Those Foreign Profits

In Washington this week the Senate Finance Committee will begin debating a New Frontier tax proposal with far-reaching consequences in foreign trade.

The argument swirls around the manner in which U.S. firms should be taxed on their overseas profits. Of all the Kennedy Administration's economic measures, none has evoked such vehement and unanimous opposition from U.S. business.

Payment in Full. Already passed by the House, the Administration's proposal would radically change the rules under which .U.S. business operates abroad. At present, a firm pays U.S. corporate income tax only on whatever part of its foreign earnings it "repatriates" to the U.S. as dividends. Earnings kept abroad are free of U.S. tax--which encourages U.S. corporations to use a substantial part of their foreign profits to expand their overseas operations.

The Administration wants to make most foreign profits taxable when earned, rather than when repatriated. U.S. subsidiaries operating in such economically advanced foreign nations as Britain and the Common Market countries would pay the full 52% U.S. corporate tax on all earnings--less whatever they paid in local income tax. Payment of U.S. taxes could still be deferred in underdeveloped nations, where the Administration wants to encourage U.S. private investment. The Administration bill has three professed purposes: to clamp down on U.S. firms that channel their overseas earnings into foreign "tax havens," to slow the alleged "export of jobs" created by U.S. investment abroad, and to narrow the gap in the nation's balance of payments by restricting the outflow of U.S. investment capital.

Sacrificing the Market. Few businessmen are prepared to defend publicly the increasingly popular U.S. corporate practice of funneling foreign earnings into semifictional subsidiaries in such low-tax areas as Switzerland, Liberia, Panama, Bermuda or the Bahamas. In the single year of 1960, the undistributed earnings of U.S. subsidiaries in such tax havens increased by 100% to $122 million. But businessmen argue that passing the new tax bill to get at the tax havens would amount to rolling out a cannon to kill a mouse. The Government would gain perhaps $85 million a year in tax revenues, but in doing so, say the businessmen, it would discourage U.S. firms from plowing most of their overseas earnings back into expansion.

Opponents of the Administration bill contend that the vast majority of foreign subsidiaries are set up not to dodge taxes but to develop new markets that cannot be served from U.S. plants because of tariffs, transport costs, higher U.S. production costs--or the simple difficulty of selling at long range. With stiffer tax rules, U.S. businessmen would be faced with a hard choice: either they would have to concede many of these markets to hustling and lower-taxed competitors from Europe and Japan, or they would have to export even more dollars than they now do to keep their foreign plants competitive.

Matching the Newly Mighty. Even the Government recognizes that investment abroad has helped rather than hurt the U.S. balance of payments. Since 1951 U.S. businessmen have sent $13 billion overseas in capital investment and have brought back $20.2 billion in earnings.

Investment abroad also stimulates U.S.

exports of raw materials, machines and spare parts to feed the foreign branches.

In 1960, the latest recorded year, the U.S.

imported $475 million worth of products from U.S.-owned foreign companies, while exporting $2.7 billion worth of U.S. products to them. These figures weaken U.S. labor's thesis that investment abroad generates unemployment at home.

Criticism of the Administration bill has already produced one significant modification of it in the House Ways and Means Committee: the bill now provides that foreign profits of U.S. companies would not be taxed so long as they are reinvested in the same line of business, either in the country where they were earned or in a less developed country. But the critics are still not appeased. The language of the House provision, they contend, is dangerously vague; it does not make clear, for example, whether a drug company could reinvest in a related chemical operation.

Above all, however, businessmen argue that the legislation runs contrary to the Administration's expressed ambition to bind the U.S. and European economies closer together. With new markets and newly mighty competitors rising within the Common Market, many businessmen are convinced that the U.S. must rapidly expand its capital base abroad or face an economic decline similar to Britain's after she was forced to sell off most of her foreign investments in World War II. "The President's tax bill," says International Milling Co. President Atherton Bean, "is nothing other than a new and sophisticated economic isolationism."

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