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There is oftentimes the charge made that our foreign trade problems are due somehow to American labor. I don't believe that is true. I think that American labor has cooperated with management and together they have controlled costs in a manner that is at least as good as the control of labor cost increases around the world.

Mr. KARTH. Thank you very much, Mr. Gibbons.

I might just say that I thought your answer to Mr. Gibbons' question was that our manufacturing and management ingenuity over here was of such high caliber that we were competitive on a per unit cost basis with our major trading partners. I understood that one of those three reasons you gave to me was multinational corporations move overseas because that is not the case, that the per unit cost is so much cheaper by moving to some of the low labor cost countries that that is one of the three reasons they moved.

Mr. STEWART. Correctly understood, what I said to you, Mr. Karth. I appreciate your pointing out the lack of clarity in what I said to Mr. Gibbons. I hope you understand the context in which I was talking. That was the matter of controlling increases in the unit labor cost which has nothing to do with the relative labor cost which was the reason that I gave you.

Mr. KARTH. But the closeness of those disparities that existed in 1967 or 1965 or 1966, apparently, are much less today than they were at that time.

Mr. STEWART. No question but they are still substantial enough to have the result I attributed.

Mr. KARTH. Thank you.
Thank you, Mr. Gibbons.

Mr. GIBBONS. That is all right. I am glad to yield at any time.

Mr. Stewart, still on page 13, and I am just trying to understand the chart there, the last column, the United Kingdom, 1968, in the lower right-hand corner of the chart, you show under unit labor cost, U.S. dollar basis, 88.9. Was that 100 in 1967 and it dropped to 88.9?

Mr. STEWART. If you will look at the bank of information immediately above, unit labor cost of national currency, you will see in 1968 for the U.K. it was 102.2. When you express it in U.S. dollars that is a function of the devaluation of the pound that occurred in that period.

Mr. GIBBONS. That is what I was going to ask you. So all of these figures do reflect the changes which have occurred in the exchange rates or in the ratios of one country's currency against another's is that right?

Mr. STEWART. Yes.

Mr. GIBBONS. In other words, the 88.9 reflects a British devaluation primarily, is that right?

Mr. STEWART. That is right. But the purpose of showing on the table the index both in terms of national currency and U.S. currency, is to give you the full picture so that no distortion will occur. When you see something such as you did for the United Kingdom you simply see what index was for national currency, then you understand what the significance of the devaluation was.

Mr. GIBBONS. In Switzerland they apparently had a revaluation there too, is that right?

96-006 O 73 pt. 7 34

Mr. STEWART. There was an appreciation that occurred in that respect in contrast to the United Kingdom situation.

Mr. GIBBONS. Mr. Chairman, I have used enough time here. I will yield the floor for a while.

Mr. ULLMAN. Mr. Burke.

Mr. BURKE. I wish to commend you, Mr. Stewart, for your excellent statement and your presentation of the facts. I don't believe we have had a better witness before this committee since the hearings started. Mr. STEWART. Thank you.

Mr. GIBBONS. Mr. Chairman, at the risk of getting shot by my fellow members, could I ask one more question?

Mr. ULLMAN. You are recognized.

Mr. GIBBONS. Mr. Stewart, do you think that the responsibility for foreign trade in the United States is too diffused in the executive branch? I am talking about the responsibility of monitoring, promoting, or regulating trade, or whatever you want to call it. I know this is all under the President but I realize that covers a broad range of things.

Do we have just too many people in this and nobody responsible for overall performance?

Mr. STEWART. That answer is yes, that certainly is part of our problem.

Mr. GIBBONS. Then one more question: How do you think we ought to solve this?

Mr. STEWART. Being deeply mindful of the inconvenience I have caused the gentlemen who are waiting behind me, may I submit my answer to you?

Mr. GIBBONS. I will be glad to have it.

Mr. ULLMAN. The record will be held open for that. [See letter at p. 2449.]

Mr. ULLMAN. Thank you, Mr. Stewart. You have been very helpful. Mr. STEWART. Thank you, Mr. Chairman.

Mr. ULLMAN. Our next witness on the subject of foreign taxes is Mr. John R. Greenlee. Let me say it is a great pleasure to introduce Mr. Greenlee, who has been for a long time a leader in tax policy matters and chairman of the Tax Policy Committee. He is in part a constituent from Oregon.

We certainly welcome you before the committee, Mr. Greenlee.

STATEMENT OF JOHN R. GREENLEE, CHAIRMAN, TAX POLICY COMMITTEE, THE TAX COUNCIL

Mr. GREENLEE. Thank you, Mr. Chairman.

My name is John R. Greenlee. I am director of taxes of the Hanna Mining Co. of Cleveland, Ohio.

