In their search for ways to raise taxes, congressional budget negotiators had little trouble taking aim at one target in particular: foreign banks and foreign companies operating in this country.
The budget package before Congress proposes to raise $300 million through 1995 by tightening tax reporting requirements for the foreign firms, a group that legislators contend is systematically cheating on U.S. taxes.
The package would broaden special powers that the Internal Revenue Service was granted last year concerning inspection of the books of the U.S. subsidiaries of foreign companies. The IRS would now be free to scrutinize branches of those subsidiaries and use the special powers in audits that are already underway.
Budget negotiators adopted these measures from a bill authored by House Majority Leader Richard A. Gephardt (D-Mo.) and Rep. Dan Rostenkowski (D-Ill.), chairman of the House Ways and Means Committee. Cracking down on foreign tax evaders offered a politically easy way to promise to raise revenue.
But the package they agreed on does not include several of the bill's more controversial features, to which the White House objected. Notably absent are proposals to impose a withholding tax on foreigners for capital gains and to allow the IRS broad rights to unilaterally extend the statute of limitations on foreign companies' tax affairs.
Congress and the IRS are pursuing tax investigations of a broad range of foreign companies and banks. Suspicions of wrongdoing have been stoked by Treasury Department figures showing that the U.S. subsidiaries of foreign companies reported sales of $650 billion in 1987 but profits of only $5.6 billion, a far lower rate than for American companies as a group.
Critics contend that profits are improperly transferred overseas through the inflation of prices that parent companies charge in sales to U.S. affiliates. This, critics say, short-changes the U.S. Treasury and also gives the offending companies an unfair advantage in the market by lowering their tax bills. Japanese companies have been called particularly frequent offenders.
"Foreign companies operating here are going to have to be treated more like domestic" firms, a Democratic congressional aide said yesterday. "They're going to need to pay taxes as a U.S. citizen, pay their fair share."
Foreign firms have responded that they do pay their fair share, but that exchange rate fluctuations and low profits due to investment in start-up operations have made them as a group less profitable than U.S. companies in selected years.
Foreign companies have criticized the 1989 measure, which created new reporting requirements and strengthened the IRS's powers to fine them and gather documents and testimony. The companies say it is a violation of a long-standing U.S. principle that foreign and U.S. companies should be treated alike under the law. The Bush administration has also opposed measures that it believes would soften this guideline.
Yesterday, officials of foreign firm seemed to indicate that they could live with the new arrangements, which would expand the 1989 law. "They're certainly not thrilled with this," said Catherine Porter, an attorney who represents the Organization for the Fair Treatment of International Investment, which is composed of foreign investors. "But they are relieved that the even more onerous and discriminatory provisions suggested this summer were not adopted."