[Senate Hearing 114-88]
[From the U.S. Government Publishing Office]





                                                         S. Hrg. 114-88

  IMPACT OF THE U.S. TAX CODE ON THE MARKET FOR CORPORATE CONTROL AND 
                                  JOBS

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

                                HEARING

                               before the

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                                 of the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS


                             FIRST SESSION

                               __________

                             JULY 30, 2015

                               __________

         Available via the World Wide Web: http://www.fdsys.gov

                       Printed for the use of the
        Committee on Homeland Security and Governmental Affairs
        
        
        
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    
    
                                    
    
                             U.S. GOVERNMENT PUBLISHING OFFICE 
    
    96-194 PDF                     WASHINGTON : 2015 
    -----------------------------------------------------------------------
      For sale by the Superintendent of Documents, U.S. Government Publishing 
      Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
             DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
                              Washington, DC 20402-0001
                          
    
    
    
    
        
        
        
        
        
        
        
        
        
        
        
        
        

        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                    RON JOHNSON, Wisconsin, Chairman
JOHN McCAIN, Arizona                 THOMAS R. CARPER, Delaware
ROB PORTMAN, Ohio                    CLAIRE McCASKILL, Missouri
RAND PAUL, Kentucky                  JON TESTER, Montana
JAMES LANKFORD, Oklahoma             TAMMY BALDWIN, Wisconsin
MICHAEL B. ENZI, Wyoming             HEIDI HEITKAMP, North Dakota
KELLY AYOTTE, New Hampshire          CORY A. BOOKER, New Jersey
JONI ERNST, Iowa                     GARY C. PETERS, Michigan
BEN SASSE, Nebraska

                    Keith B. Ashdown, Staff Director
              Gabrielle A. Batkin, Minority Staff Director
           John P. Kilvington, Minority Deputy Staff Director
                     Laura W. Kilbride, Chief Clerk
                     Lauren Corcoran, Hearing Clerk


                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                       ROB PORTMAN, Ohio Chairman
JOHN McCAIN, Arizona                 CLAIRE McCASKILL, Missouri
RAND PAUL, Kentucky                  JON TESTER, Montana
JAMES LANKFORD, Oklahoma             TAMMY BALDWIN, Wisconsin
KELLY AYOTTE, New Hampshire          HEIDI HEITKAMP, North Dakota
BEN SASSE, Nebraska

                     Brian Callanan, Staff Director
        Margaret Daum, Minority Staff Director and Chief Counsel
                       Kelsey Stroud, Chief Clerk
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Portman..............................................     1
    Senator McCaskill............................................     4
    Senator Johnson..............................................     7
    Senator Lankford.............................................    18
    Senator Ayotte...............................................    24

                               WITNESSES
                        Thursday, July 30, 2015

Jim Koch, Founder and Chairman, Boston Beer Company..............     8
David E.I. Pyott, Chairman and Chief Executive Officer, Allergan.    10
Walter J. Galvin, Vice Chairman, and Chief Financial Officer, 
  Emerson........................................................    12
Howard B. Schiller, Chief Financial Officer, and Board of 
  Directors, Valeant Pharmaceuticals International, Inc..........    31
Joshua Kobza, Chief Financial Officer, Restaurant Brands 
  International..................................................    33

                     Alphabetical List of Witnesses

Galvin, Walter J.:
    Testimony....................................................    12
    Prepared statement...........................................    54
Kobza, Joshua:
    Testimony....................................................    33
    Prepared statement with attachment...........................    70
Koch, Jim:
    Testimony....................................................     8
    Prepared statement...........................................    47
Pyott, David E.I.:
    Testimony....................................................    10
    Prepared statement...........................................    49
Schiller, Howard B.:
    Testimony....................................................    31
    Prepared statement...........................................    57

                                APPENDIX

Majority Staff Report............................................    80
Organisation for International Investment statement submitted for 
  the Record                                                        213
Responses to post-hearing questions for the Record from Mr. 
  Schiller.......................................................   216

 
  IMPACT OF THE U.S. TAX CODE ON THE MARKET FOR CORPORATE CONTROL AND 
                                  JOBS

                              ----------                              


                        THURSDAY, JULY 30, 2015

                                   U.S. Senate,    
              Permanent Subcommittee on Investigations,    
                    of the Committee on Homeland Security  
                                  and Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:32 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Rob Portman, 
Chairman of the Subcommittee, presiding.
    Present: Senators Portman, Lankford, Ayotte, Sasse, Johnson 
(ex officio), and McCaskill.
    Staff present: Brian Callanan, Mark Angher, Matt Owen, 
Andrew Polesovsky, Daniel Strunk, Gabriel Krimm, Arielle 
Goldberg, Brandon Reavis, Sarah Garcia, Mel Beras, Tom 
McDonald, Amanda Montee, Emerson Sprick, Kelsey Stroud, Zachary 
Rudisill, Liz Herman, Samantha Roberts, Satya Thallam, Bryan 
Barkley, and Chris Barkley.

              OPENING STATEMENT OF SENATOR PORTMAN

    Senator Portman. Good morning. Thank you all for being 
here, and I appreciate the fact that Chairman Johnson joined 
us, too.
    I want to begin by thanking Claire McCaskill. This is 
Senator McCaskill's and my first hearing together as Chair and 
Ranking Member of the Subcommittee. I am glad to have a chance 
to team up with her again. We actually led a Subcommittee on 
Oversight in the last Congress. I was in that chair, she was in 
this chair. But we worked very well together, and as some of 
you know, she is a former State auditor and a prosecutor all in 
one, so she is very effective at oversight. And we will see 
that again today and going forward with so many of our 
projects.
    This is a unique organization, this Subcommittee. The 
Permanent Subcommittee on Investigations (PSI) has 
investigative powers that allow us to do deeper dives in 
conducting our oversight of the Federal bureaucracy. We also 
want to use this Subcommittee to build a foundation for policy, 
and that is really what we are doing today. And then, finally, 
we are going to be rooting out some private wrongdoing that 
warrants a public response. Together, Senator McCaskill and I 
have a number of very interesting, long-term projects underway 
at PSI today that would fit in each one of these three 
categories.
    This morning, we are going to focus on an important policy 
issue, as I say, and that is, frankly, how the U.S. Tax Code 
affects the market for corporate control. This topic involves 
the jargon of corporate finance, as we will hear today, but 
what it really involves is jobs and investment. And it is 
negatively impacting our economy today because our Tax Code is 
not working.
    We see the headlines every week, practically, about the 
loss of some American corporate headquarters. More often than 
not, it is to a country that has a more competitive corporate 
tax rate--that is easy to find when you have the highest rate 
among all the developed countries--but also countries that have 
a different international system, a territorial system of 
taxation.
    Our Tax Code, frankly, just makes it hard to be an American 
company, and it puts U.S. workers at a disadvantage. At a 39-
percent combined State and Federal rate, the United States does 
have the highest rate among the industrialized world. Adding 
insult to injury, our government taxes American businesses for 
the privileges of taking their overseas profits and reinvesting 
them here at home, which is something we should be encouraging, 
not discouraging.
    Economists will tell us that this burden of our tax on the 
corporate side falls primarily on workers in the form of lower 
wages, fewer job opportunities, and, again, that is really what 
is at stake here.
    All of our competitors have cut their corporate taxes and 
eliminated repatriation taxes, including our neighbor to the 
north; just about all of them have. We have not touched our 
corporate tax rate really since the 1980s. We have not changed 
our international code in any significant way since the 1960s. 
In the meantime, every one of our competitors has. As a result, 
too many American businesses are headed for the exit, and this 
is at a loss of thousands of American jobs.
    The unfortunate reality is that U.S. businesses are often 
more valuable in the hands of foreign acquirers who can reduce 
their tax bills. It is one reason that you see this big 
increase in foreign acquisitions of U.S. companies. Last year, 
we now know, the number of foreign takeovers increased. In 
fact, last year it doubled to $275 billion from the year 
before. So doubling in terms of the value of foreign 
acquisitions of U.S. companies last year from the previous 
year.
    This year, we are on track to surpass $400 billion--so it 
went from $275 to $400 billion--according to Dealogic, again, 
far outpacing the increase in overall global mergers and 
acquisitions.
    It should be very clear that foreign investment in the 
United States is essential to economic growth. We want more of 
it. That is not the issue. But we want a Tax Code that does not 
distort ownership decisions by handicapping U.S. businesses. 
That is not good for our U.S. economy, and that is what we have 
today.
    What is happening is that the current tax system 
increasingly drives U.S. businesses into the hands of those 
best able to reduce their tax liabilities, not necessarily 
those best equipped to create jobs and increase wages here at 
home. That is, of course, bad for American workers and bad for 
our long-term competitiveness as a country.
    To better understand the trend and inform legislative 
debate over tax reform, this Subcommittee has decided to take a 
hard look at this issue. Over the past several months, the 
Subcommittee has reviewed more than a dozen recent major 
foreign acquisitions of U.S. companies and mergers in which 
U.S. firms relocated overseas. Again, this was a bipartisan 
project. Senator McCaskill's experienced team at PSI worked 
with us every step of the way. I am grateful for that.
    Today's hearing is the culmination of that hard work. We 
will hear directly both from U.S. companies that have felt the 
tax-driven pressures to move offshore and from foreign 
corporations whose tax advantages have turbocharged their 
growth by acquisition.
    One such foreign company is Quebec-based Valeant 
Pharmaceuticals. Over the past 4 years, as we will talk about, 
Valeant has managed to acquire a slew of U.S. companies worth 
more than $30 billion. The Subcommittee reviewed key deal 
documents to understand how tax advantages affected Valeant's 
three largest acquisitions to date, including the 2013 sale of 
New York-based eye care firm Bausch & Lomb and the 2015 sale of 
North Carolina-based drug maker Salix. We learned that in those 
two transactions alone, Valeant determined it could shave more 
than $3 billion off the target company's tax bills by 
integrating them into the Canadian-based corporate group. Those 
tax savings meant that Valeant's investments in its American 
targets would have higher returns and pay for themselves more 
quickly--two key drivers, of course, of any acquisition. All 
three Valeant acquisitions we studied, unfortunately, came with 
job loss in the United States.
    Beyond inbound acquisitions, America is also losing 
corporate headquarters through mergers in which U.S. companies 
relocate overseas. The latest news is the U.S. agricultural 
business Monsanto's proposed $45 million merger with its 
European counterpart, Syngenta. A key part of that proposed 
deal, as we understand it, is a new global headquarters not in 
the United States but in London.
    To better understand this trend, the Subcommittee chose to 
review in detail the 2014 merger of Burger King with the 
Canadian coffee and donut chain Tim Hortons, an $11.4 billion 
agreement that sent Burger King's corporate headquarters north 
of the border. A review showed that Burger King had strong 
business reasons to team up with Tim Hortons. But the record 
also shows that when deciding where to locate the headquarters 
of the combined firm, tax considerations ruled out the United 
States.
    At the time Burger King estimated that pulling Tim Hortons 
into the worldwide U.S. tax net rather than relocating to 
Canada would destroy up to $5.5 billion in value over just 5 
years--$5.5 billion in an $11 billion deal. Think about that.
    The company concluded it was necessary to put the 
headquarters in a country that would allow it to reinvest 
overseas earnings back in the United States and Canada without 
an additional tax hit. They ultimately chose, of course, Tim 
Hortons' home base of Canada.
    Both Valeant and Burger King played by the rules. I think 
that is an important point to be made. They and their deal 
partners responded to economic pressures, opportunities, and 
incentives created by our tax laws. If there is a villain in 
this story, it is the U.S. Tax Code. And, frankly, it is 
Washington not doing what Washington should be doing to reform 
it.
    My goal is to use these examples this morning and others we 
will hear about today to better understand the need to overhaul 
our broken corporate Tax Code and put U.S. businesses and 
workers on a level playing field.
    Again, I thank the witnesses for being here, and I would 
like to hear now from Senator McCaskill her opening statement.

