Mr. HOLMES. You want the whole bracket? Mr. HOLMES. I just wanted to bring up that point. If not, we thank you for your appearance and information given the committee, and particularly appreciate your bringing with you our friends, Senator Johnson and Senator Carroll, who used to be on the committee. Thank you very much. Mr. KITCHEN. Thank you, Mr. Chairman. The CHAIRMAN. The next witness is Mr. William C. Crichley. Will you identify yourself for the record, by giving your name, address, and the capacity in which you appear. STATEMENT OF WILLIAM A. CRICHLEY, TAX POLICY COMMITTEE, MANUFACTURING CHEMISTS' ASSOCIATION, WASHINGTON, D. C. Mr. CRICHLEY. My name is William A. Crichley, from Cleveland, Ohio. I am appearing as chairman of the tax policy committee of the Manufacturing Chemists' Association. The CHAIRMAN. You are recognized for 15 minutes, Mr. Crichley. Mr. CRICHLEY. Thank you. We appreciate this opportunity of giving you our recommendations. The Manufacturing Chemists' Association is an incorporated national trade organization composed of 169 companies which manufacture and sell chemicals. These companies account for more than 90 percent of the chemical production capacity of the United States. My testimony will be concise and will not include detail which is repetitious of the testimony of others appearing at these hearings. High income tax rates are major problems: Our association believes that, at such time as national security considerations permit, a realistic reduction of the present high corporate income tax rate and the high surtax rates on individual income would result in a healthier business atmosphere and a sounder economy. However, we recognized the necessity for a Federal Budget adequate to finance national defense and other essential Government activity and the importance of national fiscal soundness. Even though budgetary considerations may preclude rate reductions now, we urge that your committee promptly begin to study reform of our basic tax policies, with a view toward equitable downward revision of corporate and individual income-tax rates which could be instituted as soon as prudent fiscal policy will permit. However, there are a number of tax changes, for the most part to correct substantive inequities, which we consider important and which should be effectuated without delay. We are submitting supplemental explanatory material for inclusion in the record, but I should like to summarize the changes we propose. The CHAIRMAN. Without objection, the material will appear in the record. Mr. CRICHLEY. Thank you. First, tax policy to stimulate private investment in foreign countries: Our association believes that the expansion of American business operations in foreign countries should be encouraged by providing that business income derived from operations abroad will be taxed at a lower rate than the rate for corporate domestic income. Many chemical manufacturers have shown definite interest in investing in business activity abroad, and we are confident that, if tax revisions are enacted to offset the greater risks involved in business operations in foreign countries, there will be increased American business investment abroad. Such a program will materially assist in stimulating private investment which should help to reduce the need for publicly financed foreign-aid programs, and would counteract the development of socialistic tendencies in foreign countries. We endorse in principle the proposal recommended by President Eisenhower in his January 10, 1955, message to Congress that legislation be enacted to provide for taxation of business income from foreign affiliates or branches of American firms at a rate of 14 percentage points lower than the corporate rate on domestic income, and providing for a deferral of tax on income of foreign branches until it is brought back to the United States. An additional improvement would be to grant domestic taxpayers an election, in determining their foreign tax credit, to apply a limitation based either on income from each foreign country, or on aggregate foreign income. Facilitating corporate reorganizations: Section 269 of the Internal Revenue Code was intended to prevent the avoidance of tax through acquisitions which would secure for the acquirer a deduction, credit, or other allowance which such person would not otherwise enjoy. The section was not intended to apply to corporate rearrangements within an affiliated group where there is no change in ultimate ownership. We recommend that the attribution of stock ownership rules of code section 318 be made applicable to section 269. Taxation of cooperatives: We desire to emphasize the inequity of the tax favoritism now accorded to cooperative organizations which engage in manufacturing and sell a substantial portion of their output to others than their stockholders. Cooperatives are entering new business and industrial fields each year. Because of special tax privileges, they have an unfair advantage in the accumulation of capital to finance rapid expansion. More and more cooperatives are manufacturing and selling products in direct competition with regular business corporations whose earnings are taxed at a 52 percent rate. Such favoritism should be eliminated in the interest of fairness to all taxpayers and to the public. In addition to concepts of fairness and equity, the taxation of cooperatives on the same basis as regular business corporations would add substantial sums to the Federal revenue. For example, several years ago the staff of the Joint Committee on Internal Revenue Taxation estimated that Federal revenues would be increased $700 million if the earnings of cooperatives were taxed under a bill proposed by a member of this committee in 1953. Unless legislation is enacted to eliminate the inequitable and discriminatory distribution of tax burdens between cooperative organizations and business corporations, more corporations