[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
THE OECD BASE EROSION AND
PROFIT SHIFTING (BEPS) PROJECT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TAX POLICY
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
DECEMBER 1, 2015
__________
Serial No. 114-TP04
__________
Printed for the use of the Committee on Ways and Means
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COMMITTEE ON WAYS AND MEANS
KEVIN BRADY, Texas, Chairman
SAM JOHNSON, Texas SANDER M. LEVIN, Michigan
DEVIN NUNES, California CHARLES B. RANGEL, New York
PATRICK J. TIBERI, Ohio JIM MCDERMOTT, Washington
DAVID G. REICHERT, Washington JOHN LEWIS, Georgia
CHARLES W. BOUSTANY, JR., Louisiana RICHARD E. NEAL, Massachusetts
PETER J. ROSKAM, Illinois XAVIER BECERRA, California
TOM PRICE, Georgia LLOYD DOGGETT, Texas
VERN BUCHANAN, Florida MIKE THOMPSON, California
ADRIAN SMITH, Nebraska JOHN B. LARSON, Connecticut
LYNN JENKINS, Kansas EARL BLUMENAUER, Oregon
ERIK PAULSEN, Minnesota RON KIND, Wisconsin
KENNY MARCHANT, Texas BILL PASCRELL, JR., New Jersey
DIANE BLACK, Tennessee JOSEPH CROWLEY, New York
TOM REED, New York DANNY DAVIS, Illinois
TODD YOUNG, Indiana LINDA SANCHEZ, California
MIKE KELLY, Pennsylvania
JIM RENACCI, Ohio
PAT MEEHAN, Pennsylvania
KRISTI NOEM, South Dakota
GEORGE HOLDING, North Carolina
JASON SMITH, Missouri
ROBERT J. DOLD, Illinois
TOM RICE, South Carolina
David Stewart, Staff Director
Janice Mays, Minority Chief Counsel and Staff Director
______
SUBCOMMITTEE ON TAX POLICY
CHARLES W. BOUSTANY, JR., Louisiana, Chairman
DAVID G. REICHERT, Washington RICHARD E. NEAL, Massachusetts
PATRICK J. TIBERI, Ohio JOHN B. LARSON, Connecticut
TOM REED, New York LINDA SANCHEZ, California
TODD YOUNG, Indiana MIKE THOMPSON, California
MIKE KELLY, Pennsylvania LLOYD DOGGETT, Texas
JIM RENACCI, Ohio
KRISTI NOEM, South Dakota
GEORGE HOLDING, North Carolina
C O N T E N T S
__________
Page
Advisory of December 1, 2015 announcing the hearing.............. 2
WITNESSES
Panel One
Robert B. Stack, Deputy Assistant Secretary for International Tax
Affairs, U.S. Department of the Treasury....................... 6
Panel Two
Barbara M. Angus, Principal, Ernst & Young....................... 34
Catherine Schultz, Vice President for Tax Policy, National
Foreign Trade Council.......................................... 56
Gary D. Sprague, Counsel, The Software Coalition................. 47
Martin A. Sullivan, Ph.D., Chief Economist, Tax Analysts......... 64
SUBMISSIONS FOR THE RECORD
Andrew F. Quinlan................................................ 85
Business and Industry Advisory Committee (BIAC) to the OECD...... 92
Motion Picture Association of America (MPAA)..................... 100
National Association of Manufacturers (NAM)...................... 105
Tax Innovation Equality (TIE) Coalition.......................... 111
THE OECD BASE EROSION AND
PROFIT SHIFTING (BEPS) PROJECT
----------
TUESDAY, DECEMBER 1, 2015
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Tax Policy,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:04 a.m., in
Room 1100, Longworth House Office Building, Hon. Charles W.
Boustany, Jr. [Chairman of the Subcommittee] presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON TAX POLICY
CONTACT: (202) 225-3625
FOR IMMEDIATE RELEASE
Tuesday, November 24, 2015
No. TP-04
Chairman Boustany Announces Hearing on
The OECD Base Erosion and
Profit Shifting (BEPS) Project
Congressman Charles Boustany (R-LA), Chairman of the Committee on
Ways and Means Subcommittee on Tax Policy, today announced that the
Subcommittee will hold a hearing on the OECD BEPS project final
recommendations and its effect on worldwide American companies. The
hearing will take place on Tuesday, December 1, 2015, in Room 1100 of
the Longworth House Office Building, beginning at 10:00 a.m.
In view of the limited time available to hear witnesses, oral
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Chairman BOUSTANY. Good morning. And I want to call this
hearing to order.
You might remember this Subcommittee was formerly called
the Select Revenue Measures Subcommittee. But, to reflect the
central role of tax in the Ways and Means Committee agenda,
Chairman Brady and the rest of the Members decided to change
its name to the Subcommittee on Tax Policy to give it its
rightful position among subcommittees.
I also want to acknowledge the fine work done by the two
Chairmen before me, Mr. Reichert and Mr. Tiberi, in moving
forward the agenda on tax reform. Thank you, gentlemen, for the
fine work of leading the Subcommittee.
Today the Subcommittee on Tax Policy will examine the final
recommendations recently issued by the OECD on their Base
Erosion and Profit Shifting project.
The alarming increase in foreign acquisitions of U.S.
companies over the past decade, and especially in the last
year, have exposed the critical and urgent need for tax reform
in America. At 39 percent, the United States now faces the
highest Federal and State combined corporate rate in the
developed world, which is rapidly draining America of its
homegrown innovation and business, and forcing companies to
relocate to countries with more business-friendly tax regimes.
Globalization of the business marketplace has created
historic opportunities for growth that were previously
impossible. U.S. tax policy must account for these changes in
this rapidly complex changing environment. Just last week,
Pfizer, an American company founded in 1849 in New York City,
announced the largest foreign acquisition of an American
company in history. That is not the first, nor will it be the
last.
Foreign acquisition has been pushed over the line by our
broken Tax Code--and the last time comprehensive tax reform
took place in the United States was 1986. And since then, our
international counterparts have capitalized on our lack of
action, outpacing us to a debilitating degree in adopting tax
reforms needed to attract capital investment.
As international tax regimes have evolved, multinational
companies have also evolved to become increasingly savvy in
minimizing their overall tax liability. International
competition for business and a fiduciary duty to shareholders
obligates companies to be proactive. The political and policy
hurdles that have prevented tax reform efforts from moving
forward seem to pale in comparison to the problem America faces
with the mass exodus of American companies through foreign
acquisitions.
Since 2001, global economic instability, alongside the
increasing mobility of capital and high-value profitable
business activities, have served as natural and powerful
motivators for international tax reform. The substantial
migration of multinational companies to more favorable tax
jurisdictions has placed front and center an acute
international awareness that there are limits to the tax
burdens countries can place on their resident companies before
they must seek a more favorable tax environment elsewhere.
All the while, the United States has failed to keep with
the pace. It is being left behind. Indeed, the need for tax
revenue resulted in the push by OECD to launch the BEPS
project.
The OECD BEPS project was intended to target limited,
overly aggressive tax planning, and resulted in inappropriate
tax avoidance. In fact, one key theme of the BEPS project was
to eliminate cash boxes. In effect, shell companies with few
employees or economic activities, and which are subject to no
or low taxes. However, the project quickly expanded into a
fundamental rewrite of global tax practices, including those of
the United States, in a relatively opaque process outside the
reach of U.S. political process.
The OECD's BEPS project recommendations are deeply
troubling on a number of levels, not the least of which is the
aggressive attempt to impose substantial tax policy changes on
the international community under the guise of eliminating so-
called harmful tax practices to ensure multinational companies
pay their ``fair share'' of taxes owed in the jurisdictions in
which they operate. This is a highly subjective standard set by
the OECD that seems to unnecessarily target American companies,
while also disregarding the detrimental impact these
recommendations will have on U.S. companies that currently
operate under the worldwide system of taxation observed in the
United States.
The BEPS project may have been motivated by an underlying
belief that creating a business-friendly tax regime to attract
business investment to one's country is itself an illegitimate
and harmful practice that must be eliminated. But the BEPS
project ended up making recommendations that will achieve the
opposite result, by encouraging countries to create patent
boxes, which will effectively force worldwide companies to
shift their business operations out of the United States in the
absence of change.
Moreover, the exposure of American companies' highly
sensitive information through the country-by-country reporting
requirements within BEPS' recommendations
are not constrained by any rationale for the breadth of
information required, and are also lacking appropriate
protections for highly-sensitive information in this regard.
The BEPS project final recommendations issued this year,
coupled with the present European Commission investigation into
alleged receipt of illegal state aid by mostly American
companies, exposed what appears to be an extremely disturbing
and multifaceted attack specifically targeted at American
companies.
Ladies and gentlemen, we are out of time. We have nearly
three decades of inertia with regard to tax reform. This must
be the Congress of action that takes the tough but necessary
steps to reform our Tax Code for the sake of American families,
American companies, and America's stature as the world's leader
in fostering innovation and business growth.
And, with that, I will yield to my Ranking Member, Mr.
Neal, for an opening statement.
Mr. NEAL. Thank you very much, Mr. Chairman. And
congratulations on your new post. A reminder that I have now
either been the Chairman or the Ranking Member with the three
people sitting to my right. So I provide some institutional
anchor to the conversation that we are about to have.
Our Tax Subcommittee has a long and rich bipartisan history
of coming together to address some of the Nation's biggest
problems. We have worked together in the past, and I hope to
continue to work together on tackling very important issues of
this day. Thank you for calling this important hearing on
OECD's Base Erosion and Profit Shifting project. The timing
could not be more fitting.
A new wave of inversions has gripped the corporate world,
as yet another U.S. multinational has renounced their U.S.
corporate citizenship. In a record-setting $160 billion deal,
Pfizer and Allergan--and a reminder, Allergan was also formerly
an American company--have agreed to merge and create the
world's largest pharmaceutical company. With this merger, the
U.S. tax base continues to erode. Perhaps this latest inversion
will prompt Congress to come together on reforms so this does
not continue to happen.
These inversions happen because of a broken Tax Code which
allows these deals to take place. Congress must take action
immediately, as we did in 2004, with legislation that I
sponsored, to stop the flow of inversions until we can
meaningfully fix our broken Tax Code.
Our rudimentary Tax Code remains ill-equipped to handle our
increasingly globalized and digital economy. As a result, we
have seen an explosion of multinational companies shift
profits, activities, and property from high tax countries to
low tax countries. By OECD's best guess, countries are losing
as much as $240 billion a year in lost revenue.
I want to commend the Obama Administration and Secretary
Lew for their efforts in working with the international
community and finding commonsense solutions to address these
taxation challenges. I look forward to the hearing, the
testimony from our distinguished panelists on the best ways to
address the challenges ahead of us, and to ensure that the OECD
process is not one where our jurisdictions try to grab revenue
that rightly belongs to the United States.
But ultimately, the task of fixing our Tax Code falls on
us, specifically on this Subcommittee. Mr. Chairman, it is my
hope that we can use this hearing as a springboard toward
meaningful reform, one that broadens the base and lowers the
rate in a revenue-neutral way, as the Obama Administration has
proposed.
Thank you, Mr. Chairman.
Chairman BOUSTANY. I thank the gentleman. Today we will
hear from two panels comprised of experts on international
taxation. I am very excited to have these panelists, who are
all well-known experts in this area.
Our first panel will be Robert Stack, Deputy Assistant
Secretary for International Tax Affairs, U.S. Department of the
Treasury.
Mr. Stack, thank you for being here today. We appreciate
the fine work you have done over the years, and we look forward
to hearing your testimony. Rest assured the Committee has
received your written statement. It will be made part of the
formal hearing record. We ask you to keep to 5 minutes on your
oral remarks, and you may begin when you are ready.
STATEMENT OF ROBERT B. STACK, DEPUTY ASSISTANT SECRETARY FOR
INTERNATIONAL TAX AFFAIRS, U.S. DEPARTMENT OF THE TREASURY
Mr. STACK. Chairman Boustany, Ranking Member Neal, and
distinguished Members of the Subcommittee, I appreciate the
opportunity to appear today to discuss some key international
tax issues, including the recently-completed G20 OECD Base
Erosion and Profit Shifting--or BEPS--project. We appreciate
the Committee's interest in these important issues.
In June 2012, the G20 Summit in Los Cabos, Mexico, the
leaders of the world's largest economies identified the ability
of multinational companies to reduce their tax bills by
shifting income into low and no-tax jurisdictions as a
significant global concern. They instructed their governments
to develop an action plan to address these issues, which was
endorsed by the G20 leaders in St. Petersburg in September
2013. The project came to fruition with the submission of the
final reports to the G20 this fall.
The BEPS reports cover 15 separate topics. Some reports,
such as those on the digital economy and controlled foreign
corporation rules, are more or less descriptive of the
underlying issues, and discuss approaches or options that
different countries might take, without demonstrating any
particular agreement among participants on a particular path.
Other reports, such as those on interest deductibility and
hybrid securities, describe the elements of a common approach
that countries might take with respect to those issues. With
respect to transfer pricing, the arm's length standard was
further amplified in connection with issues around funding,
risk, hard-to-value intangibles.
And finally, in the areas of preventing treaty shopping,
requiring country-by-country reporting, fighting harmful tax
practices, including through the exchange of cross-border
rulings, and improving dispute resolution, countries did agree
to a minimum standard.
I believe that the transparency provided by country-by-
country reporting, the tightened transfer pricing rules, and
the agreement to exchange cross-border tax rulings will go a
long way to curtail the phenomenon of stateless income.
Companies will very likely be reluctant to show on their
country-by-country reports substantial amounts of income or
lower--in low or no-tax jurisdictions. And the transfer pricing
work will better align profits with the functions, assets, and
risks that create that profit.
The exchange of rulings will drive out bad practices and
shine sunlight on the practices that remain. The improvement of
dispute resolution and the inclusion, where possible, of
arbitration, will streamline dispute resolution and should
thereby reduce instances of double taxation.
Throughout this work, the U.S. Treasury Department worked
closely with stakeholders--in particular, the U.S. business
community, which stands to be most directly affected by this
work. And this was particularly the case in fashioning the
rules on country-by-country reporting. Across the board, the
BEPS deliverables are better than they would have been if the
U.S. Treasury Department had not been heavily involved in their
negotiation. We are proud of the role we played in the BEPS
process, but our work is not done.
Where do we go from here? Well, certain technical work
remains for the OECD in 2016 and beyond. And the participants
in the G20 OECD project will be turning its attention to
implementation of the BEPS deliverables, as well as monitoring
what countries actually do with respect to those deliverables.
