Page Irwin, Richard F., International Telephone & Telegraph Corp., and Electronic 274 Kahne, Stephen, American Society for Engineering Education. 739 499 Kraut, Alan G., American Psychological Association, Association for the Advancement of Psychology, and Federation of Behavioral, Psychological, and Cognitive Sciences... 765 Krowe, Allen J., International Business Machines Corp Lear Siegler, Inc., Thomas Perfitt and Richard F. Vander Veen.. 422 329 M/A-COM, Inc., Joseph A. Saloom Mahapatra, S., California State University, Long Beach. 448 524 Massachusetts, Commonwealth of: Evelyn F. Murphy, on behalf of Hon. Michael S. Dukakis, Governor 383 386 McCarthy, C. Kim, National Machine Tool Builders' Association 213 274 191 Miller, Michael I., Gould Inc. 691 Mineta, Hon. Norman Y., a Representative in Congress from the State of Murphy, Evelyn F., on behalf of Hon. Michael S. Dukakis, Governor of the 383 Mussman, Harry C., National Food Processors Association. 324 National Association of Manufacturers, Robert A. Ragland. 238 National Association of State Universities and Land-Grant Colleges, Steven C. 731 National Coalition for Science & Technology, Marc H. Rosenberg. 709 324 National Machine Tool Builders' Association, W. Paul Cooper and C. Kim Ragland, Robert A., National Association of Manufacturers. 238 224 Rosenberg, Marc H., National Coalition for Science & Technology. 709 Ross, Ian M., AT&T Bell Laboratories, and American Telephone & Telegraph 429 Saloom, Joseph A., M/A-COM, Inc., and American Electronics Association Schick, C. William, United Technologies Corp., and Chamber of Commerce of the United States. 448 390 Schoenberg, Lawrence J., AGS Computers, Inc., and Association of Data Processing Service Organizations, Inc..... 504 Scientific Apparatus Makers Association, James A. Taylor. 435 558 741 Shannon, Hon. James M., a Representative in Congress from the State of 231 Shea, Hon. Philip L., State Senator, Commonwealth of Massachusetts 386 741 Taylor, James A., Varian Associates, Inc., and Scientific Apparatus Makers Young, John A., Hewlett-Packard Co., and Computer & Business Equipment 402 Zschau, Hon. Ed, a Representative in Congress from the State of California. 355 SUBMISSIONS FOR THE RECORD Aerospace Industries Association of America, Inc., statement 772 777 777 Page Association of Independent Research Institutes, Federico Welsch, letter and pamphlet.... 778 Atkins, Hon. Chet, State Senator, Commonwealth of Massachusetts, statement...... 819 Automated Financial Systems, Inc., James E. Greenwood, letter.. 790 Beck, David P., Public Health Research Institute of the City of New York, 827 Boris, Michael J., Medtronic, Inc., letter and attachment. Coriell, Lewis L., Institute for Medical Research, letter 799 Engman, Lewis A., Pharmaceutical Manufacturers Association, letter 826 Fink, George B., Computer Financial Corp., letter 791 793 Germain, Albert E., Aluminum Company of America, letter 777 Global Competitiveness Council, Bruce Rubinger, letter and attachment 955 790 Inman, Adm. B.R., Microelectronics & Computer Technology Corp., statement. 824 799 International Union, United Automobile, Aerospace & Agricultural Imple ment Workers of America-UAW, Dick Warden, letter. 799 Jefferson, E.G., Business Roundtable, letter...... 790 Lytle, Michael A., Texas A&M University System, statement. 834 McKay, Charles A., Foxboro Co., letter.. 793 Machinery & Allied Products Institute, statement. 801 Mansfield, Edwin, University of Pennsylvania, statement.. 955 Massachusetts Technology Park Corp., statement. 821 Medtronic, Inc., Michael J. Boris, letter and attachment.. 822 Microelectronics & Computer Technology Corp., Adm. B.R. Inman, statement.. 824 Niederhauser, Warren D., American Chemical Society, letter..... 777 Otto Engineering, Inc., J.O. Roeser, letter. 826 Pharmaceutical Manufacturers Association, Lewis A. Engman, letter 826 Public Health Research Institute of the City of New York, Inc., David P. Rubinger, Bruce, Global Competitiveness Council, letter and attachment 955 Scott, John S., Richardson-Vicks, Inc., letter 827 Shepherd, Mark, Jr., Texas Instruments Inc., statement 837 Texas A&M University System, Michael A. Lytle, statement. 