Panel Tightens Foreign Income Tax Rules

The House Ways and Means Committee, continuing work over the weekend in an effort to finish drafting a sweeping tax bill by this week, voted Saturday to dramatically restrict the tax credits businesses may claim for their overseas operations and give less generous tax breaks to Americans working in foreign countries.

The new regulations, if enacted into law, would increase taxes paid by multinational corporations and U.S. taxpayers working overseas by $12 billion over five years.

Corporations traditionally have been able to deduct from their U.S. taxes the amount of taxes they pay foreign governments on income earned by their overseas operations. Although the regulations are designed to prevent companies from being taxed twice for the same profits, critics say current law encourages companies to manipulate their earnings, shifting operations among various countries, to lower their overall tax burden.

Tied to Lower Tax Rates

Changing the regulations also would provide much-needed revenue that may be applied toward the committee’s goal of lowering tax rates without widening the federal deficit. The bill, which still must go before the full House, is not likely to become law until next year because the Senate has not yet begun work on a comparable measure.

President Reagan, in his tax overhaul plan, would have raised about $13 billion over five years by putting a limit on the foreign tax credit a corporation could claim from each country in which it does business.

The committee’s version recommended a somewhat different formula, based on the types of businesses conducted by companies overseas. The panel’s plan would restrict both the tax credits businesses may claim and their ability to claim as overseas income the profits they receive from foreign sales of goods made in the United States.

Businesses Oppose Changes

Businesses had lobbied heavily against the changes under either plan, which they said would make it more expensive to compete with foreign companies at a time when the U.S. trade deficit is running at a record $150 billion a year.

“A majority of what they have done is really going to hurt U.S. business and the ability of U.S. firms to compete overseas,” said Rachelle Bernstein, manager of tax policy for the U.S. Chamber of Commerce.

Rep. Sam Gibbons (D-Fla.), chairman of the Ways and Means Committee’s trade subcommittee, agreed that the panel’s proposals would seriously hurt U.S. companies’ ability to compete globally, and he offered an amendment that would maintain most of the existing law governing foreign operations. It was rejected, 26 to 10, with Gibbons the only committee Democrat supporting it.

Particularly vocal on the issue were banks, which would be restricted in their ability to claim tax credits in connection with lending to foreign countries.

‘Dangerous Consequences’

“At the same time that the Treasury Department is trying to encourage foreign lending, this proposal could have a negative effect on overseas loans,” said Nina Gross, a lobbyist for the American Bankers Assn. “The (committee) members don’t understand what is at stake, and tinkering in this area could have dangerous consequences for foreign trade.”

U.S. taxpayers working overseas now are exempt from paying U.S. income taxes on the first $80,000 they earn--an amount that would rise to $95,000 by 1990 under current law--but the committee voted to allow them to earn only $75,000 tax-free.

However, the committee rejected Reagan’s proposal to abolish tax credits for companies that locate plants in Puerto Rico and instead opted to scale back those benefits.