But we must do more than that. The G20 OECD project has
produced well over 1,000 pages of material, some of it quite
technical in detail. It is imperative that we turn our
attention to ensuring that countries are able to implement
these rules in a fair and impartial manner, based on the rule
of law. What good is having carefully crafted new transfer
pricing rules, if the agent in another country auditing a U.S.
multinational is compensated based on the size of the
assessment he or she can make against the multinational,
regardless of its technical merit?
Can these rules really be fairly implemented if there is
not access to a meaningful appeals process? Ensuring the fair
and effective administration of the BEPS deliverables must be
part of our ongoing work. Indeed, the best way to foster the
G20 goal of supporting global growth is to actively promote the
connection between foreign direct investment growth and
efficient and effective tax administrations.
Foreign leaders often come to the United States seeking
greater foreign direct investment in their countries from our
investors, seemingly unaware of the impediment to such
investment resulting from their very own tax administrations.
We need to do a better job of making the connection between
fair and efficient administration, foreign direct investment,
and global growth. We are working hard to ensure that issues
around effective and fair tax administration are made part of
the post-BEPS agenda.
I would like to close by noting that it is no secret that
the BEPS project was inspired to no small degree by the fact
that large U.S. multinationals have been able to keep large
amounts of money offshore in low-tax jurisdictions untaxed
until those amounts are repatriated to the United States. This
phenomenon, and the sometimes very resulting low effective
rates of tax, in turn have led to the perception abroad that
U.S. multinationals are not paying their so-called fair share.
Thus, the BEPS phenomenon also lends support to the need
for business tax reform. The President's proposal to lower
corporate rates and broaden the base enjoys bipartisan support.
We look forward to continuing to work with Congress to bring
business tax reform to fruition.
Let me repeat my appreciation for the Committee's interest
in these important issues. And I would be happy to answer any
questions you may have. Thank you.
[The prepared statement of Mr. Stack follows:]
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Chairman BOUSTANY. Thank you, Mr. Stack. I--clearly, this
Committee now certainly has a sense of urgency about what is
happening on the international front. And, as developments have
occurred in a rapid pace, whether it is the creation of
innovation boxes or patent boxes by European countries, or the
completion of the OECD BEPS recommendations, we are falling
behind. We need to pick up our pace. And that means we need to
move forward with tax reform. We need a firm commitment that
the Administration will work with us getting beyond where we
are today, and really roll up the sleeves to try to move
forward on this.
But one of the concerns that a number of us have had, as we
have watched through the fall with the completion of these
recommendations on the BEPS project, is that Treasury might be
perceived as speaking or committing to legislative policy
recommendations on behalf of Congress without full consultation
with Congress.
BEPS implementation will focus on getting countries to make
legislative changes, which will require congressional action in
this country. And I just want you to outline for us, in signing
off on BEPS, to what extent did Treasury and others in the
Administration consult with Congress, or consider whether
Congress would agree with any of the specific tax policy
recommendations?
Mr. STACK. Thank you, Mr. Chairman. I can report very
directly that the--if you go through the BEPS' 15 action items,
there are 2 in particular that absolutely would need
congressional legislative action. One is the work on interest
stripping, which is in the BEPS project. And there is a second
piece on what we call hybrid securities. That is a situation in
which you get a deduction, let's say, in the United States
because it is treated like interest, but when it is received in
the other jurisdiction, they view it as a dividend and don't
tax it, so that creates stateless income.
We were very careful, Mr. Chairman, not to include those in
the minimum standard agreed at the OECD, precisely because we,
as the Administration, could not and would not commit the U.S.
Congress. I think, if you work through the other items, if you
think, for example, of treaty matters, where we might agree, as
a matter of Treasury, to put something in our model, a treaty,
of course, requires the advice and consent of the Senate. Fully
mindful of that, all our obligations in the BEPS process take
into account the legislative processes in the United States.
I mean I would just add for the record that there is
nothing in the BEPS project that is a legally binding
commitment on the part of the U.S. Government. And so, I think
we tried very hard to respect the legislative role and the
difference between the legislative and the executive in every
aspect of our work.
Chairman BOUSTANY. Well, I appreciate that. And I think
what we need to do now, going forward, is accelerate our level
of communication on how we are going to move forward. Because
other countries are taking steps, very aggressive steps, with
some of the implementation of these recommendations. And if we
fail to reform our Code appropriately, we will not lead this
process, it will be led by others, and I don't think the
outcome is going to be as amenable to American companies as we
would all hope.
I want to shift gears for a minute with one last question
for you. I want to examine this EU state aid situation. EU
state aid cases seem to be another example of foreign
governments targeting U.S. firms to expand their tax bases. And
we have seen the press reports. I have actually had a
conversation with folks at Apple who are very concerned about
this. I believe you share my concern that these EU state aid
cases will lead to retroactive foreign tax increases on U.S.
companies that could result in American taxpayers footing the
bill through foreign tax credits, further eroding our base.
I am very concerned that the effects will go far beyond the
EU's initial cases--I mean we are in the early stages of this--
and that these cases could have substantial and direct impact
on our U.S. companies--and ultimately our U.S. taxpayers.
In light of the EU's state aid cases, what is Treasury
doing to protect the interests of the United States?
Mr. STACK. Thank you, Mr. Chairman. I would like to begin
this discussion with a note of humility. I am a trained U.S.
tax lawyer. I am not a European lawyer. I am not a competition
lawyer in Europe, nor have we seen the final legal documents of
all the various investigations that are ongoing.
In light of that, we were faced with a judgement, which is
do we, as the Treasury Department, simply sit and let these
cases kind of move forward and unfold with the possibility that
I can talk--which I will talk more about--of the effect on U.S.
bilateral relationships and/or the possibility of an ultimate
foreign tax credit if, indeed, these taxes are determined to be
creditable, which is an open question I need to put on the
record.
Or we could speak now about the U.S. interest in these
cases, even though the work is not finally done. So what
Treasury has done is we have made it clear to the EU Commission
directly that the United States has a stake in these cases.
The first--our first stake is as follows. The United States
has income tax treaties with the member states in the EU. We do
not have an income tax treaty with the EU. And that is because
income tax in the EU is left to the members to do their own
income tax. Well, there is a great deal of uncertainty in the
current proceedings whether or not the commission is
substituting its own tax determination for that of the member
states. And if it were to do that, I think it calls into
question our bilateral relationships with members of the EU.
And it is worth mentioning that the United States has an
interest in understanding, with clarity, the precise nature of
income tax enforcement administration in the EU. That is number
one.
Number two, some of the numbers that have been reported in
the press here are what I would call eye-popping. And while it
is true--and I will repeat for the record that we have not
analyzed whether or not taxes required to be paid in these
jurisdictions will, in fact, be creditable. The fact that they
may be could mean that, at the end of the day, U.S. taxpayers
wind up footing the bill for these charges by the EU State Aid
Commission.
But let me make two other points that I think are very
important here.
One is that I believe we also have a concern that these
taxes are being imposed retroactively under circumstances in
which--I do not believe countries, companies, tax advisors, or
auditors ever expected a state aid analysis of the type that is
emerging from this work. In our view, when a novel approach to
law is taken, that is precisely the situation in which a
prospective remedy would be appropriate, to ensure that the
behavior ceases without imposing very large tax impositions on
a retroactive basis. So we have been very careful to note that
we think the basic fairness calls for these to be retroactive.
Beyond being public about our concerns, and demonstrating
the U.S. interest, and demonstrating our concern that fairness
calls for a prospective approach, to be honest, it is not 100
percent clear what other tools are at our disposal, except to
make our concerns known. And we have done that, and hopefully
will continue to do that.
Chairman BOUSTANY. We look forward to exploring options
with you on that. You put your finger exactly on the real
concern that I and other Members of the Committee have, about
the retroactive nature of this, and how it is really, in
effect, going after advance pricing agreements that are in
existence. And this is deeply problematic.
I do believe we are going to need policy ideas that can be
discussed between the Administration and this Committee on
outlining our way forward on that. I thank you.
I now yield to Mr. Neal for questioning.
Mr. NEAL. Thank you, Mr. Chairman. I think on that question
and the answer that was given by Mr. Stack there would be broad
agreement on this Subcommittee and the full Committee. I don't
know that there was anything that the witness said that we
could disagree with on that. I thought it was right on target.
So thank you for establishing that.
Mr. Stack, it appears clear that the Pfizer Allergan merger
is moving forward, and the resulting inversion of one of the
largest U.S. pharmaceutical companies is imminent. You and the
witnesses on the next panel have testified on the need for tax
reform, and specifically international tax reform, as an
important and even vital step to ensuring that multinational
companies remain competitive globally, and continue to create
jobs and income in the United States. I think you would agree
so far that such tax reform has been elusive, despite years of
conversation on the Committee.
Are there some things that Congress could do right now, as
we continue our efforts, to reform the Tax Code that could stem
the tide of inversions?
Mr. STACK. Thank you, Congressman. Yes, I actually believe
there are. And tomorrow I believe that if Congress were to
lower the threshold for an inversion that forces the inverted
company to retain its U.S. tax domicile from, let's say, 80
percent of the current statute to 50 percent, I believe that
this would act very strongly to stem the tide of inversions
because companies are quite reluctant to, let's say, give up
control entirely, even in the public context, through a merger
with another entity.
Second, I think that plugging our interest-stripping rules,
so that once a company is inverted it is not able to take
excess amounts of income out of the United States in the form
of interest, is an imperative that we could do today, both to
stem the tide of inversions, and also to level the playing
field between foreign and domestic U.S. companies. I don't see
those as necessarily having to wait for the full package of tax
reform. And this is something I believe Congress could do.
As Secretary Lew has said, we have tried to do with our
regulatory authority what we can. But these are some actions
Congress could take that would help greatly, I believe, stem
the flow of inversions.
Mr. NEAL. Mr. Stack, I have also heard from a number of
multinational companies talk about the bad things that BEPS
might do. I think everyone in the room would agree that it is
certainly not in the United States' best interest to do
something like pulling back from BEPS in the project, or stand
on the sidelines as the rest of the world implements BEPS rules
that could greatly impact our multinational corporations. For
the Members of this Committee, that could be tantamount, I
think, to malpractice.
But to look at this from another angle, I think there are a
number of very important things that the United States could
specifically do, and that Members of Congress could join in in
a helpful role.
There is an opportunity here, I think, for some very
basic--many things that could be done on insight that other
countries are now choosing to do. Their authority under the new
rules is to ensure that the United States, after a period of
time, would push the participating countries to ensure that
their efforts are being monitored by their peers. Would you
offer your insights on that, as well?
Mr. STACK. Certainly, Congressman. I think the--frankly,
the next phase that we will be working very intensely on in
BEPS goes to both the implementation--how will countries
implement it. And here I mentioned I would like to push for the
rule of law. And then, what kind of monitoring will we do? Will
we watch other countries to see how they are implementing these
rules?
From the U.S. perspective, there are a lot of areas where
we are going to care a lot about the monitoring. We care a
great deal about how country-by-country
reporting is going to be done, whether it is confidential and
whether it is used for the appropriate purposes. We are going
to care a lot about whether new permanent establishment rules
are applied in a fair and efficient manner.
So, some of the ongoing work in BEPS is going to be
creating these monitoring tools, so that, over time, we are
watching to see that countries are not simply using these new
rules to grab revenue, but are applying them in a principled
way. So that will absolutely be part of our ongoing work in
BEPS.
And the country-by-country, I should add, in 2020 we
actually all come back together to assess how the rules are
working, how countries are doing them, are they producing
necessary information for countries. And adjustments will be
made, as necessary, at that time to the proposed rules, as
well.
Mr. NEAL. Thank you, Mr. Stack. Thank you, Mr. Chairman.
Chairman BOUSTANY. Mr. Reichert.
Mr. REICHERT. Thank you, Mr. Chairman. And I want to take a
moment, too, to thank you and Pat and the rest of our team over
here, and then, of course, recognize Mr. Neal for his expertise
and for being a good partner over the last year I was Chairman,
and I thank the team on the Democrat side.
I am an old cop, a retired cop. So I am all about teamwork.
And I understand that in this world sometimes politics get in
the way of teamwork. But I think that you are hearing a lot of
agreement so far with the testimony that you provided. And we
will see how that goes as we continue to question you, but I
appreciate all the work that you have done. And, as Chairman
Boustany said, we really look forward to working with you to
help make America stronger, and have that fair playing field
that we all are searching for.
I want to focus on dispute resolution. You mentioned that
in your testimony. Prior to the release of the BEPS final
report, the number of tax disputes initiated between countries
far outpaced the number of disputes actually resolved. And, as
countries begin to implement the various changes to their own
international tax rules, as recommended by the BEPS final
report, the number of unresolved disputes is almost certain to
increase. I think you would agree with that.
However, the final report did not call for mandatory
binding arbitration. And as you mentioned in your testimony,
the United States, along with 20 other countries, remain
committed to pursuing mandatory binding arbitration procedures.
So, my question, Mr. Stack, is why was mandatory binding
arbitration, which is, again, of great importance to American
companies and the United States, in general, not included in
the final report?
Mr. STACK. Thank you, Congressman. The short answer is the
OECD BEPS project was a consensus kind of approach that
sometimes played to the U.S. advantage, as we were trying to
push items that we cared about. And in other circumstances,
countries made clear that they were not yet ready to move
forward on mandatory binding arbitration.
The reasons for that, by the way, are not always nefarious.
I mean some countries don't have experience with it. Some
countries worry about whether or not they can keep up with
wealthier countries that might be able to put a lot of
resources into it. And many countries have a concern that it
raises issues of sovereignty to give away the right to make
their tax determinations. And, of course, I suspect some are
concerned that they would come out on the losing end of many
arbitrations if, in fact, their tax administration was put to
the test.
The good news, however, Congressman, is the fact that--you
referred to the fact that there are 20 countries ready to move
forward in mandatory binding arbitration. This is something,
when we were not successful in getting it in BEPS, we pushed it
through the G7, and we have created quite a deal of momentum
around it.
And I can also report that the 20 countries that are
interested represent 90 percent of the dispute cases around the
world. So, by bringing together a lot of the developed
countries that actually have the cases today, we are able to
put the real critical mass of countries into the pot of moving
forward on mandatory binding arbitration, and we are deeply
engaged in that work at the OECD and the multilateral.
The thinking I have is if we can get this critical mass of
countries having experience with binding arbitration, that over
time it will grow out and attract the countries that for now
are not willing to do that, most notably a country like India.
And so we would try to demonstrate its success, make it part of
the international tax fabric and, over time, I believe we will
have success in making mandatory binding arbitration a standard
tool in our international toolbox.
