[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]


        TAX REFORM: TAX HAVENS, BASE EROSION AND PROFIT-SHIFTING

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

                                  HEARING

                                BEFORE THE

                      COMMITTEE ON WAYS AND MEANS

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 13, 2013

                               __________

                          Serial No. 113-FC09

                               __________

         Printed for the use of the Committee on Ways and Means
         
         
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                      COMMITTEE ON WAYS AND MEANS

                     DAVE CAMP, Michigan, Chairman

SAM JOHNSON, Texas                   SANDER M. LEVIN, Michigan
KEVIN BRADY, Texas                   CHARLES B. RANGEL, New York
PAUL RYAN, Wisconsin                 JIM MCDERMOTT, Washington
DEVIN NUNES, California              JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio              RICHARD E. NEAL, Massachusetts
DAVID G. REICHERT, Washington        XAVIER BECERRA, California
CHARLES W. BOUSTANY, JR., Louisiana  LLOYD DOGGETT, Texas
PETER J. ROSKAM, Illinois            MIKE THOMPSON, California
JIM GERLACH, Pennsylvania            JOHN B. LARSON, Connecticut
TOM PRICE, Georgia                   EARL BLUMENAUER, Oregon
VERN BUCHANAN, Florida               RON KIND, Wisconsin
ADRIAN SMITH, Nebraska               BILL PASCRELL, JR., New Jersey
AARON SCHOCK, Illinois               JOSEPH CROWLEY, New York
LYNN JENKINS, Kansas                 ALLYSON SCHWARTZ, Pennsylvania
ERIK PAULSEN, Minnesota              DANNY DAVIS, Illinois
KENNY MARCHANT, Texas                LINDA SANCHEZ, California
DIANE BLACK, Tennessee
TOM REED, New York
TODD YOUNG, Indiana
MIKE KELLY, Pennsylvania
TIM GRIFFIN, Arkansas
JIM RENACCI, Ohio

        Jennifer M. Safavian, Staff Director and General Counsel

                  Janice Mays, Minority Chief Counsel


                            C O N T E N T S

                               __________
                                                                   Page

Advisory of June 13, 2013 announcing the hearing.................     2

                               WITNESSES

Mr. Edward Kleinbard, Professor of Law, University of Southern 
  California Gould School of Law.................................    16
Mr. Paul Oosterhuis, Partner, Skadden Arps Slate Meager & Flom 
  LLP............................................................    38
Mr. Pascal Saint-Amans, Director, Centre for Tax Policy and 
  Administration, Organisation for Economic Co-operation and 
  Development (OECD).............................................     7

 
        TAX REFORM: TAX HAVENS, BASE EROSION AND PROFIT-SHIFTING

                              ----------                              


                        THURSDAY, JUNE 13, 2013

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10 a.m., in Room 
1100, Longworth House Office Building, the Honorable Dave Camp 
[Chairman of the Committee] presiding.
    [The advisory announcing the hearing follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Chairman CAMP. Good morning. The committee will come to 
order. Thank you all for being here.
    On October 26, 2011, as part of its overall approach to 
comprehensive tax reform that lowers rates and broadens the 
base, this committee released a discussion draft aimed at 
modernizing our outdated international tax rules. The draft 
included a structure that would allow the U.S. to move from a 
worldwide taxation system to a participation exemption system 
similar to that used by almost all of our major trading 
partners.
    In the interest of transparency, we made a specific 
request. We actively sought feedback from stakeholders, 
taxpayers, practitioners, economists, and members of the 
general public in how to improve the draft proposal. Since then 
we have heard from a wide range of practitioners and worldwide 
American companies. Nearly all have offered a universal 
observation: Having the highest corporate rate in the developed 
world, along with an outdated international tax system, is a 
barrier to success that leaves our country falling further 
behind our foreign competitors.
    Academics and economists agreed and also cautioned that any 
solution to these challenges must protect against erosion of 
the U.S. tax base through the shifting of profits to low-tax 
jurisdictions. Their concern is not without merit. Oftentimes 
multinational businesses reduce their tax liability by 
separating the jurisdiction in which income is booked for tax 
purposes from the jurisdiction in which the economic activity 
occurs. The result of these practices is erosion of the tax 
base in a jurisdiction where the activity takes place.
    We have all heard and read about these practices. As we 
will hear today, the commentary on these practices varies 
greatly. As policymakers engaged in the tax reform debate, it 
is clear that there is no perfect system for taxing corporate 
income. But it is also important to bear in mind that these 
activities are fundamentally the consequences of bad laws and 
not necessarily bad companies.
    In my mind, the fact that the current Tax Code allows 
companies to achieve these tax results strengthens the case for 
comprehensive tax reform. Whether a country has a hybrid system 
similar to the current United States' worldwide system or a 
dividend exemption system like that of our major trading 
partners, it is important to develop strong base erosion rules 
that protect against aggressive transfer pricing, migration of 
intangible property overseas, and foreign earning stripping.
    Let me just say that it is important to remember that the 
most effective anti-base erosion rule is a lower corporate tax 
rate. But unfortunately, while a lower rate is necessary, the 
rate alone is not sufficient.
    Mindful of the need to develop meaningful protections of 
the U.S. tax base, the international tax reform discussion 
draft included three options to mitigate U.S. base erosion. 
Although the merits of each option remain open for debate, 
option C, the carrot and stick proposal, received, and 
continues to receive, the most support from the business 
community, and our close work with the staff of the Joint 
Committee on Taxation leads us to believe it is an effective 
safeguard.
    Under option C, all foreign income attributable to 
intangibles, whether or not owned by the U.S. parent or foreign 
subsidiary, would be taxed by the United States at a 
substantially lower rate of 15 percent, minus any credits for 
foreign taxes paid on the same income. This approach provides a 
deduction for income related to intangibles kept in the United 
States--the carrot--and an immediate inclusion for income 
related to intangibles held abroad--the stick. In other words, 
companies would feel less pressure to shift income to low-tax 
jurisdictions because that income would be taxed at the same 
rate, whether it is earned in the United States or Bermuda.
    The results of this approach would be that moving 
intangibles to tax havens would have little or no appeal, since 
the income earned from those intangibles obviously would be 
taxed at the same rate, regardless of location. In fact, some 
companies have said that intangibles which have already been 
moved to tax havens under our current system could actually be 
moved back to the United States because there would not be any 
tax advantage to owning them abroad.
    The U.S. is not the only country concerned about base 
erosion. We will hear testimony today from the OECD about its 
base erosion and profit shifting report. As noted in the 
report, every jurisdiction is free to set up its corporate tax 
system as it chooses; however, the OECD's attention to this 
issue underscores that concerns about base erosion exist 
globally and must be considered as solutions are developed that 
are unique to each country's tax system.
    As I said at the outset, there is no perfect solution, and 
all systems have problems with base erosion. Our task is to 
develop a system that is more in tune with the global 
marketplace, and that will allow domestic companies to prosper 
while simultaneously protecting the U.S. tax base. 
Comprehensive tax reform that includes a more modernized system 
of international taxation, coupled with a lower rate, can 
create the climate necessary for those companies to prosper, 
invest and hire here at home.
    I will now recognize Ranking Member Levin for his opening 
statement.
    Mr. LEVIN. Thank you very much.
    Good morning, and thank all of you, the three of you, for 
coming to testify today on this important subject.
    I am glad we are looking at the issue of international 
taxation today. I believe it highlights the need for tax reform 
to be about so much more than just lower rates or labels like 
``worldwide'' and ``territorial.'' We live in a global economy. 
That is not going to change. There have been and will continue 
to be major benefits from globalization, which has occurred 
more rapidly in recent decades than in all previous ones 
combined. It has been furthered by dramatic new technologies 
that quickly spread beyond national borders.
    But globalization often can spread its benefits in very 
uneven and sometimes harmful patterns. Indeed, it presents 
increasing challenges to tax policies. And that is why we are 
here today, that is what we must confront, and it is the crux 
of what we are discussing, as I said, here today.
    Entities that truly have a home base in our Nation and 
experienced many benefits and advantages as a result are using 
their presence, or their pro forma presence, in other places to 
lower their tax bills. Often the effect is so dramatic that it 
is difficult for the average taxpayer to believe that such tax 
avoidance is legal. The fact that it is, and is widespread, 
only highlights the urgent need to confront it.
    That truth was on vivid display last month when the Senate 
Permanent Subcommittee on Investigations revealed the complex 
structures and intergroup transactions that some multinational 
corporations employ in order to shift profits offshore in an 
effort to avoid U.S. taxes. The investigation illustrated how 
Apple's international tax planning techniques have enabled that 
tax giant to dramatically lower its tax bill. One example 
showed how an Irish entity, established by Apple, Inc., 
received tens of billions of dollars of income with no tax 
residence, and as a result paid no taxes. Other major 
corporations like Microsoft, HP, and Google have also been 
shown to use legal tax-avoidance techniques to shift income 
overseas to lower their U.S. tax liability.
    But as we will hear today, the problem is not isolated to 
the U.S. Jurisdictions throughout the world, particularly 
European Union member nations, are realizing that companies are 
engaging in complicated structures that often have no economic 
value or substance simply to avoid taxes. The response is anger 
from businesses that compete to citizens who are facing deep 
cuts in important government programs.
    The challenge of ending massive tax avoidance must be at 
the forefront of any tax-reform effort worth its salt. I 
believe that will be confirmed by today's testimony. No country 
can compete with a zero percent tax rate. Any tax reform must 
end the use of loopholes and base-erosion techniques, including 
addressing how to curtail the shifting of jobs and profits 
offshore.
    Our current Tax Code creates incentives for multinational 
enterprises to shift money overseas, and with that money goes 
jobs. The days of so-called stateless income and double 
nontaxation must end. We cannot participate in a global race to 
the bottom that results in taxing jurisdictions being the big 
losers. Our Tax Code must not only promote American 
competitiveness at home and abroad, it must also promote 
domestic job creation that strengthens economic security for 
workers and businesses here in the U.S. Reform of our 
international tax rules cannot be done on the backs of small 
businesses, domestic companies, and individual taxpayers.
    So all of us on this side and, I think, throughout the 
committee look forward to hearing from the witnesses and 
learning more about your ideas to reform this area of the law. 
All of us appreciate the time and resources you have spent to 
help inform this committee on this complex and sometimes opaque 
area of the tax law. This discussion is an important step in 
reforming our international tax system.
    Thank you.
    Chairman CAMP. Thank you, Mr. Levin.
    Now it is my pleasure to welcome our panel of experts, all 
of whom bring a wealth of experience from a variety of 
perspectives. Their experience and insights will be very 
helpful as our committee considers the impact of Federal tax 
reform on tax havens, base erosion, and profit shifting.
    First, I would like to welcome Pascal Saint-Amans, Director 
of the Centre for Tax Policy and Administration at the 
Organisation for Economic Co-operation and Development based in 
Paris, France. Second, we will hear from Edward Kleinbard, 
professor of law at the University of Southern California Gould 
School of Law in Los Angeles, California, and a former chief of 
staff at the Joint Committee on Taxation. Welcome back to the 
committee, Professor Kleinbard. And finally, we will hear from 
Paul Oosterhuis, a partner at Skadden Arps Slate Meager & Flom 
here in Washington, D.C., and a widely recognized authority on 
international tax issues. We welcome you back to the committee 
as well.
    Thank you all, again, for being with us today. The 
committee has received each of your written statements, and 
they will be made a part of the formal hearing record. Each of 
you will be recognized for 5 minutes for your oral remarks.
    Mr. Saint-Amans, we will begin with you. You are recognized 
for 5 minutes.

 STATEMENT OF MR. PASCAL SAINT-AMANS, DIRECTOR, CENTRE FOR TAX 
    POLICY AND ADMINISTRATION, ORGANISATION FOR ECONOMIC CO-
                OPERATION AND DEVELOPMENT (OECD)

    Mr. SAINT-AMANS. Thank you, Chairman. It is an honor to 
testify here today as the Director for Tax Policy at the OECD, 
which is an international organization--the U.S. is a permanent 
member of this organization--which includes 34 members overall.
    Tax work at the OECD focuses primarily on eliminating 
double taxation. As you know, when you have cross-border 
investments, they can be taxed at source, in the country where 
the operations are taking place, but also at residence, where 
the headquarters of the international company is based. As a 
result you may have tax at source and at residence. And this is 
no good for cross-border investments, which all countries need 
in a free trade environment to foster growth and to foster 
jobs. And for the case, we have been working on eliminating 
double taxation by providing a Model Tax Convention on which 
countries draw when they negotiate bilateral treaties, as the 
U.S. is doing.
    We also do some economic analysis. And we recently issued 
reports, trying to see what are the merits or the lack of 
merits of different taxes. And the corporate income tax is not 
a progrowth tax. What has been recommended from this analysis 
is that lowering the rates and broadening the base would be 
more favorable to growth than having very high rates. We must 
recognize that the U.S. now--after Japan's recent move to lower 
the rate--the U.S. has the highest rate for corporate income 
tax in the OECD, which is 35 percent, not taking into account 
the local rates, the State rates.
    What has happened over the past few years, I would say 3 to 
4 years, is a growing concern in all OECD countries--and this 
goes beyond OECD countries to include what we call the BRISC--
Brazil, Russia, India, South Africa, China, and some others--
about what we now call base erosion and profit shifting. That 
is why the OECD was asked by its member countries to launch 
this project on BEPS to put an end to what countries identify 
as double nontaxation.
    We have moved from removing double taxation to an 
environment where the international rules, articulated with 
domestic legislations, might result in growing double 
nontaxation, as, Chairman, you have just explained. The OECD 
has been asked to look at the reasons why we have come to that 
situation.
    These concerns, of course, have been growing because of the 
crisis--the financial crisis turning into a fiscal crisis, 
turning into a political crisis, in some countries a social 
crisis--with the growing awareness that there is an issue with 
domestic companies not exposed to international transactions 
paying an effective tax rate which is close to the statutory 
tax rate, while some other companies exposed to international 
transactions can reduce their effective tax burden to very low 
rates. I mean, a 3, 4, 5 percent effective tax rate for a 
number of companies. And this is a global issue. It is not a 
U.S. issue as it is portrayed by some in Europe, for instance; 
it is something that you find in all countries, including in 
European countries.
    The OECD project is about trying to put all the countries 
together to try to identify what type of solutions can be 
brought to this global issue. The solutions are not about any 
kind of harmonization, because the world is made of tax 
sovereignties, and every country decides on its own 
sovereignty. But countries cannot ignore the spillover effects 
of what they are doing, or a single country cannot address the 
whole issue. Otherwise it would put its own businesses at a 
competitive disadvantage. I think that can be the value added 
of the OECD, to make sure that all countries know what the 
others are doing and may benefit from best practices. And this 
is why we have issued this report, which is annexed to my 
written testimony, which is a report on base erosion and profit 
shifting, which was issued in February.
    Since February, we have developed an action plan, which 
will be ready and published in July and then reported to the 
G20 Finance Ministers on the 20th of July when they meet. And 
in the action plan we consider a number of areas where actions 
could be taken, meaning developing some guidelines or some 
models, as the OECD does, letting, of course, the countries 
decide whether they want to draw on that or not. Within the 
actions there will be something on controlled foreign 
companies, which is what you are trying to address in the 
draft.
    So I will be very happy to answer any questions you may 
have on this action plan. Thank you, Chairman.
    Chairman CAMP. Thank you.
    [The prepared statement of Mr. Saint-Amans follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman CAMP. Second, we will hear from Edward Kleinbard, 
professor of law at the University of Southern California. We 
certainly look forward to hearing your testimony, Mr. 
Kleinbard. You have 5 minutes.

