THE UNITED STATES COUNCIL FOR INTERNATIONAL BUSINESS

(A BUSINESS ASSOCIATION)

SUBMITS THESE COMMENTS TO

THE PRESIDENT'S ADVISORY PANEL ON FEDERAL TAX REFORM

JUNE 10, 2005

Submitted by:

Michael Reilly

Chair, Taxation Committee

Andrew B. Breslow

Chair, Tax Legislative & Administrative Developments Subcommittee

Richard M. Hammer

International Tax Counsel

COMMENTS FOR

**THE PRESIDENT'S ADVISORY PANEL ON FEDERAL TAX REFORM**

**SUBMITTED BY**

**THE UNITED STATES COUNCIL FOR INTERNATIONAL BUSINESS**

The United States Council for International Business (USCIB) is pleased
for this opportunity to present our views to the President's Advisory
Panel on Federal Tax Reform (the Panel) with respect to the momentous
topic of reforming the Internal Revenue Code (the Code). A fair and
equitable tax system, based upon a sound tax policy foundation, is
essential to the economic well being of our nation. The Code has become
antiquated by reason of changing and evolving business models, meriting
a thorough overhaul at the earliest possible time. We will address tax
policy aspects only, and, furthermore, our emphasis will be, for the
most part, on the international aspects of the Code and their impact on
the competitiveness of U.S. business vis-à-vis competing foreign
enterprises.

USCIB advances the global interests of U.S. business, both here and
abroad. It is the U.S. affiliate of the International Chamber of
Commerce (ICC), the Business and Industry Advisory Committee to the OECD
(BIAC), and the International Organization of Employers (IOE). As such,
it officially represents U.S. business in the preeminent
intergovernmental bodies, where it addresses a broad range of issues
with the objective of an open system of world trade, finance and
investment.

The U.S. income tax system was initially authorized by the 13th
amendment to the Constitution, and the first statute imposing such tax
was enacted in 1913. The system evolved over the years, progressing from
annual income tax acts to the 1939 Code, the 1954 Code and, finally, the
1986 Code, which is the basis of today's tax law and practice. Since the
outset, the regime has operated as a classical system using the global
approach.

Traditionally, a classical system doubly taxes corporate profits, first
at the corporate level and, again, at the shareholder level. This is in
contradistinction to an integrated system, which is currently very
popular around the world, where the tax at the corporate level is deemed
to be, in whole or in major part, an advance payment of the tax at the
shareholder level. It should be noted that the double taxation of
corporate profits only applies to profits earned, irrespective of
source, by a U.S. corporation.

The global approach taxes U.S. resident taxpayers on their worldwide
income, providing relief from international double taxation by way of
the foreign tax credit (FTC) provisions of the Code. This is in contrast
to a territorial (exemption) approach, also quite popular abroad, which
exempts foreign business income and grants credit for foreign income
taxes only on foreign non-business (e.g., investment) income. It must be
noted that a global system generally does not include in the income
subject to double taxation the profits of foreign affiliated
corporations, under the long-standing U.S. principle known as
**deferral.**

Over the years since World War II, amendments to the Code have addressed
the operation of the classical system, in particular, the deferral
principle and the FTC mechanism (these are the provisions in the Code,
as noted above, designed to avoid international double taxation.) Most
of these amendments have been deleterious to the worldwide competitive
position of U.S. multinational enterprises, who effectively dominated
the international business scene in the early decades following the war.
The erosion triggered by these restrictive amendments must be reversed
so as to continue to maintain a strong economy in this country. Whatever
the Panel comes up with in the way of proposed reform to the Code, this
aspect of the current system **must not be ignored**.