Mr. REICHERT. And I recognized at the end of your testimony
you asked yourself the question where do we go from here, and
you mentioned tech work, implementation, and large document--
1,000 pages. Mr. Neal also asked about reporting and
monitoring, which you mentioned, again, at the end of your
comments. And you are looking for fair, efficient, and
effective, all of those things you mentioned.
Where do we go from here when it comes to binding
arbitration? Is it your testimony, then, that demonstrating
success is a likely way to get countries to come on board with
dispute resolution language?
Mr. STACK. Thank you, Congressman. I should have added
that, as a very concrete next step, we are working in Paris on
something called a multilateral instrument, which will try to
put in one instrument the various treaty-related matters that
have been agreed in the BEPS process. Mandatory binding
arbitration will, we expect, be part of this multilateral
instrument, at which point countries can sign up to the
instrument and, in effect, put it into effect with those 20
countries, automatically if you will, subject, of course, to
ratification by the Senate.
And so, that gives us a very concrete, near-term vehicle to
move forward with mandatory binding arbitration. And then I
think we would watch the results and try to build out from
there.
Mr. REICHERT. Thank you. I yield back.
Chairman BOUSTANY. Mr. Larson.
Mr. LARSON. Thank you, Mr. Chairman, and congratulations to
you. And kudos always to Mr. Neal and your other predecessors
who served as Chairmen here,
as well. And we want to get all these accolades out, and also
condolences to Mr. Kelly on Notre Dame's loss this past
weekend. I was with you, I wanted you to know.
Thank you again for your testimony, Mr. Stack, and for your
service to the Nation. And if I could, just a couple of
followup questions, one on what Mr. Neal had to say, and the
other one is--it relates to the BEPS process.
There is great concern about wholesale rewriting of the
rules on the digital economy, with countries wanting the rights
to tax companies with a so-called digital presence in their
country. Did that occur? And can you discuss some of the
Administration's proposals regarding the digital economy and
subpart F income?
Mr. STACK. Thank you, Congressman. Yes. I mean I think
that, as I said in my opening statement, I think the U.S.
presence in the BEPS project was critical to moving
international rules to a better place for the United States.
As the--our digital companies are doing business all over
the world. They are household names. They have penetrated
markets and the consciousness of people and politicians all
over the world.
And one of the issues we were facing in BEPS was whether or
not there should be new rules to tax people who sell into an
economy through the digital economy. And there is a great deal
of fervor and political pressure to write such new rules. And I
am proud to report that the digital report in the OECD was an
excellent discussion of the technical tax elements of digital.
But, at the end of the day, none of the more aggressive
proposals for taxation based on a digital presence were
adopted.
In the report there are options. And I believe also that
European countries will turn, over time, more to that
collection, which is totally appropriate. And I believe we were
able to play a very constructive role in the digital space.
With respect to the U.S. issues on digital in our subpart F
reforms, I would say that, quite different from the work in the
OECD, whether we needed a brand new paradigm to tax the digital
age, what we were really doing in the President's budget
proposals was really trying to conform our subpart F rules to
the fact that we now have different modes of achieving, in the
digital space, things that brick-and-mortar countries used to
do.
So let me give you a very simple example of our rules. Our
subpart F rules are based on a premise that, if you sell out of
the United States, let's say, to Bermuda, and then Bermuda on-
sells, let's say, into Europe, that the presence of this
intermediate company provides an opportunity to do a little
game-playing with how much income stays in the United States.
And so, we have a rule called a foreign-based company rule,
that says, well, if you're going to buy from a related person
and on-sell, we're going to treat that Bermuda profit as really
subpart F, and bring it back into the United States.
Well, in the digital space, if you think about it, you
don't need to buy and sell a widget. You might license some IP
and then stamp a disk in Bermuda and sell it. And really, I
think the easy way to understand our proposal is we simply
brought our subpart F rules up to what we had been doing in the
brick and mortar world, so that similar games could not be
played by tech companies in the digital space. And we have a
couple of examples like that in our budget.
Mr. LARSON. So let me quickly ask you, as well, you
mentioned that there were--in addressing Mr. Neal's concerns,
there were two things that Congress could do immediately. We
all hope, and certainly would like to see the bipartisan effort
continue for tax reform. But you mentioned there were two
immediate things, one was lowering the threshold and the other
was dealing with interest stripping.
You said going from 80 to 50 percent. Why 80 to 50? And,
with interest stripping, could you give us a quick explanation
of how that occurs?
Mr. STACK. Sure. Thank you. Well, in the interest
stripping, you know, I often say when I speak, you know, you
read a lot in the press about these highly-engineered
structures to do base stripping around the world. And what I
have said publicly sometimes, if you're a foreign multinational
you don't really have to do something very fancy to strip out
of the U.S. base, you just have to--maybe you even dividend up
a note. You just hand something to your owner and say, ``Now I
owe you $1 million.'' And those interest deductions start
clicking in the United States, and we are losing revenue at
every moment.
Our proposal--and one that we pushed at the OECD--said,
``Wait a second. First of all, a multinational shouldn't get,
in our jurisdiction, any more than its pro rata share of its
third-party borrowing.'' And without getting too much into the
weeds, what we did was we came up with a way to say you can get
your share of global borrowing based on your EBITDA in the
United States. And that seems fair. Or you can take a fixed
percentage of your EBITDA so you don't have to prove anything.
And in the Administration's proposal we put it at 10
percent. The OECD work suggested a corridor of 10 to 30. But I
would just point out for the Committee both of those are far
removed from the 50 percent in our current 163J, which seem to
permit far more interest stripping than we can probably afford,
or that is based on sound tax policy.
Mr. LARSON. Thank you.
Chairman BOUSTANY. I thank the gentleman. Mr. Tiberi.
Mr. TIBERI. Thank you, Mr. Stack. I have a headache. This
is just unbelievable.
[Laughter.]
So, in responding to Dr. Boustany's question about the EU
state aid cases, you said you are not sure what else Treasury
can do besides express concerns.
Mr. Neal correctly identified the problem, and that is
Congress not acting. But I would also argue, Mr. Neal, that
there has been a lack of leadership at the White House on this
very issue, as well.
To me, it is not very complicated. Number one, it is outra-
geous, what the EU is doing in retroactively targeting U.S.
multinationals. I just think it is outrageous. But number two,
to me, in my Fred Flintstone mind, it is not really
complicated, what the problem is. We have a very uncompetitive
Tax Code.
So, you can point to States. I was in Connecticut recently
and I saw my friend, and the chatter there was about a large
U.S. multinational company that has been headquartered there
for a long, long time that was considering moving because of a
new tax that was put in place in that State.
In my State of Ohio, we lost longtime multinational--and
not even multinational--domestic companies not to just India,
but to Indiana, to Georgia, to Texas. And the companies, many
of them public, cited the Tax Code in Ohio. And this has
happened internationally, as well. And yet we talk about trying
to prevent ways by writing regulations and rules.
Mr. Stack, I don't understand why we can't look at this
picture--I am cynically asking, I am not really asking you,
because it is above your pay grade.
[Laughter.]
Why the Administration and Congress can't come together and
do what happens in communities in Ohio. One community loses a
major employer to another community because the tax rate is
lower in that community than the community they left. We see
this all over. It is the marketplace.
And, at the end of the day, you write rules to try to stop
this, and maybe we can--you know, we can hit that peg for a
little while, but it is going to come up somewhere else. And
the reality is we have an uncompetitive tax system. And if we
can lower the rate and go to a system, some exemption-type
system, that puts our large employers who do business all over
the world on the same playing field, quite frankly, that the
rest of the world's rules are on, then we could actually maybe
see some of this loss of jobs and ultimate loss of revenue
stop.
And for the life of me, I can't understand, so I ask you
this personally, not as a Member of the Administration, someone
who leans to the left, rather than to the right. What is the
problem with lowering rates and going to an exemption-type
system that puts us--puts our employers on a level playing
field? Why not just do that?
Mr. STACK. Thank you, Congressman. First of all, I think
you have just described the President's plan.
Mr. TIBERI. Wow.
Mr. STACK. Because the President's plan would lower the
corporate rates, would broaden the base, and, in many of the
jurisdictions around the world, where you pay more than a
minimum tax, you are exactly on equal footing with your
competitors in those jurisdictions.
Mr. TIBERI. Boy, oh boy. I remember watching the Democratic
Convention and Joe Biden making fun of the exemption system,
saying that would ship jobs overseas. So maybe the Vice
President needs to get on board with the President, because I
clearly don't think that what I am describing is the
President's plan, because we would have passed that back in
2011. Or maybe you should have passed it back in 2009.
I mean, clearly, the market is doing something differently
than what we would like it to do. And so, we have a--not a loss
of jobs. We have a loss of really good companies. The only
thing worse than an inversion is the company actually moving
their headquarters overseas.
And I don't know about the community you are from. The
community that I am from, the jobs that--the employers that
make up the heart and soul of the communities, whether they are
small businesses, medium-sized businesses, or large businesses,
are the ones that are headquartered there, because they are
involved in the United Way, they are involved in the
educational system. They provide so many dollars to the
community. And we are losing those.
And, rather than trying to come up with these BEPS rules
and anti-inversion rules, I just don't understand and don't see
the leadership from the White House to say, ``Look, let's look
at what other countries have done. Let's look at what Ireland
has done. Let's look at what the UK has done. Let's look at
what other major employers, countries in the world have done,
and follow their lead.'' If we would have done that 3 years
ago, we wouldn't be having this hearing today. And maybe what
we would actually be having is a great debate in Connecticut
and in Massachusetts and Ohio and Louisiana about jobs coming
here from Europe, rather than losing jobs to Europe.
I yield back.
Chairman BOUSTANY. I think the gentleman really outlined
the problem beautifully. I thank him for that analysis.
Ms. Sanchez.
Ms. SANCHEZ. Thank you, Mr. Chairman. And I am prepared to
yield more time to Mr. Tiberi, if he wants to unveil the
Tiberi-Obama plan.
[Laughter.]
Mr. TIBERI. If you will support it, Ms. Sanchez.
Mr. THOMPSON. I ask unanimous consent that we do a letter
asking the Vice President to support the Obama-Tiberi plan.
[Laughter.]
Ms. SANCHEZ. That is right, that is right. Reclaiming my
time, Mr. Stack, thank you for being here today.
You mentioned that the United States had a presence in the
BEPS discussion, and that was a favorable outcome, to have that
input. You talked about making it known that we have a vested
interest in what comes out of that project, and that you favor
a prospective approach, and that there is this issue of
retroactivity.
I am curious to know what other ways did your--did
Treasury's participation in the BEPS project improve the
outcome, the overall outcome, of the project?
Mr. STACK. Thank you, Congresswoman. In preparing for today
I had occasion to go back through these BEPS action items and
just think of the ways the United States demonstrated a very
strong intellectual leadership in--actually, across the board
of the actions. And let me just give you a couple of examples.
You know, transfer pricing is the prices that companies pay
between affiliates across borders. Today, a lot of the action
is around royalties and intellectual property, which is
offshore. That constituted three action items: 8, 9, and 10.
And there was an enormous push around the world to really water
down the rules that respect contracts and respect the
separateness of legal entities so that tax auditors and
administrators could almost have carte blanche to look at a
multinational setup and say, ``Well, we think so much more
profit should have been here than there.''
We were extraordinarily aggressive in the transfer pricing
space, and I think we have produced a report--and I don't think
it is--I don't think I need to be the test of it, but I think
within the U.S. tax community people have seen that move back
to something that is far more a recognition of the arm's length
standard and how to apply it.
On country-by-country reporting, I understand fully that it
has been the subject of some complaint, because I can
understand that any time you add burdens, et cetera, then there
are concerns. But I have to say, on that one, the very first--
first of all, the world started off wanting the multinationals
to publicly produce their country-by-country data all over the
world, number one. And number two, the first draft of that
report didn't just want 6 or 7 items per country. I believe the
first draft wanted something in the neighborhood of 19 or 20
items. And there was going to be a--far more complexity.
And we worked with the business community, and we came back
to OECD and said, ``Look, this is what can be done in the least
burdensome way. This is really all companies need.'' And we
were able to push the country-by-country stuff over the line.
In the hybrid work--and this is weedy, I will confess, and
I won't get into the details--but there were times when the
administra-
tors around the world wanted U.S. multinationals to identify
every single item on their books and records that might
actually cause
a mismatch. And we said, ``Wait a second. This should be done
among related parties,'' because that is really where the
problems are.
So, I think we went item after item, led very strongly, and
have improved the quality of the work by our tenaciousness, our
adherence to principle, and our technical skills.
Ms. SANCHEZ. I appreciate your answer. And I would just add
one further thing before I yield back my time, that if Mr.
Tiberi is interested in us, the United States, conforming our
laws to that of most nations around the world, I would just
point out that in the performance rights arena we lag far
behind where the rest of the world is, and we give up revenue
that sits overseas because we don't pay performance rights here
in this country, as other countries do to our performers.
And, with that, I will yield back the balance of my time.
Chairman BOUSTANY. I thank the gentlelady. We will go next
to Mr. Kelly.
Mr. KELLY. I thank the Chairman. Mr. Larson, thank you for
your condolences, although I would just say to you that we both
know Jerry Hogan. Jerry Hogan is the father of Kevin Hogan, the
quarterback at Stanford. Jerry is a good friend of all of ours.
His brother, Tom, and I went to school together at Notre Dame.
And Jerry was also Notre Dame, too. But Kevin--I was happy--as
much as I hate to see the Irish lose, I love seeing the Hogans
win. So it is something about this Irish deal that keeps us
together.
Mr. Stack, thanks so much for being here today. I am going
to ask you a question, though. And I think Mr. Tiberi hit on it
very clearly. Now, I come from the private sector. And in the
private sector you are always looking for market opportunities.
And in our case we are looking at a global market. And we are
looking at competitors who look at us and say, ``This is a
country whose pocket we can pick,'' because of tax policy and
regulations that make it very hard for us to be competitive on
a world stage.
Now, Senator Levin had proposed a bill in early 2014 that
would place strict limits on mergers in which they move their
tax address outside of the United States. Under the Senator's
plan U.S. companies trying to buy a foreign company and
relocate their headquarters to a lower tax country would have
to ensure that shareholders of non-U.S. companies owned at
least 50 percent of the combined company, up from 20 percent
now. The bill would consider inverted companies to be domestic
for U.S. tax purposes if executive control remained in the
United States and if 25 percent of sales, employees, or assets
remained in the United States. The measure would have been
retroactive to May 2014, and would be in place 2 years while
Congress considers broader tax changes.
Mr. Levin was responding to 14 companies that had conducted
mergers since 2011 in which they moved their headquarters
outside of the United States and into a lower tax jurisdiction.
At the time of his announcement, Pfizer was contemplating such
an inversion. Fast forward to today. Pfizer has announced that
is just what they are doing.