             OPENING STATEMENT OF SENATOR MCCASKILL

    Senator McCaskill. Thank you so much, Chairman Portman.
    Let me say what a great honor it is to sit on this dais for 
the first time as the Ranking Member of the Permanent 
Subcommittee on Investigations. This is the Truman Committee. 
This Committee was formed when Harry Truman got in his car with 
no staff and drove around the country investigating war 
profiteering in World War II. This is how he made his 
reputation in the U.S. Senate, and many historians say it was 
his work on this Committee that vaulted him into consideration 
for the Vice Presidency and ultimately the Presidency of the 
United States.
    I am a huge Harry Truman fan for many reasons. His mouth 
used to get him in trouble almost as much as my mouth gets me 
in trouble. And he also did some courageous things that were 
not poll-driven in his day. I am honored to hold his seat in 
the Senate, and I am thrilled--it is a lifelong dream--to be 
able to sit on this investigative Subcommittee and try to do 
the kind of work that taxpayers would be proud of.
    I know that Chairman Portman and I can work together well 
in a bipartisan way to uphold PSI's long history of 
bipartisanship in a way that is worthy of President Truman's 
legacy.
    I am also pleased to see a long-time Missouri business here 
today--Emerson Electric Company, now celebrating 125 years in 
St. Louis. Mr. Galvin, we are happy to have you here today to 
offer your thoughts on this important issue.
    Today I think we are in agreement that the current U.S. tax 
system is broken and needs reform. Our corporate tax rate is 
among the highest in the industrialized world. Our worldwide 
tax system is out of sync with the territorial models our 
economic peers have implemented. We lag behind other countries 
in the Organisation for Economic Co-operation and Development 
(OECD) in the value of the research credits we provide, and we 
risk losing out as our European allies move forward with new 
plans to incentivize the flow of intellectual property to their 
borders.
    On a very timely note, we are putting the Export-Import 
Bank in jeopardy of existence, which is also another tool that 
our manufacturers use in this country to compete on a worldwide 
basis, since most of our economic peers have a similar type of 
bank in their countries that is helping finance exports and 
imports.
    We see the effects of these problems every day. We see more 
and more profits and intellectual property shifted out of the 
United States to low-tax jurisdictions overseas. We see U.S. 
companies stashing over $2 trillion in earnings overseas to 
avoid the tax rate they would face upon bringing that money 
back to our shores. And we see increasing numbers of U.S. 
companies heading for the exits, whether through an inversion 
or by otherwise relocating overseas.
    At the same time, we are witnessing a huge upswing in 
cross-border mergers and acquisitions activity--$1.3 trillion 
in deals in 2014 alone, with foreign takeovers of U.S. 
companies accounting for $275 billion of that total. This is 
double the value of takeovers in 2013, and every expectation is 
the boom will continue throughout 2015. This increasing trend 
merits an examination about the causes of this merger impact 
and the larger impact on jobs, tax revenue, and innovation.
    Some argue that, absent the advantages the U.S. Tax Code 
provides to foreign multinational corporations, many of the 
U.S. companies acquired in these takeovers could have remained 
in American hands. In this view, the combination of a high U.S. 
corporate tax rate and a worldwide taxation system makes U.S. 
acquirers uncompetitive, while foreign acquirers can employ 
aggressive tax planning strategies that boost the value of U.S. 
assets and allow them to make higher offers.
    The reality may not be quite so simple. We know from 
previous hearings before this Subcommittee that many U.S. 
multinational corporations are adept at avoiding repatriation 
of their overseas earnings and are just as active as their 
foreign counterparts in shifting income and IP out of the 
United States. As a result, effective corporate tax rates for 
some U.S. multinationals can fall below the low statutory rates 
in other countries.
    In 2013, for example, the Government Accountability Office 
(GAO) reported that the 2010 effective worldwide U.S. corporate 
tax rate for profitable companies was only 12.6 percent. 
Similarly, a study from the University of Michigan found that 
the effective tax rates of the 100 largest U.S. multinationals 
from 2001 to 2010 were actually lower than the rates for the 
100 largest multinationals in the European Union.
    The solutions offered to address the competitiveness gap 
between U.S. multinationals and foreign multinationals are also 
not quite so clear cut. Tax experts estimate that because of 
profit shifting techniques by foreign multinationals, U.S. 
companies will remain at a disadvantage so long as the U.S. 
statutory corporate rate is above 15 percent--which is 
significantly below the rates in previous bipartisan tax reform 
proposals. The move to a territorial system also carries the 
risk of providing greater incentives for companies to shift 
profits overseas, and a territorial model without stringent 
rules to prevent abuse and ensure transparency could cost 
taxpayers over $100 billion over 10 years. Many other countries 
are employing an ``innovation box'' through which business 
income derived from intellectual property development is taxed 
at a preferential rate. This is a very promising approach, but 
there are challenges. We have to determine which IP rights we 
should protect and the types of research and development (R&D) 
activity that we should incentivize.
    As we move forward in this discussion, I want us to keep a 
few points in mind.
    First, I believe that U.S. competitiveness ultimately 
depends on continued investment in public goods like our world-
class research universities, our highly skilled workforce, our 
strong rule of law, and infrastructure that is needed to 
support business activity in the 21st Century. As a result, we 
should guard against any tax reform measures that threaten to 
erode the U.S. tax base and undermine these very clear-cut 
advantages the United States of America offers to the business 
world. This effort will require implementing anti-abuse 
provisions to ensure a shift to a territorial system does not 
provide an even greater incentive for multinationals to move 
profits overseas.
    Second, tax reform--particularly revenue-neutral tax 
reform--will necessarily involve gains for some and losses for 
others. As we discuss the challenges U.S. multinationals face, 
we should not lose sight of the challenges faced by domestic 
U.S. businesses--the companies that account for four out of 
five jobs in this country. These businesses already operate at 
a tax disadvantage relative to their multinational competitors, 
and they should not lose out on tax credits that support 
domestic manufacturing and research and development to 
compensate for lowering taxes on foreign income.
    Finally, we should resist the urge to demonize foreign 
companies operating inside the United States. Foreign direct 
investment brings $3 trillion to the U.S. economy. For every 
non-U.S. company that grows through rapid acquisition and 
severe cuts to research and development and employment, 
countless others invest in their communities and provide much 
needed manufacturing jobs. Robust foreign direct investment in 
the United States is not just a consequence of globalized 
competition; it is a tremendous advantage for our economy. Our 
challenge is to ensure that when U.S. companies choose to grow 
their businesses through domestic acquisition, our Tax Code 
does not tip the scales in favor of foreign acquirers.
    My hope for the hearing today is that our witnesses can 
help us understand the role the U.S. Tax Code plays in 
competition between U.S. acquirers and foreign acquirers. I 
also hope we can gain insight into how the Code influences 
corporate decision-making and how we can address the problems 
in the existing tax system while still ensuring that the United 
States continues to build the infrastructure and maintain the 
tax base necessary to be a leader in innovation, research and 
development, and business opportunities.
    I think I could not agree more with the Chairman. Our Tax 
Code is broken. Our Tax Code needs to be fixed. We are going to 
have to have the political will to do it. And blaming companies 
for doing the math that our Tax Code represents is a waste of 
time. And what Congress needs to do instead is hold the mirror 
up to ourselves because it is our inability to come together 
and compromise in a comprehensive way that is holding us back 
from reforming our Tax Code in a way that levels the playing 
field for our businesses, not just in the global marketplace, 
but right here in the United States of America.
    I look forward to working hard with my colleague Senator 
Portman and Senator Johnson and other Republicans, Senator 
Lankford, to find those compromises necessary to level that 
playing field and quit blaming companies for simply doing the 
math.
    Thank you, Mr. Chairman.
    Senator Portman. Thank you, and great points.
    Senator Johnson has to go to another hearing in a moment, 
so I am going to ask him if he has a brief opening statement as 
well. And, Senator Lankford, thank you for joining us as well. 
Senator Johnson.

             OPENING STATEMENT OF CHAIRMAN JOHNSON

    Chairman Johnson. I will be very brief.
    First of all, I just want to commend both the Chairman and 
the Ranking Member for holding this first hearing. I think it 
is very appropriate. If you take a look at the weaknesses in 
our system that are preventing us from growing, it really is a 
very uncompetitive tax system. And, I really appreciate Senator 
McCaskill's saying we should not be demonizing businesses and 
we should be looking at these structural problems we have, and 
we should be incentivizing job creation, pointing out that the 
true villain really is a Tax Code that is completely 
uncompetitive.
    I come from the business world. A basic principle in 
business is benchmarking yourself against your competition. 
Well, as a Nation state, we have to do the same thing. We have 
to benchmark our Tax Code, our regulatory environment, against 
our global competitors. It is not that hard to do. What is 
difficult is developing the political will and achieving those 
compromises to actually enact it.
    So, again, I have read the briefing. I think the staff--I 
want to commend them as well--has done an excellent job of 
laying out the case. I have often said that the first step in 
solving any problem is you have to properly define it and you 
have to admit you have it. And so rather than demonizing 
businesses, let us point out that the villain here really is a 
very uncompetitive Tax Code. This is that first steps in 
defining the problem so we can take--the real first step is 
admitting we have it.
    And, again, I just want to commend you. I wish I could be 
here for the whole hearing. I will pop in and out as best I 
can. This is an excellent first hearing, so thank you.
    Senator Portman. Thank you, Senator Johnson.
    We will now call our first panel of witnesses for this 
morning's hearing. The hearing is entitled ``The Impact of the 
U.S. Tax Code on the Market for Corporate Control and Jobs.'' I 
would like to welcome our three panelists here on the first 
panel.
    The first one is Jim Koch. Jim is founder of the Boston 
Beer Company, the brewer of Sam Adams beer.
    The second is David Pyott. David is the former Chairman of 
the Board and Chief Executive Officer (CEO) of Allergan. Thank 
you, David.
    And then Walter Galvin is here. He is the former Vice 
Chairman and Chief Financial Officer (CFO) of Emerson Electric.
    All three have great experience and expertise to bring to 
bear on this, and we appreciate their willingness to come 
forward this morning.
    I would ask you to stick with our timing system this 
morning. All of your written statements will be included in the 
record, and we want to have plenty of time for questions with 
you. We are going to ask you to limit your oral testimony, if 
you could, to 5 minutes. Mr. Koch.

  TESTIMONY OF JIM KOCH,\1\ FOUNDER AND CHAIRMAN, BOSTON BEER 
                            COMPANY

    Mr. Koch. Thank you, Chairman Portman, Ranking Member 
McCaskill, Senator Johnson, Senator Lankford. It is an honor to 
be here today as your Subcommittee investigates how the current 
corporate tax structure in the United States should be reformed 
to lessen the obstacles to starting, growing, and maintaining 
an American business.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Koch appears in the Appendix on 
page 47.
---------------------------------------------------------------------------
    It is a little uncomfortable for me because I am not used 
to talking without a beer in front of me, but I will try to do 
it on plain old water. [Laughter.]
    Senator McCaskill. We could probably send out for one if 
you need one. If you get halfway through it and you need a 
beer, just let us know.
    Mr. Koch. That would be good. Thank you.
    The Boston Beer Company had humble beginnings. I used my 
great-great grandfather's recipe actually from the Soulard 
district of West St. Louis, where his brewery stood in the 19th 
Century. And I started brewing in my kitchen in 1984. I went 
from bar to bar to sell the idea of a rich, flavorful American 
beer, which was quite novel. Thirty years ago, I named my beer 
after the American revolutionary and Founding Father Samuel 
Adams, whose statue stands in the capitol representing 
Massachusetts. Boston Lager was released in April 1985. And 6 
weeks later, it got picked as the ``Best Beer in America'' at 
the Great American Beer Festival.
    Today, our family of beers includes over 60 varied and 
constantly changing styles of beer. We are now available in all 
50 States and in 30 foreign countries. Today Boston Beer 
Company is a team made up of 1,300 American employees with 
breweries in Boston, in Cincinnati where I grew up, and in 
Pennsylvania. We have invested over $300 million in those 
breweries in the last 3 years, and we are proud that today the 
craft beer industry, which when I started was just a handful of 
semi-lunatics, has grown to over 3,600 local businesses all 
across the United States.
    But despite that growth, today almost 90 percent of the 
beer made in the United States is made by foreign-owned 
companies. And foreign-owned breweries have now begun acquiring 
American craft brewers with 9 of the most successful ones 
having been acquired in recent years. So I am concerned that 
growing and expanding an American-owned brewery is increasingly 
difficult because our corporate tax structure places American-
owned companies at a competitive disadvantage to our foreign 
counterparts.
    It is not uncommon for me to receive visits from investment 
bankers interested in facilitating the sale or the merger of 
Boston Beer Company to foreign ownership. One of the principal 
financial benefits of such a transaction is to reduce the tax 
rate we pay. We are vulnerable because we currently report all 
100 percent of our income in the United States, and as a 
result, we pay a tax rate of about 38 percent on all of that 
income. Under foreign ownership, that rate, I am told by 
investment bankers, would be reduced to the range of 25 to 30 
percent immediate through various practices like expatriation 
of intellectual property, earnings stripping and the strategic 
use of debt, offshoring of services, and transfer pricing. So 
that means that a dollar of pre-tax earnings is worth 62 cents 
to me under American ownership but about 72 cents under foreign 
ownership. To put it another way, Boston Beer Company is worth 
16 percent more to a foreign owner simply because of the 
current U.S. tax structure.
    Why haven't we sold Boston Beer Company to a multinational 
or another foreign entity? The simple answer: It is just not 
who we are. I named my beer ``Samuel Adams'' after our patriot 
namesake. We were born in America. We have grown because of the 
advantages available in the United States, and we do not mind 
paying our taxes here in the United States in gratitude for the 
opportunities that exist in this country and that I certainly 
have enjoyed.
    But do not mistake that for good financial decisionmaking. 
I have to explain to shareholders why we have not taken 
advantage of some of the strategies available to reduce our 
corporate tax burden by moving overseas. In response to 
economic pressures, other companies are saving millions, or 
hundreds of millions of dollars through complex tax planning 
every year. And rest assured Senators, while we are sitting 
here talking about corporate tax reform, there are folks in 
offices and boardrooms all over the world making their own 
version of corporate tax reform every day. The difference is 
that not one of them is accountable to your constituents. So 
Congress' inaction on this subject has created a system of do-
it-yourself corporate tax reform that is available to few and 
understood by even fewer. Because of our broken corporate tax 
system, I can honestly predict that I will likely be the last 
American owner of the Boston Beer Company.
    Due to hard work, innovation, and diligence, American craft 
brewers have created thousands of well-paying manufacturing 
jobs and created respect for American beer all around the 
world. I know of no manufacturing sector in the United States 
that has grown for 30 straight years and achieved double-digit 
growth for 16 straight quarters. But when these foreign 
acquisitions occur, American jobs are often cut or shipped 
overseas, less investment is made here in the United States, 
and other cost-cutting measures on management and sales forces 
are implemented along with reductions in local philanthropy and 
community involvement.
    The solutions are pretty clear: Cut the highest-in-the-
world U.S. corporate tax rate to the mid-20s; bring America's 
international tax system in line with the rest of the 
industrialized world by allowing U.S. companies to bring their 
overseas earnings home--just like the British and Canadians 
allow their businesses to do. And Senator Portman's recent 
proposal with Senator Schumer provides a strong, bipartisan 
road map on the international piece of tax reform. With these 
reforms, I believe we can unleash a lot of job creation and 
innovation in this country. And without them, I fear America 
will fall behind economically.
    Thank you.
    Senator Portman. Thank you, Mr. Koch. Mr. Pyott.

