[Congressional Record Volume 148, Number 86 (Tuesday, June 25, 2002)]
[Senate]
[Pages S6018-S6019]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. TORRICELLI (for himself and Mr. Hatch):
  S. 2676. A bill to amend the Internal Revenue Code of 1986 to allow a 
10-year foreign tax credit carryforward and to apply the look-thru 
rules for purposes of the foreign tax credit limitation to dividends 
from foreign corporations not controlled by a domestic corporation; to 
the Committee on Finance.
  Mr. TORRICELLI. Mr. President, today, Senator Hatch and I are 
introducing legislation to modernize and simplify the foreign tax 
credit. The legislation contains two meritorious provisions that we 
hope Congress will enact this year, in that they are both long overdue.
  The first provision addresses the problem of double taxation that 
results when foreign tax credits expire unused under current law. To 
enhance the international competitiveness of U.S. companies operating 
overseas, and to help avoid this unfair double taxation, our 
legislation simply extends the current 5-year foreign tax credit 
carryforward period for five additional years to a 10-year 
carryforward.
  The second provision reforms current law, which unduly hinders U.S. 
companies in their efforts to penetrate foreign markets by imposing the 
so-called 10/50 foreign tax credit rule. Due to legal and political 
realities, many U.S. companies are forced to operate through corporate 
joint ventures in partnership with local businesses. The 10/50 rule 
imposes a foreign tax credit limitation for each of these corporate 
joint ventures where a U.S. company owns at least 10 percent but not 
more than a 50 percent interest in a foreign company, and thus 
increases the cost of doing business for U.S. firms competing abroad.
  10/50 reform would restore parity in the tax treatment of joint-
venture income to other income earned overseas by U.S. companies by 
applying ``look-through'' treatment. Without this change, U.S.-based 
companies engaged in joint ventures overseas will continue to be 
disadvantaged vis a vis foreign competitors. Congress attempted to 
rectify this problem in a large tax bill that was ultimately vetoed in 
1999. The Clinton Treasury also recommended enactment of this crucial 
tax change in its FY 2000 budget package and similarly, the Joint 
Committee on Taxation endorsed this non-controversial provision in its 
2001 Simplification Study.
  As indicated earlier, these two changes are long overdue and we urge 
their expeditious enactment.
  Mr. HATCH. Mr. President, I am pleased to join with my friend and 
colleague from New Jersey in introducing a bill to improve the tax 
treatment of U.S.-based multinational companies.
  It is apparent that our international tax code is deeply flawed. The 
current wave of companies reincorporating in Bermuda, the foreign sales 
corporation debacle, and the trend of tax-motivated foreign takeovers 
all provide abundant evidence that Congress needs to act to make our 
international tax rules friendlier to American-based companies.
  The bill we are introducing today is one that I consider to be a 
down-payment on the fundamental reform that our international tax 
system demands. The bill will reduce, but unfortunately will not 
eliminate, the double taxation of international income that occurs far 
too often. This double taxation is just one of several serious problems 
with our international tax rules.
  The threat of double taxation, where an American corporation ends up 
paying corporate taxes to both the United States and to a foreign 
country on the same income, discourages U.S. firms from investing 
overseas. And since U.S. multinationals provide millions of America's 
best-paying domestic jobs, anything that discourages overseas direct 
investment ends up hurting the take-home pay of our nation's workers.
  Our bill has two provisions. The first would reform the carryforward 
treatment of foreign tax credits. The Internal Revenue Code was 
originally designed to make sure that U.S. corporations investing 
overseas are not subject to double taxation by a foreign nation and the 
U.S. on the same income. It does this through the availability of a 
foreign tax credit. If this system worked well, then American 
businesses would seldom or ever face this kind of double taxation.
  However, the system most emphatically does not work well. For 
example, American businesses are only allowed to use these foreign tax 
credits when their U.S. operations are profitable. As a result, when 
the U.S. side of the business is doing badly, firms are unable to 
immediately use the foreign tax credits. While the current tax law 
allows

[[Page S6019]]

businesses to carry excess foreign tax credits forward for up to 5 
years, that timetable is unrealistic. An expanding business, with high 
domestic expansion costs and low domestic profits, can easily go 
through 5 years of losses, and never get a chance to use those tax 
credits. Once the 5-year period has expired, the credits are gone 
forever, and the result is double taxation, the threat of which 
discourages firms from taking on otherwise profitable overseas 
investment projects.
  If we want American businesses to take the long view, a 5-year 
carryforward just is not long enough. The legislation Senator 
Torricelli and I are introducing today will extend that horizon to 10 
years. If enacted, it would give U.S. firms a much better search 
throughout the world for profitable investment projects. And again, 
profits earned by U.S. companies throughout the world generally 
translates into more and better-paying jobs for Americans.
  Our second proposal would eliminate our tax code's inhospitable 
treatment of international joint ventures. In many developing countries 
with rules and restrictions on foreign ownership, joint ventures are 
the only way to get things done. Our current-law tax treatment of these 
joint ventures, known as 10/50 companies because between 10 and 50 
percent of the joint venture is owned by the U.S. company--is 
indefensible.
  Ordinarily, our tax code adds together tax attributes from different 
divisions of the same firm. For example, if one division of a company 
loses a hundred dollars and another division earns a hundred in 
profits, we offset the gain and the loss and assess no tax liability.
  Unfortunately, when it comes to these 10/50 companies, the tax law 
applies a separate foreign tax credit limitation to each venture. This 
increases the cost of doing business for the U.S. firms competing 
abroad because it makes it harder for firms to use their foreign tax 
credits and also adds a great deal of complexity. The result? Double 
taxation once again. And once again, our tax code discourages U.S. 
firms from jumping on profitable investment opportunities, because of 
the very real threat of double taxation.
  When American businesses are considered overseas investment 
opportunities, we do not want that decision to turn on the arcane 
details of U.S. tax law--we want a code that is fairer, simpler, and 
most of all, helps our companies better compete in the global 
marketplace. The bill we are introducing today will not fix all of our 
tax code's many problems in the international area, but it is an 
excellent start. I urge our colleagues to give their consideration to 
this important piece of legislation.
                                 ______