[Congressional Record (Bound Edition), Volume 152 (2006), Part 16]
[Extensions of Remarks]
[Pages 21738-21739]
[From the U.S. Government Publishing Office, www.gpo.gov]




        INTRODUCTION OF THE INTERNATIONAL TAX SIMPLIFICATION ACT

                                 ______
                                 

                            HON. SAM JOHNSON

                                of texas

                    in the house of representatives

                       Friday, September 29, 2006

  Mr. SAM JOHNSON of Texas. Mr. Speaker, today I am introducing the 
International Tax Simplification Act of 2006. This bill is aimed at 
streamlining tax rules so that American companies doing business all 
over the world can be more competitive. In the last few years we have 
taken a number of important steps toward this goal and the bill I am 
introducing would continue this effort.
  In the past one of our former colleagues, Amo Houghton of New York, 
introduced similar bills. Some of the provisions of this bill echo his 
legislation and build off of his efforts.
  Many of the concepts related to the taxation of international 
business operations were written forty years ago and have remained 
frozen in time. The global business environment has changed 
dramatically since the early 1960s when American companies were the 
major player in global business transactions. In the early 1960s, 
Western Europe was still recovering from the scars of World War II and 
the Asian business environment was just developing.
  Today, our European and Asian competitors produce products and 
services of world-class standards and have consumers that demand the 
same. American companies must compete in these markets but are 
sometimes still bound by a tax code that presumes they are the only 
player on the field.
  The American system of taxation--based on a ``worldwide income'' 
model--basically taxes all income earned by American companies both in 
the United States and abroad and then gives credits for taxes paid in 
other countries. Many other countries look only at income earned within 
its borders--based on a ``territorial'' model--but make certain 
exceptions for income earned abroad.
  The tax departments of American companies are double and triple the 
size of tax departments of their foreign competitors. I believe there 
are more productive uses of corporate assets than complying with the 
arcane rules that make up our tax system.
  At the House Ways and Means Committee, we've been taking steps to 
modernize the tax rules for American businesses working in the global 
business environment. We were also forced to change our tax code 
because of rulings by the World Trade Organization. Yet there remain 
dozens of places in the tax code that need work. The bill I am 
introducing is a first draft at this work. I am introducing it as the 
109th Congress comes to a close and I invite those who are interested 
in these issues to work with me to either fine tune these provisions or 
find broader strokes to envelop wider solutions. I hope to reintroduce 
similar legislation early in the 110th Congress.
  The bill I am introducing would get rid of some of the rules 
regarding the worldwide grab for revenue. The part of the tax code 
known as ``Subpart F'', in particular requires that tax be paid on 
income earned in foreign countries where American companies are making 
goods and providing services as if that money were earned in this 
country. The presumption is that companies are just keeping money 
offshore so that they can avoid American taxes. But we know that 
American companies must engage in business activities such as making 
loans to finance the sale of their goods and that a temporary provision 
exists to allow companies to engage in this legitimate business 
activity without seeing their income taxed immediately. My bill would 
make this provision of the tax code permanent.
  I'd also repeal the rules that require immediate taxation of American 
subsidiaries on the income earned when related subsidiaries do business 
with one another. The anti-deferral rules are meant to discourage 
parking money offshore and evading taxes but the rules as written 
punish American companies that try to work collaboratively with their 
subsidiaries. If a subsidiary in Germany is working on a project with a 
subsidiary in Brazil, that income should not be subject to immediate 
tax in the United States. American subsidiaries should be able to work 
together for sourcing products and services rather than being 
encouraged by the tax code to work with other companies. By having 
subsidiaries work together on sales and services projects, American 
parent companies should see higher growth and productivity.
  I have had several companies request that I fix specific parts of the 
rules on sales and services income. Because the full repeal of these 
rules is likely to be scored as a big loss to the Treasury, I may have 
to whittle away at these rules bit by bit instead of taking one bold 
step. I would like to hear comments from the business community and tax 
lawyers on the full repeal of these rules as well as inviting comments 
and suggestions on more narrow approaches.
  Another provision in this bill would make permanent a temporary 
provision that permits related American subsidiaries in other countries 
to make dividend, interest, rent and royalty payments between 
subsidiaries without being subject to current taxation in the United 
States. We've already decided that this is not a business activity that 
should be penalized and we should now take the step of making it 
permanent.
  The foreign tax credit regime prevents double taxation of income in 
multiple countries. Because use of credits is restricted in some 
circumstances, credits are not always used in the year earned. My bill 
would double to 20 years the current 10-year carryforward period that 
sometimes causes credits to expire before they can be used. While this 
would virtually eliminate the expiration of credits, I would like to 
hear from companies that would instead prefer to have the ordering 
rules changed so that oldest credits would be used first.

[[Page 21739]]

  The bill changes a simple threshold for when American subsidiaries 
abroad are subject to the Subpart F rules. The current $1 million or 5 
percent of income threshold, set generations ago, would be raised to $5 
million or 5 percent of income.
  Another provision of the bill concerns how earnings and profits are 
reported. Publicly traded companies are required to file financial 
statements. based on Generally Accepted Accounting Principles (GAAP) in 
the United States. My bill would permit American subsidiaries abroad to 
report their foreign earnings and profits based on GAAP rather than the 
American tax accounting rules of uniform capitalization.
  The bill would accelerate the effective date of a provision of law 
that allows companies to allocate their interest expense as if all 
members of a worldwide group were a single corporation. This change 
would speed up the ability of companies to use a formula for allocating 
interest expenses.
  Finally, this bill would repeal special rules on income from foreign 
oil and gas. American oil and gas companies need to explore and develop 
energy sources in other countries where oil and gas deposits exist. The 
provision would also repeal special tax rules that limit foreign tax 
credits for oil and gas companies, thus permitting underlying tax rules 
to apply.
  The provisions of this bill generally focus on American corporations 
that have subsidiaries abroad. However, there are two other areas on 
which I invite comment for the next version of this bill. One is the 
inverse of this bill and concerns subsidiaries in America that have a 
parent company abroad. Global businesses know that having American 
operations is strategically important and I know that these businesses 
provide excellent jobs and contribute to American economic expansion. 
The other area on which I invite comment is individual taxpayer 
concerns regarding international taxation.
  I want to thank several professional tax staffers who have helped to 
comb through many proposals and provided invaluable advice to me in 
drafting this legislation. They are: Marc Gerson from the Ways and 
Means Committee, Tom Barthold, Patrick Driessen, Tara Fisher, Chris 
Gerke, David Lenter, and Allen Littman from the Joint Committee on 
Taxation.

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