International Tax Provisions of the American Competitiveness and Corporate Accountability Act (H.R. 5095)

Publication Date: September 2002

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

On July 11, 2002, House Ways and Means Committee Chairman William Thomas introduced H.R. 5095, the American Competitiveness and Corporate Accountability Act. The focus of this report is the bill's proposed changes in U.S. taxation of income from international transactions. The bill also contains provisions designed to restrict corporate tax shelters; the report does not discuss these.

The bill's international proposals are in three general areas. First, the bill would repeal the extraterritorial income (ETI) tax benefit for exporting, thereby attempting to end a long-running dispute between the United States and the European Union (EU) over whether the U.S. tax benefit is an export subsidy prohibited by the World Trade Organization agreements. Second, the bill contains proposals aimed at offshore corporations with subsidiaries in the United States. In part, these proposals are aimed at corporate "inversions" where some U.S.-owned firms have reorganized to include paper parent corporations chartered in "tax haven" countries. In part, these proposals also address "earnings stripping," or the shifting of U.S. profits abroad by means of intra-firm transactions. Third, H.R. 5095 contains proposals altering the tax treatment of U.S. firms with foreign operations and investment. The bill terms these changes international tax "simplification;" the bulk of the provisions would have the effect of reducing U.S. tax on foreign-source income. The chief areas that would be affected are rules related to the foreign tax credit and provisions affecting the "deferral" tax benefit for overseas business operations.

This report does not attempt a comprehensive economic analysis of H.R. 5095. Several likely broad effects, however, can be identified. First, taken alone, repeal of the ETI export benefit would likely not increase the U.S. trade deficit, but would reduce the overall level of U.S. trade -- exports and imports alike -- by a small amount. Because export subsidies generally reduce the aggregate economic welfare of the subsidizing country, repeal of the ETI provisions would likely increase U.S. economic welfare, while leading to a small contraction of the export sector and a small expansion of import competing sectors. Second, tax-motivated inversions are apparently events that chiefly occur on paper, involving little alteration of the location of economic activity. Their chief economic impact is probably a reduction in U.S. tax revenues. Thus, the chief impact of H.R. 5095's inversion provisions would probably be to reduce the extent to which inversions erode U.S. corporate tax collections. The bill's earnings stripping provisions may likewise reduce erosions in U.S. tax collections but an assessment of whether these provisions would reduce foreign investment in the United States is not attempted here. Third, the bill's foreign source income provisions would likely reduce the tax burden on foreignsource income. As a result, their impact would probably be to increase the level of U.S. investment abroad beyond what would otherwise occur. Preliminary estimates by the Joint Committee on Taxation indicate the bill would increase tax revenue by a net of $6.4 billion over five years and a net of $1.1 billion over 10 years.

This report will be updated as legislative developments occur.