[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





                   HOW OTHER COUNTRIES HAVE USED TAX
                 REFORM TO HELP THEIR COMPANIES COMPETE
                  IN THE GLOBAL MARKET AND CREATE JOBS

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 24, 2011

                               __________

                           Serial No. 112-12

                               __________

         Printed for the use of the Committee on Ways and Means











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                      COMMITTEE ON WAYS AND MEANS

                     DAVE CAMP, Michigan, Chairman

1WALLY HERGER, California            SANDER M. LEVIN, Michigan
SAM JOHNSON, Texas                   CHARLES B. RANGEL, New York
KEVIN BRADY, Texas                   FORTNEY PETE STARK, California
PAUL RYAN, Wisconsin                 JIM MCDERMOTT, Washington
DEVIN NUNES, California              JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio              RICHARD E. NEAL, Massachusetts
GEOFF DAVIS, Kentucky                XAVIER BECERRA, California
DAVID G. REICHERT, Washington        LLOYD DOGGETT, Texas
CHARLES W. BOUSTANY, JR., Louisiana  MIKE THOMPSON, California
PETER J. ROSKAM, Illinois            JOHN B. LARSON, Connecticut
JIM GERLACH, Pennsylvania            EARL BLUMENAUER, Oregon
TOM PRICE, Georgia                   RON KIND, Wisconsin
VERN BUCHANAN, Florida               BILL PASCRELL, JR., New Jersey
ADRIAN SMITH, Nebraska               SHELLEY BERKLEY, Nevada
AARON SCHOCK, Illinois               JOSEPH CROWLEY, New York
LYNN JENKINS, Kansas
ERIK PAULSEN, Minnesota
KENNY MARCHANT, Texas
RICK BERG, North Dakota
DIANE BLACK, Tennessee

                       Jon Traub, Staff Director

                  Janice Mays, Minority Staff Director













                            C O N T E N T S

                               __________
                                                                   Page

Advisory of May 24, 2011, announcing the hearing.................     2

                               WITNESSES

Gary M. Thomas, Partner, White & Case, Testimony.................     7
Frank Schoon, Partner, Dutch Desk, International Tax Services, 
  Ernst & Young, Testimony.......................................    13
Steve Edge, Partner, Slaughter and May, Testimony................    23
Jorg Menger, Partner, German Desk, International Tax Services, 
  Ernst & Young, Testimony.......................................    37
Reuven S. Avi-Yonah, Irwin I. Cohn Professor of Law, University 
  of Michigan Law School, Testimony..............................    43

                       SUBMISSIONS FOR THE RECORD

Asian American Hotel Owners Association, Statement...............   103
The Center for Fiscal Equity, Statement..........................   104
The Chamber of Commerce, Statement...............................   111
The Securities Industry and Financial Markets Association, 
  Statement......................................................   118
The Working Group on Intangibles, Statement......................   127

                        QUESTIONS FOR THE RECORD

Gary M. Thomas--1................................................    83
Gary M. Thomas--2................................................    86
Frank Schoon.....................................................    91
Steve Edge--1....................................................    95
Steve Edge--2....................................................    96
Jorg Menger......................................................    99

 
                     HOW OTHER COUNTRIES HAVE USED
                        TAX REFORM TO HELP THEIR
         COMPANIES COMPETE IN THE GLOBAL MARKET AND CREATE JOBS

                              ----------                              


                         TUESDAY, MAY 24, 2011

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.
    The committee met, pursuant to call, at 2:00 p.m., in Room 
1100, Longworth House Office Building, the Honorable Dave Camp 
[chairman of the committee] presiding.
    [The advisory of the hearing follows:]

HEARING ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                  Camp Announces Hearing on How Other

                   Countries Have Used Tax Reform to

                  Help Their Companies Compete in the

                     Global Market and Create Jobs

Tuesday, May 17, 2011

    Congressman Dave Camp (R-MI), Chairman of the Committee on Ways and 
Means, today announced that the Committee will hold a hearing on how 
other countries have reformed their international tax rules to enable 
companies headquartered in those nations to compete more effectively in 
the global marketplace. As part of the Committee's ongoing 
consideration of how best to reform the Tax Code in order to help grow 
the U.S. economy and create good jobs for hard-working Americans, this 
hearing will examine the experiences of other countries in order to 
identify best practices in designing stable, pro-growth tax policies 
that would help American companies compete against their foreign 
counterparts. The hearing will take place on Tuesday, May 24, 2011, in 
Room 1100 of the Longworth House Office Building, beginning at 2:00 
P.M.
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing. A list of invited 
witnesses will follow.
      

BACKGROUND:

      
    At the Committee's May 12, 2011 hearing on international tax 
reform, the four Chief Financial Officers (CFOs) who testified 
recommended that in reforming our current international tax rules, 
Congress should benchmark against the rules that have been put in place 
by our major trading partners. The CFOs cited several nations as having 
international tax systems that make those countries' companies and 
workers more competitive in the global economy. Many countries have had 
their rules in place for decades, while others have recently enacted 
major reforms with global competitiveness in mind. Surveying the tax 
laws in some of those countries will provide the Committee with useful 
information as it continues to explore options for tax reform.
    In announcing this hearing, Chairman Camp said, ``Many of our major 
trading partners have already reformed their tax laws in ways they 
believe help their companies expand their global operations and in turn 
support good-paying jobs within their own borders. To make American 
employers and workers more competitive in the global market, we would 
be wise to examine those reforms and consider if such rules would be 
appropriate for the United States.
      

FOCUS OF THE HEARING:

      
    The hearing will examine international tax rules in various 
countries with an eye toward identifying best practices that might be 
applied to international tax reform in the United States. The hearing 
will explore policy choices that maximize competitiveness and job 
creation while also appropriately protecting the U.S. tax base.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
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2011. Finally, please note that due to the change in House mail policy, 
the U.S. Capitol Police will refuse sealed-package deliveries to all 
House Office Buildings. For questions, or if you encounter technical 
problems, please call (202) 225-3625 or (202) 225-2610.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
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    1. All submissions and supplementary materials must be provided in 
Word format and MUST NOT exceed a total of 10 pages, including 
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relies on electronic submissions for printing the official hearing 
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    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
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these specifications will be maintained in the Committee files for 
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    3. All submissions must include a list of all clients, persons and/
or organizations on whose behalf the witness appears. A supplemental 
sheet must accompany each submission listing the name, company, 
address, telephone, and fax numbers of each witness.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
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noted above.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://www.waysandmeans.house.gov/.

                                 

    Chairman CAMP. Good afternoon. The hearing on ``How Other 
Countries Have Used Tax Reform to Help Their Companies Compete 
in the Global Market'' will come to order. Good afternoon. I 
want to thank everyone for joining us today for the next in our 
series of hearings on comprehensive tax reform.
    Today's hearing will examine international tax rules in 
various countries and identify best practices that might be 
applied here in the United States. The hearing will explore 
policy choices that must be considered to create a structure 
that maximizes competitiveness and job creation while also 
appropriately protecting the U.S. tax base.
    This is the second hearing the committee has convened on 
international tax. During the first hearing, we looked at how 
America's high statutory corporate tax rate, the ever-
increasing complexity of the Tax Code, and our worldwide system 
of taxation impairs our competitiveness in the global economy. 
And during that hearing, a number of witnesses encouraged the 
committee to benchmark our efforts on international tax reform 
against what other countries, especially our major trading 
partners, have done recently in this area.
    Many of our major trading partners across the globe have 
already reformed their tax laws in ways they believe help their 
companies expand their own global operations and support good-
paying jobs within their own borders. Some of these countries 
have improved upon the rules they have had in place for 
decades, while others have recently enacted major reforms with 
global competitiveness in mind.
    Through the testimony of the panel assembled here today, we 
will discuss the approaches developed and implemented by our 
global competitors. We hope to learn what influences led other 
countries to move toward a territorial system and other related 
corporate tax reforms, such as a lower corporate rate. We also 
expect to hear some details about the process these countries 
undertook in developing their reforms, as well as lessons 
learned and other outstanding issues these countries are 
encountering with their international tax systems. Finally, in 
hopes of crafting a system that is uniquely American, we will 
begin to focus on what a more territorial U.S. tax system would 
look like, including key design options to consider for the 
United States.
    There is no doubt that the global marketplace is changing. 
Today it doesn't even slightly resemble the marketplace that 
America once dominated. As the world economy changes, America 
must also change and adapt. That begins with transforming our 
Tax Code so that America can be a more vibrant competitor 
abroad and a more attractive place to invest and create the 
jobs we need here at home.
    As this committee re-examines the Tax Code and pursues 
comprehensive tax reform, we are grateful for the insight 
provided by our witnesses. Thank you all for being here.
    I will now yield to Ranking Member Levin for his opening 
statement.
    Mr. LEVIN. Thank you, Mr. Chairman.
    And welcome to all of you.
    In this committee's last hearing on tax reform 2 weeks ago, 
we heard testimony from U.S.-based multinational corporations 
regarding what they believe corporate tax reform should look 
like. Their testimony illustrated the importance, the 
complexity, and the controversial nature of these issues.
    The corporations indicated that they would prefer sharply 
lower rates and a territorial system. At the same time, they 
rejected a notion of a one-time repatriation holiday, 
acknowledged the need for reform to be at least revenue-
neutral, and suggested that the U.S. consider a value-added tax 
to make up the revenue that would be lost by cutting corporate 
taxes.
    The testimony from the last hearing bears on today's 
hearing because U.S. multinational corporations, by and large, 
often describe their desire for a European-style territorial 
system or a tax system that is similar to that of our major 
trading partners. Today, I hope we will continue to explore 
exactly what such statements mean.
    If we are going to compare our tax system to our trading 
partners, it is appropriate to consider the broader context of 
their corporate tax systems. To say simply that we want to 
adopt certain territorial features and low statutory rates 
offered by other countries' tax systems is somewhat like going 
out to shop for a car and saying, I would like to have a 
Corvette engine without worrying about anything else. That 
engine comes with a number of tradeoffs. When you get that 
engine, you know not to expect wonderful gas mileage, four 
doors, room for children, or low-cost insurance. You know that 
having that powerful V8 will mean compromising on some other 
things. These compromises and tradeoffs may not be appropriate 
for everyone.
    As we consider the corporate tax systems of other 
countries, it is important that we pay close attention to the 
compromises and the tradeoffs that they might entail. What 
kinds of anti-abuse rules did countries with territorial 
systems have to adopt to stem erosion of their corporate tax 
base? What do choices about a corporate tax system mean for 
other countries' individual tax systems and the necessity of 
finding other revenue sources, such as value-added tax? What is 
the broader economic context in which these choices were made? 
How much do these other countries invest in economic 
fundamentals, such as education and infrastructure? How does 
their revenue collection relate to these important investments?
    Last, but perhaps most importantly, we should consider the 
basic differences between our economy and the economies of our 
trading partners. Our European trading partners, for instance, 
operate under EU rules that constrain their options for 
corporate taxation. It is also the case that the U.S. remains 
the largest economy in the world and we remain the world leader 
in innovation. How much do we need to follow in the 
international tax arena? How much do we need to lead?
    With these questions in mind, my Democratic colleagues and 
I look forward to hearing the witnesses' testimony today.
    Thank you.
    Chairman CAMP. Thank you very much, Mr. Levin.
    We are pleased to welcome our panel of experts, all of whom 
either have extensive experience as law or accounting 
practitioners in countries that have moved to more territorial-
based tax systems or have spent time studying such systems in 
the halls of academia.
    First, I would like to welcome and introduce Gary M. 
Thomas, a partner at White & Case in Tokyo, Japan. Mr. Thomas 
has worked in Japan for over 25 years and is a licensed 
Japanese tax attorney fully qualified to practice before the 
Japanese National Tax Agency and the National Tax Tribunal. It 
is my understanding that he is the only U.S. attorney with such 
qualifications.
    We know that it has been an extraordinarily challenging 
time for Japan and all its residents over these past several 
months, so we are especially grateful for your willingness to 
appear before us today.
    Second, we will hear from Frank Schoon, a partner at Ernst 
& Young and originally from the Netherlands. Mr. Schoon heads 
Ernst & Young's Dutch Desk as part of the firm's international 
tax services practice in Chicago and has spent more than 22 
years of experience in serving multinational clients.
    And, third, we welcome Steve Edge, a partner at Slaughter 
and May in London. A large part of Mr. Edge's practice involves 
advising multinational corporations on cross-border 
transactions, and we look forward to him sharing his expertise 
about the U.K. tax system.
    And, fourth, we will hear from Jorg Menger, a partner at 
Ernst & Young and the head of the German Tax Desk of the firm's 
international tax services practice in New York. Before joining 
the international tax services practice, Mr. Menger worked in 
the national Ernst & Young office in Germany.
    And, finally, we will hear from Reuven Avi-Yonah, the Irwin 
I. Cohn Professor of Law at the University of Michigan Law 
School in Ann Arbor. Professor Avi-Yonah is a familiar face 
here at the Ways and Means Committee, having testified before 
us several times, and we welcome you back this afternoon.
    Thank you all again for your time today.
    The committee has received each of your written statements, 
and they will be made part of the formal hearing record. Each 
of you will be recognized for 5 minutes for your oral remarks.
    And, Mr. Thomas, we will begin with you. Votes have been 
called on the floor. There will be two votes. I was hopeful we 
could get through two of your 5-minute oral testimonies before 
we broke for the vote. So, Mr. Thomas, you have 5 minutes.

