WASHINGTON — An executive for Wal-Mart joined other executives Tuesday in warning a Senate panel that U.S. companies with foreign operations could lose millions and be less competitive globally if Congress isn’t careful in fixing a tax break deemed by the World Trade Organization to be an illegal subsidy.
Lawmakers are under pressure to repeal a tax break for foreign-generated corporate income. If a fix isn’t in place by mid-August, the European Union will be able to retaliate against U.S. exports, including some apparel.
It’s been seven months since the WTO ruling, and EU officials continue to say they won’t retaliate as long as U.S. lawmakers are making progress in finding a legislative fix. However, so far a fix supported by business — a way to cut corporate taxes in another area while repealing the offending tax — has been elusive.
“It is vitally important for Congress to develop legislation that will not only assist those sectors of the U.S. economy that currently benefit from the (current tax break on foreign income), but which will enhance the competitive position of all American businesses in the global marketplace,” David Bullington, vice president for tax at Wal-Mart Stores, told the Senate Finance Committee.
Bullington said a simple solution would be to reduce the corporate tax rate across the board, which would benefit all businesses. However, Bullington said he realized “that such a reduction may not be feasible in today’s environment.”
Cutting corporate taxes, always a contentious issue in Washington, has been set aside as a GOP priority since federal coffers are being hit by the slow economy and the cost of the war on terrorism.
Bullington suggested other solutions to the foreign-income tax conundrum. They involve the labyrinth of tax rules covering capital investment, sales and income, and when exceptions are granted to foreign operations in order to avoid being taxed by both the U.S., as well as a foreign country. An estimated 4,000 U.S. corporations now benefit from the foreign income tax break.
“Congress should eliminate or at least reduce substantially situations that can result in double taxation,” said Bullington, adding that provisions in the tax code “inappropriately compromise American international competitiveness.”
Executives from The Boeing Co., Caterpiller Inc. and Hewlett-Packard also testified.
The House Ways and Means Committee, where any tax change must originate, has been working on changing the tax code. Committee Chairman Bill Thomas (R., Calif.) has introduced a bill that calls for outright repeal of the offending tax break, but his proposal is meeting with opposition among GOP colleagues in the Republican-controlled House.
Senate Finance Committee Chairman Max Baucus (D., Mont.), whose committee also has jurisdiction over taxes, appeared frustrated by a lack of progress on the issue.
“Number one, we have to find a solution. Number two, there is none,” said Baucus, who plans to create a Capitol Hill-Bush administration task force to address the issue.
As far as a pending trade war with the EU, Bob Zoellick, the U.S. trade representative, said his EU counterpart, Pascal Lamy, isn’t eager to retaliate.
The next step in the dispute is next month when the WTO is expected to decide the value of U.S. products the EU could retaliate against, equal to the edge the foreign-income tax break supposedly provides the U.S. The U.S. claims the value is $1 billion and the EU argues it’s $4 billion.