Congress will launch hearings next year on rewriting international tax rules, according to Senator Roth (R.-Del.). These rules date from the 1960s and are out of sync with the times

Congress will launch hearings next year on rewriting international tax rules, according to Senator Roth (R.-Del.). These rules date from the 1960s and are out of sync with the times

November 01, 1998 | By Keith Martin in Washington, DC

A key issue in the debate will be to what extent US tax rules should favor letting US companies compete on the same terms as the competition in foreign countries or to what extent the focus should be “tax neutrality,” which is the idea that US companies should be subject to the same 35% tax on worldwide income whether they invest at home or abroad. Otherwise, they may have an incentive to invest abroad. Labor unions tend to worry about “runaway plants.”

A UTILITY GROUP COMMENCES AN EFFORT to fix foreign tax credit problems in the power industry, but the fix would only help affiliates of regulated electric and gas utilities.

All US companies doing business overseas run quickly into a double taxation problem. The US claims the right to tax US companies on worldwide income. In theory, it lets anyone who has already paid taxes abroad on the same income claim a credit for these taxes in the US. However, the foreign tax credit rules are so full of fine print that few US power companies are able to claim such credits in practice.

The main problem is that interest paid on borrowing in the US is treated partly as a cost of foreign operations, even if the borrowed money was put to use solely in the US. This reduces earnings from overseas and reduces capacity to claim foreign tax credits, since the US only allows credits for up to 35% of foreign earnings.

Senator Mack (R.-Fla.) introduced a bill on October 14 that would fix the problem only for companies that are consolidated for federal income tax purposes with a regulated electric or gas utility.

Mack is a member of the Senate tax-writing committee. The bill will feature in the international tax reform debate next year.

Keith Martin