This June 29, 2004, AICPA letter to the tax writing committees urges that Congress reconsider combining the foreign income and foreign housing exclusion limits. It states that the proposal would reverse long standing tax policy and might cause a potential loss of U.S. jobs and exports.

June 29, 2004

The Honorable Charles E. Grassley
Chairman
Senate Finance Committee
219 Senate Dirksen Office Building
Washington, D.C. 20515
Fax: (202) 228-0554

The Honorable Max Baucus
Ranking Minority Member
Senate Finance Committee
219 Senate Dirksen Office Building
Washington, D.C. 20515
Fax: (202) 228-0554

The Honorable William M. Thomas
Chairman
House Ways and Means Committee
1102 Longworth House Office Building
Washington, D.C. 20515
Fax:  (202) 225-2610

The Honorable Charles B. Rangel
Ranking Minority Member
House Ways and Means Committee
1102 Longworth House Office Building
Washington, D.C. 20515
Fax: (202) 225-1284

Re: Modification of the Foreign Earned Income and Housing Expense Exclusion of Citizens or Residents Living Abroad

Dear Chairmen and Ranking Minority Members:

The American Institute of Certified Public Accountants (AICPA) is writing to offer its comments on a provision contained in section 632(c) of the Jumpstart Our Business Strength (JOBS) Act, S. 1637, as passed by the Senate on May 11, 2004 that would include employer-provided housing in the $80,000 foreign earned income exclusion cap. We realize that, while crafting any tax legislation, a multitude of economic, policy and revenue considerations must be balanced. We nevertheless urge you not to include this provision in the final FSC/ETI tax bill for the reasons stated below.

Beginning in 2004, the JOBS Act (S. 1637, Section 632) would substantially modify the Internal Revenue Code Section 911 foreign earned income and housing expense exclusions (collectively, the "911 exclusion”) by combining both and capping the total at $80,000. The AICPA strongly opposes this proposal, because we are concerned that this modification will reverse long-standing tax policy and result in the loss of American jobs and exports.

The AICPA is the national, professional organization of certified public accountants comprised of more than 350,000 members. Our members advise clients on federal, state, and international tax matters, and prepare income and other tax returns for millions of Americans. Our members provide services to individuals, not-for-profit organizations, small and medium-sized businesses, as well as America's largest businesses.

Reversing Long-Standing Tax Policy

The United States imposes taxes based upon citizenship, while most developed countries impose individual income tax based upon residence. A tax benefit/exclusion for people working overseas has been a part of the Code since 1926. In 1978, an unlimited housing exclusion benefit was signed into law. This provision was designed to: (1) equalize the tax treatment between Americans working abroad and their foreign counterparts working in the same countries; and (2) recognize the hardships involved in employment abroad, including higher, and frequently duplicative, housing costs and irretrievable expenses and losses resulting from cross border sales and purchases of housing.

These real economic considerations justified Congress’s decision over 25 years ago to reconcile the U.S. tax policy to tax the worldwide income of its citizens with separate foreign income and housing expense exclusions. The circumstances underlying this policy decision have not changed. Therefore, we urge you to delete this proposal from the final tax bill.

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U.S. Job and Export Losses

U.S. employees working abroad frequently have to leave their families behind and incur separate and distinct housing costs in the foreign country. The separate housing expense exclusion was put in the law to benefit Americans who must work in very high cost locations abroad. If this proposal is enacted, U.S. employees working in high cost locations abroad may no longer receive the benefit.

Combining and limiting the 911 exclusion will almost certainly result in less employment for Americans abroad, as foreign workers will be hired in place of the Americans who would otherwise be employed in these positions. The cost to American employers of “equalizing” the compensation agreements of American employees working abroad will be prohibitively high, and “un-equalized” American workers will be more reluctant to accept overseas positions. If American multinationals substitute foreign national workers for American workers at their foreign operations, American employment rates will decrease. In addition, American export sales will decrease because foreign workers are less likely than their American counterparts to purchase U.S. goods and services. At a minimum, U.S. multinationals that retain U.S. employees overseas will suffer a competitive disadvantage vis a vis foreign multinationals.

On June 4, 2004, the IRC Section 911 Coalition wrote to Congress stating that limiting the 911 exclusion "could shift tens of thousands of jobs now held by U.S. citizens working abroad to foreign nationals and significantly increase the financial burden on U.S. multinationals, reducing their ability to keep pace with their foreign competitors." We agree.

Six years ago, Congress increased the exclusion amount, thereby recognizing the importance of helping American companies to retain qualified American workers in important international posts and improve their competitive position in the global marketplace. Judged by this standard, the current proposal appears to conflict with prior Congressional objectives.

We welcome the opportunity to discuss this further with you or your staff. Please contact me at robert.zarzar@us.pwc.com or Andrew Mattson, Chair of the AICPA International Tax Technical Resource Panel, at andy@mohlernixon.com or Eileen Sherr, AICPA Technical Manager at esherr@aicpa.org.

cc:
Mr. Bob Winters, Chief Tax Counsel, House Ways & Means Committee
Ms. Allison Giles, Chief of Staff, House Ways & Means Committee
Mr. Greg Nickerson, Staff Director/Tax Counsel, House Ways & Means Committee
Mr. Jon Sheiner, Tax Legislative Assistant to Rep. Rangel (fax 202-225-0816)
Ms. Janice Mays, Democratic Chief Counsel, Ways & Means Committee
Mr. John Buckley, Democratic Chief Tax Counsel, Ways & Means Committee
Mr. Kolan Davis, Staff Director and Chief Counsel, Senate Finance Committee
Mr. Mark Prater, Chief Tax Counsel, Senate Finance Committee
Mr. Ed McClellan, Tax Counsel, Senate Finance Committee
Mr. Russell Sullivan, Democratic Staff Director, Senate Finance Committee
Mr. Patrick Heck, Democratic Chief Tax Counsel, Senate Finance Committee
Mr. Matt Genasci, Democratic Tax Counsel, Senate Finance Committee
Ms. Anita Horn Rizek, Democratic Tax Counsel, Senate Finance Committee
Mr. George Yin, Chief of Staff, Joint Committee on Taxation (fax 202-225-0832)
Mr. David G. Noren, Legislation Counsel, Joint Committee on Taxation
Ms. Andrea Becker, Tax Legislative Assistant to Senate Majority Leader Bill Frist (fax 202-228-1264)
Mr. Greg Jenner, Acting Assistant Secretary for Tax Policy, Treasury Department
Ms. Helen Hubbard, Tax Legislative Counsel, Treasury Department
Ms. Barbara M. Angus, International Tax Counsel, Treasury Department