The Carter aministration signaled yesterday that it will oppose any move in Congress to deny foreign tax credits to American oil companies operating overseas, despite demands by liberals to "crack down" on alleged abuses.
The Treasury issued proposed regulations setting formal restrictions on the use of foreign tax credits, but provisions mostly reiterated existing policies and did not break ground in limiting the credits further.
The few changes were so modest that Donald C. Lubick, assistant secretary of the Treasury for tax policy, told a news conference there was no way to tell whether the shift would have any major impact on Treasury revenues.
Yesterday's action was timed to make the proposals public before the House Ways and Means Committee begins hearings on the foreign tax credit issue Tuesday. Treasury Secretary W. Michael Blumenthal is scheduled to testify.
It was not clear immediately how effective the action would be in heading off the demands by liberals. Some liberals want Congress to deny the foreign tax credit to oil companies entirely. Others want to limit it sharply.
The administration has proposed new legislation to accompany its "windfall profits" tax that would prohibit oil companies that accrue excess foreign tax credits from using them to offset taxes on related shipping ventures.
However, Blumenthal is expected to tell the panel Tuesday the administration believes that, with that single tightening, the foreign tax credit should be kept intact, to prevent double taxation of U.S. firms abroad.
Under present law, American companies operating abroad may use the foreign tax credit to reduce the U.S. taxes they owe on foreign earnings. Except for rare instances, they may not offset taxes on money earned here.
A major issue in earlier years has been a practice in which oil companies have been able to claim the foreign credit for royalties paid to oil-producing countries, even though they are not actually a form of taxation.
However, the Internal Revenue Service already has moved to block this through a series of company-by-company rulings - a policy shift that yesterday's proposed regulations would solidify into what amounts to law.
Treasury figures show that if U.S. oil companies were denied the foreign tax credit entirely, it would cost the industry approximately $1.2 billion in additional taxes. Many industrial nations do not tax foreign earnings at all.
Yesterday's proposals contained several general "principles" by which companies can decide whether the tax they paid a foreign government is eligible for a credit. Current law allows credit only for a foreign income tax.
The conditions include these restrictions:
The tax levied by the foreign government must be a true income tax, based on the profits earned by the U.S. company, not on its use of some mineral or resource. If a firm's profits decline, the tax bite would be reduced.
The tax must be calculated based on the "realized net income" of a corporation and must be "substantially equivalent" in size and form to the U.S. income tax. If a special tax is levied on producers, it must not exceed 46 percent.
Lubick said yesterday he thought that besides the oil industry, the changes would affect U.S. multinational banks, management services and manufacturing services doing business abroad.