       STATEMENT OF GARY M. THOMAS, PARTNER, WHITE & CASE

    Mr. THOMAS. Thank you, Chairman Camp, Ranking Member Levin, 
and Members of the Committee. My name is Gary Thomas. As 
indicated, I am with White & Case in Tokyo. I appear before you 
today on my own behalf and not on behalf of my firm or any firm 
client.
    It is a privilege to have been invited here today to 
testify on how Japan has used international tax reform to 
assist its companies to compete in the global market, to 
revitalize Japan's economy by encouraging the repatriation of 
foreign profits to Japan, and to enhance employment 
opportunities in Japan.
    Prior to 2009, Japan's international tax system bore a 
remarkable resemblance to that of the United States. Japan 
imposed its corporate taxes on a global basis, including taxing 
dividends from foreign subsidiaries, while avoiding double tax 
by means of a foreign tax credit. Japan's deferred taxation of 
profits of foreign subsidiaries until repatriation but 
restricted deferral for profits of CFCs operating in low-tax 
countries unless an active business exception applied.
    The similarity with the U.S. international tax regime was 
not surprising because, for the past 50 years, the U.S. tax 
system has been Japan's model. However, on April 1, 2009, Japan 
moved to a territorial tax regime by adopting a foreign 
dividend exemption system, pursuant to which 95 percent of the 
dividends from qualified foreign subsidiaries are exempted from 
Japanese national and local corporate income taxes. At the same 
time, Japan abolished its indirect foreign tax credit system.
    Why did this substantial change occur? There were a number 
of key reasons.
    First, the Japanese Government concluded that it was vital 
to encourage the repatriation of profits of foreign 
subsidiaries in order to assist in revitalizing Japan's 
economy. There had been a significant increase in profits 
retained overseas by foreign subsidiaries, but Japan's tax 
regime resulted in the imposition of additional corporate taxes 
in Japan upon repatriation of those profits, thereby creating a 
clear disincentive to repatriate. It was felt that a failure to 
repatriate these profits to Japan raised the risk that R&D 
activities and jobs would be shifted overseas.
    Second, the policymakers recognized that maintaining the 
competitiveness of Japan's multinational enterprises in the 
global marketplace would ultimately lead to additional 
investments in job creation within Japan and to the promotion 
of Japan's economy and that eliminating bias in capital flows 
within corporate groups was critical for this purpose.
    Third, the government was deeply concerned about the 
increasing compliance burdens imposed by the indirect foreign 
tax credit system and the overall international tax regime. It 
is noteworthy that in adopting the foreign dividend exemption 
system, Japan explicitly rejected capital export neutrality as 
a key guiding principle in the new global business environment. 
Although this principle had been imported from the U.S. 50 
years ago, the position of the foreign tax credit approach 
based upon capital export neutrality was characterized as 
having declined while the era of the United States as the 
dominant capital exporter in the world was ending.
    In considering this new tax regime, Japan did not ignore 
potential downsides. In particular, the government was worried 
about the possible hollowing out of Japan's economy and 
shifting of jobs overseas. However, the government concluded 
that the adoption of the foreign dividend exemption system 
itself would not unduly influence corporate decisions as to 
whether to establish or move operations overseas.
    Nevertheless, the Japanese Government implemented and 
continues to study a number of design features in order to cope 
with the risk of shifting of profits, assets, and jobs 
overseas. These include, for example, denying deferral for 
passive income of CFCs. There has also been a proposed 
reduction of corporate tax rates in Japan.
    In addition, the government continues to evaluate potential 
measures to reduce the risk of outbound transfers of intangible 
property while encouraging R&D and related job growth in Japan. 
For example, it is reported that potential relief for at least 
some types of royalty income is being closely reviewed.
    In closing, as a tax practitioner working in Asia, I have 
seen firsthand how nimbly America's competitors can operate 
within their territorial tax systems at the same time that U.S. 
corporations struggle to deal with the very complicated and 
burdensome U.S. worldwide tax regime. Your review of the U.S. 
tax rules, therefore, is extremely important.
    Thank you.
    [The statement of Mr. Thomas follows:] 




    Chairman CAMP. Thank you very much, Mr. Thomas.
    We have less than 5 minutes for this vote, so we are going 
to recess now, and we will return and hear from the rest of our 
witnesses after the series of two votes on the floor. Thank 
you.
    [Recess.]
    Chairman CAMP. All right, the hearing will resume.
    Mr. Schoon, you have 5 minutes, and your full statement 
will be made part of the record. Welcome.

      STATEMENT OF FRANK M. SCHOON, PARTNER, DUTCH DESK, 
           INTERNATIONAL TAX SERVICES, ERNST & YOUNG

    Mr. SCHOON. Mr. Chairman, Mr. Ranking Member, and other 
members of this distinguished committee, it is an honor to 
participate in these hearings on international tax reform.
    I would like to thank you for the invitation to appear 
before you today to provide information on key international 
elements of the Netherlands corporate income tax system.
    I am Frank Schoon, a Netherlands tax partner with Ernst & 
Young based in Chicago. I appear before you today on my own 
behalf and not on behalf of my firm or any client.
    Corporate income tax is imposed in the Netherlands on the 
worldwide profits of resident entities and on the income 
derived from certain sources within the Netherlands of 
nonresident entities, with provisions to prevent double 
taxation. The provision used in the Netherlands to prevent 
double taxation is a dividend or a participation exemption, as 
well as a foreign branch exemption. This is generally referred 
to as a form of a territorial tax system.
    As of January 1, 2011, the Dutch corporate income tax rate 
is 25 percent. Over the last three decades, the corporate 
income tax rates have decreased from 45 to 48 percent in the 
early 1980s to the current rate. From parliamentary history, it 
can be seen that the motivation for this decrease generally was 
to lower the tax burden on companies, to stimulate investment, 
and to create jobs, as well as to align with developments in 
other jurisdictions.
    One of the pillars of the Dutch corporate income tax system 
is the participation exemption regime, which aims to prevent 
double taxation of business profits at different corporate 
levels in both a foreign and a domestic context. The origins of 
the participation exemption regime go back to 1893. A hundred 
years later, in 1992, the Dutch state secretary for finance 
stated during parliamentary proceedings that the exemption 
method, as provided under the Dutch corporate income tax 
system, is still the most suitable system for the Netherlands, 
considering its many international relations and its open 
economy.
    The participation exemption regime fully exempts income, 
such as dividends and other profit distributions, currency 
gains or losses, and capital gains or capital losses realized 
with respect to a qualifying interest in a subsidiary. To 
qualify for the participation exemption, an ownership test and 
a motive test must generally be satisfied.
    Under the ownership test, the taxpayer is required to hold 
at least 5 percent of the subsidiary. Under the motive test, 
the interest in the subsidiary cannot be held as a portfolio 
investment. The motive test is generally satisfied if the 
shares in the subsidiary are not held merely for a return that 
may be expected from normal asset management. If the motive 
test is not met, the participation exemption could still apply 
if either an asset test or the subject-to-tax test is met.
    Under the current Dutch rules, expenses related to interest 
that qualify for the participation exemption are deductible. 
Several anti-abuse measures apply to limit deductions in 
specified circumstances. If a Dutch tax resident has a foreign 
permanent establishment, the income, both positive and 
negative, of the foreign branch will directly be included in 
the worldwide income of the Dutch tax resident. As a result, 
foreign branch losses are deductible, albeit subject to 
recapture. Foreign branch income is generally exempt.
    The Dutch Government is currently considering moving to a 
full territorial tax system for foreign branch income. This 
would mean that foreign branch losses are not deductible and 
income would continue to be exempt.
    Other foreign-source income, like interest and royalties, 
is, in principle, subject to the current statutory rate of 25 
percent. However, net earnings from qualifying intellectual 
property, such as royalties for example, may effectively be 
taxed at a rate of 5 percent under the so-called innovation box 
regime. This regime was first introduced in 2007 to cover 
patents and has been expended to cover other forms of 
intangible property. It was intended to stimulate development 
of technology, innovation, and employment in the Netherlands.
    There are no special provisions in Dutch law for controlled 
foreign companies. In the Dutch tax system I have described, 
the relevant question, therefore, is whether or not the 
participation exemption or the branch exemption applies, which, 
along with the anti-abuse rules, address the issue of mobile 
and passive foreign income.
    Thank you very much. I would be happy to answer any 
questions.
    [The statement of Mr. Schoon follows:] 




    Chairman CAMP. Thank you very much.
    Mr. Edge, you have 5 minutes, and your full statement will 
be part of the record, as well.

     STATEMENT OF STEPHEN EDGE, PARTNER, SLAUGHTER AND MAY

    Mr. EDGE. Thank you.
    Chairman Camp, Ranking Member Levin, Members of the 
Committee, I, too, am pleased to be here today, and I hope that 
I can help you in your deliberations.
    First of all, let me apologize for the length of my 
testimony. As you will see, we have been on a long journey in 
the U.K., and I thought it would be interesting for you to see 
some of the very open Revenue consultations that there have 
been which tell the full story of what the revenue in recent 
years have been calling ``a direction of travel''.
    As I acknowledge in my paper, tax is an important business 
consideration, but it is not the most important. Logically, one 
might say that the best tax rate for a corporate tax lawyer is 
zero, but we know that that is not practical politics. This is 
not, as some people have suggested, a race to the bottom. It is 
a question of finding the right balance between the tax rate 
that is fair for business and will enable it to compete and 
that is fair to the society that is imposing that tax.
    As the U.K. has gone along its direction of travel, Three 
pressures have emerged, and I deal with those in my testimony.
    The first is obviously government pressure. Government 
needs to raise funding to provide the infrastructure that 
business needs in which to operate and to provide all the 
facilities its people need. It also needs to be cognizant of 
the fact that tax can be a great disincentive to investment.
    Secondly, industry. A huge amount of industry pressure, as 
you will see from my paper, followed the 2007 consultative 
document in which the government sought to extend the scope of 
our CFC rules so that they resembled what I remember of your 
SubPart F rules in the early 1980s, Propensity to tax offshore 
passive income regardless, resulted in many U.K. companies 
saying, well, if that is the way the U.K. system is going to 
be, we will leave the U.K. The U.K. does not have and cannot 
have anti-inversion rules. And as I explained in my testimony, 
the effective tax rate is absolutely key if a multinational is 
going to compete and is going to continue to grow.
    Thirdly, we have the pressures that are connected with the 
EU freedoms which say that, if you are within the EU, your laws 
can't distinguish between the investment that you might make 
elsewhere in the U.K., buying shares in a company in the north 
of England, and an investment that you might make in a Spanish/
French/German company. So if you have a 100 percent domestic 
exclusion on dividends, you must have it if a dividend is 
coming in from elsewhere in the EU. And, equally, if you don't 
have CFC rules within your domestic regime, of course, then, 
you can't have them internationally.
    But, as I say in my paper, although you could say that the 
EU rules forced us in the direction of conforming to an 
exemption system, that, I don't think, was the main driver. The 
main driver, as the consultation showed, for where we have got 
to now, which is an exemption system with no interest 
allocation and severely pared-down CFC rules compared with what 
we have had in the past, is that there is perceived to be an 
identity of interest between government and industry in 
maintaining our national champions. Multinationals are 
perceived to be good things and to contribute things to the 
U.K. which we would prefer to have.
    The government has been brave and said that we should not 
have a tax system that distorts good business decisions. If 
people want to invest somewhere else, they should be free to do 
so, and the U.K. tax system should not then take away an 
overseas tax advantage that is part of the total picture as to 
why someone invests overseas. And we shouldn't create penalties 
when somebody repatriates cash which might be a barrier to 
investment in the U.K.
    Of course, industry, in its desire to achieve an effective 
tax rate that is low, has to be conscious of its obligations. 
There is more pressure now in the U.K. on social responsibility 
in tax. And base erosion has been a key part of this process. 
As I say in my testimony, the U.K. decided not to have interest 
allocation or restrictions. That decision, I think, could have 
gone either way and will be kept under review. The CFC rules, 
or course, are a key feature in the territorial system. We are 
trying to be sensible on those and only tax income within a CFC 
if there is clear evidence of avoidance or diversion. And in 
order to make the U.K. comparatively a more attractive place to 
invest, we have lowered the domestic tax rate, which is 
targeted to come down to a 23 percent rate by the end of this 
parliament.
    So we are on a long journey. I hope we are proceeding to a 
successful conclusion. Thank you.
    [The statement of Mr. Edge follows:] 




    Chairman CAMP. Thank you very much. Thank you for your 
testimony.
    Mr. Menger, you also have 5 minutes, and your written 
testimony will be part of the record, as well.

 STATEMENT OF JORG MENGER, PARTNER, GERMAN DESK, INTERNATIONAL 
                  TAX SERVICES, ERNST & YOUNG

    Mr. MENGER. Mr. Chairman, Mr. Ranking Member, other members 
of this distinguished committee, thank you for your honor to 
participate in this hearing on international tax reform.
    I am Jorg Menger, an international partner of the German 
firm of Ernst & Young currently on assignment in New York. I 
appear before you today on my own behalf, not on behalf of my 
firm or any client. The purpose of this statement is to provide 
a brief overview over the German corporate tax system, in 
particular the tax treatment of foreign-source income.
    German tax policymakers have long focused on the 
implementation of a system of foreign-source taxation which is 
governed by the principle of capital import neutrality, which 
is aimed to ensure that German companies are able to compete in 
foreign markets against local companies.
    The German corporate tax rate--the German corporate tax 
includes corporate income taxes and trade taxes. The current 
combined average tax rate is slightly below 30 percent. The 
current tax rate reflects a series of reforms which has reduced 
the corporate tax rate from as high as 65 percent.
    To avoid double taxation on corporate earnings distributed 
within a chain of corporations, the German corporate tax law 
employs an exemption systems on dividends distributed from one 
corporation to another corporation. Generally, 95 percent of 
any dividends received by a corporation are tax-exempt; thus, 
only 5 percent of the dividend income is included in the 
taxable income.
    The tax policy rationale for the 5 percent income inclusion 
is to act as a compensating offset for the deduction of 
business expenses which are directly related to the exempt 
dividend income. The implementation of the 5 percent inclusion 
rule ended a constant conflict between the German taxpayer and 
the German tax authorities with regard to the interest 
deduction.
    A brief overview of the history of the international German 
tax system should provide an insight into the current tax 
policy. Beginning in the 1950s, dividends distributed by 
foreign corporations to German corporations were exempt from 
taxation pursuant to the tax treaty provisions. This 100 
percent exemption was combined with a rule that disallowed 
deductions on certain expenses which were directly related to 
the shares owned in the distributing company and were 
determined using the tracing approach. Since 2001, the treaty-
based rule on dividend and capital gain exemption was replaced 
by a 95 percent exemption, and this applies both to foreign and 
domestic shares.
    Germany has foreign corporation rules which subject 
undistributed income of controlled foreign companies to a full 
German corporate and trade tax, but only if such income is both 
passive in nature and low-taxed. Moreover, the CFC rules do not 
apply to EU subsidiaries if the subsidiary carries on an own 
business activity.
    In summary, Germany has incorporated its territorial tax 
system in the tax treaty network and the Tax Code with special 
rules for low-tax passive income. This approach was guided by 
the principle of capital import neutrality and simplicity.
    Thank you, and I am happy to answer any questions.
    [The statement of Mr. Menger follows:] 




    Chairman CAMP. Thank you.
    Mr. Avi-Yonah, you have 5 minutes, as well. And your full 
statement will be part of the record.

