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Proceedings of a Seminar on Assessing U.S. Tax Policies Toward International Investment

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As the business climate becomes increasingly global and interdependent, the strength of the U.S. economy is more and more dependent on the efficient international flow of goods, services, and capital. Federal taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy plays an important role in shaping international trade and investment decisions and economic competitiveness. Therefore, the Tax Foundation saw the need for promoting a greater understanding of federal tax policies toward international investment and provided an objective forum with a seminar entitled “Assessing U .S. Tax Policies Towards International Investment : An Opportunity for Change.” The taxation of international transactions can be divided into two major parts: Americans operating overseas (outbound transactions) and foreigners operating in the United States (in-bound transactions).

The first part of this seminar is about Americans operating overseas. When American businesses decide to operate overseas, their overwhelming choice of form is the foreign subsidiary. When these subsidiaries earn income in the foreign jurisdictions, they usually pay a foreign tax. The international tax ruleInternational tax rules apply to income companies earn from their overseas operations and sales. Tax treaties between countries determine which country collects tax revenue, and anti-avoidance rules are put in place to limit gaps companies use to minimize their global tax burden. s of the United States provide for a foreign tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. for these taxes paid to foreign governments. However, the U.S. imposes numerous limitations on creditable foreign taxes.

The U.S. international tax rules also provide generally that a U .S. tax is not levied on foreign earnings of a U.S. subsidiary unless they are repatriated to the U.S. parent in the form of dividends. Exceptions to this general rule of deferral occur in the following cases: Subpart F income, and passive foreign investment companies (PFICs). These areas of international taxation give rise to various controversial issues. Many of these issues are discussed by the speakers in the first half of this seminar.

The two panels of this part were chaired by David M. Crowe, Partner in Caplin & Drysdale and Robert N. Mattson, Assistant Treasurer for IBM, both of whom provided articulate panel discussions. Raymond Haas, International Tax Partner for Ernst & Young; B. Anthony Billings, Professor of Accounting at Wayne State University; and Richard M. Hammer, International Tax Partner, Price Waterhouse provided an excellent overview of some of the problem areas in the international taxation rules for U.S. multinationals. Murray Schlussel, Assistant General Counsel – International Tax for Ford Motor Company, and John F. Brussel, Tax Director – International for AT&T, related how their firms have experienced difficulties complying with the U.S. tax rules of international taxation. Additionally, Peter A. Barnes, Deputy International Tax Counsel for the Treasury, provided some insight into these rules from the perspective of the Treasury Department.

The second session examined the tax treatment of foreign investment in the U.S., or inbound transactions. American individuals and corporations have long explored other parts of the world seeking financial gains and opportunities. But the movement of foreign capital here is of more recent vintage. As a consequence, the advising of foreign investors is now a larger component of American practitioners than ever before. The sheer size of the U .S. market makes it attractive to foreign investors. As a result, foreign persons – and their money – seem destined to play an ever larger role in our economy.

The very participation of foreigners on such a large scale has inevitably sparked the interest of U.S. fiscal authorities, and now through the media, politicians and the general public have become involved. The Treasury is concerned that these foreign-owned U .S. companies are avoiding U.S. taxation by using, or abusing as the case may be, the transfer pricing rules. Recent proposals have also included various information reporting rules for U .S. affiliates of foreign-owned companies. More recent bills have included the proposal to tax non-resident aliens and vii foreign corporations on their disposition of stock in U .S. companies.

The two panels for this session were chaired by Robert Ashby, Assistant Vice President, Taxes for Northern Telecom Inc. and John G. Wilkins, Partner for Coopers and Lybrand. Both of these panels provided a stimulating and enjoyable discussion of the taxation of foreign investment in the U.S. An overview of inbound foreign investment issues was provided by former Attorney General Elliot Richardson, now senior resident partner in the Washington, DC office of Milbank, Tweed, Hadley & McCloy, and chairman of the Association for International Investment.

Virtually all six of the speakers on these panels agreed that the U .S. should be careful if it initiates massive changes in the way foreign-controlled U.S. corporations are taxed. Congressman Philip Crane (R-IL), House Ways and Means CommitteeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S. The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others. , Peter A. Barnes, Deputy International Tax Counsel for the U.S. Treasury, Bruce R. Bartlett, Deputy Assistant Secretary for Economic Policy for the U.S. Treasury, and Harrison J . Cohen, Legislation Counsel for the Joint Committee on Taxation, provided the perspective from either the Congress or Treasury. James M. Carter, Senior Tax Counsel, ICI Americas, and Catherine T. Porter, partner in Miller & Chevalier, Chartered, spoke on foreign direct investment in the U.S. from the vantage point of having somewhat of an advocacy role for these companies. Finally, speaking as a representative of the country with the largest amount of foreign direct investment in the U .S., Richard Pratt, Economic Counsellor of the Embassy of Great Britain, stated that foreign investment in the U.S. should be viewed in a positive light.