STATEMENT OF MR. EDWARD KLEINBARD, PROFESSOR OF LAW, UNIVERSITY 
           OF SOUTHERN CALIFORNIA GOULD SCHOOL OF LAW

    Mr. KLEINBARD. Thank you.
    Chairman Camp, Ranking Member Levin, distinguished Members, 
multinational firms today engage in large-scale base erosion 
and profit shifting, what I call the generation of stateless 
income. This committee's international discussion draft was 
sensitive to the problems posed by stateless income strategies, 
and this hearing demonstrates your interest in protecting 
revenues from the spread of what might be called unprotected 
territoriality.
    But the problems have been underestimated, and stronger 
anti-abuse measures are required. For example, one recent study 
found that 54 percent of U.S. firms' foreign income is taxed at 
effective rates below 15 percent, and 37 percent of foreign 
income enjoys tax rates below 5 percent.
    My current research project, for example, looks at 
Starbucks, a classic bricks-and-mortar retail operation that 
deals directly with customers at thousands of locations around 
the world. Yet it appears that Starbucks has successfully 
reduced its foreign tax liabilities to surprisingly low levels. 
To put matters bluntly, if Starbucks can organize itself as a 
successful stateless income generator, any multinational firm 
can do so.
    The recent Senate PSI hearing focusing on Apple raises 
similar concerns. To me, the most remarkable aspect of the 
hearing was the baldness of Apple's tax planning. In effect, in 
1980, Apple created a shell company in Ireland, capitalized it, 
and executed a contract on behalf of itself and this subsidiary 
in which the subsidiary returned to Apple some of the capital 
ceded to it a moment before and thereby purportedly acquired 
ownership in all of Apple's intangible assets outside the 
Americas. My description obviously simplifies the facts, but 
captures the essence of the story.
    Now, no one likes the current international tax rules, but 
the debates about a replacement have been marred by some 
recurring myths and misunderstandings. I wish to address just 
one of these. Intuitively it seems sensible to argue that when 
our multinationals employ stateless income technologies to 
minimize their foreign tax liabilities, we should cheer rather 
than criticize, but this is false. In fact, that apparently 
foreign income often is U.S. income traveling incognito. What's 
more, the stream of tax-free foreign income encourages U.S. 
firms to engage in tax arbitrage by leaving all their global 
interest expense in the U.S. parent, where it reduces wholly 
domestic taxable income.
    Further, the prospect of stateless income distorts 
investment decisions by offering U.S. firms the possibility of 
realizing supersized returns on their foreign investments; what 
I call tax rents. And finally, promoting our national champions 
to avoid other countries' taxes leads to the mirror-image 
response from those other countries and a ``beggar thy 
neighbor'' race to the bottom, where multinational firms are 
the only winners and every taxing jurisdiction the loser.
    While I applaud the committee's inclusion of antiabuse 
rules in its discussion draft, I am concerned that none of 
them, including option C, will work very well or be 
administrable. What then should we do? Many recommend a 
territorial system with some form of antiabuse constraints, 
what we now call the hybrid system, but I believe there is a 
simpler alternative that is more resistant to tax gaming; that, 
in fact, is competitive; and it makes economic sense: genuine 
worldwide tax consolidation, just as we do for financial 
statement purposes, combined with a corporate tax rate squarely 
in the middle of the pack, let us say 25 percent.
    This idea is less wacky than you might think. The economic 
effects of worldwide consolidation are basically the same as 
the territorial tax, with a 25 percent worldwide minimum tax as 
an antiabuse measure. True worldwide consolidation is 
competitive with the tax environments that foreign and domestic 
firms face in the countries in which they actually do business. 
By contrast, current law or, alternatively, unprotected 
territoriality heavily subsidizes foreign investment at the 
expense of our own domestic economy.
    Finally, every U.S. multinational firm should be required 
immediately to publish a worldwide disclosure matrix of its 
actual tax burdens by jurisdiction. Tax transparency rules are 
not a substitute for substantive international tax reform, but 
they would enable tax authorities to identify patterns of 
possibly inappropriate income shifting, thereby making better 
use of limited audit resources. A transparency principle also 
would awaken the public to the massive amounts of international 
tax avoidance today known only to specialists.
    Thank you, Mr. Chairman.
    Chairman CAMP. Well, thank you very much, Mr. Kleinbard.
    [The prepared statement of Mr. Kleinbard follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman CAMP. Mr. Oosterhuis, you are recognized for 5 
minutes.

