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I will be unable to attend the May 27 hearings of the Senate Finance Taxation Subcommittee, and would therefore like to submit this letter with respect to 5.654. That bill would amend the tax code to treat deductions for research and experimental expenses attributable to activities conducted in the U.S. as allocable to income from sources within the U. S.

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Foxboro believes the operation of Reg. 1.861-8 is a disincentive to the conduct of research and development in the U.S. Our own company is a in point. For many years, we tended to centralize all our R&D effort in the United States. Then in 1980 a decision was made to establish a European R&D operation. The Foxboro Company now has R&D activities underway in its subsidiaries in The Netherlands and the United Kingdom. Our reason for this relocation was a combination of tax penalties and shortages of key technical skills in the U.S. We already had a support infrastructure in place in Europe, and have found no difficulties in directing and coordinating this activity from the United States, thanks in part to ease of communication via telephone, telex, computer links, and personal visits. We believe that when cost differentials become noticeably large, action will be taken to relocate R&D, especially when it is believed that those cost differentials will continue, and especially when the move is to a location where an infrastructure already exists.

Foxboro had excess tax credits in 1979 and 1980, and we would not have had those excess tax credits if our R&D spending levels had remained constant. In fact, the operation of Reg. 1.861-8 was such that in 1979 and 1980 the increase in R&D expense apportioned to foreign source income grew even faster than the underlying R&D expense. This increased apportionment to foreign source income reduced our Section 904 limitation in amounts greater than our unused credits, i.e., if we had not increased our R&D expenditures we would not have run into a Section 904 limitation. The net result is the equivalent of denying a deduction for a portion of our increased R&D expenditure.

FOXBORO

We believe Reg. 1.861-8 attempts to address problems that are more appropriately addressed under Sections 367 and 482 of the Internal Revenue Code, i.e., the transfer of technology abroad free of charge. Therefore, we see no particular reason to allocate and apportion domestic expenses to foreign source income (other than royalty income). As to the allocation to royalty income, we believe that such allocations should be simply on a gross income to gross income basis, taking into account gross income from foreign source royalties and all domestic gross income (including domestic manufacturing gross income) which arises as a result of the use of R&D, knowhow. Such an approach would certainly eliminate the negative effects of Reg. 1.861-8 which undercut the explicit national effort to encourage expanded R&D. We believe that this matter could be addressed by regulation alone, and still be consistant with the existing law.

As a matter of congressional policy, however, we believe that the moratorium found in the Economic Recovery Tax Act should be made permanent as proposed in $.654. By making the moratorium permanent, it would encourage firms to relocate their R&D activities within the U.S., and would serve as a further encouragement to expand their U.S. R&D efforts. The Congress has already indicated its firm commitment to and belief in the fact that R&D will lead to industry growth and profitability, as well as improved export performance. High technology companies such as Foxboro have in the past spent significant funds on R&D. As a result, they have grown and prospered, and have provided increased employment in the U.S. Such firms, along with Foxboro, have also significantly expanded exports. We think it is important that the Congress send a signal to all high technology companies that increased R&D expenditures are to be encouraged, not penalized.

Thank you very much for considering the points raised in this letter. If we can be of further assistance, please do not hesitate to contact us.

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22-894 0-83_-21

IBM CORPORATION STATEMENT FOR HEARINGS BY
THE SENATE FINANCE SUBCOMMITTEE ON

TAXATION AND DEBT MANAGEMENT

May 27, 1983

The Finance Subcommittee on Taxation and Debt Management is

to be commended for addressing the subject of R&D and tech

nology education assistance as they are vital national issues.

IBM has always recognized that the success of our company

depends on vitality of our basic research; the competitiveness

of our technology in markets both here and abroad; and the

quality of mathematics, science and professional education

which provide the important human resources of our business.

The public and the Congress have long been interested in our educational system and the nation's scientific research, development and productivity. Lately the ability of U.S.

companies to compete with Japanese and other foreign companies has become of prime importance. There is now widespread

consensus that R&D and math, science and engineering education,

the roots of our economic prosperity, have been neglected,

and are critical to the job of rebuilding our economy.

The

computer as an information and productivity tool has increased

the need for attention and action.

IBM supports s. 738, which would make permanent the tax

credit for increasing research activity; s. 654, which would

permit the deduction of all research and experimentation

expenditures against u.s. source income for research conducted

in the U.S.; and s. 1194 and s. 1195, which would promote

contributions of scientific equipment to our schools and foster university research. All are important measures which are key to our nation's economic health and would make U.S. companies more competitive in the world markets.

The Importance of Worldwide Competition

Because of the importance of semiconductors and computers,

worldwide competition in the two industries is increasing.

The industrial and developing nations recognize the funda

mental importance of viable domestic capabilities.

With Government initiatives, especially in Japan, France, Germany, and England, the knowledge base of these technologies

is spreading worldwide and is augmented by the contributions

in research, development, and manufacturing that these

nations are making.

The United States no longer has an undisputed lead in these

two industries.

In fact, in specific sectors of these

industries, such as memory devices, calculators, and displays,

the USA has lost its preeminence.

In 1971, the United States suffered its first balance of

trade deficit since 1897.

Since then, deficits have been

persistent and large.

If we are to recapture a healthy

trade position, it is essential that increased amounts are

spent on R&D and that educated Americans are available in

ever increasing numbers to retain this renewed leadership.

Role of Research and Higher Education

In order for the high technology sectors to progress and continue

to advance, research and development efforts must be expanded, and qualified technical professionals must be made available

to industry and academia.

On both of these counts, the United States is not keeping up

with its world competitors.

U.S. R&D spending as a percent

of GNP has been dropping from a high of 3% in 1963 to 2.3%

in 1981.

In the same time frame that figure in Japan has

increased from 1% to close to 2% and West Germany from 1.25%

to 2.4%.

While in total dollars, U.S. R&D spending is the highest in

the world, the gap narrows considerably if defense R&D

spending is excluded. Also, government spending by Japan and European countries is heavily focused on target industries;

the semiconductor and computer industries, in particular.

With regard to education, the U.S. has been overtaken by

Japan in the yearly generation of electronic and electrical

engineers.

This discipline is a basic one for most high

technology industry sectors, especially semiconductors,

computers and the telecommunications industry.

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