TESTIMONY OF DAVID E.I. PYOTT,\1\ CHAIRMAN AND CHIEF EXECUTIVE 
                 OFFICER (1998-2015), ALLERGAN

    Mr. Pyott. Thank you, Chairman Portman and Ranking Member 
McCaskill, Senators Johnson and Lankford.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Pyott appears in the Appendix on 
page 49.
---------------------------------------------------------------------------
    My name is David Pyott, and I am the former Chairman and 
CEO of Allergan. Until it was acquired by Actavis in March 
2015, Allergan was a great 65-year-old American pharmaceutical 
company, a world leader in ophthalmology, medical aesthetics, 
and Botox therapeutic as well as cosmetic.
    In my 17-year tenure as CEO, Allergan experienced 
tremendous growth, going from $600 million in sales in 1997 to 
more than $7 billion in 2014. Lots of jobs were created, going 
from 4,000 to 10,500.
    Growth was principally organic and R&D-driven. Allergan's 
R&D investments increased from less than $100 million in 1997 
to over $1 billion in 2014, leading to a steady stream of 
regulatory approvals by the Food and Drug Administration (FDA).
    In early 2014, Allergan's outlook was bright: We projected 
double-digit revenue growth and mid-teens increases in earnings 
per share for the next 5 years.
    But, ultimately, those qualities--sustained growth, robust 
R&D, and $4 billion in cash, most of it located overseas--made 
Allergan a very attractive target for acquisition, especially 
for a foreign company.
    The U.S. Tax Code, as we have heard, creates advantages 
that are worth billions for foreign acquirers to buy up 
American companies.
    So what happened in 2014? We were targeted by Valeant, a 
Canadian company that has acquired over 100 pharmaceutical, 
medical device, and OTC companies in the last 7 years in a 
roll-up strategy. Valeant has the clear strategy of not 
investing in R&D. Valeant had just completed an $8 billion 
acquisition of Bausch & Lomb in 2013 and was too weak and laden 
with debt from that transaction to be able to buy Allergan on 
its own. So Valeant entered into a partnership with Pershing 
Square, run by activist investor Bill Ackman, to go after 
Allergan together. It was the first-ever partnership of its 
type. In the February to April 2014 timeframe, using stock 
purchases and then options and derivatives, Pershing Square was 
able to accumulate 9.7 percent of Allergan's shares without 
making any public announcement.
    On April 22, Valeant bid $47 billion to buy Allergan, an 
increase from the $37 billion valuation when Pershing Square 
initiated its first purchases of stock, a premium, obviously, 
of $10 billion, or about 25 percent. Such a premium was enabled 
by the enormous tax savings available to Valeant, with a 3-
percent worldwide corporate tax rate, allied with their 
rapacious cost-cutting plan.
    In its pitch to investors, the Valeant plan was to reduce 
Allergan's 26 percent effective tax rate to 9 percent, a 
difference of 17 percent, or $500 million per year. Applying a 
price earnings multiple to this $500 million, this gives 
Valeant and Pershing Square roughly a $9 billion valuation 
advantage. In simple terms, thinking back to the math, Allergan 
was worth $9 billion more--simply by being moved to foreign 
domicile.
    On the day of announcing the bid, Pershing Square 
interestingly posted a profit of almost $1 billion. I sincerely 
hope that the SEC will investigate this novel structure 
regarding possible breach of the insider trading laws and other 
securities regulations.
    But back to Valeant. The Allergan Board felt that the offer 
substantially undervalued the company. Valeant's plan was also 
to strip Allergan, cutting overall operating expenses by 47 
percent, slashing R&D within that from more than $1 billion to 
just over $200 million per year, along with other market-
building investments.
    Valeant planned to load up Allergan with more than $22 
billion in new debt, taking the debt load of the combined 
company to more than $50 billion.
    After assessing many strategic alternatives, the Allergan 
Board ultimately decided to seek out a so-called white knight. 
Of the potential suitors, it was clear to me that only a 
foreign-domiciled company could be in a position to outbid 
Valeant while still creating value for their own stockholders. 
Obviously, as we have heard, foreign acquirers have lucrative 
tools: debt pushdown, migration of intellectual property. 
Valeant contemplated both.
    In November 2014, Irish-domiciled Actavis bid $66 billion 
for Allergan. Similar to Valeant, Actavis could immediately 
reduce Allergan's effective tax rate--from 26 percent to 15 
percent. Beyond just selling to the highest bidder, the 
Allergan Board assessed an acquirer's commitment to innovation. 
Unlike Valeant, Actavis was and is committed to maintaining the 
best of Allergan in the combined company.
    Given the premium that had to be paid to secure control of 
our company, cost synergies, of course, had to be found, about 
$1.8 billion, a modest 11 percent of operating expenses across 
both companies.
    As for jobs, I am no longer with the company, but estimate 
that about 1,500 jobs will be eliminated from the legacy 
Allergan side, mostly in California. The reduction in R&D thank 
goodness has been modest.
    With this sale, we could salvage what we could of a great 
American company. The last operating year was the best in our 
65-year history. Sales increased by 16 percent, or over $1 
billion to $7.1 billion. As a point of pride, Actavis adopted 
Allergan as the new corporate name in June 2015.
    Looking back, I am convinced that Allergan today would have 
remained an independent, American company had it not been for 
the significant disadvantages caused by our uncompetitive U.S. 
corporate tax system. The implications are clear, not only for 
the pharmaceutical and biotech industry, but extend across many 
industries that are global. Unless Congress acts, I believe 
that many more innovative American companies will be lost.
    Thank you for the opportunity to testify about my 
interesting experience.
    Senator Portman. Thank you, Mr. Pyott. Mr. Galvin.

 TESTIMONY OF WALTER J. GALVIN,\1\ VICE CHAIRMAN (OCTOBER 2009-
   FEBRUARY 2013), AND CHIEF FINANCIAL OFFICER (1993-2010), 
                            EMERSON

