Statement of Sally A. Stiles, International Tax Manager, Caterpiller Inc.

Testimony Before the House Committee on Ways and Means

Hearing on Impact of U.S. Tax Rules on International Competitiveness

June 30, 1999

Good morning Mr. Chairman and members of the Committee, I am Sally Stiles, International Tax Manager for Caterpillar Inc. It's a pleasure to be here and to have the opportunity to talk with you about international taxation.

For those of you not entirely familiar with Caterpillar, let me begin with some facts about the company. We are the world's largest manufacturer of construction and mining equipment, natural gas and diesel engines, and industrial turbines.

We also own and operate subsidiaries that handle financing, insurance, leasing programs, countertrade and logistics services. We employ 65,000 employees worldwide and posted sales last year of nearly $21 billion, including $6 billion in exports from the United States. These export sales directly support 15,000 U.S. jobs and an additional 30,000 jobs with our U.S. suppliers.

Mr. Chairman, Caterpillar applauds your efforts to reduce trade and tax barriers that US companies face on a daily basis. We wholeheartedly agree with you that many of our tax policies don't reflect the current competitive environment facing companies like Caterpillar. Tax policies implemented in the 1960's and continually expanded in the years since have not kept pace with the global marketplace.

The cross border emphasis embodied in the US anti-deferral rules is rapidly becoming obsolete in a world where the marketplace is no longer defined by country borders. The dramatic events unfolding in Europe are certainly the most convincing evidence of the changing marketplace. As the world recognizes the European Union as a single marketplace so too should the US tax laws.

Mr. Chairman we support your efforts to preserve two very important features of the current tax code. The Export Source Rule and the Foreign Sales Corporation provisions are critically important to US exporters. These provisions and the recent decision to include active finance company income in the deferral rules have helped place US companies on a more level playing field with their foreign competitors. We strongly support permanent extension of the active finance provision.

Let me briefly explain why this provision is so important to Caterpillar.

Purchasing high value goods like Caterpillar equipment generally entails more than simply writing a check. The model you have in front of you represents the little brother of our largest mining shovels that are manufactured exclusively in our Joliet Illinois facility. This mammoth equipment generally costs in excess of one million dollars per unit…and let's bear in mind many customers buy in fleets.

Caterpillar Financial Services Corporation and its subsidiaries offer competitive leasing and purchasing programs to all our customers -- including the nearly fifty percent who are not in the United States.

Until the recent change to US tax law providing deferral for active finance income, the foreign source income generated from our foreign financing business was taxable in the United States on a current basis. Many of our foreign competitors are able to offer flexible financing programs to assist in the purchase of their competitive equipment without this additional home-country tax burden. The active finance exception has allowed us to remain competitive in these programs, but we run the risk of losing what we've gained if we backtrack now.

If we are to maintain our primary philosophy of "build it here and sell it there", we need a modern tax policy that is consistent with our global focus. US tax rules must allow us to be competitive bidders when opportunities arise rather than placing us at an immediate disadvantage.

Several members of this Committee have been instrumental in proposing and helping to enact simplification measures to our international tax system. We encourage those efforts to continue. The compliance costs associated with the incredibly complex US international tax rules are enormous.

Let's keep our eyes on the long-term benefits to the U.S. economy, ensuring U.S. companies remain globally competitive, recognizing and responding to the tax-related challenges of new technologies…and new markets. By working together, we can assure future generations of Americans an opportunity to participate in world markets -- instead of apologizing for lost possibilities.

As stated in the discussion above, the US anti-deferral rules must be reformed if US companies are to fully participate in world markets. The Foreign Base Company Income rules and the Foreign Personal Holding Company Income rules make it impossible for US companies to enjoy the same economies of centralized operations that are available to their foreign competitors. Under current US rules, the cross border transactions that are inherent in centralized operations such as treasury centers, distribution operations, marketing and "back office" service centers are all currently taxable in the US. Income associated with these centralized operations is clearly active business income and should not be subject to current US taxation.

The Foreign Tax Credit Limitation calculation is another area of the international tax law that is very much in need of reform. The rules dictating the segregation of income into the various baskets have become so overly complicated that compliance efforts are not only costly but also error prone. Acceleration of the provisions allowing look-thru treatment for dividends of Non-controlled Section 902 Corporations and extension of the allowable period for foreign tax credit carryforwards are measures that, if adopted, would provide some relief in this area.

The expense allocation and apportionment rules are no less complicated and burdensome than the income sourcing rules. In particular, the interest expense apportionment rules are not only a complex administrative burden but also unfairly penalize US multinational companies with US financial subsidiaries. Under current rules interest expense may not be netted against interest income and must be apportioned on the asset method. For US companies with foreign subsidiaries a significant portion of this interest expense will be apportioned to foreign source income in spite of the fact that the expense was incurred solely to fund US financial transactions.

The volume of information that must be collected from foreign locations to comply with the US informational reporting requirements has become a tremendous burden on US multinational companies. Adopting US GAAP accounting for the determination of Earnings and Profits for both informational and Subpart F calculations would greatly simplify this process.