D.

4.

legislative oversight committees, even those with a single member.
Is a vast universe of qualified recipients necessary?

The Provisions On Common Agencies Should Be Clarified and Narrowed.

The provisions on the use of common agencies are highly unsatisfactory.
By permitting a common agency to be designated by as few as four states,
it is possible that multistate taxpayers will not only have to accommodate
tax auditors from each state, but from as many as 12 common agencies
(assuming each state may designate only one common agency, another factor
the Bill should make clear). This is particularly troublesome because it
does not appear that an audit by the common agency and its constituent
states will be mutually exclusive. To the contrary, it would seem
reasonable to expect that after the common agency completes its
examination, each of its constituent states will wish to review this
examination to determine whether the common agency has applied its rules
properly. Therefore, safeguards should be provided to limit both the
number of designated agencies and the overlap of the examinations of the
common agency and the states it represents.

Effective Date.

1. The Effective Date of the Bill Should Be Delayed.

The effective date of the Bill, December 31, 1986, should be set back. It
likely will require more time than the proposed effective date allows
before taxpayers and the federal government can be ready to implement the
Bill. In particular, there will not be enough time to develop a federal
administrative framework in response to the Bill if the Treasury and
Internal Revenue Service resources are simultaneously burdened by the
implementation of major changes to the other provisions of the Internal
Revenue Code. Furthermore, corporations will have to develop compliance
systems to gather the data required by the Bill. Accordingly, because of
the need for regulations in several substantial areas of the Bill, the
effective date of the Bill should be deferred to the later of 12 months
after the date of enactment or 12 months after regulations have been
promulgated thereunder. Another alternative may be for Congress to
mandate the issuance of temporary regulations by a specified date so that
they will be available to assist taxpayers in preparing their initial
spreadsheets. However, if this course of action is followed, in no event
should the effective date be before 12 months after the date of enactment.

STATEMENT OF EXXON CORPORATION
COMMITTEE ON FINANCE SUBCOMMITTEE
ON TAXATION AND DEBT MANAGEMENT
HEARINGS ON S.1974 AND S.1113
SEPTEMBER 29, 1986

As a company that operates in the United States and directly or indirectly in over 80 foreign countries, Exxon is concerned with the problem of developing workable rules for attributing the income of a multijurisdictional business to operations within any particular state of the United States. While reasonable people may differ as to the most appropriate method of income attribution among the states, we believe that there is an overriding need for the states to apply a consistent framework to avoid duplicative taxation and refrain from adversely impacting international commerce.

Thus, Exxon has, for more than 20 years, actively participated in efforts by business and state representatives to develop a framework for consistently determining the amount of income reasonably assignable to each state taxing jurisdiction for companies operating in more than one state or country.

In the mid-1960's, Exxon and other members of the business community, as well as leading state tax administrators, became convinced that before following the path of federal intervention as recommended by the Special Subcommittee on State Taxation of Interstate Commerce (the Willis Subcommittee), a concerted effort should be made at the state level to develop a more orderly approach to carving up the income of multijurisdictional businesses.

Exxon, therefore, supported the efforts of a group of states to establish the Multistate Tax Compact to:

1. Facilitate proper determination of state and local tax liability of multistate taxpayers, including the equitable apportionment of tax bases and settlement of apportionment disputes.

2. Promote uniformity or compatibility in significant components of tax systems.

3. Facilitate taxpayer convenience and compliance in the filing of tax returns and in other phases of tax administration.

4. Avoid duplicative taxation.

However, efforts by representatives of the business community and the states to develop a consensus on how to achieve these goals failed, and were marred by state charges that business was trying to avoid its fair share of taxes and business countercharges that the states were seeking maximum tax revenues without regard to "equitable apportionment". In the meantime, Exxon pursued the issue of appropriate income attribution rules through the court system, but to no avail.

2

In 1980, Exxon reluctantly concluded that a federally legislated solution was in order and filed a statement with this Subcommittee in connection with its hearings on the issue in which we took the following position:

Exxon has consistently expressed its willingness to expose all of its U.S. source income to state taxation provided there are safeguards to prevent overlapping or duplicative taxation of the same income. To avoid such overlapping and duplication, Exxon supports a reasonable federal limit on the portion of a taxpayer's income that may be attributed to a particular state. To avoid distortion and to spare foreign (non-U.S.) corporations an unnecessary recalculation of income for U.S. state tax purposes, it would be appropriate to eliminate from any combination affiliates not doing business in the U.S., and to allow states to tax only U.S. source income determined under the federal income tax sourcing rules. The desire of the Internal Revenue Service to maximize U.S. source income for federal tax purposes would seem to offer adequate protection to states.

