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CFP Weekly Update, February 12, 2002

Center for Freedom and Prosperity's Weekly Update

1) Washington Update

2) Third Ranking Republican in U.S. Senate Denounces the EU's Savings Tax Directive

3) US Rep. Pete Sessions asks the EU to answer a "few simple questions."

4) US Rejects EU Tax Harmonization Scheme

5) Two Florida Congressmen Circulates letter on Capitol Hill to Kill IRS Reg

6) Marshall Langer: New Reporting Rules on Bank Deposit Interest Paid to Nonresidents

7) The Grassroots Speak Out:  Kill the Proposed IRS "Information Exchange" Rule

8) Mitchell:  U.N. tax police potential. . . . Hold on to your wallet

9) Report on the Heritage Foundation's WTO/FSC/ETI/Territorial Tax Seminar

10) [TOMORROW] Cato Policy Forum: Trade War or Tax Reform?: The WTO Ruling on Tax Breaks for U.S. Exporters


1) Washington Update

In the last month, we have visited and spoke with more than one hundred staff members representing key Capitol Hill lawmaker and Bush Administration policy makers.  Our message has been the same for each visit.  1) Tax competition is a liberalizing force in the world's economy. 2) Tax harmonization is economically flawed and morally wrong. 3) The U.S. is the biggest beneficiary of tax competition in the world.  And, 4) any move by the U.S. to appease the tax harmonizers in Europe will damage the US's economy. As you can see, our message seems to have resonated.

This week's update focuses on the EU's Savings Tax Directive and the IRS's proposed regulation on "information sharing." Senator Rick Santorum warns the Administration about the EU's scheme and Representative Pete Sessions sends a thoughtful letter to the European Commission's President asking him to explain why the US should support the EU "Savings Tax Directive." Two Florida Congressmen rally the House of Representatives against the proposed IRS rule to inform on foreign investors in the U.S. The Heritage Foundation's Dan Mitchell warns us of the UN's impending tax grab and the Bush Administration just says NO to the EU's Internet tax harmonization scheme.  And if you're in town Wednesday, try to drop by the Cato Institute's forum on the WTO and FSC/ETI.


2) Third Ranking Republican in U.S. Senate Denounces the EU's Savings Tax Directive

Pennsylvania Senator Rick Santorum, who serves as Chairman of the Republican Conference, asked Treasury Secretary Paul O'Neill to be "equally skeptical toward the European Union's proposed Savings Tax Directive" as O'Neill was toward the OECD's "harmful tax competition" scheme.  The following are excerpts from the letter:

"Tax competition between nations is a liberalizing force in the world economy, one that forces policy-makers to be more fiscally responsible lest they drive economic activity to competing jurisdictions with lower tax burdens. . . . I urge you to be equally skeptical toward the European Union's proposed Savings Tax Directive. As a low-tax country by industrial world standards, the United States has little if anything to gain by participating in a tax cartel designed to help high-tax nations . . . . Governments, like private businesses, should be subjected to the discipline of market competition."  Below is a link to the full letter:


3) US Rep. Pete Sessions asks the EU to answer a "few simple questions."

Congressman Pete Sessions of Texas, a member of the U.S. House of Representatives' powerful Rules Committee, has taken a leadership role in Congress on the European Union's Savings Tax Directive. Mr. Sessions sent a letter today to Mr. Romano Prodi, President of the European Commission, asking him to "answer a few simple questions[.]"  The Congressman plans on sharing the President's responses with the rest of Congress because "it is difficult to understand why members of Congress should support a scheme that would undermine America's competitive advantage in the global economy."

The six questions asked:

1) Do you think sovereign nations have the right to determine how income earned inside their borders is taxed?

2) Have EU member nations considered tax rate reductions and tax reforms as an alternative way of stopping capital flight?

3) Even if the six non-EU nations participate, is the EU's Savings Tax Directive feasible? Won't savings simply gravitate to other jurisdictions (in Asia and elsewhere) outside of the proposed cartel?

4) The Savings Tax Directive assumes that there should be multiple taxation of income that is saved and invested. But if a nation reforms its tax system to eliminate double-taxation, would that nation still be expected to collect data on savings even if such information was not needed for domestic purposes?

5) Should taxpayers have due-process legal protections, such as the right to contest the release of confidential financial information?

The following is a link to the full letter:


4) US Rejects EU Tax Harmonization Scheme

The Bush Administration rejects an EU proposal to impose European VATs on sales of U.S. businesses. This is a critical development since it demonstrates that the Bush White House understands that nations should not be able to impose their taxes on economic activity outside their borders.