are likely to adopt the cooperative form, thus further diminishing tax revenues and increasing the inequity. In our view, this would not be in the national interest, and we hope this tax favoritism will soon be eliminated by legislation. Taxation of compensation: Several inequities dealing with the taxation of compensation which your committee proposed to correct in 1954 still present a serious problem which we hope you will again endeavor to correct. Under existing law and the judicial doctrine of "economic benefit," an employee can be taxed on compensation prior to the time he has any actual or constructive right to realize any income with which to pay the tax. We believe this cannot be justified under any reasonable theory of taxation. An amendment which the Ways and Means Committee proposed in H. R. 8300 would have dealt with another inequity by making it clear that an employer is entitled at some time to a deduction for compensation which is paid into a nonqualified trust, to the extent that it is later paid to an employee. No reason was given by the Senate for the deletion of the amending provisions approved by the House. Still another inequity relates to an inconsistency between the gift tax and the estate tax sections of the law. This is already dealt with and we hope that section 57 of H. R. 8381 will be enacted into law. Liability for interest under Government-requested extensions of time: Under existing law, deficiencies of income taxes can be assessed during a 3-year period from the date an income tax return is filed. by a taxpayer. The commissioner may secure an extension of this 3-year period by requesting a waiver from the taxpayer. Interest on such deficiencies accrues from the due date of the tax to the date of payment of the deficiency. In many instances, the taxpayer is not responsible for the delay and, in such cases, it seems inequitable to require him to pay interest. Therefore, we recommend that the law should be amended to provide that no interest shall accrue subsequent to the end of the 3-year statutory period in cases where waivers are given by taxpayer for the convenience of the commissioner. Depreciation of obsolete assets: The depreciation provisions of the Internal Revenue Code of 1954 were constructive additions to the tax law, but restrictions imposed on the application of these provisions are a deterrent to the chemical industry. The "reasonable allowance for obsolescence" authorized in code section 167 is interpreted as not covering obsolescence arising from technological improvements. Our industry needs flexibility to shorten the depreciable life of a fixed asset rendered obsolete by discovery of a new process or development of a new product. The chemical industry can continue its dynamic existence only by the development and utilization of new techniques and processes, and the entire national economy will benefit by a depreciation policy which encourages a high rate of investment in modern plant and equipment. We believe that the Internal Revenue Code should be amended to permit a taxpayer to give realistic weight to obsolescence attributable to technological changes. Depreciation of goodwill: For many years the tax law has permitted a taxpayer to depreciate intangible assets provided the useful life of the asset can be reasonably estimated. However, the Treasury Department regulations do not permit any depreciation of goodwill. We recommend the enactment of legislation to permit writing off the cost of purchased goodwill, trademarks, trade names, and similar intangible assets over a reasonable length of time, for example, 60 months. The CHAIRMAN. You have already obtained permission to include the remainder of the statement in the record. Mr. CRICHLEY. Yes, sir. (The supplemental material referred to is as follows:) SUPPLEMENTAL STATEMENT OF MANUFACTURING CHEMISTS' ASSOCIATION, INC., PRESENTED TO COMMITTEE ON WAYS AND MEANS, HOUSE OF REPRESENTATIVES, JANUARY 21, 1958 To provide detail in support of several of the tax changes recommended by the Manufacturing Chemists' Association, Inc., as summarized in the oral testimony of William A. Crichley before the Committee on Ways and Means on January 21, 1958, this statement is respectfully submitted for inclusion in the committee's hearing record. PROPOSALS WITH RESPECT TO UNITED STATES TAXATION OF FOREIGN INCOME In recognition of the vital role of the United States in world economy, Congress and Government-appointed commissions have conducted hearings and undertaken studies repeatedly since World War II to examine and recommend measures for strengthening our foreign economic policy. Reports on these proceedings reflect consistent emphasis on positive Government action to encourage expansion of American private trade and investment abroad. Taxation by the United States of income from abroad is recognized as an important factor affecting foreign investments; one which is within the jurisdiction of Congress. Among the recommendations resulting from these studies were specific proposals for amending our tax laws. The Commission on Foreign Economic Policy, in its "Report to the President and Congress" in January 1954, suggested a 14 percentage point reduction in the rate of tax on foreign income, and an election to defer payment of tax on such income until its return to the United States. President Eisenhower subsequently recommended enactment of similar proposals to facilitate the investment of capital abroad. The above-mentioned studies also acknowledge that double taxation and inequities do exist under present United States methods of taxing foreign income. They arise from the variable effects on United States taxpayers of the alternative corporate forms for operating abroad and the inadequacies of the foreign tax credit system which does not provide for differences in types of taxes and methods of determining income under foreign laws. As a consequence, in addition to the