2002 Ron Paul 72:1
MR. PAUL: Mr. Chairman, thank you for the
opportunity to submit my statement
regarding the corporate tax bill recently marked up by this
committee.
2002 Ron Paul 72:2
I hope Congress understands the historical significance of this
bill. Once
again, as when we created the ETI ("extraterritorial") tax regime in
2000, we are acting at the behest on an international body. We
are changing our domestic laws, and changing the way we tax domestic parent
corporations on the activities of their subsidiaries operating
wholly outside
of the U.S., because an international body demands it. The
WTO
appellate panel has spoken, and their will trumps Congress. Yet
we were
assured in 1994 that our membership in the WTO would never diminish
American
sovereignty.
2002 Ron Paul 72:3
The Europeans argue, quite correctly, that we
treat some foreign-source
corporate earnings preferentially, i.e. we exempt from tax a portion of
the earnings of foreign sales corporations (FSCs). This is not,
however, an argument for abolishing the FSC — it is an argument for adopting a
territorial tax system like many of our European critics!
2002 Ron Paul 72:4
Putting politics aside, however, the reality
is that we must craft a bill
that satisfies the WTO to avoid further trade sanctions.
While
reform of our overall tax system remains an issue for another day, it
is vital
that Congress begin to consider comprehensive overhaul of U.S.
international tax
rules.
2002 Ron Paul 72:5
The FSC,
created by Congress in 1984 under IRC sections 921-927, provides needed
relief
from the subpart F anti-deferral rules for the foreign subsidiaries of
our
domestic corporations.
FSCs make it
possible for U.S. corporations to better compete with companies
incorporated in
territorial-system nations — which is to say companies that generally
pay no
corporate tax at all on the foreign-source income of their subsidiaries.
I urge the committee to reconsider repealing the FSC, an entity
utilized by
several corporations in my district that employ thousands of people,
including
Marathon Oil, Dow Chemical, and British Petroleum. Since
competing
legislation recently introduced in this committee seeks to encourage
American
manufacturing and exports, it is imperative that any manufacturing
deduction
(for "qualified production activities") include income derived from
the production of finished energy products — refined gasoline,
liquefied natural
gas, etc.
2002 Ron Paul 72:6
It
may not be possible
to design a replacement that will replicate the same benefits (of the
FSC) to
the same taxpayers and still satisfy the WTO. On this point, I
concur with
Chairman Thomas. The committee should recognize that there
will be
winners and losers with any change to the existing rules.
However, I
believe it is important to balance the needs of various affected
industries and
implement any proposed legislation in a manner that avoids disruption
of current
business plans and activities.
2002 Ron Paul 72:7
Current
international
tax rules are grossly outdated. The basic Subpart F rules were
enacted in
1962. These rules reflect the economic climate of that
time. In
1962, the United States was a net exporter of capital and enjoyed a
trade
surplus. Imports and exports were only one-half of the percentage
of GDP
that they are today. The world has changed. Our tax laws
need to
change too.
2002 Ron Paul 72:8
The
impact of U.S. tax
rules on the international competitiveness of U.S. multinationals is
much more
significant an issue than it was forty years ago. Today, foreign
markets provide
an increasing amount of the growth opportunities for U.S.
businesses. At
the same time, competition from multinationals headquartered outside of
the
United States is becoming greater. Of the world’s 20 largest
corporations, the number headquartered in the United States has
declined from 18
in 1960 to just 8 in 1996. Around the world, 21,000 foreign
affiliates of
U.S. multinationals compete with about 260,000 foreign affiliates of
foreign
multinationals.
2002 Ron Paul 72:9
If U.S. rules for
taxing foreign source income are more burdensome than those of other
countries, U.S. businesses will be less successful in global markets, with
negative consequences for exports and jobs at home. I think a fair
comparison of U.S. international tax rules and those of other nations shows that
American businesses are increasingly put at a competitive disadvantage in the
world marketplace.
2002 Ron Paul 72:10
First,
about half of OECD countries have a territorial tax system under which a company
generally is not subject to tax on the active income earned by a foreign
subsidiary. By
contrast, the United States taxes income of a U.S.-controlled foreign
corporation either when repatriated or when earned in cases where
income is
subject to U.S. anti-deferral rules.
2002 Ron Paul 72:11
Second,
the scope of
U.S. anti-deferral rules under subpart F is unusually broad compared to
those of
other countries. While some countries tax passive income earned
by
controlled foreign subsidiaries, the United States stands out for
taxing (as a
deemed dividend) a wide range of active income under various subpart F
provisions.
2002 Ron Paul 72:12
Third,
the U.S. foreign
tax credit, which is intended to prevent double taxation of foreign
source
income, has a number of deficiencies that increase complexity and
prevent full
double tax relief.
2002 Ron Paul 72:13
Taken
all together, you
find that a U.S.-based business operating internationally frequently
pays a
greater share of its income in foreign and U.S. tax than does a
competing
multinational company headquartered outside of the United States. Yet
Congress
wonders why corporate inversions are at an all-time high!
2002 Ron Paul 72:14
One
indication of the
impact of an overly burdensome and complex tax regime on the U.S.
economy is in
the area of corporate mergers and reorganizations. U.S.
international tax
rules can play a key role in determining the location of a corporate
headquarter, as we witnessed with the DaimlerChrysler merger. In
fact,
recent studies have shown that between 73 and 86 percent of large
cross-border
transactions involving U.S. companies have resulted in the merged
company being
headquartered abroad.
2002 Ron Paul 72:15
In conclusion, Mr. Chairman, I urge the committee to craft a final bill
(or conference report) that satisfies the WTO without punishing those
U.S.
corporations that have relied on the FSC structure to maintain their
international competitiveness. I also urge the committee to use
this
debate as a springboard for wholesale reform of our international tax
rules.
This chapter appeared in Ron Paul’s Congressional website at http://www.house.gov/paul/congrec/congrec2002/cr072602b.htm