[Associated Press:] "A European Union proposal to tax goods and services delivered digitally over the Internet would impose new burdens on U.S. sellers, the Bush administration said Friday. . . . Deputy Treasury Secretary Kenneth Dam said in a statement that the administration has "serious concerns" about the proposal, which he said could allow EU companies to charge lower tax rates and would impose "onerous administrative and compliance burdens" on U.S. companies." Link to full article below:

February 8, 2002, The Associated Press, White House Raps EU Internet Tax


5) Two Florida Congressmen Circulates letter on Capitol Hill to Kill IRS Reg

Republican lawmaker Dave Weldon and his Democratic colleague Robert Wexler, both from Florida and with Mr. Weldon serving on the House Financial Services Committee and Mr. Wexler serving on the House Judiciary Committee, are asking their fellow Members of the U.S. House of Representatives to join them on a letter to President Bush urging the withdrawal of the proposed IRS regulation to inform on foreign savers in the U.S. 

The Center supports the Congressmen's effort and we ask that every concerned citizen urge their Representative in Washington to sign the letter to President Bush.  House switchboard 202-225-3121.

Information on the IRS rule:

December 20, 2001, The Washington Times, by Veronique de Rugy, IRS global deposit overreach?

November 12, 2001, Investor's Business Daily, By Daniel J. Mitchell, Europe's Vassal: IRS Reg Exposes Foreign Investors To Tax Fleecing

Dump the IRS "information exchange" regulation page:


6) Marshall Langer:  New EU, U.K., and U.S. Reporting Rules on Bank Deposit Interest Paid to Nonresidents

Marshall Langer, an international renowned tax attorney, spoke at the European-American Tax Institute's 24th Annual Congress in Barcelona in November on bank deposit interest reporting rules. Dr. Langer's remarks were published in the January 28, 2002 issue of Tax Notes International. Link to PDF of story below:


7) The Grassroots Speak Out: Kill the Proposed IRS "Information Exchange" Rule

CFP asked many of our supporters to contact their representatives in Washington and Treasury Secretary Paul O'Neill to withdraw the IRS regulation that would force U.S. banks to report the bank deposit interest they pay to nonresident foreigners.  Below are excerpts from a few of their comments:

Making our banks inform depositor's home countries of accounts held here will result in the depositors withdrawing their money, which will hurt our money supply, retard our coming out of recession, and prevent industry from getting the money to expand and grow.  In the long run it will dampen the economy and prevent job creation. . . . There will also, naturally, be reciprocation.  Other countries will be forced to inform the IRS of accounts held by their banks.

We don't need to be doing the tax work for other governments and vice-versa. . . . The possible negative effects on investments in the U.S. is unknown. . .but surely it would not be positive. . .we don't need more negatives. . .especially at this time.

I would ask for your opposition to IRS Regulation 126100-00. Under this Reg. U.S. banks would act as vassal tax collectors for foreign governments.  Specifically, the banks would be compelled to inform the

IRS about any bank accounts owned by people from other countries. The IRS then would pass that information to the other countries' tax authorities so that they could impose tax on the interest paid to those accounts!

Oppose IRS Regulation 126100-00, better yet, shut the IRS down!


8) Mitchell: U.N. tax police potential. . . . Hold on to your wallet

"Hold on to your wallet. The United Nations is gearing up for a ritzy get-together at a Mexican resort to discuss ways to pick your pocket.

"Specifically, the U.N.'s upcoming "Financing for Development" conference is meant to boost foreign aid spending. To finance their scheme, the bureaucrats want to create a World Tax Organization with the power to impose global taxes.

"U.N. bureaucrats still believe big government is a magic elixir, whatever the ill. They're peddling the same snake oil to the Third World, but their prescription more government handouts is a recipe for failure. And they want the United States to pick up most of the tab. . . " Link to full article below:

February 7, 2002, The Washington Times, by Daniel Mitchell, U.N. tax police potential


9) Report on the Heritage Foundation's WTO/FSC/ETI/Territorial Tax Seminar

The Heritage Foundation hosted a seminar last week on "Making Lemonade out of European Union Lemons: Why Territorial Taxation for Corporate Income is the Best Response to the Recent WTO Ruling against America's ETI (formerly FSC) Legislation." All participating in the panel, including Daniel Mitchell of the Heritage Foundation, Kevin Hassett of the American Enterprise Institute, Jim Rose of the National Association of Manufacturers Tax and Budget Policy Committee, and Mark Warner of Hughes Hubbard & Reed supported a move by the U.S. to a territorial system for corporate income taxation.  Below are excerpts from each of their comments. Some of the report below is from an article that appeared in Worldwide Tax Daily on February 4, 2002.