 STATEMENT OF MR. PAUL OOSTERHUIS, PARTNER, SKADDEN ARPS SLATE 
                       MEAGER & FLOM LLP

    Mr. OOSTERHUIS. Thank you. I appreciate the opportunity to 
be here. We have had a lot of catchy phrases and indeed some 
fairly boisterous hearings on both sides of the Atlantic on 
this issue over the last several months, and it is indeed 
welcome to have a more considered debate and discussion of a 
topic that is very difficult and very important.
    We are building in tax reform a set of rules that we hope 
will be enacted this year or next year that will replace rules 
enacted in 1986 that lived for 27, 28 years, and they replaced 
rules that were enacted in 1962 that lived for 24 years before 
they were revised. So we are planning for the very long run. 
That means, to my mind, we have to be very careful what we do, 
because we can cause long-run distortions in the economy in our 
effort to try to fix current short-term distortions in 
international taxation when you are planning something for the 
run.
    Income taxes are, for most successful companies that are 
multinationals, probably the largest single non-cost-of-goods 
expense that they have. It is not at all surprising that they 
devote substantial resources to minimizing that tax globally in 
the interest of their shareholders. They ought to do that.
    We operate and other countries operate under a system of 
what we call arm's-length pricing. That rewards activities, 
yes, and it rewards financial risk, financial investments, 
financial costs. For example, R&D is a major product 
development cost; if you are bearing the risk of that cost in a 
particular jurisdiction under those principles, that 
jurisdiction deserves a reward if you are successful.
    We have talked today about many successful companies in the 
other hearings' focus on Apple and Google. We don't see much 
attention spent on Wang or on Cullinet Software--my first 
software company that died; it was a great company back in the 
1980s--or Atari, or even AOL, or other companies who may well 
have used these strategies, but had them backfire on them 
because they book costs in low-tax jurisdictions, where the 
deduction wasn't worth very much, rather than booking them in 
high-tax jurisdictions, where their losses at least could be 
bought by somebody else.
    Governments are joint venture partners of multinational 
companies. Governments imposing income taxes are joint venture 
partners with companies. And companies obviously, if they think 
they are going to be successful, prefer to have a joint venture 
partner that is going to take a small share of the profits and 
a small share of the losses. Companies prefer to move their 
investments and, to the extent they need to, their economic 
activities to lower-tax jurisdictions rather than high-tax 
jurisdictions. There is nothing surprising about that than 
under present law. There is nothing evil about that under 
present law.
    The other feature of present law is that arm's-length 
pricing is not a science. You don't have a determination of a 
single price that is the right price. Arm's-length pricing is a 
range, and in many cases it is a very broad range. (If I had 
time, I would tell you a few stories from practice about how 
broad that range can be, even when it is countries like the 
U.S. and the U.K. trying to decide the right price.) And when 
there is a broad range of reasonable prices, it is not 
surprising that the companies bias their transfer pricing so 
that the favorable side of the range would end up in a low-tax 
country and the unfavorable side in high-tax countries. And 
that is true whether the company is based in the U.K., or the 
U.S., or France, or Japan or anywhere else in the world. It is 
a natural outgrowth of the system that we have had for the last 
40 years.
    As income has become more a function of valuable 
intangibles and not bricks and mortar and equipment, as the 
kinds of products that get high value have low transportation 
costs--pills, software, things like that--this international 
tax planning has grown, and that is why we see numbers that 
have grown so much over the last few years.
    The pendulum, in my judgment, is at its peak. Governments 
are now waking up to the extent of taxplanning. The IRS woke up 
to it a few years ago and established a new unit in LB&I to 
centralize and expand their transfer pricing enforcement, and I 
think that, from a government's perspective, holds substantial 
promise. Other countries are now starting to do the same thing. 
They may be a little behind the IRS, but they are starting to 
do the same thing.
    So we shouldn't just look at the pendulum at its peak, we 
should look at the longer run, because we are talking about a 
system that we want to enact and to last for 25 years.
    With that, I would be glad to take any questions.
    Chairman CAMP. Thank you very much.
    [The prepared statement of Mr. Oosterhuis follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman CAMP. Mr. Saint-Amans, a couple of times in your 
testimony, you mentioned that the base erosion by 
multinationals could actually place small businesses and other 
purely domestic companies at a disadvantage. Could you just 
expand on that a bit for the committee, please?
    Mr. SAINT-AMANS. Thank you, Chairman.
    Indeed, when you look at the effective tax rates of 
companies, which is the effective tax burden that they face, it 
looks like in most of the countries, if not all the countries, 
the multinationals, which are exposed to international 
transactions and therefore can play with the different gaps 
which are there through transfer pricing rules, tax rules, and 
domestic legislation, they are exposed to a much lower 
effective tax rate than domestic companies which cannot benefit 
from these international instruments, and therefore this gap is 
quite significant, putting domestic businesses at a competitive 
disadvantage. And this is a distortion which is not good from 
an economic perspective.
    Chairman CAMP. Thank you.
    Mr. Oosterhuis, is there something unique to the United 
States? Because unlike many other countries, we have such a 
large segment of our economy in intellectual property. Is there 
something about that--and intangibles--that makes this a more 
important issue for us than for some other countries?
    Mr. OOSTERHUIS. Yes, and I think it makes it a more 
difficult issue. Why Google and Apple and Microsoft are all 
U.S. companies, I can't tell you. I am delighted that they are. 
But I can tell you that their competition is not just domestic. 
Apple's main competitor is Samsung. HP has huge competitors in 
companies like Lenovo and Canon. Our pharmaceutical companies' 
main competitors are companies like Novartis and Glaxo. Even in 
the consumer products, Procter & Gamble, one of their main 
competitors is Unilever; Mars is Nestle.
    So we are dealing with a lot of U.S. companies that are 
successful, but a lot of their main competitors are foreign. 
They operate under territorial systems, and they have 
governments that see them as champions. For whatever reason, we 
don't see our multinationals as champion in the same way that 
the U.K. sees Glaxo, or that Switzerland sees Nestle, or that 
China sees Lenovo. Why that is, I am not sure. But I think we 
need to be careful when we do things to our multinationals that 
are quite different than what their competitors are having done 
by their home countries.
    Chairman CAMP. And you have also observed that option C in 
this chairman's discussion draft that has been out there 
approaches neutrality between the development and manufacture 
of products in the U.S. and those activities that take place 
abroad.
    Now, can you explain how you think that is the case and 
what kind of behavorial responses we might expect to see from 
companies if option C were actually enacted into law?
    Mr. OOSTERHUIS. Sure. The advantages of option C, to my 
mind, start from the fundamental point that they differentiate 
products sold into foreign markets from products sold into the 
U.S. market. To the extent we worry about base erosion, to my 
mind, in a territorial world it is largely a concern with 
respect to products being sold in the U.S. market. That is 
where there could be incremental base erosion in a territorial 
system, and, from a revenue point of view, you really have to 
worry about that.
    If you are going to do something like Camp C for products 
sold back to the U.S. and tax foreign affiliates on that income 
at normal rates, which is what Camp C does for the IP profit, 
the intellectual property profit, you may need transition 
rules, and we can talk about that. But that will help any 
revenue hemorrhaging and will help any real base erosion of the 
U.S. tax base for U.S. products.
    For foreign products, it is quite a different situation, 
because for foreign products, in most of these businesses, they 
are consumer-facing businesses. And so the country where the 
products are consumed has a large right to tax that income. You 
will notice in Europe some of the outrage that has been raised 
lately, particularly in the U.K., has all been focused on 
inbound companies. Whether it is Starbucks or Google or Amazon, 
it is all inbound companies and their income in the market 
country.
    And what Camp C does is recognize that we have a much 
lesser right, if you will, to assert jurisdiction to collect 
revenue out of that income. And I think that is a very sensible 
distinction over the long run.
    The other thing that Camp C does through the ``carrots,'' 
as you described it in your opening statement, is to try to 
come closer to neutralizing where you locate your manufacturing 
plants and other similar activities. I think there is more than 
one way to do that, but I think the goal, while you are 
differentiating between products that are sold for foreign 
markets and products that are sold for the U.S. market, if you 
could try to do measures like Camp C does to neutralize where 
you manufacture those products, I think that would be an 
important goal. And that is what Camp C is trying to 
accomplish.
    Chairman CAMP. All right. Thank you.
    Mr. Levin is recognized.
    Mr. LEVIN. Thank you.
    And, again, welcome.
    I just wanted to say, Mr. Saint-Amans, I am glad you talked 
about effective tax rates, because when we look at the 
corporate tax rate, we really need to look at the effective 
rate as well as the other rate.
    And let me just say, Mr. Oosterhuis, we are proud of 
American corporations. I think we have as much pride as 
Europeans. And so, when we talk about tax policy and we talk 
about how our companies utilize them, it is not because we are 
not proud of them. It is because we very much want to have a 
tax system that makes sense for all of us. And I hope that 
isn't misunderstood.
    I am hopeful that we can have--this is such a useful 
hearing--a lot of discussion among the three of you. So I want 
to start off, and I will--so maybe we can get you talking with 
each other, maybe even arguing a bit. Because this is so 
important. So I am sure my colleagues will pick up and take 
other pieces of your testimony and have you comment on the 
others, because we don't do enough of that.
    So I want to read for you, Mr. Kleinbard, a sentence or two 
sentences from your testimony, Mr. Oosterhuis, and ask Mr. 
Kleinbard to comment. And then maybe one of my colleagues will 
ask you to comment on his comments, okay? Because I really want 
to understand it. I think this is critical to our getting at 
this important issue.
    So this is from the last page of your testimony.
    And, Mr. Kleinbard, I will read it to you, though you can 
see it in his testimony.
    Mr. Oosterhuis concludes, ``I would suggest that a 
corporation's place of residence or the location of its 
activities or how much foreign tax it pays are not likely to 
provide useful and certainly not complete''--it is modified a 
bit--``measures of profit shifting. A focus that is geared 
towards the location of sales and matching of income and 
expenses is far more likely to produce useful measures of, and 
thus productive solutions to, the issue of U.S. profit shifting 
and base erosion.''
    So I didn't tell you I was going to ask this, but, so we 
have lively discussion, if you would analyze that from your 
perspective. And don't pull any punches, okay?
    Mr. KLEINBARD. Unlike my usual practice. Okay.
    Chairman CAMP. He has never been known to do that.
    Mr. LEVIN. I know that. We know each other well. All of us 
know you.
    Mr. KLEINBARD. There is a lot bundled in those thoughts of 
Paul's.
    Let me begin by observing that there, at least in my view, 
is a fundamental conflict between the idea of looking to the 
place of sales on the one hand and the policy recommendations 
that are contained in Paul's testimony on the other.
    In my world view, we ought to end up with knock-down, drag-
out fights all the time between the country of residence and 
the country of what I call source, or the market country, where 
things are actually sold. That is not what we have today, and 
that is not, I think, what a world in which cost-sharing 
agreements are given primacy would lead to.
    Those lead, in fact, to a siphoning off of revenues neither 
to the home country nor to the source country. That is the 
point of the Apple hearing. It was not that income was being 
taxed where the sales were; income was being taxed nowhere. So 
there is a natural tension.
    The United States is a great generator of intellectual 
property, as Paul identified. And the United States may well 
want to consider carefully whether moving to a destination-
based tax system is net a revenue loser or a revenue gain for 
the United States.
    We are the largest single consumption base in the world, so 
we would pick up revenue from that perspective. We lose revenue 
from the other perspective, because we would treat sales from 
intellectual property developed in the United States to 
customers outside the United States as having no U.S. tax 
liability associated with it at all.
    So, to my way of thinking, there is this important tension 
between the sentiment and the actual recommendation. There is a 
very mixed message, I think, as to what is in the best 
interests of the United States.
    And, finally, we should not forget the fact that, although 
we have open capital markets, although we have an open economy, 
the fact is, the last time I looked at the statistics, 84 
percent of U.S. firms are owned by U.S. individuals, 
ultimately. And so there is an identity between U.S. firms and 
U.S. individuals that is not true in the U.K., for example, 
where the percentage is much, much lower.
    That is why I see taxing the U.S. firm on a worldwide basis 
as a pretty good substitute for taxing U.S. individuals on 
their share of the capital income thereby earned.
    Mr. LEVIN. Thank you.
    Chairman CAMP. All right. Thank you.
    Mr. Brady is recognized.
    Mr. BRADY. Thank you, Mr. Chairman.
    The testimony clearly reveals the need to fix this broken 
Tax Code and make America far more competitive, make our 
workers far more competitive around the world.
    Mr. Oosterhuis, I want to talk to you about a hybrid 
system. It seems like the current system we have today makes it 
difficult for when an American business competes around the 
world and wins, when they attempt to bring those profits home 
to reinvest in America, they oftentimes find themselves paying 
a huge premium to do that.
    My question is, should we move to a hybrid system, in 
effect, an investment-neutral system where companies that 
compete around the world and make profits, rather than have 
them stranded, that there would be a lower tax rate so they can 
reinvest in the U.S. R&D jobs, in manufacturing plants, in 
dividends that go to shareholders, middle-class families. That 
those are all positive things for the U.S. economy.
    Can you tell me how you view the current code, and would an 
investment-neutral-type system that would allow those stranded 
profits to flow back to the United States help make us more 
competitive?
    Mr. OOSTERHUIS. Sure, happy to.
    And you absolutely hit on the point that I think some of 
the base erosion profit split discussion has sidetracked us 
from keeping a focus on, is that the most broken part of the 
system as it is today is the fact that your non-U.S. earnings 
have to stay, if they are low-taxed, have to stay outside the 
United States and you can't bring them back. We need to 
eliminate the system that forces companies to leave their 
earnings offshore.
    Ed in his testimony mentions that in Apple's case it is not 
a problem because they can borrow $17 billion. Well, not every 
company is Apple, and, indeed, Apple wasn't Apple 10 years ago. 
Most companies don't have the flexibility to do that.
    I do transactions every day, I have two this week, with 
foreign companies and U.S. companies buying or selling assets. 
The most important question is, can I use my offshore cash to 
buy? And if I am going to sell, am I going to get those 
proceeds offshore or onshore?
    Because cash that is offshore for a U.S. company that would 
have a high tax cost to come back is a wasted asset. It doesn't 
help a company's profit-and-loss statement. You can't pay it 
out to your shareholders. You have to find some effective use 
for it, and that leads people to pay more for assets that they 
can buy if outside the United States. It distorts the economy. 
As foreign earnings have grown over the last 5 to 10 years, it 
has become a very large problem, and we need to fix that.
    However, hybrid the system needs to be in order to satisfy 
base-erosion concerns, that hybrid system will likely be better 
than what we have today with deferral, because the deferral 
system is really causing some serious problems.
    Mr. BRADY. So if we keep the current system worldwide, with 
a complicated set of provisions to try to offset some of that, 
do you think that problem continues to grow----
    Mr. OOSTERHUIS. Absolutely.
    Mr. BRADY [continuing]. And those investment decisions 
continue to be distorted in the future?
    Mr. OOSTERHUIS. Absolutely.
    Mr. BRADY. And then, right, a hybrid system could make us 
more competitive?
    Mr. OOSTERHUIS. A system that doesn't do what Ed proposes, 
in my judgment, which is tax U.S. multinationals at the full 
statutory rate on their global income, but is truly hybrid with 
has elements of a territorial system, can be real plus from a 
competitive perspective for our multinationals and can be 
designed in a way that minimizes some of the issues of base 
erosion and profit shifting that we are talking about today.
    Mr. BRADY. Well, it just seems to me, finishing up, 95 
percent of the world's consumers are outside the United States. 
We want our companies competing in every corner of the globe 
and winning. And we want them to have the ability to reinvest 
those dollars back in the United States for our jobs, for our 
research and development, for our manufacturing, in order for 
the economy to grow stronger. So I think that ought to be a 
focus of where real reform heads.
    Mr. Chairman, thank you.
    Chairman CAMP. Thank you.
    Mr. Rangel is recognized.
    Mr. RANGEL. Thank you, Mr. Chairman.
    And thank all of you for taking the time out to share your 
views with us.
    Mr. Kleinbard, you have a reputation of not pulling 
punches; everyone agreed on that. And, of course, the great job 
that you did for the Joint Committee was certainly bipartisan, 
so I expect that a lot of that bipartisanship will still be 
with you.
    When you find complete accord with everyone that has 
reviewed our present tax system that we have to eliminate 
unfair loopholes and broaden the base and reduce corporate 
taxes and to have our firms creating jobs here, and since we 
have known this and that objective appears to be bipartisan in 
nature, and even to the extent that the private sector, in 
terms of wanting to know how to plan, have advocated publicly 
that we should reform the system, why in the world do you find, 
regardless of which party is in charge, that there doesn't 
appear to be any sincere movement to make that a priority?
    Mr. KLEINBARD. Mr. Rangel, you are asking a political 
question, and the inner workings of the political system, 
despite my close study for many years, has always been a bit of 
a mystery to me.
    There ought to be movement. The current system is broken. 
The current international system is crazy. But more important 
to me and, frankly, one of the oddest things to me about much 
of the debate on corporate tax is that the domestic business 
tax system is broken.
    What we need in the United States is lower statutory rates, 
a broader base, as Mr. Saint-Amans explained, that reduces 
distortions. The goal should not be to help U.S. firms compete 
around the world. That is just a subsidy by another name. We 
finally learned after 100 years that trade subsidies don't 