834 Texas Instruments Inc., Mark Shepherd, Jr., statement. 837 Warden, Dick, International Union, United Automobile, Aerospace & Agricultural Implement Workers of America-UAW, letter. 799 Welsch, Federico, Association of Independent Research Institutes, letter and pamphlet 778 Whirlpool Corp., letter and statement. 839 APPENDIX "Canadian R&D Incentives: Their Adequacy and Impact", by Donald G. McFetridge and Jacek P. Warda..... 849 RESEARCH AND EXPERIMENTATION TAX CREDIT THURSDAY, AUGUST 2, 1984 HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, DC. The subcommittee met at 10:10 a.m., pursuant to notice, in room B-318, Rayburn House Office Building, Hon. Charles B. Rangel (chairman of the subcommittee) presiding. [Press releases announcing the hearings follow:] [For immediate release, Tuesday, Sept. 20, 1983] HON. CHARLES B. RANGEL (D., N.Y), CHAIRMAN, SUBCOMMITTEE ON OVERSIGHT, COMMITTEE ON WAYS AND MEANS, U.S. HOUSE OF REPRESENTATIVES, ANNOUNCES HEARINGS TO BE SCHEDULED ON RESEARCH AND EXPERIMENTATION EXPENDITURE TAX ISSUES Congressman Charles B. Rangel (D., N.Y), Chairman of the Oversight Subcommittee of the Committee on Ways and Means announced today that hearings will be held to examine the two provisions contained in the Economic Recovery Tax Act of 1981 (ERTA) which relate to the tax treatment of research expenditures. Specifically, the Subcommittee will review the provisions which (1) provide that all research and experimental expenditures for research activities conducted in the United States be allocated or apportioned to sources within the United States, and (2) provide for a 25-percent tax credit for certain incremental research expenditures. The research source allocation rule applies only to expenditures paid or incurred during the taxpayer's first two taxable years beginning after August 13, 1981. The 25-percent tax credit applies to expenditures made after June, 1981, and before 1986. The Subcommittee's hearings are being conducted at the request of Committee on Ways and Means Chairman Rostenkowski and as part of the Oversight Subcommittee's continuing review of current Internal Revenue Code provisions. The Subcommittee plans to conduct two separate hearing sessions. The first hearing will address the two-year research source allocation rule and will be scheduled in October. The second hearing concerning the 25-percent tax credit will be held at a later time. Details concerning the time, place and location of each hearing will be announced in subsequent press releases. A brief discussion of the scope of the Subcommittee's hearings follows: RULE FOR ALLOCATING RESEARCH AND EXPERIMENTAL EXPENDITURES TO U.S. SOURCE INCOME Section 223 of the Economic Recovery Tax Act of 1981 (ERTA) provides a two-year rule that allocates all research and experimental expenditures which are paid or incurred for research activities conducted in the United States to U.S. sources, for all purposes under the Internal Revenue Code (I.R.C.). This rule is effective for the taxpayer's first two taxable years beginning after the date of enactment, August 13, 1981, and has the effect of placing a temporary moratorium on the relevant portions of Treasury Regulation 1.861-8. In addition, ERTA directs the Department of the Treasury (Treasury) to conduct a study of the impact that the research expenditure allocation provisions of Treasury Regulation 1.861-8 have on both research activities conducted in the United States (1) and on the availability of the foreign tax credit. (Treasury released their study in June 1983 and recommended a two-year extension of the present moratorium.) The allocation of research and experimental expenditures is important for purposes of calculating the foreign tax credit. Under I.R.C. Sections 861-3, a taxpayer is required to allocate or apportion expenses between foreign source income and U.S. source income. Treasury Regulation 1.861-8 sets forth the rules for allocating or apportioning these expenses. However, the temporary ERTA provision replaces the Treasury allocation rules and allocates all research and experimental expenditures for research activities conducted in the United States to U.S. source income (rather than between United States and foreign