THE AMERICAN COMPETITIVENESS ACT OF 2002

Summary of Proposal

• U.S. businesses, especially those competing in global markets, struggle under the burden of complex U.S. tax laws.  Our companies often face higher tax rates and more obstacles than their foreign competitors. 

• Current laws aimed at leveling the playing field have been found to provide “export subsidies” in violation of our treaty obligations.  If we repeal these laws, U.S. businesses will be placed at an even greater competitive disadvantage than they already face today.  If we don’t repeal these laws, U.S. companies may be hit with billions of dollars of retaliatory trade sanctions. 

•  Overall, our uncompetitive tax system raises serious problems:

• It hurts U.S. competitiveness, which is bad for the economy and job creation;
• It encourages companies to reincorporate overseas where they can lower their tax bills;
• It encourages tax sheltering activity; and
• It encourages foreign takeovers of U.S. companies.

• The Ways and Means Committee is responding with the American Competitiveness Act of 2002, a comprehensive tax reform package that:

• Improves the competitiveness of U.S. companies,
• Stems the flight of U.S. companies to offshore tax havens (i.e., “inversions”), and
• Reduces the use of abusive tax shelters.

• The American Competitiveness Act of 2002 is the only bill that meaningfully addresses the problem of corporate inversions because it takes a comprehensive approach to reforming the provisions of the Tax Code that penalize U.S. companies competing abroad.  Other legislation merely punishes companies that flee overseas without addressing the root of the problem:  a hostile tax system.

THE AMERICAN COMPETITIVENESS ACT OF 2002
KEEPING U.S. COMPANIES AND JOBS AT HOME

• In recent years, several U.S. companies have decided to reincorporate in a low tax foreign country, such as Bermuda – an act known as “inverting.”

• Inverting creates two primary tax benefits.  First, it allows companies to avoid paying U.S. taxes on income earned overseas.  Second, inversions allow companies to reduce or eliminate their U.S. taxes through “earnings stripping.”  Under these arrangements, the company makes interest payments to the new foreign parent, and uses these payments to offset their taxable income in the United States.

• The American Competitiveness Act of 2002 improves the incentive to stay in the United States and reduces incentives to incorporate overseas.  Specifically, the bill:

• Cracks down on earnings stripping arrangements, thus making U.S. companies less attractive targets for foreign takeovers and shutting down a primary incentive for U.S. companies to move overseas;
• Ensures that companies pay a tax when they transfer assets overseas; and
• Equalizes the treatment of corporate insiders (officers and directors) and common shareholders by imposing an excise tax on the stock options and stock based compensation held by corporate insiders at the time of an inversion.

• The American Competitiveness Act of 2002 is the only bill that meaningfully addresses the problem of corporate inversions by offering a comprehensive package that removes the “juice” that makes inversions so sweet and improves the competitiveness of U.S. businesses in global markets.

• Other legislation merely punishes companies that flee overseas without addressing the reason they choose to invert:  a hostile tax system.  Such a single-minded approach only creates other tax avoidance opportunities and makes U.S. companies even riper targets for foreign takeovers.

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THE AMERICAN COMPETITIVENESS ACT OF 2002
MAKING U.S. COMPANIES MORE COMPETITIVE

• U.S. businesses, especially those competing in global markets, struggle under the burden of complex U.S. tax laws.  Our companies often face higher tax rates than their foreign competitors and double taxation of income earned abroad. 

• The current Extraterritorial Income (ETI) regime was designed to level the playing field between U.S. companies and their foreign competitors.  Both ETI and its predecessor, the Foreign Sales Corporation (FSC), have been repeatedly ruled to be “export subsidies” that violate our treaty obligations.

• If we repeal ETI, U.S. businesses will be placed at an even greater competitive disadvantage relative to their foreign competitors. 

•  If we don’t repeal ETI, U.S. companies may be hit with billions of dollars of retaliatory trade sanctions.  An arbitration panel will set the level of authorized trade sanctions in July.

• The American Competitiveness Act repeals the ETI regime and replaces it with more than 20 reforms of the Tax Code that enhance U.S. competitiveness.  For example:

• Simplifying the complex foreign tax credit rules designed to prevent double taxation,
• Increasing expensing for small businesses,
• Reforming complex interest allocation rules, and
• Removing punitive rules which reduce companies ability to defer taxes on active income earned abroad.

• Unlike other bills that narrowly focus on punishing corporate inversions by chasing one particular transaction, the American Competitiveness Act of 2002 will increase U.S. competitiveness, thus growing the economy and preserving the high-paying jobs that American exports support.

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 THE AMERICAN COMPETITIVENESS ACT OF 2002
CLOSING THE DOOR ON ABUSIVE TAX SHELTERS

 “A tax shelter is a deal done by very smart people that,
absent tax considerations, would be very stupid.”
                                                   --  Michael J. Graetz
                                                                               Professor of Law, Yale University

• Testimony before the Committee on Ways and Means demonstrated the extent to which companies and their well-paid tax attorneys will go to exploit loopholes in the Tax Code.

• Tax sheltering activity undermines the rule of law and reduces economic efficiency.  Moreover, every dollar lost to a tax shelter means higher taxes on U.S. families.

• The American Competitiveness Act of 2002 aggressively fights tax shelters by: 

• Requiring more transparency and
• Imposing stiffer penalties on those who use tax shelters and those who promote them.

• The bill will save billions of dollars that are currently lost through the gaming of our tax laws.