work, and the same is true with tax subsidies.
    What we want is a robust, successful economy for the United 
States of America. And the way to get that is to improve the 
business tax system and to lower rates and broaden the base. We 
can't afford to lose revenue, in my view.
    Mr. RANGEL. Is your answer, Professor, that it is a mystery 
to you?
    Mr. KLEINBARD. It is a mystery to me as to why more 
progress has not yet been made, yes, sir.
    Mr. RANGEL. Does anyone else have any type of answer that 
you--because I am under the impression that the power of the 
multinationals that are enjoying this tremendous tax benefit is 
overwhelming and that people fear politically of interfering 
with these corporate desires.
    Does anyone have any views on that at all? And I hope I am 
wrong.
    Yes, sir?
    Mr. SAINT-AMANS. I am not sure I will respond exactly to 
your question, but I think what----
    Mr. RANGEL. No one else is, so----
    Mr. SAINT-AMANS [continuing]. Governments and businesses 
have in mind is to what we call leveling the playing field----
    Mr. RANGEL. Yes.
    Mr. SAINT-AMANS [continuing]. Making sure that companies 
from one country are not at a competitive disadvantage with the 
companies of other countries.
    Mr. RANGEL. That is the question, yes.
    Mr. SAINT-AMANS. And what has happened over the past 20 
years, I think, even though it is implicit, is that high-tax 
countries, at least in corporate income tax--and there the U.S. 
is a high-tax country for corporate income tax, as well as a 
number of European countries--they have kept the high tax 
probably for, I mean, visibility reasons, but they have 
organized a system where companies don't actually pay the 
statutory rate in many European countries, which are 
territorial systems, but still they----
    Mr. RANGEL. Okay. I am sorry to interrupt, but one would 
know, even if your assumption is correct, that is totally 
unfair to the companies that are paying the real tax rates. So 
that is an expansion of the degree of the problem.
    Mr. Oosterhuis, do you have any views on this?
    Mr. OOSTERHUIS. Well, the one thing I would say, Mr. 
Rangel, is that I think the multinational community is more 
ready to embrace tax reform, even if it involves some pain for 
them, than they have been in the last 20 years.
    Mr. RANGEL. They have said that.
    Mr. OOSTERHUIS. And I believe it, because I see what 
happens with CFOs, I see what happens in boardrooms and how the 
distortions of the current system is causing real problems for 
our multinationals.
    Mr. RANGEL. So you mean everyone is in agreement that we 
should do it, the corporate world----
    Mr. OOSTERHUIS. It is certainly not companies that are 
keeping reform from happening.
    Mr. RANGEL. And, politically, you can't think of any reason 
why we shouldn't do it.
    Mr. OOSTERHUIS. Agreed.
    Chairman CAMP. All right, time has expired.
    Mr. RANGEL. Thank you.
    Chairman CAMP. Mr. Tiberi is recognized.
    Mr. TIBERI. Mr. Oosterhuis, you mentioned some American 
worldwide companies and their competitors, mostly being foreign 
competitors. I constantly hear from CFOs of many of those 
companies that they have trapped cash abroad, whether they are 
selling diapers, widgets, cylinders. Is that a function of our 
U.S. tax system today?
    Mr. OOSTERHUIS. Absolutely. It is a function of the 
deferral system that requires foreign profits, which are taxed 
at a lower rate than the U.S.--and the U.S. has a very high 
rate relative to most countries--pay the U.S. incremental tax 
if they are distributed back to the U.S.
    So even your U.K. profits--we are not talking about Irish-
Dutch-sandwich-type profits--even U.K. profits that are taxed 
now at 23 percent, going down to 20 percent, with a 10 percent 
patent box, if a company brings those back, it has a huge tax 
cost. And it is not in your shareholders' interest that you 
bear that cost. Therefore, companies leave the money outside of 
the United States, and it is, in that sense, trapped. And that 
is an economic distortion.
    Mr. TIBERI. So if we went to a pure worldwide system--we 
don't have that today because of deferral--wouldn't that also 
disadvantage those companies, those American worldwide 
companies that are selling diapers abroad, widgets abroad, 
cylinders abroad?
    Mr. OOSTERHUIS. Going to a worldwide system, of current 
taxation of non-U.S. government, would be a huge gamble, 
because we would be risking the competitive life of our 
multinationals. No other country does it.
    Ed gave some of the foreign tax rates. When you look at the 
averages these days that are effective, it is more like 17 
percent. And so, even at a 25 percent U.S. rate, we would be 
subjecting our multinationals to a very large cost that their 
competitors, whether it is Samsung, Lenovo, Glaxo, Novartis, 
are not bearing. And their countries are not interested in 
forcing them to bear that cost.
    Mr. TIBERI. So theory might be great, but, on the world 
stage, reality is different. And our companies that are selling 
diapers, widgets, and cylinders face a much different reality, 
right?
    Mr. OOSTERHUIS. Correct.
    Mr. TIBERI. So if we want to be competitive, because having 
a worldwide company in my district or in Mr. Reichert's 
district or Mr. Ryan's district, obviously, the best jobs of 
the company are usually at the headquarters--I know that is 
true in Columbus, Ohio--I have been told by CFOs that our 
current system that we are under, where that trapped cash is 
abroad and competitors don't have that double taxation, that 
when you have a merger or an acquisition, even if it is in a 
U.S. multinational company acquiring a foreign company, that 
for shareholders it is actually to the benefit to invert or 
move the headquarters to that foreign jurisdiction, whether it 
be Ireland or Belgium or another----
    Mr. OOSTERHUIS. Right.
    Mr. TIBERI [continuing]. Low-cost jurisdiction that might 
have a different tax system. Do you see that?
    Mr. OOSTERHUIS. We see it fairly frequently. There are 
definitely transactions that are under consideration all the 
time involving U.S. companies and foreign companies combining. 
When you look at those transactions with our rules as they 
exist today, and even more so if we had Ed's proposed 
consolidated worldwide tax system, the only choice those 
companies have is for that resulting parent company to be a 
non-U.S. company. The difference in global tax liability of the 
complained company can be huge.
    Mr. TIBERI. So we are really today, in reality, not in 
theory, in reality, we are at a disadvantage.
    Mr. OOSTERHUIS. We are causing ourselves a disadvantage by 
the way our system works today. That is right.
    Mr. TIBERI. Do you believe the Camp draft now, on the 
international side, by lowering that rate, will stop that 
disadvantage and maybe even potentially turn some heads 
internationally that, hey, you know what, not only should we 
not move but maybe we should actually look at the United 
States?
    Mr. OOSTERHUIS. If you take the Camp proposal with option 
C, a variant of option C, you are certainly moving 
substantially in the right direction. Whether you get all the 
way there depends on the specifics of the base-erosion 
provision and some other aspects of it. But you would certainly 
move substantially in the right direction.
    Mr. TIBERI. Thank you.
    I yield back my time.
    Chairman CAMP. All right, thank you.
    Mr. McDermott.
    Mr. MCDERMOTT. Thank you, Mr. Chairman.
    I have been sitting on this committee listening to the fact 
that we need to reduce the tax rate to 25 percent on 
corporations, that that would make them competitive worldwide. 
And now today we come and we hear this. And it turns out that 
really what you want to do is bring back this so-called trapped 
capital back into this country.
    Now, unfortunately, I have had the experience of sitting on 
this committee for quite some time, and I was here in 2004 when 
we repatriated. Eight hundred and forty-three companies 
repatriated, $312 billion. They avoided $92 billion worth of 
taxes. Fifty-eight companies accounted for 70 percent of that. 
They saved $64 billion in taxes, and they laid off 600,000 
workers. They paid dividends, and they bought bad stock.
    Mr. MCDERMOTT. Now, I am trying to figure out, when you 
tell me that Apple and my local company, Starbucks, which we 
are kind of proud of in Seattle, and a few other places are 
doing quite well but they got this trapped money over there, 
who is it that benefits from this untrapping? And what are they 
going to do? What benefit will there be to America?
    Starbucks is doing pretty good right now. Apple is doing 
pretty good. All these companies are doing pretty good.
    Mr. OOSTERHUIS. I will start out, Ed.
    To my mind, it is largely their shareholders. I mean, I 
think with most companies----
    Mr. MCDERMOTT. Oh, so it is the shareholders.
    Mr. OOSTERHUIS. Yeah----
    Mr. MCDERMOTT. It is not the workers. It is not the----
    Mr. OOSTERHUIS. That is right.
    Mr. MCDERMOTT [continuing]. Economy of the country. It is 
only the shareholders. Wherever the shareholders----
    Mr. OOSTERHUIS. I think it is largely the shareholders, 
yes.
    Mr. MCDERMOTT. Okay.
    Mr. OOSTERHUIS. Because of a lot of that--there are two 
effects. One would be, if the money comes back, it would be 
used to buy back stock, pay dividends in the first instance 
that are not being paid now. And I think that is healthy. That 
gets the money efficiently invested, and that will help the 
economy.
    The second aspect is that, today, because of the trapped 
cash, companies have more of an incentive to buy assets that 
are outside the United States than to buy assets inside the 
United States. It has to help us----
    Mr. MCDERMOTT. Let me just stop you a second. Do you take 
into account at all those 600,000 workers who were displaced by 
that activity? Does that make any difference?
    Mr. OOSTERHUIS. The workers weren't displaced by the cash 
coming back.
    Mr. MCDERMOTT. Well, why was that part of the process? Why 
did they lay off 600,000 people in the United States when they 
are bringing all that money back here and supposedly investing 
it here? Tell me what that kind of investment looks like. 
Because if you don't hire workers, I don't see what the 
investment is. Maybe I don't--I am not an economist, so I, you 
know----
    Mr. OOSTERHUIS. And I am not here to defend the 2004 Act 
provision that basically allowed companies to bring the money 
back and spend money that they were going to spend anyway and 
then do what they wanted to with the incremental money that 
they brought back. That is the way that provision worked. And 
so, in the end, most of the money ended up benefiting 
shareholders, not benefiting workers.
    But that was the way Congress drafted the provision. It is 
not surprising that it worked as it was intended to work.
    Mr. MCDERMOTT. So you would suggest maybe that we should 
put in provisions that would require them to invest it in 
things that produce jobs in this country, would you?
    Mr. OOSTERHUIS. No. I think you should give companies 
discretion to do with it as they see best for their company. 
And that will give them a level playing field where they use 
the money or they distribute it to their shareholders for them 
to invest in other ventures which may well be in the United 
States.
    Mr. MCDERMOTT. So with our own economy, we haven't done 
anything about poverty in this country. Poverty is about where 
it was. And we have 2 million people less working now than we 
did in 2007. And you don't think that anything we do in this 
tax structure should have anything to do with job creation?
    Mr. OOSTERHUIS. I would not recommend enacting a provision 
that is targeted towards job creation. When I was on the Joint 
Committee staff back in the 1970s, when Mr. Rangel was the 
junior member, we drafted a credit for hiring in 1977. That 
didn't work very well. And those provisions generally tend not 
to work very well.
    We really are better off setting up neutral rules for 
businessmen to make business decisions. And, hopefully, that 
kind of transparency and lack of economic distortion will lead 
to growth in the economy.
    Mr. MCDERMOTT. Mr. Kleinbard.
    Mr. KLEINBARD. I agree, actually, with a fair amount of 
what Paul said. Let me just--but a couple of important caveats.
    First, $100 billion a year is coming back right now. We 
have $100 billion a year of repatriation today.
    Second, the money is not trapped in the sense that it is 
excluded from the U.S. economy. The money is not buried in a 
backyard in Zug. The money is invested in U.S. banks and in 
U.S. Government bonds. So it is at work in the U.S. economy 
today.
    Third, the U.S. multinationals that have this trapped cash 
have today the lowest cost of capital that they have ever had 
in a generation. They are not capital-constrained in any way.
    Finally, where I do agree with Paul is, let the money come 
back as part of reform. Don't try to micromanage how the money 
is used. It will go for stock buy-backs. But tax the money, not 
at 5 percent, but at a higher rate. And use the tax revenues to 
fund programs that are designed to address joblessness, that 
are designed to address poverty.
    Chairman CAMP. All right, thank you. Time has expired.
    Mr. Reichert.
    Mr. REICHERT. Thank you, Mr. Chairman.
    Thank the witnesses for being here today.
    I am fortunate enough to come from the same State as Mr. 
McDermott comes from. We have a number of international 
corporations, as you know, in Washington State that would be 
affected by these erosion proposals. And I have been following 
this base-erosion issue with a lot of interest, and it is not 
an easy thing to really grab on to if you are not some sort of 
a tax expert or a tax attorney.
    But it seems to me like the goal here is to create a tax 
system where our companies are able to compete on a level 
playing field. And a couple of the ways that all three of you 
have mentioned today is to lower our tax rate and broaden the 
base. That is sort of a commonsense, I think logical approach 
which hopefully brings money back into the country and creates 
jobs, I think. But what I hear you saying, too, is to let the 
free market work. Don't micromanage, is what I have heard from 
all three of you also.
    So what we all want, I think, Democrats and Republicans, is 
for our corporations to be competitive internationally and to 
pay the taxes they owe. I mean, we have heard of companies that 
are not paying taxes right now.
    So the testimony today, we have heard U.S. corporations 
that manufacture in foreign affiliates and then they sell the 
products back to the United States. And one of the main goals 
of the corporate tax reform is to put corporations on a level 
playing field, as I said.
    How do our competitors, such as the U.K., who recently 
changed its international tax rules, handle these types of 
transactions?
    Mr. SAINT-AMANS. Thank you, Congressman.
    Over the past 10 years, just a fact for you, we have more 
than 10 OECD countries which have moved from a worldwide system 
to a territorial system. But at the same time they have, most 
of them--it is not the case of the U.K.--they have strengthened 
their CFC legislations to make sure that you tax territorial 
but you fight the de-localization of profits in low-tax 
jurisdictions or no-tax jurisdictions. The U.K. recently has 
lowered its corporate income tax but has also changed CFC 
legislation in a way which is not about strengthening it.
    However, overall, the countries, I think, agree; there is a 
consensus, and it is clear at the OECD when we have discussions 
with all the member countries, that all the countries care 
about putting an end to the divorce between the location of the 
profit and the location of the activities.
    Today, through the transfer pricing rules, the tax treaty 
rules, which were designed in a different environment, where 
business was not global--you had cross-border investment, but 
it was not completely global--these rules have not kept pace 
with the way business operates. And that is why we have gaps 
which allow businesses to put the profit in a shell company, 
where you have absolutely nothing else but funding and 
ownership with absolutely no employees to develop the 
intangible and the real value of the company.
    And so the project that we are pushing for, which I think 
is fully in line with the reform you are trying to introduce, 
is to try to put an end to this situation which unlevels the 
playing field between companies within one country and also 
between companies from different countries.
    Mr. REICHERT. So we have been talking about option C, which 
we know is not perfect but kind of gets us to that same point; 
is that correct?
    Mr. OOSTERHUIS. Option C does have what I would call a 
destination focus, in that it taxes offshore manufacturing with 
respect to sales back to the U.S. at the full rate, but lesser 
so with offshore manufacturing for sales abroad. So it does 
have a destination focus.
    Mr. REICHERT. Right.
    Let me ask one quick question. My time is winding down.
    One of the frequent questions that people have asked me 
about option C is, how do you define what percentage of income 
is attributable to intangible products?
    Mr. KLEINBARD. This is one of the reasons why I think that 
option C, to sort of paraphrase Mr. Tiberi, have a theoretical 
merit but, as a practical matter, is impossible to administer. 
You are going to ask the IRS and companies to fight for the 
rest of their lives about what fraction of total income is 
attributable to which intangible asset. I think that this is a 
very unfair burden to put on the future system.
    Mr. OOSTERHUIS. I would, if I could, disagree with that, 
although there clearly is some burden. But if we define 
intangible profit as essentially being the excess profit over a 
routine profit, which is what the administration tries do in 
their excess-profit proposed, that can be a relatively 
administrable proxy for intangible profits because you are 
taxing the rents that Ed talked about.
    Chairman CAMP. All right. Time has expired.
    Mr. Lewis is recognized.
    Mr. LEWIS. Thank you, Mr. Chairman.
    Mr. Kleinbard, my district is home to a large number of 
corporations. Many of them are multinational and many more that 
are domestic. I strongly believe, in order for our American 
companies to grow, they must be competitive, both at home and 
abroad.
    Now, the chairman has stated that he doesn't want a code 
that would pick winners and losers. In your testimony, you 
recognize there is something of a consensus around the idea of 
a hybrid system of taxation. If this system was adopted, would 
both domestic corporations and multinational corporations win? 
Who would lose?
    Mr. KLEINBARD. In my view, corporations, multinational 
corporations, must come to recognize that in any future system, 
whether it is called worldwide consolidation, whether it is 
called territorial, whether it is called hybrid, any system 
that accomplishes the policy goals that you all share is going 
to be one in which U.S. multinationals pay a higher tax bill on 
their foreign income.
    The only question is how much are they going to pay to the 
United States and how much are they going to pay to the 
countries in which they are really doing business. That is 
going to be a part of the revenue. How much is very hard to 
model, but it is going to be some of the revenue that gets you 
to the lower rate.
    The lower rate is going to be really important because it 
enables the domestic business sector to be competitive in 
worldwide terms, which is what you really want. You want a U.S. 
environment that attracts foreign investments into the United 
States, and you want one in which U.S. firms that are U.S.-
owned can, in turn, face tax rates that make their environment 
competitive with those around the world.
    Multinational firms will pay a higher tax in the future. 
Whether it is a well-designed hybrid system with an option C 
that works--I have great skepticism about that--or whether it 
is worldwide, they will pay a higher tax to somebody.
    Mr. LEWIS. Well, thank you very much.
    Mr. Chairman, I yield back the remainder of my time to the 
gentleman from Texas, Mr. Doggett.
    Chairman CAMP. All right.
    Mr. DOGGETT. Mr. Kleinbard, there are millions and millions 
of dollars being spent to convince this Congress that the 
country will live happily ever after if it would just let these 
multinationals bring back their $2 trillion from overseas and 
do wonderful things, fund infrastructure, do other things here 
in this country.
    The last time we did that, as you mentioned, we entitled 
the bill the American Jobs Creation Act, but, as Mr. McDermott 
indicated, we lost 600,000 jobs.
    You have pointed out in your testimony that much of this 