As the chairman has stated, I appear here in behalf of the Tax Council in my capacity as chairman of the Tax Policy Committee and vice chairman of its board of directors.

Mr. Chairman, I have only a 10-minute statement here. I know it is a long afternoon. If it serves the wishes of the committee, I will be glad to summarize that even more briefly and I will be glad to answer any questions that any members might have.

Mr. ULLMAN. Without objection, your statement will be included in the record.

Mr. GREENLEE. Thank you, Mr. Chairman.

Basically we believe that the present tax system enables American business to compete abroad on reasonably comparable tax terms with our foreign competitors. We also agree with the President in his trade message when he says, "Our income taxes are not the cause of our trade problems, and tax changes will not solve them."

As the committee is aware, the Treasury then recommended three changes in our tax laws, which our testimony goes on record to oppose. Our testimony sets out the reasons and the bases, for the proposals. In the case of tax holidays, for example, we fear that the result will be to strengthen the position of our foreign competitors abroad if we do away with tax holidays. We strongly believe that this will not result in any increased jobs or any benefit to the American economy. As we explain in our statement, neither do we believe this will result in any increase in revenue to the Treasury.

The same basic factor is also set forth in our analysis of the problem of exports to the United States by U.S. controlled firms. For example, we think that in many industries where the volume in this kind of import situation is the greatest, you will merely substitute instead of American ownership abroad exporting back to the United States, national companies of Germany, Japan, and other countries. We just do not think that this will result in any increase in American production in the United States of a particular product, that is mostly subject to this problem.

The next and third, the Treasury proposal had to do with loss deductions and the foreign tax credit. We believe as set out in our statement that the present rules which in effect provided for the U.S. taxation of foreign income earned abroad to the higher of the U.S. tax rate or the foreign tax rate have consistently worked over a period of years and that the benefits of our American investment abroad to the U.S. economy are such that we recognize there can be a case made for what may appear to be an inequity in this position. We think, however, that it should be resolved on the basis of the present law. Therefore, we strongly recommend that no charges be made in this particular segment of present tax law.

Gentlemen, on balance, we believe that the interest of the general public, of American workers as a group, and of the United States Treasury, would not be served by making the proposed tax changes nor in other ways withdrawing from the present provisions for taxing foreign source income.

We thank you very much for the opportunity to present these views. [Mr. Greenlee's prepared statement follows:]

STATEMENT OF JOHN R. GREENLEE, ON BEHALF OF THE TAX COUNCIL

I am John R. Greenlee, Director of Taxes of the Hanna Mining Company, of Cleveland, Ohio. I appear here in behalf of The Tax Council in my capacity as Chairman of its Tax Policy Committee and Vice Chairman of its Board of Directors.

The Council is a non-profit, tax policy organization supported by business. Our membership includes large, medium-size and small companies, most of them involved to some degree in foreign business operations.

Although we applaud and hope for favorable consideration of the Administration's enlightened and critically important program for improving international trade arrangements, our formal policies do not extend beyond the tax field..

GENERAL POSITION

We believe the United States tax provisions covering business income earned abroad enables American business to compete on reasonably comparable tax terms with foreign based enterprises, and were gratified that the President in his trade message to the Congress noted that "Our income taxes are not the cause of our trade problems and tax changes will not solve them". Nevertheless, the message did recommend legislation in three tax situations spelled out in a Treasury memorandum separate from the trade program. We appear here in opposition to these proposals because they would unnecessarily handicap American business operating abroad.

TAX HOLIDAYS

The first proposal deals with "holidays" from local taxes, or other incentives, for attracting investment to particular countries. Under the proposal, an American company would be taxed currently on income of a controlled foreign subsidiary in an affected country even though that income had not been disbursed to it in the form of dividends. This taxation would apply to income from existing plants whenever additional investment exceeds 20 percent of original plant cost. Because the additional investment includes replacements, the retroactive effect of the proposal would be triggered in a few years even when there is no expansion in plant capacity.

Unhampered by a comparable tax penalty, our foreign competitors would gain advantage in world markets by expanding investment in the holiday countries. Hence, it could not be anticipated that there would be any increase in U.S. production and jobs from the proposal. Instead, as American investment in the countries leveled out and foreign investment increased, export of American equipment, supplies and pre-fabrications, and inflow of income, would be adversely affected. There would be no benefit at all to the American economy or to American workers but, as all factors balanced out, a detriment to both.

Moreover, not even the U.S. Treasury would gain from the proposal. First, there would of course be the loss of revenue potential which otherwise would result from an increased flow of income from increased investment. But, second, because the tax holiday countries would in all liklihood impose withholding or other new taxes on actual or constructive distributions from the foreign subsidiaries, revenue gain in the short run also would be effectively curtailed. The profits of foreign subsidiaries which were the object of the Treasury proposal would largely end up in foreign treasuries.