 STATEMENT OF REUVEN S. AVI-YONAH, IRWIN I. COHN PROFESSOR OF 
             LAW, UNIVERSITY OF MICHIGAN LAW SCHOOL

    Mr. AVI-YONAH. Thank you, Chairman Camp and Ranking Member 
Levin, Members of the Committee, for inviting me to testify 
before you on this important topic. I will make five points.
    The first one is that, despite what you may have heard, the 
issue before us is not really about territoriality versus 
worldwide taxation, because, as the witnesses before me have 
clarified, in fact all of us have a mixed system in which we 
tax some income of our resident corporations overseas currently 
under the CFC rules or other anti-abuse provisions and other 
income is not. This is really not about what addresses 
territorial at all; this is about whether we will tax dividends 
that are sent back from CFCs from income that is not subject to 
SubPart F when it arrives to our shores. And that is the 
various participation exemptions that have been described.
    Now, that particular narrow issue, in my opinion, has 
nothing to do with competitiveness. Competitiveness, as Mr. 
Edge, for example, has mentioned, is determined, to the extent 
that it is determined by taxes at all--and there are other more 
important topics--but to the extent it is determined by taxes, 
it is determined by the overall effective tax rate that is 
borne by a multinational from a particular country or, you 
could say, maybe sometimes by the effective tax rate on 
foreign-source income on a particular project. It is not 
determined by the question of whether you tax dividends when 
they are sent back, because that tax basically is never paid. 
The dividends are not repatriated if there is an additional tax 
that is paid on them, so how can that affect competitiveness? 
The issue of competitiveness has to do with the overall tax 
rate, not with the tax on dividends.
    The second point is the recent issue with sending dividends 
back, and that is the issue of the trapped earning phenomenon. 
American multinationals don't repatriate unless there is a 
foreign tax credit, and a lot of their earnings overseas are 
subject to a low tax rate, so then they don't repatriate. But 
that particular issue, which is a real issue, has another much 
simpler solution which I think alleviates the need to deal with 
a lot of the other problems that I will talk about, and that 
solution is that we should tax those income currently as they 
are earned.
    Now, I think that that is only feasible if we significantly 
reduce our rate to prevent us from being anticompetitive. But, 
nevertheless, I think that that would, for example, enable us 
not to have to worry about transfer pricing, it will enable us 
not to have to worry about the endless characterization of 
SubPart F, et cetera. So if trapped income is the real problem, 
then I think that is another solution.
    Now, adopting an exemption for dividends without doing 
anything about the potential for profit shifting is really 
problematic. Currently, the main disincentive for American 
multinationals to put their profits overseas is because they 
know that they will not be able to bring them back without 
paying tax. That is the trapped income phenomenon. If we 
abolish that--that is, if we stop taxing dividends--then there 
will be no disincentive to further shift profits overseas.
    And here, I think, if you listen carefully, you could see 
that, in fact, the anti-abuse and CFC rules of our trading 
partners, not just those that are represented at the table but 
other ones as well, are significantly different from our 
SubPart F, because they all take into account explicitly the 
effective tax rate in the source jurisdiction--that is, where 
income is earned. And if the income is passive and is subject 
to low taxation at source, then that triggers SubPart F. That 
is the CFC rules.
    Of course, our SubPart F doesn't work that way, as you all 
know. It has nothing to do with the effective tax rate in the 
source jurisdiction in almost all cases. And it enables freely 
to shift income from one CFC to another without triggering 
SubPart F so that if income, for example, is shifted to one of 
those four countries which has a real corporate income tax 
rate, our SubPart F then enables you to shift the income again 
to a third country which has no income tax whatsoever and leave 
it there as, quote, ``active income'' without--or as 
nonexistent income if you are going to disregard transfers from 
one CFC to another--without triggering SubPart F inclusions. 
And that, I think, is what makes our system particularly porous 
and subject to income shift abuse, and that is why we should be 
really careful about this.
    Now, the fourth point is that this is a revenue loser. It 
is a revenue loser under some circumstances, specifically if we 
don't adopt any limitation on expense deductibility. But that 
seems to be the direction in which we are going, in which case 
it is a revenue loser and we can't afford it.
    And then, finally, I think the comparison that is being 
done today ignores, as Ranking Member Levin mentioned in his 
opening remarks, other differences between our system and the 
overall economy of the countries that we are being compared to 
that I think are also relevant, and I will be happy to answer 
questions about them.
    Thank you very much.
    [The statement of Mr. Avi-Yonah follows:] 




