Use of GAAP in computing earnings and profits of foreign corporations - generally accepted accounting principles - Tax Executives Institute International Tax Committee

Tax Executive, The, March-April, 1995

On February 9, 1995, Tax Executives Institute submitted the following comments to Joseph H. Guttentag, the Department of the Treasury's International Tax Counsel, concerning proposed regulations under sections 952 and 964 of the Code, relating to the use of generally accepted accounting principles in computing earnings and profits of foreign corporations. The Institute's comments were prepared under TEI's International Tax Committee, whose chair is Philip J. Bergquist of Apple Computer, Inc.

During TEI's recent liaison meeting with the Office of Tax Policy, we discussed the proposed regulations under sections 952 and 964 of the Internal Revenue Code, relating to the computation of earnings and profits of foreign corporations. The regulations were issued on June 30, 1992, and would eliminate the need to adjust financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) with respect to uniform capitalization (UNICAP) and depreciation for purposes of computing the earnings and profits (E&P) of a foreign corporation. At the meeting, TEI urged the Treasury Department to issue the final regulations as soon as possible. We renew that request today.

TEI has long been interested in the development of a simplified method of computing the E&P of foreign corporations. The proposed regulations mark a commendable first step in that development. In prior written comments and during meetings with IRS and Treasury representatives, the Institute wholeheartedly endorsed the concept. We continue to believe that, by allowing taxpayers to use financial information gathered for required, non-tax reasons, Treasury and IRS can substantially reduce reporting burdens'

As you may know, TEI advocated the development of a much broader GAAP-based rule, i.e., one that goes beyond' the computation of depreciation and UNICAP adjustments. Even if this recommendation is not adopted, however, we believe that the proposed regulations will materially ease the administrative burdens of taxpayers and the government alike without violating sound tax policy.

During our recent meeting, you asked whether the issuance of final regulations requires a legislative change to the Subpart F rules. The answer is, no; the proposed regulations can be issued without legislation. We suggest that--even with the Subpart F carve-out in the proposed regulations--taxpayers will experience a significant reduction in compliance burden, particularly where (1) the taxpayer's Subpart F income consists solely of foreign personal holding company income, or (2) the taxpayer has not elected the U.S. ratio method for purposes of the UNICAP rules.

We note, however, that many taxpayers will continue to face a significant compliance burden unless the GAAP E&P method is permitted to be used for purposes of calculating Subpart F income, particularly foreign base company sales and services income. We believe the use of the GAAP E&P method for such income is permissible under current law. Even if a legislative change is required in respect of Subpart F, however, the proposed GAAP E&P regulations should be included in the Treasury's business plan and issued as final regulations this year. We would be pleased to meet with you to elaborate on our views and to discuss how the GAAP E&P method may be expanded to reduce compliance burdens further.

For your information, we are enclosing a copy of the Institute's October 8, 1992, comments on the proposed regulations which discuss the effect of the regulations on Subpart F. If you have any questions concerning the Institute's comments on this or any other issue, please feel free to contact Philip J. Bergquist, chair of the Institute's International Tax Committee, at (408) 974-1531, or Mary Lou Fahey of the Institute's professional staff at