Daniel Mitchell, McKenna senior fellow at the Heritage Foundation, made clear his preference for the United States to adopt a territorial system, under which the United States would only tax companies on their earnings from domestic activities. "A territorial system would be simple and compliant [with the WTO ruling on the ETI Act]," he said during the 4 February discussion. Mitchell also said that a change to a territorial system would benefit U.S. businesses, and it is a change that's long overdue. "A worldwide tax system is not in the interest of U.S. companies," Mitchell said, because it results in U.S. companies paying tax both in foreign jurisdictions and at home. "Businesses in a territorial system do not pay tax twice on their income." Even though the WTO ruling in the ETI Act dispute went against the U.S. side, according to Mitchell, the result could be a positive outcome for U.S. businesses and the U.S. economy if the country adopts a territorial system.

Kevin Hassett, a resident scholar at the American Enterprise Institute, expanded on Mitchell's arguments by saying that a territorial system would cut compliance costs for U.S. businesses and boost the efficiency of capital. "There's one estimate . . . that about 40 percent of the compliance costs of the U.S. corporate tax code is spent on international tax [rules]," Hassett said, "even though the international tax is a tiny fraction of the total revenue." All that would change if U.S. companies operated under a territorial system. Moving to a territorial system would result in efficiency gains, as American businesses would gain the freedom to move capital around the world without any tax penalty, therefore putting the capital to its highest economic use, Hassett said. If there was a need for capital back home, he said, "Money could come home that, for tax reasons, U.S. companies now leave in Bermuda or in Germany."

James E. Rose Jr., senior vice president for taxes and government affairs at the Tupperware Corporation, echoed the sentiments of the other panelists. "Frankly, the right thing to do with the corporate tax system is to start fresh and create a system that levels the playing field with our international competitors," Rose said. A secondary topic was the possibility of combining a territorial system with a border-adjustable value added tax system as exists with virtually all U.S. trading partners. The complexity of the system and the frequent changes make it difficult even for full-time tax advisors to understand today's system. Also, Rose said, the U.S. tax system encourages mergers of U.S. and foreign companies to set up their headquarters in the foreign country. "If a U.S. and foreign company merge, the foreign company will be the parent, and the foreign headquarters will grow and prosper," he said. "Meanwhile, after the merger, the U.S. headquarters and other operations typically shrivel." The jobs in corporate headquarters, and in research and development operations, are good, high-paying jobs, and the United States is losing those jobs to our competitors because of tax policies. Rose specifically suggested repealing the 954(a)(2) rules in the Internal Revenue Code to restore deferral for foreign base sales company income. "You could move toward a system that is WTO- compliant, and businesses would embrace it," Rose said. Finally, he recommended changing 956 rules over time so that businesses could elect to invest in the United States without a penalty. Making those changes to the 954 and 956 sections in the code would be a way to move the United States toward a territorial system.

Attorney Mark Warner of Hughes Hubbard & Reed LLP reviewed the WTO rules and decisions in the DISC, FSC and ETI cases, and concluded that "moving to a territorial system of taxation would be the best way to end the cycles of disputes with Europe over U.S. taxation of certain foreign source income." He pointed out "that the root of the problem lay in the antiquated distinction drawn in the GATT between the treatment of direct and indirect taxes." Warner indicated that "unless that distinction were negotiated away, which is unlikely, it would be difficult if not impossible for the U.S. to level the playing field with the European territorial and consumption-based taxation systems as far as foreign source income is concerned." Accordingly, Warner argued that "the U.S. should use the recent WTO decision as a springboard for fundamental tax reform that would make U.S. taxation even more efficient and attractive relative to its trading partners."


10) Cato Policy Forum: Trade War or Tax Reform?: The WTO Ruling on Tax Breaks for U.S. Exporters

February 13, 2002
Trade War or Tax Reform?: The WTO Ruling on Tax Breaks for U.S. Exporters
11:00 a.m.
The Cato Institute
1000 Massachusetts Avenue, NW
Washington, DC 20001

Cato Policy Forum Participants:
Featuring Rep. Phil Crane, Committee on Ways and Means; William Reinsch, National Foreign Trade Council; John Meagher, PricewaterhouseCoopers; and Chris Edwards, Cato Institute.

For more information on the Forum:


Best regards,

Andrew Quinlan
Center for Freedom and Prosperity
208-728-9639 (efax)


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