    Mr. Galvin. Good morning, Chairman Portman, Ranking Member 
McCaskill, and Members of the Committee. My name is Walter 
Galvin. I am the former Vice Chairman and Chief Financial 
Officer of Emerson, a $25 billion global manufacturing company 
founded in St. Louis 125 years ago. Emerson has over 110,000 
employees and operations in more than 150 countries.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Galvin appears in the Appendix on 
page 54.
---------------------------------------------------------------------------
    In each of the last 3 years, Emerson paid $1.3 billion in 
taxes worldwide. Over half was paid in the United States.
    Emerson's business is global. Over 55 percent of our sales 
are outside the United States, and several of our major 
competitors are domiciled abroad. Being domiciled in the United 
States means we pay more in taxes on a worldwide basis.
    My testimony will focus on three areas: first, why 
America's tax cost on foreign profits is such a disadvantage to 
U.S. companies; second, how other nations have set examples we 
can follow; and, third, how Emerson can serve as an example of 
an American-based multinational that lost out to foreign 
competitors because of our Tax Code.
    To begin, the combination of our high corporate tax rate 
and the way the U.S. taxes foreign profits can make U.S. 
companies more valuable in foreign hands--which is leading to 
American businesses being stripped away.
    A recent analysis by Ernst & Young found that, from 2004 
through 2013, foreign buyers acquired $179 billion more of U.S. 
companies than we acquired of theirs. Additionally, data 
provider Dealogic reports that the gross value of foreign 
takeovers of U.S. companies doubled last year to $275 billion 
and, at the current rate, will surpass $400 billion this year. 
These takeovers reflect thousands of U.S. companies leaving 
American shores.
    How can we stop this accelerating exodus? Congress must 
remove the premium only American companies pay by moving to a 
territorial system and reducing the top corporate tax rate.
    We know it can be done. Other nations, like the United 
Kingdom (U.K.), have successfully reduced their top rates. In 
2009, the United Kingdom switched to a territorial system while 
their corporate rate stood at 28 percent. Now that rate is 20 
percent, and earlier this month, the United Kingdom released a 
plan to drop that rate further to 18 percent.
    Companies are taking note. Monsanto, an American company 
also founded in St. Louis more than 100 years ago, is 
attempting to merge with a competitor and set up a new parent 
company in the United Kingdom. It is no mystery why.
    I have two real examples of how Emerson's investors, 
shareholders, and employees have been directly impacted by 
America's out-of-date Tax Code.
    In 2006, Emerson sought to acquire a company called 
American Power Conversion (APC), a Rhode Island-based producer 
of high-tech electronic equipment. At that time over half of 
APC's earnings were made outside the U.S. Emerson competed 
against Schneider Electric, a French company, and Ohio-based 
Eaton Corporation to buy APC.
    Emerson valued the company at just under $5 billion, but 
Schneider ultimately acquired the company by bidding $5.5 
billion. The principal reason Schneider's valuation of APC was 
higher was due to the French tax law on repatriation.
    Headquartered in France, 95 percent of Schneider's 
repatriated profits are exempt from French taxes, so APC's 
profits are worth more to Schneider because they can be 
repatriated at a tax rate of under 2 percent. By contrast, if 
Emerson repatriated those earnings, we would be subject to a 
tax rate of approximately 17 percent. That 17 percent is the 
difference between our 35-percent corporate rate and foreign 
taxes we pay. The difference between Schneider's rate of 2 
percent and Emerson's rate of 17 percent on a discounted cash-
flow basis is worth $800 million more to Schneider. Therefore, 
Schneider was able to outbid Emerson, and what had once been an 
American company became a subsidiary of a French-domiciled 
company.
    As for Eaton, they dropped out of the bidding process early 
and about 6 years later acquired Ireland-based Cooper 
Industries. Eaton is now an Irish-domiciled company, enjoying a 
lower worldwide tax rate.
    Second, America's worldwide system creates a perverse 
incentive to keep foreign profits abroad. A few years ago, 
Emerson bought a company in the United Kingdom called Chloride 
for about $1.5 billion with cash we had earned abroad and kept 
abroad. We considered other options for that cash, but the 
United States would have charged us 10 to 15 cents in taxes on 
every dollar we bring back home. So where will we get a higher 
expected return--from one dollar invested in the United Kingdom 
or only 85 cents in the United States?
    We need to reform the Tax Code sooner rather than later. 
Every time a company is acquired and the headquarters is moved, 
there is a real community impact. In addition to costing 
American jobs, this impacts local communities because of a 
decline in State and local taxes and a loss of corporate 
philanthropy and jobs.
    I am grateful that the Portman-Schumer framework is moving 
the conversation forward.
    In closing, we cannot expect to create more jobs at home if 
we continue to punish businesses like Emerson who want to 
remain headquartered here. America's businesses and workers are 
the best in the world, and we are not asking for a tax handout. 
We are asking for a level playing field. With that, we can 
compete with anyone in the world and win.
    Thank you, and I welcome your questions.
    Senator Portman. Thank you, Mr. Galvin. And, look, I 
appreciate all three of you being here and testifying, and 
specifically going into some detail on case studies that 
involved your companies. We want to focus on the facts here, 
and you have given us some great studies.
    We are going to have a couple rounds here. The first round 
will be 7 minutes each. The second round will be 5 minutes 
each. We have some colleagues who have shown up, and I know 
everybody is under pressure, so I am going to try to keep my 
initial questions to less than 7 minutes.
    I want to focus on a couple things. One, what I am hearing 
from you all is that there are a number of problems with the 
U.S. Tax Code and the perverse effect it has on U.S. jobs and 
investment. One is you are just less competitive, and it makes 
more sense to have your businesses in the hands of a foreign 
acquirer because of the tax savings. And there are some amazing 
numbers you have provided us here today, to the extent to which 
that is true.
    Second, you talked about--and Mr. Galvin just mentioned the 
fact--that it is harder to grow as an American company, because 
when you are competing for acquiring another company, you are 
finding foreign competition coming in that can pay a premium 
because of their after-tax profits.
    And then third is this whole issue that you have all 
referenced but that Mr. Galvin talked about, which is when you 
have this lockout effect, you have the money stuck overseas 
because you cannot bring it back because of the prohibitively 
high rate, it is an incentive to make your investments 
overseas, all three of which are bad for U.S. jobs.
    So I guess I start with Mr. Koch, and I thought your 
analysis was really interesting. I heard you say something 
about investment bankers giving you a proposal frequently. Can 
you sort of pull back the curtain on that a little bit and tell 
us what is happening in the real world? Do you get proposals 
from investment bankers or others saying, why don't you do this 
inversion or why don't you make yourself a target for a foreign 
acquisition?
    Mr. Koch. Sure. And as we heard from the other panelists, 
if you are an attractive American company, you have the things 
that characterize American business. Innovation and creativity, 
willingness to sort of create a new industry--those things are 
very attractive to foreign owners, and that puts you on the 
radar screen. So investment bankers, that is what they do. They 
find these opportunities, and they work both sides, put them 
together. So it is a regular feature of my life, talking to 
investment bankers who can do the math.
    Senator Portman. Yes, so you have U.S. investment banking 
firms coming to your companies and saying, ``Why don't you do 
this? This makes sense for you.''
    One final question. You talked about the fact that you may 
be the last U.S. owner of your company, sadly, and you talked a 
little about the shareholder pressure. Are you responding to 
that shareholder pressure by saying, we can become a foreign 
company and maybe make some savings, but, we have a commitment 
to this country? And how does that conversation go?
    Mr. Koch. Well, I am very fortunate, for two reasons. One, 
I have all the voting shares. [Laughter.]
    So that helps. It is a wonderful form of democracy. I vote.
    Senator Portman. I wish I had that here. [Laughter.]
    Mr. Koch. It is a good thing. And the other is under 
Massachusetts law, I am not legally required to maximize 
shareholder value. I am not legally required to run the company 
only for the benefit of shareholders. But under Massachusetts 
law, I am allowed to take into account the interests of other 
stakeholders. So that is about as good as it gets.
    Senator Portman. I suppose it is clear to everybody on the 
panel that that is a highly unusual situation, both in terms of 
having voting shares and also having this fiduciary 
responsibility be broader than it is in most of your cases. And 
I really appreciate your patriotism and your coming here today.
    Mr. Pyott, if you could tell us a little more about 
shareholder pressure yourself. You had an amazing story to 
tell. Among others, you talked about the fact that when Valeant 
first made an offer for your company, it offered about a 25-
percent premium, as I heard it from you, and you thought that 
they had about a $9 billion valuation advantage related just to 
taxes, that meaning that Allergan was much more valuable in 
their hands just because of the Tax Code.
    Can you take us inside the board room for a minute? What 
were those conversations like? How do shareholders react to an 
offer like that?
    Mr. Pyott. Well, as you can imagine, the intent both by 
Valeant, allied with Pershing Square, because they could do 
different things, one being an activist, one being a strategic, 
was basically to put us into a tub of boiling hot fat. That was 
very clear, to bring us to the negotiating table ASAP.
    Well, we stood back and, of course, we had a proud track 
record, because I was fortunate when I started at the end of 
1997, the company was worth $2 billion. And thanks to the 
enormous growth that I spoke about, by the beginning of 2014 it 
was worth $37 billion on the New York Stock Exchange so people 
could not really complain that much about my team's poor 
performance.
    So, of course, then comes the bid, and, of course, given 
the numbers I gave you, pretty much all of the bid premium was 
courtesy of the tax, right? So we knew this was, likely to be 
much higher, and, of course, we had our investment bankers at 
hand, and one of their principal jobs was to run numbers under 
various valuation metrics. What was the value of Allergan to a 
public shareholder? And it was very clear that the value was 
substantially higher than what was being offered, and so as a 
board, we could very much look in the mirror, look at 
ourselves, and say we have to do a lot better than this to get 
something approximating what we think--and not just we--the 
experts with our numbers reflect the true value.
    And so we then got into a huge fight that lasted 8\1/2\ 
months, and I was screamed at, every time I went out, whether 
it was the media or especially the investment community to go 
and negotiate. And I said, look, I will not negotiate until 
there is a number on the table that is so close that one would 
think the market will clear. If somebody is a million miles 
off, beyond just shouting at each other, you do not get any 
reasonable outcome.
    And due to some major performance-enhancing measures we 
took ourselves, because we had to get into our own cost-cutting 
campaign--right?--to drive up earnings per share or to drive up 
the intrinsic value of the company, we were able to really move 
up the value. And, happily, due to the culture we have, the 
team did not get distracted because you can imagine people were 
saying, you are on a path to hell, because with all this media 
opprobrium, literally I could not keep out of the newspaper for 
more than 2 days. I am sure you all know what that feels like.
    And I said to our team, if you do not focus on the 
business, we are lost. And they did a fantastic job, the best 
result for 65 years, which tells you about the spirit of the 
people.
    And so that is the way we just kept moving things along, 
always steadily increasing the value of the company, until we 
reached a point where, in fact, I knew I could no longer hold 
the line, although I was constantly thinking--do I really go to 
a shareholder vote? And I seriously thought of it.
    If I may, just one last thing, because I am giving you the 
various angles. The role of Pershing Square was very 
interesting, because, of course, having 10 percent of the vote 
out of the box is a powerful position. And then, clearly, the 
goal was to kind of create a wolf pack with those firms whose 
business is investment firms to pile in, in the so-called 
event-driven world of hedge funds. We were able to contain that 
whole community, Ackman plus the others, to actually 31 
percent. And as you well know, 31 percent does not mean you 
lose the election. And my job was to win and keep the long-
oriented investors in our position so that we theoretically 
could have won, 50 and one percent would have done it--right?--
to keep control of the board. And then I am sure you want to 
come back to how then Actavis came in from the other side.
    Senator Portman. Yes, and I want to move on because I want 
to give my colleagues a chance to ask questions.
    Mr. Pyott. Absolutely.
    Senator Portman. But we are going to dig deeper into that, 
and also, Mr. Galvin, you are not off the hook here. I will be 
asking you some further questions in the second round, but I do 
want to go to my colleagues. Let me just make one comment, if I 
might. You were consistently named one of the best CEOs in 
America, and this was not a company that was floundering where 
an acquisition, might have made sense in order to change the 
management or to improve the business performance. This was 
tax-driven, clearly. So I think it is interesting to hear your 
story this morning, and, again, we will get into some further 
detail as to the next step and what the consequences were of 
the Tax Code on the actual acquisition and what has happened 
since. Senator McCaskill.
    Senator McCaskill. Thank you very much.
    I am curious, Mr. Koch. I confess I have not paid close 
enough attention to your marketing, but are you marketing that 
you are the largest American beer company in the United States 
of America?
    Mr. Koch. Not really. I mean, we try to sell our beer on 
the quality of the beer, the care and----
    Senator McCaskill. You might think about it.
    Mr. Koch. OK.
    Senator McCaskill. I am just telling you.
    Mr. Koch. OK.
    Senator McCaskill. I do not think most Americans realize 
that you are the largest fully owned American beer company.
    Mr. Koch. It is sort of sad because we are little over one 
percent market share.
    Senator McCaskill. I get it, but I am just saying.
    Mr. Koch. It is kind of crazy.
    Senator McCaskill. I am just telling you, just for what it 
is worth.
    I wanted to go back momentarily, Mr. Pyott, to your 
testimony. Did you say that Pershing posted $1 billion of 
profit the day they tendered the bid?
    Mr. Pyott. Very close. The number is $950 million.
    Senator McCaskill. Is that being investigated now?
    Mr. Pyott. I sure hope so. But, of course, as you well 
know, if officials from the SEC come before you, they have to 
speak with enormous caution, and I have to admit that I have 
visited many Senators' offices, many Members of the House of 
Representatives, doing my best to encourage whatever oversight 
is possible.
    Senator McCaskill. The former prosecutor in me kind of 
went, ``What did he just say?''
    Mr. Pyott. Yes. Well, I mean, you can tell I'm a person of 
principle, and a lot of people in my shoes just move on.
    Senator McCaskill. Goodness.
    Mr. Pyott. I am afraid I feel pretty strongly about a lot 
of things that happened last year. It was not just the Tax 
Code. You can say, the very slow reporting periods that our 
rules provide, are antiquated. Something has to happen in 
financial services as well. And those members agree with me.
    Senator McCaskill. Let me talk to you all about the anti-
abuse erosion measures. If we move to a territorial tax system, 
which I think all of us understand is--everyone should 
understand is, I believe, inevitable, everyone agrees that it 
has to include measures to prevent abuse and to limit the 
erosion of the U.S. tax base.
    According to the Treasury Department, a territorial system 
without full rules on the allocation of expenses could result 
in $130 billion in lost revenue over 10 years.
    So, some proposals are committed to revenue neutrality, 
which has raised difficult questions about how we compensate 
for lost revenue as a result of lowering corporate tax rates. 
So I would like to hear your perspective as business leaders on 
these hard choices. What kind of anti-abuse measures do you see 
would work or that you might support so that we do not fix a 
system and then all of a sudden wake up the next day and 
realize it is being gamed by everybody shifting expenses to 
once again do the kind of math calculations that put you in the 
position you were in? Let us start with you, Walter, if you 
would. Do you have recommendations on how we can put some rules 
in place that would provide a cautionary note for the abuses 
that could occur?
    Mr. Galvin. Well, my personal opinion would be you need to 
keep it relatively simple. You already have a tax rate with 35 
percent base and all the earnings and profit calculations. So 
if you consider--and American corporations have always said a 
base rate of 5 percent is very attractive. A lot of the other 
international companies have a 2-percent base rate. So, 
internationally, if a company pays 10 percent in international 
taxes against the 15, they get that credit. They would only pay 
a 5-percent tax. But if an international company paid--a U.S.-
based company paid a 2-percent international tax rate, which is 
probably suspicious even though totally legal, they would have 
to pay an additional 8, or a total of 13 percent. So you would 
scale it back down.
    Certainly, for a lot of companies, if you look at what the 
international tax rates are where companies participate, it's 
nowhere close to the tax rates currently being reported. So I 
think you need to do something. While it is a lot of work with 
the earnings and profit calculation, having a sliding scale 
between 5 and 15 should prevent some of the abuse, and 
companies that are paying a more ordinary tax rate over 10 
percent should not have a problem with it.
    Senator McCaskill. Do you agree with that approach in terms 
of preventing the kind of abuses that could really erode our 
tax base?
    Mr. Pyott. Well, my sort of general view is that I think if 
we can get our headline tax rate down into the same kind of 
target zone as the rest of the industrialized countries, then 
we have solved a lot of problems of what I call ``around the 
edge.'' And I think the whole matter of how you account for 
revenue, especially cost sharing, is pretty well laid out.
    I could talk a little bit about R&D partnerships because 
that is the big deal in the pharmaceutical industry where, 
clearly, to give you sort of a framework of what I meant: a 
company like ours, we could at the time make a choice of 
saying, OK, we will establish the intellectual property in 
Ireland. We had a very large operation Ireland, the biggest, in 
fact, outside the United States. We had thousands of employees 
in the Republic of Ireland. And, of course, if you do that and 
you say, OK, the Irish entity owns the intellectual property, 
if the drug finally makes it, that is a fantastic answer 
because their corporate tax rate is 12 percent.
    But the bad news is for somebody like me who, does not last 
forever, because CEOs normally last for 5 years, right? A few 
masochists like me did it for 17. In the short run, you do not 
get the deduction. So, obviously, if you did the same research 
in the United States, you get a full deduction as a legitimate 
business expense. But, of course, we did all that math and say 
presuming we win and we got the drug approved, that will still 
over a 20-year period be the right answer to position the 
intellectual property in this case in Ireland versus the United 
States.
    Senator McCaskill. So the deductibility of expenses was not 
sufficient to overcome the hurdle of what you would gain once 
you made it across the finish line in terms of the tax rate on 
the profits?
    Mr. Pyott. That is right, 35 versus 12. There you go.
    Senator McCaskill. There you go. Math again. Thank you.
    Thank you, Mr. Chairman.
    Senator Portman. Thank you. Senator Lankford.