allegedly locked offshore tax revenue, locked offshore money, 
is actually sitting right here in the United States; it is only 
a paper transaction away. And that money can be invested in the 
United States in infrastructure or just about anything other 
than paying dividends, corporate executive raises, and buying 
back stock, can it not?
    Mr. KLEINBARD. That is absolutely right, sir. The money is 
in the U.S. economy, it is at work in the U.S. economy. It is 
just in the one place where corporate executives really, 
really, really want it to be, which is in their----
    Mr. DOGGETT. In their pockets.
    Mr. KLEINBARD. In their pockets, yes, sir.
    Mr. DOGGETT. Yes, in their pocket and in the pockets of 
some of their shareholders.
    Mr. KLEINBARD. Yes, sir.
    Mr. DOGGETT. But the money can be put to use now. What is 
really offshore is any payment of taxes.
    And the notion that we would let folks get essentially a 
tax amnesty, pay a nickel on the dollar, without benefiting the 
United States economy as a whole and just enriching those who 
are already doing pretty well is a notion that strikes me as 
being very, very counterproductive.
    Mr. KLEINBARD. And what is interesting, in addition, is 
this is the only time you will ever confront an efficient tax, 
in the technical economic sense. Taxing these old earnings does 
not affect future behavior. So, by putting a reasonable tax on 
the old earnings, you are not incurring any economic-efficiency 
cost. It would be the only time this committee has ever 
confronted an efficient tax.
    Chairman CAMP. All right.
    Mr. DOGGETT. Thank you very much.
    Thank you, Mr. Lewis.
    Chairman CAMP. Thank you.
    Mr. Gerlach.
    Mr. GERLACH. No questions. Thank you.
    Chairman CAMP. Okay.
    Mr. Buchanan.
    Mr. BUCHANAN. Yeah, I want to thank the chairman for this 
important hearing, and I want to thank our witnesses for taking 
the time today.
    Mr. Kleinbard, you had mentioned this idea, a worldwide 
tax. I don't want to oversimplify this thing, but I just look 
at these--these tax proposals and bills come up every 25, 30 
years. You can see how far we have come in the last 25 years. I 
have done business abroad. I think about maybe we might not get 
to this for another 25 years.
    But my point is, it seems like, to eliminate the trapped 
cash and all these other issues, isn't the bottom line really 
with all this is to have a worldwide tax, giving some 
consideration for territories and other things? But it has to 
be at the right rate.
    I think of Hong Kong. When I was there 20 years ago, they 
had a flat rate, no deductions, minimal deductions, 20 percent. 
Back there a year ago, it was at 16.
    Isn't really what we are talking about is that, you know, 
the U.S. and the world has changed in the last 20 years. 
Thinking forward another 20, 30 years--we want to be paid on 
taxes from around the world ideally. But it has to be at a 
number that is competitive and makes sense, takes the incentive 
away from CEOs to work with their accountants, outside 
accountants, creative tax lawyers.
    So I look at this as someone who has done business abroad 
and thinking about this a lot. We need to get to a rate that 
makes sense. And I want you to comment. You have touched on 
that, but I want to go back. Isn't that really what we are 
talking about, ideally?
    Mr. KLEINBARD. Mr. Buchanan, I would agree absolutely with 
everything that you have said. And to be clear, a worldwide tax 
consolidation, to move to that, part of that would be to deal 
with the trapped cash. Whatever you do, whatever you all decide 
to do for the future, you need to clean up the past.
    Mr. BUCHANAN. We will deal. Let's make the assumption. I am 
worried about trapped cash in the future.
    Mr. KLEINBARD. Yes.
    Mr. BUCHANAN. We will figure out how to----
    Mr. KLEINBARD. And the worldwide consolidation, as you say, 
does not have a trapped cash problem because you paid your tax 
on it already.
    Mr. BUCHANAN. Yeah.
    Mr. KLEINBARD. And I agree 100 percent that the only 
question really is rate.
    Mr. BUCHANAN. And that is the question I want to ask you.
    Mr. KLEINBARD. Right. And that is why I said in any 
testimony that my proposal only works if you imagine that the 
U.S. rate is squarely in the middle of the pack, ideally even a 
little bit lower than that, so that a U.S. firm can face in 
every country in which it does business a tax rate that is 
comparable to the domestic rate in those----
    Mr. BUCHANAN. We have a 35 percent published rate.
    Mr. KLEINBARD. And that is too high.
    Mr. BUCHANAN. We effectively collect whatever, pick a 
number, 17 percent. But what do you think that number should be 
today? I am going to put you on the spot.
    Mr. KLEINBARD. That is no problem. Twenty-five percent is, 
you know--my bid is 25 percent.
    Mr. BUCHANAN. Okay.
    Mr. KLEINBARD. And I would point out that there are a 
couple of countries, like the U.K., that are a little bit 
lower, others a little bit higher.
    Mr. BUCHANAN. Personally, I think that is high. I know that 
is where we want to go as a committee, but----
    Mr. KLEINBARD. We can negotiate.
    Mr. BUCHANAN. Yeah.
    Mr. Oosterhuis, I want to get your thoughts on this. I 
think, at the end of the day, the way we eliminate this stuff 
going forward, we have to have a rate that makes sense, that 
takes the incentive away from corporations that do business 
worldwide, but what is your thought on that?
    And then I want to put you on the spot. What should that 
rate be today so we don't have to game the system, somewhat 
game the system?
    Mr. OOSTERHUIS. There is no question in my mind that 25 
percent is definitely too high and risks the competitiveness of 
our companies over the long run.
    Rates have come down in foreign countries since the study 
that Ed referred to, and many countries have patent boxes now 
that actually lower their rates from their statutory rates. The 
U.K. is implementing a 10 percent patent box. We are also 
facing more competition from Asian companies that are taxed at 
lower rates in their countries, as well as having their own 
territorial systems.
    What rate would work? I think there are two aspects of 
that. One is, what is the rate? I mean, I would say for foreign 
income--for U.S. income, obviously we have to talk about maybe 
a 25 percent rate----
    Mr. BUCHANAN. Yeah.
    Mr. OOSTERHUIS [continuing]. Because that affects a huge 
amount of our tax bank. For foreign taxes, if we are going to 
eliminate deferral and have a current tax, like KFC does, but 
at a lower rate, I would say somewhere between 10 and 15 
percent. But I would also say you would need to make sure you 
give a credit on an overall basis for the foreign taxes that 
companies are paying.
    If you do that, then you will increase many companies,' the 
most successful U.S. companies,' taxes on their foreign income. 
You won't increase it on many companies that are not 
successful----
    Mr. BUCHANAN. Let me add, just because my time is expiring, 
I think at the 25 percent rate--I don't want to take anything 
away from the committee or anything, but I think the bottom 
line, we will be back here again talking about the same things 
in the next 5 to 10 years. Because we are moving aggressively--
95 percent of the marketplace is outside the U.S. We have to 
recognize that. That is the future. And we need to get to a 
rate that makes sense, and I think it is a lot lower than 25 
percent to eliminate the gaming.
    And I yield back.
    Chairman CAMP. Thank you. Time has expired. And the 
chairman thanks the gentleman from Florida for not taking 
anything away from the committee.
    Mr. Neal is recognized.
    Mr. NEAL. Well, I hope my questions will add value to the 
conversation. Thank you, Mr. Chairman.
    Professor Kleinbard, you have spoken of your concern with 
stateless income, income earned abroad that isn't taxed 
anywhere. So let me discuss with you, I want to ask you about 
something equally troubling, which is the stripping of U.S.-
based income into tax havens to avoid U.S. tax.
    As you know, for the past several years, I have introduced 
legislation to address a competitive imbalance in the domestic 
property casualty insurance market that favors foreign 
companies over their domestic competitors. I am not trying to 
hide the fact it is constituent-driven. In fact, the 
legislation was developed working with your staff while you 
were the chief of staff at JCT.
    A loophole in the current tax system allows foreign 
companies to strip their income overseas and avoid U.S. tax 
merely by reinsuring their U.S. written policies with 
affiliates located in tax havens. As you wrote in the last law 
review article, this provides them with, quote, ``the ability 
to invest `long-tail' P&C reserves in a tax-free environment.''
    The ability to strip their earnings overseas and avoid U.S. 
tax on their investment income provides them with a significant 
advantage over their domestic competitors. Should our system 
favor foreign companies over domestic companies in serving the 
U.S. market, or should we restore a competitive balance by 
addressing this loophole?
    Mr. KLEINBARD. You know, Mr. Neal, just because it is a 
constituent issue doesn't mean that you are not right. And, you 
know, in this case----
    Mr. NEAL. I just think I don't want anybody to be confused 
about----
    Mr. KLEINBARD. There is a policy problem here.
    Mr. NEAL. There is a policy problem.
    Mr. KLEINBARD. And the policy problem is, I think, unique 
to insurance. And the problem is that reinsurance is a kind of 
way of doing business in the United States without getting your 
fingerprints on the United States, so that you are treated as 
not doing business in the United States.
    Reinsurance is a very interesting business. It is typically 
done by a long-term contract called a treaty. There is a season 
where everybody descends--literally, everyone goes to Bermuda 
for a 2-week period to negotiate their reinsurance treaties.
    So it is possible to take on a great deal of insurance risk 
with respect to the United States without getting your 
fingerprints all over the U.S. tax system and being treated as 
doing business here in the United States by virtue of the 
unique nature of reinsurance. And so I do think there is a 
policy problem there that could fairly be addressed.
    Mr. NEAL. Okay.
    I am pleased you raised the issue of Bermuda because 
Members of the Committee that have been here for a long time, 
you know I tackled that issue back in the early 1990s and had 
some success. But the former chairman of the committee resisted 
the idea of making the provision retroactive that we offered, 
and we were able to shut it down, only to discover that on the 
island of Bermuda today there are still plenty of companies 
that insist that they are a Bermuda-based company without 
economic substance.
    It is a real issue.
    Mr. KLEINBARD. Yes, sir. I believe it--I agree. And it is 
unique to reinsurance because of this whole idea of the 
reinsurance treaty and the very short time period in which the 
treaties are negotiated enables U.S. risk to be taken on by 
firms without being technically treated as doing business in 
the United States.
    Mr. NEAL. Right.
    And I had some success in leading the charge here on FATCA, 
as well. But I want to, based on what you have just said, 
Professor Kleinbard--I recently talked to Tom Barthold and his 
team at JCT about a difference between tax avoidance and tax 
evasion.
    As the former head of JCT, would you talk to me a bit about 
the differences between these two concepts?
    Mr. KLEINBARD. Yeah. I am obviously going to talk in my 
capacity as a professor of law. I have nothing special to say 
about JCT and its work in this respect.
    When it comes to corporate tax, when we talk about the kind 
of issues we are confronting today, I like to think of things 
in terms of a continuum of aggressiveness of behavior rather 
than avoidance and evasion. I, frankly, don't find those terms 
as helpful.
    The basic problem is that, anytime you have fact-intensive 
issues, there is a mismatch between the corporate taxpayer and 
the tax authority. The corporate taxpayer can muster more 
resources, knows itself better, obviously, and can put more 
energy into a case.
    And so the systems that, unless they are very simple--this 
is one of the reasons I like worldwide tax consolidation--
unless the system is very simple, you are always going to have 
a mismatch in the energies that are brought to bear on a 
question between an aggressive firm and the IRS. That rewards 
aggressiveness in behavior. And, as I say, I think of it as a 
continuum, but I think the right word is ``aggressiveness'' and 
how aggressive is a firm.
    Today, firms really are, you know, self-reporting agencies. 
We rely very heavily on corporations to get it right in the 
first instance. You don't want a system that encourages more 
and more aggressive behavior.
    Chairman CAMP. All right. Thank you.
    Mr. NEAL. Thank you, Mr. Chairman.
    Chairman CAMP. Thank you.
    Mr. Smith.
    Mr. SMITH. Thank you, Mr. Chairman.
    And thank you to our witnesses for sharing your insights 
and expertise.
    We know that the world economy and global economy is very 
diverse, and manufacturing might be very different from, say, 
agriculture, which I represent.
    Could you perhaps share your perspective on how the current 
U.S. tax system affects American agricultural producers 
internationally and what the effects of changes proposed in the 
chairman's discussion draft would be on those?
    Mr. KLEINBARD. You know, I was in private practice for a 
long time, but I didn't have any direct experience with 
agricultural exporters.
    But I think the fundamental point is they ought to be 
concerned with rate, and anything that gets to a lower domestic 
rate is going to be in their long-term interests. And I think 
we have a consensus among the three of us that the U.S. 
statutory rate today is too high, and domestic business, 
including export business, is disadvantaged.
    Mr. SMITH. Thank you.
    Mr. OOSTERHUIS. Yeah, I would agree with Ed on that. I 
think, you know, we do have agricultural companies that are 
global. I seriously doubt that any of them would be accused of 
base erosion, because their products are commodities, and so 
transfer pricing works relatively well in that world. But they 
do engage in tax planning, like other U.S. multinationals do 
and as they should.
    And so I think, for some of those companies, the kinds of 
reforms that we are talking about today that would be a hybrid 
system of exemption and current taxation and get rid of the 
potential trapped-cash problem would be a constructive reform 
for those companies, as well.
    Mr. SMITH. Okay. Thank you.
    Any others wish to comment?
    As well, what would you say is the experience of other 
countries who pursued repatriation alongside a shift away from 
worldwide to territorial, hybrid, or another system?
    Mr. SAINT-AMANS. I am not sure that other countries have 
been in the same situation as the U.S. I think it is a very 
typical U.S. situation because of the articulation of the very 
high rate, the check the box, and all the very U.S.-specific 
features. So, to my knowledge, it has not arisen in other 
countries in the same terms.
    Mr. SMITH. Okay.
    Anyone else?
    Mr. OOSTERHUIS. Well, I can speak somewhat, at least, for 
the U.K. I mean, I think the U.K. has not only lowered their 
corporate tax rates and gone to territorial, but they actually 
limited their CFC rules in terms of their application to U.K. 
multinationals with respect to their non-U.K. income. And I 
think that has been a healthy thing for their multinationals.
    And now the U.K. is a jurisdiction that is attracting 
companies. I mean, when we have a U.S. company that is 
combining with a non-U.S. company and the CEOs ask, where do we 
put the headquarters of this company, the U.K. is at the top of 
the list.
    Mr. SMITH. Uh-huh.
    Mr. KLEINBARD. Yeah, just with respect to trapped cash, we 
really need to distinguish the past and future. In the future, 
there will be no trapped cash. Whatever this committee does 
will not replicate the bizarreness of the current system in 
that respect. So the problem with trapped cash is entirely a 
problem with respect to the past.
    And there, again, we have to remember, the reason why we 
have $2 trillion of trapped cash is that firms are hoist by 
their own petard. They have been so successful at stateless 
income generation, they have so much income that has been taxed 
at 5 percent or less effective rates, those aren't competitive 
rates. There are no countries in which firms actually do 
business that have 5 percent rates.
    Those are the results of aggressive tax planning. And that 
success at achieving extremely low effective tax rates creates 
the problem and explains the $2 trillion.
    Again, this is the only time, I believe, that this 
committee, at least in my lifetime, will ever confront an 
efficient tax, a tax that is efficient. It is efficient in the 
sense that it does not have any adverse behavioral 
consequences. There is no reason why the old cash should come 
back at preferential rates. The old cash should come back at a 
sufficient rate to pay for reform, because going forward you 
will have moved into a new system with completely different 
behavioral consequences.
    Mr. SMITH. Thank you.
    And I yield back.
    Chairman CAMP. Thank you.
    Mr. Becerra.
    Mr. BECERRA. Thank you, Mr. Chairman.
    And thank you to all of you.
    And, Mr. Kleinbard, great to see you here. I hope you don't 
penalize us for our weather here. I know you are going to head 
back to sunny southern California, and I plan to join you soon. 
But just wait a minute, the weather will change.
    A couple of quick points.
    First, Mr. Kleinbard, I think you mentioned that, while I 
think there is full agreement throughout the room here that the 
system for taxation for all of our business community, whether 
foreign or domestic, has problems.
    Can you focus a bit on the domestic issue that we have with 
our corporate tax system, or business tax system--not just 
corporations, for all our businesses?
    Mr. KLEINBARD. Yes. I think we have two structural issues 
in the United States. The first is that the U.S. is the only 
large economy where a large fraction of its business income is 
outside the corporate sector. That is unique to the United 
States. More than half of our income now, business income, is 
earned by unincorporated businesses. Some are small, but some 
are also very large.
    Second, we have the worst of all worlds; we have a high 
statutory rate with sort of middle-of-the-pack effective rates 
of what we actually collect. Those statutory rates leads to all 
sorts of tax avoidance behavior, tax planning work that people, 
you know, like in my former life, Paul--you know, we should all 
be put out of business. And, at the margin, it distorts 
marginal decision-making.
    So it is really important to get a lower rate. That makes 
the U.S.--corporate rate. That gets the U.S. economy to be more 
efficient. It leads to a better allocation of resources, and it 
leads to more investment in the United States. And, again, it 
is not just U.S. people investing in the United States. It also 
makes the U.S. a more attractive environment for foreign 
investment to come into the United States.
    Mr. BECERRA. And most of the discussion we have had today 
deals with our treatment of foreign-earned income by 
corporations.
    Mr. KLEINBARD. That is right, sir.
    Mr. BECERRA. But if I recall correctly a statistic from the 
Small Business Administration, 99 percent--actually, 99.7 
percent, I believe they say, of all employer firms in this 
country are small businesses that are unlikely to be 
corporations, or at least corporations that do business abroad 
and have a large percentage of their income coming from foreign 
activities.
    Mr. KLEINBARD. The second part is almost certainly true. 
The first part is going to pose a very interesting question. 
When you lower the corporate rate, when you clean up the 
corporate preferences and create a more attractive business 
environment, what will unincorporated businesses do?
    Mr. BECERRA. Right. So 99.7 percent of all the companies, 
of our firms in America really aren't going to benefit 
directly, immediately, from something we do with the foreign-
earned income. They may ultimately and indirectly; I think 
there is no doubt about that. Because what affects AT&T or some 
multinational company will obviously affect those small firms 
that do business with AT&T.
    But when we talk about the taxation of foreign-earned 
income, we are essentially not talking to about 99.7 percent of 
the companies and firms that are here in the U.S. And I think 
we have to recognize that they have a great interest in having 
a workable tax system, as well. And so we have to recall that 
