INTERNATIONAL TAX SEMINAR for Congressional Staff

1
INTERNATIONAL TAX SEMINARfor Congressional Staff

• International Tax Policy Forum
• Finance Committee Hearing Room
• U.S. Senate
• February 15, 2002

2
International Tax Seminar

• Contents
• Introduction
• Economic background
• US International tax system Overview
• Current International tax policy issues
• Extra-territorial income (ETI) regime
• Dividend exemption (territorial) tax systems
• US International tax system Primer
• Anti-deferral regime (subpart F)
• The foreign tax credit

3
Introduction

• International Tax Policy Forum (www.itpf.org)
• Founded in 1992, the International Tax Policy
  Forum is an independent group of over 30 US MNCs
  with a diverse industry representation. The
  primary purpose of the Forum is to promote
  research and education on taxation of income from
  cross-border investment. To this end, the Forum
  sponsors research and conferences on
  international tax issues and meets periodically
  with academic and government experts. As a
  matter of policy, the Forum does not take
  positions on legislative or regulatory proposals.
• Mr. John Samuels (General Electric Co.) serves
  as Chairman of the Forum and Prof. James Hines,
  Jr. (University of Michigan) is the Forum's
  research director. PricewaterhouseCoopers is a
  consultant to the Forum.

For more information contact Margery Sweat
(202-414-1620).
4
Introduction

• Presenters
• Alan Fischl, PwC International Tax Services
• alan.fischl_at_us.pwcglobal.com (202.414.1030)
• Carl Dubert, PwC International Tax Services
• carl.dubert_at_us.pwcglobal.com (202.414.1718)
• Peter Merrill, PwC National Economic Consulting
• peter.merrill_at_us.pwcglobal.com (202.414.1666)

5
Introduction

• Some current international tax policy issues
• Response to WTO decision on FSC/ETI
• Dividend exemption (territorial) tax systems
• Other changes in structure of US international
  tax rules
• Active financing extension
• Simplification
• JCT study
• Treasury study announced in budget short- and
  long-term parts
• Other simplification initiatives

6
Economic background

• Global economic trends
• Foreign direct investment
• Foreign portfolio investment
• Cross-border mergers and acquisitions

7
Global economic trends

• The U.S. share of the world economy has declined
  due to faster economic growth abroad since World
  War II
• A domestic company that limited itself to the
  U.S. market in 1945 would have foreclosed half
  the world market, today it would lose 80 percent

Source Mathew J. Slaughter, Global Investments
American Returns, 1998, p. 6.
8
Global economic trendsInternational trade

• US economy has become more open trade is now
  over 24 of GDP
• US now runs a large trade deficit in goods (3.7
  of GDP)
• US now runs a trade surplus in services (1.0 of
  GDP)

9
Global economic trendsUS FDI in the world economy

• Cross-border Foreign Direct Investment (FDI) has
  expanded
• U.S. MNCs share of world FDI has fallen
• In 1960, 18 of the worlds 20 largest companies
  (ranked by sales) were US headquartered. In
  1996, 8 were.

10
Global economic trendsMarket integration

• GATT WTO rounds have substantially reduced
  global tariff levels
• Regional trade agreements have proliferated
• Euro Econ Area, NAFTA, ASEAN, Mercosur, etc.
• Half of the 153 FTAs created since 1990
• MNCs view their business regionally

11
U.S. foreign direct investment
Foreign receipts as a percent of corporate
profits in GNP

• U.S. MNCs and U.S. economy are far more dependent
  on FDI abroad

12
U.S. foreign direct investmentLocation

• U.S. FDI primarily is located in developed
  countries
• In 1998, 73 of foreign affiliate assets and
  sales were in developed countries, and 58 of
  foreign affiliate employment
• U.S. FDI overwhelmingly supplies foreign, not US
  markets
• In 1998, less than 11 of sales of
  U.S.-controlled foreign corporations were back to
  US (less than 7 if Canada excluded)
• Foreign affiliates of U.S. companies are
  primarily in the services sector
• 56 of U.S. MNC affiliate abroad are classified
  in the services sector, including
  wholesale/retail trade (compared to 27 of U.S.
  parents)
• According to the UN accessing markets will
  remain the principal motive for investing abroad