Exxon believes this position is as sound today as it was six years ago.

In 1983-1984, Exxon participated in the lengthy effort by the President's Worldwide Unitary Taxation Working Group to develop an approach which would satisfy the tax enforcement concerns of the states while avoiding the extraterritorial state taxation of income from operations outside the United States which U.S. and foreign based multinationals find so objectionable.

The Working Group agreed that the following three principles should guide state taxation of the income of multinational corporations:

Howev

busin

probl

world

divid

As a

favo

reas

of i

We

from

SOU

of

the

at

tax

Thi

Wr

an

S.

19

to

to

Principle One:

Water's edge unitary combination for both U.S. and
foreign based companies.

S

Principle Two:

Increased federal

administrative assistance and

cooperation with the states to promote full taxpayer
disclosure and accountability.

Competitive balance for U.S. multinationals, foreign
multinationals and purely domestic businesses.

Principle Three:

State and business representatives, however, were unable to reach agreement on the proper state tax treatment of foreign-source dividends and of U.S. incorporated corporations operating primarily abroad (so-called "80/20 corporations").

The efforts of the Working Group did provide the impetus for another effort by the states and business community to resolve this foreign income issue at the state level.

Statement

of

HOUSEHOLD INTERNATIONAL, INC.

on

Pending Federal Legislation Prohibiting State Taxation
on the Worldwide Unitary Basis, Restricting the State
Taxation of Foreign-Source Dividends, and Imposing New
Information Reporting Requirements on Multistate
and Multinational Corporations

September 29, 1986

Household International, Inc. is a diversified Fortune 100 corporation with business operations located in all fifty states and major foreign countries. The President's Working Group on unitary taxation called for the prohibition of the worldwide unitary method of taxation as well as, the equitable taxation of foreign-source dividends, as a means to achieve a competitive balance between U.S. and foreign based multinational businesses. As a corporation deeply concerned with the achievement of these objectives, we appreciate the opportunity to state our position on S. 1974 and H.R. 3980 which address the worldwide unitary tax problem and related issues.

Household International, Inc. supports the enactment of federal legislation to resolve the worldwide unitary tax conflict and, consequently, supports the goals of S. 1974 and H.R. 3980. However, we have strong reservations with the proposed legislation as it currently stands and suggest certain modifications which we feel are absolutely necessary in achieving a fair and equitable federal solution to the problems associated with worldwide unitary taxation.

Our comments and suggested modifications are set forth below and are organized under two general headings both relating to specific sections contained in the proposed federal legislation: (1) Section 7518(b). State Taxation of Foreign-Source Dividends; and (2) Section 6139(A). Information With Respect to Certain Multistate and Multinational Corporations.

In addition, the Secretary should not be given authority to add to the information requirements of the spreadsheet, nor should corporations have to be listed on the spreadsheet when the reporting corporation or the common owner have less than a controlling interest in such corporation. Finally, the bill should not specifically authorize the states to use the spreadsheet filings as the basis for state civil and criminal penalties for negligence, fraud, or material understatement of income or tax liability because the returns actually filed with the states should suffice for this purpose.

S.1113

S.1113, introduced in the Senate on May 9, 1985 as part of the continuing effort by Senator Mathias (R-MD) to prohibit states from including foreign corporations in a "worldwide combination" to calculate a multinational corporation's taxable income, accomplishes this result by prohibiting the states' from taxing an affiliates foreign source income until it is includable in the parent's gross income, and then only to the extent that the parent's aggregate foreign income tax rate is less than 46%.

S.1113 should be modified so that, unlike the current version, it clearly prohibits states from taxing a domestic parent corporation's foreign source operating income or the income of 80/20 companies.

The bill should also be modified to include an ownership test in its definition of "affiliated group", as well as some indication of how brother-sister controlled groups and combined groups should be treated.

Conclusion

In summary, Exxon believes the time has come for federal legislation which will write a definitive end to the long-running worldwide unitary taxation controversy. The method has become a constant irritant in our international trade relations and frequently leads to international double taxation. Further, even though the recent trend has been for the individual states to more or less abandon the method, it could reemerge as a major controversy at any time so long as states are unrestrained by federal legislation.

We would be pleased to work with the Congress, the states, and other interested parties in reaching a reasonable federal legislative solution as soon as possible.

October 1, 1986