all those businesses today that are hiring Americans are likely 
not part of the conversation we are having with regard to 
foreign-earned income.
    Can I move to another subject, and that is this whole issue 
between worldwide versus territorial rates for the treatment of 
foreign-earned income. I always am amused by those who talk 
about us accepting the territorial treatment of foreign-earned 
income. But folks put the period after talking about the 
territorial rate that a country uses for treatment of that 
income by those companies based in those countries.
    I am wondering if those who advocate for territorial tax 
rates for multinationals would argue that the U.S. should adopt 
the rest of the tax system or regime used by those countries 
that have a territorial rate. And so I did a quick little 
Googling with looking at Wikipedia.
    And, Mr. Oosterhuis, to respond to some of the companies 
that you mentioned, you mentioned Nestle. I got Nestle, 
Novartis, Glaxo, Lenovo, Samsung.
    Glaxo is based in the U.K. Their tax revenue as a 
percentage of GDP is 34.3 percent. They are collecting more tax 
revenue than we are. The U.S., the OECD looks at us as having 
24 percent.
    So the U.K. collects more in taxation than the U.S. does. 
If we go to a territorial rate, which reduces rates for 
companies, someone is going to have to make up for that. And 
what the U.K. does is they make up for it with income taxes, 
national insurance, VAT tax. And I am wondering if----
    Chairman CAMP. All right.
    Mr. BECERRA [continuing]. We would be prepared to accept 
all those other tax regimes along with a territorial rate, when 
we talk about a territorial rate.
    So that is food for thought. Maybe at some point, Mr. 
Chairman, we will have an opportunity to discuss that.
    Chairman CAMP. Time has expired.
    Mr. BECERRA. Yield back.
    Chairman CAMP. Ms. Jenkins.
    Ms. JENKINS. Thank you, Mr. Chairman.
    Thank you all for being here.
    The OECD report calls for a renewed focus on risk 
allocation. According to the report, the transfer pricing 
guidelines are perceived by some as putting too much emphasis 
on legal structures, for example, in contractual risk 
allocations rather than on the underlying economic reality.
    Some have proposed moving away from the principle that risk 
may be allocated among entities by contract and towards the 
principle that significant people and functions are 
determinative in allocating profits.
    One potential downside is allowing countries to 
recharacterize transactions based on some sort of economic 
substance claim and, as a result, could very well create an 
incentive to move people and jobs offshore to low-tax 
jurisdictions.
    So for all of you, in your view, are there specific areas 
where the current guidelines produce undesirable results from a 
policy perspective? And do the current OECD transfer pricing 
guidelines place too much emphasis on contractual risk 
allocations rather than the underlying reality of an 
economically integrated group?
    Mr. Saint-Amans.
    Mr. SAINT-AMANS. Thank you, madam.
    In the area of high-risk activities or highly mobile 
activities or intangibles--and we all know that the value now 
is--I mean, the value chain, the value is in the intangibles. 
The transfer pricing guidelines can be put at jeopardy or are 
failing in a number of circumstances.
    And it can be serious, because what businesses need is 
security. I mean, they need to know--they need certainty. They 
need to know what the tax regime will be. And if a number of 
countries depart from the international consensus there, the 
risk we face is that they will take their own measures, they 
will take their own interpretation, and this will be chaos for 
business.
    So what we are trying to do is to recognize the 
difficulties of the arm's-length principle, which too much 
relies on some legal arrangements in the activities you have 
precisely described, to tackle this and make sure that if you 
have in a very low-tax jurisdiction two men and a dog to deal 
with all the intangibles of a highly sophisticated 
multinational, whether American or European or from Asia, this 
would not work. And all the profits cannot be located without 
regard to where the intangible has been developed.
    So this is part of the action plan that we are developing. 
But, again, this is to protect the consensus and to keep the 
certainty for all the players, tax administrations but also 
companies.
    Ms. JENKINS. Thank you.
    Mr. KLEINBARD. I do think that a fundamental problem with 
current concepts of transfer pricing and of the exploitation of 
intangibles is the empty formalism that we allow to drive 
results. This is how we get to stateless income. It is by 
treating as real contracts between a company and a subsidiary, 
where that subsidiary is nothing but the alter ego, in 
practical economic terms, of the parent itself.
    Looking forward, the OECD discussion draft changes the 
calculus. It says, if you want to be treated as the owner of an 
intangible, you really have to have independent business 
substance, you have to be the one that does the R&D, the 
subsidiary does, itself. And I think that is the right answer.
    I appreciate the concern that that means that tens of 
thousands of high-priced engineers will now move to the Cayman 
Islands, but I also appreciate that, in reality, that won't 
happen. You know, I spent years trying to get securities 
traders to move across the river to New Jersey. I couldn't get 
that to happen.
    Mr. CROWLEY. Thank God.
    Sorry, Mr. Chairman.
    Mr. KLEINBARD. With all respect to New Jersey. It is just 
how they work.
    So the problem is a very serious one.
    We actually have in the code, in 954(h), we have today a 
rule that requires that. Oddly enough, it is for banking 
income. And banking income is not the source of all the 
problems that we talk about, because the rules require the 
human carrying-out of all the relevant human activities by the 
CFC itself.
    Mr. OOSTERHUIS. Could I----
    Chairman CAMP. Just briefly.
    Mr. OOSTERHUIS. Yes.
    I disagree with Ed on a portion of this. If we are not 
going to recognize where expenses are incurred, then we are 
moving away from arm's-length pricing, and we should just be 
candid about that. Because, in the real business world, who is 
bearing expenses is one of the most important determinants of 
who gets the income.
    And, yes, from a group point of view, that fact that one 
entity is bearing it at the Irish tax rate rather than another 
entity is bearing it at the U.S. tax rate and it is being 
deducted in one country versus another, that from a group point 
of view doesn't matter that much, but from a country point of 
view it does.
    If we want to move away from that, what we are moving to is 
what you might call a factor apportionment system, where you 
are allocating the income based on factors. And if you have the 
income allocable to where the jobs are, you are going to have 
some of those jobs move over a 20-year period when you have 
this in place. That is just going to happen. It may not happen 
overnight. You are not going to pick up 80,000 engineers and 
move them overnight. It is not going to be a giant sucking 
sound. But it will happen. And you have to be careful.
    And that is why in my paper I suggest, if we want to move 
away from arms-length pricing, that we move towards more of a 
destination-based income tax, where the intangible value is 
allocated to where the sales are, because the sales are not 
movable. The sales are the least movable aspect of economic 
activity.
    Chairman CAMP. All right. Thank you.
    Mr. Doggett.
    Mr. DOGGETT. Thank you very much, Mr. Chairman.
    And thanks to our witnesses.
    I certainly take the same pride other Members do in the 
creativity and product development and the success of large 
American companies. We have many of them with major operations 
in central Texas, and we are glad to have them there.
    But I think we can applaud and encourage that success 
without maintaining a view that, because they are successful 
and they are big names, they are entitled to special treatment 
in the Tax Code not accorded to other businesses and 
individuals.
    The real question today about all of the fine print and 
complicated discussion that we have had is whether or not small 
businesses and individuals ought to bear a greater part of the 
tax burden so that some of these large, brand-name 
multinationals can pay less.
    I like a good cup of Starbucks just like the next person, 
but I also enjoy my coffee when I get a chorizo plate at Joe's 
Bakery or when I have a breakfast taco at Patty's Taco House in 
San Antonio or when I go by and pick up my cleaning at Estrada 
Cleaners. And those companies, those small businesses, they 
don't get the kind of tax breaks that are available for these 
multinationals.
    And a system that accords General Electric a lower tax rate 
than the people that clean up the corporate board room at 
General Electric I think is really offensive. What we have here 
is massive tax abuse, outrageous tax abuse by large, 
multinational companies.
    And I think the second major question before us today, 
amidst all the minutia, is whether or not we want a Tax Code 
that encourages the export of American jobs overseas. If we 
have a system that says to a company that is looking to invest 
in either San Antonio, Texas, or South Africa or Europe or Asia 
that if they invest abroad they will pay nothing on the 
earnings from that investment but if they invest here they will 
pay 20, 25 percent, even 10 or 15 percent, the incentive is to 
encourage the export of those jobs overseas.
    And I think another question before the committee is 
whether the problem is just with the laws or with the 
companies, as was suggested in the opening remarks. As if the 
two didn't have something to do with one another.
    Thirty companies have paid more to their lobbyists than to 
the United States Treasury in taxes. And I think they made a 
pretty thoughtful investment, because when you look at this Tax 
Code, it didn't just come down on tablets. It was the result of 
the determined lobbying efforts by some of the same companies 
that are here today asking for tax reform to make our system 
more complex if it helped them to maintain the minuscule level 
of taxes that they were already paying.
    Indeed, this committee and the Senate Finance Committee, if 
anything, facilitated, enabled, and created that Tax Code. And 
but for the work of the Permanent Subcommittee on 
Investigations under Chairman Carl Levin and some impressive 
investigative journalism from several journalists, we would not 
even know about the extent of the abuse that is occurring in 
America today and shifting that burden to individuals.
    Mr. Kleinbard, as I listened to Mr. Oosterhuis, or really 
read his testimony, I got the impression that if we had more 
cost-sharing agreements, like the one Apple has, that we would 
be better off. As I understood the testimony before the Senate 
Investigations Subcommittee, Apple developed, I guess with the 
research and development tax credit, products here that it 
assigned 60 percent of the rights to Irish companies. And on 
$74 billion of income, it assigned that to the Irish 
subsidiary, with profits taxed at less than 1 percent.
    Do we need more cost-sharing agreements like that?
    Mr. KLEINBARD. Paul and I obviously part company quite 
dramatically on this point. I do not see cost-sharing 
agreements as a solution. I see them as a core part of the 
problem.
    Again, when you look at the international tax questions, 
there really should be a tug of war in your mind between the 
United States as the residence country, as the place where, 
say, intangibles are primarily created for a U.S. firm on the 
one hand, and the market country on the other, where those 
intangibles are exploited, where the products are sold. Who 
gets how much; it is a tug of war.
    What the cost-sharing agreements as currently practiced do 
is siphon money off between the two legitimate claimants, 
between the home country and the market country, to nowhere. 
That is why I called it stateless income. That is what Apple 
demonstrates. That is not income that reflects doing business 
in Ireland or anywhere else. The income that is being taxed 
under the cost-sharing agreement at essentially close to zero 
rates is income that has been syphoned off either from the 
United States, which I think is the case in that particular 
example, or from the market country.
    So, unless you radically change how cost-sharing agreements 
work, along the lines of what the OECD has actually proposed, 
which is to require a firm, before it could even claim that it 
is part of a cost-sharing agreement, to do all of the work, as 
opposed to just contract right back to the U.S. parent to do 
the work, it is a meaningless operation. It is a subsidiary 
that purports to take on risk.
    That is no risk-shifting. The parent ultimately bears all 
the risk because it owns the subsidiary. There is no risk-
shifting going on, there is no independent decision-making 
going on, and there is no independent ability to act going on.
    Mr. TIBERI [presiding]. The gentleman's time has expired.
    Mr. DOGGETT. Thank you.
    Mr. TIBERI. Mr. Marchant is recognized for 5 minutes.
    Mr. MARCHANT. Thank you, Mr. Chairman.
    A question for Mr. Saint-Amans: Can you describe to us the 
trends in the OECD countries on corporate tax rates since the 
U.S. lowered the corporate tax rate as a part of its last big 
tax reform in 1986?
    Mr. SAINT-AMANS. Thank you, sir.
    Indeed, the U.S. and the U.K. in the mid-1980s started the 
trend of reducing corporate income tax rates. And this trend 
has been pursued by almost all OECD countries except the U.S., 
which now has the highest rate. The average rate in the OECD is 
around 24 percent for corporate income tax. The U.S. is at 35, 
plus the State taxes, so the average is around 39 percent in 
the U.S.
    There is a distinction between small, open economies and 
bigger, less open economies, and usually the rates in bigger 
economies will be higher than in the small, open economies. If 
you take Germany, you are at around 30 percent. France is at 34 
percent. But, still, the trend has been to reduce the rates in 
all OECD countries. And Japan, which was quite high, higher 
than the U.S., has recently, last year, changed its rate to 
reduce it.
    Mr. MARCHANT. And of the OECD countries that have the lower 
rates, do all of them have a VAT tax, as well? Or is the U.S. 
the only----
    Mr. SAINT-AMANS. The U.S. is the only OECD member country 
not having a VAT system.
    Mr. MARCHANT. So if you take the complete tax picture into 
account in each of these countries, is there still a very large 
gap between the actual tax bill of the companies versus just 
simply the corporate tax bill?
    Mr. SAINT-AMANS. This would assume that VAT is borne by 
companies, where, from an economic perspective, it is more 
borne by the ultimate taxpayers, who are the consumers. So I am 
not sure we can bundle both corporate income tax and VAT.
    Mr. MARCHANT. Okay. So any comparisons throwing the VAT in 
distorts that whole equation, in your view.
    Mr. SAINT-AMANS. Indeed.
    Mr. MARCHANT. The U.S. worldwide system taxes U.S. tax-
based companies on the profit of their foreign subsidiaries. 
Most of our major trading partners exempt that kind of income.
    If the U.S. converted to a pure worldwide system, wouldn't 
that provide a tax incentive for foreign companies to buy U.S. 
companies?
    And that is a question for all the panel.
    Mr. SAINT-AMANS. I can start by providing the following 
response.
    You have no pure system, or it is quite exceptional. I 
mean, Hong Kong, which was referred to earlier, has a pure 
territorial system, but it is quite exceptional. But in most of 
the European countries or Asian countries, Korea, Japan, when 
they have a territorial system, it is a territorial system with 
teeth, which means that you will be taxing some of the profits 
made offshore when they are taxed at a very low rate.
    And when you have a worldwide system, as you have here in 
the U.S., you have exceptions, which allows, actually, 
companies not to pay their taxes because of deferral or because 
of other mechanisms not to pay.
    So you have hybridity almost everywhere, and so you have no 
such thing as a pure system. So what matters, I think, is the 
way you will design either of the systems you can opt for.
    Mr. MARCHANT. Mr. Oosterhuis.
    Mr. OOSTERHUIS. But it is absolutely true that if we went 
to a worldwide system--and, indeed, today, with our deferral 
system, compared to the system in countries like the U.K., like 
the Netherlands, like Switzerland, when deals are thinking 
about being done, when companies are thinking about combining, 
and they are incorporated in different countries, it is rare 
for them to think of using a U.S. company as a parent. And that 
is because it would subject the earnings of the non-U.S. 
company to the U.S. tax regime, overlaid on their own tax 
regime. And that would clearly be a detriment to the synergies 
that the transaction is intending to accomplish.
    Mr. MARCHANT. Mr. Kleinbard.
    Mr. KLEINBARD. The problem is, what Paul said about current 
law and current business practice is true, but the question is, 
how will people behave in the new regime? If you have a 
worldwide tax consolidation with a low rate, then the incentive 
to be not the U.S. corporation would dissipate. So we really 
have to project forward to a different regime to answer that 
question appropriately.
    Mr. TIBERI. The gentleman's time has expired.
    Mr. Blumenauer is recognized for 5 minutes.
    Mr. BLUMENAUER. Thank you.
    Mr. Kleinbard, I would like to explore one element here. We 
have had reference to how individual countries would like to 
have tax advantage for their own enterprises, a little home 
field advantage, or maybe a lot of home field advantage, with 
patent box or whatever.
    But I wondered if you could just take a step back and help 
us visualize, what would be the dynamic for countries across 
the board if we could have some mechanism that agreed to a 20 
percent rate, a 25 percent rate, a uniform rate? Is it 
conceivable that the top 10 economies of the world, where most 
of the business is being transacted right now, that they would 
end up substantially ahead?
    Mr. KLEINBARD. A couple quick thoughts.
    For 100 years or so, we had this problem in the world of 
trade, where countries tried to get a leg up through trade 
subsidies. And, finally, countries wised up, and we have GATT 
today, the General Agreement on Trades and Tariffs, and 
countries act together. Ultimately, what is going on right now, 
I think, in countries like the U.K. is, in effect, a trade war 
being conducted through the guise of the tax system. And that 
is unhealthy.
    But the truth is that, if you look at the OECD data, 
corporate rates from major economies, in fact, converge towards 
a point, and that point is in the neighborhood of 24 or 25 
percent. So European countries, in particular, have gigantic 
revenue problems, they have deficits, they have all the same 
problems the United States does in that respect but more so. A 
24 or 25 percent rate is more or less the norm, without the 
formality of a GATT-type process.
    And that, I think, is a much healthier environment for 
everyone to be in, is the comparable rates across the board, 
and then firms make their decisions based on pure business 
considerations.
    Mr. BLUMENAUER. But the issue that I am wrestling with, 
everybody ought to be concerned about income that doesn't have 
a home, that simply there is no tax liability. And as you 
pointed out, if Starbucks can figure out a way to do this, 
anybody can. Although Starbucks found a way to classify pouring 
coffee as being manufacturing, and they ended up getting a $88 
million tax break in 2005.
    But isn't everybody going to be facing this, ultimately? 
That, unless we reach some sort of accord, people are going to 
gravitate, because they can, putting aside the morality of it, 
or if they have a fiduciary responsibility, they are going to 
do it if they make a substantial amount of money.
    Mr. KLEINBARD. Yes. And that is what the OECD is all about. 
I mean, the OECD is the best organization today to try to get 
the consensus on the kind of issues you are concerned with.
    Mr. BLUMENAUER. Well, is there a way to formalize some of 
this, in your judgment, in the context of treaty negotiations 
moving forward?
    Mr. KLEINBARD. Yes, absolutely. We have exactly that 
experience in the trade area with GATT, with the General 
Agreement on Trades and Tariffs. So we have experience in this 
area.
    Mr. SAINT-AMANS. If I may, shortly, one of the challenges 
in the tax area is that tax is at the core of sovereignty. And 
