Richard C. Green Jr.
Chairman and CEO
The inequity of interest allocation rules in the U.S. tax code is a very serious problem that unfairly constrains the international growth aspirations of American companies.
When U.S. companies doing business overseas prepare their returns under present law, tax on foreign income is paid in the foreign country and again in the United States- but without full credit. That`s double taxation, pure and simple.
Many of our foreign competitors have no such burden. Their profits from U.S. investments are free to go home to strengthen operations on their own turf, or to fund other international ventures, possibly even including additional U.S. acquisitions.
As an American CEO, I`d love to have that choice. As it is, I have but one choice-to leave such funds overseas or take the double tax hit.
The global need for energy is poised for explosive growth, and it is the demands of this marketplace that are pointing to the fault lines in our tax rules. To meet these growing energy needs, U.S. companies and our government must dramatically alter the way they do business.
Huge amounts of capital will be required to take advantage of these emerging opportunities. Unfortunately, outdated interest allocation rules act as a strong disincentive, literally trapping American corporate funds in foreign countries where they cannot be efficiently utilized.
In some respects, the concerns I`ve raised would apply to many U.S. corporations doing business internationally, but my operating arena-the utility industry-is especially hurt by existing interest allocation rules.
The current interest apportionment formula harms an industry such as mine because a disproportionate amount of U.S. interest is allocated to foreign source income, thereby reducing or eliminating the foreign tax credit and creating the double tax.
Contributing factors include:
– Utilities are capital-intensive businesses holding long-lived assets and are among the more highly leveraged U.S. companies. The greater the leverage, the greater the interest expense, the greater the interest to be allocated, thereby decreasing the foreign tax credit.
– Because of the inability to transport electricity or gas over long distances, particularly over the ocean, U.S. utilities must establish a taxable presence where the utility customers reside. This means that U.S. utilities generally do not have the ability to generate a low-tax foreign income to offset the disadvantage caused by the interest allocation rules.
American know-how, capital and muscle have built a truly “First Tier” energy system that`s the envy of the world. That`s why foreign investors already are moving aggressively to buy U.S. utilities, such as the acquisition of PacifiCorp by ScottishPower and the U.K.`s National Grid acquisition of New England Electric System.
When approving the ScottishPower and National Grid acquisitions in June, FERC chairman James Hoecker said the deals “illustrate(s) how attractive U.S. utility assets are to international markets.”
There should be no question that we in the U.S. energy industry know how to compete. However, foreign utility companies generally are not subject to the same regulatory restrictions as U.S. utility companies in making foreign investments, thus creating a serious competitive disadvantage.
U.S. tax law should not compound this problem. If it continues, then the U.S. utility industry, which is among the best in the world, could quickly slip to a position on the second or third tier behind our foreign competitors.
U.S. tax policy should not unduly disadvantage U.S. companies in their efforts to expand internationally, and UtiliCorp and other companies are urging Congress to eliminate double taxation by changing the allocation rules to take into account foreign interest in the interest allocation formula.