The recent proposals of the President’s Advisory Panel on Federal Tax Reform (“Panel”) included comprehensive changes to the U.S. international taxation rules. These recommendations could have significant negative implications on the international tax and trade environment faced by U.S. and foreign-based multinationals including:

• Increasing the tax cost to U.S. companies of developing intangible property in the United States;
• Discouraging the establishment of management activities in the United States by foreign-based multinationals;
• Increasing the tax cost of raising capital in the U.S. equity markets, in particular for foreign-based multinationals; and
• Increasing the tax cost of importing goods into the United States.

Upcoming Teleconference

We have received many requests from our clients and friends for advice on the implications of these recent proposals on the international tax and trade environment. In light of these requests we have scheduled a one-hour teleconference on December 7, 2005, at 3:00 p.m. EST. The teleconference will feature a discussion by Miller & Chevalier’s international tax, international trade, and government affairs experts regarding:

• The implications of the proposals for U.S. and foreign-based multinationals;
• The compatibility of the proposals with existing business practices and U.S. international trade and tax obligations; and
• Prospects of the proposals becoming law, either as part of a tax reform package or as stand-alone revenue raisers.

Key International Tax Recommendations Under the Simplified Income Tax Plan

Territorial System. The Panel recommended the adoption of a “territorial” system of taxation to replace the current system. Among the features of this proposal is the taxation of inbound royalties without regard to whether the underlying intangible property is used within the United States. This proposal is very similar to a proposal issued by the Joint Committee on Taxation (“JCT”) in early 2005, which was estimated to raise $54.8 billion over 10 years.

Corporate Residency. The Panel recommended the adoption of a “place of primary management or control” test to supplement the current “place of incorporation” test for determining whether a corporation is a resident of the United States. This proposal is very similar to a proposal issued by the JCT in early 2005, which was estimated to raise $900 million over 10 years.

Corporate Integration. The Panel recommended exemption from U.S. tax of dividends paid to U.S. individuals from a U.S. company in proportion to the domestic earnings of that company. The Panel recommended full U.S. taxation of dividends paid to U.S. individuals from foreign-based companies.

International Tax Recommendations and International Trade Implications under the Growth and Investment Tax Plan

The Panel also recommended more far-reaching changes to the tax rules affecting international transactions to achieve results somewhat similar to a subtraction method VAT. International transactions would be taxed under a destination basis principle, with border adjustments for exports and no deductions for the costs of imports. The Panel acknowledged uncertainty over whether the border adjustments proposed would be consistent with current trade obligations. Further, there is some uncertainty regarding whether the taxes imposed under such a proposal would be creditable under the rules of countries employing worldwide tax systems, such as Japan and the United Kingdom.

For more information, please contact the following lawyers:

Rocco Femia, rfemia@milchev.com, 202-626-5823

Leonard Bickwit*

Phillip Mann*

Kimberly Majure*

*Former Miller & Chevalier attorney

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

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