this cannot be overcome anywhere, and so be it.
    And so what we are trying to do as the OECD is to get the 
countries to speak to each other so that they respect their 
sovereignty, but there is some form of leveling the playing 
field on the one hand, and on the other hand limiting the 
frictions in terms of double taxation, but also limiting the 
gaps in terms of double nontaxation.
    And that is why we bring all these countries, which are 
sovereign at the end of the day--they will decide for 
themselves, but they cannot ignore the spillover effects on the 
others. And bringing them together is a way to limit such 
risks.
    Mr. BLUMENAUER. Thank you very much.
    Thank you, Mr. Chairman. I hope that this is the beginning 
of a series of hearings, that we can do a deeper dive on this. 
I have enjoyed the informal operations that we had with the 
working groups, but I think there is value to the committee to 
continue this. And I hope this is the first of several.
    Mr. TIBERI. Thank you.
    Mr. Reed is recognized for 5 minutes.
    Mr. REED. Thank you, Mr. Chairman.
    And, to the panel, I really do appreciate your input and 
information on this.
    And I heard at least some unanimous kind of positions that 
were being taken, and one is that we need to do something, that 
maintaining the status quo doesn't work. And that is good.
    I also kind of got a sense of, when we were talking in 
response to my colleague from Washington, Mr. McDermott, that 
when we looked at the repatriation holiday history--and one of 
the lessons I am taking away from that, having not been here, 
was that, if you do it on a temporary basis, you are going to 
get different behavioral outcomes as opposed to if you do it on 
a permanent basis.
    Mr. REED. So I think I got a sense that there is a broad 
agreement to do it on a permanent basis versus a temporary 
basis.
    The one thing that I am very interested in exploring a 
little in detail with you is, I firmly believe in the 
innovation economy, but I also believe that we can have a 
manufacturing renaissance here in America again. I am the 
eternal optimist, and I believe it can happen, though. And so 
we will continue to work for it.
    So as we look at option C from the chairman, Mr. 
Oosterhuis, I would be interested in, how do you see option C 
promoting manufacturing in America? And give us some input on 
that, and then we will----
    Mr. OOSTERHUIS. Sure.
    Mr. REED [continuing]. Maybe open it up to other portions 
of the panel.
    Mr. OOSTERHUIS. What option C does is, by providing a lower 
tax rate on the intellectual-property element of value in 
exported products, option C allows exported products then to 
bear an aggregate tax rate that is similar to foreign-
manufactured products. So it levels the playing field between 
U.S. and foreign manufacturing.
    Now, it does it by giving a deduction for a portion of the 
IP profit. There are other ways you can do that, I think, and 
there may be some ways that would raise fewer trade concerns 
than what Camp option C has.
    But the point is that Camp option C says, we are not going 
to go to a 25 percent tax rate on the foreign manufacturing for 
foreign markets because that has a serious competitive impact 
on U.S. companies. And, instead, given that, if we are going to 
tax at a lower rate, then we want to also the reduce the tax on 
exports so that U.S. factories can compete with offshore 
manufacturing. And that would be an improvement over the 
situation that we have today.
    Mr. REED. Mr. Saint-Amans, do you agree or disagree with 
Mr. Oosterhuis' assessment on that? And if so, why or why not?
    Mr. SAINT-AMANS. It is hard for me to meddle in the 
domestic debates between the options. So I don't really have a 
comment, except the general comment that you have no pure 
system such as a worldwide system or a territorial system.
    So it is up to the U.S. to decide which one you would like 
to take, knowing that intangibles clearly are where the value 
now is located in the value chain, and many countries are 
introducing patent boxes. That is just a fact that I can bring 
to you, the U.K. being the latest one having introduced such a 
patent box. The Netherlands has done so recently. Switzerland 
has a plan to do this.
    It doesn't mean that it is the right way to follow because 
it has some implications also in terms of tax competition. 
Within Europe, there is a debate on whether a patent box is a 
right thing to do also.
    But I have no personal nor official view to share here with 
you.
    Mr. REED. Well, I appreciate you dodging that one.
    Mr. Kleinbard.
    Mr. KLEINBARD. You know, we do have today an incentive for 
manufacturing in Section 199. We do have a special tax rate for 
domestic manufacturing.
    You know, I would love to see a renaissance of domestic 
manufacturing. That is why I think reducing the tax rate to 25 
percent for the broader base is really an urgent priority. It 
will bring foreign investment into the United States, among 
other things, which we tend to forget about.
    But I don't like trying to pick winners or losers. And I 
don't think that the tax system should be designed with the 
premise that we are going to subsidize in some way one sector 
of the economy as opposed to another. Let's get an efficient 
tax and get tax out of the business of businesspeople and let 
them get about their business.
    Mr. REED. Well, and I appreciate that input. So we have 
another general sense of agreement. Lowering the rate will 
bring that opportunity for manufacturing here in America.
    And I see my time is expiring, so I guess, with that, I 
will yield back, Mr. Chairman.
    Mr. TIBERI. The gentleman from Wisconsin, Mr. Kind, is 
recognized for 5 minutes.
    Mr. KIND. Thank you, Mr. Chairman.
    This has been a very enlightening hearing. I want to thank 
our witnesses for your insightful testimony today.
    Mr. Kleinbard, just picking up on the last point, because I 
do share my friend's focus on domestic manufacturing--and this 
is true for all the panelists who want to weigh in on it.
    I am assuming that, implicitly, because you haven't 
addressed it in your written testimony or even today, that 
there should be no distinction between tradeable and 
nontradeable jobs when it comes to comprehensive tax reform or 
the impact on the domestic manufacturing base?
    Mr. KLEINBARD. I start from the premise that we want to 
have a neutral business environment in which firms face a 
consistent tax rate and then let business go at it. So I don't 
make any distinction between the two.
    Mr. KIND. Well, let me ask you this, then. Obviously, any 
formal revenue collection system is meant to basically fund the 
basic government functions. And the reason this is so hard is 
we are trying to avoid blowing another hole in our budget 
deficit. So the goal of trying to reduce the rates and simplify 
and broaden the base has to be paid for. And that is what is so 
difficult, and why we don't have a plan on paper.
    And here is my concern. And I have been wrestling with this 
in regards to the territoriality and the impact in that, is we 
always seem to be playing catch-up internationally, with the 
OECD nations, what they have done in the last decade or so in 
lowering their corporate tax rate. But they have been in a 
unique position of being able to dial up their VAT in response 
to a reduction in revenue on the corporate side. We don't have 
that option. And so we are going to have to look at 
expenditures within the Tax Code in order to eliminate, in 
order to pay for the reduction somewhere else.
    And many of those expenditures, on the C side especially, 
have a direct impact on domestic manufacturing. The 199, Mr. 
Kleinbard, you just cited, depreciation, R&D--those are the big 
ones. And so, if we are going to get to a 25 level, chances are 
we are going to have to go after them.
    Mr. KLEINBARD. Yes, sir. I think that that is correct, Mr. 
Kind.
    Mr. KIND. Yeah. And do you think we have been operating 
somewhat in a vacuum by ignoring the VAT system that exists in 
virtually every other OECD nation?
    Mr. Saint-Amans, I have noticed that their ability to 
reduce the corporate rate has also been coupled with their 
ability to dial up the VAT too.
    Mr. SAINT-AMANS. Thank you, sir.
    I am not sure I would venture on the area of VAT, which is 
quite controversial, I understand, in this country.
    However, I would like to draw your attention to the fact 
that, in spite of having reduced the rates of corporate income 
tax over the past 20 years, OECD member countries have seen the 
contribution of corporate income tax to the overall revenue 
increasing. So it doesn't----
    Mr. KIND. Is that based on the corporate rate or all the 
taxes?
    Mr. SAINT-AMANS. On the corporate rate. I mean, the 
corporate income tax contribution to the overall revenue has 
increased instead of diminishing, which results in some saying 
there is no base erosion and profit-shifting; look, the rates 
have reduced, but the contribution has augmented. Actually, it 
should have augmented further if you take into account the 
profitability of companies.
    And, of course, you have cycles there. Following the crisis 
in 2008, you had a decrease. But, overall, you can find a tax 
policy reform which will be neutral or which can even bring 
more money to the revenue. So decoupling it from the----
    Mr. KIND. And how much of that do you attribute to the 
teeth that they put into the territorial system that they have 
moved to?
    Mr. SAINT-AMANS. That is quite hard to interpret, so I 
wouldn't get into the details.
    Mr. KIND. Okay.
    Mr. SAINT-AMANS. But I think it is worth looking at it. The 
data is available to you, of course. This is official from the 
OECD.
    Mr. KIND. Right.
    Well, I just think, you know--and, again, I would be 
interested in following up with you--that we do need to be 
somewhat careful in regards to the incentives that already 
exist for domestic manufacturing in the country, since those 
are the big ones that we are really going to have to wrestle 
with if we are going to be able to lower the rate to a level 
that makes us competitive globally.
    And I think these companies are going to have to do their 
calculation, whether they can live with a simplified lower rate 
without the current expenditures that they are able to take 
advantage of. And I think right now, when we are trying to 
create more jobs domestically, I think there are important 
distinctions to be made between the tradeable and nontradeable 
jobs that we see going on in the global economy.
    Mr. KLEINBARD. Mr. Kind, one thing to sort of keep in mind 
here is that the United States is, in 2012, the lowest-taxed 
country in the OECD. There is capacity in our economy to raise 
more tax.
    But, also, when you think about taxes and burdens on 
individuals and burdens on businesses, you have to remember how 
does the government spend the money. And other countries raise 
more tax, but they then spend that money in much more 
progressive ways.
    Mr. KIND. Well, and, again, that is one of the great 
elephants in the room here, is we do as a Nation have the 
obligation of financing the world's largest, most effective 
military that does provide a relatively stable and peaceful 
global market for companies to do business. No other nation is 
willing to step up to assume that obligation, so we have to 
wrestle with that obligation, too.
    Thank you.
    Mr. TIBERI. The gentleman from Indiana is recognized for 5 
minutes, Mr. Young.
    Mr. YOUNG. Thank you, Mr. Chairman.
    I thank all our panelists for being here today, offering 
your thoughts. It has certainly been a thought-provoking 
conversation with some divergent views on different things, and 
I think that is helpful in a public forum here.
    Mr. Saint-Amans, I have also appreciated your very much 
understandable efforts to try and avoid making much 
international news in your current capacity.
    You know, one of the benefits to being of lower rank within 
this committee is that I have an opportunity to sometimes 
respond to some earlier comments that were made and get 
clarifications, and I would like to do that.
    First, it will just be a comment. There was earlier a 
statement made with respect to small businesses, saying that 
there seemed to be a desire among some to have small businesses 
pay more so that multinationals could pay less in this effort. 
And, certainly, I don't share that. And for those that have 
those concerns, I think it is really important that in this 
country, in the interest of competitiveness internationally and 
domestically, we reform not just the corporate code but also 
the individual code.
    But, secondly, I would like to talk about an exchange that 
was earlier made--I think, Mr. Kleinbard, it was directed 
towards you--related to the benefits of repatriating profits. I 
think it is actually, again, thought-provoking that so much of 
those moneys that have not been repatriated are essentially 
already in the economy and benefiting American corporations, in 
the form of purchasing shares or being available for investment 
in a banking system or whatnot.
    And was that an accurate characterization of your position? 
Very briefly, please.
    Mr. KLEINBARD. Yes, in respect to the cash. In respect to 
the liquid----
    Mr. YOUNG. That is right.
    Mr. KLEINBARD [continuing]. Permanently reinvested 
earnings, yes, sir.
    Mr. YOUNG. So then if I could get another perspective, Mr. 
Oosterhuis, are there not benefits to having more liquidity, 
not just in terms of sort of abstract economic liberty terms, 
but are there some economic benefits to having that money 
repatriated and, thus, allowing those who hold the funds to 
have greater flexibility to start new businesses, expand 
existing businesses, spend the money domestically, invest in 
capital equipment, thus leading to higher personal incomes? Is 
that something that you can speak to, sir?
    Mr. OOSTERHUIS. Well, yeah, I absolutely can speak to it. 
And I do think it is, as I have said before, quite beneficial 
for repatriation to be able to take place. I don't want to 
overstate it. It is true, money is in bank accounts that are 
largely in U.S. dollar accounts. Of course, our banks are not 
lending now, we know, so that money is just sitting on deposit 
with the Federal Reserve, offsetting some of their asset 
purchases. So it is not clear to me it is really helping the 
economy in any significant sense today.
    But the important thing is that it distorts corporate 
behavior. I see it all the time. Companies don't like to have 
excess cash on their balance sheet. They want to put it to 
productive use. Cash does not generate earnings. Cash generates 
very, very small earnings for them. What generates earnings for 
them are real assets.
    And so, because the cash is abroad and they don't want to 
pay the tax to bring it back, they bias their investments 
towards foreign assets. That is just a reality of the system. 
It makes perfect sense. If you had to pay a 25 percent tax to 
buy something in the United States and didn't have to pay the 
25 percent tax to buy something in Europe, of course you would 
buy something in Europe.
    Mr. YOUNG. All right. I am going to try and tease this out 
further. I do want to be fair on this. It is an interesting 
exchange.
    Mr. Kleinbard.
    Mr. KLEINBARD. And I agree with what Paul just said.
    Mr. YOUNG. Okay. So in terms of growth of our economy, we 
would see a benefit to further repatriation here. It is not a 
net-neutral issue. We want to make reforms within the code here 
that will lead to a greater repatriation because that will grow 
the economy. I think that was confusing, in terms of the 
earlier testimony and some of the statements that were made.
    You know, in my remaining time here--I have 30 seconds 
left--I think I will just yield it back and look forward to 
speaking with some of you offline. Thanks so much for being 
here.
    Mr. TIBERI. Mr. Davis is recognized for 5 minutes.
    Mr. DAVIS. Thank you very much, Mr. Chairman.
    And let me thank you gentlemen for the insights that you 
have conveyed. It has been a very interesting and productive, I 
think, discussion.
    In the last few weeks, we have heard a great deal about 
Apple and its taxes and not taxes, what it has paid and what it 
should have paid and should not have paid.
    I note in your testimony, Mr. Oosterhuis, you argue, 
essentially, that a company's profits should be thought to 
occur where its sales are. Apple's main activity is research 
and development. The actual manufacture of its product is 
outsourced, and 95 percent of the research and development 
takes place in the United States.
    Mr. Kleinbard, it seems that the business activity that is 
generating Apple's profits, even on offshore sales, is largely 
in the U.S. and that those profits would not be possible if not 
for the patent protection, educated workforce, infrastructure, 
and other public investments made possible by U.S. taxpayers. 
Would you agree?
    Mr. KLEINBARD. I would.
    And what you are saying, Mr. Davis, is consistent with the 
point that I have been trying to emphasize, that we should 
conceptualize all this as a tug of war between the home country 
on the one hand and the market country on the other. The Apple 
case is a powerful case for why some tax revenues belong in the 
home country, not in the destination country.
    Mr. DAVIS. Mr. Oosterhuis.
    Mr. OOSTERHUIS. Yes. Two points on that.
    First of all, Apple is a company that spends about 3 
percent of their revenues on R&D. That is relatively low. Apple 
is a company that has become fabulously successful because they 
had ideas that captured consumers. And a lot of that has to do 
with the consumer-facing side of the business, not the R&D side 
of the business.
    They were able to capture products that not only sold at 
premium prices but that led to annuities of income when people 
bought movies, they bought books, they buy records. They buy 
all kinds of things that Apple gets a piece of. That is a 
terrific business model that they built. That requires real 
value in the countries where the customers are, because it is 
the customers that are paying those premium prices.
    If Samsung had done what Apple had done and was shipping 
its smartphones into the United States and charging premium 
prices, you know that the IRS would be saying the bulk of the 
value should be in the United States, even if the phones were 
invented in Korea. And that is the reality of it. There is 
tension between the two.
    My point in saying that the bulk of the profits should be 
in the market country is that that is the least mobile way to 
allocate the profits among the countries and the best way to 
minimize the distortion of people moving jobs and moving 
activities around the world for tax purposes.
    Mr. DAVIS. Then let me move on a bit, if I might. And let 
me just--it is hard for me to reconcile the notion--and I 
certainly hear the argument, but I also note that you argue 
that the U.S. should not be too concerned if a company like 
Apple seems to be avoiding taxes that it ought to pay to 
foreign governments on its foreign profits.
    But once we recognize that much of the profits that Apple 
characterizes as ``foreign'' are really U.S. profits, because 
all the research and development that created those products 
took place in the United States, then I think that avoidance of 
foreign taxes becomes a problem.
    Now, Mr. Kleinbard, you indicated that in your testimony. 
And I guess my question becomes, do you think the United States 
has a bit of self-interest in helping to protect the tax base 
of foreign countries?
    Mr. KLEINBARD. I actually do, once we understand that 
foreign countries means the market countries. What we want to 
get to is the tug of war. The United States will win its fair 
share of those tugs of war.
    What we don't want is a case like Apple, where the income 
is not being taxed either in the market country or in the 
source country. That is the fundamental problem that the Apple 
case demonstrates, is that the income has escaped tax 
everywhere.
    Now, I think that income, in this case, is more 
appropriately taxed in the United States. I don't think that 
Apple is in the business, like maybe a Nike, of having 
different shoe models in every country. They are selling the 
same iPhones everywhere in the world. It is the same global 
platform. For that reason, I think the profits are in the U.S.
    Other cases, you know, may be different. But we will win 
our fair share of the tug of war. What we have to get out of is 
the idea that we will allowing the siphoning off of cash to 
nowhere.
    Mr. DAVIS. Thank you, Mr. Chairman. I yield back.
    Mr. TIBERI. The gentleman's time has expired.
    Mr. Renacci is recognized for 5 minutes.
    Mr. RENACCI. Thank you, Mr. Chairman.
    And I want to thank the witnesses, too. It is interesting, 