So, if you just did the Levin bill, that is a bill that
actually became law, would that by itself forestall this
migration of the U.S. tax base, considering the question within
the context, relative of the tax advantage that foreign
acquirers would gain from tighter inversion rules on U.S.
companies?
Mr. STACK. Congressman, yes. I--we have a budget proposal
that differs from the Levin proposal in some minor ways that I
can't recall as I speak at this moment. But the general concept
of telling a company that if you are--if you retain more than
50 percent ownership by the U.S. shareholders of the formerly
inverted company, you have it inverted and you are still United
States, we think would help greatly stem the flow of
inversions.
Mr. KELLY. Okay. But I think, when I heard Mr. Tiberi
talk--and I think we all agree--in the private sector there is
something about a carrot and a stick, and how you incentivize
people to behave properly, or the way you would like to see
them behave.
So, I don't believe that a bigger stick that makes it
harder for people to be profitable--and, by the way, we all
want to see companies be profitable because they hire more
people, they make more capital investments--I would rather see
a carrot that makes sense in relation to what the rest of the
world perceives as a global market, and as an advantage that
they have, or in restructuring their Tax Code to say, ``Come
over here and shop with us, you can be here,'' knowing that--I
think this is the part that is really hard for people to
sometimes grasp--the total cost of operation includes
everything, not just your raw materials and your labor, but
also tax policy.
When we artificially increase the cost of any product or
service by a Tax Code or by regulation that makes it impossible
to be on the same shelf globally as other countries, then it is
time for us to take a look at what it is that we are doing
wrong. Not what they are doing wrong. They are responding to an
opportunity. It is not that they are not patriotic; they are
just not stupid. Why the hell would you stay here, and continue
to pay those kind of taxes and follow those kind of
regulations, and then be held up as the worst people in the
world because you are not paying your fair share? There is
something that just doesn't make sense about this whole piece.
And this is not a Democrat or Republican issue. This is an
American issue. We continue to lose red-white-and-blue jobs. We
continue to decimate our local economies. We continue to
downgrade our ability to compete globally and then blame it on
some kind of a corporate strategy. That is not the problem
here. The problem is we have no strategy, going forward, to
gain market share. And I am talking about global market share.
If you really want to lift this economy, then do it the right
way.
So I don't expect you to respond to that, but, I mean, I
don't think the Levin bill does it. I would argue against any
time that somehow a bigger stick, swung harder, is going to
encourage people to stay. You know what they are going to do?
They are going to say, ``You know what? I am going to stay. I
am not going to leave. But in the future, I am making
investments someplace else, and I will let this die on the
vine. It can wither and go away. I will still succeed, but it
won't be here.''
And I think that is the real crux of the matter. We seem to
think that somehow, by beating people, that we are going to
make them perform better. That is not the key. The incentive is
much, much brighter for America when we actually encourage
people to make investments here, not tax them out of business
or regulate them out of business and make them totally
uncompetitive on a global stage.
Thank you, I yield back.
Chairman BOUSTANY. The Chair recognizes Mr. Thompson.
Mr. THOMPSON. Well, thank you, Mr. Chairman. And I also
congratulate you on your rise to prominence in this fantastic
Subcommittee.
Mr. Stack, thank you very much for being here. And it is
interesting. We all seem to be coming from the same place on
the dais, irrespective of the side. We may have a different way
of articulating it, Mr. Kelly, but I think we all want to make
sure that the United States is a competitive place where we
attract businesses, businesses who will stay here, businesses
who will come here, businesses that will create jobs,
businesses that will pay a tax level that gives us the revenues
that we need in order to fund the priorities that we have, as a
Congress, as Americans.
And so, I guess my--what I am interested in is maybe some
help from you, some guidance from you, as to how we get there.
Your focus has been on business and international tax reform.
The other side of the equation is the comprehensive tax reform
that has had us all wrapped around our axles for the last many
years. And is it your perception that we need to do one before
the other?
You talked a little bit about some specific tax policy that
could be done, irrespective of comprehensive, that would help
things around, help things move along. But is it better to
break it off and do the business international, or would doing
comprehensive help you get to where you believe we need to be,
in regard to the business and international?
Mr. STACK. Thank you, Congressman. I would mention, just
as an opener, there has been, in terms of carrots and sticks
and competitiveness--as a Tax Policy Committee, I think you
folks know better than I do that, at the end of the day, the
most competitive rate might be zero, but then we don't raise
any revenue.
So, as tax policy folks, we always are all thinking about
what is the revenue we need to fund the government we have. And
finding a happy median with that and these competitiveness
concerns is kind of an obvious point. And so we are not free, I
take it, to just join a race to the bottom to, let's say, zero
corporate tax rates without an alternative revenue source.
As to the second question, I would simply point out that
the business tax reform in the last 2 years--there seems to
have been some bipartisan consensus that a revenue-neutral
business tax reform could be broken apart and done
independently. And I think there has been a lot of good work
done in lowering the rates and broadening the base and trying
to get to the revenue-neutral business tax reform. Whether or
not it is better to put it on with the comprehensive and the
individual, I am simply going to report, as the international
guy on the team, I am afraid that falls a little above my
paygrade.
I don't--I think there is a lot of complicated issues that
folks--that you all appreciate perhaps better than I do about
the complexity of going to the full comprehensive, you know, in
the current environment. And I think there was a judgement made
at some point to try to do the business-only on a revenue-
neutral basis, and that seemed to be, for a while, the most
promising thing we could do.
Mr. THOMPSON. Thank you. Before I yield back, I just want
to elaborate a little bit on the last point you made, and that
is the importance of being revenue-neutral. It has to be able
to pay for itself. And, if it doesn't, all we are doing is
digging the deficit hole deeper, and passing on greater debt to
future generations. I think that is real important to keep in
our focus, as we do any tax policy in this House.
Thank you, and I yield back.
Chairman BOUSTANY. I thank the gentleman. Mr. Renacci.
Mr. RENACCI. Thank you, Mr. Chairman. And I want to thank
you for holding this hearing on this very important issue.
It is clear that our international tax system is outdated
and anti-competitive, and makes U.S. companies vulnerable to
foreign takeovers. In northeast Ohio we already have one large,
multinational that has inverted. We have another company that
is considering inversion. We have another one that looks like
they are going to be taken over. So these are issues that are
very concerning to me. And, Mr. Stack, you and I have talked
about this in the past. So I do think we have to continue to
look at this and do what is necessary to make sure that we are
competitive here.
Mr. Stack, I am going to get into the weeds a little bit,
though, on one of the items finalized on round one. As you
know, action 13 requires companies to maintain and report
significant transfer pricing documentation. Some have said that
action 13 may be the most important action item arising out of
the BEPS project. I want to focus on the difference between two
of the types of documentations that companies will be required
to report, country-by-country, CBC, reporting; and master file
information.
Can you explain what types of documentation businesses must
provide under these two types of reporting?
Mr. STACK. Thank you, Congressman. The country-by-country
report is really a template in which a country would list the
various jurisdictions around the world in which it does
business, and then it would list out six or seven economic
indicators: Its revenue, its taxes paid, its taxes accrued, its
assets, its retained earnings, its number of employees. And
then it would have a little code of, like, what kind of a
business does that company do. It is a distributor or a
manufacturer.
So it is really a form, if you will, that sets forth that
kind of information. The form will be filed with the U.S. tax
return. And then the U.S. Government will, with appropriate
treaty or tax information exchange partners, exchange that form
with jurisdictions around the world that have promised to keep
it confidential, and use it for kind of a risk assessment.
The master file is really a different document. And, by the
way, the work in this space about harmonizing transfer pricing
documentation around the world precedent BEPS, because
multinationals were basically stuck with a situation in which
every country in which they did business was asking for a
different kind of transfer pricing documentation to
substantiate what it did.
So the OECD went to work and said, ``Gee, we could have a
win-win here. We can simplify this documentation to reduce the
burdens on business and, at the same time, get the countries
what they need.'' And that aspect of it consists of two parts,
really. There is something called the master file, which I will
talk about, and then there is something called a local file.
And the local file is, oh, tell me about your foreign
affiliates that have direct transactions with my country, so we
can go in and check your transfer pricing. The master file is
this overview document. Tell us about--in fact, I highlighted
just a couple of sections of it--give us a high level--it is
intended to provide a high-level overview in order to place the
multinational group's transfer pricing practices in their
global economic, legal, financial, and tax context.
It is not intended to require exhaustive listings of
minutiae, a listing of every patent, as this would be
unnecessarily burdensome. Instead, it is an overview of the
business, the nature of the operations, its transfer pricing
policies, et cetera. And in producing that master file, which
is written by the company, it should include lists of important
agreements. But the company should use prudent business
judgement in determining the appropriate level of detail.
So this is your big, overarching picture. It goes to the
company. When they come in to audit you they know something
about you and how you function. And that is the master file.
Mr. RENACCI. Mr. Stack, I am running out of time, but are
you concerned that the master file information will be used by
foreign governments to launch frivolous foreign audits or, even
worse, leaked to foreign competitors?
Mr. STACK. I am--one can never say never, Congressman,
right? However, we have to look at this context of the
countries had the opportunity to ask for this on their own
beforehand. We will be vigilant in watching how American
companies are treated around the world, and we will try to take
actions appropriately.
Mr. RENACCI. And I am going to move back to state aid,
which I know the Chairman talked about.
It is disturbing to me that American companies are being
targeted in proceedings and aren't given an opportunity to
defend themselves. My understanding is that only the countries
can defend the state aid proceeding at the commission level.
Companies that are subject to increased retroactive taxes--
which we talked about, almost 10 years--are precluded from
participating in the commission's proceedings.
Mr. Stack, do you share the concern of fairness of these
proceedings, if the company is not allowed to participate in
these hearings?
Mr. STACK. Congressman, I am not an expert in the
procedures in the state aid proceedings, so I am a little
loathe to kind of judge them, you know, from afar. Obviously,
opportunities like ability to present your case are part and
parcel of fairness, in our view. But I don't know their
procedures well enough to comment.
What I have chosen is the retroactivity aspect, because I
think that stares us all in the face to say, ``Hey, these are
new rules, they should be applied prospectively, not
retroactively,'' and that is the piece that I have chosen to
focus in on. And I apologize, I am not a procedural expert to
know enough for the basis of your question. But, obviously, I
am concerned about the fair treatment of our companies.
Mr. RENACCI. Thank you, Mr. Stack. I yield back.
Chairman BOUSTANY. I thank the gentleman.
Mrs. Noem.
Mrs. NOEM. Mr. Stack, thank you for being here today. I
will keep mine short.
I am concerned that there isn't mandatory binding
arbitration procedures in the final report. When the United
States, obviously, made it a priority, and several other
companies--or countries, as well, asked for that, we look at
the number of tax disputes every year--they far exceed those
that are resolved. And as many countries start to implement
some of the changes that were recommended in the final BEPS
report, we are bound to see more tax disputes.
Why was there no binding arbitration procedures put in the
final report?
Mr. STACK. Thank you, Congresswoman. I--we were also
disappointed that we were not able to have mandatory binding
arbitration as part of the final deliverables.
The nature of the BEPS process, however, was a consensus
process. And so, countries were able, in effect, to veto the
idea that we would have binding mandatory----
Mrs. NOEM. I understand that it was a major concern for
many countries, up to 20 of the major countries that are part
of the negotiations.
Mr. STACK. Yes, yes, it is. And the nature of the OECD
process is it takes one country, basically, to block moving
something forward.
Now, on the flip side of that is, when it came to the
transfer pricing work, the United States was able to be very
aggressive in saying, you know, ``We have certain demands
before that work comes out.'' I----
Mrs. NOEM. So what is our next process? What do we do about
getting some procedures put in place?
Mr. STACK. We have 20 countries that have said, ``We want
to do mandatory binding,'' and they represent 90 percent of
the world's disputes right now. And we are moving to put that
in this multilateral instrument that, hopefully, that--part of
which the United States can join, and hopefully get it signed
and ratified by our Senate. And we will have made enormous
progress, even though there will be some outlier countries, for
the time being, that will not have mandatory binding
arbitration with us.
So, it is not a whole loaf, but it is a pretty good loaf.
Mrs. NOEM. And the time frame on having those
recommendations ready for the Senate's consideration would be?
Mr. STACK. So the multilateral is hoping to finish a draft
in 2016. I think that is very ambitious. So I think we are
looking over the next couple of years when this would play out.
And, of course, we need to have those provisions look like
provisions that we think our Senate would ratify. So there is a
fair amount of work on that.
Mrs. NOEM. Okay, thank you. With that, I yield back.
Chairman BOUSTANY. I thank the gentlelady.
Mr. Holding.
Mr. HOLDING. Thank you, Mr. Chairman. I want to follow up
on a couple of lines of inquiry from my colleagues.
First, from Mr. Tiberi--just to expand on his comments. You
know, it is not only about rates. And if we could just simply
lower the rates, broaden the base, you know, we would be much
more competitive. It is also compliance cost. I had a series of
interesting meetings with large multinationals, and just talked
about how they comply with the U.S. Tax Code, and how they
comply with other countries.
You take one particular company, tens of billions of
dollars in revenue. Their U.S.-based operations, they have 40
IRS employees in their accounting division to continually
prepare their returns, and so forth. In their UK-based
operations with similar amounts of revenue, they are able to
comply with the Tax Code there with no revenue agents in their
accounting offices. It is a huge burden to comply with our Tax
Code. So it is not only a matter of lowering the rates, Mr.
Chairman, you know, it is a matter of simplifying the system so
that companies can easily comply.
I want to follow up a little bit on Mr. Renacci's comments
about the master files. You know, it is--in the master files--I
mean the information there is not general. There are a lot of
specifics there regarding supply chains, service agreements,
extremely sensitive information. Imagine the sensitivity of a
defense contractor's information who is doing work all around
the world, in different countries, dozens upon dozens of
different countries on every continent. You can imagine the
angst they would have in supplying, you know, the information
required by the master file.
So, I mean, I understand that Treasury will be compiling
those, collecting and compiling those master files. Is that
correct?
Mr. STACK. Congressman, we will--the IRS will collect the
country-by-country file. The master file goes directly from
companies to the countries in which they operate.
Mr. HOLDING. Okay. Will the Treasury also have the master
files?
Mr. STACK. We--if--let's say there is a U.S. company that
operates in foreign jurisdictions. We would not necessarily get
a master file from, let's say, a U.S. resident multinational,
because they are our taxpayer, they are here, and we have all
the information we need about them.
Mr. HOLDING. So, I mean, if the master file is misused in
some way, what recourse does a company have?
Mr. STACK. I think that one of the reasons I would like to
move our focus--let me back up.