The USCIB feels strongly that the double taxation of corporate profits
that results from the use of the classical system represents flawed tax
policy, and the Panel should, if possible, make a serious effort to
achieve a wholly integrated system, like that of many of our trading
partners. Over the years, various legislative efforts have been made to
partially reduce the incidence of double taxation of corporate profits,
by way of a combination of dividend credits and exemptions, most of
which were repealed because of government revenue concerns. At last, in
the 2003 Jobs and Growth Tax Relief Reconciliation Act, a 15% tax rate
was imposed on the portfolio dividends of individual taxpayers, a large
step toward integration. In our view, however, total integration, such
as exists in several other countries, should be the ultimate goal.

We next focus on the two key issues in our global system, deferral and
double tax relief, which, to re-establish, and then maintain, a strong
competitive position for our multinationals, **must** be seriously
considered by the Panel. First, as to deferral, pre-1963 law provided
total deferral for the profits of overseas subsidiaries of U.S.
enterprises. The Revenue Act of 1962 altered that situation by enacting
the Controlled Foreign Corporation (Subpart F) (CFC) provisions, which
introduced into the Code the current taxation of U.S. shareholders on
certain earnings of controlled foreign corporations. Since 1962, a
plethora of ill-conceived amendments to these provisions made them even
more onerous to U.S. multinationals, making it more difficult than ever
for U.S. business to compete effectively internationally. It is true
that other capital exporting nations have since enacted their own CFC
provisions, but the U.S. version remains far and away the most
burdensome set of CFC provisions extant, thus contributing substantially
to the decline of the competitive edge for U.S. business. USCIB strongly
supports a complete repeal of Subpart F of the Code (more on this
below).

Secondly, of utmost importance to U.S. competitiveness, is the existence
in the statute of a flexible and effective mechanism for the relief of
international double taxation. In 1960, the U.S. enacted an overall
(global) limitation for the FTC (prior thereto, only a per-country
limitation was allowed). The overall approach proved to be a most
effective defense against double taxation, but, almost immediately,
Congress added a new rule requiring a separate limitation for certain
portfolio interest income (referred to as Sec. 904 (d) interest). Since
then, Congress, presumably for revenue considerations, kept chipping
away at the overall limitation, establishing a series of separate
limitation categories, rendering our double tax relief mechanism far
less effective than that of our competitor nations, obviously again
adversely impacting U.S. competitiveness.

The 2004 American Jobs Creation Act finally reversed the trend of many
years with a package of amendments to the CFC and FTC provisions that
actually attempted to redress the eroding U.S. competitive position.
These amendments do indeed improve the competitive climate for U.S.
multinationals; but there is much more yet to do. USCIB strongly
believes that what is needed is a complete repeal of Subpart F of the
Code, coupled with rolling back the FTC provisions to its 1960
configuration (i.e., essentially, an overall limitation without any,
separate limitation categories, including the separate limitation
covering oil and gas income in Code Sec. 907) and extending and
reordering the foreign tax credit carryover period so that foreign tax
credits do not expire unused subjecting taxpayers to double taxation.
These changes will prove to be the medicine that U.S. business needs to
compete effectively and successfully abroad.

With respect to the possibility of converting from a global (credit)
system to a territorial (exemption) approach, USCIB would strongly
object to such a plan of conversion. We believe that the Code, if
amended along the lines suggested herein, is eminently preferable to a
wholesale switch to something new, for the following reasons:

-   It is a system with which U.S. business is familiar and comfortable;

-   It provides a more effective shield to averting international double
    taxation; and

-   It avoids a transition which could be expensive, overly lengthy and
    excruciatingly burdensome.

Of course, any changes to the current rules should be done in a manner
that make it easier for the government to administer the law, and for
taxpayers to comply with the law. Moreover, we strongly object to
changing the current tax rules if such changes would result in a net
overall increase in business taxes.

We have framed our discussion in this submission of the selected issues
addressed above on a very general tax policy level, without getting
bogged down in the many and varied technical issues involved. We would,
however, be pleased to discuss such technical issues with the Panel or
members of its staff, if the Panel would so desire. We are anxious to be
of assistance in this extremely important undertaking, and to support
the Panel in seeing that its recommendations, if consistent with the
views expressed herein, become reality.