as Mr. Young said, being here at the end and listening to all 
the conversation. You get to kind of go back and re-discuss 
some of the issues.
    You know, I still question this trapped issue. Mr. 
Kleinbard, you had indicated--and I know Mr. Young brought this 
up--that these earnings aren't trapped. They are coming back; 
they are in bank accounts.
    Mr. Oosterhuis, you were saying--I think you disagree with 
that, though. I want to just--can you----
    Mr. OOSTERHUIS. Actually, I think Ed and I agree that there 
are much more productive uses of that cash than sitting in bank 
accounts. And so if companies could bring the money back and 
have tax-neutral decisions on whether to invest it and where to 
invest it, that would be an improvement.
    Mr. RENACCI. Because it is not being used by the company to 
put back into the business here in the United States, correct?
    Mr. OOSTERHUIS. Or anywhere. Yeah.
    Mr. KLEINBARD. Well, right. My point is that the cash, the 
very large sums, perhaps as much as a trillion dollars, is in 
the U.S. economy, but it is not optimally allocated.
    And where Paul and I agree is that there is an incentive to 
use that cash to make foreign acquisitions. I think of 
Microsoft Skype, for example, as a perfect example, when 
Microsoft bought Skype.
    Mr. OOSTERHUIS. HP Autonomy.
    Mr. KLEINBARD. Or HP Autonomy. Well, I was trying to think 
of a more successful example.
    Mr. RENACCI. The other thing that I thought was kind of 
interesting, I know one of my colleagues talked about the 
deferral is a tax break that causes companies to ship jobs 
overseas.
    I am a CPA; I have had to look at tax consequences of many 
businesses. My question would be, is this really a tax break, 
or is this just something that is really part of an outdated 
Tax Code?
    Mr. OOSTERHUIS. I think it is the latter. It grew up from 
the 1920s practice of taxing companies that were incorporated 
in the United States and not taxing companies that are not 
incorporated in the United States, without regard to who owns 
the shares of those companies. It wasn't intended as a tax 
break.
    Mr. KLEINBARD. I think of it as a thing. And, you know, 
when I was at JCT, one of the things I tried to do was to 
change how we scored that as a tax expenditure and say, no, it 
is not a tax expenditure, it is just a thing, it is just a 
structural way we have chosen to do our international tax 
system.
    The right question is, what should the international tax 
system be? Whether you call this a break or you call it an 
outdated norm is unimportant. It is just a thing. It has 
economic consequences. We can do better than the current thing.
    Mr. RENACCI. Mr. Kleinbard, you said a 25 percent rate 
across the board is something that you believe in.
    Mr. KLEINBARD. And it is right at the OECD norm. The OECD 
average is about, what, 24? Twenty-four.
    Mr. RENACCI. Mr. Oosterhuis, where do you see that?
    Mr. OOSTERHUIS. No, I think that is definitely too high.
    First of all, as I have said before, the statutory rates 
aren't the complete answer because of the incentives that are 
built into the systems in foreign countries to reduce those 
rates. The U.K. patent box at a 10 percent rate is a classic 
example. Their corporate rate will be going down to 20 percent, 
but they will have a 10 percent box. So the effective rate will 
be substantially lower for high-intangible-value companies.
    Second, that doesn't say anything about what Ed calls his 
stateless income or third-country earnings. There are always 
going to be some third-country earnings, whether it is in 
Samsung's system or in Glaxo's system or in Novartis' system. 
They are going to have that. So their effective tax rates--and 
those are the companies U.S. companies compete with--their 
effective rates will be lower than their local statutory rates 
by that reason, as well.
    So if we are taxing U.S. companies at 25 percent, when 
those companies have--I mean, Lenovo's tax rate is under 20 
percent, for example. Why should we give our companies that 
kind of competitive disadvantage?
    If we are going to tax worldwide income, it needs to be at 
a low enough rate that it basically approximates the amount of 
foreign tax they will, in fact, pay. And that is between a 10 
and 15 percent rate, in my judgment.
    Mr. RENACCI. It is interesting, I know my time is running 
out, but the one thing I think everybody agrees to is we have 
to simplify this and we have to bring the rate down. And 
whether it is 25, 10, 15, it has to come down.
    So I appreciate your comments. Thank you.
    I yield back.
    Mr. TIBERI. Ms. Sanchez is recognized for 5 minutes.
    Ms. SANCHEZ. Thank you, Mr. Chairman.
    And I want to thank our witnesses for being with us today.
    Mr. Chairman, as you know, I recently sent both you and the 
ranking member a letter urging that the bipartisan task 
force's--that that process continued to the next logical step, 
which is trying to construct some policy. Because I think we 
need to and can get concrete bipartisan tax reform proposals on 
paper. And if we are serious about a bipartisan comprehensive 
tax reform, I think the task force working groups are a way to 
keep that process moving.
    And if we can do that, I think we can put together a fairer 
and simpler Tax Code that provides the long-term certainty that 
businesses crave and makes America more competitive in our 
global economy.
    Our hearing topic today arises from the fact that our 
current laws make it perfectly legal for huge multinational 
corporations to avoid paying taxes on mind-boggling sums of 
money. And while our statutory corporate rate may be the 
highest of any country in the OECD, the U.S. has the second-
lowest corporate taxes as a percentage of GDP of all the OECD 
countries.
    Companies with the resources to transfer profits and jobs 
abroad have an unfair advantage over truly domestic companies 
that do their research here, provide good-paying jobs here, and 
manufacture products in the U.S. And I think that leveling that 
playing field is long overdue.
    Throughout the task force process, our manufacturing group 
heard over and over again from domestic manufacturers that 
foreign governments aggressively offer research and development 
incentives and packages to try to lure them, their company's 
research and intellectual property overseas. We would love to 
keep those innovative, high-paying jobs and the IP that goes 
with them in this country, preferably in southern California.
    But I want to take my time to focus on domestic businesses, 
specifically manufacturers, who, as Mr. Kleinbard noted before 
the Senate Finance Committee in 2011, are the truly 
disadvantaged actors in our current system because they can't 
engage in those base-erosion activities that multinational 
corporations can.
    So my question is directed to Mr. Kleinbard.
    If we can close offshore loopholes and get this money back 
into our economy, what kinds of changes could we make to 
incentivize domestic manufacturing growth for companies that 
invest in high-tech R&D and manufacturing here in the U.S.?
    Mr. KLEINBARD. Two quick thoughts.
    Whatever system you go to, if it is well-designed, U.S. 
multinationals are going to pay more tax, and the only question 
is, will they pay it to the United States or will they pay it 
to foreign countries? So their tax burdens will go up. What 
choice can there be, when their tax burdens on their foreign 
income today are measured in single digits?
    The question of domestic manufacturing is a very difficult 
one because, frankly, I am skeptical of the utility of tax 
expenditures in the form of R&D credits and the like. They are 
very expensive subsidies, and they are often poorly targeted 
subsidies because they go to firms that would behave in exactly 
the same way without the subsidy. So that is just money wasted 
by government.
    I would use all the revenue you can raise to lower the rate 
to whatever it is. Twenty-five is my opening bid. If you guys 
can come in at 22, more power to you. Whatever it is, that is 
the way to go. The subsidies are just extremely expensive, 
because they go to people who don't need them in the end.
    Ms. SANCHEZ. A follow-up question on that: Do you prefer 
things like Section 199, which actually ties incentives to 
wages for workers?
    Mr. KLEINBARD. You know, I am not a fan of any of these 
programs, honestly. 199, as you all lived it, became a broader 
and broader concept as to what was included. Movies suddenly 
came in. Pouring coffee suddenly came in. The subsidy grew and 
grew and grew by virtue of the nature of the political process.
    I think it is the wrong direction. You know, the right 
direction--and, you know, Mr. Ryan said this yesterday. We are 
drowning in tax expenditures. Let's not figure out which 
subsidies we should add. 199 distorts decisions as to what is 
covered, what is not covered, you know, wages as opposed to 
investment in capital equipment that might lead to higher 
incomes in the future.
    The tax system ought not to be in the business of trying to 
steer the economy. We ought to do what we can to have a low, 
consistent business rate and declare a victory and let business 
take care of business.
    Ms. SANCHEZ. Thank you.
    I yield back.
    Chairman CAMP [presiding]. Thank you.
    I will go to Mr. Pascrell now.
    Mr. PASCRELL. Thank you, Mr. Chairman.
    The issue of the big, multinational corporations like Apple 
reducing the tax bill into the teens by shifting their profits 
to offshore havens has been in the news lately. And we are all 
concerned, as we should be. I believe that this is an ``alert'' 
sign, that issue, to all of our attempts to reform the Tax 
Code. I believe it is very significant, more so than we think.
    We are coming out of one of the worst economic crises in 
our Nation's history. Many Americans are playing by the rules, 
most Americans, and are still struggling to get by. That is not 
a question. That is data.
    When you see what happened after the Second World War up to 
1973, in terms of productivity and return, when we still 
believed in sharing of wealth. And then what has happened from 
1973-1974 to 2011 and 2012, where we stopped sharing the 
wealth? Productivity increased, and folks were participating 
less in the sharing of it.
    So we have gone from a stakeholder society to a shareholder 
society. There are no two ways about it. That is the data. That 
is what it shows.
    And then we look over at corporate America, and we see 
these big companies, these big conglomerates, as we call them--
whatever name we choose. And they are worthwhile in this 
society; that is not the question. Big accounting departments 
changing, bending, exploiting the Tax Code--average person 
doesn't have all of these folks at his fingertips to do these 
things--to make sure they are contributing as little as 
possible.
    We are talking here, time after time, Mr. Chairman, we talk 
here about how we are going to help corporate America. We have 
very few meetings about how our Tax Code can help the poor, 
unless I missed any meetings I didn't know about.
    Chairman CAMP. Well, we did have a working group on exactly 
that subject, including 10 others.
    Mr. PASCRELL. I think it is un-American, Mr. Chairman, if I 
can use those terms. I think that is a good word to describe 
it. So we need to fix it.
    So let me ask you, Mr. Kleinbard, this question. Corporate 
taxes once made up about a quarter of Federal revenues, many 
moons ago. In fact, to the 1950s that was the case. Now it is 
down to below 10 percent today. That didn't just happen. I 
mean, somebody didn't just wake up some morning and say, we had 
better start changing this and moving things around. This 
government, our Government of the United States, a 
representative government, changed the rules.
    Many corporations are now calling for further reductions in 
the corporate tax and a shift to a so-called territorial system 
in order to keep this competitive.
    Do you believe--you, personally--that this is possible to 
do in a revenue-neutral way? Will a shift to such a system lead 
to an increase or a reduction in the amount of corporate tax 
collected?
    And if corporate tax collections go down, what are the 
Federal Government's other sources of revenue that will go up 
to compensate? Who pays for them?
    Mr. KLEINBARD. This is a very important question.
    And for the historical pattern, we have to keep in mind 
that the United States embarked on a unique path of 
disincorporating business. So, today, more than half of 
business income is simply not in corporate form, but it is 
still in the U.S. tax system. It is taxed through the 
individual system, because we have gone on this unique path to 
disincorporate business in America. So that explains some of 
the data.
    My belief is--well, the JCT estimates will be what they 
are. And I think the tax rate has to be driven by that. There 
is a great deal by way of business tax expenditures that make 
no sense to me. You know, this is not the Soviet Union, we 
don't engage in Soviet 5-year plans for the economy. So we 
should get the United States of America, the government, out of 
the business of subsidizing individual companies or industries. 
That brings a lot of revenue onto the table to buy down the 
rate.
    And, again, although it may not be generally appreciated, 
if you do a sensible job in this committee, whatever you end up 
doing, multinationals are going to pay more tax. The only 
question is, how much of that does the U.S. grab as opposed to 
foreign market countries? And, you know, that will be a very 
interesting question, very interesting to see how JCT scores 
it.
    Finally, you have the $2 trillion pot of old earnings. And 
I keep emphasizing, this is the only time that this committee 
will ever be confronted with the opportunity to have an 
efficient tax. You can tax those old earnings in the transition 
to the new system. They rate higher than 5 percent and are 
sufficient to help fund the revenue costs of moving to the new 
system.
    Under no circumstances do I contemplate moving to a 
corporate system that is a net revenue loser.
    Chairman CAMP. All right, thank you.
    Mr. PASCRELL. Thank you.
    Thank you, Mr. Chairman.
    Chairman CAMP. And for our final Member to question this 
morning, Mr. Kelly.
    Mr. KELLY. Thank you, Mr. Chairman.
    And thank you all for staying so long.
    I am interested in a couple different things. We certainly 
have a lot we can talk about.
    But there is an old saying I remember that goes something 
like, build a better mousetrap, and the world will beat a path 
to your door. That is accredited to Waldo Ralph Emerson. But 
what he really said, if a man has good corn or wood or boards 
or pigs to sell or can make a better chair or knife, crucibles 
or church organs than anybody else, you will find a broad, 
hard-beaten road to his house, though it be in the woods.
    Now, we are talking about tax strategies here. Now, you all 
understand it because you do it every day, but for the average 
American, the average American, who relies on us to do the 
right thing for them and talk to people like you to come to an 
answer to this, a code that is 75,000 pages, that American 
companies and individuals preparing their taxes spend $168 
billion--that is with a ``B''--to do the preparation, and 
almost 7 billion hours, gosh, do you think that is a little 
difficult?
    So my question to you, as we talk about all this--it 
doesn't matter to me how we get there, but if our goal, our 
stated goal, is pro-growth tax reform--because what we are 
talking about, we need the extra revenues. Where would you get 
them? Who pays taxes?
    Mr. OOSTERHUIS. People.
    Mr. KELLY. People.
    Mr. OOSTERHUIS. People pay taxes.
    Mr. KELLY. People who work. What kind of companies pay 
taxes? Only profitable companies.
    So if we create a Tax Code that is so complicated that 
drives them offshore and then say, these are bad folks, they 
are not patriots, they are willing to take their business 
offshore--it is not that they are unpatriotic, it is just that 
they are not stupid.
    We have created a system--and I have a lot of people I 
represent back home that are in the host business; it means 
they have bars. You can keep customers out of your bar by 
raising the cover charge. And I am suggesting that is what we 
have done.
    Now, if we are looking for revenue and if we are looking 
for success and we are looking for profits, then wouldn't the 
idea be a government that is actually an advocate for your 
success and not an adversary? Would that be a little better 
model?
    Now, we talk about international Tax Code. Why would we 
want to do this? This strategy is a huge part of every 
business's and every individual's life. My gosh, you have to 
look at it. And you have to hire somebody else do it because it 
is too complicated. And the real fear is not that you are going 
to pay too much; it is that you are going to make a mistake, 
and somehow you are going to come under greater scrutiny.
    Anyplace else in the world that makes it tougher than in 
the United States? You know the international boundaries.
    Mr. KLEINBARD. I have never done research on the individual 
compliance----
    Mr. KELLY. No, but you talk to companies all the time. Tell 
me why companies--tell me why we are no longer one of the best 
places to start a business.
    Mr. KLEINBARD. Well, first of all, you know, I am now an 
academic----
    Mr. KELLY. Not to be disrespectful, the reason is it is too 
hard.
    Mr. KLEINBARD. Well, I don't agree with the premise of the 
question, that we are not one of the great places.
    Mr. KELLY. Well, I am only going by the rankings. We are 
way down.
    Mr. KLEINBARD. Well, the rankings--you know, there are a 
lot of interesting opinion polls. I don't think----
    Mr. KELLY. No, no, I am not talking about opinion polls. I 
am talking about hard facts. I am talking about batting 
averages. I am talking about completion yards after the catch. 
This is a tough place to start a business in.
    Mr. KLEINBARD. It is legendarily----
    Mr. KELLY. And the government is too----
    Mr. KLEINBARD. That is simply false.
    Mr. KELLY. It is not false.
    Mr. KLEINBARD. It is simply false. This is the easiest 
country in the world in which to get----
    Mr. KELLY. Then why are they not flocking here? Why are 
they going to Ireland? Why are they doing other things?
    Mr. KLEINBARD. Because no country can compete with zero. 
That is simply the problem.
    Mr. KELLY. I get it. I get it.
    Mr. KLEINBARD. The problem is that we have allowed a system 
in which companies are able to reduce their tax rates to zero 
or to single digits. That is not a rate that any actual economy 
operates under--not the U.K., not Germany, not France, not the 
United States.
    Mr. KELLY. I get you. I get you. But it still comes down 
to, does it not, it comes down to usually people do business 
where it is easiest to do business.
    Mr. KLEINBARD. Again, it is easy to start a business in 
this country. You don't have----
    Mr. KELLY. Mr. Kleinbard, have you ever started a business?
    Mr. KLEINBARD. My wife did.
    Mr. KELLY. Sir, just a yes or no.
    Mr. KLEINBARD. I was a partner in a large----
    Mr. KELLY. Okay.
    Mr. KLEINBARD [continuing]. Business.
    Mr. KELLY. All right. Well, me, too.
    Mr. KLEINBARD. My wife started a business.
    Mr. KELLY. I do own a business. I am going to tell you 
right now, it has become so difficult, so heavily taxed, and so 
heavily regulated, we are not the premier place to start. 
People are going elsewhere. Why?
    This is this greatest market in the world. It is a global 
economy, Mr. Buchanan said. Shouldn't we be looking at 
establishing a Tax Code that is a pro-growth Tax Code that 
allows people to look at us and not just participate in the 
global economy but dominate the global economy?
    My goodness, with all the natural resources we have, with 
all the advantages we have, I would hate to be sitting there 
with a tin cup looking for other people to help us. We don't 
need to. We have been endowed by God with the greatest assets 
in the world at any time in the history of the human race, and 
we can't get out of our own way. We have gamed ourselves.
    So I appreciate you being here.
    Mr. Oosterhuis, I would have liked to get to you because I 
really admire what you said and understand it.
    And, Mr. Saint-Amans, thank you for being here.
    Mr. Chairman, I yield back.
    Chairman CAMP. Well, thank you.
    And I want to thank our witnesses. This is a very important 
hearing, and I very much appreciate the quality of your 
testimony this morning. And I want to thank you for the 
contributions you have made to this issue.
    And, with that, this hearing is adjourned.
    [Whereupon, at 12:40 p.m., the committee was adjourned.]

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