Companies already today deal with tax administrations that
don't always behave in the best ways, and they struggle with
that. And it is one of the reasons we want to move the BEPS
work more into focusing on tax administration.
The second thing to keep in mind is companies--countries
were always free to ask for a master file. What we really did
at the OECD was homogenize the work so that there is, like, one
file asked for around the world. We didn't really have a
special power to tell countries what they could ask of
multinational----
Mr. HOLDING. So in the BEPS process, was there
consideration of some form of recourse that a company might
have or, you know, special safe harbor provisions, where a
company could shield sensitive information?
Mr. STACK. I----
Mr. HOLDING. Is there any arbiter of that----
Mr. STACK. On that last point, Congressman, we--the
companies have the pen on that report, and we do not expect
them to, willy nilly, give away sensitive information. Because
we think the master file rules can be read in such a way that
companies can use judgement to be sure the country gets the
high-level view that I described without necessarily pouring
out, you know, super-sensitive information. That was the
judgement----
Mr. HOLDING. So, you know, during the BEPS process it was
clear that the various countries involved were working hard to
protect their own multinational countries, protect their own
interests. So Treasury, at the table at the BEPS process, what
were you doing to protect U.S. multinational countries during
this process?
Mr. STACK. I think----
Mr. HOLDING. Give me your top three hits.
Mr. STACK. I think the top three hits are the work we did
to make the transfer pricing respect the legal entities and
contracts of our companies, I think the work we did to get the
country-by-country reporting to be manageable for our
multinationals, and I think the work we did to protect our
digital companies from overreaching by foreign jurisdictions.
Those are the three that I would say pop to mind----
Mr. HOLDING. Give me a couple where you think you failed.
Mr. STACK. I--we were disappointed that things like
permanent establishment rules are looser than we would like,
although there we said, ``Well, we are not necessarily going to
adopt those, but the rest of the world wants to.'' And there we
are going to come back on more work to make sure we can ring
fence the work done on permanent establishment rules.
And the fact that countries around the world have opted for
a kind of a very loose principal purpose test for treaty abuse
was disappointing to us. Now, again, the United States is not
going
to adopt that approach, but other countries seemed to want to
do that.
We wanted, in both those cases, more clear and
administrable rules for other countries to follow, but other
countries had different ideas.
Mr. HOLDING. Thank you. Thank you, Mr. Chairman.
Chairman BOUSTANY. I thank the gentleman. And I think Mr.
Holding hit on some very important questions, given that we
have 6103 protections for U.S. taxpayers and yet, under the
master file, we have serious concerns about those kinds of
protections, going forward.
Mr. Stack, thank you for being here today. We appreciate
your testimony. It has been extraordinarily--oh, I am sorry.
Mr. Reed.
Mr. REED. I know I am from New York, so we are often
forgotten here. But if we could have the last word, Mr.
Chairman, I would appreciate it.
Chairman BOUSTANY. You got it.
Mr. REED. Thank you, Mr. Stack. I do want to zero in a
little bit on this master file issue, because it is of a
concern to me.
So what I am hearing from your testimony is, essentially--
and from your written testimony--is the Treasury is going to
require country-by-country reporting mechanisms for certain
companies--I think it is $800 million or more, or above. But
with the master file, Treasury is not requiring that
information.
And essentially, what I heard from your testimony--and is
this accurate--that you are essentially saying companies are in
the best position to protect their information, therefore we
are going to let them make the determination as to what
information they release in that master file? Is that the
testimony you are offering?
Mr. STACK. Yes, Congressman.
Mr. REED. Okay. So what is Treasury going to do if someone
challenges that determination by the businesses, that maybe
they erred in their judgement, and a taxing administration
says, ``We need more information''? What is Treasury's position
or response to those multinational companies that are in that
situation?
Mr. STACK. So those questions--that question could go in
two directions. The first direction could be that a U.S.--a
foreign country is always asking our multinationals for more
information. It is a constant part of being a multinational tax
director. And then you have the laws of the local country, and
you--that local subsidiary may or may not have that
information. And that is kind of a common, everyday dispute in
the multinational space. So, in this case, that would be no
different.
A trickier question could be, well, let's say they don't
like the level of detail in the master file. And so they----
Mr. REED. That is my question.
Mr. STACK. Yes, and they impose a penalty, or they do
something----
Mr. REED. Correct.
Mr. STACK. Then I do think--but I don't think this is
different in kind from a whole slew of administrative things we
have to be paying more attention to, to protect our
multinationals that I would like to get on the next wave of the
agenda, which is: How do tax administrations act; do they act
in good faith, in accordance with what the general consensus--
--
Mr. REED. You are going away from my question here, Mr.
Stack.
Mr. STACK. Yes?
Mr. REED. Because, if I am understanding correctly,
country-by-country reporting is going to be given to you, the
Treasury----
Mr. STACK. Yes, right.
Mr. REED. And then that is going to be protected by tax
information----
Mr. STACK. Yes.
Mr. REED [continuing]. Treaty agreements, and you will have
the ability to defend what information is released, et cetera,
and stand by those companies that are targeted maybe in an
inappropriate manner.
But with the master file data, I don't see the same type of
protection that Treasury is offering to companies that, you
know, make that error in judgement or say, you know, ``We gave
you enough information,'' and the tax administration says,
``No, we are going to hit you with a penalty.''
Treasury is essentially telling our guys, ``You are on your
own,'' is what I am hearing from your testimony.
Mr. STACK. Well, the report does call for countries to
treat it confidentially. But what I want to emphasize here is--
and this is difficult----
Mr. REED. How are they going to treat it confidentially?
Mr. STACK. Because, in many of these jurisdictions, it is
expected to be treated as tax return information in those
jurisdictions. So it would just be----
Mr. REED. So your understanding is that the foreign
countries are going to protect that information. And what is
the penalty if the foreign country violates that----
Mr. STACK. We don't have a specific penalty, Congressman. I
mean, and that is fair. I think----
Mr. REED. That is the problem.
Mr. STACK. It is----
Mr. REED. That is the problem.
Mr. STACK. It is, Congressman, except if we never had a
BEPS project, those countries could ask for the same
information. We didn't do anything special in the BEPS project
that the country couldn't have done on its own. What we did do
was try to get a homogenized look at these----
Mr. REED. All right, so----
Mr. STACK [continuing]. Across the countries.
Mr. REED. Going into the negotiation, you recognized that
the countries had the ability to potentially----
Mr. STACK. Yes.
Mr. REED [continuing]. Abuse or inappropriately use that
information, but we elected--you elected not to take that issue
up. You elected to negotiate other points is what I am hearing.
Mr. STACK. No. Actually, Congressman, I think my big, heavy
lift in the next part of BEPS is I want to get all the tax
administration issues like this on the table, and get the world
to agree to peer reviews and standards for what a fair and just
tax administration should look like. And when we do that, that
country could not assert a penalty on a master file, just
because it is missing some jot or tittle, because that is not
the spirit of that work.
That is a reason to stay engaged multinationally, but it is
more work to be done for--to be sure, and it is a heavy lift. I
wouldn't doubt that. But it is important.
Mr. REED. So that is for future consideration and future--
--
Mr. STACK. Yes.
Mr. REED [continuing]. Negotiation. Because----
Mr. STACK. And it is important.
Mr. REED. Because that is another question I have. One of
the things I am seeing here, potentially, on the international
scene, especially with the EU, is the EU seems to be targeting,
for lack of a better term, this revenue. And as they face
austerity budgets in the EU, I just see, in my opinion, an
aggressive attack by the EU to go after this revenue.
And you just said there is a future BEPS environment that
you envision. What is post-BEPS? Where are you going? What is
after? What can we expect in those negotiations, going forward,
especially when the EU seems to be taking a very aggressive
approach here?
Mr. STACK. Yes. I think I just want to--because they are
doing it through their competition committee, they don't
necessarily participate in the overall tax work that we do at
the OECD, and that is part of the problem, I think, that you
are pointing to.
Mr. REED. Yes.
Mr. STACK. In the--coming back to the tax world that I live
in, I think the next phase in BEPS is how do we implement this,
how do we monitor each other, how are we implementing it. And
something the United States is aggressively trying to put on
the table is how do we make everybody else behave with all this
information. And that is something that I want to get companies
and countries to focus on, both through the G20 and also at the
OECD.
Mr. REED. I appreciate it. I notice my time has expired.
With that, I yield back. I appreciate the information.
Chairman BOUSTANY. I thank the gentleman.
Well, thank you, Mr. Stack, for appearing before this
Subcommittee. You helped walk us through some very difficult
and complicated issues. Obviously, a lot more is going to be
done in this area. I want to assure you that both sides of the
aisle of this Subcommittee have a deep interest in how this is
going to be implemented, and there are a number of outstanding
questions. So, again, thank you, and we look forward to staying
in touch.
We will now call the second panel up.
[Pause.]
We will now hear from our second panel of witnesses. We
have a very distinguished panel, starting with Barbara Angus,
Principal with Ernst & Young, followed by Gary Sprague,
Counsel, The Software Coalition. Then Catherine Schultz, Vice
President for Tax Policy, National Foreign Trade Council and
Martin Sullivan, Chief Economist, Tax Analysts.
The Committee, as I stated earlier, has received your
written statements. They will be made part of the formal
record. We look forward to hearing your oral remarks, and I
would ask each of you to limit those oral remarks to 5 minutes.
Ms. Angus, you may begin when you are ready.
STATEMENT OF BARBARA M. ANGUS,
PRINCIPAL, ERNST & YOUNG
Ms. ANGUS. Chairman Boustany, Ranking Member Neal, and
distinguished Members of the Subcommittee, it is an honor to
appear before you. My name is Barbara Angus, and I am leader of
strategic international tax policy services for Ernst & Young.
Earlier I had the privilege of serving as international tax
counsel for the Treasury Department, and as business tax
counsel for the Joint Committee on Taxation. I am appearing
today on my own behalf, and not on behalf of EY or any client.
I am pleased to be here to discuss the practical
implications of the final reports issued by the OECD as part of
its BEPS project. Other countries are already implementing
aspects of the recommendations, so this hearing is very timely.
As the Ways and Means Committee continues its work toward U.S.
tax reform, it is important to consider the BEPS
recommendations, the actions that other countries are taking in
response, and how those actions will affect global companies
that are headquartered or invested in the United States.
At the core of the reports issued by the OECD last month
are recommendations for significant changes affecting
fundamental elements of the international tax framework.
Countries must now consider whether, how, and when to act with
respect to the BEPS recommendations. They will act in their own
interests and under their own timetables.
The OECD project arose out of a growing political and
public focus in many countries on the taxation of foreign
companies. Therefore, I have no doubt that significant action
with respect to BEPS will take place across countries around
the world. Indeed, countries had already begun taking
unilateral action to address BEPS, even before the OECD issued
its reports.
The international tax changes that are embodied in the BEPS
recommendations have significant implications for all global
businesses. While the OECD did not deliberately target U.S.
companies, the recommendations could have a disproportionate
impact on U.S. businesses because of their geographic spread
and the particular pressures of the U.S. worldwide tax system.
Moreover, some countries have singled out U.S. companies, and
the recommendations could well be used by countries in such
targeting.
Global companies face uncertainty in light of the BEPS
recommendations, significant uncertainty. The BEPS
recommendations generally reflect a move away from relatively
clear rules and well-understood standards to less-specific
rules, more subjective tests, and vaguer concepts. Global
companies face significant new compliance burdens highlighted
by the new country-by-country reporting requirement.
Global companies face significant risk of misuse of their
business information. The new reporting would put global
information about a company into the hands of all countries
where it operates. For U.S. companies, which tend to have the
broadest global footprint, the risk of breaches of
confidentiality is particularly acute.
In this regard, many U.S. companies believe it is in their
interests for the United States to implement the recommended
country-by-country reporting so that they can provide their
information to the IRS to be shared under U.S. information
exchange relationships, subject to the U.S. rules on
confidentiality of taxpayer information. This approach would
mean greater protection and lower administrative burdens than
the alternative, of U.S. companies directly providing their
information to multiple foreign countries.
Global companies face significant risk of controversy. The
new rules are subject to varied interpretation. Controversy
imposes substantial resource burdens on both taxpayers and tax
authorities. For taxpayers, controversy in a foreign country is
even more complex.
Global companies face significant risk of double taxation.
Where countries do not apply the new transfer pricing
guidelines included in the BEPS recommendations in the same
way, for example, multiple countries may assert taxing
jurisdiction over the same dollar of income. One of the BEPS
focus areas was improving the dispute resolution mechanisms
used to prevent this kind of double taxation. But the BEPS
project made little progress in this area, which is a major
disappointment for the U.S. business community.
Importantly, there is continuing work in the OECD on BEPS
that provides opportunity to ameliorate these issues. Business
input is much needed, and the U.S. business community, which
has much at stake, should continue its participation in the
OECD process. In order to ensure that U.S. interests are
protected, it is essential that Treasury, in consultation with
the tax rating committees, continues to play an active role in
all aspects of the OECD/BEPS work.
Countries' actions with respect to the BEPS recommendations
will dramatically change the global tax landscape. The aspects
of the current U.S. tax system that detract from the
attractiveness of the United States as a location to
headquarter and invest will become more acute as other
countries implement the BEPS recommendations. The BEPS project,
and the response by foreign countries, should be viewed as yet
another reason why tax reform must be an urgent priority.
Thank you for the opportunity to present these views.
I would be happy to answer any questions.
[The prepared statement of Ms. Angus follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman BOUSTANY. Thank you, Ms. Angus.
Mr. Sprague.
STATEMENT OF GARY D. SPRAGUE,
COUNSEL, THE SOFTWARE COALITION
Mr. SPRAGUE. Chairman Boustany, Ranking Member Neal, and
Members of the Subcommittee, thank you for inviting me to
appear today on behalf of The Software Coalition to provide
testimony on the impact of the OECD G20 BEPS project on U.S.
software companies. In particular, how the BEPS project will
reduce the U.S. tax base and create disincentives for U.S.
multinationals to create R&D jobs in the United States. The
members of our coalition are listed in our written submission.
Our comments today will focus on those BEPS developments of
greatest significance to the U.S. software industry, namely
corporate income tax nexus in countries into which our
companies export goods and services, transfer pricing, R&D
employment incentives, and the unraveling of consensus among
countries on international tax norms. While my comments are
delivered on behalf of the U.S. software industry, U.S.
multinationals and other high-tech industries are similarly
impacted.
First, the changes to tax treaty rules that establish when
an exporter is subject to income tax in the country into which
it exports goods or services. A key focus of the BEPS work was
a push by market countries to obtain greater taxing rights over
non-resident exporters which make sales into their countries.