indeterminate political and financial risks, American investors abroad are confronted with substantial tax deterrents, accentuated by our high level of income tax rates. Thus, United States traders and investors are placed at a serious disadvantage vis-a-vis nationals of the capital-importing country and of other capital-exporting countries. Furthermore, capital importing countries are encouraged to increase their income tax rates in the knowledge that, to the extent their taxes are less than ours, American business abroad must pay the difference in additional taxes to the United States. Our association believes that the expansion of American business operations in foreign countries should be encouraged. Therefore, we urge enactment of the following proposals to offset the greater risks and tax disadvantages affecting foreign operations. Provide a lower rate of tax on foreign income It is recommended that income from foreign sources be taxed at a rate of 14 percentage points lower than the corporate rate on domestic income. Such a rate reduction would be consistent with that presently applicable to Western Hemisphere trade corporations. We believe that this measure would provide a stimulant for expanded foreign trade and investment by offsetting some of the deterrents to American business. It would reduce the disadvantage to our investors who are in competition with nationals of other countries which put little or no tax burden on foreign income. It would compensate for some of the foreign taxes, other than income taxes, which are an integral part of the tax systems of certain foreign countries, but which are not recognized as creditable against United States taxes on foreign income. Equally important is recognition of the principle that the country where profits are made should have the prior right to establish the form and level of taxation appropriate to its economy. This proposal would tend to reduce the influence of the United States on tax policies of foreign countries and slow the trend to shape their tax systems and increase their rates to approximate those of the United States. These trends have been apparent in the development of foreign tax laws and have been emphasized in the course of negotiations of income tax conventions between the United States and certain foreign countries for the avoidance of double taxation. It is generally understood by tax officials of foreign countries that any reductions in their taxes to attract American business would be offset by additional United States taxes on those American taxpayers. This has unquestionably been a factor in slowing the conclusion of double taxation conventions with Latin American countries, and has resulted in restrictions by foreign countries on granting lower rates. For example, such restrictions were incorporated in the Australian and the German Treaties with the United States in providing for the applicability of a reduced rate of tax on dividends paid to United States corporations. In addition to the foregoing, tax eexemptions adopted by foreign countries as incentives to attract new and expanded investment, which are laregly nullified by our present tax system, would be of some advantage to United States investors if the proposal for lower tax rates were adopted. The Association believes that the adoption of realistic provisions for extending a lower rate of tax would be an effective method of encouraging American business expansion abroad. While the application of such provisions must necessarily be clearly defined, we urge the adoption of existing concepts where feasible; for example, the benefits should be applicable to domestic corporations owning a minority interest in foreign corporations, such as provided in section 902 of the Internal Revenue Code with respect to application of the foreign tax credit. If full consideration is given to normal forms of organization and operating procedures of American business, we believe that this tax proposal would be of substantial value in strengthening this country's foreign economic program. II. Defer taxation of foreign branch income We recommend that domestic corporations with branches abroad be permitted to defer payment of United States taxes on income of such branches until it is brought back to the United States. In so doing, Congress would grant treatment more nearly equivalent to that applied to dividends received from foreign subsidiaries of United States corporations. This proposal has been endorsed generally as one of the measures to enact in revising taxation of foreign income. While immediately, it would result in some reduction of Federal revenue, this proposal would tend to encourage further expansion abroad and permit longer term investment in plants and other than current assets. Thus, the economic program of this country would be advanced, and ultimately increasing profits returned to this country. Frequently a branch operation is deemed more prudent or necessary for other than tax considerations. A choice of corporate form should have no effect upon the time when such income is taxed. Accordingly, we feel that United States corporations with branches abroad should have the same freedom in employment of earnings after foreign taxes as do foreign corporations operating under similar conditions. III. Permit an election to apply either per country or overall limitation on foreign tax credit It is recommended that section 904 of the Internal Revenue Code of 1954 be amended to permit taxpayers an election to apply either the per country or the overall limitation in computing the maximum allowable credit for foreign taxes. During the period 1921 to 1932 the overall limitation was in effect, providing that the maximum credit allowed with respect to all foreign income taxes paid was an amount equivalent to that proportion of the United States tax which income from without the United States bore to total income. This provision |