Thus, all across-the-board as far as American interests are concerned the tax holiday proposal is a "no win" proposition.

EXPORTS TO UNITED STATES BY U.S. CONTROLLED FIRMS

The second proposal deals with situations in which controlled foreign subsidiaries of American companies export to the United States as substantial proportion of their products. Subject to an additional investment test, the American company would be taxed currently on unremitted income if 25 percent of the subsidiary's sales are destined for American markets and the income tax rate is less than 80 percent of the U.S. rate. We are informed that this proposal is not intended to apply to mineral products which currently or potentially are in short supply in the United States.

The theory back of this proposal seems to be that the foreign operation is designed to be competitive with domestic production. Regardless of cases in point, however, this is not the pattern of past ventures of the kind nor a reasonable blueprint of what we can expect in the future. More generally, the foreign operation is designed to be competitive with foreign production already penetrating U.S. markets. If the field is left to foreign producers, neither a stream of supporting exports nor a return flow of income is generated, but, as likely as not, the total flow of imports will be little if any affected. On balance, the U.S. economy, labor force and Treasury would be the losers.

We submit that if imports of any product from any area pose a threat to American production and jobs meriting government intervention, that intervention should be under the appropriate arrangements and powers sought by the President to deal with such situations. We believe that any effort to prevent such threats from developing by imposition of tax penalties on American companies producing abroad would be unsuccessful as regards the objective and harmful to the national economy as regards overall effect.

LOSS DEDUCTIONS AND THE FOREIGN TAX CREDIT

The third proposal deals with a situation which results from relatively dissimilar tax systems in a number of nations. Under the U.S. and other similar tax systems, operating losses in one year may be carried forward for offset against profits earned in later years. When this process takes place as regards a controlled foreign subsidiary of an American company, the reduction of its subsequent profits otherwise available for remittance as dividends to the U.S. company is offset by a corresponding reduction in the foreign tax credit.

In tax jurisdictions which do not provide for carryover of operating losses, or comparable offsetting adjustments, there is no reduction in subsequently taxable profits and at present no reduction in the corresponding tax credit. The result is that the foreign government involved collects taxes that would not be due under a similar tax system, but the American company is protected from bearing the burden of this unreasonable impost by the foreign tax credit while the U.S. government is deprived of corresponding revenue. However, if the credit were not allowed-which is what the Treasury proposes-the U.S. company would be paying taxes on income which it did not realize on a net basis.

There is an apparent conflict in the equities of this situation. However, the guiding rule of U.S. taxation of foreign source income is that all such income must at the minimum bear a tax burden equal to the domestic tax of 48 percent, even though the foreign tax burden is lower. Corresponding, the rule now operates to protect the American company from bearing a higher burden than 48 percent based on U.S. tax accounting standards unless the foreign tax rate is higher than that figure. Considering the benefits which flow to the American economy, and Treasury, from foreign investment, it is clear that the public interest would not be served by abrogating the rule. Consistently, it would seem that the conflict in equities would be resolved by continuing to allow the full tax credit in the given situation.

As part of its proposal for protecting U.S. revenues against failure to balance out losses and profits over a period of time under some foreign tax jurisdictions, the Treasury also deals with the situation of an American company first operating a branch or branches overseas and later turning that operation into a controlled foreign subsidiary. When the branch or branches had operated on a loss basis, such losses are not offset by profits of the subsidiary for the purposes of U.S. taxation unless remitted as dividends to the American company. The proposal would subject such profits to U.S. tax to the extent of losses incurred during branch operation.

While there may be abstract equity in this proposal, as a practical matter it would discriminate against new foreign ventures as compared with old ventures already incorporated. Nearly all companies going abroad for the first time incur some expenses (and losses) before subsidiaries are setup or acquired, and in the case of both hard mineral and petroleum ventures the initial costs incurred before incorporation can be very large. In some if not many areas, local laws would inhibit or actually prevent incorporation during exploration or before the productive stage of a venture, if it gets that far, is reached. Subjecting such ventures which become profitable and are turned into subsidiary operations to a new tax burden would tend to strengthen the competitive position of companies (foreign based as well as U.S.) with established operations in the subsidiary form, and in cases at least freeze out ventures which would be very much in the national interest of the United States. Again, the public interest as well as the practical equities seem on the side of not making the proposed change in foreign tax policy.

CONCLUSION

On balance, we believe that the interests of the general public, of American workers as a group and of the U.S. Treasury would not be served by making the proposed tax changes nor in otherwise withdrawing from present provisions for taxing foreign source income.

We thank you for the opportunity to present these views.

Mrs. GRIFFITHS [presiding]. Thank you very much. The next witness is Mr. Hofmann.

Mr. Hofmann, will you identify yourself, please, and you may proceed as you choose.

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