COMMITTEE ON WAYS AND MEANS DAN ROSTENKOWSKI, Illinois, Chairman SAM M. GIBBONS, Florida J. J. PICKLE, Texas CHARLES B. RANGEL, New York RICHARD A. GEPHARDT, Missouri CECIL (CEC) HEFTEL, Hawaii JAMES M. SHANNON, Massachusetts KENT HANCE, Texas ROBERT T. MATSUI, California BYRON L. DORGAN, North Dakota BARBER B. CONABLE, JR., New York GUY VANDER JAGT, Michigan JAMES G. MARTIN, North Carolina W. HENSON MOORE, Louisiana South Carolina WILLIAM M. THOMAS, California Page Boston College Law School, Richard L. Kaplan on behalf of Hugh J. Ault Chamber of Commerce of the United States, C. William Schick and David E. Cherecwich, Paul, Jr., Foxboro Co., on behalf of the American Electronics Association, the Scientific Apparatus Makers Association, and the Semicon- Kingson, Charles I., Willkie, Farr & Gallagher, New York, NY 9 Lokken, Lawrence, New York University School of Law 141 McCloskey, Peter F., Electronic Industries Association. 173 McGarrah, Robert E., Jr., American Federation of State, County & Municipal 208 Scientific Apparatus Makers Association, Paul Cherecwich. Jr 189 (111) Semiconductor Industry Association, Paul Cherecwich, Jr. Shannon, Hon. James M., a Representative in Congress from the State of Syracuse University College of Law, Jon Bischel. White, Glenn W., Dow Chemical Co...... Willkie, Farr & Gallagher, New York, N.Y., Charles I. Kingson. SUBMISSIONS FOR THE RECORD Machinery & Allied Products Institute, Charles W. Stewart, letter.......... Pharmaceutical Manufacturers Association, Lewis A. Engman, letter and Tax Council, Thomas P. Maletta, statement. Tax Executives Institute, Inc., Paul A. Barrese, letter. APPENDIX Subcommittee on Oversight report and recommendations concerning research and development source allocation rules.... Page 189 3 221 164 234 245 250 251 255 257 259 RESEARCH AND EXPERIMENTAL SOURCE ALLOCATION RULES WEDNESDAY, OCTOBER 26, 1983 HOUSE OF REPRESENTATIVES, Washington, D.C. The subcommittee met at 9:48 a.m., pursuant to notice, in room 1100, Longworth House Office Building, Hon. Charles B. Rangel (chairman of the subcommittee) presiding. [The press release announcing the hearing follows:] [Press release of Monday, Oct. 3, 1983] HON. CHARLES B. Rangel (D., N.Y.), CHAIRMAN, SUBCOMMITTEE ON OVERSIGHT, COMMITTEE ON WAYS AND MEANS, U.S. HOUSE OF REPRESENTATIVES, ANNOUNCES THE SCHEDULING OF THE HEARING ON RESEARCH AND EXPERIMENTAL SOURCE ALLOCATION RULES Congressman Charles B. Rangel (D., N.Y.), Chairman of the Subcommittee on Oversight of the Committee on Ways and Means announced today that a hearing has been scheduled for Wednesday, October 26, 1983, to consider the temporary rule which allocates and apportions all research and experimental expenditures for research activities conducted in the United States to sources within the United States. The hearing will begin at 9:30 a.m. in the Committee on Ways and Means Main Hearing Room, 1100 Longworth House Office Building.1 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 U.S. 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 Subcommittee hearing will (1) focus on the findings and recommendations contained in Treasury's June 1983 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 U.S. and 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. For additional information see the Subcommittee's previous hearing announcement: Subcommittee on Oversight, Press Release No. 8, Tuesday, September 20, 1983. A subsequent press release dated Oct. 18, 1983, announced an additional day of hearings to be held on Thursday, Nov. 3, 1983, beginning at 2 p.m. (1) DETAILS FOR SUBMISSION OF REQUESTS TO BE HEARD Individuals and organizations interested in presenting oral testimony before the Subcommittee must submit their requests to be heard by telephone to Harriett Lawler ((202) 225-3627) no later than noon Friday, October 14, 1983, to be followed by a formal written request to John J. Salmon, Chief Counsel, Committee on Ways and Means, U.S. House of Representatives, 1102 Longworth House Office Building, Washington, DC. 20515. Notification to those scheduled to appear will be made by telephone as soon as possible after the filing deadline. It is urged that persons and organizations having a common position make every effort to designate one spokesman to represent them in order for the Subcommittee to hear as many points of view as possible. Time for oral presentations will be strictly limited with the understanding that a more detailed statement will be included in the printed record of the hearing. This process will afford more time for Members to question witnesses. In addition, witnesses may be grouped as panelists with strict time limitations for each panelist. In order to assure the most productive use of the limited amount of time available to question hearing witnesses, witnesses scheduled to appear before the Subcommittee are required to submit 5 copies of their prepared statement to the Subcommittee office, Room 1101 Longworth House Office Building, by close of business, Friday, October 21, 1983, and 100 copies to the full Committee office, Room 1102, 24 hours in advance of their scheduled appearance. Failure to comply with this requirement may result in the witness being denied the opportunity to testify in person. Each statement to be presented to the Subcommittee or any written statement submitted for the printed record must contain the following information: 1. The name, full address, and capacity in which the witness will appear as well as a telephone number where he or his designated representative may be reached; 2. A list of any clients or persons, or any organization for whom the witness appears; and 3. A topical outline or summary of comments and recommendations. WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE Persons submitting a written statement for inclusion in the printed record of the hearing are required to submit at least six (6) copies of their statement by the close of business, Friday, November 4, 1983, to John J. Salmon, Chief Counsel, Committee on Ways and Means, U.S. House of Representatives, Washington, D.C. 20515. If those filing written statements for the record of the printed hearing wish to have their statements distributed to the press and the interested public, additional copies may be submitted for this purpose if provided to the full Committee office before the hearing begins. Chairman RANGEL. The Subcommittee on Oversight of the Committee on Ways and Means will please come to order. This morning the Subcommittee on Oversight will receive testimony concerning rules that affect the allocation and apportionment of expenses for research and development activities conducted in the United States between United States and foreign income sources. The allocation and apportionment rules provided for under Internal Revenue code, section 861, and related code sections are relevant to a taxpayer's calculation of taxable income for purposes of the foreign tax credit, disc computations, and other provisions of the code. While the code generally requires the allocation of expenses, losses and other deductions between United States and foreign source income, the allocation rules as applied to R&D expenses are complex and have been particularly controversial. The Department of the Treasury issued a regulation concerning R&D allocation rules, as required by statute, in proposed form in 1973 and in final form in 1977. This regulation is the so-called section 861 regulation or Treasury regulation 1.861-8. As part of the Economic Recovery Tax Act of 1981, ERTA, Congress included a |