    Chairman CAMP. Well, thank you. Thank you very much.
    I would just like to point out, a territorial system or 
international tax system does not need to lose revenue. I mean, 
it could be designed in such a way that it is revenue-neutral. 
And that would be another sort of discussion.
    But I did have a question, particularly for Mr. Thomas and 
I think anyone who wanted to weigh in, all four of you who are 
really talking about particular countries.
    What were some of the underlying reasons we have seen some 
dramatic changes in international tax law and tax reform? Was 
it about competing abroad? Was it making their workers more 
competitive? What were some of the underlying reasons?
    And if you want to start, Mr. Thomas, we can just go down 
the row.
    Mr. THOMAS. Thank you.
    I like to use a sports analogy, an American football team 
on the field playing against a U.K. soccer team. The American 
football team goes on the field. There are all sorts of complex 
rules and penalties. They have to huddle, they have to 
determine how they could move the ball forward within all those 
complex rules. At the same time, the soccer team is out running 
around the entire field reacting on a second-by-second basis to 
what is happening everywhere and simply can be much more 
flexible.
    My sense is that Japan looked around, They did do 
benchmarking. They looked at other countries, and they came to 
the conclusion that the rest of the world is playing soccer and 
that Japan should play soccer, as well, in order to compete 
effectively in each of the jurisdictions in which they are 
competing with companies from France, Germany, and the U.K., 
and particularly throughout Asia where there are many emerging 
countries growing rapidly, with many of those countries 
offering various tax incentives for business that the Japanese 
companies want to take advantage of.
    Chairman CAMP. All right.
    Mr. SCHOON. In the Netherlands, it is not a recent 
development but it has been reviewed over time. And I quoted 
the statement by the state secretary of the ministry for 
finance in the 1990s. The idea is, indeed, capital import 
neutrality, to be able to compete locally, and also to 
recognize the sovereignty of third countries.
    Chairman CAMP. Thank you.
    Mr. Edge.
    Mr. EDGE. For me, in the U.K., competitiveness is at the 
heart of it. When I talk to my U.K.-based multinational 
clients, they can achieve low effective tax rates but only, as 
someone said to me, by running working very hard. And if they 
look at their peer groups around the rest of Europe and in the 
U.S., they will find that effective tax rates at a global level 
are lower. And that does make it very difficult for you to 
compete, particularly if you are looking to acquire other 
companies and grow.
    And as a symptom of that, in 2007, when the last Labour 
government was looking to extend the CFC rules, that was seen 
as having a direct effect on effective tax rates. And it 
resulted not in a mass exodus, only a number of small companies 
left, but the bigger companies in the U.K.--and a number of 
them said this publicly--said, we like the U.K. for everything 
else it has to offer; if the tax system is going to make it 
uncompetitive, we have to work with government and change it. 
So it is competitiveness that has driven the change.
    Chairman CAMP. All right.
    Mr. Menger.
    Mr. MENGER. Yes, Germany didn't change the system. They 
have an exemption system since after World War II. And the 
German system is driven by the capital import neutrality in 
order to compete in the foreign markets.
    Chairman CAMP. All right. Thank you.
    And, Mr. Thomas, to what extent, as you talked about these 
rules, football versus soccer, to what extent did corporate tax 
rates play in the decision to make changes in Japan, as well as 
the double taxation of foreign-source profits? What were the 
factors that really sort of drove that, or the rules, as you 
called them?
    Mr. THOMAS. Well, I think there were quite a number of 
factors. The Japan authorities were concerned about the 
complexity of the tax system, and the resources that Japanese 
companies were having to devote toward complying with the tax 
laws. In fact, I hold here in one hand the entire Japanese 
national and local corporate tax laws, income tax laws, and all 
the other tax laws and regulations. They prefer simplicity. 
They prefer not having to maintain armies of tax lawyers to 
figure out what the laws mean and to comply with them.
    I think that they definitely wanted to be able to take 
advantage of the various types of tax incentives that are 
granted in other countries, particularly in Asia. And they felt 
they could do this effectively really only by adopting a 
territorial system.
    Chairman CAMP. Mr. Schoon, the Netherlands has had--I know 
you call it a worldwide system, but it is, in effect, a 
territorial system, or at least how we look at it. So I just 
wanted to make sure we are using the same terminology. And you 
have had it for a hundred years.
    What are some of the structural issues that continues to 
maintain that sort of tax policy that you look at? What are 
some of the reasons that that has worked for the Netherlands, I 
guess is a better way to put it.
    Mr. SCHOON. You know, the reasons that it has worked, I 
think, as I referred to earlier, it did allow Dutch companies 
to grow, Dutch multinationals to grow in a way that, you know, 
was acceptable and preferred by the Dutch Government. So I 
think that that is the most important aspect, actually, the 
stimulation that that created.
    Chairman CAMP. All right.
    And, Mr. Edge, I think you mentioned that corporate rates 
did play a significant role in the U.K. Were there other 
factors, as well?
    Mr. EDGE. EU pressures, which, of course, affect the other 
two European countries here, have come into it. But, 
interestingly, I think the Revenue haven't yet admitted that 
they have been losing the litigation on that, so they have been 
trying to work around it.
    At the heart of the changes has been the fact that the 
U.K., with a maritime tradition and a mercantile tradition, has 
wanted to have a competitive system to attract people to the 
U.K. I make the point in my testimony, I don't know whether 
Members of the Committee will remember that, that when we put 
our tax rate up to 52 percent in 1972, we had to take immediate 
action so that U.S. companies who were investing in the U.K. 
did not suffer that 52 percent rate but could, through the 
double tax treaty that was negotiated, get a tax refund in the 
U.K. to bring that tax down. I think the U.S. rate then was 40 
percent.
    Early in my career, when U.K. tax rates were a somewhat 
eye-watering 83 and 98 percent for individuals and, as I say, 
52 percent for corporations, I spent quite a bit of time 
working on Northern Ireland investments, where they looked 
rather jealously across the border at then the Irish 
incentives, Northern Ireland then got its fair share of 
industrial basket cases.
    Interestingly, the government, in the last budget, has 
announced that it is proposing something rather radical, which 
is a lower tax rate for Northern Ireland as part of the U.K., 
simply so that, with its identical geographic position and 
economic advantages to Southern Ireland, it could compete 
evenly across the border. So even the low U.K. rate is thought 
to be uncompetitive on the island of Ireland.
    Chairman CAMP. Thank you.
    Mr. Levin may inquire.
    Mr. LEVIN. Thank you very much.
    And I think it is very useful to have this hearing and to 
really scratch beneath the surface and try to go beyond labels, 
because I think, as we read the testimony, all of these systems 
are mixed to some degree, and you don't have either/or.
    We pulled out, for example, provisions that show the mixed 
nature, just to review a few of them quickly. For Japan, there 
are major transfer pricing guidelines. Also, there are certain 
provisions relating to denial/deferral on certain types of 
passive income, and also there are certain provisions relating 
to royalty income. And also, I am not sure it was mentioned, 
the present system subjects 5 percent of dividends to taxation. 
That is a system used in other countries.
    In terms of the Netherlands, as we extracted the provisions 
there that I think show the mixed nature, some of them are 
fairly complicated. Under, for example, the ownership test, 
that interest in a subsidiary cannot be held as a portfolio 
investment. And then you have a lot of other anti-abuse 
provisions and provisions relating to foreign branches. And it 
is interesting, on royalties, that they have a higher tax 
except where there is an innovation box provision, which I 
think again shows the mixed nature of this.
    With Germany, which I guess has an older system, with 95 
percent, also you have exemptions relating to dividends, also 
to branches that are in a non-treaty jurisdiction. So there is 
a differential between investments or operations by a 
corporation one place or another, depending where there is a 
tax treaty. Also, differentials as to whether income is passive 
or not. And, also, some major transfer pricing provisions that 
reflect the OECD guidelines.
    And so, as you go through this, looking at the Netherlands 
and the U.K., you see that what we need to do is pierce through 
the surface and try to go beyond either/or propositions, look 
at what the realities are here and overseas, and to see, that 
the primary standard has to relate to our competitiveness.
    My plea is that we all take the time, and I think your 
testimony is indeed useful, to look at the complexities in each 
of these systems, because they are just not simple. You held up 
the code, and I didn't ask you how many pages they are, but it 
is more than a few and not as many as we have here.
    And I think, also, we should take seriously the testimony 
that was given by Mr. Avi-Yonah in terms of what is the reality 
within each of these territorial systems and how they relate to 
what we have today. And I think we will see the complexity.
    Professor, you suggest the elimination of deferral. That, 
in itself, is very complex and controversial. And as I said a 
few weeks ago, when Amo Houghton and I, many years ago, sat 
down for a couple days on a bipartisan basis to look at our 
international tax system, we came up with some ideas, some of 
which were incorporated in legislation. But when we got to 
deferral, we came to a stop, because it was difficult to find a 
strong basis on which to proceed.
    So thank you very, very much for your testimony.
    Chairman CAMP. Mr. Herger is recognized.
    Mr. HERGER. Thank you, Mr. Chairman.
    Critics of a territorial tax system often argue that it 
will result in companies shipping jobs overseas. Based on your 
experiences and observations, does adopting a territorial tax 
system result in jobs being shipped overseas?
    And I would like to ask each of our witnesses that 
represent other countries, beginning with you, Mr. Thomas.
    Mr. THOMAS. Thank you. That is certainly a very important 
question. As I indicated in my testimony, the Japanese 
Government was concerned. They consulted very closely with 
business. They tried to learn from business what factors are 
involved in deciding to set up operations overseas or move 
operations overseas, and they concluded that there were a 
variety of very legitimate business reasons for doing so.
    Japan recognizes that due to population growth, or relative 
lack of population growth in Japan, frankly there is going to 
be more economic growth outside of Japan. The principal policy 
objective in Japan is what they call a ``virtuous growth 
cycle.'' A virtuous growth cycle would involve assisting and 
encouraging Japanese companies to grow outside Japan and to 
bring the profits back into Japan for enhanced domestic 
investment. They view the situation as a win-win, not as a 
zero-sum game. And, consequently, at the end of the day, they 
concluded that the risk of jobs being shifted overseas was far 
less than the benefit of encouraging Japanese companies to 
expand and bring the profits back into Japan to help the 
Japanese economy.
    Mr. HERGER. Thank you. Mr. Schoon.
    Mr. SCHOON. In the Netherlands it is the same; the 
experience of a hundred years that I think strengthened the 
Dutch Government in its position that this is, for the 
Netherlands, the appropriate system and on a net basis does not 
lead to a shift in jobs overseas.
    Mr. HERGER. Mr. Edge.
    Mr. EDGE. The concern in the U.K., I think, has not been as 
I have seen it here in the U.S., that this encourages people to 
create jobs overseas. To the extent we had concerns, they have 
actually been that U.K. companies coming under the control of 
foreign multinationals has led to loss of jobs in the U.K. That 
has been quite a controversial issues in a number of areas 
recently.
    The philosophy in the U.K., as I said earlier, is than if 
you try to use the tax system to force people to invest at home 
and make it less attractive to invest overseas, rather than 
letting everything be treated on a level playing field as part 
of a total package, then you will eventually make your own 
multinationals uncompetitive. And, if you do that, then you go 
back to the first position, which is your big companies come 
under the control of foreign companies and then you no longer 
have the national sway that you thought you had.
    You are actually maintaining the influence and trying to 
make sure that businesses don't find tax a driving factor in 
where they put investments and do jobs. But tax is, as I say, 
just a part of the package.
    Mr. HERGER. Mr. Menger.
    Mr. MENGER. The legislative history in Germany shows that 
the policymakers believe that capital import neutrality would 
generate jobs in Germany by making German companies competitive 
abroad under competitive tax rates, and that is generating jobs 
in Germany to manufacture and design all the products which are 
sold abroad.
    Mr. HERGER. Mr. Avi-Yonah.
    Mr. AVI-YONAH. I don't know of any evidence that indicates 
that this particular provision--that is, whether you tax or do 
not tax dividends paid by CFCs to the parent companies--has any 
effect on jobs by itself. But I think the broader question of 
the tax rate--the effective tax rate on foreign-source income 
certainly can have an effect on both income shifting and 
potentially job creation outside the country where the parent 
is in place.
    Mr. HERGER. Thank you. I yield back, Mr. Chairman.
    Chairman CAMP. Thank you. Mr. Johnson.
    Mr. JOHNSON. Thank you. Mr. Chairman.
    You know, it sounds like to me that you all agree since the 
U.S. last reduced its corporate tax rate through the 1986 tax 
reform, that our major trading partners have moved past the 
U.S. in terms of reducing the corporate tax burden by lowering 
rates and going to a territorial system.
    Is that what you all are saying? Am I reading you right? It 
also eliminates our need for an IRS army to go out and try to 
persecute these companies, I think.
    Would you all agree that our current corporate tax system 
hurts the U.S. economy, the competitiveness and jobs worldwide? 
Go ahead, Mr. Thomas.
    Mr. THOMAS. I believe that it does. I work for U.S. 
companies and French companies and German companies in Japan. 
Many times when we try to set up transactions or we try to 
reorganize operations, the French and German companies really 
don't have a problem under their territorial tax systems. The 
U.S. companies look at the particular proposal and there always 
seems to be a foreign tax credit problem or a CFC problem or 
some other problem that prevents them from doing what would be 
best for their business in Japan. And, again, it is not an 
issue that the French or German companies seem to face.
    Mr. JOHNSON. Go ahead, if you have got a comment.
    Mr. SCHOON. It is hard for me to judge what the impact 
would be from the U.S. system for the U.S. multinationals. But 
I would believe that if the Netherlands would abandon the 
territorial system, they would put their companies at a 
competitive disadvantage.
    Mr. JOHNSON. Competitive worldwide, you mean?
    Mr. SCHOON. Yes.
    Mr. EDGE. During the 1980s when we were looking at a lot of 
possible U.S.-U.K. mergers, the U.S. and UK advisers used to 
compete which had the most horrible system, We used to wonder 
as to whether we could find somewhere else that was more 
friendly. We looked then to our friends in the Netherlands. Of 
course at the end of the day, you came back to all the other 
parts of the package and you ended up being in the U.S. or the 
U.K. because of all the other bits and pieces there. But from 
my perception I would say that the U.K. has gone in the right 
direction of lower tax rates in a territorial system, and it 
seems to me that the U.S. would benefit from that.
    It would be interesting to see what the position would be 
here if your capital markets weren't so strong and you didn't 
have anti-inversion rules. That certainly influenced the U.K. 
Government thinking a lot.
    Mr. MENGER. There are a lot of factors influencing the U.S. 
system and it is very difficult for me to judge what is best 
for the United States. But I can mention that in Germany there 
were discussions; German legislators were looking at the U.S. 
system once or twice, and then decided it is too complicated 
for Germany and therefore Germany
    Mr. JOHNSON. I think it is too complicated for us, too. 
That is a good statement.
    Mr. Avi-Yonah, do you have any comment?
    Mr. AVI-Yonah. I have to say I do not see our companies 
suffering so much. American companies recently have been doing 
extremely well worldwide and the basic reason, as far as tax is 
concerned--I think it basically is for other reasons, but as 
far as tax is concerned, is that we don't tax our overseas 
profits more than any other of the countries that are 
represented here.
    Mr. JOHNSON. Yeah, but we are leaving money overseas 
because they are afraid to bring it back and get it taxed at a 
high rate. Under our current deferral system, but not under a 
territorial system, foreign earnings are subject to U.S. tax 
when they are repatriated to the United States. You know that.
    What I would like to know from you all is, what did the 
U.K. and Japan do about accumulated foreign earnings when they 
transitioned to a territorial system? I am about to run out of 
time, so be quick, please.
    Mr. THOMAS. Japan imposed no restrictions. Basically, any 
dividends that were paid from foreign subsidiaries during a 
taxable year beginning on or after April 1, 2009 are subject to 
the exemption.
    Mr. JOHNSON. Do you all agree with that? Mr. Edge.
    Mr. EDGE. In the U.K. we did not distinguish. That would 
have been seen to have been an unfair distortion. But most 
importantly, the point was made quite forcibly to the 
government that if they did try to distinguish, the profits 
would end up in Ireland and not in the U.K. because companies 
would leave.
    Mr. JOHNSON. Thank you very much. I appreciate your 
testimony.
    Chairman CAMP. Mr. McDermott is recognized.
    Mr. MCDERMOTT. Thank you, Mr. Chairman. I want to thank you 
