- The Washington Times - Friday, October 26, 2001

An obscure international corporate tax provision slipped into the House economic-stimulus bill that passed Wednesday would cost the government $21 billion over 10 years but provide little immediate boost to the economy, critics say.

The proposed change to the tax code would reduce federal revenue almost as much as the $24 billion repeal of the alternative minimum tax that was the subject of much partisan rancor. But international tax provision has attracted much less notice.

The measure would permanently lift U.S. taxes on interest income generated by foreign subsidiaries of such giants as General Electric Co., Merrill Lynch and auto manufacturers who finance most of their sales to consumers.

"It's a great step," said Rep. Bill Thomas, the California Republican who heads the House Ways and Means Committee.

Rep. Robert T. Matsui, a California Democrat on the panel, criticized its inclusion in the stimulus package. He pointed out that most of the money is returned to corporations in the latter half of the next decade.

"It has nothing to do with boosting the economy right now," he said.

Mr. Thomas stopped short of saying whether the change would help the economy in a speech Wednesday night to the annual dinner of the Organization for International Investment, a business group.

Realizing there were reporters present, he added sarcastically that "the entire package" passed by the House will stimulate the economy, a comment that drew widespread laughter from the lobbyists at the dinner.

Mr. Thomas' office did not return a call seeking comment.

Mr. Matsui added that he supports eventually changing the law to improve the competitiveness of American companies. American tax law hurts U.S. companies because the home countries of their chief competitors, such as Germany and France, impose no taxes on their "foreign-source" income, Mr. Matsui said.

Republicans have long sought this change, and have had the support of some Democrats, such as Mr. Matsui. But the high cost of the change $260 million in the first year, rising to $3.8 billion in 2008 has made it a tough sell.

As a result, the change has been extended on a temporary basis several times since 1997 because short extensions of the rule cost much less. That extension expires Jan. 1.

But in the rush to pass a stimulus package, former senior congressional staffers who are now lobbyists for major corporations, like General Electric, took advantage of the momentum behind the stimulus bill to get the provision included, committee sources said.

Kenneth Kies, a lobbyist with PricewaterhouseCoopers, insisted that the change will boost the U.S. economy by helping financial-services firms hold their own against foreign counterparts overseas.

"Thousands of jobs here depend on the international operations of the financial-services sector," he said.

Opponents call the change a shameless tax dodge.

Robert McIntyre, director of Citizens for Tax Justice, a liberal advocacy group, said the U.S. tax on interest income prevents corporations from using an old trick, around since the 1960s, of shifting money around to reduce their tax bill in the United States.

Under this method, Mr. McIntyre said, U.S. corporations transfer money to their subsidiaries in tax havens such as the Cayman Islands, and then bring the money back to the United States in the form of a loan. They can then deduct the interest on those loans from their U.S. taxes.

"It undermines the whole corporate-tax system," Mr. McIntyre said.

Mr. Kies ridiculed this notion, saying that U.S. law requires companies to have concrete operations on the ground, and they cannot simply shift money through paper corporations in the Cayman Islands.

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