Developed countries defined as Canada, Europe
and Japan.
13
U.S. foreign direct investmentExports

• In 1998, U.S. MNCs accounted for 64 of all U.S.
  exports
• According to the OECD
• Each dollar of outward FDI is associated with
  2 of additional exports and with a bilateral
  trade surplus of 1.701
• 1OECD, Open Markets Matter The Benefits of
  Trade and Investment Liberalization, 1998, p. 5p

14
U.S. foreign direct investmentUS wages

• US plants of companies without foreign operations
  pay lower wages than domestic plants of US MNCs,
  controlling for industry, firm size, age of firm,
  and state location

Source Mark Doms and Brad Jensen, 1996
15
Foreign direct investmentUS employment

• Foreign and domestic employment of US MCS are
  complements not substitutes.1
• According to the Council of Economic Advisers
• On a net basis, it is highly doubtful that US
  direct investment abroad reduces US exports or
  displaces US jobs. Indeed, US direct investment
  abroad stimulates US companies to be more
  competitive internationally and to allocate
  their resources more efficiently, thus creating
  healthier domestic operations, which, in turn,
  tend to create jobs.2
• 1D. A. Riker and S. L. Brainard, U.S.
  Multinationals and Competition from Low Wage
  Countries, NBER, WP no. 5959, March 1997
• 2US Council of Economic Advisers, Economic
  Report of the President, 1991, p. 259

16
U.S. foreign direct investmentForeign share of
US MNC operations
Foreign share of gross output
6.9
5.8
5.0
5.0
Foreign share of employment
Employment in US CFCs remained at 5.0 of US
civilian employment over the 1982-1998 period.
Gross output of US-controlled foreign
corporations has declined from 6.9 percent of US
GDP in 1982 to 5.8 percent in 1998. (Source
PricewaterhouseCoopers calculations based on US
Department of Commerce data.)
17
U.S. foreign direct investmentFinancing

• IRS data shows that foreign subs of US parents
  distributed 69 billion or 63 of net foreign
  earnings and profits (1996 tax returns)
• 76 of U.S.-controlled foreign corporation
  financing is from foreign sources (1995 data)

18
US foreign direct investmentFinancing of CFCs
14
24
62
76 of the financing of US-controlled foreign
corporations comes from foreign sources -- not US
parents. Debt and equity from US parents
financed less than 24 of total assets in 1995.
19
Foreign direct investmentComparative tax burdens

• Over the 1992-97 period, US MNCs paid 7.4 more
  of net income in taxes than US domestics
  (controlling for industry and other factors), up
  from a 4.4 multinational tax penalty during
  the 1982-91 period.1
• 1J. Collins and D. Shackelford, Taxes and
  Cross-Border Investments The Empirical
  Evidence, American Enterprise Institute, Seminar
  Series in Tax Policy (February 19, 1999).

20
Foreign direct investmentComparative tax burdens

• The effective tax rate on cross-border
  investment is higher for US MNCs than EU MNCs
  according to European Commission

21
U.S. foreign portfolio investment

• I n 1999, two-thirds of U.S. investment abroad
  was portfolio investment, compared to less
  one-seventh in 1980

22
Cross-border mergers and acquisitions
23
Does location of headquarters matter?

• US MNCs ...
• locate over 70 of assets jobs in US
• Invest and pay more per job at home than abroad
  (including in developed countries)
• perform 88 of RD in US (vs. 67 of sales)
• overwhelmingly have US leadership
• supply foreign subs much more heavily from US
  sources

