[Congressional Record Volume 142, Number 128 (Tuesday, September 17, 1996)]
[Senate]
[Pages S10687-S10689]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. PRESSLER (for himself, Mr. Lott, Mr. Baucus, Mr. Hatch, 
        Mr. D'Amato, Mr. Nickles, Mr. Gorton, Mr. Hatfield, Mr. Burns 
        and Mrs. Murray):

  S. 2086. A bill to amend the Internal Revenue Code of 1986 to 
simplify certain rules relating to the taxation of U.S. business 
operating abroad, and for other purposes; to the Committee on Finance.


 The International Tax Simplification for American Competitiveness Act

 Mr. PRESSLER. Mr. President, I am pleased to introduce a bill 
today that would provide much-needed relief to American-owned companies 
that are struggling to compete in the world marketplace. This bill is 
an attempt to simplify the overly complex international tax rules. I 
wish to thank my fellow cosponsors for their support--Senators Lott, 
Baucus, Burns, D'Amato, Hatch, Hatfield, Gorton, Murray, and Nickles.
  America's economy is more and more linked to the success of our 
businesses in the international economy. That's not a surprise to any 
of us. As the economies of previously less-developed countries around 
the world begin to expand, and the economic boundaries between our 
countries become more blurred, it is increasingly important for our 
businesses to be able to operate abroad from their most competitive 
position. Restraining our own companies through redundant and 
unnecessary complexities in our own Tax Code dampens their ability to 
compete for foreign business. In the end, it only hurts our own 
economy.
  There are many factors that affect U.S. world competitiveness--
factors over which we have little control. I know our international 
trade negotiators labor hard to change those factors we can control, 
such as barriers to foreign markets and existing agreements designed to 
keep trade free and fair. This is an issue of importance to me. I have 
sought to open markets for many South Dakota products--wheat in Africa, 
beef in Asia, and pork products in the former Soviet Union.
  While we have had some successes in opening markets, barriers remain. 
And I intend to push for open and fair trade among all of our trading 
partners. However, we can do more than just open barriers. We can 
reform our tax code in a way that will ensure continued U.S. success in 
the world economy. If we miss this opportunity, we risk the erosion of 
U.S. international competitiveness as countries with simple, favorable 
tax treatment of businesses lure away American businesses.
  This is a risk that is very real. A recent report by the Financial 
Executives Research Foundation found some rather shocking declines in 
U.S. competitiveness. This report found that over the last three 
decades, the global economy has grown more rapidly than our own 
economy. This is due, in part, to the recovery of Japan and Europe from 
the aftermath of World War II, and as a consequence, the United States 
presence in global markets has become less prominent. Their findings 
comparing the first half of the 1990's with the 1960's found the U.S. 
share of world GDP has declined to 26 percent--from 40 percent; the 
U.S. share of cross-border investment has fallen to 25 percent--from 50 
percent; and the U.S. share of world exports has dropped to 12 
percent--from 17 percent. In 1960, 18 of the world's 20 largest 
corporations were headquartered in the U.S. Today, that number is a 
mere eight.
  There is a strong correlation between American corporate 
competitiveness overseas and the ability of those companies to continue 
to provide jobs at home. A 1991 Council of Economic Advisors Economic 
Report to the President explained:

       In most cases, if U.S. multinational corporations did not 
     establish affiliates abroad to produce for the local market, 
     they would be too distant to have an effective presence in 
     that market. In addition, companies from other countries 
     would either establish such

[[Page S10688]]

     facilities or increase exports to that market. In effect, it 
     is not really possible to sustain exports to such markets in 
     the long run. On a net basis, it is highly doubtful that U.S. 
     direct investment abroad reduces U.S. exports or displaces 
     U.S. jobs. Indeed, U.S. direct investment abroad stimulates 
     U.S. companies to be more competitive internationally, which 
     can generate U.S. exports and jobs. Equally important, 
     U.S. direct investment abroad allows U.S. firms to 
     allocate their resources more efficiently, thus creating 
     healthier domestic operations, which, in turn tend to 
     create jobs.