source income). This rule has the effect of increasing a taxpayer's foreign tax credit limit and, for many firms, the amount of the taxpayer's tax credit. The foreign tax credit is structured to provide a taxpayer with a credit for foreign income taxes imposed on foreign income against U.S. taxes. The foreign tax credit amount is basically the lesser of the foreign tax credit limit or the amount of foreign tax paid. Taxpayers desire to increase the foreign tax credit limit amount, at least to an amount equal to the amount of the foreign tax paid, or they may find themselves in a "credit loss" situation. Allocating research and experimental expenditures as deductions against U.S. source income, rather than as deductions to reduce foreign source income, will result in an unreduced taxable foreign source income amount and therefore, a relatively higher foreign tax credit limit. Further, in some instances, a foreign country does not allow deductions against the foreign tax paid for research and experimental expenditures conducted in the United States. In such a case, expenditures allocated to foreign source income as deductions by the United States are not available to the firms to reduce the amount of foreign tax paid and further the foreign country may tax U.S. source income. The rule in ERTA allocating all research and experimental expenditures to U.S. source income was enacted by the Congress to encourage firms to locate (or retain) their research and development activities in the United States. Firms with overseas manufacturing operations argued that Treasury's allocation rules caused firms to shift research and experimental activities to foreign countries in order to obtain a deduction in that country and thus obtain a full credit for taxes paid on the income earned in that country. The Subcommittee hearing will (1) focus on the findings and recommendations contained in the June 1983 Treasury Report, "The Impact of the Section 861-8 Regulation on U.S. Research and Development," and other related analyses, (2) consider the policy implications of not requiring expenses to be allocated between foreign source income (including the incentive under present law to make tax free transfers of technology for use in manufacturing operations abroad), and (3) examine the research activities and location response of taxpayers who have received tax benefits under the temporary ERTA allocation rule. TWENTY-FIVE PERCENT CREDIT FOR INCREMENTAL RESEARCH AND EXPERIMENTAL EXPENDITURES Section 221 of the Economic Recovery Tax Act of 1981 provides for a 25 percent tax credit for certain qualified research expenditures paid or incurred by a taxpayer in carrying on a trade or business. Qualified research expenditures generally consist of "in house" expenditures by the taxpayer for research wages and supplies used in research, plus certain amounts paid for research use of laboratory equipment, computers, or other personal property, and 65 percent of certain amounts paid for contract research and basic research grants to universities and scientific research organizations. The credit applies to expenditures made after June 30, 1981, and before 1986, and is applicable to incremental expenditures above a base period amount according to the average of certain previous year expenditures. The legislative history of the credit indicates that the 1986 sunset date was intended to give the Congress an opportunity to evaluate its operation and efficacy. Accordingly, the Subcommittee on Oversight will receive testimony on the following issues: (1) whether the tax credit provisions should be allowed to sunset, should be extended, or should be made permanent; (2) whether the credit operates to stimulate additional research expenditures, or simply rewards increased research expenditures which would have been made in the absence of a credit, (3) a review of the types of research expenditures and industry activities that have generated use of the tax credit; (4) whether the categories of qualifying research expenditures should be broadened or narrowed; (5) whether taxpayers and the Internal Revenue Service have been able to accurately distinguish qualifying research expenditures from non |