[Congressional Record Volume 144, Number 151 (Wednesday, October 21, 1998)]
[Extensions of Remarks]
[Pages E2269-E2270]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




   TAXATION OF FOREIGN OPERATIONS OF U.S. ELECTRIC AND GAS UTILITIES

                                 ______
                                 

                            HON. JIM McCRERY

                              of louisiana

                    in the house of representatives

                       Tuesday, October 20, 1998

  Mr. McCRERY. Mr. Speaker, today, I am introducing legislation to 
remedy a problem brought to my attention by the U.S. utility industry 
involving the taxation of foreign operations of U.S. electric and gas 
utilities. These firms were prohibited for many years from doing 
business abroad until the National Energy Policy Act (NEPA), enacted in 
1992, removed that prohibition. With passage of NEPA, and as some 
foreign governments began privatizing their national utilities and 
increasing energy demands necessitated the construction of new 
facilities to fulfill the new capacity, U.S. utilities began to make 
foreign investments. Since 1992, U.S. utility companies have made 
significant investments in utility operations in the United Kingdom, 
Australia, Eastern Europe, and South America.
  Foreign utilities are particularly attractive investments from a U.S. 
viewpoint. They are not ``runaway plants'', but rather stimulate job 
creation in the U.S. in design, architecture, engineering, construction 
and heavy equipment manufacturing. When the subsidiary of an U.S. 
utility builds generating plants, transmission lines, or distribution 
facilities to serve its foreign customers, these most often come from 
U.S. suppliers. Given that the U.S. energy market is mature, overseas 
investments are a good way for U.S. utilities to diversify and grow, to 
the benefit of their employees and their shareholders.
  Unfortunately, the Internal Revenue Code penalizes these investments 
by subjecting them to double taxation. Under the foreign tax credit 
rules, the interest expense of a U.S. person is allocated in part to 
its foreign operations based on the theory of the ``fungibility of 
money.'' The allocation formula in Internal Revenue Code section 864 
requires U.S. domestic interest expense to be allocated based

[[Page E2270]]

on the value of the company's foreign and domestic assets. If a firm 
has mature (depreciated) U.S. assets and newly acquired overseas 
assets, like many U.S. utilities, a disproportionate amount of U.S. 
interest expense will be allocated abroad. The result is a very high 
effective tax rate on that foreign investment and a loss of U.S. 
foreign tax credits. Rather than face this double tax penalty, some 
U.S. utilities have actually chosen not to invest overseas and others 
have pulled back from their initial investments.
  One solution to this problem is found in the legislation that I am 
introducing today. Our remedy is to exempt the debt associated with a 
regulated U.S. utility business (the furnishing and sale of electricity 
or natural gas) from the interest allocation rules of Internal Revenue 
Code section 864. The proposal would allocate and apportion interest 
expense attributable to qualified infrastructure solely to sources 
within the United States. ``Qualified infrastructure indebtedness'' 
would be defined as debt incurred in a corporation's trade or business 
of furnishing or selling electricity or natural gas in the United 
States. Further, the rates for such furnishing or sale of electrical 
energy must be regulated or set by the federal government, a State, the 
District of Columbia or a political subdivision thereof.
  I am also aware that my colleagues on the Committee on Ways and 
Means, Congressmen Houghton and Levin, together with Senators Hatch and 
Baucus, have been leading a multi-year effort to reform the 
international tax laws. I am a strong supporter of that effort, which 
is intended in part to rectify the disconnect between our nation's 
favorable trade laws and our tax laws, which too often penalize 
American firms wanting to expand into foreign markets. The problem of 
interest allocation has not yet been addressed in the Houghton-Leven 
legislation, but I strongly urge that this provision be included in any 
foreign tax reform bill introduced in the next Congress. Further, 
because the process of getting legislation enacted into law properly 
involves consultation with Treasury, the affected industry, and the 
bar, we encourage those with subject matter expertise in this area to 
review our bill. I believe my bill reflects the best thinking now 
available on how to address this serious problem, but we are certain 
that further reflection will yield an even better ??? for U.S. 
utilities attempting to invest overseas.

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