all for coming here. I have a feeling as though I have seen 
this movie before, because the Japanese have a health care 
system and the Dutch have a health care system and the English 
have a health care system and the Germans have a health care 
system and they are all different. And never have we had a 
hearing in the Congress where we asked them to come in and talk 
about how they run a health care system that is half as 
expensive as our own. So it seems strange that we are asking 
you to come in here and talk about systems developed in your 
own countries.
    And Dr. Avi-Yonah, I would like to ask, you nailed it down 
to one issue as to why we are here. We are not going to do what 
the Germans do, we are not going to do what the English do, we 
will not do what the Dutch do, we will not do what the Japanese 
do, because we are Americans. And we have developed this 
system--complicated, yes.
    Why are we having this hearing? It sounded to me like you 
were saying it is money left overseas, and we have two ways to 
get rid of the problem. One is tax it while it is over there, 
just get rid of deferral. And then--explain to me why are we 
talking about competitiveness. Because in health care we never 
look at the Europeans to see what is the best way to do it. 
They don't know anything. We only know. That is how our health 
care system was developed. The same with our tax structure. So 
tell me, what it is that we are really here discussing today?
    Mr. AVI-YONAH. What we are discussing is this very narrow 
question, it seems to me, which is what to do about dividends 
that are distributed upstream at CFCs not held as income. That 
is the issue on the table. And the other countries, some 
recently some before, have decided not to tax them. It has 
nothing to do with the competitiveness. American multinationals 
don't have any problem shifting profits around even from their 
overseas operations, one to another, or raising money at home 
or borrowing at very low rates, or even when their stock price 
reflects overseas income, it does nothing in any of this issue 
of trapped earnings overseas that affects their 
competitiveness. They are perfectly fine and competitive with 
the current system.
    The issue is some people argue that leaving the money 
overseas means that they don't invest it at home. You know, you 
can argue about what the economic effects of that would or 
would not be. We had a 1-year experiment in 2004-2005 and the 
economic effects are not so stellar. But they did make enough 
money----
    Mr. MCDERMOTT. You mean the one----
    Mr. AVI-YONAH. When we allowed the creation----
    Mr. MCDERMOTT. And they handed it out in dividends rather 
than investing it in any kind of----
    Mr. AVI-YONAH. Right. But I think you can argue that there 
is an impediment there. There is no question that they usually 
don't, because they have to pay an extra tax, and they also 
engage in all kinds of complicated transactions to try to 
repatriate without paying the tax. So that puts a burden on the 
IRS to try to fight these transactions.
    So I would say that something should be done about that. 
But in my opinion, if we were to reduce the rate to something 
like the OECD average, we could abolish deferral and and then 
we could get rid of a lot of this complexity that is currently 
in the code and we would not have a competitive disadvantage 
because of that either. And then the money can simply flow 
freely within the multinationals without having any tax effect.
    Mr. MCDERMOTT. Which way would you go? You have these two 
ways to go. Which way would you recommend to us to go?
    Mr. AVI-YONAH. I would not recommend going territorial, 
because I think that this strongly increases the incentive to 
shift profits overseas. We know that American multinationals 
already use a lot of transfer pricing and other transactions in 
order to increase their overseas profits. And we have recently 
heard about large American multinationals putting their money 
overseas and paying very, very low effective tax rates on that 
money. And we have also had a hearing just last summer in this 
committee discussing all the ways in which they shift profits.
    But I think the one disincentive that currently exists is 
this problem, if they put more money overseas they will not be 
able to bring it back without paying taxes. And I think that if 
we eliminate that----
    Mr. MCDERMOTT. Tax it as it is made?
    Mr. AVI-YONAH. Yes.
    Mr. MCDERMOTT. Then they can move it anyplace they want.
    Mr. AVI-YONAH. Yes, we we abolish deferral; there is no 
problem with transfer pricing; they can move it anyplace they 
want. They can bring it back here and there will not be a tax 
disincentive to do that.
    Mr. MCDERMOTT. Why do you think they don't want that? We 
could pass a bill here in 15 minutes to get rid of the ability 
to defer taxes and keep it outside the country.
    Mr. AVI-YONAH. I don't think that all of them don't want 
it. What I have read recently is that some have actually said 
if the corporate tax rate is reduced sufficiently, they would 
being willing to leave it inside the system. That came from GE, 
which was one of the companies that was highlighted recently in 
terms of how good their overseas tax strategy is.
    Chairman CAMP. Mr. Brady.
    Mr. BRADY. Thank you, Mr. Chairman, for holding this 
important hearing. As opposed to health care where our local 
doctors, for example, don't compete globally to provide 
services to us, our businesses do compete globally for 
customers. And what we have learned through this hearing and 
others is that America has fallen behind. Where we used to hold 
a distinct advantage in competitive tax rates, in fact our 
global competitors have taken a page from our playbook and are 
beating us at it. It is costing us jobs.
    The goal today is to find out how we become competitive to 
make sure that we have the strongest economy of the 21st 
century, not the strongest economy until China catches us or 
the European Union becomes more competitive, but how do we 
create the strongest economy for the next 100 years.
    This hearing I think is very important for exploring it. I 
want to follow up with Mr. Johnson's conversation and direct a 
question to Mr. Thomas and Mr. Edge, if I may. And by the way, 
all the panelists have been excellent today.
    You know, as Mr. Johnson said, many critics of the current 
U.S. worldwide tax system argue the current system has a 
lockout effect which forces U.S. companies to hoard cash 
overseas and not distribute those earning back to the U.S. 
where those earnings could be deployed for domestic 
investments. They are, by some estimates, $1 trillion in 
stranded U.S. profits overseas eager to be brought back here. 
In fact, Mr. Thomas' testimony stated the lockout effect was 
one of the primary reasons why Japan adopted the territorial 
tax system.
    Mr. Thomas and Mr. Edge, based on your experiences, you 
believe that the lockout effect is an impediment to domestic 
investment?
    Mr. THOMAS. Yes, I believe it is an impediment. Japan's 
rules have been in effect only for a short period of time but 
initial indications are that repatriation of profits is 
increasing. And frankly, given the recent disaster in Japan, 
more and more Japanese companies will probably need to bring 
profits back into Japan to help with their rebuilding. So I 
definitely believe that the lockout effect is a problem, and 
the Japanese Government recognized that and that is why they 
changed their system.
    Mr. EDGE. The U.K. has not had as much trouble with where 
overseas cash gets used because, as I explained in my 
testimony, we did not have rules dealing with upstream loans. 
That meant the money could be brought back to the U.K. not only 
tax free- but in theory at the cost of a further detriment to 
the U.K. because of the additional interest deduction that that 
created. You then had money being lent back to the U.K. rather 
than being paid back to the U.K. by way of dividend.
    Once you have reached the conclusion that you deal with 
abuse through CFC rules, and through interest allocation, 
through tax pricing, then the essence of the territorial system 
as we have adopted is that you should take tax off the table in 
terms of deciding where corporations should invest their money. 
And therefore I think that leaving cash offshore because of tax 
reasons is an artificiality that is very good to get rid of.
    Mr. BRADY. The comment has been made that the way to 
address and solve the lockout problem is that you move to a 
territorial system or end deferral. Most of the countries that 
faced that decision have chosen to move to a territorial 
system. In your view, given a choice between ending deferral or 
moving to a territorial system, what is your recommendation to 
the panel?
    Mr. THOMAS. I would definitely recommend moving to a 
territorial system. Moving to ending deferral would be a step 
backwards. Again, the rest of the world is playing soccer. I 
think for U.S. companies to be competitive, we need to move to 
a territorial system.
    Mr. EDGE. I think you get much greater complexity if you 
get rid of deferral and you have to address the different ways 
in which taxable interest is calculated in different 
jurisdictions. And if you go for a territorial system life is 
much simpler; you let the total package that each country has 
to offer stand on its own.
    Mr. BRADY. Great. Thank you. I appreciate the panel and 
everyone has been very insightful today.
    Mr. Chairman, thank you.
    Chairman CAMP. Mr. Nunes.
    Mr. NUNES. Thank you, Mr. Chairman. At this time I would 
like to yield my 5 minutes to the chairman of the Select 
Revenue Subcommittee.
    Mr. TIBERI. Thank you, Mr. Nunes. Thank you, Mr. Chairman, 
for holding this hearing today.
    Kind of following up on what Mr. Brady talked about, Mr. 
Thomas, with respect to the lock-out effect that he talked 
about. We had a week and a half ago a hearing with four CFOs, 
and in response to a question from me one of the CFOs with 
respect to the lock-out effect said--this is a quote--``the Tax 
Code certainly is structured in a way where there are 
significant disincentives to bringing those earnings and 
profits back here to the U.S.'' So if we are looking to invest 
in the U.S., we have to find alternative sources of capital to 
make those investments.
    To piggyback on Mr. Brady's question, from your experience 
in Japan--for what you just went through in Japan--what the 
Japanese just went through in Japan--can you give us some 
further insight as to the debate with respect to the 
territorial system and the lock-out effect and how that debate 
centered around creating more capital for the Japanese in 
Japan?
    Mr. THOMAS. Absolutely. I think it is well known that the 
Japanese financial institutions are still in the process of 
recovering from the recent global financial crisis, and, 
consequently, their ability to lend to Japanese companies is 
far more restricted than it used to be. That was one of the 
issues the Japanese Government took into account. They wanted 
to enable Japanese companies to bring their profits back into 
Japan to avoid the lockout effect in order to help them 
continue to fund their operations and to do so in the most 
cost-effective manner.
    The Japanese business response was they felt it was much 
better for them to bring the profits back as opposed to trying 
to borrow within Japan under these circumstances.
    Mr. TIBERI. Thank you. To the four of you in the countries 
where you do tax work, if you could just comment on this 
question that I have. Some of my colleagues on the other side 
of the aisle seem to link going to a territorial system and 
adding a value-added tax. We have heard that not only today but 
in other hearings.
    Now I have family in Italy, and from what I hear from them, 
and they are not tax experts, the value-added tax is really to 
provide for a social safety network for more of a welfare 
state. I certainly don't know what it is like in the countries 
that you do work in.
    But starting with you, Mr. Menger, in Germany, was there a 
link between going to a territorial system and adding a value-
added tax? Can you give us some context to that?
    Mr. MENGER. Yes. There was no link. Germany, after World 
War II, had the participation exemption, the territorial system 
for corporate entities, and at the same time had a kind of VAT. 
It was slightly different. Later it was governed by the 
European Union. But there is no link between the two. And also 
from a policy perspective, there is legislative history that 
you wouldn't be able--the policymaker wouldn't be able to 
change or raise the VAT rate in order to pay for a changes in 
the corporate tax rate. Politically they are clearly 
disconnected and separate issues for financing different needs 
of the government.
    Mr. TIBERI. Mr. Edge.
    Mr. EDGE. That is true in the U.K. as well. I don't think 
there is any link between the VAT increases that we have had 
over the years, particularly the one in the last budget which 
was expressed to be to help deal with the deficit problem. The 
last government that I can remember in the U.K. making a major 
switch to taxes on spending was the Thatcher government, coming 
in in 1979, when that was very definitely the trend at that 
point, and that is when U.K. corporate tax rates starting going 
down.
    It is interesting, in one of the documents that I put in 
there, the 2007 consulting document, the Revenue themselves 
admit that the yield from foreign dividends is very low. Yes, 
there was a lot of cash offshore, but there were no basis under 
the tax system short of just grabbing it--which would have 
resulted in lots of people leaving--under which you could have 
taxed it.
    So I personally don't think, although you don't know what 
is in the tax legislators' mind, that there was any link 
between the VAT increase in the recent budget and the 
exemption.
    Mr. SCHOON. I am not aware of any link in the Netherlands. 
As I mentioned, the territorial system was developed over a 
very long time and the individual components of the Dutch tax 
system in general.
    Mr. THOMAS. There was no link in Japan between the adoption 
of a territorial system and Japan's consumption tax.
    Chairman CAMP. Thank you. Mr. Neal is recognized.
    Mr. NEAL. Thank you, Mr. Chairman.
    I can understand the conversation as it relates to 
businesses that take advantages of preferences built into the 
Code and those who use legal mechanisms to seek low-tax 
jurisdictions. Part of the conversation as we discuss the 
territorial system versus the worldwide system, though, needs 
to focus on what our European friends have done to combat 
avoidance. You have heard me say here on the panel many times, 
I believe there is a difference between avoidance and deferral. 
But tax evasion in no-tax jurisdictions seems to me to be an 
opportunity to promote some credibility as we pursue tax 
reform.
    And Mr. Edge, how does the United Kingdom pursue tax 
evasion? The difference would be in this instance the Cayman 
Islands or Bermuda or Liechtenstein or some of those no-tax 
jurisdictions.
    Mr. EDGE. The answer to that question is ``with 
handcuffs''. Tax evasion is criminal. If it occurs, then the 
tax authority will do everything they can to catch it. There 
has been increasing cooperation between tax authorities in 
developed countries and the tax havens I think that is a good 
thing.
    There is a middle ground between aggressive tax avoidance 
and what you might call routine tax planning, As I say in my 
testimony, there was aggressive tax avoidance in the past 
because the rules were perceived to be too harsh.
    In the CFC area I would personally be surprised if that 
happened in the future because there is now a much better 
relationship between government and the Revenue and industry, 
and that much more open relationship plus the territorial 
system and what people perceive to be a tax system that is 
respected must help a lot. You can't rule out human greed, but 
I hope we will get to a situation where business will be able 
to get on with business and not worry so much about, as I said 
early on, having to run very hard to get the effective tax rate 
down.
    Mr. NEAL. Mr. Menger.
    Mr. MENGER. With regard to Germany, Germany looked at your 
U.S. SubPart F rules, and Germany has CFC legislation which 
applies if there is passive income and low tax. And in these 
cases there is full taxation in Germany. So it is a system that 
overlays and takes care of passive income with low taxation.
    Mr. NEAL. But, Mr. Chairman, I would hope that we would 
have an opportunity here in the committee to have a hearing on 
no-tax jurisdictions. I think that again lends some credibility 
to the task at hand. That is how to make American corporations 
more competitive, again distinguishing between no-tax 
jurisdictions and low-tax jurisdictions. At least those that 
have a low-tax jurisdictions have a corporate tax rate. That is 
a separate argument.
    Mr. Avi-Yonah, Mr. Edge stated that getting rid of deferral 
would increase complexity, but you are saying the opposite. 
Moving to a territorial system would put pressure on our 
transfer pricing rules and SubPart F rules, possibly leading to 
greater complexity in the tax system. Would the two of you care 
to elaborate?
    Mr. AVI-YONAH. Well, I think those two areas are clearly 
areas in which abolishing deferral would greatly simplify our 
tax system. SubPart F, as you know, is entirely devoted over 
hundreds and hundreds of pages of regulations to drawing very 
fine distinctions between the income that is currently taxed 
and income that is not currently taxed. All of that would 
disappear if we did not have deferral. Most of our transfer 
pricing enforcement and almost all of the big transfer pricing 
litigation that we have had in this country were outbound 
cases; that is, cases about American corporations shifting 
income overseas. There were very few inbound cases. All of that 
likewise disappears if you don't have deferral. In fact SubPart 
F was enacted in part in order to bolster transfer pricing 
enforcements back in the 1960s.
    So other than the fact that we have a foreign tax credit--
but even that is a complicated measure that we will have to 
retain if we abolish deferral--but I think even with 
territoriality, we are going to keep the foreign tax credit. 
Nobody suggested that we will abolish the foreign tax credit 
altogether, Because we still are going to tax some forms of 
foreign source. Nobody is suggesting abolishing SubPart F 
either. I think territoriality keeps all the most complicated 
elements of our Tax Code and greatly enhances the enforcement 
problem that we face.
    Mr. NEAL. Mr. Edge, do you want to quickly respond to that?
    Mr. EDGE. I don't see the anti-avoidance aspects on a 
territorial system as greatly increasing the burden of the tax 
authorities. If you are trying to create jobs, I suspect that a 
good way to create jobs is to have armies of people working out 
what creditable taxes are.
    Chairman CAMP. Thank you. Mr. Tiberi is recognized.
    Mr. TIBERI. Thank you, Mr. Chairman.
    Mr. Avi-Yonah--I get my name mispronounced every day, I 
didn't want to mispronounce yours--you made a statement and I 
