Law Professor Urges Legislation to Address Foreign Source Income Tax
Law Professor Urges Legislation to Address Foreign Source Income Tax
- AuthorsShields, Cornelius C.
- Cross-ReferenceFor a summary of H.R. 1769, see Tax Notes, May 5, 2003, p.
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2003-18193 (2 original pages)
- Tax Analysts Electronic Citation2003 TNT 163-9
Devon, PA 19333
August 12, 2003
Assistant Secretary (Tax Policy)
Treasury of the United States
Washington, D.C.
Dear Assistant Secretary Olson;
[1] This is to suggest that the Treasury Department propose legislation to treat as foreign source the income of foreign subsidiaries (and foreign hybrids owned by foreign subsidiaries) operating from a U.S. office to the extent the income is attributable to furnishing equity capital and other financing to foreign affiliates (including foreign hybrids), exercising management supervision and control with respect to the foreign affiliates, and supplying services to the foreign affiliates that are incident to furnishing equity capital and other financing and exercising management supervision and control. Qualifying entities might be required to file a special tax return as a "Section XXX Entity."1
[2] I write as an adjunct professor teaching courses in tax policy and international tax planning in a law school graduate tax program and from experience in the federal government, a multinational corporation, and law firms.
[3] This suggestion is made in light of the uncertain outcome of legislation to repeal the ETI provisions and enact new foreign tax rules. The Crane-Rangel bill, H.R. 1769, would lower the section 11 rate on U.S. manufacturing income to compensate companies for loss of the export provisions. Chairman Thomas's H.R. 2896 incorporates a number of changes that respond to competitiveness concerns of U.S. multinationals. Neither bill would move the U.S. to full or "pure" territoriality, and under both bills the U.S. tax system would continue to distinguish sharply between U.S. and foreign incorporated companies.
[4] U.S. companies, to obtain the benefit of deferral of U.S. tax on their foreign income, still would have to use foreign subsidiaries. Because neither bill would change applicable source-of-income rules, the activities of these foreign subsidiaries still would have to be located outside the United States. Currently, U.S. multinationals often place holding-financing-management functions in foreign subsidiary corporations, or in foreign hybrids owned by foreign subsidiaries, located in countries such as the Netherlands that tax lightly or not at all income from sources outside their borders. The countries in which these entities are located benefit substantially from the significant number of associated high level jobs.
[5] Unless something is done in connection with passage of either H.R. 1769 or H.R. 2896, both U.S. and foreign multinationals will continue to be effectively precluded from using a U.S. location for their foreign holding-financing-management entities.
[6] A different location policy would seem to be better for the country. The U.S. would lose little or no section 11 tax, compared to the status quo, if it permitted and welcomed these entities to be located within the United States by treating their income as foreign source. In fact, the country would gain revenues from taxes on the employees if the jobs were in the U.S. instead of abroad. Additional revenues would come from added business for U.S. based third-party suppliers. The U.S. could be an attractive location not only for the holding-financing-management entities of U.S. multinationals for their foreign operations, but also for the comparable entities of foreign multinationals. Many, perhaps a great many, high level, world class jobs might be located or relocated to the U.S. instead of being sited abroad.
[7] If Treasury decides to propose legislation along these lines, it would be helpful if an accompanying memorandum provided text and examples to show how Treasury and the IRS will construe the statutory terms (hopefully, broadly) and how they will apply section 482 to the holding-financing-management entities and to the foreign affiliates with which they deal (hopefully, in a manner consistent with the purposes of the legislation).
[8] Thank you for your time in considering this letter.
Cornelius C. Shields
Barbara Angus, International Tax Counsel, Treasury
Patricia Brown, Deputy International Tax Counsel, Treasury
Emily Parker, Acting Chief Counsel, IRS
Henry Hicks, Associate Chief Counsel (International), IRS
Robert Winters, Chief Tax Counsel, Majority, House Ways and Means
John Buckley, Chief Tax Counsel, Minority, House Ways and Means
Mark Prater, Chief Tax Counsel, Majority, Senate Finance
Russ Sullivan, Chief Tax Counsel, Minority, Senate Finance
George Yin, Chief of Staff, JCT
FOOTNOTE
1 The proposed legislation is taken from the draft territoriality statute which I sent to you by letter dated July 4, 2002 (see also 27 Tax Notes International 589, 29 July 2002, and 2002 WTD 145-18 ). In that draft the part described above appears twice with slight word variation, once for U.S. multinationals (headed "Headquarters and Holding Subsidiaries for Foreign Operations"), and once for foreign multinationals (headed "Headquarters and Holding Subsidiaries of Foreign Parent Corporations"), and was available to both foreign and domestic subsidiaries.
END OF FOOTNOTE
- AuthorsShields, Cornelius C.
- Cross-ReferenceFor a summary of H.R. 1769, see Tax Notes, May 5, 2003, p.
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2003-18193 (2 original pages)
- Tax Analysts Electronic Citation2003 TNT 163-9