The BEPS work significantly reduces the threshold for income
tax nexus, so that a member company of an MNC group may have to
file tax returns and pay taxes in a market country, even if it
has no physical presence in that country.
Second, with respect to the OECD transfer pricing
guidelines, these guidelines determine how much of a group's
income is subject to tax in a particular country where that
group operates. The principal effect of these transfer pricing
changes will be to decrease the returns allocated to intangible
property and other assets in favor of returns to people
functions. This also will increase tax collections by market
countries, since U.S. software companies do not hold their
intangible assets in such countries.
Third, I will comment on the BEPS work regarding incentive
tax regimes for R&D employment. The BEPS work recognizes that
countries may set their national tax rate at any level. Most
OECD member states have significantly reduced their rates of
corporate income tax in recent years. At the same time, the
BEPS work has created guidelines for targeted R&D employment
regimes. Several countries that compete with the United States
for technology investments have enacted so-called IP Box
regimes that provide an even lower incentive tax rate for
income derived from IP developed in their country. These rules
create a strong incentive for U.S. multinationals to locate R&D
functions in those countries.
Finally, I would like to comment on a particularly
unfortunate side effect of the current political and
administrative environment relating to international tax. In
our view, the BEPS process has encouraged, or at least tacitly
permitted, some countries to circumvent the normal consensus-
building process at the OECD and to act unilaterally. This
stands in stark contrast to much good work the OECD has done
historically to develop an international tax consensus.
On the related point, we note the EU state aid cases
represent another example of foreign governments endeavoring to
tax income which ultimately is part of the U.S. tax base. What,
then, are the implications for U.S. tax policy? We believe that
Congress should enact comprehensive international tax reform,
which would include reducing the corporate tax rate to an
internationally competitive rate--for example, to 25 or even
20, as some have suggested.
As part of such comprehensive reform, we favor a
territorial system, such as a 95 or 100 percent dividend
exemption system, consistent with other major OECD countries,
and a transition rule that allows tax-favored repatriation of
earnings.
Further, the United States should enact a best-in-class IP
Box regime that provides an effective incentive to protect and
create R&D jobs in the United States. Please see our letter of
September 14 to Chairman Boustany and Ranking Member Neal,
which details our recommendations on the proposal.
This proposal would provide the following benefits to the
United States: Preserves the competitiveness of U.S.
multinationals; it encourages the repatriation of IP by those
U.S. multinationals which now hold their IP offshore, and
discourages newly emerging companies from migrating their IP
outside the United States in the first place; third, it would
reduce the incentive for inversions through foreign
acquisitions by diminishing the incentive for tax-motivated
foreign takeovers; finally, it would encourage U.S. job growth
and innovated industries by countering the incentives which now
exist for U.S. multinationals to locate R&D jobs offshore.
The work on BEPS is not finished. Therefore, we would
encourage U.S. Treasury to continue taking an active role in
ongoing technical discussions to be held in 2016 and beyond. In
particular, the new tax nexus rules will present U.S.
multinationals with considerable unnecessary expense and
increased compliance burdens.
Accordingly, Treasury should encourage our treaty partners
to adopt alternative means of compliance and reasonable
transition periods.
I very much appreciate the opportunity to provide testimony
on behalf of the software industry, and would be pleased to
answer any questions.
[The prepared statement of Mr. Sprague follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman BOUSTANY. We thank you, Mr. Sprague.
Ms. Schultz.
STATEMENT OF CATHERINE SCHULTZ, VICE PRESIDENT FOR TAX POLICY,
NATIONAL FOREIGN TRADE COUNCIL
Ms. SCHULTZ. Chairman Boustany, Ranking Member Neal, and
Members of the Subcommittee, thank you for inviting me to speak
today about the G20 and OECD report on Base Erosion and Profit
Shifting. I request that my complete statement be made part of
the record.
The National Foreign Trade Council, organized in 1914, is
an association of some 250 U.S. business enterprises engaged in
all aspects of international trade and investment. The NFTC
believes the current U.S. tax law is outdated and must be
modernized by enacting tax reform that reduces the U.S.
corporate income tax to be more in line with our trading
partners, and adopts a competitive territorial tax system that
does not disadvantage U.S. businesses competing in foreign
markets. Competitive U.S. tax reform would address many of the
concerns raised in the BEPS project.
The Treasury Department staff should be commended for their
efforts to attempt to ensure the rules that were drafted were
as grounded as they could be in reasonable and objective tax
law. Unfortunately, this was a difficult task, since the BEPS
project was politically driven and, we believe, appeared to be
aimed more at raising revenue from U.S.-based multinational
corporations, rather than other global companies.
We have several concerns with the CBC report. The country-
by-country report is intended to provide information that is to
be used only as a high-level risk assessment tool. Completing a
CBC report will be cumbersome and expensive for taxpayers,
particularly for taxpayers who have operations in many
countries. There are many NFTC members who operate in over 100
countries. If tax authorities release taxpayer information to
the public, as some recommend, there is concern about
determining the correct amount due on a tax return, based on
media reports, rather than tax law. Companies understand they
must share tax information on a confidential basis to the
relevant tax authorities, where it can be explained in context.
However, they are unwilling to be subject to audit by media
spin.
It is important to note that if the United States does not
require country-by-country reporting subject to confidential
information exchange via the U.S. treaty network, U.S.
companies will still have to comply with the reporting
requirements, because each country will demand that the local
subsidiaries of companies produce a global CBC report under its
local variation of the rules, which will be expensive, and may
expose confidential information to improper disclosure.
The NFTC hopes the United States will continue to make the
case to maintain the confidentiality of CBC reporting, as the
countries who participated in the BEPS project will review the
implementation of the CBC reporting in 2020.
Countries are already adopting these reporting guidelines,
and many are not following the BEPS report guidelines. Indeed,
China has already said that it will require entire value chains
to be reported in all local analysis. Companies are concerned
with how the information they are required to file under the
master file will be used by local authorities. We believe it is
important for Treasury and the IRS to provide further guidance,
so companies can report their information to the IRS with
section 6103-protected information exchanged via the U.S.
treaty network. Otherwise, as I have noted, countries will be
entitled to request it for--without section 6103 protections.
There are several other concerns that the NFTC member
companies have with the final BEPS report, and I will try to
get through them pretty quickly.
The action 7 on permanent establishment changes several of
the longstanding definitions of what constitutes a permanent
establishment, which subjects a business to income in a local
country. Action 7 changed the definition of a deemed income tax
permanent establishment to achieve in-country tax results under
applicable transfer pricing rules. This will result in more
companies being subject to tax in a local jurisdiction, and
could result in potentially double or triple taxation for
companies.
I am not going to spend a lot of time going over the
transfer pricing rules, but we do have a lot of concern about
the new rules on value creation. It is often hard to determine
where value is created. In a value creation that is supposedly
tied to function, it will be difficult to determine the final
values, because value and function are not always linked. So we
have a lot of new transfer pricing rules with new value
creations. It could actually be very difficult.
Some countries are adding additional value creation
requirements.
China is considering a value contribution method that departs
from the BEPS guidelines. Location-specific advantages will be
used--analysis.
The NFTC is concerned about the general aggressive global
tax enforcement environment. The BEPS report action 11 analyzed
base erosion and estimated how much is lost to--worldwide to
aggressive tax planning. Interestingly, this analysis was not
done prior to the start of the BEPS project, but only at the
very end.
As countries continue their aggressive stance to collect
enough taxes to counter base erosion, who will determine what
enough is? If BEPS is hard to determine beyond a I-know-it-as-
I-see-it standard, how will it be determined when it no longer
exists? As other governments increase taxes on U.S.
multinational companies, the United States is likely to provide
foreign tax credits to those companies to offset double
taxation on the same income. As the number of foreign tax
credits increase, we will see more base erosion. But this time
it will be the U.S. base that is eroded.
What can Congress do to protect the U.S. base from being
eroded further? The NFTC is strongly in favor of tax reform
that lowers corporate income taxes in line with our trading
partners, and moves to a competitive territorial-style tax
system.
Thank you for the opportunity to present the views of the
National Foreign Trade Council, and I would be happy to answer
any questions.
[The prepared statement of Ms. Schultz follows:]
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Chairman BOUSTANY. We thank you, Ms. Schultz.
Mr. Sullivan.
STATEMENT OF MARTIN A. SULLIVAN, PH.D.,
CHIEF ECONOMIST, TAX ANALYSTS
Mr. SULLIVAN. Good morning, Chairman Boustany, Ranking
Member Neal, Members of the Committee. Thank you for inviting
me to discuss the BEPS project and its effect on the U.S.
economy.
In 2013, the OECD initiated the BEPS project to address the
flaws in the international tax system that allowed
multinationals to shift profits but not corresponding business
operations from high- to low-tax countries. At the core of the
OECD's response is a focus on aligning taxable profits with
value creation with economic activity, with economic substance.
This is likely to have significant consequences for the
competitiveness of multinationals, on how multinationals
allocate investment across borders, and on how countries engage
in tax competition.
Check-the-box regulations issued in 1996 made it easier for
U.S. multinationals to shift profits into tax havens. The BEPS
alignment of taxable profits with business operations would
take much of the juice out of these--out of this check-the-box
tax planning. In 1998, when Treasury wanted to withdraw check-
the-box regulations, many questioned why the United States
should have rules that help foreign governments collect taxes.
Now it is the BEPS project that will help foreign governments
collect taxes.
Before, multinationals could lower their taxes with tax
planning that had minimal impact on real activities. Now, to
lower taxes, they will be required to shift jobs and capital
investment to low-tax countries. If BEPS succeeds, we will be
entering a new era when cross-border profit shifting is
replaced with cross-border shifting of jobs and of capital.
Countries with low tax rates and real economies, countries
like Ireland, Singapore, Switzerland, and the United Kingdom,
are the likely winners. Their gains will come at the expense of
high-tax countries that will lose jobs and will lose
investment. With a combined Federal-State rate of 39 percent,
the United States is particularly vulnerable.
The likely response by foreign parliamentary governments
that can more easily change their tax laws will be to set their
corporate rates even lower than they are now. The UK has
already announced that it will reduce its corporate rate to 18
percent in 2020. Competition for real activity will increase.
The already problematic effects of the high U.S. corporate rate
will be compounded by these rate cuts.
Reducing the corporate tax rate has always been a top
priority. The BEPS project will raise the stakes. The critical
question is how do we pay for it. The economics of corporate
tax reform are trickier than most people realize. It is
entirely possible that any revenue-neutral corporate tax reform
that rolls back investment incentives will impede and not
promote economic growth.
At the top of the list of usual suspects to pay for a rate
cut is a reduction in depreciation allowances. Unfortunately,
the positive growth effects of a rate cut are more than offset
by the negative effects of slower capital recovery. If you add
to that capitalization of R&D, as proposed by Chairman Camp,
you have a tax reform that penalizes capital formation, with
the heaviest burden on domestic manufacturing.
Clearly, to boost America's competitiveness, we need a new
approach. Revenue neutrality within the corporate sector is not
a useful guiding principle for 21st century tax reform. We need
to downsize our most economically damaging tax and replace
those revenues with revenues from other sources.
One option is for the United States to follow the example
of other nations and adopt a value-added tax. This would
greatly enhance U.S. competitiveness because revenue from the
capital-repelling corporate tax would be replaced with a
highly-efficient consumption tax.
Another approach would be to shift away from taxing
business entities and toward taxing investors. The main
advantage of this approach stems from differences in cross-
border mobility. Investors are less mobile than investment.
Most OECD countries have raised shareholder taxes, while
cutting their corporate taxes. And because the burden of
corporate taxation is increasingly falling on labor, a shift
from corporations to shareholders will increase progressivity.
On the international side, the Camp approach to territorial
taxation, including all of its strong anti-base erosion
provisions, still seems correct. We need to banish lock-out
from our international tax rules. To the extent we impose any
tax on foreign profits, we should levy that tax as profits are
earned, not when they are distributed.
We need strong and tough earnings stripping rules. It is
common practice for foreign-headquartered multinationals
operating in the United States to cut their U.S. tax by paying
interest to foreign affiliates. Earnings stripping is a major
motivation for inversions.
Finally, as proposed by Chairman Camp, we need to adopt a
one-time tax on unrepatriated foreign profits. From an economic
perspective, this tax is as good as it gets. As a tax on old
capital, it does not affect incentives on new investment.
Congress should consider a deemed repatriation proposal with
rates substantially higher than those proposed in the Camp
plan, and use those revenues for tax cuts that promote domestic
jobs and domestic capital formation.
Mr. Chairman, thank you very much.
[The prepared statement of Mr. Sullivan follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman BOUSTANY. Thank you, Mr. Sullivan. We will now
proceed with questions. Let me start with Ms. Schultz and Ms.
Angus.
Under the BEPS action item 13, the master file information
that is required is something of concern. We had some
discussion on it earlier. Based on what we know today, what
recourse does a company have if it discloses sensitive business
information to a foreign jurisdiction and that information gets
out to a foreign competitor?
Ms. SCHULTZ. Yes. I think, as Mr. Stack said, companies
have to work very hard to try to make sure that whatever
information is provided is not proprietary. But a lot of
countries are requiring that information.
So, you may say, ``I am going to put this much information
on, and if they ask for additional information they can do it
through the audit process and we will then, you know, have a
separate conversation to review that information,'' but the way
it is set up right now, a lot of these governments are already
making these changes, and are going to require that
information. It is going to be very difficult, if information
is required and it doesn't go through an exchange of
information provision, for companies to be able to control what
happens with that information.
There is also a big push by some of the civil society to
make sure that as much information gets published as possible.
They think that to have corporate transparency you need to have
all the tax information out in the public. So a lot of the
proprietary information that companies really hold very
tightly, especially value chain information, is stuff that they
are very concerned could get released or could get given to
some other governments, or through civil society, and released
in another way.
Chairman BOUSTANY. Thank you. Ms. Angus, do you want to
comment?
Ms. ANGUS. I agree with----
Chairman BOUSTANY. Please turn your microphone on.
Ms. ANGUS. I agree with the comments by Ms. Schultz, and
also Mr. Stack, that the master file is an important document
to focus on. Because it is a more extensive document than the
country-by-country report, it can provide more information. It
is in narrative form. So precisely what information is provided
and how it is described is in the hands of companies, and they
will need to approach this very carefully to be compliant with
the requirements but give themselves as much protection as they
can.
Once a master file is provided to a government, as with any
other information that a company has to provide to the tax
authority, it then falls under that country's rules as to the
protection of that information, and we certainly have seen
experiences where U.S. companies have had unfortunate
experiences in the past with countries not protecting
information the way that it is protected in the United States.
