Washington, DC – In response to renewed interest in imposing a territorial tax regime, the National Foreign Trade Council today strongly cautioned against viewing the territorial tax system as a cure-all corporate taxation reform for U.S. companies with overseas operations. NFTC characterized the switch to a territorial taxation approach as the answer to the ills of the U.S. international tax regime as an oversimplification – one that would do significant harm to U.S. economic interests and global competitiveness.
“The theory of using territorial taxation to reform the U.S. tax system may be well-intended, but this type of tax reform can be better achieved through other means. As we have noted time and again, moving to a territorial tax system alone would not cure the problems inherent in the U.S. international tax system and would put U.S. companies at a significant disadvantage in the global market. The United States should instead concentrate legislative efforts on improving current international tax rules that will ultimately increase the global competitiveness of American companies,” said Judy Scarabello, NFTC’s Vice President for Tax Policy. “Rather than adopting a territorial exemption system, we need to reform our current deferral and foreign tax credit systems, as well as find a WTO-compatible replacement for FSC and ETI.”
Scarabello cited a 2002 NFTC study on the potential U.S. adoption of a territorial tax regime as a method of reforming the U.S. international tax system. In the report, NFTC and 32 member companies formed a study group to review the basic features of traditional territorial systems, as well as the features of possible alternative tax systems. The study concluded that improving the competitiveness of any substantial group of U.S. companies through the use of a traditional territorial tax system would require favorably resolving many of the same issues that make current U.S. rules anti-competitive, including:
• the overly broad scope of subpart F with respect to active business income;
• the over allocation of expenses to foreign income; and
• the restrictive aspects of the foreign tax credit.
To read the full NFTC study, “Territorial Tax Study Report,” please visit: http://www.nftc.org/default/tax/Territorial%20Report.doc