The U.S. should bring its international tax system into harmony with those of other industrialized nations to make American companies more competitive in global markets, according to a new study conducted by Price Waterhouse LLP for the Financial Executives Research Foundation, Inc. (FERF), the research arm of the Financial Executives Institute.

The study, Taxation of U.S. Corporations Doing Business Abroad: U.S. Rules and Competitiveness Issues (prepared by Price Waterhouse principals Alan W. Granwell and Peter R. Merrill and consultant Carl A. Dubert and sponsored and published by FERF), reviews the rules governing the taxation of U.S. corporations and evaluates how these rules affect the competitiveness of U.S. corporations operating abroad. The study compares the U.S. rules with corresponding rules in France, Germany, and Japan. It also contains a review of economic studies that measure the relative competitiveness of the U.S. international tax system.

The study points out some of the main differences between the U.S. international tax rules and those of France, Germany, and Japan:

* The U.S. taxes the worldwide income of U.S. corporations and U.S. citizens. Many other countries exempt foreign source business income either by statute (France) or by treaty (Germany) in order to prevent international double taxation. Moreover, the U.S. is the only major industrial country that taxes the foreign income of nonresident citizens.

* The U.S. has one of the most complicated foreign tax credit systems in the world. Under the system, taxpayers must segregate different types of foreign source income, allocate and apportion their expenses to such income, and perform separate foreign tax credit limitation calculations with respect to each category. The systems of other countries frequently are simpler or offer benefits to their multinational corporations that the U.S. system denies to U.S. multinationals. The purpose of a foreign tax credit system is to avoid the international double taxation of income.

* The U.S. taxes corporate income twice: once at the corporate level and again when distributed to shareholders. Most other industrial countries integrate corporate/shareholder taxation, thereby lessening the overall tax burden.

According to the study, if the U.S. government were to harmonize these and other tax rules with those of other industrialized countries, the effective U.S. tax rate on cross-border investments would be reduced to a more competitive level.