             OPENING STATEMENT OF SENATOR LANKFORD

    Senator Lankford. Mr. Pyott, let me continue on that same 
line on the intellectual property issue. Intellectual property, 
how is that connecting with the repatriation issues, 
territorial, worldwide system? Do you see that in the same 
vein? Do you see that as separating that out? How would you 
handle that? Because if you are dealing with the intellectual 
property issues and ownership, what do you see as the best 
resolution on that specific issue? Then, Mr. Galvin, I have a 
question coming back to you on some of your math you were just 
doing as well.
    Mr. Pyott. Right. Well, at a very high level, I think, as I 
said before, resolving the headline tax rate is the real 
important thing. Around that, of course, there are other tools 
available that other countries have used, like the Netherlands, 
the United Kingdom in particular, on the innovation or patent 
box. And that will encourage where R&D takes place and where 
intellectual property is located. And, of course, just as I 
said before, once you know exactly what the rules are, then our 
peoples' job is to set up a stream of numbers where you decide 
what is the best answer for that particular program and your 
own particular corporation.
    Senator Lankford. It does, but we are in this race that we 
are currently standing still while everyone else is running on 
the tax issues, when other countries drop their corporate rate 
and try to encourage people to come. We are in the same race on 
intellectual property as people continue to find innovative 
ways to be able to encourage R&D to happen in their country 
while we are standing still in it. So I guess the nature of my 
question is: What can we do as a Nation to encourage R&D to be 
here beyond just the rate itself?
    Mr. Pyott. In addition to rate?
    Senator Lankford. Yes.
    Mr. Pyott. I think a patent box would be helpful. It is not 
the solution. It would be a palliative or an aid.
    I think, earlier we heard from, in Senator McCaskill's 
remarks, we have, thank goodness, still have some huge inherent 
advantages in the United States. And in our industry; 
pharmaceutical, biotech, most innovations occur here, and in my 
view, that is due to the knowledge base that we have, which is 
due to the country's investment in National Institute of Health 
(NIH), in great universities, and then the whole financial 
system to enable startup companies to find capital and----
    Senator Lankford. Right, but that is the asset side of it.
    Mr. Pyott. The liability.
    Senator Lankford. The liability side of this.
    Mr. Pyott. Yes, yes. So I think what I am trying to answer 
is to say, first and foremost, it has got to be rate. And then 
I think after that you can probably bridge some numbers, you 
know, if there is a difference between--I will toss out 
numbers--a 30-percent rate and a 25-percent rate by using these 
other tools, you can tilt the advantage back in the favor of 
the United States.
    Senator Lankford. Mr. Galvin, let me ask you a question 
about rates as well. There has been a lot of conversation about 
25-percent rate and how that ends up being this normative rate 
in multiple countries. But you are also talking about countries 
that may be 12 percent, 2 percent, whatever it may be, to try 
to compete there, intentionally setting a corporate rate low, 
where their individual rates may be much higher, but their 
corporate rate is low intentionally to target companies.
    So the question I have is: If we get a rate down to 25 
percent, which has been discussed, or whatever that may be for 
a corporate rate, that does not really solve the problem, it 
does not seem like.
    Mr. Galvin. It makes a significant improvement in the 
situation. So if you could get the corporate or business tax 
rate--and I will use ``business'' rather than look at the legal 
entity, C corporations and everything else. If you made the 
business tax rate 25 percent and you put in place a territorial 
system that is similar to the vast majority of our competitive 
countries, you would find that we would not have the 
significant disadvantage that we currently have.
    Also, as you look at intellectual property, all those other 
countries also, in addition to those lower rates, a territorial 
system, do have large R&D incentives. So you need a tax system 
that is competitive with the rest of the world. Certainly you 
are not going to get a rate or should not try, I do not think, 
to get a rate to 12 percent because there are a lot of 
potential problems if you have the rate there, because then 
other countries would just continue to follow it down. We need 
a rate that is just competitive with the vast majority of our 
competition.
    Senator Lankford. OK. So I would tell you just my American 
attitude screams at me when I say let us try to get down to 
average. I like to win. Right now we are losing because we are 
at this rate that is noncompetitive. But dropping it to average 
does not seem exciting to me. How do we win in this, obviously 
not trying to shoot ourselves in the foot in the process, but 
to incentivize businesses to be able to be here rather than 
just say if we get to average, maybe we will not lose as many. 
I do not want to just lose as many. I want to win.
    Mr. Galvin. I think if you look at--because taxes are only 
one aspect of the manufacturing, technology, employment issues 
that you have. If you drop the rate further, as we did in 1986, 
the last time, we saw the other countries just brought it down 
even more. So if, for lack of a better term, you want to create 
a price war, which generally----
    Senator Lankford. Which we are already in.
    Mr. Galvin. Yes, but be competitive at least. You have to 
match prices in the markets that you serve. If you do not, your 
volume goes down tremendously. That is what we are 
experiencing. If you drop it to 12, I do not know how long 
other countries, which have other levers to pull, will not just 
do the same and you have not accomplished anything.
    Senator Lankford. OK. Fair enough. Can I ask about debt 
financing as well and the strategy and the advantages that 
foreign companies have in trying to compete to buy American 
businesses based on debt financing in that process? Do you have 
any insight on that?
    Mr. Galvin. Yes. I would say an example is the United 
States has fairly liberal thin cap rules on acquisitions, as I 
think some of the other panelists suggested, that when the 
companies were acquiring them, they used a lot of debt 
financing. And as you look at other countries as to debt 
financing in acquisitions, in studying the rules, other 
countries tend to use other instruments besides their tax laws 
to prevent the debt financing.
    When we tried to acquire a company in China, which we did, 
for $750 million, we were trying to look at some debt financing 
because it generated--this was in 2000--a lot of cash and you 
could pay it off. The tax law would say you could do debt 
financing, but their equity investments and other controls 
within China said it all had to be equity. So we had to put in 
$750 million of equity.
    If you look at the French tax code, it is fine to have debt 
financing. But if you look at what they would say are transfer 
pricing on inter-company loans, it precludes it.
    So we have, in my opinion, weak thin cap rules, and for a 
company--go back to a Missouri company that I am sure Senator 
McCaskill is quite close to, with Anheuser-Busch--and I think, 
Mr. Koch, you have probably heard of that company. The amount 
of debt financing that was used in that transaction was 
substantially significant, and they were able to finance it----
    Senator McCaskill. Just say ``huge.'' [Laughter.]
    Mr. Galvin. Yes, it was a huge number. It was a very big 
number. And what you had then is companies not only--the 
acquirer likes to put all this debt in the United States where 
you get the benefit of a 35-percent tax shield of all the 
operating profit of Anheuser-Busch. And so it is another case 
of where--if you are a capitalist around the world, where would 
you rather have your debt located? In Ireland at 12 percent, in 
Germany and most of the developed at 25, or in the United 
States at 35 percent? You would load it all into the United 
States. That is what they do. They acquire the companies, and 
they lever it up. Then when you see also what happens, which 
being familiar in the St. Louis community, the amount of job 
losses that occur are significant. When the U.S. companies are 
acquired, jobs in the corporate and also manufacturing 
locations, the R&D location, you lose jobs. No one likes that. 
That is what the Tax Code does.
    Senator Lankford. OK. Thank you.
    Senator Portman. Senator Johnson.
    Chairman Johnson. Thank you, Mr. Chairman.
    I want to pick up on the point you just made, because I 
make a similar point in terms of where do you want to load up 
your operating profit. If you are a global manufacturer and you 
want to take advantage of what I think we have in terms of 
global advantages, competitor advantages, we are the world's 
largest market here in the United States, right? I came from a 
manufacturing background. I know manufacturers want to be close 
to the customers, so that is an enormous advantage. Plus we 
have abundant and relatively cheap power. So if you are one of 
those global manufacturers, you want to come manufacture close 
to the world's largest customer with cheap energy, are you 
going to site your plant in Toronto at 15 percent or Detroit at 
35 percent? Isn't that what we are talking about? So you are 
going to want to site your operating profit or locate your 
profit in low-tax zones, and you are going to put your debt in 
a high-tax zone. Correct.
    Mr. Galvin. Yes.
    Chairman Johnson. I want to talk about the total decision, 
because we are always talking about a territorial versus a 
worldwide system, which is a problem, traps profit overseas. 
But then we also have tax rates.
    Mr. Koch, you talked about--and I thought it was a very 
powerful figure--that for every dollar of profit under U.S. 
ownership, you get to keep 62 cents; under foreign ownership, 
you would keep 72 cents. So that is a combination, though, of 
not only a territorial system but also tax rates. Correct?
    Mr. Koch. For us, we keep everything simple. We report 
every dollar of income in the United States.
    Chairman Johnson. Right.
    Mr. Koch. So the territorial thing does not really affect 
us.
    Chairman Johnson. But it affects any other decision here.
    Mr. Koch. Absolutely.
    Chairman Johnson. It is a combination of the two factors. 
It is really difficult to separate both of them out. Is that 
basically correct?
    Mr. Galvin. Yes, and I would give you an example, that for 
Emerson, with 58 percent of our sales outside the United 
States, more than 50 percent of our profits are in the United 
States. And if you look at our sales and exports, we export 
from the United States to trade customers and to our 
internationally owned subsidiaries $1.6 billion more from the 
U.S. abroad than we export from those own subsidiaries back to 
customers in the United States. So, yes, you make other 
decisions as well.
    Chairman Johnson. Mr. Koch, you are largely a family owned 
business still?
    Mr. Koch. Yes.
    Chairman Johnson. What is your ownership in terms of 
outside?
    Mr. Koch. We are a publicly traded company, but the 
publicly traded shares are non-voting shares. And then I have 
about 30 percent economic interest, and that is all the voting 
shares.
    Chairman Johnson. So, again, as an individual, as a 
patriot, you are saying, ``I do not care about the 10 cents. I 
am going to keep the business here, and I will pay that 10 
cents on every dollar penalty.''
    But I want to go to a public company, and the fiduciary 
responsibility of a CEO and the board of directors that are 
reporting to shareholders, which are unions and everybody else, 
and the pressure and, quite honestly, the fiduciary 
responsibility they cannot give up that 10 cents, can they? Mr. 
Pyott.
    Mr. Pyott. Yes, exactly. So that is why, U.S. 
multinationals, as we heard, do appropriate tax planning 
following the rules. And in our case, I would say we were maybe 
just over the middle of the pack, where we paid 26 percent 
worldwide effective tax rate, in our case, with 40 percent of 
our sales being outside the United States. And I can certainly 
say in terms of the locus of decision of where to manufacture, 
clearly for a long period of time, 25 years plus, we invested 
most of our non-U.S. capacity into Ireland because, obviously, 
a good workforce, well educated, hardworking, and a tax rate--
and given our kind of business, where, you are selling eye 
drops in a little bottle of 5 or 10 ml., freight costs really 
do not play any role at all.
    Chairman Johnson. Now, what Senator McCaskill was saying, 
people that run these large corporations can do the math. But, 
again, they also have that fiduciary responsibility. But it is 
way more than just making a decision or being a patriot. It is 
about being able to compete, correct? If you do not make that 
decision, if you take that 10-cent-per-dollar penalty, or even 
greater, eventually you will not be able to compete, and then 
you will lose jobs. Is that basically a correct evaluation?
    Mr. Pyott. That would be true. In our case, I think we were 
so strong that we were able to overcome the tax disadvantage 
because we had innovated. And, again, when I started, we were a 
very small firm. It was less than $1 billion. And we competed 
against large U.S. multinationals--Pfizer, Merck--and people 
used to say, ``How will you survive?'' Well, happily, we were 
so focused in eye care that both those companies for different 
reasons left that business, and we were the ones that prevailed 
and gained market share year in, year out.
    Chairman Johnson. Well, eventually you were not able to 
survive as a U.S.-owned company. That is the bottom line. 
Again, we can demonize those individuals that took a look at 
the Tax Code--and, again, if there was insider trading, that is 
a totally different subject. But let us assume there was not. 
But those--we will call them ``corporate raiders''--they are 
simply using a Tax Code and looking at global tax jurisdictions 
and saying this is a financial transaction that makes a lot of 
sense, and there was in the end nothing you could really do 
about it, other than find a white knight----
    Mr. Pyott. Which happened to be a foreign----
    Chairman Johnson. A foreign company, because, again, that 
is the only way they could compete.
    Mr. Pyott. That is right.
    Chairman Johnson. So this is about math, this is about 
competition. And, again, we can demonize American companies 
that are trying to survive, which is the wrong way of looking 
at this, or we can take a look and, as the Chairman said, point 
to the real villain, which is the Tax Code, which forces this. 
And, again, if we ignore that reality--and that is what I want 
to get to. The reality of the situation is we have an 
uncompetitive Tax Code, and if U.S. businesses do not respond 
to that, they will be put out of business because they will not 
be able to compete. Is that basically a true statement, Mr. 
Galvin.
    Mr. Galvin. Yes.
    Mr. Pyott. I would like to follow on to what you really 
suggested, and that is, companies that are either foreign or 
have become foreign through the inversion process typically 
have then used that hunting license and that advantage to keep 
going. And there are many examples where the original 
transaction was, let us call it, $10 billion, and 4 or 5 years 
later, the quantity of deals they had done was multiples of 
that, three, four, or five times. So you can see there is a 
secondary effect here as well.
    Chairman Johnson. OK. I will just close, again, by 
commending the Chair and Ranking Member. This is so important. 
Senator Lankford just left. He is in charge of our Subcommittee 
on Regulation, which is another big problem when you are trying 
to track global capital and keep manufacturing jobs in America. 
We have such an uncompetitive regulatory environment. But as 
this hearing clearly shows, as the work of this Committee staff 
has done, and the Chairman and the Ranking Member have done, we 
have an uncompetitive tax system forcing companies, in order to 
survive, to take over that corporate ownership, and then we 
lose it all. We lose all the income in terms of being able to 
tax it. So we have to become far more competitive, and we are 
highlighting a reality here that we have to admit exists.
    Thank you, Mr. Chairman.
    Senator Portman. Senator Ayotte.

