Lapas attēli


274 739 499

765 422 329 448 524

383 386 213 274 191 691

351 246 558 496

383 324 238

Irwin, Richard F., International Telephone & Telegraph Corp., and Electronic

Industries Association .....
Kahne, Stephen, American Society for Engineering Education.
Knestrick, Martin, Commtech International.
Kraut, Alan G., American Psychological Association, Association for the Ad-

vancement of Psychology, and Federation of Behavioral, Psychological, and

Cognitive Sciences .....
Krowe, Allen J., International Business Machines Corp.
Lear Siegler, Inc., Thomas Perfitt and Richard F. Vander Veen.
M/A-COM, Inc., Joseph A. Saloom ..
Mahapatra, S., California State University, Long Beach.
Massachusetts, Commonwealth of:

Evelyn F. Murphy, on behalf of Hon. Michael S. Dukakis, Governor

Hon. Philip L. Shea, State senator
McCarthy, C. Kim, National Machine Tool Builders' Association
McCloskey, Peter F., Electronic Industries Association
McGraw-Hill Economics, David J. Braverman..
Miller, Michael I., Gould Inc
Mineta, Hon. Norman Y., a Representative in Congress from the State of

Motor Vehicle Manufacturers Association, John S. Nolan
Motorola, Inc., John T. Hickey.
Mungovan, James D., Deloitte Haskins & Sells.
Murphy, Evelyn F., on behalf of Hon. Michael S. Dukakis, Governor of the

Commonwealth of Massachusetts ...
Mussman, Harry C., National Food Processors Association..
National Association of Manufacturers, Robert A. Ragland.
National Association of State Universities and Land-Grant Colleges, Steven C.

Beering, M.D...........
National Coalition for Science & Technology, Marc H. Rosenberg.
National Food Processors Association, Harry C. Mussman...
National Machine Tool Builders' Association, W. Paul Cooper and C. Kim

New England Council, Inc., L. Thomas Bryan, Jr.
Nolan, John S., Motor Vehicle Manufacturers Association
Perfitt, Thomas, Lear Siegler, Inc.,
Ragland, Robert A., National Association of Manufacturers.
Rashkin, Michael D., Apple Computer, Inc
Rosenberg, Marc H., National Coalition for Science & Technology.
Ross, Ian M., AT&T Bell Laboratories, and American Telephone & Telegraph

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 .....
Schoenberg, Lawrence J., AGS Computers, Inc., and Association of Data Proc-

essing Service Organizations, Inc......
Scientific Apparatus Makers Association, James A. Taylor ......
Semiconductor Industry Association, John T. Hickey
Semiconductor Research Corp.,

Larry A. Sumney
Shannon, Hon. James M., a Representative in Congress from the State of

Massachusetts ..
Shea, Hon. Philip L., State Senator, Commonwealth of Massachusetts
Sumney, Larry A., Semiconductor Research Corp
Taylor, James A., Varian Associates, Inc., and Scientific Apparatus Makers

United Technologies Corp., C. William Schick.
Vander Veen, Richard F., Lear Siegler, Inc
Varian Associates, Inc., James A. Taylor......
Young, John A., Hewlett-Packard Co., and Computer & Business Equipment

Manufacturers Association ....
Zschau, Hon. Ed, a Representative in Congress from the State of California .....

731 709 324

213 696 246 329 238 224 709

429 448


504 435 558 741

231 386 741

435 390 329 435

402 355

SUBMISSIONS FOR THE RECORD Aerospace Industries Association of America, Inc., statement Aluminum Company of America, Albert E. Germain, letter .. American Chemical Society, Warren D. Niederhauser, letter

772 777 777



819 790

827 822 790 791 791 799 826 791 793 777 955 790 824 799

Association of Independent Research Institutes, Federico Welsch, letter and

pamphlet. Atkins, Hon. Chet, State Senator, Commonwealth of Massachusetts, state

Automated Financial Systems, Inc., James E. Greenwood, letter.
Beck, David P., Public Health Research Institute of the City of New York,

Inc., letter
Boris, Michael J., Medtronic, Inc., letter and attachment.
Business Roundtable, E.G. Jefferson, letter.......
Computer Financial Corp., George B. Fink, letter
Consortium of Social Science Associations, statement
Coriell, Lewis L., Institute for Medical Research, letter
Engman, Lewis A., Pharmaceutical Manufacturers Association, letter
Fink, George B., Computer Financial Corp., letter
Foxboro Co., Charles A. McKay, letter.
Germain, Albert E., Aluminum Company of America, letter
Global Competitiveness Council, Bruce Rubinger, letter and attachment
Greenwood, James E., Automated Financial Systems, Inc., letter..
Inman, Adm. B.R., Microelectronics & Computer Technology Corp., statement.
Institute for Medical Research, Lewis L. Coriell, letter
International Union, United Automobile, Aerospace & Agricultural Imple-

ment Workers of America–UAW, Dick Warden, letter..
Jefferson, E.G., Business Roundtable, letter...
Lytle, Michael A., Texas A&M University System, statement.
McKay, Charles A., Foxboro Co., letter..
Machinery & Allied Products Institute, statement..
Mansfield, Edwin, University of Pennsylvania, statement.
Massachusetts Technology Park Corp., statement
Medtronic, Inc., Michael J. Boris, letter and attachment.
Microelectronics & Computer Technology Corp., Adm. B.R. Inman, statement..
Niederhauser, Warren D., American Chemical Society, letter.
Otto Engineering, Inc., J.O. Roeser, letter
Pharmaceutical Manufacturers Association, Lewis A. Engman, letter
Public Health Research Institute of the City of New York, Inc., David P.

Beck, letter.
Richardson-Vicks, Inc., John S. Scott, letter
Roeser, J.O., Otto Engineering, Inc., letter
Rochester Tax Council, statement.
Rubinger, Bruce, Global Competitiveness Council, letter and attachment
Scott, John S., Richardson-Vicks, Inc., letter
Shepherd, Mark, Jr., Texas Instruments Inc., statement
Texas A&M University System, Michael A. Lytle, statement
Texas Instruments Inc., Mark Shepherd, Jr., statement
Warden, Dick, International Union, United Automobile, Aerospace & Agricul-

tural Implement Workers of America-UAW, letter
Welsch, Federico, Association of Independent Research Institutes, letter and

pamphlet ...... Whirlpool Corp., letter and statement.....

APPENDIX "Canadian R&D Incentives: Their Adequacy and Impact”, by Donald G.

McFetridge and Jacek P. Warda ....

799 790 834 793 801 955 821 822 824 777 826 826

827 827 826 828 955 827 837 834 837


778 839






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]



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:


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, ĚRTA 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


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 pur. poses 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.



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

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