United States. We 
     urge Congress to approve the provisions of S. 1355.
     \1\ Several of the companies mentioned here apparently have 
     been lobbying hard against S. 1355.
     \2\ Many companies do not separate the tax savings from their 
     Puerto Rican and foreign tax-haven activities in their annual 
     reports.
     \3\ ``Imported property income means income . . . derived in 
     connection with manufacturing, producing, growing, or 
     extracting imported property; the sale, exchange, or other 
     disposition of imported property; or the lease, rental, or 
     licensing of imported property. For the purpose of the 
     foreign tax credit limitation, income that is both imported 
     property income and U.S. source income is treated as U.S. 
     source income. Foreign taxes on that U.S. source imported 
     property income are eligible for crediting against the U.S. 
     tax on foreign source import[ed] property income. Imported 
     property does not include any foreign oil and gas extraction 
     income or any foreign oil-related income.
     ``The bill defines `imported property' as property which is 
     imported into the United States by the controlled foreign 
     corporation or a related person.'' House Committee on Ways 
     and Means, ``Report on Title X of the Omnibus Budget 
     Reconciliation Act of 1987,'' in House Committee on the 
     Budget, Omnibus Budget Reconciliation Act of 1987, House Rpt. 
     100-391, 100th Cong., 1st Sess., Oct. 26, 1987, pp. 1103-04.
     \4\ Id.
     \5\ Companies that manufacture abroad in non-tax-haven 
     countries generally would not be affected by the bill, since 
     they still will get foreign tax credits for the foreign taxes 
     they pay.
     \6\ Foreign affiliates of U.S. companies that produce goods 
     for foreign markets--not addressed by Senator Dorgan's bill--
     may well have a negative trade balance with the United 
     States, insofar as they transfer property from their domestic 
     parent to be used in overseas manufacturing. But it would 
     obviously be far better for the U.S. trade balance--and for 
     American jobs--if those final products were manufactured 
     completely in the United States and exported abroad, rather 
     than having much of the manufacturing process occur overseas. 
     To assert that foreign manufacturing operations by American 
     companies helps the U.S. trade balance is to play games with 
     statistics.
     For example, suppose an American company was making $100 
     million in export goods in the U.S. for foreign markets. Now, 
     suppose it moves the assembly portion of that manufacturing 
     process overseas, where half the value of the final products 
     is produced. At this point, instead of $100 million in 
     exports, there are only $50 million. America has thus lost 
     exports and jobs--even though the foreign affiliate itself 
     has a negative trade balance with the United States. For 
     better or worse, however, S. 1355, does not address this 
     situation.

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