  Overseas operations are frequently necessary to reduce costs of 
production and transportation, and locating facilities abroad increases 
brand familiarity. Within the United States, export related jobs pay on 
average a significantly higher wage than non-export related jobs. All 
of these factors combine to strengthen the U.S. parent company and 
bolster our economy here at home.
  The compliance costs associated with filing a tax return for overseas 
business operations of a U.S.-based company are staggering. My state of 
South Dakota is home to the credit card headquarters of Citibank. In 
its printed form, the Federal income tax return form for Citibank 
stands over 9 feet high--taking tens of thousands of hours to complete. 
The compliance cost burden associated with the foreign source income 
taxation rules is disproportionate to the amount of tax raised by these 
sections. For example, a 1989 study by the University of Michigan 
Office of Tax Policy Research, quoted in recent Financial Executives 
Research Foundation report, states that 39.2 percent of Federal income 
tax costs are attributable to foreign source income, while foreign 
operations represent only 21 percent of assets, 24 percent of sales, 
and 18 percent of employment. And a 1993 survey of 17 large 
multinationals indicates an even higher percentage of Federal income 
tax compliance costs are attributable to foreign source income (51 
percent)--indicating that compliance costs associated with foreign 
source income amount to 8.5 percent of the Federal income tax collected 
from this source. In comparison, a European Commission report found 
that among European multinational corporations, there is no evidence 
that compliance costs are higher for foreign than domestic source 
income.
  The bill I am introducing today seeks to simplify and correct various 
areas in the Code that are unnecessarily restraining U.S. businesses. 
Some changes are areas in need of repair, and some changes are to take 
into consideration international business operations that exist today, 
but which were domestic-only or nonexistent businesses when the 1986 
tax reform laws were implemented.
  One of the most substantive and important changes included in the 
bill would repeal the so-called 10/50 foreign tax credit basket rules 
that force U.S. corporations to calculate separate foreign tax credit 
limitations for each of its foreign joint venture businesses--foreign 
business operations in which it holds at least 10 percent but no more 
than 50 percent of the stock. Along with creating administrative 
nightmares for U.S. companies that may have hundreds of such foreign 
joint venture operations, these rules impede the ability of U.S. 
companies to compete in foreign markets.
  Today, United States businesses find it necessary to operate in joint 
ventures overseas, particularly in emerging markets such as the 
People's Republic of China and the former Soviet Union. Such joint 
ventures are necessary often times because U.S. investors face 
significant local country legal and political obstacles to taking a 
controlling interest in foreign companies. This is particularly the 
case for telecommunications companies and other regulated businesses. 
While such joint ventures are thus necessary for U.S. companies to 
enter and compete in foreign markets, our current tax law acts to 
discourage such operations.
  Our bill would eliminate the needless administrative hassles of 
current law and put U.S.-backed joint ventures on equal footing with 
competitors from other countries by replacing the 10-50 separate 
foreign tax credit limitation. The proposal would provide for so-called 
look-through treatment. That is, income from such entities would be 
computed for purposes of the foreign tax credit limitation based on the 
underlying character of the income earned by such corporations, as is 
the case for income earned through controlled foreign corporations.

