U.S. tax rules should reflect realities of global operations
The U.S. securities industry leads global capital markets. As technological advances, product innovations, and worldwide regulatory reforms opened and linked the world’s financial markets in the 1990s, securities firms invested billions of dollars to establish operations in important financial centers throughout the world to serve local investors and issuers. The international operations of U.S.-based broker-dealers directly benefit issuers through better distribution of their securities worldwide. Similarly, American investors get cost effective access to global investment opportunities.
In the recurring debate over U.S. tax legislation, international concerns were often secondary. As a result, the U.S. tax system has been slow to adapt to the evolving realities of global business. But there has been progress in the past few years. In 1997, Congress put in place, and then twice extended, crucial temporary reforms of the international tax rules for financial services firms. These reforms provide U.S. financial services firms with tax treatment that is much closer to that afforded their major foreign-based competitors and other U.S. businesses.
Under these rules, U.S. tax is not imposed on the active business income earned by foreign subsidiaries of U.S. financial services firms until that income is distributed to the U.S. parent company.
The international tax regime must be reformed in other respects so that it operates fairly while safeguarding the competitiveness of U.S. firms in the global marketplace. It is particularly important that Congress change the current rules for allocating interest expense between foreign and domestic sources.