              OPENING STATEMENT OF SENATOR AYOTTE

    Senator Ayotte. I want to thank the Chair. I want to thank 
the witnesses that are here. This is a very important topic. 
But I kind of want to boil this down to a little straight talk 
on this, because I think what we are seeing in the political 
realm is we have seen a lot of discussion about bad 
corporations who want to commit these horrible things called 
``inversions.'' When we think about the workforce, the people 
of this country that want a good-paying job in this country, 
isn't it those individuals who get impacted the most by our 
failure to take on this Tax Code issue and make sure that we 
are competitive? And I would ask each of you for a yes or no 
answer on that. Mr. Galvin.
    Mr. Galvin. It is very difficult, how you phrased the 
question, to give a yes or no answer, because there are two 
types of transactions you proposed or looked at. If you are 
looking at corporate acquisitions from an international company 
buying a U.S. company, the employment levels I think factually 
will show you have been substantially reduced. I think you can 
see that very clearly in the Anheuser-Busch situation.
    If you look at inversions, we are seeing a lot of 
inversions, and I do not have the numbers in front of me, but I 
suspect the management generally does not move from the U.S. 
location where they are at. A few people, it is a domiciled 
location in another country. The community involvement in an 
inversion probably still remains very heavily in the U.S. So 
you have a different impact on an inversion with a management, 
even though they acquired another company and a new company is 
set up, the legal ownership--and there are probably several 
more lawyers here than I am, but that legal ownership is 
abroad, the management who is running it is probably----
    Senator Ayotte. I am just trying to boil this down for my 
constituents to understand. Competitiveness, incredibly 
important. What I get the question from your average person is, 
OK, I see these corporations, the management, the leadership, 
they are doing very well. How do we make sure that the people 
in this country that are struggling, the middle class, that we 
create greater opportunities for them? And it seems to me that 
this Tax Code issue often gets misrepresented, that somehow if 
we make our code rate more competitive, if we make sure that we 
have the right types of laws to encourage research and 
development, whether it is a patent box or something, 
ultimately, it is the workforce that is going to benefit in 
terms of opportunity. And that is what I am trying to get at, 
because this is a question I will get out at my town halls when 
it comes to the corporate rate and why should we do this, 
aren't we giving an advantage, to people that are doing well 
anyway. And I just want to boil this down so that your average 
person can understand why this is so important.
    Mr. Pyott. Maybe if I can have a stab at it, if one looks 
at history around the world--and I am fortunate. I have lived 
in 10 countries, worked in 7, so I could tell you the good, 
bad, and ugly of all of them. And if you look, say, at extreme 
examples like the United Kingdom and Sweden in the 1970s, where 
we had completely uncompetitive taxes, probably uncompetitive 
labor markets, and business just left the country, once that 
got fixed, a lot of it came back. So that is very encouraging 
that in the same way that we are lamenting the current 
situation, if we can get it right, even if we were average, 
things would be a lot better.
    I would also like to give you an example of creation of 
jobs. In my testimony I was talking about the huge investment 
in R&D. In my 17 years, I started with an investment of $100 
million a year in R&D, and the last year was well over $1 
billion. A large part of that was you need people to do that. 
You need highly educated people. Eighty percent, maybe 85 
percent of those people were in the United States. They were 
not in the United Kingdom, France, Switzerland, or Singapore. 
They were in the United States. And, hence, why when my 
explanation of what occurred, the plan to really kill R&D, 
which is just factual, by Valeant to reduce the R&D spend from 
$1 billion down to $200 million-plus, you can work it out what 
would have happened. And I stated thank goodness the best 
answer I could get was the merger with Actavis, who at the 
margin is reducing R&D probably 12, 15 percent, again, not my 
desire, but we are all pragmatists. It was the best we could 
do. And it was the right thing for the future company and its 
stockholders.
    Senator Ayotte. Mr. Koch.
    Mr. Koch. Yes, I would add to what the other panelists have 
said. There is something different about American ownership of 
a company. I mean, you live in the community. You do not want 
to see in the paper that you just cut 1,000 jobs.
    Senator Ayotte. Right.
    Mr. Koch. But if you live in a foreign country and you fly 
in and you whack all those jobs, there is no remorse. But as an 
American-owned company, the people I employ, their kid, my wife 
may coach them on the soccer team, you see them at a--I mean, 
these are people you went to school with back in Cincinnati. It 
is important to provide a livelihood for those people, and you 
cannot get away from the personal commitment and desire to 
continue that comes from having the decisionmakers here in the 
United States in that community.
    Senator Ayotte. Well, I appreciate all of you being here. I 
think that you have given us a very obvious list of things we 
need to do. And this is something that we have been talking 
about a lot here collectively in the Congress for too long, 
because it is obvious what we need to do in terms of the tax 
rate, in terms of competition, in terms of making sure that 
this is the best place in the world to own a great American 
company that produces some really good beer.
    And so I think that we, I hope that this is something we 
can work together across party lines on because it will help 
make sure that the 21st Century is an American century when it 
comes to American jobs. So I thank you all for being here.
    Senator Portman. Thank you, Senator Ayotte.
    We are now into our second round of questions. We will try 
to keep these to 5 minutes for each of us. Many of the 
questions that you all have answers I think have shed light on 
this issue of how do you come up with a better tax system. We 
talked about the rate. We talked about the international 
system, territorial system, enabling countries to repatriate 
their profits, the U.S. system currently locking out those 
profits.
    But on the jobs front, I am just curious. Mr. Galvin, I 
said I was not going to let you off the hook. I have some 
questions for you as well. You talked a little bit about 
Schneider outbidding you for APC, and this is in this category 
I talked about earlier where it is not just about U.S. 
companies getting taken over by foreign companies. It is about 
U.S. companies not being able to be as successful as they could 
be because when they try to grow, they are constrained because 
foreign entities can pay a higher price for that company 
because of their after-tax profits being better. They can pay a 
premium. And I think what you said was that this was an 
example.
    So here is my second question, though, about APC. Do you 
know what happened to APC? They were taken over by Schneider. 
What happened to their U.S. job totals?
    Mr. Galvin. They went down substantially in Rhode Island, 
and a lot of the R&D was consolidated and leveraged in the 
French operations, which when you have an acquisition, there 
generally is a lot of leverage on that business.
    We would have also reduced the Rhode Island employment, but 
we would have substantially moved those jobs to Columbus, Ohio, 
where we still own Liebert Corporation, which makes three-phase 
UPSs as opposed to single-phase and would have kept the 
workforce in the United States.
    We both had a substantial share already in the UPS 
business, and we could both get substantial operational 
synergies in serving the world market. It would have been just 
us, would have moved it to a U.S. location, which is often 
where we have our centralized investments, so we still employ a 
lot of people in Ohio, as you know.
    Senator Portman. Now you have really piqued my interest by 
mentioning Ohio.
    Mr. Galvin. I thought I would.
    Senator Portman. We are part of this puzzle.
    Senator McCaskill. That was convenient.
    Senator Portman. Thank you. [Laughter.]
    So here we have a situation where you are trying to buy up 
companies so you can expand and grow your U.S. company. You 
lose out on the acquisition because of a foreign company can 
pay a higher price because they can pay a premium. They buy the 
company. This is a U.S. company that you wanted to buy. They do 
the smart tax planning, which is to take intellectual property, 
R&D, take it overseas, and the French do have a lower rate, and 
they have the ability to take advantage of that. They, 
therefore, take jobs out as well. David Pyott talked earlier 
about how R&D and jobs go together, and increasingly that is 
the case. I do not know, we have not really talked about the 
OECD Base Erosion and Profit Shifting (BEPS) project, but 
basically that is encouraging countries to go ahead and say not 
only do we have a patent box, but we have a nexus where you 
have to have the actual business activity connected with it, 
meaning people.
    So we lose jobs. You cannot expand, including in Columbus, 
Ohio, thank you. But it is almost a secondary cause that I 
think we do not focus on enough here, is that it is not just 
about U.S. companies being taken over. It is about U.S. 
companies not being able to be competitive. And this does go to 
salaries and wages and benefits, because that is who, in the 
end, bears the brunt of this, is the American worker. So thank 
you for your work on this project of tax reform over the years, 
Mr. Galvin, and we look forward to working with you going 
forward on trying to come up with a bipartisan approach that is 
sensible. Perhaps even in the next few months we can make 
progress on that.
    Back to Mr. Pyott for a second with regard to this 
intellectual property issue. You talked about the fact that 
other countries are putting in place these patent boxes where 
they may have a lower rate than us but they have a 
substantially lower rate than us with regard to intellectual 
property that is often a patent or a copyright, and they define 
these differently. Senator McCaskill raised the good question 
earlier about a challenge for us as we look at patent boxes, 
and as you know, that is something that Senator Schumer and I 
recommended in our report a few weeks ago, is, what kind of 
intellectual property do you include? Obviously, you have a lot 
of experience with regard to the R&D side, on the pharma side, 
and with regard to patents. But do you have some thoughts for 
us with regard to if the United States were to go to a patent 
box, how broad the definition of innovation should be?
    Mr. Pyott. Yes, I think that is where you really get down 
into the real nitty-gritty details, and I think to answer on a 
high level, first of all, as I said earlier in my testimony, 
you can overcome a couple of hundred basis points of overall 
rate by making those kinds of tools available. In our case, as 
I was explaining, we often chose to think very carefully about 
where we would locate our intellectual property, understanding 
on the long swing we had a final good answer. But, of course, 
on the short swing, we were paying a lot more--it was costing 
more because we did not have the full 35-percent reduction. So 
that was a balancing act.
    Senator Portman. The deduction you would have had in the 
United States versus the----
    Mr. Pyott. If we had kept the intellectual property here.
    Senator Portman. Right. But the value of that IP grows as 
your drug may be successful.
    Mr. Pyott. That is right.
    Senator Portman. And, therefore, it is worth having it 
overseas.
    Mr. Pyott. Yes. I think also another one for us--and that 
gets back to the nexus you made between patent box and where 
the R&D actually gets done, let us use that word, where the 
real people sit, the real expenses are, because there, thank 
goodness, we still have a huge inherent advantage. We located 
most of our R&D in California, not just out of emotional love, 
but that is where the real knowledge was. And even in the 
United Kingdom, where we located our operation, there was 
access to the kind of people we needed, but let us say the real 
emphasis remained the United States. And had we moved forward 
another 10 years the same way, I think it would have still 
stayed the same rough balance.
    Senator Portman. The final question I have is just briefly 
with regard to this inter-company lending. So what you told us 
this morning is not only does the rate matter, not only does 
the territorial system matter, but also that these foreign 
companies have an advantage because when they buy a U.S. 
company, they can load up debt in the United States, take 
advantage of the 35-percent rate and the deduction you get.
    So this is something, obviously, that is a concern as you 
are looking at tax reform, and, Mr. Galvin, you have, I am 
sure, looked into this quite a bit. But one of the challenges 
that we have right now as we look at how do we come up with a 
new system is to try to avoid some of--the BEPS project gets 
into this, of course--some of the base erosion that might occur 
through inter-company debt. Can you talk about what you think 
might be the right answer to that?
    Mr. Galvin. Well, certainly a benefit in lowering the rate 
to 25 percent and having it competitive with the rest of the 
world would substantially reduce the incentive to load the debt 
in the United States.
    Senator Portman. Probably the best base erosion we could do 
is lowering the rate.
    Mr. Galvin. Yes, lower the rate, and they are not going to 
load up--if it is the same rate in Germany, France, 
Switzerland, whatever, you do not have the same incentive. You 
are incentivizing them economically to put the debt in the 
United States.
    Senator Portman. Senator McCaskill.
    Senator McCaskill. So here is my worry about us really 
getting serious about redoing this Tax Code. I have had the 
pleasure or the horror of sitting in on some complicated tax 
planning meetings with some of the foremost tax experts in the 
country, and it is frightening. It is frightening because, for 
everything we do in the Tax Code, it is an action we take, but 
then there is a reaction. So you cannot just say, OK, we are 
going to do 25 percent and then let it go. We have to do all of 
the other stuff. I mean, if you just look at the interplay 
between estate taxes and trusts, for example, and all of the 
things that good tax planners can do around those two things, 
that is just one example of thousands that are in the Tax Code.
    So I would certainly ask all of you, those of you who have 
had real-world experience with complex financial, international 
transactions, to be all hands on deck helping us here so that 
we can look around corners.
    What we just talked about in terms of the patent box, if we 
do something like a patent box, do we require, for example, Mr. 
Pyott, that in order to take advantage of the patent box, you 
must do the R&D in the same country? In other words, if you are 
going to get the patent deal here, you cannot just have the IP 
located here; you have to do all the R&D here, too. Is that a 
good idea? Is that a bad idea? Are we going to have a reaction 
that is not good there? What is your opinion on that?
    Mr. Pyott. I think that would be very sound for the United 
States given our strength in R&D and our whole background of 
huge investment in the NIH, which is a national jewel, as well 
as all the benefits that then spill into startup companies, 
universities and so on. That takes decades to replicate.
    And if I were hypothetically, in the U.S. Government, I 
would say make that an item of trade negotiation as well, to 
say to our partners in the OECD, ``Fine, we are good with your 
patent boxes, but you have to have a level playing field,'' 
i.e., make the nexus, the expenses, the people have to be where 
the patent----
    Senator McCaskill. Require the nexus for them also as part 
of trade.
    Mr. Pyott. That is what I would say.
    I will give you another example in the discussion that we 
did not touch upon, and that was the Treasury regulation that 
was put out last September to tighten up the rules on so-called 
hopscotching of foreign-located cash. And, again, I think that 
was a useful measure, but as I said in pretty much all my 
testimony, these are things that are at the edge. But if you 
get them all right in the cumulation, then it will be really 
quite good. Or I think with Mr. Galvin, when I was listening to 
you, if you have rules about how much debt can you put down, to 
prevent, let us call it, certain limits being exceeded, those 
are all things--if you just get them, like 10 of those things 
broadly right, then you have probably got the whole thing 
broadly right.
    Senator McCaskill. I was interested to hear you say that 
your R&D went to California, and the reason that interested me 
is because around here California by some of my colleagues 
would be considered the worst place for a business to go 
because all the regulation in California and the taxes are so 
high and the regulation is so awful. So the magnet was, in 
fact, the higher education community and the knowledge base 
that is in California?
    Mr. Pyott. That is still our inherent advantage. Now, to be 
fair, the company was founded in California in 1950, started in 
L.A., went down to Irvine before the city even existed. I 
celebrated with the mayor 2 years ago, 50 years of Irvine, and 
I pointed out, ``We were here before you were,'' which was kind 
of fun.
    But the real point that you make, I totally agree with you. 
It is the basis of people that are being produced by the UC 
system, CSU, which we need to, by the way, pay attention to 
because funding is disappearing from the University of 
California, and then all the startup companies. It is a whole 
fabric, a tapestry of people, venture capitalists, that is very 
difficult to replicate. And, you see it happening in other 
areas of the United States, but, really when you step back, you 
can say the biotech industry is really Northern even more than 
Southern California, more San Diego than Orange County. It is 
the Boston area, a little bit in Maryland. And then the device 
industry is very much Boston, Minnesota, and California.
    I mean, there are notable exceptions, but those are the 
real clusters. And, if anything, I see people moving more to 
the clusters than moving away from them despite cost.
    Senator McCaskill. So I think the point I am trying to make 
here is it is just not as simple as the number. The math 
matters and being competitive matters. I could not agree more. 
But if we in the effort to lower the corporate tax rate erode 
our revenues we have done NIH on the cheap ever since the 
crisis. NIH has been struggling. Government shutdowns are 
brutal to NIH because of the inability to have certainty in 
terms of funding research, which you cannot do in fits and 
starts and do it effectively, certainly not cost-effectively.
    So I just want to make the point, I think the hardest thing 
for us on tax reform is the partisan divide that we have, that 
we try to navigate around. And the Chairman and I are, I hope, 
part of a group that is working very hard to tear that down. 
But I think it is important for the business community to 
continue to stress that higher education in this country, 
funding of NIH, the ability of our kids to afford college, that 
all of these are just as important for our global 
competitiveness as the number that we stick in the Tax Code. 
And I hope that all of you will help us with that, and 
particularly, Mr. Galvin, I know your leadership role in BRT 
and the business leaders. It would be a shame if we would, have 
a race to the bottom on what is our inherent strength in a 
foolish race to be the lowest tax rate in the world.
    Thank you, Mr. Chairman.
    Senator Portman. I thank the Ranking Member, Senator 
McCaskill, and I just have to say the Joint Tax Committee in 
2013 did a great analysis, saying if you get the rate down to 
25 percent, you actually get more revenue because you have more 
economic activity. And that is the goal, obviously, that all of 
us have, is to bring these jobs and investment back and to 
generate more opportunity here.
    Gentlemen, thank you very much for your testimony this 
morning. We will now call the second panel. Thank you for being 
here.
    [Pause.]
    Senator Portman. OK. We will call our second round of 
witnesses now for this morning's hearing, and I want to start 
by thanking both Mr. Schiller and Mr. Kobza for being here. And 
I also want to thank them for their cooperation and their 
companies' cooperation with the Subcommittee. They voluntarily 
provided very important information that helps us to get to the 
bottom of what we are after here, which is better tax policy. 
And I appreciate their willingness to do that.
    I also want to repeat what I said earlier today, which is 
that we are talking here about the U.S. Tax Code being the 
problem. OK? And I hope that is something that every person 
watching or listening today understands. This is about a 
problem here in Washington, D.C., which is a Tax Code that is 
dysfunctional. It is not serving American workers. It is 
antiquated, it is outdated, and it has to be more competitive.
    Mr. Schiller served as Valeant Pharmaceuticals' chief 
financial officer between December 2011 and June 2015; 
therefore, he has a lot of experience and background that will 
be helpful to us.
    Joshua Kobza is the chief financial officer of Restaurant 
Brands International, which is the parent company of Burger 
King and Tim Hortons, the Canadian restaurant chain.
    I appreciate, again, both of you being here this morning 
and look forward to your testimony. We do have a time system, 
which we talked about earlier. We would ask that you try to 
limit your oral testimony to 5 minutes. Of course, all of your 
written testimony will be printed in the record, and we look 
forward to the opportunity to ask some questions afterwards. 
Mr. Schiller.