will paraphrase the statement--and correct me if I am wrong--
that the current tax structure for the United States doesn't 
lead to American companies making a choice of moving jobs 
overseas, moving corporate headquarters overseas. I don't think 
you said it that way. Could you repeat that again as to our 
current tax structure?
    Mr. AVI-YONAH. I usually try not to talk about jobs 
specifically, because first of all, I am not an economist. And 
I think the economic literature that I am familiar with is 
ambivalent about what precisely the effect of U.S. 
multinationals expanding overseas on jobs here in the United 
States. There are studies with which you may be familiar, and 
there has been testimony before this committee before, that 
increasing U.S. multinational operations is a complement to 
U.S. job creation, and there are other studies that it is a 
substitute; namely, that you close factories here and move them 
overseas. I think it probably depends on--move from national 
and multinational--depends on the situation.
    What I can say, however, is that clearly our current system 
creates an incentive to shift income overseas and profits 
overseas in an artificial manner, and that I think there is 
plenty of evidence for and there have been a lot of reports 
both in the media and in the academic literature recently about 
that.
    Mr. TIBERI. I am trying to engage you in your thought 
process and maybe I can't convince of you this. I have talked 
to CFOs far and wide of American multinational corporations--
and we had a hearing a couple of weeks ago, as I said earlier--
who are growing their American businesses overseas in emerging 
markets overseas in Asia and Europe. For instance, selling 
diapers. And when they sell diapers abroad, as an example, they 
are going to compete with somebody else who is selling diapers. 
If they don't sell diapers overseas, somebody else is going to 
sell those diapers overseas. And when they sell those diapers 
overseas they are not going to make them in Ohio, they are 
going to make them close to where they are being sold overseas. 
Some would say that is shipping jobs overseas, but if they are 
not going to sell diapers overseas they are not going to make 
diapers overseas.
    And then you have the issue of returning profits. And as 
they continue to compete in a world marketplace where they are 
being taxed differently than their competitors who are 
headquartered in Germany, in the U.K., in the Netherlands, or 
in Japan, they are at a competitive disadvantage.
    And we had four CEOs last week. One of them said, ``my 
biggest concern is that we are going to be taken over by a 
foreign competitor.''
    I used to walk to grade school in Columbus, Ohio, and I 
could smell the hops of the brewery down the street that I 
thought would be an American brewery forever, Anheuser Busch. 
It is no longer an American brewery, in part because of the 
business they do and the American Tax Code. Do you just not 
recognize that reality in the world?
    Mr. AVI-YONAH. It seems to me that the American 
multinational, including let's say P&G, is competing very 
nicely overseas. And one reason that they are doing that is 
they don't pay too much tax on their overseas profits. And I 
don't think there is any evidence that the effective tax rate 
that the American multinationals pay on their overseas profit 
is higher than that of companies headquartered in any of these 
other----
    Mr. TIBERI. But the Tax Code that we have today makes them 
make a financial decision that if they bring those profits back 
here they are double-taxed, as opposed to a U.K. company they 
are competing against that does not have to have that double 
taxation. So it is a perverse incentive for them to keep their 
money overseas--unless there is a tax holiday--to keep that 
money overseas and invest it overseas. Does that not occur to 
you at all?
    Mr. AVI-YONAH. No. First of all they are not double-taxed. 
There is no double taxation because we do have a foreign tax 
credit. When the dividend comes back, we only tax it if it has 
not been taxed overseas. We give a foreign tax credit if it has 
been taxed. And I don't think this particular distinction has 
any impact on the competitiveness of American businesses 
because they don't bring the money back if it is going to be 
taxed. The money is overseas and they have plenty of money here 
in the United States.
    Mr. TIBERI. My wife says men are from Mars and women are 
from Venus. I am starting to think differently here. Mr. Edge, 
if you have a diaper company in the U.K. that is competing with 
an American company, did my example make sense to you?
    Mr. EDGE. Yes, I empathize with it considerably. You saw I 
was nodding my head as you were speaking. I think the correct 
term----
    Chairman CAMP. The time has expired, so if you could answer 
very quickly.
    Mr. EDGE. Very quickly, the correct answer is there is 
double tax because two jurisdictions are having a bite at the 
cherry. You don't level down. Allow each jurisdiction to stand 
on its own.
    Chairman CAMP. Mr. Davis is recognized for 5 minutes.
    Mr. DAVIS. Thank you, Mr. Chairman.
    I would like to follow a little bit on this line of 
discussion, maybe in a wider area. I am surprised about the 
commentary that American companies are doing just fine 
overseas. I have a question relating to this competition 
between tax systems, and I am intrigued that Britain and Japan 
have moved into this area.
    The first area that I would like to touch on is the area of 
mergers and acquisitions. My colleague just mentioned the 
American brewing industry. It used to be American at one time. 
But as I have looked particularly in the spirits industry that 
is prominent in Kentucky, companies like Brown-Forman among 
others that are major players in the industry here in the 
United States, I get the sense looking at comparative tax 
structures between the Europeans where the English and the 
French are dominating acquisitions right now, that you can have 
two companies that have essentially the same level of 
competitive edge, of the ability to create margin if you will--
and I am saying that outside the sense of a tax construct for a 
moment. But as I began to look at the advantage that a European 
company could bring to the table, specifically a British 
company in an acquisition versus an American company with the 
same revenues and general gross margins, it appeared to me in 
acquisition after acquisition that I looked at over the last 
several weeks, that the American company was at a 10 to 15 
percent or more disadvantage in the offer that could be laid on 
the table for an acquisition. That has somewhat turned the 
tables, where we are seeing American industries, let's say, 
being gobbled up in many aspects. Would you all like to comment 
on that?
    Mr. EDGE. From a strictly British point of view, let me say 
that your fear is right. It does go back to the same thing. We 
have moved from a situation where the British competitors you 
are no doubt thinking of have had to run very, very hard with 
our CFC rules, (the equivalent of your deferral problem), to 
try to make sure the income is not currently taxable, and then 
find ways in which to move it around to keep the low effective 
tax rate to an exemption system is easier to deal with.
    What I rejoice about now is that, with the work that was 
done by the last Labour government and the current Coalition, 
We have moved to a very sensible system. Life will tell us 
whether or not it is a good system for the U.K., but to me at 
present it seems like a good system and should make our 
multinationals more competitive, because deferral is not a 
feature and people can plan with much more certainty.
    Mr. DAVIS. So you would say, then, that your tax system 
gives you a competitive advantage over us on the same playing 
field?
    Mr. EDGE. Yes, I would. As I say, it is a part of the 
package and America has huge other strengths. But purely 
looking at it from a tax point of view, and knowing the little 
I know about the U.S. tax system, I would say where we have got 
to now is a very good place.
    Mr. DAVIS. We don't like being in that place at the moment. 
I guess the question, and it is important in terms of 
international commerce, would it level the playing field in 
terms of the effectiveness of the global economy if we, too, 
had a territorial tax system here? Particularly from a 
standpoint of doing mergers and acquisitions?
    Mr. EDGE. From my point of view, yes, it would. And of 
course as I have said a few times, it is part of the package. 
You have got things in your package that are pretty impressive. 
So whether the playing field would be level or tilted in your 
favor again, I am not sure. But on the tax side I think a level 
playing field would to my eyes be helpful.
    Mr. DAVIS. We would like to keep our spirits industries 
owned by Kentucky companies right now, at least for a few 
specific brands.
    Mr. Thomas, do you have a comment.
    Mr. THOMAS. Yes, I definitely agree with Mr. Edge's 
comments. Businesses make, investment decisions on the basis 
of, after-tax return. And to the extent that American 
businesses are faced with a lower return as compared to foreign 
businesses, they are put at a disadvantage when they try to 
engage in these transactions. So I definitely agree.
    Mr. DAVIS. I appreciate that perspective very much. Thank 
you. And, Mr. Chairman, I yield back.
    Mr. TIBERI. [Presiding.] Mr. Doggett is recognized.
    Mr. DOGGETT. Thank you, Mr. Chairman.
    And thank you for your testimony. There are some here who 
believe that we ought to borrow from the Chinese and our other 
creditors or shift more of our tax burden onto small businesses 
and individuals so that a few large multinationals can pay even 
less than the relatively low effective rate that they pay today 
when they pay taxes. General Electric and a few others don't 
even bother to do much of that.
    In the cries for lower corporate tax rates, there is also 
the immediate demand for a rate of about 5 percent on previous 
earnings that have been accumulated abroad in what is called a 
repatriation tax holiday, but what is certainly not a holiday 
for most American taxpayers. At a cost of $80 billion, we 
cannot afford to lower the corporate tax rate to 5 percent on 
the cash that multinationals have stashed in foreign tax 
havens.
    At our last hearing, fortunately, all four corporate 
witnesses called by the Republicans agreed that such a stand-
alone 5 percent repatriation tax break was a very bad idea, in 
the words of one of the witnesses, to which the other 
Republican witnesses agreed.
    Whether we are discussing this immediate or more permanent 
changes in our tax laws, I believe the focus has to be whether 
we are encouraging jobs and growth in America or we are 
incentivizing the export of jobs and capital.
    Mr. Avi-Yonah, you testified earlier about jobs. But let me 
ask you a more narrow question. Is adopting a territorial 
system an efficient way to create jobs in the United States?
    Mr. AVI-YONAH. No.
    Mr. DOGGETT. Will adopting a territorial system help us 
prevent multinationals from shifting billions of dollars out of 
the United States?
    Mr. AVI-YONAH. No.
    Mr. DOGGETT. And with reference to--you referred to 
transferral pricing rules. We know that we already have a 
system in place in which multinationals stash billions of 
dollars overseas and that not all of that money is on earnings 
overseas, but is in fact earnings from American consumers that 
have been categorized as foreign earnings.
    Steve Shay, who was sitting in your chair not that long ago 
as the Department Assistant Secretary for International Tax 
Affairs, just recently again objected to the very territorial 
system being considered today and declared, quote: ``No other 
country with an exemption system has successfully protected its 
domestic tax base from abuse. They all are struggling with 
transfer pricing.''
    Let me ask you, if I understand the way this great 
territorial system is going to work, the idea is if you have 
any earnings overseas, you don't owe any taxes at home on 
those. And if you have earnings at home, you pay whatever the 
statutory rate is, 25, 28, 30 percent. Doesn't that create a 
slight incentive, a more than slight incentive for a 
multinational to categorize earnings at home, particularly with 
intellectual property like a formula or trademark, as foreign 
earnings so they won't have to pay any taxes on it?
    Mr. AVI-YONAH. Yes.
    Mr. DOGGETT. So you referred to the current rules and their 
inadequacies. The effect of that in incentivizing the export of 
what are truly American earnings to tax havens only increases, 
doesn't it?
    Mr. AVI-YONAH. Yes.
    Mr. DOGGETT. Let me ask you also, we have heard the cries 
today right from this committee dais about American 
corporations having to pay 35 percent. And I am one who 
believes, as I think every witness testified today, that we 
should be looking at the level of that statutory rate, even 
though few multinationals actually pay the statutory rate. But 
I want to be sure that I understand how that interfaces 
generally with our foreign tax credit rules.
    If I understand, if a company packs up in Ohio or Michigan 
or Texas and moves those jobs to China and opens a factory over 
there, and they pay the Chinese 25 percent, 25 cents, say, on 
every dollar that they earn from their factory in China, the 
objection is that if they bring any of those profits back to 
the United States they have to pay 10 cents on the dollar here. 
Is that the way the system works?
    Actually, I think that is a little too favorable to the 
corporations because there are all kinds of other gimmicks 
under the foreign tax credit rules, so you sometimes can get it 
even higher than the statutory rate in the country where the 
manufacturer is located. But is that generally how it works?
    Mr. AVI-YONAH. Yes.
    Mr. DOGGETT. Thank you.
    Mr. TIBERI. The gentleman's time has expired. I recognize 
Mr. Reichert for 5 minutes.
    Mr. REICHERT. Thank you, Mr. Chairman.
    I want to thank the panel for being here today also. It is 
a great opportunity for all of us on the committee to hear from 
the different experiences that you had representing the 
countries and the organizations that you represent from around 
the world. I think it is a great opportunity for us to gain 
some wisdom from you, and I think that is always a good thing 
if we could have that sort of dialogue.
    We may not adopt everything that Japan does or the 
Netherlands or Germany or the U.K., but certainly we can adjust 
things to fit the United States as other countries look at us 
and use some of those ideas here in the United States.
    So that leads me to a question that is on a topic that is 
very near and dear to the hearts of those who live in the 
Northwest, and especially Northwest Washington where some of 
the most well-known tech companies are from, Microsoft and 
others. Congress, as you know, is considering a wide range of 
ideas looking at patent reforms to protect intellectual 
properties from counterfeiting and from theft. We are also 
looking at ways we might be able to encourage innovation in 
those areas. And, of course, as you know, innovation in America 
is one of our calling cards. We are proud of that and we want 
to encourage that.
    I do understand that the Netherlands, and I think the U.K., 
has a special tax treatment that I think was referred to in one 
of the statements, an ``intellectual property patent box.''
    Mr. Schoon or Mr. Edge, can you explain the concept of the 
patent box and the idea behind it to encourage keeping IP 
within your countries' borders, recognizing that it is a 
domestic tax proposal but there are some international 
implications? Can you address those two issues, please? Mr. 
Schoon, and Mr. Edge.
    Mr. EDGE. Okay, I will start. Yes, I did refer to the 
patent box, and the patent box has been the result of quite a 
long and broad-spread inquiry in the U.K. into what we are 
doing about R&D. We have got some great companies there, 
particularly in the pharmaceutical area where R&D is important. 
And Sir James Dyson of vacuum cleaner fame has set up a 
committee to look at it in the U.K.
    One of the conclusions on this was that this should be an 
area where we went beyond a level playing field on tax and went 
a little bit further to say, having had research and 
development credits over the years which have been enhanced 
deductions against tax, we should have a favorable tax regime 
for income from patents. It is quite limited. It is a 10 
percent tax for income from patents that is received within the 
U.K., and a little bit (as I have referred in my testimony) 
like tonnage tax. So we have tax wrinkles, as you have in the 
U.S. as well. It is a rule that is designed to encourage 
activity in one particular area. And we are taking a gentle 
step in that direction.
    It does also have international implications as well 
because in our CFC changes we are saying that that income from 
patents is good income or income from intellectual property is 
good income unless that intellectual property started off in 
the U.K. and has been exported.
    So in those two ways we are trying to encourage innovation 
and not stifle our multinationals, but actually just give a 
little fillet to R&D in the U.K.
    Mr. REICHERT. And you are looking at a law that may go into 
effect sometime in 2012; is that right?
    Mr. EDGE. That is absolutely right.
    Mr. REICHERT. Are you looking at the Netherlands' laws? I 
understand that the tax rate is 10 percent, I think, in the 
Netherlands also. You are looking at a 10 percent tax, too.
    Mr. SCHOON. In the Netherlands it is 5 percent. It was 
reduced to 10 percent in 2007 and was reduced in 2010 to 5 
percent at the same time the scope was broadened. It was 
limited to patents initially, self-developed patents. But it 
has broadened to certain specified R&D activities, development 
activities, but does not include trademarks, et cetera. It is 
focused on technology, including software.
    Mr. REICHERT. Thank you, Mr. Chairman.
    Mr. TIBERI. Dr. Boustany is recognized for 5 minutes.
    Mr. BOUSTANY. Thank you, Mr. Chairman.
    I thank the witnesses for your testimony. Critics of 
territorial systems argue that the systems oftentimes put 
excessive pressure on transfer pricing. Mr. Thomas, do you 
agree with that?
    Mr. THOMAS. I think that it is fair to say that it puts 
some additional pressure because there is potentially a greater 
incentive to transfer profits overseas. However, the question 
is how much additional pressure, and how you take that pressure 
into account. There have been tremendous developments in the 
transfer pricing field in the past 10 years. Countries outside 
the U.S., countries all over the world, now are becoming very 
sophisticated. Companies have to deal with transfer pricing 
regulations not only in one country but in other countries as 
well. And the tax authorities are becoming more adept at 
evaluating transactions that may be abusive.
    So, yes, I think there is greater pressure. But my own view 
is that that such pressure is not a sufficient justification to 