1 Source L. DAndrea Tyson, They are not us
why American ownership still matters, The
American Prospect, Winter 1991, pp. 37-49
24
The US International Tax System Overview
24
25
Overview

• Income from cross-border investment may be
  subject to income tax in both source and
  residence countries
• Residence countries use various mechanisms to
  avoid double tax
• Worldwide system
• Residents are taxed on their worldwide income
  with a credit (or, in some cases, a deduction)
  for foreign taxes
• Dividend exemption (territorial) system
• In a pure territorial tax system, residents are
  taxed only on domestic source income with all
  foreign source income exempt
• Most territorial systems are hybrids, with
  exemption for non-portfolio dividends and
  worldwide taxation for most other income
• Since 2000, the US technically has had a
  territorial income tax system with an exception
  (i.e., worldwide taxation) for all income other
  than income qualifying for the ETI regime

26
OverviewInternational Income Taxation, OECD
Countries, 1990
1 For non-treaty countries, worldwide tax with
credit. 2 For non-treaty countries, worldwide
tax with deduction. 3 Exemption of 90 of gross
dividend. 4 Treaty countries with tax system
similar to Australia's. 5 25 ownership
requirement and tax system similar to
Denmark's. 6 Credit for Swiss tax on foreign
dividends effectively exempts these dividends
from Swiss tax. Source OECD, Taxing Profits
in a Global Economy Domestic and International
Issues, 1991, pp. 63-64.
27
OverviewRole of tax treaties

• Bilateral income tax treaties are used, inter
  alia, to
• Coordinate income tax systems to prevent double
  taxation
• Reduce or eliminate source based taxes (e.g.,
  withholding taxes on interest, dividends, rents
  royalties)
• Provide non-discrimination in the application of
  domestic taxes to foreign residents
• Establish procedures to resolve double taxation
  disputes
• Provide mutual assistance in tax administration,
  such as sharing of taxpayer information
• Model income tax treaties
• OECD Model (including transfer pricing
  guidelines)
• US Model
• UN Model

28
OverviewTiming of tax on foreign income

• Most countries respect foreign subsidiaries as
  separate legal entities and tax income from such
  subsidiaries only when received by a resident
  shareholder
• The United States and about half of the OECD
  countries have controlled-foreign corporation
  (CFC) rules that accelerate tax on certain types
  of CFC income (deemed dividend)
• CFC regimes typically apply to passive income and
  certain low-taxed mobile income
• US CFC regime (subpart F) applies to other
  categories of active income as well as
  investments in US property made with untaxed
  foreign income

29
OverviewDomestic double taxation

• Double taxation also may occur when US corporate
  income is distributed to US shareholders
• Most countries provide some form of relief from
  domestic double taxation of corporate dividends
• Shareholder imputation credit for all or a part
  of the corporate tax
• Partial shareholder exclusion
• Reduced individual tax rate for corporate
  dividends
• Corporate deduction for dividends paid

30
OverviewCorporate Taxation in OECD Member
Countries, 1990
/ Hybrid tax system (relief from double
taxation at both corporate and shareholder
levels). / Deduction for dividends paid may
offset fully the corporate and personal income
tax for dividends up to 15 of capital value.
Dividends in excess of this limit are fully taxed
at both levels. Sources Sijbren Cnossen, Reform
and Harmonization of Company Tax Systems in the
European Union, Research Memorandum 9604.
Erasmus University, Rotterdam. OECD, Taxing
Profits in a Global Economy Domestic and
International Issues, 1991, p. 57.
31
Current International Tax Policy Issues

• Extraterritorial Income (ETI) regime
• Dividend exemption (territorial) tax systems

31
32
Extraterritorial Income (ETI) Regime
32
33
History of Export Incentives

• China Trade Corporations (1922)
• Exemption method
• Western Hemisphere Trade Corporations (1942)
• Exemption Method
• Export Trade Corporations (1962)
• Deferral Method (as a limitation on Subpart F)

