The Senate Finance Committee held hearings on reforming international tax rules, looking at the ways the federal government taxes the foreign income of U.S. taxpayers and businesses.

"Put simply, the United States is close to unique among world nations in taxing foreign income in the way that we do," said James R. Hines, a professor at the University of Michigan Law School, in his testimony. "Not only does the United States subject active foreign business income to domestic taxation, but we do so in a manner that strictly limits the ability of taxpayers to claim foreign tax credits and to avoid current U.S. taxation of unrepatriated foreign income."

The committee heard about reforming both individual and business taxes on income earned abroad. Stephen E. Shay, a partner at the Boston law firm Ropes & Gray, talked about transfer pricing, deferrals and other issues.

"There is no a priori reason for allowing a special position for foreign business income, whether the income is earned directly by individuals or indirectly through foreign activities of U.S. or foreign corporations," he said. "If U.S. taxation of foreign business income is lower than on domestic business income, U.S. persons who do not earn foreign business income will be subject to heavier taxation solely because of where their business is located. To justify relief from U.S. tax on foreign business income, there should be an identifiable benefit to individual U.S. citizens and residents."

Another witness argued that closing off the ability to defer taxes on the earnings of foreign subsidiaries, as some have proposed, would not necessarily lead to more jobs in the U.S.

"Some seem to think that the deferral of residual federal taxes on foreign subsidiary earnings contributes greatly to the export of jobs rather than products. I do not share that opinion," said Robert H. Dilworth, a partner with the Washington, D.C.-based law firm McDermott Will & Emery. "From my vantage point, ending deferral will not bring jobs back, nor will exempting foreign income usher in a golden age for American business in the global economy in which expanding foreign business will generate lots of good domestic jobs. Instead, I see a terrain that is overgrown with weeds."

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