I think that is an important issue to be considered as the
work in the OECD goes forward. The OECD has an opportunity to
take a leadership role here and get countries really focused on
the price of obtaining the information that they want about
companies has to be to protect that information.
Chairman BOUSTANY. I thank you. And I see in the country-
by-country reporting it is limited to large multinational
groups with consolidated group revenue of at least 750 billion
Euro. Does the master file disclosure requirement in action 13
have similar restrictions?
Ms. ANGUS. It does not have those restrictions, as
specified by the OECD. And the countries that have already
begun to adopt the master file have not always put in any
restrictions. So it could apply to any company of any size.
Chairman BOUSTANY. I thank you. And finally, a question for
Mr. Sprague.
BEPS was supposedly meant to level the playing field and
address tax evasion and tax avoidance in an even-handed
fashion. Can you elaborate further on how BEPS is encouraging
the creation of IP regimes in various countries? Are these
patent boxes, or innovation boxes, likely to effectively force
companies that use a lot of intangibles to move operations out
of the United States?
Mr. SPRAGUE. Thank you, Mr. Chairman. The short answer to
the last question is yes. The BEPS process, very interestingly,
resulted in, essentially, a setting of minimum standards for IP
boxes. So even though general corporate tax rates outside of
the United States are lower, considerably lower, than the U.S.
rate, every country that has adopted an IP box will have an
even lower rate for income in the IP box. It is remarkable, how
many countries have either already adopted or are intending to
adopt an IP box. The rate in the UK, for example, is 10. The
rate in Ireland is likely to be 6.25. Those are very powerful
incentives.
The agreement that has come up through the BEPS process
essentially is to establish a connection, a very direct
connection, between the amount of income that can be taxed in
the IP box and the amount of R&D development activity that is
performed in the country. So, as a consequence, the very direct
result of the IP incentive is to incentivize all companies--
U.S. companies included--to move R&D functions into the
countries that offer such IP boxes.
Chairman BOUSTANY. I thank you.
Mr. Neal.
Mr. NEAL. Thank you much, Mr. Chairman.
Mr. Sprague, you correctly noted that many of our
competitors, particularly in the G20, have lowered their
corporate rate. And you cited the British, for example, as Mr.
Sullivan did. Simultaneously, while lowering that corporate
rate, Prime Minister Cameron is now calling for more defense
spending. Who is going to make up the difference in revenue?
Mr. SPRAGUE. Well, that is a political question that I
guess----
Mr. NEAL. I am going to give Mr. Sullivan a shot at it, as
well.
Mr. SPRAGUE. You guys get to--you get to decide. You know,
my--from an international corporate tax competitiveness
perspective, I am a private practitioner. You know? I work with
companies. They ask me what the tax rate is outside the United
States compared to the United States, and I tell them. And that
provides a very powerful incentive for them to move operations
outside the United States.
And one very important result of the BEPS process--I think
Ms. Schultz commented on this--the transfer pricing changes, in
particular, are going to encourage companies, our clients, U.S.
multinationals, U.S. software companies, to put high-value jobs
outside the United States, because it is those high-value jobs
that are going to solidify the foreign structures to make them
stand up better to challenges of the market jurisdictions.
Mr. NEAL. Mr. Sullivan.
Mr. SULLIVAN. Thank you, Mr. Neal. You know, the question
keeps coming up over and over again. Or it doesn't--actually,
it doesn't come up enough. How are we going to pay for a lower
rate?
I am in favor of a low corporate rate. I would go to 10--I
would go to 15 percent to 10 percent. But we have to find
alternative sources of revenue. Obviously, a value-added tax is
not very popular in the U.S. Congress right now, although it is
what other countries have done to lower their corporate taxes.
And perhaps the more realistic alternative that you also see in
other countries is raising taxes on shareholders, raising taxes
on investors.
So you would move the point of imposing tax on capital away
from the mobile corporations that can move outside of the
United States and place that burden on shareholders. And you
see more and more in the academic community experts are
recognizing that this is a far better approach than trying to
impose tax on corporations.
Mr. NEAL. Thank you. And, Mr. Sprague, how much of the
trapped cash that U.S. multinationals have held overseas is
attributable to software companies, do you know?
Mr. SPRAGUE. I don't know, offhand. I mean there are many
industries that have trapped cash overseas. I think there are
articles that publish those statistics from time to time.
Mr. NEAL. What is the software industry currently doing
with that money?
Mr. SPRAGUE. Generally, the money is used to reinvest
outside the United States, reinvest in operations outside the
United States, make acquisitions outside of the United States.
Because of the lockout effect of U.S. tax law, the income or
the cash can't be dividended back to the United States without
the punitive U.S. tax. And so it is much more efficient to
deploy that cash to grow business operations outside the United
States.
Mr. NEAL. Mr. Sullivan, do you want to comment on that?
Mr. SULLIVAN. Well, the--I think one--maybe one way of
thinking about this is what will they do with the money if the
money is brought----
Mr. NEAL. That is the point, yes.
Mr. SULLIVAN [continuing]. If they are allowed to bring it
back. And we saw, back in 2004, when we had a repatriation
holiday--I don't know about specifically the software industry,
but, despite all of the discussion about how it was going to be
used for investment and plant and equipment and job creation,
most of it went into paying dividends and share buybacks.
Mr. NEAL. And I think that is the point. And I--having
experienced that moment, when it was suggested that the
repatriated money could be used for job creation, that
certainly--we--there is broad agreement today that certainly
did not happen.
Mr. SULLIVAN. And you know, we certainly want to get rid of
the lockout effect.
Mr. NEAL. Exactly.
Mr. SULLIVAN. We don't want to have that money trapped
offshore.
Mr. NEAL. Right.
Mr. SULLIVAN. But I think some of the claims about how much
benefit we will get for it as being a major stimulus that will
transform the economy is a little bit overblown.
Mr. NEAL. You know, there seems to be some consensus
amongst the panelists that trying to get that money back at a
reasonable rate would be very productive for America's economic
purpose. And I think that is where we ought to be focusing our
attention, but not to miss the point that that argument was
made here.
I was on the Committee at the time and objected strongly to
the notion that that money should be brought back at five and a
quarter. And it was brought back at five and a quarter. And
even the most aggressive proponents of bringing that money back
later acknowledged not only did they not do any hiring, but
that the money was given to the shareholders, and it was called
good management. Now, that is up to them to make the
determination. But not to miss the point, under the guise of
job creation, that money was returned.
Thank you, Mr. Chairman.
Chairman BOUSTANY. Mr. Reichert.
Mr. REICHERT. Thank you, Mr. Chairman. Thank you all for
being here, and for providing your testimony, taking time out
of your busy schedules to be with us today. Just a quick
followup question on BEPS action 13 that the Chairman was
pursuing.
I would just like a little bit of a--more elaboration, Ms.
Angus, on--and Ms. Schultz--on what other countries are doing.
So you have referenced the more than 60 countries in the last 2
years that are now taking actions related to BEPS action 13. So
what are those actions that other countries are taking, and how
do they affect the United States? Either one of you would be--
--
Ms. ANGUS. With respect to country-by-country reporting--in
particular, we have seen a flurry of activity starting before
the OECD final reports, but speeding up since the issuance of
the reports last month. And there are three countries that have
already adopted country-by-country reporting: Mexico, Poland,
and Spain. There are several others that have legislation in
the process
that is expected to be completed shortly that will have
country-by-country reporting in place, and many other countries
are considering it.
At the same time, there are countries that have also acted
with respect to putting in place master file requirements.
Mr. REICHERT. Ms. Schultz.
Ms. SCHULTZ. I agree with Ms. Angus, that you start to see
the countries that originally were called unilateral actors.
Now they are called early adopters, before the BEPS report was
finished. It just sort of changed the dialogue a little bit on
who was doing what.
But just by putting the BEPS action report--by starting the
BEPS project, countries already started to make changes in
their tax laws, and said that they were doing it because of
BEPS. There were a lot of countries doing tax reform. There are
countries that have started to add the--as Barbara said,
countries are already starting to do the things from the BEPS
action report, but a lot of them started well before the BEPS
project was finished. There was a lot of tax reform taking
place. There were a lot of countries taking a look at their
rules, both indirect and direct taxation on how they were
taxing the income that they considered to be the BEPS income,
the base erosion income.
And one of the things that Mr. Sullivan said about the VAT,
a lot of governments, because the United States is the only
OECD country without a VAT system, a lot of these governments
had already started to look at the VAT and said, ``If you need
a specific agent for VAT purposes, we will give you a PE for
direct tax purposes.'' So governments have started to try to
figure out a way to get more income tax from U.S.
multinationals in many other ways, not just looking at the CBC
and the master file.
So, by doing these early actions, there has been an awful
lot of activity prior to the finish of the BEPS project, where
companies have had to be more aware of where the changes were
coming.
Mr. REICHERT. And what are the impacts on American
companies?
Ms. SCHULTZ. It is much more expensive for American
companies. We are seeing companies--just the complication of
complying with all these different rules, and paying attention
to who is changing their rules under which--at which time, it
is becoming a little bit more difficult for companies to make
sure that they are ready to comply with all these different
rules.
It has also increased the number of disputes already,
significantly. The number of audits is up. And the number of
disputes is going to go up substantially, as well.
Mr. REICHERT. Ms. Sprague--or Angus, I am sorry.
Ms. ANGUS. I would just add that it--certainly change is
happening like this all around the world. At the same time it
creates significant uncertainty. In many cases the changes are
not fully described or detailed, so there is uncertainty about
how the rules will be applied.
And we are seeing an increase in tax authorities using the
label of BEPS to justify challenges of companies under current
law. So, potential for significant retroactive effect, where
the law hasn't been changed, but they are using this as an
excuse to make a challenge against a company.
Mr. REICHERT. Thank you, and I yield back, Mr. Chairman.
Chairman BOUSTANY. Mr. Larson.
Mr. LARSON. Thank you, Mr. Chairman, and I thank all of the
panelists for your testimony.
Mr. Sullivan, if I could, I would just like to ask a couple
of questions. And one of them--and what I appreciate about
these hearings--and I want to say, Mr. Chairman--is that this
provides us an opportunity to demystify for the American public
a lot of the terminology that we utilize. I can imagine someone
tuning in--I don't think our ratings are probably that high,
but I can imagine someone tuning in and listening to the
conversation here, and when I go home to Augie and Ray's and I
talk about the lockout effect, and I talk about base erosion
and earnings stripping and check-the-box, et cetera, they kind
of look at me and say, ``Well, yes, but what are you doing
about jobs.''
And while I do think that there is a direct correlation
between these, Mr. Sullivan, if you could, briefly discuss how
we can make changes to some of our international tax rules to
help grow jobs in this country, while preventing the further
base erosion, if possible. And then I would like you to expand
upon what you had to say about what is going on in academic
circles about a discussion--you and Ms. Schultz mentioned the
VAT tax. Probably the unlikelihood of that happening, but the
thinking as it relates to shareholders and investors. So answer
those two questions, sir, if you would.
Mr. SULLIVAN. Thank you, Mr. Larson. That is quite a
challenge, for an economist to put something in plain English,
but I will try.
[Laughter.]
It is about jobs. And we want domestic job creation. And
when we look at our tax system, the major flaw of our tax
system is the corporate tax. It has always been a flaw. But for
the prior 50 years we have had so much economic growth that we
haven't really--we have been able to endure it.
But now we really can't afford to have a high corporate tax
rate. And so, what we--all roads will lead you to the same
conclusion. We need to get the corporate tax beaten down as
much as possible, because it repels capital from the domestic
economy, which raises productivity, which raises wages, which
creates jobs. And so we need to be thinking about different
types of proposals.
And so, we want--so the conventional tax reform is about
broadening the base and lowering the rates. We don't really
have that option any more. We need to broaden the base. We need
to lower the rates without getting rid of domestic--incentives
for domestic capital formation. And so we need to look at other
sources of revenue.
And I think, you know, it is an education process. At first
we thought we could broaden the base and lower the rates, and
now we see that it is not possible. We can't get the rate below
30 percent. We need to get it to, you know, to 20, and we can't
even get it to 30 right now. And so, what I think more and more
academics are looking at--on both sides of the aisle, this is
not a partisan issue--is where else can we get revenue. How can
we collect tax in a more efficient way? Nobody likes to raise
taxes on anybody, but where are the best places to look?
And if you look at what is going on around the world, where
everybody is--all the other countries are lowering their
corporate rate, they are raising their value-added taxes. And
we don't have that option. But also, what they are doing is
they are--they have fairly high taxes on their--at the personal
level. Ireland has very high personal tax rates. The UK has a
45 percent top individual rate. And all throughout the world
you see this conscious decision to lower the corporate rate and
replace it with a higher individual rate.
Mr. LARSON. And so how would that--as you were saying in
the--how would the proposal work, in terms of shifting
responsibility to shareholders and investors? How would that--
what kind of revenue would--could that get us toward revenue
neutrality? Could that help make up the base? What is the
thinking along those----
Mr. SULLIVAN. Well, the--it is--there are limitations on
how much you can raise the taxes at the shareholder level. You
can certainly get the capital gains rate back up to 28 percent.
You could certainly think about getting the dividend rate back
to--at the regular level. And then we raise a significant
amount of revenue that could be used for lowering the corporate
rate.
Mr. LARSON. Thank you. I yield back.
Chairman BOUSTANY. Mr. Kelly.
Mr. KELLY. Thanks, Mr. Chairman, and thank you all for
being here.
I continue, though, to--as I listen to all of you, coming
from a little different world than the world I am existing in
right now, other than really pro-growth tax reform and
regulation reform, all the rest of these things are interesting
topics to sit around some night, have a nice drink and discuss
and debate. But the reality of it is, if you look--let's just
relate it to where we are right now, relate it to football. We
need to look at what the other guys are doing in order to win,
and adopt those practices. Look at why the other guys are
losing, and then thank them for continuing on that same path,
because it makes your win a lot easier.
And what you each have said is exactly what we all agree
on, and that is tax reform. But not just tax reform, but pro-
growth tax reform, based on the market, the global market that
we now compete in. Sometimes I think we are going back to the
Dark Ages and we are having debates about how many angels we
can fit on the head of the pin, instead of how many people we
can get back to work.
In my world, profitable companies pay taxes, working people
pay taxes. That is the key to it. So it takes getting more
people back to work. But you have to have a product on the
shelf that competes with everybody else in the global
marketplace. And you have all talked about it. And it is just
kind of mystifying that we are sitting here, asking you
questions like, ``How could we possibly fix this?''
What is the problem? The cost of operation. So every good
or service that we do--and I don't care what it is that you
look at--if we are going to make it harder to go to market,
more expensive to go to market with a product that can't
compete on a price range with everybody else in the world, we
are going to continue to lose. And to think that somehow, by
having you come in here, and baring your souls to us, or giving
us ideas is going to get it done, it is not.
