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Archer Supports Repeal of 956A, Passive Foreign Investment Company Rules

Thursday, July 18, 1996

OnLine

House Ways and Means Committee Chairman Bill Archer, R-Texas, expressed support for repealing the passive foreign investment company (PFIC) rules and the excessive passive assets rules, in order to make the U.S. economy more competitive.

Archer’s remarks came at a Ways and Means hearing on the potential impact that major tax reform would have on the nation’s international competitiveness.

Both the PFIC rules and Internal Revenue Code Section 956A discourage U.S. entities from making investments overseas, and this places them at a disadvantage relative to their foreign counterparts, Archer said.

The impact of replacing the current income tax with a consumption tax or a no-deduction flat income tax also is a concern, he said. Since foreign income subject to income tax abroad effectively is exempted from U.S. taxation due to the foreign tax credit, after tax reform domestic companies could be placed at a disadvantage compared to their overseas counterparts who would retain their domestic tax exemption while U.S. firms would not, he warned.

Broader Reform-Related Issues: Other committee members, rather than focusing on specific tax code provisions at the hearing, took a broader view of the tax reform debate.

Rep. Sam Gibbons, D-Fla., the panel’s ranking Democratic member, predicted that Congress will not agree merely to tinker with the tax code along the edges to solve international competitiveness problems.

The only way to tackle the competitiveness issue is by replacing the entire tax system, said Gibbons, who is serving his last term in Congress. Tax reform advocates should bear in mind that "whatever we do there will be an international response," so if the U.S. decides to reform its system the U.S. should be aware that there will be a reaction overseas, he added.

Taking a similarly broad view, Rep. Amo Houghton, R-N.Y., said reform proponents keep asking what type of changes should be enacted, but no one asks where the pressure will come from to force Congress to pass a tax reform bill. There is "no excitement" underlying the current reform proposals, and no legislation will be passed unless that happens, he said.

Reform advocates criticize the U.S. tax system and compare it unfavorably to our trading partners’ tax systems, Houghton said. However, the U.S. must be doing something right, considering that Germany--whose system is held up as a positive model--has double-digit unemployment, he said.

The U.S. system does have some positive attributes, said Kevin Conway of the Emergency Committee for American Trade who highlighted the foreign sales company (FSC) rules and the Section 863(b) rules for determining income sources.

Conway, who is also vice president of tax for United Technologies Corporation, Hartford, advised Congress to enact reform cautiously and suggested that a piecemeal approach to reform would be prudent. Among other things, he recommended that Congress halt the expansion of subpart F, repeal Section 956A and the PFIC rules, protect the FSC and the export rules, and avoid tax treaty overrides.

House Wants To Pare Senate’s Version Of Tax Bill: House conferees on the small business tax incentive bill (HR 3448) will attempt to pare down the Senate’s version of the bill when and if the two bodies go to conference to iron out the differences between the two versions, House Ways and Means Committee Chief of Staff Phil Moseley said Thursday.

The decision not to extend the research and experimentation tax credit retroactively was driven by concerns over revenue, he said in a speech to a group of Washington tax lawyers.

There is a problem with using the airline ticket tax to fund the research and experimentation tax credit extension, Moseley explained, because of technical problems created by the Congressional Budget Office’s scorekeeping rules regarding excise taxes.

Another provision the House conferees may wish to modify from the Senate-passed version is the independent contractor language, Moseley said without providing further detail.

Even if some provisions contained in the larger Senate bill are not enacted, members of Congress should not be concerned since "there still is time to pass a second tax bill" this year, he said.

Now that Ways and Means has concluded the tax reform hearing on international competitiveness, three more tax reform hearing remain to be completed this year, according to Moseley.

The Ways and Means Committee Thursday announced another tax reform hearing on the impact replacing the current system would have on manufacturing, energy, and natural resource issues.

Next year, the committee once again will hold hearings on tax reform, but reform legislation is not likely to be considered until 1998, Moseley said. If a reform bill is going to pass it will require widespread support from the American people and must be backed by a broad coalition in Washington.

GOP Tax Forum Scheduled For Next Week: Probable Republican presidential nominee Bob Dole will be joined by House and Senate congressional leaders next Tuesday in a forum to discuss ways to improve economic growth.

Dole has indicated that sometime during the month of July he will unveil his 10-point economic revival strategy, which likely will include a tax cut proposal.

According to Senate Majority Leader Trent Lott, R-Miss., various experts will make presentations at the forum that could lay the groundwork for future legislation or to help define Dole’s campaign strategy.