Academic journal article Journal of Accountancy

Foreign Tax Reform Bill

Academic journal article Journal of Accountancy

Foreign Tax Reform Bill

Article excerpt

A bill to improve the application of U.S. tax laws to American businesses operating abroad was introduced in May by House Ways and Means Committee Chairman Dan Rostenkowski (D-IIi.) and Willis Gradison (R-Ohio), a committee member.

The Foreign Income Tax Rationalization and Simplification Act of 1992, HR 5270, would affect both U.S.-based and foreign-based multinational companies. Although it probably will not be enacted this year, the bill may be reintroduced in the future.

The provisions affecting U.S. multinationals contain good and bad news. On the plus side, U.S. taxpayers would be permitted to include interest expenses and assets of foreign subsidiaries (rather than just U.S. subsidiaries, as under current law) for allocating interest expenses between U.S. and foreign source income. This generally would increase the amount of the foreign tax credit that is available to companies with significant foreign debt.

On the down side, the rules relating to the overseas inventory sales would be changed so income from such sales would be primarily U.S.-source income rather than foreign-source income. This would reduce the foreign tax credit available to U.S. companies selling inventory overseas.

Another piece of bad news is income deferral for controlled foreign corporations would be ended by generally treating all income of these companies as currently taxable. Under current law only certain passive-type income (interest, dividends, rents, royalties, etc.)of foreign subsidiaries currently is taxable to U.S. parent companies, while the remainder is deferred until distributed. …

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