not change to a territorial system.
    Mr. BOUSTANY. If we have a higher corporate tax rate, 
lowering corporate tax rates would obviously reduce some of 
that pressure on transfer pricing.
    Mr. THOMAS. That is correct. And even though it was not 
directly related to the adoption of a territorial system, Japan 
has proposed a reduction in its corporate tax rates. It may be 
delayed now because of the disaster, but I believe that they 
will ultimately move ahead with that reduction.
    Mr. BOUSTANY. Mr. Edge, do you agree with those comments?
    Mr. EDGE. Yes, I very much agree on the comment on how tax 
authorities around the world have become much more 
sophisticated in dealing with transfer pricing. And with your 
comment--certainly from my experience in the U.K.--that, if you 
have a lower tax rate, there are still going to be some people 
who engage in tax avoidance because that is human nature. But 
the incentive to do so would be less.
    In the U.K. the CFC regime has generally been kind to 
active income, and so transfer pricing has been very much a 
part of the U.K.'s protection, against the export of active 
income I don't see that changing.
    And the other thing that has been a big change in the U.K. 
in the last 4 or 5 years is much more real-time working between 
the Revenue and the industry, which has really helped. There is 
a much more open, trustful relationship, no-surprises culture. 
That helps enormously.
    Mr. BOUSTANY. I have heard mixed reviews about advanced 
pricing agreements, and I would like to hear each of your 
comments with regard to your experience.
    Mr. Thomas, why don't you start?
    Mr. THOMAS. Japan actually invented the advance pricing 
agreement back in 1986 when they adopted their transfer pricing 
rules. They called it the preconfirmation system. After a few 
years of perhaps mixed results, from about the mid-1990s, it 
has become a very successful program. Indeed, in Tokyo right 
now, there are more examiners becoming involved in the APA 
review process than there are in transfer pricing examinations. 
We are finding that APA renewals are becoming more easy to do 
and quite efficient. We are finding that other governments 
increasingly are adopting procedures for advance pricing 
arrangements, so these are being done on a bilateral basis more 
effectively and more efficiently. So I think there is 
tremendous promise in that program and that can also go a long 
way to help with the entire whole transfer pricing issue, 
including issues that may arise in connection with the adoption 
of a territorial system.
    Mr. BOUSTANY. Mr. Schoon, what is your experience?
    Mr. SCHOON. In the Netherlands it is very common to 
conclude advanced pricing agreements on transfer pricing 
matters. And that settles a lot of disputes in advance.
    Mr. BOUSTANY. Thank you. Mr. Edge.
    Mr. EDGE. APA transfer pricing agreements are invaluable in 
the financial services area. It has enabled banks to have a 
great deal of flexibility in running their operation.
    Very useful also on inbound investments. A lot of U.S. 
companies coming to the U.K. have found the ability to clear 
the charging arrangements useful for headquarters and cost-plus 
operations.
    Historically, since it came in about 5 years ago the APA 
regime has been more suspiciously treated in other areas but it 
is now becoming more common as the Revenue have got better at 
transfer pricing investigations. And any investigation is 
usually followed by an agreement for the future.
    Mr. BOUSTANY. Mr. Menger.
    Mr. MENGER. In Germany it is becoming more and more 
popular. APAs catching on slowly, but now it is very helpful 
for the taxpayer and the tax authorities because you have 
certainty about your international transactions.
    Mr. BOUSTANY. I thank you. I yield back.
    Mr. TIBERI. Thank you. Mr. Blumenauer is recognized for 5 
minutes.
    Mr. BLUMENAUER. I want to see if I can understand the 
context. Mr. Avi-Yonah mentioned the context of tax reform. Mr. 
Schoon, total taxes in the Netherlands approaches 40 percent of 
GDP; is that correct?
    Mr. SCHOON. I do not have those statistical data available 
with me at this time.
    Mr. BLUMENAUER. Well, I have here the OECD tax statistics 
database for 2008, before weird things happened, and it says in 
this that it was 39.1 percent total tax revenue as a percent of 
GDP. Is that reasonable? Is that in the ballpark?
    Mr. SCHOON. As I said, I can't comment on that.
    Mr. BLUMENAUER. You don't know? Okay. Let me turn, maybe 
Mr. Edge, if you have some sense of the total tax burden in the 
United Kingdom. The same chart suggests--not suggests, tells me 
that it is 35.7 percent total tax burden percentage of GDP. Is 
that reasonably accurate?
    Mr. EDGE. I don't have it at my fingertips but that sounds 
about right. And it is clearly a figure that the government 
focuses on as times goes by, along with the balance between the 
different forms of tax that we have.
    Mr. BLUMENAUER. Right.
    Mr. Menger, in Germany it says 37 percent. Is that ballpark 
figure?
    Mr. MENGER. I am not an economist and don't have the 
numbers at hand, but I believe it is an accurate number, yes.
    Mr. BLUMENAUER. You are a tax expert.
    Mr. Avi-Yonah, my chart here says that total tax percentage 
of GDP in the United States is 26.1 percent in 2008. Is that in 
the ballpark in your judgment?
    Mr. AVI-YONAH. Yes.
    Mr. BLUMENAUER. You in your final point, which you kind of 
rushed by in your testimony, you referenced the context of tax 
reform. Does the conversation that we are having this 
afternoon, does it make any difference that these other 
countries have much higher tax burdens on individuals and 
businesses, on managers and suppliers, when we are talking 
about both the impact of tax changes and the capacity to be 
able to make a tax change that, according to Joint Tax, would 
cost $80 billion a year to the Treasury? Could you talk a 
little about the context?
    Mr. AVI-YONAH. I think that makes a tremendous difference. 
I mean the fact of the matter is that when American companies 
migrated, before we adopted the anti-inversion rules, they 
never inverted to Japan or to Germany or to the Netherlands or 
to the U.K.
    They wouldn't dream of it because of these other taxes. I 
mean, the total tax burden on the headquarters of a 
multinational has to be measured to include the tax burden on 
the management and on the employees and the VAT that they all 
pay in all of these other countries. And you can't, in my 
judgment, talk about competitiveness in general in the abstract 
without taking all of these other taxes into account.
    The other point, of course, is, despite, you know, the 
claim that the two things have nothing to do with each other, 
as a practical matter, if you are going to significantly reduce 
your revenues from the corporate tax to the tune of $80 billion 
or more, it is helpful to have another tax that can be raised 
relatively easily to compensate for that. And that is what 
every other country does, but we don't.
    Mr. BLUMENAUER. Thank you very much. I appreciate that.
    Mr. Chairman, I think my friend, Mr. Doggett, pointed out 
that this would be the functional equivalent of a permanent 
repatriation--good, bad, indifferent. I mean, I just think our 
putting on the table what it means for the United States having 
a relatively lower tax burden than all these other countries--
Japan more basically the same; it will be interesting to see 
how that retains over time, with exploding costs for an aging 
population in Japan--but the other three it seems pretty clear. 
And it seems to me important for us to try and understand the 
total context about what we would be getting into and what the 
likely consequence may be. And I think it is worth our 
exploring further.
    Thank you, and I yield back.
    Mr. TIBERI. Thank you.
    And Mr. Buchanan is recognized.
    Mr. BUCHANAN. Thank you, Mr. Chairman, for holding this 
important hearing today on taxes.
    And I want to thank each of our panelists for being here 
today, also.
    I believe we need to reform our Tax Code to get our economy 
going and get people back to work. But, Mr. Thomas, I noticed 
in your remarks you stated that the United States--its 
corporations struggle to deal with a very complicated and 
burdensome U.S. worldwide tax regime.
    Would you all agree that our Tax Code is outdated and a 
barrier to economic growth or prosperity? That was kind of your 
conclusion. I just wanted to follow up on that point.
    Mr. THOMAS. Yes, I would agree with that. I think, as we 
see what is happening around the world, all these countries 
that have for years had a territorial system or like the U.K. 
and Japan most recently, have gone through this thought 
process, have reached the conclusion to adopt a territorial 
system. And I think there is no reason why the United States 
shouldn't reach the same conclusion.
    Mr. BUCHANAN. And along that line, what would be your 
couple of recommendations to us, as a panel, to supercharge or 
get our economy going or help our corporations worldwide?
    Mr. THOMAS. Well, I think the adoption of a territorial 
system along the lines of what the U.K. or Japan has done, the 
dividend exemption, would encourage U.S. companies to bring 
their profits back into the United States and avoid the lockout 
effect.
    Mr. BUCHANAN. And the other thing, I just wanted to touch 
base a little bit on Japan. I remember in the 1980s we had 
offices in California. It just seemed like Japan was going to 
own everything. How is their Tax Code there--has that made a 
difference? Has that bogged them down?
    The reason I say that is because I remember, in the late 
1970s, Hong Kong had a flat tax of 20 percent. And I was over 
there the other day, seeing they went to 16 percent. But with 
Japan keeping their rate, it seems, a little bit higher, has 
that made a negative impact? And then, do you agree that has 
affected us, as well, being competitive?
    Mr. THOMAS. I think that it has had a negative impact. And 
that is why there were very strong calls in Japan, beginning a 
couple of years ago, to reduce Japan's corporate tax rates. 
Many of us were calling for a reduction closer to 10 percent, 
from the existing 40 percent. Ultimately, they decided to 
reduce the national corporate rate to 25 percent. So, all in, 
it is about 35 percent. But they did recognize that the current 
high rates were hurting them.
    Mr. BUCHANAN. Yeah.
    Mr. Chairman, I yield back.
    Mr. TIBERI. Thank you.
    Ms. Jenkins is recognized.
    Ms. JENKINS. Thank you, Mr. Chair.
    And thank you all for being here.
    In his prepared testimony, I believe it was Mr. Edge, who 
spelled out the real danger of having an uncompetitive tax 
system in an open economy like that of the United States and 
U.K. The fear is that our international competitors with a 
lower tax rate can afford to pay a higher purchase price when 
making acquisitions.
    If U.S. companies become subsidiaries of foreign firms, 
their fair-market value might rise because they escape 
worldwide taxation. Studies have shown that foreign-based 
companies take over U.S.-based companies three-fourths of the 
time when there is a cross-border merger. The alternative to 
tax reform could be continually making our companies takeover 
targets.
    Could you all elaborate on the role that tax reform could 
play in our increasingly competitive and global marketplace to 
put U.S. multinationals or future U.S. multinationals in a 
position where they are the acquirers, and not the targets, but 
also serves to protect our domestic tax base?
    Mr. THOMAS. Yes, certainly, lower tax rates would increase 
after-tax returns for a particular investment. And, 
consequently, in order to be competitive, U.S. companies should 
be placed on the same level playing field as other countries 
around the world. The adoption of a territorial system would, 
in effect, result in foreign taxes being essentially the only 
taxes that would be paid in connection with those transactions 
and, again, would put U.S. companies in the same position as 
their competitors.
    Mr. SCHOON. Again, speculation on what the U.S. should or 
should not do is not for me to do. But, as a general statement, 
a lower effective rate obviously increases your payback or your 
rate of return, as was earlier addressed.
    Mr. EDGE. I think this is an ``all-other-things-being-
equal'' question. But you are right, the drift of my testimony 
is exactly in that direction, because I have seen U.K. 
companies not able to make acquisition because other companies 
(rival bidders) have had better tax attributes. And I have also 
seen U.K. companies fall under foreign ownership, and then 
gradually you see businesses move out of the U.K.
    So those fears are very real. But, as I say, it is ``all 
other things being equal''. Because if you are bringing other 
things to the table in innovation, capital market strength etc, 
then it may well be that you can outbid the tax system. But all 
other things being equal, it must be a positive move to lower 
the effective tax rate and make yourself more competitive so 
you become the acquirer and not the target.
    Mr. MENGER. To acquire companies, you have to look at the 
return on investment and you have to look at the deductibility 
of interest. And both, of course, are affected significantly 
depending on what kind of tax system you have. And the better 
the return is, the easier it is to take over your competitors.
    Mr. AVI-YONAH. I don't know of any evidence that cross-
border M&A is driven primarily by tax considerations. It is 
driven primarily by business considerations. This is not the 
inversion saga, where this was purely a tax-motived 
transaction.
    Large cross-border M&A is driven by the ultimate needs of 
business to expand. And the United States is a very, very 
important market, the richest and biggest market in the world, 
so it is not surprising that foreign companies are interested 
in making acquisitions here in order to access our markets. I 
think that is a positive thing for the United States.
    Ms. JENKINS. Okay. Well, it would seem that the tax bills 
of these major corporations would be a business decision, as 
well. So I think it would factor in when you call it a business 
decision, would it not?
    Mr. AVI-YONAH. I don't think that the tax bill that 
American multinationals pay is significantly higher than the 
tax bill that foreign multinationals pay. So I think that these 
tax considerations are not particularly relevant because there 
is no evidence that I know of that shows that American 
multinationals are taxed more heavily than multinationals from 
other countries.
    Ms. JENKINS. Okay.
    One final question. It looks like we are running out of 
time. I am just wondering about exports. The President has 
stated that a goal is to double exports, and many of the 
companies that we have talked about indicate that they have 
more exports than the United States.
    And maybe I will follow up in writing with you, because I 
hear the gavel. Thank you.
    I yield back.
    Mr. TIBERI. Thank you.
    Mr. Kind is recognized.
    Mr. KIND. Thank you, Mr. Chairman.
    I want to thank the witnesses for your testimony and 
feedback I hear today.
    Professor Avi-Yonah, let me start with you. Here is one of 
the concerns, and I know it is a little bit off-topic here 
today, and we are talking about corporate tax reform here. But 
the majority of businesses in America are passthrough entities, 
so the individual rate is terribly important. And yet, if you 
take a look at the overall corporate tax rate, the goal of 
trying to reduce it to the mid- to upper-20s, you know, if we 
got rid of all the tax expenditures on the corporate side, 
except for accelerated depreciation, the best we can do is a 31 
percent rate. Getting rid of accelerated depreciation, we can 
get down to 28 percent.
    Assuming we hit that mark, what would be the response with 
these passthrough entities, the majority of businesses in 
America, if we had a corporate rate at 28 percent with no 
expenditures at all on the corporate side?
    Mr. AVI-YONAH. Well, I mean, I think the concern would be 
that the bigger the disparity between the rate that you impose 
on passthroughs and the rate that you impose on corporations, 
the more shifting there would be from one form to the other 
based primarily on tax considerations.
    I mean, we used to have the system for many years where 
there was a huge--I mean, traditionally, the individual rate 
was much higher than the corporate rate. And the result was 
that a lot of earnings, even more than now, were parked maybe 
unnecessarily inside corporations and are not used in the best 
way that works for the economy.
    Mr. KIND. Well, let me ask you, as well, because, you know, 
one of the difficulties that we have in dealing with this, if 
there is agreement that we should do it in a deficit-neutral 
fashion, is finding a way to pay for it. Obviously, the 
corporate tax expenditure is in one area, but that is only 8 
percent of the entire expenditures in the U.S. Tax Code; 92 
percent is on the individual side.
    Should we be approaching this comprehensively, not just on 
the corporate but also on the individual side, given that, 
again, the majority of businesses are passthrough entities?
    Mr. AVI-YONAH. I think it makes sense to address tax reform 
comprehensively and to address tax expenditures not just on the 
corporate side but other tax expenditures, as well, as the 
various deficit reduction commissions have proposed.
    Mr. KIND. Well, I don't think it would go over very well, 
as far as the passthrough entities, if we started going to 
their side of the ledger in order to help pay for lowering of 
rates in the mid-20 range or something, which seems to be a 
goal that many of my colleagues are striving for.
    So if we don't go to the individual side, we eliminate all 
of the corporate expenditures, again, that gets us, at best, to 
28 percent. If you want to go lower than that, are there any 
other acceptable offsets to help pay for a lower rate? Should 
we be looking at cap gains, dividend, or both, dialing that in 
order to pay for a lowering of corporate tax rates?
    Mr. AVI-YONAH. In my opinion, yes. I mean, I would increase 
the cap gain and the dividend rate in order to pay for 
corporate tax rate reduction.
    Mr. KIND. Do our other witnesses have an opinion on that, 
as far as the dividend rate right now, as it currently exists, 
or the cap gain rate, as far as looking at that with the goal 
in mind of trying to simplify and lower overall corporate tax 
rates?
    Mr. EDGE. I would be happy to make a comment based on the 
U.K. experience. I referred to Northern Ireland earlier on I 
did quite a lot of work there in the 1970s before the 1979 
Conservative government came in with the objective of 
broadening the base and lowering the rates. And I found that 
Northern Ireland politicians were very much saying that if they 
had a high tax rate with grants or tax allowances for capital 
incentives, they ended up with investment coming in with 
significant risks attached--if you remember Mr. DeLorean, whose 
business wasn't terribly successful--where as Southern Ireland, 
