[Congressional Record Volume 147, Number 46 (Monday, April 2, 2001)]
[Senate]
[Pages S3279-S3280]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HATCH (for himself, Mr. Baucus, Mr. Ensign, Mr. Murkowski, 
        Mr. Torricelli, Mr. Schumer, and Mr. Breaux):
  S. 676. A bill to amend the Internal Revenue Code of 1986 to extend 
permanently the subpart F exemption for active financing income; to the 
Committee on Finance.
  Mr. HATCH. Mr. President, I rise today on behalf of myself and 
Senators Baucus, Ensign, Torricelli, Schumer, Murkowski, and Breaux, to 
introduce legislation to permanently extend the exclusion from Subpart 
F for active financing income earned on business operations overseas. 
This legislation permits American financial services firms doing 
business abroad to continue to defer U.S. tax on their earnings from 
their foreign financial services operations until such earnings are 
returned to the U.S. parent company.
  The permanent extension of this provision is particularly important 
in today's global marketplace. Over the last few years the financial 
services industry has seen technological and global changes that have 
altered the very nature of the way these corporations do business, both 
here and abroad. The U.S. financial industry is a worldwide leader and 
plays a pivotal role in maintaining confidence in the international 
marketplace. It is essential that our tax laws adapt to the fast-paced 
and ever-changing business environment of today.
  Let me outline exactly why this bill is needed. Regulated U.S. 
financial institutions with operations overseas need to retain earnings 
in foreign subsidiaries in order to meet ever-expanding capital 
requirements. Unfortunately, if the tax provision this bill seeks to 
permanently extend is allowed to expire at the end of this year, as is 
scheduled under the current law, those earnings will be subject to 
current U.S. taxation. Obviously, current taxation makes it more costly 
for a growing overseas business to meet those capital requirements, an 
impediment that is not in place for most foreign-based competitors.
  Congress recognized this fact as long ago as the early 1960s, when 
the Kennedy Administration proposed the imposition of current taxation 
for all overseas income of U.S.-based corporations. Counsel for the 
Joint Committee on Taxation testified at that time that Congress could 
not constitutionally tax shareholders on the unremitted earnings of 
foreign subsidiaries except in cases where such tax was necessary to 
prevent the evasion or avoidance of tax. In cutting back the scope of 
the President's proposal, the House Ways and Means Committee stated, in 
part, ``to impose the U.S. tax currently on U.S. shareholders of 
American-owned businesses operating abroad would put such firms at a 
disadvantage with other firms located in the same areas not subject to 
U.S. tax.''
  Forty years later, those words still ring true. The competition 
abroad for U.S. banks, for example, is no longer the Chases, Bankers 
Trusts, and Bank of Americas of the world. They are now Deutschebank, 
ABN Amro, HSBC, and Societe Generale. These foreign-based financial 
institutions are big players in the worldwide arena operating, usually, 
under home-country tax regimes that generally do not tax currently 
their active financial income earned outside their home countries.
  The bill we are introducing today would provide a consistent, 
equitable, and stable international tax regime for this important 
component of our economy. A permanent extension of this provision would 
provide American companies much-needed stability. Our current ``on-
again, off-again'' habit of annual extension limits the ability of 
U.S.-based firms to compete fully in the marketplace and interferes 
with their decision making and long-term planning. The activities that 
give rise to this income are long-range in nature, not easily or 
inexpensively stopped and started on a year-to-year basis. Permanency 
is the only thing that makes sense when it comes to this kind of tax 
policy.
  This legislation will give U.S.-based financial services companies 
consistency and stability. The permanent extension of this exclusion 
from Subpart F provides tax rules that will ensure that the U.S. 
financial services industry is on an equal competitive footing with 
their foreign-based competitors

[[Page S3280]]

and, just as importantly, provides tax treatment that is consistent 
with the tax treatment accorded most other U.S. companies.
  The world has changed rapidly over the past few years. Like it or 
not, we live and compete in a global economy. In many respects, our Tax 
Code is outdated and represents the world as it was in the 1960s or 
1970s, or in some cases, even before. If we close our eyes to these 
facts, we risk losing our worldwide leadership. The legislation we are 
introducing today will not solve all of our tax problems, nor even all 
of the tax problems of U.S. companies trying to compete 
internationally. It will, however, solve one very important problem. 
And this would be a start from which we can build.
  I urge my colleagues to support this important bill and ask that the 
text of the bill be printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 676

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. PERMANENT SUBPART F EXEMPTION FOR ACTIVE FINANCING 
                   INCOME.

       (a) Banking, Financing, or Similar Businesses.--Section 
     954(h) of the Internal Revenue Code of 1986 (relating to 
     special rule for income derived in the active conduct of 
     banking, financing, or similar businesses) is amended by 
     striking paragraph (9).
       (b) Insurance Businesses.--Section 953(e) of the Internal 
     Revenue Code of 1986 (defining exempt insurance income) is 
     amended by striking paragraph (10) and by redesignating 
     paragraph (11) as paragraph (10).
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years of a foreign corporation 
     beginning after December 31, 2001, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of such foreign corporation end.

  Mr. BAUCUS. Mr. President, today I am pleased to join my colleague 
Senator Hatch in introducing legislation to permanently extend the 
exception from Subpart F for active financing income.
  Current law contains a temporary provision, expiring at the end of 
this year, that makes sure that the active financial services income 
that a U.S. financial services company earns abroad is not subjected to 
U.S. tax until that income is distributed back to the U.S. parent 
company. Our legislation is intended to keep the U.S. financial 
services industry on an equal footing with foreign-based competitors by 
making this provision permanent.
  The growing interdependence of world financial markets has 
highlighted the need to rationalize U.S. tax rules that undermine the 
ability of American financial services industries to compete in the 
international arena. At the same time, it is important to ensure that 
the U.S. tax treatment of worldwide income does not encourage avoidance 
of U.S. tax through the sheltering of income in foreign tax havens. 
However, I believe it is possible to adequately protect the federal 
fisc without jeopardizing the international expansion and 
competitiveness of U.S.-based financial services companies, including 
finance and credit entities, commercial banks, securities firms, and 
insurance companies.
  The active financing provision is particularly important today. The 
U.S. financial services industry is second to none and plays a pivotal 
role in maintaining confidence in the international marketplace. 
Through our network of tax treaties, we have made tremendous progress 
in gaining access to new foreign markets for this industry in recent 
years. Our tax laws should complement, rather than undermine, this 
effort.
  As is the case with other tax provisions such as the research and 
development tax credit, the temporary nature of the U.S. active 
financing exception denies U.S. companies the certainty enjoyed by 
their foreign competitors. The economic growth of American's financial 
sector is impaired by the uncertainty under the current system created 
by continually extending the exception on a temporary basis. The 
activities that are affected by this provision are long-range in nature 
and therefore those entering into these activities need to know the 
long-range tax consequences of their actions. A permanent extension of 
the active financing exception is needed to allow our financial 
services industry to compete internationally.
  I ask my colleagues to join me in supporting this legislation, and 
provide a consistent, equitable, and stable international tax regime 
for the U.S. financial services industry.
                                 ______