34
History of Export Incentives (cont.)

• Domestic International Sales Corporations (1971)
• Deferral Method
• Foreign Sales Corporations (1984)
• Exemption Method (partial)
• Extraterritorial Income (2000)
• Exemption Method (partial)

35
Justification for Export Incentives

• Tax incentives used by competitor countries that
  are allowed under WTO rules
• WTO permits both FTC and exemption to mitigate
  double taxation as part of normal tax system
• Most territorial tax system exempt base company
  sales income
• WTO permits border tax adjustments for indirect
  but not direct taxes
• All OECD countries except US have VAT system
• Economic effects are uncertain

36
Origins of ETI Regime

• 1998 EU filed a complaint with the WTO regarding
  the FSC regime.
• 1999 WTO dispute panel found the FSC regime to
  be a prohibited export subsidy.
• Benefits contingent upon exports
• Revenue foregone is otherwise due
• Exception from base company rules
• Exception from effectively connected income rule
• Dividend-received deduction for FSC dividends
• 2000 The Administration and Congress worked
  together to develop bi-partisan legislation to
  repeal the FSC regime and replace it with a new
  regime designed to satisfy WTO rules
• 2002 US loses appeal of WTO dispute panel
  decision on ETI

37
Mechanics of ETI Regime

• Gross income does not include extraterritorial
  income that constitutes Qualifying Foreign Trade
  Income
• QFTI is a percentage of Foreign Trading Gross
  Receipts
• FTGR generated from sale or lease of Qualifying
  Foreign Trade Property
• QFTP consists of property
• Manufactured within or outside the United States,
• Sold or leased for use outside the United States,
  and
• Not more than 50 of the value of which is
  attributable to foreign components and foreign
  labor (Foreign Content Test)

38
WTO decision on ETI Regime

• EU filed a complaint with the WTO regarding the
  ETI regime.
• Despite U.S. efforts to design a regime to
  satisfy WTO rules, WTO dispute panel found the
  ETI regime nonetheless to be a prohibited export
  subsidy.
• Benefits still found to be contingent upon
  exports
• Revenue foregone is still found to be otherwise
  due
• In January 2002, WTO appellate panel upheld
  dispute panels findings

39
Future of ETI regime

• WTO arbitrator has 90 days to decide amount of
  retaliatory tariffs the EU may impose on U.S.
  exports
• Commission must decide whether and how to
  distribute tariff increases among categories of
  US exports
• US Options
• Repeal ETI regime immediately
• Replacement?
• Postpone repeal of ETI regime within a negotiated
  framework
• This would likely require some trade concessions
  by the US and/or limited retaliation
• Do nothing
• European Commission has said it will impose
  retaliatory tariffs
• Note other WTO member countries may exercise
  right to file a complaint against US ETI regime

40
Dividend exemption (territorial) tax systems
40
41
Territorial tax systems

• Worldwide tax systems tax all foreign source
  income - most when repatriated and some
  currently through anti-deferral regimes
• Territorial systems differ from worldwide systems
  by treating some or all of the income that is not
  taxed currently as exempt

Taxed on repatriation (with FTC)
World-wide
Taxable currently (with FTC)
Taxed on repatriation (with FTC)
Taxable currently (with FTC)
Terri-torial
Exempt
42
Territorial tax systems

• Taxation of exempt bucket
• Taxes directly and indirectly attributable to
  exempt dividends are not creditable or deductible
• Expenses allocated or apportioned to exempt
  income are not deductible
• Income typically assigned to the exempt bucket
• Non-portfolio dividends
• Active branch income (net of imputed royalty)
• Income typically assigned to the currently
  taxable bucket
• Portfolio and passive income
• Royalty income
• Export income not attributable to foreign
  economic activities
• Income typically assigned to the deferred bucket
• Low or no-tax active income
• Active income earned in non-treaty countries