with a lower tax rate for profitable companies, got people who 
didn't want somebody to risk-share on capital with them, but 
were very happy to know that they would make profits on which 
they would pay a lower rate.
    So, as you probably guessed, I am afraid I am a completely 
unreformed lower-tax-rate person. If that means broadening the 
base by getting rid of deductions, that removes another form of 
distortion, as well.
    Mr. KIND. Okay.
    Well, Mr. Edge, let me just stay with you for a second. You 
know, one of the goals that we have with this, again, is 
overall tax simplification to make our companies more 
competitive and the ability for that capital sitting offshore 
coming into the United States.
    Do you think just by going to a territorial system without 
recognizing the additional revenue forms that the developed 
nations have right now, the VAT being one of the primary ones, 
is a realistic approach for us to take here in the United 
States, I mean, with the budget deficits in mind that we are 
facing?
    Mr. EDGE. I don't know, because I don't know actually what 
your fiscal constraints are. As I said, in the U.K., We have 
been able to bring exemption in without a big immediate fiscal 
cost. And the decision has very much been based on the fact 
that if you tried to raise more revenue from our big 
multinational corporates, you would be going completely in the 
wrong direction.
    Mr. KIND. Well, I just hope we are not operating in a 
vacuum without recognizing the VAT and other forms of revenue 
that other nations are dependent on, as well.
    But thank you, Mr. Chairman. Appreciate the time.
    Mr. TIBERI. Thank you.
    Mr. Paulsen is recognized.
    Mr. PAULSEN. Thank you, Mr. Chairman.
    Also, thank you for all being part of this hearing and 
taking the time to testify. It has gone on for a while.
    And I was just curious, because we have heard the 
perspective from Japan, Netherlands, England, Germany, et 
cetera, is any country that you are familiar with, whether it 
is among those individual countries itself or other countries 
that you are familiar with, that are talking about going back 
from a territorial system to a worldwide system like the United 
States has?
    Mr. THOMAS. I haven't heard of any countries thinking along 
those lines.
    Mr. PAULSEN. Okay.
    Mr. Schoon.
    Mr. SCHOON. I am not aware of any.
    Mr. PAULSEN. Mr. Edge.
    Mr. EDGE. No, me neither. The French, as you probably know, 
have a ``mondial'' system, under which they treat everybody as 
being in France, (the best place to be of course!) but, as I 
understand it, they are not expanding that either.
    Mr. MENGER. I am not aware of anybody.
    Mr. PAULSEN. And thank you for that. It kind of underscores 
the point, the reason we are having this discussion is about 
competitiveness and what we can do to actually create jobs.
    I know Mr. Avi-Yonah had a chance to answer the question 
earlier when one of my colleagues asked it, but based on the 
country you are familiar with, whether, again, Germany, Japan, 
Netherlands, England, adopted a territorial system if we in the 
United States, would that be an efficient way to help create 
jobs in the United States?
    Mr. THOMAS. Well, I think if the United States takes into 
account the kind of considerations Japan took into account, 
that it would lead to the creation of jobs.
    Mr. PAULSEN. Mr. Schoon.
    Mr. SCHOON. You know, it is, again, a matter of U.S. tax 
law, which is very complex and there are a lot of factors, so I 
can refer to the Dutch experience, where we believe that is the 
case.
    Mr. PAULSEN. Mr. Edge.
    Mr. EDGE. By leveling the playing field for business 
investment and removing the threat on our multinationals, I 
believe it has a good tendency in that direction.
    Mr. PAULSEN. Okay.
    Mr. Menger.
    Mr. MENGER. It is a very complex question. There are a lot 
of factors going in. And as a German tax expert, it is 
difficult to give you an answer to your U.S. question.
    Mr. PAULSEN. Yeah. Well, there are a lot of complex factors 
as part of the U.S. Tax Code. It is a lot larger than the 
version you brought from Japan, certainly.
    Can you also answer the question, will it help protect--
potentially help protect American jobs and American jobs from 
being shipped overseas if we looked at moving to a territorial 
system?
    Mr. Thomas.
    Mr. THOMAS. Again, when Japan considered that question, 
they concluded that this is not a zero-sum game. They concluded 
that it is a win-win situation. It will take a lot of effort, 
but it is unavoidable that markets overseas are growing and 
that Japanese companies need to address that growth, and U.S. 
companies need to address that growth. And if they can take 
advantage of that growth effectively and then bring the profits 
back to the United States, that will serve to enhance the U.S. 
economy.
    Mr. PAULSEN. Mr. Schoon.
    Mr. SCHOON. The Netherlands, you know, has had these same 
considerations, and, as an open economy, has concluded that 
that would be the way to go.
    Mr. PAULSEN. Mr. Edge.
    Mr. EDGE. The U.K. benefits enormously from inward 
investment, particularly from the U.S. And I think anything 
that will foster that is a good thing and should be good for 
jobs. There is some paranoia about foreign ownership, and 
anything that actually preserves domestic control, some would 
say, is a good thing too.
    Mr. PAULSEN. Mr. Menger, anything to add?
    Mr. MENGER. I think it is helpful to generate jobs.
    Mr. PAULSEN. Okay. And I know that a big conversation we 
are having is how to increase economic growth. I mean, I do 
agree with my colleague from Wisconsin's comments, too, about 
making sure that corporate tax reform is not the only provision 
that is on the table, because those small entities, 
partnerships, S corporations, et cetera, that pay under the 
individual rates, that has to be a part of the conversation for 
the foundations of overall tax reform, which I know our 
chairman is a part of, as well.
    So thank you for your feedback and for being here today. I 
appreciate it.
    I yield back, Mr. Chairman.
    Mr. TIBERI. Thank you.
    Mr. Rangel is recognized.
    Mr. RANGEL. Thank you, Mr. Chairman.
    I know the hour is late, and I want to thank all of you for 
your patience with the committee.
    I find it difficult to just talk about corporate tax rates. 
In the United States, when we do tax reform, individual tax 
rates, politically, has to be addressed. But from what you are 
saying, it is like it is two separate issues, that you can just 
do the corporate rates and not the individual tax rate?
    Mr. THOMAS. Well, Japan is undergoing a comprehensive 
review of its tax system. It has considered the corporate 
rates, it is considering individual rates and consumption 
taxes.
    Mr. RANGEL. Would anybody consider just the corporate rates 
and not figure what the individual tax rates would be?
    You would.
    Mr. EDGE. Yes, I would, The government has of course to 
balance the books, which is the most important thing, and 
create the right infrastructure. But I would personally say 
that the corporate rates have to be set at a level that 
attracts investment and encourages global competition. And 
individual rates are affected by different things. They are 
part of the social responsibility.
    So, personally, I think different factors come into play on 
individual rates and corporate rates. And, therefore, the two 
don't go into tandem. But, at the end of the day, the 
government has to----
    Mr. RANGEL. If you were considering a deficit like we were 
and you wanted to see where the revenue would come from, would 
you not want to consider what percentage came from the 
individual tax rates and the corporate rates?
    And, as some other Members have indicated, where we have a 
payroll tax for health care and Social Security, many European 
countries do not tax that directly and they just provide this 
service.
    Mr. EDGE. I am sorry, is that for me?
    I think, if I can say, sir, that that is a political 
question, and the answer to it will then have to be given 
having taken into account the economic consequences.
    But, in answer to your first question, I believe that the 
corporate tax rate is something which you should look at 
economically first and then decide whether it is politically 
acceptable.
    Mr. RANGEL. Well, since our economy is so much larger, I 
gather that you don't really think that the different sizes of 
our economy makes any difference as it relates to what the 
corporate structure looks like. But it would help me if, 
without going through it now and taking the committee's time, 
if you could tell me the percentage that your country receives 
from individual tax rates and the percentage it receives from 
corporate tax rates and whether or not there is a VAT or some 
other type of tax.
    I assume you have a very high individual tax and low 
corporate tax, is that correct?
    Mr. THOMAS. In Japan, the individual income tax yields 
about 13.5 trillion yen, the corporate tax about 7.8 trillion 
yen, and the consumption tax about 10 trillion yen in total.
    Mr. RANGEL. Thank you, Mr. Chairman.
    Mr. TIBERI. Thank you.
    Mr. Berg is recognized.
    Mr. BERG. Thank you, Mr. Chairman.
    Thank you for being here.
    You know, I am interested in really the public perception, 
the dynamics that went into the tax reform change. And so, what 
was the public perception of your tax system before you did the 
reform?
    Mr. Thomas.
    Mr. THOMAS. The Japanese public perception of the tax 
system? I think that they feel that the income tax rates are 
high. I think it is fair to say the consumption tax is not the 
most popular tax, but they have become quite accustomed to it. 
And it is now, in Japan, required that the consumption tax be 
used to pay for national pension and health care for the 
elderly and senior care.
    It is hard to say what the Japanese public thinks about the 
corporate tax. But Japan has had a very international-minded 
business community, and I think the Japanese public supports 
the Japanese companies' need to be able to compete effectively 
worldwide. And so, my sense is that they have a favorable view 
of the recent changes that have been made.
    Mr. BERG. Thank you.
    Mr. Schoon.
    Mr. SCHOON. Well, the Netherlands, you know, as indicated 
earlier, the Netherlands did not go through tax reform to get 
to a territorial system because we have had that for a very 
long time. So it is engrained in the Dutch tax system, so that 
discussion did not take place in the last years.
    Mr. BERG. And maybe what I am asking you is just the public 
perception now, then, of your tax system. You know, the average 
person, where are they at on it?
    Mr. SCHOON. I think that, most times, the average person 
would think his own tax burden too high. Similar, yeah. But, 
overall, it is also a factor of the level of service that you 
get back for the taxes that you ultimately pay.
    Mr. EDGE. The sort of issues we have been talking about 
today don't really translate terribly well into the popular 
press. How much tax banks should pay and how much tax bankers 
should pay is very much in the headlines, and the answer is a 
great deal.
    If you were asking what the man in the street thinks about 
it, then I would say they react more to the notion of a well-
known British name coming under foreign control and the 
implications that that then has on jobs than they do about what 
sort of corporate tax system we should have for multinationals.
    But there is, nevertheless, a movement within the U.K., the 
U.K. Uncut system, which you have had, I think, some semblances 
of here, which looks at multinationals and it assumes if 
multinationals paid more tax, there would be less government 
cuts. But that is the only manifestation we have seen of a 
debate about the issues we have been talking about here in the 
popular sector.
    Mr. BERG. Thank you.
    Mr. MENGER. Yes, the German corporate system, corporate tax 
system, changed in the early turn of the century. The average 
man on the street doesn't really look into what the corporate 
tax issues are, is looking more at its own tax. And referring 
to what Frank already said, the tax is too high and it is too 
complicated with regard to individual taxation.
    Mr. BERG. Thank you.
    I will yield back, Mr. Chairman.
    Mr. TIBERI. Thank you.
    Mr. Pascrell is recognized.
    Mr. PASCRELL. Thank you, Mr. Chairman.
    I want to thank the panel.
    I believe we come out of this, or at this, from two 
different perspectives, and that is very unfortunate. One 
picture is--and I will tell you, that is the approach I take to 
everything--income inequality; and your approach seems to be 
corporate disincentives. While one is not correct and the other 
incorrect, that is the way, you know, we approach this issue.
    I have to respond, Mr. Chairman, to our gentlelady friend 
from Kansas who made some comments about corporate taxes, taxes 
on corporate income. Absolutely incorrect.
    Mr. Avi-Yonah, correct me if I am wrong. It would seem, 
looking at the chart, of all of the countries that we trade 
with, major, major companies, 25 companies, that we have the 
lowest--that we have the lowest--taxes on a corporate income of 
any of those countries.
    Mr. AVI-YONAH. As a percentage of revenue, that is correct.
    Mr. PASCRELL. As a percentage of GDP.
    Mr. AVI-YONAH. Yes.
    Mr. PASCRELL. And that is because many of us are talking 
about, not the marginal rate, which we like to refer to but 
doesn't take into consideration the different deductions in 
each of the countries, which is the effective tax rate.
    Mr. AVI-YONAH. Right.
    Mr. PASCRELL. So I want to correct the record, Mr. 
Chairman. And I will stand corrected if I am wrong. I think 
that this is a very important point, and I bring this up for 
everyone's review. Looking at all of our trade partners, we do 
not do very well. Or, rather--no, let's make a correction--we 
do do very well when we talk about the effective rate.
    Now, I want to ask these questions.
    Mr. Avi-Yonah, when we are shifting money out of the United 
States of America, that means that the filers here in this 
country, those people who file income taxes, pay more money in 
their taxes--must pay more money in their taxes to make up for 
the loss of revenue. Is or is not that correct?
    Mr. AVI-YONAH. The government faces a certain amount of 
revenue that it has to raise every year. And to the extent that 
it under-collects from a certain sector, then it has to 
compensate. So I think that is correct.
    Mr. PASCRELL. Gentlemen, don't you blame me for being 
concerned, or fault me for being concerned, that in New Jersey, 
the State that I am from, that State and the State of Delaware 
pay a lot more in taxes on individual filers because of this 
situation. In New Jersey, income tax filers pay $752 more in 
taxes because of a system which I don't know whether we are 
advocating today or we are simply--the fault is not in the 
folks that represent companies that are in other countries. You 
are not the problem. We are the problem, we are the problem, in 
the direction and within the context that we are talking about.
    And how is this paid for? This is paid for by those folks 
who do pay taxes in this country. And it particularly hurts New 
Jersey, which is the second worst in the entire Nation. I think 
we need to take a look at this. We need to look at this very, 
very, very carefully. When you look at what taxes are paid in 
the Netherlands or in Germany or in Japan, then you start to 
put things into context.
    And I want to ask you this question, Mr. Schoon. How does 
your VAT work on an everyday commerce situation in the 
Netherlands? How does that work? Tell us.
    Mr. SCHOON. The VAT is a tax that is levied in every chain 
of a supply chain or a production chain to the ultimate 
customer, where, in every step of the chain, the input VAT can 
be deducted. So that, in essence, only the value added will be 
taxed, and, in essence, it will be paid ultimately by the 
consumer, by the end consumer.
    Mr. PASCRELL. Now, we don't have a value-added tax in the 
United States, do we?
    Mr. SCHOON. No, you don't.
    Mr. PASCRELL. We do not. You know our economic situation in 
terms of our trade, our imbalances. Would you recommend that we 
take a look at a VAT in this country?
    Mr. SCHOON. I would think there is nothing wrong at looking 
at any other tax, including VAT.
    Mr. PASCRELL. Thank you, Mr. Chairman.
    Mr. TIBERI. Thank you.
    To conclude today's questioning, Mrs. Black is recognized.
    Mrs. BLACK. Thank you, Mr. Chairman.
    I thank all the panel members. I know it has been a long 
day for you. I sure appreciate your being here.
    Given that all of the G7 countries have adopted a 
territorial tax system, do you think that the United States 
companies will have more difficulty competing in the global 
marketplace if we continue to use the current worldwide tax 
system? And this would be for all the panelists.
    Mr. THOMAS. Yes, I do. I believe that the world has 
changed, and unless the United States changes with it, U.S. 
companies will become less competitive.
    Mrs. BLACK. Mr. Schoon.
    Mr. SCHOON. Again, I cannot judge the U.S. side, as there 
are so many elements that play a role here. But, again, the 
Dutch experience was positive.
    Mrs. BLACK. Thank you.
    Mr. Edge.
    Mr. EDGE. Tax is not the only or driving factor. It is not 
the predominant reason why people do things. But it is a swing 
factor. And the fact that other jurisdictions have gone in that 
direction tells you something. Having said which, I believe 
U.S. companies compete pretty well at present in the arena that 
I am in. But having gone through the U.K. process, I am a big, 
big advocate of a territorial system.
    Mrs. BLACK. Thank you.
    Mr. MENGER. Germany didn't change the system, but I 
believe, from comparing the two systems and being in Germany 
and in the United States, the territorial system is easier to 
deal with and should have less conflicts between taxpayer and 
the tax authorities.
    Mrs. BLACK. Mr. Avi-Yonah?
    Mr. AVI-YONAH. As I said before, I don't think 
territoriality, as narrowly defined here, has anything to do 
with the competitiveness of U.S. multinationals.
    Mrs. BLACK. Thank you.
    I yield back.
    Mr. TIBERI. I first want to thank the panel not only for 
your insight today but your concise, clear answers. Frankly, a 
number of Members had two and three rounds of questions with 
each member of the panel; that is very rare. So commend you 
very much, both for the knowledge you imparted but also for the 
answers that you provided us.
    And, also, I would say, Mr. Thomas, looking at the relative 
compactness of the Japanese Tax Code, I don't know whether to 
be inspired or depressed. Either way, we have some work to do.
    With that, this meeting is adjourned.
    [Whereupon, at 4:50 p.m., the committee was adjourned.]
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           Asian American Hotel Owners Association, Statement







                                 
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