  TESTIMONY OF HOWARD B. SCHILLER,\1\ CHIEF FINANCIAL OFFICER 
 (DECEMBER 2011-JUNE 2015), AND BOARD OF DIRECTORS (SEPTEMBER 
   2012-PRESENT), VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

    Mr. Schiller. Chairman Portman, Ranking Member McCaskill, 
and Members of the Subcommittee, thank you for the opportunity 
to appear before you on behalf of Valeant Pharmaceuticals.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Schiller appears in the Appendix 
on page 57.
---------------------------------------------------------------------------
    Valeant is a multinational specialty pharmaceutical and 
medical device company. We operate in over 100 countries with 
approximately 45 percent of our revenue in 2014 coming from 
outside the United States, with a particular focus on growing 
emerging markets.
    For the past 7 years, Valeant has employed and successfully 
executed on a unique and differentiated business strategy 
within the pharmaceutical industry. Today's Valeant was born of 
the 2010 combination of Biovail, a Canadian corporation, and 
Valeant, a Delaware corporation. At the time, each of Valeant 
and Biovail were small pharmaceutical companies focusing on 
many of the same therapeutic areas and geographies, with the 
need for greater scale to compete against larger multinational 
pharmaceutical companies. This was a merger of equals in which 
Biovail acquired Valeant. Today we are headquartered in Laval, 
Quebec, and have approximately 19,500 employees, approximately 
5,700 of whom are based in the United States.
    Over the past 5 years, our sales and market capitalization 
have each grown tenfold to projected 2015 sales of 
approximately $11 billion and a market capitalization of 
approximately $87 billion. With this growth, we have been able 
to expand our operations both here in the United States and 
around the world, creating quality jobs in the markets in which 
we operate.
    The growth and success we have been able to achieve at 
Valeant is rooted, we believe, in the values and core 
principles that guide our business decisions. These include:
    First, a commitment to the health and safety of the 
patients and customers who use and rely on our products.
    Second, a commitment to innovation through an output-driven 
R&D approach, which is unique in our industry. We focus less on 
how much we spend on R&D and more on what we get out of our R&D 
efforts. We source innovation through internal efforts, through 
licensing technologies from entrepreneurs and other third 
parties, and through acquisitions. We believe the results of 
this approach speak for themselves, with 20 product launches in 
the United States alone last year and a rich pipeline of 
products.
    Third, a commitment to our decentralized business model 
under which each business unit is given control over and held 
accountable for results within that unit.
    Fourth, we are committed to a disciplined approach to 
business development with a focus on high rates of return and 
rapid payback periods for our shareholders. I would like to 
address that last principle in greater detail.
    First and foremost, we only pursue transactions that make 
strategic business sense for Valeant. We generally look for 
businesses to complement our existing product portfolio and/or 
match our focus on high-growth therapeutic areas of geographies 
where we believe we can improve business operations. We have a 
strong track record of deploying our management and business 
strategy to grow and improve businesses we acquire and provide 
superior returns to our stakeholders.
    Second, we take a financially disciplined approach to 
business development. When assessing acquisition opportunities, 
we generally seek to achieve at least a 20-percent internal 
rate of return and a payback period of 6 years or less based on 
applying statutory tax rates to the projected future earnings 
of potential targets. Of course, these are guidelines, not 
hard-and-fast rules, and every acquisition involves a 
significant element of judgment. In particular, as we have 
previously stated in public statements to our shareholders, 
with respect to large public company acquisitions, due to the 
transparency of the public markets and other factors, we have 
generally accepted rates of return below our stated targets 
based on our ability to deploy large amounts of capital at 
returns still significantly in excess of our cost of capital.
    We do not value proposed transactions and do not decide 
whether or at what price to acquire a business based on the 
availability to achieve tax synergies. We do, however, enjoy a 
lower overall tax rate which allows us to generate more cash-
flow for a given dollar of revenue and leaves us with more 
capital to deploy in our business, which in turn allows us to 
deliver higher returns to our shareholders and accelerate our 
growth.
    Ultimately, while the tax synergies we have been able to 
achieve have certainly helped us deliver value to our 
shareholders, we believe that the execution of our 
differentiated business model has been the primary source of 
our growth and success. Our financial guidelines have helped us 
to stay disciplined in our acquisitions strategy, and as our 
Chairman and CEO indicated last week in an earning calls 
reviewing past deals, we are exceeding our expectations with 
respect to our acquisitions overall.
    You have also inquired about our views regarding U.S. tax 
reform. I am not a tax expert and cannot speak to the specifics 
of any particular aspects of tax reform, but we have found the 
Canadian system to be very conducive to our growth and success. 
I would be happy to elaborate on that further during Q&A.
    Thank you again for the opportunity to appear before the 
Subcommittee, and I would be pleased to answer questions 
regarding these topics.
    Senator Portman. Thank you. Mr. Kobza.