43
Territorial tax systems

• If a territorial tax system has three buckets of
  income (e.g., Canada), little or no
  simplification is achieved
• Income, expense, and foreign taxes must be
  allocated among three rather than two buckets
• Ordering rules are necessary to determine whether
  dividends are paid out of exempt, previously
  taxed, or deferred income.
• A two bucket territorial tax system is possible,
  however many countries are not willing to allow
  all types of low-taxed active income to be
  exempt, but do not wish to impose current
  taxation for competitive or diplomatic reasons
• Income from ocean and space activities
• Income earned in low or no tax jurisdictions
• Income earned in non-treaty countries

44
Territorial tax systemsRevenue effect

• Adopting a territorial system in US could raise
  revenue, depending on design
• Putting dividends in the exempt bucket limits the
  ability to average foreign tax credits
• Under present law, excess foreign tax credits
  attributable to high-tax dividends can be used to
  reduce US tax on currently includible low-tax
  income such as royalties and foreign income
  attributable to exports
• Expenses allocated to exempt income are
  non-deductible.
• Under present law, taxpayers without excess FTCs
  receive full benefit of deduction
• Territorial tax system might raise revenue even
  if worldwide rather than waters-edge fungibility
  approach to interest allocation were adopted
• Transition rules for accumulated deferred foreign
  income?

45
Territorial tax systemEconomic impacts

• Increased pressure on transfer pricing rules?
• No evidence found in Treasury study
• Increased incentive to invest in low tax
  jurisdictions?
• Data are inconclusive
• Increased incentive to shift debt to high-tax
  jurisdictions
• Beneficial to US revenues
• Incentive to increase dividend repatriations
  provided that exempt income is stacked first
• Incentive to suppress royalties in countries with
  tax rates less than US
• Adverse to US revenues

46
Simplification possible under either system

• Reduce number of anti-deferral regimes, limit
  scope of rules, and provide meaningful de minimis
  rule
• Use GAAP for EP calculations
• Reduce number of foreign tax credit baskets
• Eliminate high-tax kick-out from passive foreign
  tax credit basket
• Eliminate AMT foreign tax credit limitation

47
Complexity inherent under either system

• Application of foreign tax credit rules for
  non-exempt income, including sourcing of income
  and allocation and apportionment of expenses
• Operation of anti-deferral regime
• Application of transfer pricing rules
• Definition of active business income (e.g.,
  active financial services)
• Taxation of outbound transfers of property

48
The US International Tax System Primer

• Anti-deferral regime
• Foreign Tax Credit

48
49
The US International Tax System Anti-Deferral
Regime
49
50
Deferral as general rule

• US generally defers its tax on foreign earnings
  of foreign subs until they are remitted.
• US tax is imposed on foreign earnings when they
  are earned (or deemed earned) by a US person
  (i.e., US corporation, citizen or resident
  individual).
• Fundamental TIMING principle of US tax law
• Issue is not WHETHER but WHEN US shareholder is
  taxed on income earned by foreign corporations

51
Exceptions to deferral

• General rule always has been to defer US tax on
  foreign earnings of foreign subs until dividends
  are paid to a US person.
• However, various exceptions have been enacted
  over the years.
• Where an exception applies, a US shareholder may
  be subject to current US tax (or an interest
  charge).

52
Anti-deferral regimes

• Personal Holding Company (1934)
• Foreign Personal Holding Company (1937)
• Foreign Investment Company (1962)
• Controlled Foreign Corporation (Subpart F) (1962)
• Passive Foreign Investment Company (1986)
• Overlap with CFC regime eliminated in 1997
• Excess passive asset regime (1993-96)

53
Anti-deferral regimes

• Application of exceptions to deferral typically
  has depended on two factors
• Level of US ownership
• Type of income involved
• Present law is complex because there are many
  sets of potentially overlapping exceptions, each
  with its own detailed set of rules and
  definitions.

