Clinton Tax Idea May Not Produce Expected Funds

DEFICIT PROSPECTS

FOR months Arkansas Gov. Bill Clinton has been saying he wants to hike taxes on the United States subsidiaries of foreign corporations, raising $45 billion over the next four years.

However, there are considerable doubts whether that much money can be expected.

"It seems to me almost certain that figure of $45 billion is exaggerated," says Thomas Field, executive director of Tax Analysts, a nonprofit publisher of tax materials in Arlington, Va.

US Treasury numbers raise further doubts. In 1989, the Treasury reports, US-owned corporations paid 1.08 percent of their total $7.8 trillion revenues in corporate income tax. Foreign-controlled corporations in the US paid 0.64 percent of their total $953 billion revenues. If foreign corporations were to pay the same rate as US companies, they would give Uncle Sam another $4.2 billion per year, or $16.8 billion over four years. This is $28 billion short of Governor Clinton's projections.

Gene Sperling, Clinton's chief economic policy adviser, says the campaign continues to believe it can raise $10 billion per year. Mr. Sperling says the Clinton numbers were derived from looking at the tax rates of different industries, the success rate of Internal Revenue Service (IRS) claims, and the amount of taxes US companies pay abroad. He says estimates of potential new revenues from foreign firms ranged from $3 billion to $30 billion per year.

If the IRS did not get that much money, "we might have to find other spending cuts or scale back spending," he concedes.

The Treasury numbers surprised another Clinton adviser, Robert Shapiro of the Progressive Policy Institute. Mr. Shapiro, an architect of the Clinton economic plan, says that if the US Treasury statistics are right, "they suggest we ought to be looking at more serious tax reform." In other words, higher business taxes.

Sperling denies any such intention. "We are not considering any corporate tax reforms, and I speak on behalf of the campaign when I say that," he says.

"It is quite clear they have made a horrible estimating error and will have to find their way out of it," says retired Rep. Bill Frenzel (R) of Minnesota, now a fellow at the nonprofit Tax Foundation in Washington.

THE Clinton forces gathered their ammunition from a hearing held last spring by the Subcommittee on Oversight of the House Ways and Means Committee. According to the chairman, Rep. J. J. Pickle (D) of Texas, more than 70 percent of the 46,000 foreign corporations operating in the US do not pay taxes. Mr. Pickle's staff singled out 36 foreign-controlled automobile, motorcycle, and electronics distributors. The congressional staff found that over 10 years the companies had US sales of $350 billion but paid

only $4.6 billion in taxes.

Pickle was amazed to find that 28 percent of the automobile distributors, with sales of $27 billion, did not pay any tax.

Testifying at the same hearing, IRS Commissioner Shirley Peter-son said that in 1989 only 28 percent of all foreign corporations reported income tax, while 41 percent of US-owned companies paid income taxes. "We believe there is a compliance problem ... but we cannot quantify it."

The IRS faces a host of challenges. It sometimes has difficulty getting cooperation from foreign governments when auditing parent companies abroad. It also has trouble getting and keeping skilled international auditors.

There are other reasons why foreign companies don't pay the same tax rate as US companies. Foreign companies often have higher debt levels than US companies. Interest on this debt is a deductible expense. Because they have newer facilities, they have higher depreciation allowances.

However, the IRS says 50 percent of its examinations focus on accounting justifying the price a foreign parent company charges a US subsidiary or distributor for imported parts or products. If a company wants to transfer its profits offshore - perhaps to a lower-tax country - it charges a lot for the goods, including the cost of manufacturing, research and development, advertising, parent-company overhead, insurance, and other fees.

The IRS has been tightening the regulations on such "transfer pricing." In 1989, the IRS imposed new record-keeping requirements. Since then, the IRS has increased audits of foreign-controlled corporations by 127 percent and increased the number of international auditors by 100. It is auditing the top 200 foreign-controlled corporations.

The IRS estimates that it requires major adjustments for 75 to 100 foreign-controlled companies per year on this issue. However, the Tax Court has only sustained 23 percent of those adjustments.

Recently, the IRS proposed new rules under which it would be able to calculate a profit for a foreign-owned company based on its industry. "Understandably this has our foreign trading partners upset," says Bruce Garrison, a tax lawyer at Haight, Gardner, Poor & Havens in New York. He says some companies are already beginning defensive tax planning.