Please tell me about the difference between what the Irish
did--very charming. Love them, cute as the devil they are, but
they have been picking our pockets for a long time. And they
just lowered their rate again, because they looked at the world
and said, ``Wait a minute. These guys are getting close to us.
We have to cut our rates.'' Tell me the difference between what
the Irish are able to do overnight, what Cameron is able to
do--quickly--and a pivot to making it more profitable, and
giving you more market share. What is the difference between
those models and our models? Just real--and I mean real
quickly, because I think the answer is pretty obvious.
Any of you. Ms. Angus, what would you do right now, today?
And what are they able to do that we are not able to do?
Mr. SPRAGUE. You know, if I can respond to that----
Mr. KELLY. Sure, Mr. Sprague, please.
Mr. SPRAGUE. You know, the Irish tax policy has been
consistent for many years, to hold fast to a low corporate tax
rate to make them, as they describe, the most competitive
jurisdiction in Europe for inward investment. They have done
exactly what Mr. Sullivan did----
Mr. KELLY. Exactly. But how did they do it? What process
did they go through to pivot to that position? We have been
deliberating for years here. I mean they don't have to sit
around and deliberate on it as much, it seems to me. Isn't it a
quick response? Isn't it an early conviction made saying,
``Listen, in order for us to compete we have to act now, and
not continue to talk?''
Mr. NEAL. Will the gentleman yield?
Mr. KELLY. No. I will in a minute, I will in a minute. I
know we are both Irishmen. I want to get to this.
[Laughter.]
Because I am telling you, I know what they are doing.
Mr. SPRAGUE. You know, their parliament and their ministry
of finance has always been consistent: ``This is our
international tax policy.''
One thing that I think is worthwhile communicating to you
is that Ireland came under huge pressure from the EU several
years ago to raise their tax rate because Ireland was
successful. Ireland achieved----
Mr. KELLY. Well, of course, yes.
Mr. SPRAGUE [continuing]. Lots of inward investment----
Mr. KELLY. If you want to change the rules, that is the
easy way to do away with your competition.
Anybody, please tell me how quickly they were able to
respond.
Ms. ANGUS. They have a parliamentary system, and we do not.
Mr. KELLY. Thank you. That is what I am trying to get to.
We continue to play ring around the rosy with this, and we know
what the answer is, but we keep saying this is something we
have to get done, but we just can't do it.
Mr. SULLIVAN. You know, Mr. Cameron in the UK, and the same
thing in Ireland, they made conscious decisions to raise their
other taxes to pay----
Mr. KELLY. Right. Individuals pay almost 50 percent.
Mr. SULLIVAN. Excuse me?
Mr. KELLY. Individuals pay 50 percent.
Mr. SULLIVAN. Yes.
Mr. KELLY. But keep in mind they used to pay a lower
percentage on no wages. They would gladly pay 50 percent on
higher wages, because they end up with a net gain in their
pocket. That is not hard to figure out.
Mr. SULLIVAN. When Ireland was devastated by the financial
crisis----
Mr. KELLY. Right.
Mr. SULLIVAN [continuing]. They cut government worker
salaries by 15 and 20 percent. They raised all of their other
taxes, but they kept the corporate rate at 12.5 percent. And
there was no debate about it.
Mr. KELLY. Yes. But my point, Marty, is they were able to
act quickly.
Mr. SULLIVAN. Yes.
Mr. KELLY. That is the whole point. The purpose of debate
is fine, if the consequences are that you actually get
something done. And this is a Forrest Gump moment. There ain't
no fixing stupid. Thank you. I yield back.
Mr. NEAL. Mr. Chairman.
Chairman BOUSTANY. Yes.
Mr. NEAL. Just to play up on what Mr. Kelly said, the other
thing that they did, they took advantage early on of European
Union subsidies for infrastructure. They were way ahead of the
rest of Europe. The roadways were done. The Internet was
prominent across the island. And there is another lesson for
everybody: Everybody on that island is literate. That education
is the gold standard of Europe.
Chairman BOUSTANY. Mr. Renacci.
Mr. RENACCI. Thank you, Mr. Chairman. I want to thank the
panel. It has been enlightening to listen to you. And I spent a
week over in Europe talking with Members that were looking at
this BEPS project. And Mr. Neal asked a question which I
thought was kind of interesting, because I asked a similar
question when I was over there. They are lowering rates. And,
as we heard, Mr. Cameron is increasing spending. And the
question was how are they going to do that.
Well, the answer that I was told was, ultimately, they are
going to get American companies over there, they are going to
increase their tax base and their jobs. That gets to Mr.
Larson's question about jobs. If they can get American
companies over there, and they can increase the number of jobs
over there, that is how they are going to raise their tax
revenues to pay for their military spending. And that is one of
the things that we have to start looking at, is how we can be
more competitive.
The corporate tax rate is a piece of our revenue structure.
But, of course, we all know the individual tax rate is the
majority of our revenue that we get in. And how we fix this
system is that we look toward more jobs here. And today, if we
continue to do nothing, and more companies go overseas, those
companies are going to end up taking our jobs over there,
increasing their payroll taxes, and taking the dollars that we
should be getting by increasing jobs here.
I was a businessman for 28 years. If I can save 20 percent,
I am going to save 20 percent. If I have to pay 20 percent
more, I am going to have less employees. It is a pretty simple
fact when you work in the business world here in America, that
if you can move overseas you are going to do that. So this is
something we have to move on. And that is why I appreciate all
of your comments.
I want to go back to--I am actually glad that we hit on
action 13, because I really think that is important, and the
cost to companies to have to provide that. Because that is also
a job issue. If I have to spend more money here to comply with
action 13, I am going to have less for jobs. So that is one
issue.
Mr. Sprague, I noted that at least one company--well, at
least one of your member companies is a target of these state
aid investigations. But this is for the entire panel. Does it
appear that U.S. companies are being targeted more than the EU
companies when it comes to state aid? I don't know who can
answer that, but----
Mr. SPRAGUE. Well, there--of the various companies that
have been targeted, only one is a non-American company. We, of
course, don't have information as to how the competition
directorate made their decisions, but many commentators have
noted the fact that all of the rest of the targets are, indeed,
U.S. companies.
Mr. RENACCI. Yes, it is interesting. Because, again, I go
back to the fact as--how are European countries going to raise
their revenues? It keeps going back to figuring out how--a way
to get the American profits taxed overseas. So these are issues
that we continue to go back and forth on.
Ms. Angus, in your testimony you said that the BEPS
recommendations generally reflect a move away from the
relatively clear roles and well-understood standards to less-
specific roles, more subjective tests, and vaguer concepts. Can
you explain how the vague roles adversely impact American
companies, in particular?
Ms. ANGUS. Certainly I think vague rules are subject to
different interpretation in different hands. That is an
invitation for double taxation, for more than one country to
seek to tax the same dollar of income.
I think there are fundamental ways that the BEPS
recommendations have increased vagueness. Maybe one I would
single out is the proposed changes to the permanent
establishment rules, the rules for setting a threshold for when
a country is considered to have taxable--a company is
considered to have a taxable presence in a country.
The BEPS recommendation would move away from a relatively
clear set of rules to much vaguer standards, so that a company
entering into business in a country won't know when it will
cross the line and be considered to be like a domestic company,
and subject to the full rules, the full compliance procedures
in that country. That adds a huge burden, in terms of the need
to fully comply with all aspects of the tax system, to file a
tax return as if it was a domestic company.
It also can have implications beyond the income tax. If a
company is viewed as having a permanent establishment, it may
be required to register for value-added tax. There may be other
licensing requirements that get carried with it. And, at the
same time, its home country may not believe that there is a
permanent establishment there, may not be willing to cede
taxing jurisdiction. And so you have double tax.
Mr. RENACCI. Thank you, Mr. Chairman. I yield back.
Chairman BOUSTANY. I thank the gentleman.
Mrs. Noem.
Mrs. NOEM. Thank you, Mr. Chairman.
Ms. Angus, we talked a lot today about U.S. multinationals.
We tend to think of them when we are talking about the
international tax system. But in all reality, in your testimony
you shared that a company doesn't necessarily have to be large
to be impacted. And all global companies are going to face
uncertainty with regard to cross-border operation and
investment, in light of the BEPS recommendations.
But could you comment about the impact that the BEPS
recommendations and related measures might have on smaller
U.S.-based companies? In particular, looking at what they might
do in regards to expansion into other countries, and what they
might do to expand their presence in--overseas, to market their
goods.
Ms. ANGUS. I think the issue with respect to smaller
companies is a really important one that we sometimes lose
sight of. People think that an international company equates
with being a large company. That is not true today. The
smallest of companies can operate cross-border. Some might say
that the smallest of companies must operate cross-border in
today's global economy. And for them, the uncertainty, the new
compliance burdens, the potential for double taxation is
particularly stark.
A smaller company doesn't have the resources to invest in
order to put in the infrastructure to produce a country-by-
country report, to be able to get the representation to
understand the details of
the tax rules in every country in which it might be doing some
business to try to see will it be considered to have a
permanent establishment in that country, and then need to come
in to the full compliance net in that country. Those issues
really can operate as barriers to that activity if the
potential to serve that market could cause the company to
suddenly become a full taxpayer in that country, and fully into
the system.
The answer might be it is better not to serve that market,
and that is a really unfortunate answer, I think, for both the
U.S. company and for the potential consumers in that country.
Mrs. NOEM. I think that is why I wanted to highlight your
testimony, because most of the discussion here today people
would think revolved around very large entities and companies
that have multiple opportunities to expand into many different
countries. But in reality today, many small businesses, this is
such a burdensome change in recommendations that are being made
here, that it could completely eliminate their ability to be a
part of a market, or
even continue to stay in business if a lot of these things are
implemented.
So thank you for giving us some more insight into that,
because, regardless of the size of the company, this could be
very detrimental into the future.
Thank you. I yield back, Mr. Chairman.
Chairman BOUSTANY. I thank you.
Mr. Reed.
Mr. REED. Thank you, Mr. Chairman. I am interested in
having a conversation about research and development, and what
this BEPS project and tax policy is doing in regards to where
R&D is located.
So, Mr. Sprague, I read your testimony and found some of
your comments insightful here. For your member corporations or
companies, most of their R&D is done where? I think I know the
answer to that, but I just want to make sure we are clear on
that.
And after the BEPS project, where do you see that
impacting, and how does that negatively or positively impact
that R&D component of your member companies?
Mr. SPRAGUE. Well, major U.S. multinationals will tend to
do R&D in many places around the world. The life cycle of an
R&D-intensive company coming from the United States is that R&D
will start out being done in the United States. But as the
company grows, they will tend to look for excellence elsewhere.
Sometimes that is in India. You know, sometimes that is in
other places.
The effect of the BEPS process on the choice of location
for R&D will be, I think, in two areas. One is for countries
that do have an innovation box, they are putting on the table
an incentive: Please move your R&D to our country. So every
R&D-intensive company will look at that and make a decision as
to whether it is worthwhile to move the R&D to the UK, for
example, in order to take advantage of that innovation box.
The other incentive is a little more subtle, and that goes
to the transfer pricing points. U.S. software companies are, by
and large, organized in fairly efficient structures. They
generally will have a centralized sales entity somewhere, to
try to minimize the footprint and the higher tax market
jurisdictions. And a big theme, as I noted in my testimony, of
the transfer pricing is the market jurisdictions will try to
attract income into the market countries and tax it there, so
that counter to that, under the BEPS project, is to move high-
value functions--not just R&D, but high-value management
functions--into places like Ireland, for example, in order to
provide a counterweight to the Germanies and Frances of the
market jurisdictions.
So, when thinking about how the BEPS project will influence
the decision of companies on where to locate high-value jobs,
the R&D part is part of it. But the high-value job generally--
not just R&D--is also a part of it.
Mr. REED. So, what is your recommended course, as to try to
avert that situation, going forward?
Mr. SPRAGUE. Well, the----
Mr. REED. The Boustany-Neal bill. I heard it over here,
but----
[Laughter.]
Mr. SPRAGUE. Yes. No, as I said in the testimony, we think
the single best thing is comprehensive international tax reform
with a competitive U.S. innovation box to make it more
attractive for U.S. companies to keep the R&D here.
Mr. REED. And, obviously, we have had that conversation at
length today about the possibility of that occurring. And, you
know, we are not very optimistic that is going to happen any
time soon.
So there--is there any short-term--I always operated--when
I was in private business, I always had a short-term, mid-term,
and long-term plan. Obviously, if we could get to tax reform on
a comprehensive basis, you know, that is something that I would
love to see on a short term horizon. It is highly unlikely, in
my opinion, we are going to get there in the next 6 months or
thereafter. So is there anything we could be focusing on from
the panel to try to stop this loss of high-value, high-
functioning R&D activity that you would recommend to us?
Ms. SCHULTZ. You could make the R&D tax credit permanent.
That would help a lot. The fact that the credit is short-term,
and is always expiring, is really detrimental to long-term
planning by companies. And having that assurance would really
be great. If you want to do anything, make the R&D tax credit
permanent.
Mr. REED. I appreciate that very much. And I think--
hopefully, we can get that taken care of sooner, rather than
later. So I appreciate that input.
Is there anything else, Ms. Angus or Mr. Sullivan, in
regards to short-term--because I am really concerned about the
loss. Once you lose that R&D, once you lose those high-value
positions, it is tough to get that back. So do you have any
short- or mid-term plans, other than permanency of the R&D tax
credit, which I totally appreciate and totally support? Is
there anything else anyone could offer for us?
Ms. ANGUS. I think that the permanent R&D credit is
certainly important. I think that comments that have been made
earlier with respect to the BEPS project, the importance of
continuing the work, and now pushing it in the direction of
trying to ensure fair, effective, and a transparent tax
administration around the world, to counter some of the
potential for aggressive interpretations of some of the
proposals that would--for example, overreach in the transfer
pricing area is a really important thing to continue to work
on. None of that, of course, is a substitute for all the work
that you all are doing on tax reform.
Mr. REED. I appreciate that, Ms. Angus. And that is the
action 13 issue that we talked about earlier with Mr. Stack
from the Treasury Department.
With that, I yield back. I notice my time is up.
Chairman BOUSTANY. I thank the gentleman. I want to thank
all of you for your expert testimony. This has been very
helpful. We have gleaned a lot of valuable information.
And I'd like to also advise you that Members may submit
written questions to be answered in writing. Hopefully you can
get back to us within a couple of weeks with that.
With that, the Committee stands adjourned.
[Whereupon, at 12:26 p.m., the Subcommittee was adjourned.]
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