54
Subpart F

• Foreign Personal Holding Company Income
• passive income (e.g., dividends and interest)
• active finance exception (expired)
• Foreign Base Company Sales Income
• income from related party purchases/sales
• Foreign Base Company Service Income
• income from related party services

55
Subpart F (cont.)

• Subpart F insurance income
• Subpart F shipping income
• Foreign oil related income
• Illegal payments
• Section 956 (Investments in US Property)

56
Rules of Canada, France, Germany, Japan, the
Netherlands and the United Kingdom1

• Half have transaction-based systems (like Subpart
  F), while half have jurisdiction-based systems
• Other transaction-based systems generally exempt
  active business income
• Foreign base company sales and service income
• Active financial income
• Other active business income
• Jurisdiction-based systems generally tax all
  income of subsidiaries in low-tax countries, but
  generally exempt active business income that has
  some local connection

1 Based on National Foreign Trade Council, Inc.,
International Tax Policy for the 21st Century,
Volume 1, 67-92 (2001).
57
Recent JCT staff recommendations1

• Eliminate FIC and FPHC anti-deferral regimes
• Exclude foreign corporations from PHC regime
• Increase Subpart F de minimis threshold for
  active foreign subsidiaries with relatively small
  amounts of Subpart F income (also recommended in
  1987 ALI report)

1 Staff of the Joint Comm. on Taxation, Study of
the Overall State of the Federal Tax System and
Recommendations for Simplification, Pursuant to
Section 8022(3)(B) of the Internal Revenue Code
of 1986, Volume II, 398-420 (2001).
58
The US International Tax SystemThe Foreign Tax
Credit
58
59
The foreign tax credit Background

• The US was the first country to provide a foreign
  tax credit, enacted in 1918
• A foreign tax credit has been allowed in some
  form under US law ever since
• FTC is a dollar-for-dollar offset of foreign tax
  against US tax
• Purpose of FTC is to eliminate double tax on
  foreign source income. Not listed as a federal
  tax expenditure.
• FTC is allowed for foreign income taxes paid
  directly or indirectly with respect to foreign
  source income

60
The foreign tax credit Computation

• FTC Limitation, enacted in 1921, is intended to
  prevent FTC from reducing US tax on US source
  income
• A formula is used to determine the FTC Limitation
  (i.e., the share of US tax (before FTC)
  attributable to foreign source income)
• FTC Limit Foreign source income X US
  tax on worldwide income
• Worldwide income
• (Note US and foreign income measured under US
  rules)
• FTC lesser of FTC Limit and foreign taxes
• Excess FTCs may be carried back 2 years and
  carried forward 5 years

61
The foreign tax credit Computation

• This FTC Limitation computation must be done
  separately for each basket of foreign source
  income
• The purpose of the basket rules is to prevent
  averaging of taxes among different types of
  income
• Losses
• Overall foreign losses are recaptured in
  subsequent years
• Domestic losses that reduce foreign source income
  are not recaptured

62
Some foreign tax credit baskets

• General Limitation Income
• Passive Income
• Financial Services Income
• 10-50 Dividends(until 2002)

• High Withholding Tax Income
• Shipping Income
• DISC Dividends
• FSC Distributions
• Foreign Trade Income

63
Steps to compute FTC Limitation

• 1. Determine source of gross income
• Gross Receipts (minus cost of goods sold)
• Other Gross Income
• 2. Determine deductions allocable to US and
  foreign income
• 3. Determine net US and foreign source income

64
Steps to compute FTC Limitation

• 4. Characterize gross income (for baskets)
• 5. Allocate and apportion deductions among FTC
  categories of gross income
• 6. Determine amount of creditable foreign taxes
  within each category

65
Source of income rules
Different Source Rules for Different Types of
Income

• Income from the Sale of Purchased Inventory
• Income from the Sale of Manufactured Inventory
• Dividends
• Interest
• Rents
• Royalties
• Sale of stock

• Sale of Intangibles
• Sale of other personal property
• Sale of real property
• Personal services
• Maintain source of US source income earned
  through foreign corporation
• Underwriting income