  Another important correction to current rules relates to Foreign 
Sales Corporation [FSC] treatment for software. Ten years ago we did 
not have the level of software exports that we do today, and because 
the tax laws have not kept up with the changes in the high-technology 
business world, software exports are currently discriminated against by 
our own Tax Code. This bill would provide a legislative modification to 
the FSC statute to provide the same tax benefits for licenses of 
computer software as are currently available for films, records, and 
tapes. The United States is currently the world leader in software 
development, employing approximately 400,000 people in high-paying 
software development and servicing jobs. Much of the growth experienced 
by this industry is due to increased exports. The denial of the 
benefits of the FSC rules to software sold overseas ultimately harms 
the U.S. economy by constructing an impediment to the competitiveness 
of U.S. manufactured software. If theses exports are not given FSC 
benefits, many of these jobs could eventually move to other countries. 
The potential loss of these jobs would hurt our economy. My bill 
corrects this inequity.
  The goal of the international tax simplification for American 
competitiveness bill is to give fair tax treatment to American 
companies who operate abroad. This bill is truly a technical correction 
and simplification bill designed to correct inequities in our Code and 
to help place U.S. companies on a level playing field with their 
foreign competitors. Without these corrections, American companies will 
lose ground vis-a-vis their foreign counterparts, which will weaken 
their ability to operate successfully at home and harm our Nation's 
economic potential. Americans are the most creative and competitive 
workers in the world, and releasing them from unnecessary constraints 
at home will help us maintain our economic lead in the world 
marketplace--guaranteeing quality, high-paying jobs at home and a 
stronger national economy.
 Mr. D'AMATO. Mr. President, today I am pleased to join my 
friend and colleague, Senator Pressler, as an original cosponsor of the 
International Tax Simplification for American Competitiveness Act. This 
important bill will begin the process of dismantling tax barriers that 
hinder American businesses who find themselves in an increasingly 
competitive global marketplace. Although American firms have succeeded 
to date in spite of the current complexity and unfairness of our 
international tax regime, the added costs imposed by our tax rules take 
their toll. We must move to identify and eliminate those harmful and 
unnecessary provisions that stand in the way of a continuing leadership 
role for American business in world markets.
  New York is home to many industries that are driven by global 
competition. Industries like the securities and banking industries, 
computer and other high technology firms, and countless other 
businesses in my State must have fair treatment at home in order to 
compete effectively abroad. For example, during the last decade the 
securities industry has been transformed from a largely domestic-
oriented industry to an industry in which U.S. and international 
financial institutions compete against each other in the principal 
capital markets around the world. U.S.-based securities firms are 
recognized leaders in their industry worldwide. Maintaining this 
position is important not only for these firms, but also for their U.S. 
employees and for their U.S. customers who benefit from the innovative 
products and services offered by U.S.-based securities firms.
  Unfortunately, Mr. President, U.S. tax law has failed to keep pace 
with the rapid changes in the world economy. The international 
provisions of the Internal Revenue Code were last substantially debated 
and revised in 1986. And in many cases, our foreign competitors operate 
under simpler, fairer, and more logical tax regimes. This mismatch 
between commercial reality and the U.S. Tax Code creates a structural 
bias against the international activities of U.S. companies. This 
cannot and should not be allowed to continue.

[[Page S10689]]

  The International Tax Simplification for American Competitiveness Act 
acknowledges and addresses a number of problems our tax laws create for 
American businesses facing increasing global competition. This bill 
represents an important step toward correcting complexities of the 
antideferral rules under subpart F, including their inappropriate 
application to active financing income of bona fide financial 
institutions and the current definition of investment in U.S. property, 
and excessive limitations on the use of foreign tax credits.
  Mr. President, the U.S. business community has had significant input 
in the development of this bill. This proposed legislation now will be 
evaluated and studied, and I welcome suggestions for its further 
improvement. It is my intention, as our analysis progresses, that we 
include other important issues not currently addressed in the bill, 
such as the appropriate allocation of interest expenses for foreign tax 
credit purposes, particularly for highly leveraged entities such as 
securities firms.
  I look forward to working with Senator Pressler on this important 
bill, and urge my colleagues on both sides to become 
cosponsors.
      Mr. BAUCUS. Mr. President, I am pleased to be a co-
     sponsor of the bipartisan ``International Tax Simplification 
     for American Competitiveness Act.''
  In 1997, Congress will take up tax reform. Discussions will range 
from replacing the current system to fixing what we have. Many 
Montanans ask me: How should we make taxes fairer for parents who are 
raising and educating their children, encourage our entrepreneurs to 
create and expand their businesses, and encourage all citizens to save?
  Our international tax provisions also need reform. The bill we 
introduce today is a placeholder to keep international tax reform on 
the legislative radar screen.
  As you can tell from the list of cosponsors, Mr. President, a number 
of Members have made contributions to the bill before us. Am I 
comfortable with every provision in the bill as written? No, I'm not. 
But I am comfortable every provision in the bill merits our 
consideration.
  The Finance Committee will take up tax reform next year. We will 
consider simplification of the international tax provisions in that 
context. I hope that the bill we introduce today will establish the 
parameters from which the Finance Committee addresses the need to 
simplify our international tax provisions. We will hear from a number 
of witnesses ranging from the business community to the Department of 
Treasury and, no doubt, the language before us will undergo change.
  We live in a global economy, Mr. President. Many businesses in 
Montana sell products directly or indirectly into that global economy. 
The international tax provisions should be simplified to make American 
companies competitive in the global economy while fairly taxing their 
profits.
  I look forward to working with the cosponsors of this bill and with 
the members of the Finance Committee and ultimately with all of my 
colleagues in restructuring and simplifying the Tax Code to benefit all 
of our citizens.
                                 ______