66
Expense allocation rules
Different Allocation Rules for Different
Expenses

• Interest
• Research Development
• General Administrative
• State and local income tax
• Other

67
Example 1

• USCO has a foreign subsidiary XCO that earns
  1,000 on which it pays Country X income tax at a
  rate of 35 (350)
• USCO earns 1,000 taxable income in US
• If all XCO foreign earnings are distributed as a
  650 dividend to USCO, USCO would be allowed a
  foreign tax credit of 350.
• Foreign tax credit limit 350

68
Example 2
Allocating and apportioning expenses reduces the
maximum amount of foreign tax credit a US company
may receive

• Same as Example 1, except
• 200 of US expenses are allocable against foreign
  income which are not deductible by XCO in
  calculating Country X tax

69
Example 2 (cont.)

• If all XCO earnings are distributed as a 650
  dividend to USCO, USCO would be allowed a foreign
  tax credit of 280, leaving 70 of foreign taxes
  paid for which USCO would receive no credit.
• Thus 420 of total income tax would be paid on
  1000 of income earned by XCO (42 rate) even
  though US and Country X have the same 35 tax
  rate
• Foreign tax credit limitation 280

70
Other rules

• Foreign tax must be considered to be paid
• Overall Foreign Losses/Recapture
• Look-thru Rules
• AMT--90 Limitation
• No FTC allowed for taxes paid/accrued to certain
  foreign countries

• FTC only for income tax or in lieu of income
  tax
• FTC is elective
• FTC allowed when tax is paid or accrued
• Person allowed to claim FTC
• Holding period
• Six tier limit

71
Typical obstacles to FTC utilization

• Foreign tax rates higher than US tax rate
• Separate basket limitations
• Required allocation and apportionment of
  deductions (not recognized as deductions by
  source country)
• Overall foreign loss recapture
• AMT

72
Foreign Tax Credit Rules of Canada, France,
Germany, Japan, the Netherlands and UK1

• Half have partial exemption (territorial)
  systems
• Per country, per item (avoidable for foreign
  dividends), and overall basket systems all in use
• Detailed interest expense allocation rules
  generally do not exist
• Most have no equivalent to overall foreign loss
  recapture.
• The Netherlands has domestic and foreign loss
  recapture and Canada offers domestic loss relief.
• Credit carryforward and carryback range from none
  to unlimited carryforward

1 Based on National Foreign Trade Council, Inc.,
International Tax Policy for the 21st Century,
Volume 1 274-75 (2001).
73
Recent Joint Committee on Taxation Staff
recommendations on foreign tax credit1

• Accelerate repeal of 10-50 dividend baskets and
  characterize these dividends instead under
  look-thru rules regardless of year the
  distributed earnings arose
• Clarify that indirect credits are available to a
  US corporation that holds a 10 voting interest
  in a foreign corporation indirectly through a
  foreign or US partnership

1 Staff of the Joint Comm. On Taxation, Study of
the Overall State of the Federal Tax System and
Recommendations for Simplification, Pursuant to
Section 8022(3)(B) of the Internal Revenue Code
of 1986, Volume II 421-27 (2001).
74
1987 Recommendations of American Law Institute on
foreign tax credit1

• Recommendations included
• General basket system with smaller number of
  separate baskets than today, the most important
  for passive income
• Adopt domestic loss recapture
• David Tillinghast2, reporter for the ALI study
• Recommended elimination of passive basket
  high-tax kick-out
• Recommended elimination of separate basket for
  high-withholding tax interest
• Questioned need for section 907 limitation

1 American Law Institute, Federal Income Tax
Project, Proposals of the American Law Institute
on United States Taxation of Foreign Persons and
of the Foreign Income of United States Persons,
307-421 (1987). 2 David Tillinghast,
International Tax Simplification, 8 American J.
Tax Policy, 187-215 (1990).