    TESTIMONY OF JOSHUA KOBZA,\1\ CHIEF FINANCIAL OFFICER, 
                RESTAURANT BRANDS INTERNATIONAL

    Mr. Kobza. Thank you. Chairman Portman, Ranking Member 
McCaskill, and Members of the Subcommittee, thank you for the 
opportunity to appear before this Committee. My name is Josh 
Kobza. I am Chief Financial Officer of Restaurant Brands 
International (RBI) and most recently worked in the same 
capacity at Burger King Worldwide. I am here today to discuss 
the recent Burger King-Tim Hortons transaction, which created 
one of the world's largest ``quick service restaurant (QSR),'' 
chains. I understand that the Committee is reviewing the tax 
effect of the corporate Tax Code on U.S. businesses and on 
cross-border mergers and acquisitions. While this transaction, 
like all cross-border combinations, had certain tax 
implications, the marriage of these two iconic brands of 
similar size under the RBI umbrella was motivated by compelling 
business reasons rather than tax strategies.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Kobza appears in the Appendix on 
page 70.
---------------------------------------------------------------------------
    Our vision centered on combining two brands that occupy a 
distinct space in the QSR landscape--both geographically and in 
their menu offerings--to create new opportunities. Burger King 
is the world's second largest fast food hamburger restaurant, 
with over 14,000 restaurants in approximately 100 countries and 
U.S. territories.
    Tim Hortons is the largest Canadian-based QSR, with 
approximately 45 percent of all QSR traffic in Canada.
    Our new RBI family now includes over 19,000 restaurants in 
approximately 100 countries. More than half of Burger King's 
restaurants are located outside the United States, and we see a 
significant opportunity to grow the Tim Hortons brand and 
unique operating model in attractive markets all around the 
world, beginning in the United States.
    My testimony today focuses on this transaction as it 
occurred rather than hypothetical scenarios that could have any 
number of potential inputs and points of analysis.
    In 2013, our management team began to evaluate future 
alternatives for growth and enhancement of shareholder value, 
including potential strategic transactions. Through our search, 
we identified Tim Hortons as an excellent choice--a very high 
quality business with an incredibly strong brand and 
complementary menu offerings, where we could add significant 
value by leveraging Burger King's worldwide operating partner 
networks and experience in global development.
    We structured the transaction in a way that honors the 
history of both companies. Burger King's headquarters remains 
in Miami, Florida, and Tim Hortons' remains in Oakville, 
Ontario, with separate management to ensure the integrity of 
each brand.
    We plan to open hundreds of new Tim Hortons restaurants 
across the United States, attracting tens of millions of 
dollars in investment, creating thousands of new jobs, and 
expanding the U.S. tax base.
    As CFO during discussions between Burger King and Tim 
Hortons, I was responsible for working with our professional 
advisers to explore how to structure a potential transaction. 
As these discussions progressed, it became clear that a 
combined Burger King-Tim Hortons company should be domiciled in 
Canada.
    The business case for this transaction was always very 
clear to us, and closing the deal required careful calibration 
of the terms and structure of the transaction. Both the Tim 
Hortons brand and the Burger King brand are revered 
institutions in their country of origin. But given that Canada 
is the country with the highest concentration of employees, 
assets, and income for the combined company, Canada was the 
logical choice to be the domicile of the newly formed entity.
    Additionally, the Board of Directors for Tim Hortons at 
first declined to discuss any possible combination and was 
reluctant to engage in serious negotiations until our proposal 
contained both a higher price and a commitment to locating the 
combined company in Canada. Throughout our discussions with the 
company's board and management, it was made clear to us that 
domiciling the company in Canada was critical to concluding a 
deal.
    Under the transaction, Burger King remains a U.S. taxpayer 
with an unwavering commitment to our Miami headquarters, the 
surrounding community, and our U.S. franchisees. When compared 
to the 26-percent effective tax rate paid by Burger King prior 
to the transaction, our current effective tax rate is only 
slightly lower--in the range of 3-percent reduction. This 
modest impact underscores a crucial point: Joining Burger King 
and Tim Hortons together was fundamentally about growth. Tax 
considerations were never the driving force for our 
transaction. Rather, our primary motivation was to realize the 
greater business potential of combining these two iconic and 
complementary brands.
    That is not to say that the domiciling of the company in 
Canada did not have any tax effects. Canada's tax regime 
provided both slightly better rates and its quasi-territorial 
system provided an efficient and attractive platform for 
growth. As a combined company, we are focused on accelerating 
our growth. Our goal is to grow our business and our brands 
alongside our franchisees, employees, and other partners.
    In closing, we understand that in recent years, the policy 
discussion regarding the role of tax considerations in 
corporate mergers and acquisitions has become more prevalent. 
In this regard, we welcome the ongoing bipartisan efforts to 
make the U.S. tax system more competitive to level the playing 
field.
    Again, thank you for the opportunity to appear before this 
Committee. I look forward to answering your questions.
    Senator Portman. Thank you both very much.
    I am going to start with you, Mr. Kobza, and Burger King. 
You just made a point that the territorial system in Canada 
helped with growth, that you have a slightly better rate in 
Canada. The information you provided us with regard to your 
decision-making was interesting to me, in part because of what 
you said about the difficulty of bringing your profits back to 
the United States. You all were growing internationally. You 
wanted to grow more, and that is a good thing. But you found 
that it was hard to bring those rates back.
    Could you turn to page 29 of the appendix? I think you have 
that in front of you there.
    Talk to us a little about this. Is it accurate to say that 
at the time of the transaction you expected a lot of your 
future growth to come from international expansion?
    Mr. Kobza. So prior to the transaction, we had gone through 
4 years of rapidly accelerating development around the world. I 
think one of the great accomplishments of those 4 years was to 
multiply the pace of our growth by about four times in terms of 
net new restaurants.
    Senator Portman. So you were looking to grow more 
internationally. So here you are, a U.S. company wanting to 
grow internationally. And what were you facing internationally? 
You had, again, looking at the data you provided us, about $700 
million locked out in foreign earnings, meaning earnings you 
could not bring back to the United States without paying a high 
tax rate. Is that accurate?
    Mr. Kobza. It is accurate that we had about $700 million of 
permanently reinvested earnings, and we had made the decision 
prior to the transaction that we would reinvest those 
permanently, whether that be through new investments in our 
growth or through M&A, or investments in our joint ventures.
    Senator Portman. And what were you telling your board that 
your corporate rate would be if you brought those cash balances 
you had overseas, that $700 million, back to the United States 
of America? What was your tax rate you talked about? If you 
look at the appendix, there is a number there.
    Mr. Kobza. Yes, I think it is very helpful to look at page 
10 of the appendix, and I think it is very important to bring 
some context to this page. This is really fundamentally the 
lens that we look through when we analyzed the merger with Tim 
Hortons. And what you have on the left side of the page is our 
base case outlook, which considered our strategic plan for the 
existing Burger King business and our existing tax rate, which 
was around 28, 29 percent. And we thought that with that plan 
we could generate a share price of about $46 over the course of 
the next few years.
    So when we measured the incremental value that this merger 
would add, we always looked at it versus that $46 per share. So 
we looked at how much more value could we add by doing the 
merger.
    Senator Portman. Let me just focus you in on this one 
issue, though, that we are getting at, and I appreciate your 
comment earlier that you hope we could see a U.S. Tax Code that 
was a more level playing field. You had $700 million overseas. 
You were telling folks that under the corporate structure of 
being a U.S. company, if you brought that back, it would be a 
very high rate. In fact, I think you said it would likely 
increase to near 40 percent would be your corporate tax rate if 
you were to repatriate those cash balances. Is that correct?
    Mr. Kobza. The reason for that analysis was that when we 
looked at a Canadian-domiciled company, we considered that 
given the quasi-territorial system, we would likely distribute 
all of our foreign earnings. So as an illustrative analysis, we 
calculated at a very high level what the tax impact would be if 
we were to distribute all of our earnings in the existing case, 
and we used an illustrative rate of 40 percent, and that is the 
value that you see on----
    Senator Portman. I get it. And that is sort of the point, 
in part, of this hearing, to say here you were a U.S. company 
and saying you would like to have the flexibility to be able to 
bring some of those profits back and reinvest here and expand, 
and you probably also thought this is going to get worse 
because you wanted to grow more internationally and, therefore, 
have more of those earnings that would get into this lockout. 
So, there was a tax barrier.
    The other issue is how did you choose Canada as your 
headquarters, and let me preface this by saying I do not 
question what you are saying at all about the business reasons 
to have the combination. I think, from everything I have read 
and heard about it, that is what motivated you looking at Tim 
Hortons in the first place, and it sounds like it is working 
for you from a business perspective.
    But you had a decision to make. Where is the headquarters 
going to be? And my understanding is that--and, again, I think 
this is--if you look at page 25 of the appendix, you will see 
something with regard to this decisionmaking as to where the 
headquarters ought to be. You looked at a number of different 
places. I do not see the United States of America on the list. 
And I assume, based on the information that you provided us, 
that that was because of the tax consequences.
    So I get it that Tim Hortons wanted to stay in Canada. I am 
sure they had lots of reasons for that, maybe some of which had 
nothing to do with taxes, but certainly one would be taxes. Is 
it accurate to say that the United States was not even on the 
list of places where you might want to put a corporate 
headquarters of the combined companies?
    Mr. Kobza. Yes, so as we went through the transaction, I 
would say there are probably three big factors that drove our 
decisionmaking about why the combined company should be 
domiciled in Canada.
    First, Canada would be the center of operations for the 
combined company. It had the largest concentration of 
employees, assets, and income of the company.
    And the second reason is that this was something extremely 
important to the board of directors and management team of Tim 
Hortons. And, in fact, in written communications to us, it was 
put out as a condition to moving forward and even beginning to 
negotiate in the deal. It was only after we put that in our 
offer letter that the company even began to negotiate with us.
    Furthermore, we had to count on getting approval from the 
Canadian Government under the Investment Canada Act (ICA), and 
we went through a study of all 1,500 cases that have passed 
through ICA review in the past 25 years and through that study 
came to the conclusion that domiciling the combined company in 
Canada would be a critical success factor for getting through 
that approval process. And we did not have any exit from the 
merger agreement if we did not get approval, except under 
extreme circumstances and in which case we would have had to 
pay a $500 million penalty. So those three factors were very 
strong factors in driving us to consider Canada.
    That said, we also looked at the tax effects of domiciling 
the company in Canada, and as you can see from the materials, 
there was a reduction in the tax rate relative to the tax rate 
that Burger King was paying previously, and that is something 
that was factored into our analysis, into our board's analysis 
of the deal as a whole.
    Senator Portman. One final one is just with regard to, 
again, page 25 of the appendix. The slide seems to be saying 
that Burger King moving offshore would reduce your tax rate to 
the low 20s and avoid this 40-percent effective rate we talked 
about if you had had to bring your earnings back from overseas. 
And you say here that the incremental value creation from tax 
savings would be $1.4 billion without repatriated earnings and 
$5.5 billion if you did repatriate. So assuming repatriation, 
which your presentation does, was it your estimate at the time 
that placing the combined company headquarters in the United 
States would have destroyed about $5.5 billion of value?
    Mr. Kobza. So the $5.5 billion calculation was a very 
simplistic, high-level, and illustrative calculation that 
applied that rate to the combined company. Because of the fact 
that we only ever looked in-depth and explored with our 
advisers in-depth the tax structuring among other structuring 
considerations of a transaction moving to Canada, we never 
looked in-depth at fully examining the impacts of domiciling 
the company in the United States
    Senator Portman. So it is an estimate.
    Mr. Kobza. It is a very high level estimate.
    Senator Portman. But a significant one; $5.5 billion in a 
transaction of this size obviously played a huge role.
    So, look, thank you again for your willingness to provide 
information. We appreciate the fact that the information you 
provided us is helping us to come up with, as you said earlier, 
a better tax system.
    And with that, I will turn to my colleague, and I look 
forward to following up with questions in a moment. Senator 
McCaskill.
    Senator McCaskill. Thank you.
    Mr. Schiller, there was a press release at the time that 
you were fighting for Allergan from Allergan about your tax 
strategies being more aggressive than many of your peers' 
within the pharmaceutical industry. In 2014, the CEO, Michael 
Pearson, stated, and I am quoting: ``We were able to get a 
corporate tax structure which took our effective tax from 36 
percent overall to one that was actually 3.1 percent, which we 
hoped to continue to work on and move lower.''
    Do you understand how that infuriates Americans? I mean, I 
get it that it is the math, and I get it that it is legal. But 
you understand the notion that a corporation as large as yours 
that--and I think you said in your testimony the majority of 
your sales are to Americans? The majority of your profits are 
from Americans? That you believe you can figure out a way to 
pay less than 3.1 percent in taxes when most Americans are 
going, ``What is up with that? How did we get to that 
situation?''
    How much lower do you think you could get the rate than 3.1 
percent? Nothing? I mean, do you believe that you have an 
opportunity to get--are there ways you are strategizing that 
you can--is your rate at 3.1 now, your overall rate?
    Mr. Schiller. No. Our rate right now is around 4 percent.
    Senator McCaskill. It is at 4, OK. Well, let me ask you 
this: What percentage of the profit that you are generating in 
Valeant comes from Medicare?
    Mr. Schiller. We have a very small percentage of our 
profits--I believe--of our revenue. I believe it is around 5 
percent or so that is government, either Medicaid or Medicare.
    Senator McCaskill. OK. Well, let us talk about Isuprel. It 
is a drug to treat cardiac arrest, so I am assuming that a 
large number of the people who would take this drug would be 
over 65.
    Mr. Schiller. Yes.
    Senator McCaskill. In 2013, a company called Hospira sold 
Isuprel to Marathon Pharmaceutical, which increased the price 
from $44.50 per vial to $215 per vial. Do you know how much 
Isuprel is paid for by Medicare in the United States?
    Mr. Schiller. I do not know specifically.
    Senator McCaskill. Well, I would really appreciate if you 
all could get us those numbers for Isuprel, because in February 
of this year, you purchased Isuprel. And according to the Wall 
Street Journal, the price went--now, remember, it was $44 a 
vial in 2013. The price went to $1,346 per vial. This is an 
increase of more than 500 percent after you purchased the drug. 
And the only thing that has changed is the label.
    So I am trying to figure out how we reconcile this is a 
drug that I guarantee you I would be shocked if the majority of 
the people taking that drug are not on Medicare--how we 
reconcile fixing the Tax Code so that it is fairer because I do 
not want to demonize you for using business practices that we 
allow you to use in our country, but there is something way out 
of whack here. What accounts for a 500-percent increase in a 
vial of a drug where the R&D has already been done and the 
price had already been raised from fivefold immediately before 
your acquisition of the drug? How can you do that? Because 
there is no competition for the drug?
    Mr. Schiller. Well, first and foremost is ensuring that our 
patients have the drugs they need and they are safe and they 
are efficacious. This drug that you are talking about is a 
hospital-based drug. It is part of a protocol. Any patient that 
needs it is getting it.
    The analysis on pricing for a drug, as you can imagine, is 
quite complex. There was work being done by the prior owner 
before we bought it, looking at the benefits of this drug to 
the system, to patients, to hospitals, and the conclusion was 
that it was significantly underpriced. When we closed on the 
transaction, we continued that work and took the pricing 
actions that you acknowledged.
    I would add, though, however, this is one out of thousands 
of products that we have. The vast majority of our revenue in 
the United States is governed by contracts with managed care, 
et cetera, where their price increases are stipulated in 
contracts and, we do not have free pricing--free ability to 
raise prices like that. These are anomalies. And, a lot of it 
is driven--but just that, the vast majority of the drugs, price 
increases are not anywhere close to that.
    Senator McCaskill. I would love to pull back the curtain 
and figure out how you price that. I would love to figure out 
how you did that. I would love to understand how it goes from 
215 per--you did not change the drug. The drug is the same, 
right?
    Mr. Schiller. It is.
    Senator McCaskill. The protocol is the same, right?
    Mr. Schiller. It is.
    Senator McCaskill. I mean, I would love to figure out the 
formula. I mean, why not $2,500 per vial? Why not $3,000 per 
vial? I mean, how in the world did you figure out that it was 
underpriced? Because there is not a generic competitor, which I 
do not get. I bet there will be soon if you are getting $1,300 
a vial for it.
    It is a mystery to me how that number came about. And maybe 
you want to submit how that came about, because I will be 
shocked if the American taxpayers are not paying the majority 
of that, because if it is hospital-based, and they are over 65, 
it is all Medicare, because it is not something anybody is 
getting--it is not Part D, right?
    Mr. Schiller. No, it would be part of the protocol, so it 
is a fixed price for a procedure. So the procedure would not 
cost anything more because the price of a drug went up.
    Senator McCaskill. It is not the subject matter of this 
hearing, but I got distracted when I saw that. I apologize to 
the Chairman that it is not the subject, but it should be. We 
should do one on this, how we figure out these drugs going 
from--and it is happening all over the place in the 
pharmaceutical industry where drugs are just magically--we are 
having these mergers, and then all of a sudden drugs are going 
from 50 bucks to 250 bucks, or they are going from 500 bucks to 
2,000 bucks after a merger and acquisition. And I cannot figure 
out why. And it is really problematic. Hopefully on the next 
round I can get to something that is more topic-based, but I 
could not resist.
    Thank you, Mr. Chairman.
    Senator Portman. Thank you, Senator McCaskill.
    I have some questions with regard to the portrayal you gave 
us in terms of the tax advantages of both your initial decision 
to merge, and just as background you talked about this Valeant 
U.S.-headquartered company had a reported tax rate around 35 
percent, teams up with a Canadian pharma firm called Biovail, 
kind of a merger of equals, would you say? Biovail had its 
headquarters in Canada, obviously, a territorial system there 
we talked about which gives them certain advantages; but, 
second, they had a statutory rate of about 27 percent. How has 
that merger and being a Canadian company affected your ability 
to do acquisitions?
    Mr. Schiller. Sure. So at the time, as I mentioned in my 
opening statement, we were equal in size and small in the 
context of the global pharmaceutical industry, in similar 
therapeutic areas, similar geographies, focused in the United 
States and Canada, and both struggling to get scale. The 
companies came together. The decision to be in Canada did not 
drive the discussion, did not drive the decision that the 
merger made sense. But when it came down to constructing the 
transaction, there was only one possibility if the transaction 
were to occur, and that was to be in Canada, because if we were 
to contemplate coming to the United States, there would have 
been such significant dyssynergies that it would make coming up 
with a price that both sides would agree to and both sets of 
shareholders would agree to impossible.
    Senator Portman. Including the tax advantages in going to 
Canada, as we talked about earlier.
    Mr. Schiller. Yes. Those dyssynergies I am talking about 
are tax dyssynergies.
    Senator Portman. OK. So you go there, and my question to 
you is acquisitions. In that short period of time, since 2010, 
you have made lots of acquisitions. In fact, you say you 
started a small company. Now you have made $36 billion worth of 
acquisitions, $30 billion in the United States, just in that 
short period of time. So I think one of the words you used in 
the testimony was it kind of ``turbocharged'' your ability to 
do acquisitions. And that is part of, what we are looking at 
here, not just U.S. companies leaving our shores because of the 
tax disadvantages in the United States, but also once they 
leave, then looking back into the United States and acquiring 
additional companies. And you have been very successful doing 
that.
    One of the companies that you acquired was Bausch & Lomb. 
We will talk about that. Another is Medicis. Another is Salix. 
And in each of those, you showed us kind of what you were 
looking for, which makes sense. A company is not going to 
purchase another company just to make things break even. You 
want to make a nice return. And you were talking about a 
significant return. You were looking for 20-percent rate of 
return over a 6-year--and a 6-year payback period. That is the 
deal, basically will pay for itself in 6 years. And in these 
three cases, it looks like you got to that, or very close to 
that because of the synergies, as you say, on the tax side in 
large measure--not that these did not make sense for other 
reasons. So when I look at these decisions that you have made, 
I see them as being tax motivated, and they have worked for 
you.
    Salix, by the way, we will talk about first, if you do not 
mind. Here is a U.S. company. They were thinking about 
inverting. The Federal Government, the Obama Administration 
comes up with the regulations against inversions, particularly 
the percentage of shareholders that have to be foreign. They 
say, well, that is going to stop us from inverting, so let us 
just become a target of a foreign takeover. So here is a 
company that was blocked by Federal regulations from doing what 
they were going to do, invert; instead, they say, ``Let us just 
be taken over by a foreign company.'' And, indeed, 11 of the 12 
companies that bid for them were foreign, and you all won that 
bid.
    On Salix, if you look at page 80 of the appendix, I can see 
where you have laid out some different results based on what 
the tax rate might be. And, again, that makes sense from your 
point of view, specifically, this idea that, you wanted to be 
able to show over 6 years that you could get effectively the 
return to shareholders that would make the deal pay for itself 
at a 20-percent internal rate of return.
    My question for you is: With regard to Salix, is this 
presentation made by the Valeant management to the Valeant 
board one that you think was instructive to the board to make 
the decision to move forward with the deal? In other words, 
were these tax alternatives that you laid what really led to 
the board's decision?
    Mr. Schiller. Sure. So as I mentioned in my opening 
statement, there is no question being a Canadian company 
subject to their territorial tax regime has created significant 
benefits for the company and its shareholders. I would, 
however, describe the benefits and how we capture those 
benefits slightly differently than as was laid out.
    As I mentioned in my opening statement, when we look at a 
target, we are looking at whether it is a strategic fit, first 
and foremost. Second, we are looking at whether or not the 
returns are sufficient for our shareholders. It is their money; 
deploying capital is probably the most important responsibility 
a senior management team has.
    We look at statutory tax rates when we are looking at 
deploying capital. We look at lots of other factors and run 
lots of scenarios, including what we think the tax rate would 
be, a scenario with the tax rate in our hands. That is not a 
benefit we give to a seller. That is a benefit that we retain 
for our shareholders.
    So in the Salix case, the materials you pointed out, the 
debate in the board room was whether a 15-, 16-percent return 
was sufficient to go forward or whether we should wait for 
higher return opportunity that meet our thresholds, and the 
decision was that it was a great company, it was sufficient, 
and we put a lot of capital to work very quickly, and rather 
than waiting for other things to come along, uncertainty in 
terms of timing, size, quality, et cetera.
    The benefit that we clearly get is, in our hands, a dollar 
of revenue, we will bring more of that dollar of revenue to the 
bottom line than somebody that has a much higher tax rate, 
which gives us the ability to reinvest in our business, expand 
plants and R&D, or make other acquisitions and grow faster, 
create more value, become a more attractive employer, lots of 
other benefits.
    Senator Portman. Well, let me just, with regard to this 
question--and I will then turn back to Senator McCaskill. You 
showed the board how this acquisition would play out at three 
tax rates, as I see it here. One is a 36-percent rate, which 
was very close to Salix's projected effective tax rate of 32. 
And then the two lower rates you thought were possible after 
the acquisition, 5 percent and 10 percent. That is what is laid 
out in your materials.
    Looking at this page, the only scenario that shows Valeant 
hitting or exceeding this targeted 20-percent internal rate of 
return was the company's lower-rate scenarios. So, again, 
assuming a share price of 160 bucks, Valeant projected that its 
internal rate of return on Salix would be 15.6 percent at the 
U.S. rate, but would jump up to 21 and 22 percent at the lower 
tax rates. Isn't that right?
    Mr. Schiller. The numbers you called out are correct, but 
the debate at the board was whether the 15, 16 percent was 
sufficient.
    The other scenarios are clearly meant to demonstrate the 
value to our shareholders, what they will ultimately get if we 
are able to achieve those tax rates. But in terms of evaluating 
whether to go forward with Salix, the debate in the board room 
was whether accepting something lower than our targets was 
sufficient, was a good enough risk-reward for our shareholders 
at that time. But, again, the significant benefit is there in 
our hands, and our shareholders will get that benefit.
    Senator Portman. Well, given that Valeant projects that it 
would only reach your target, which is the 20-percent rate of 
return, by dramatically cutting Salix's tax bill, I think it is 
fair to say the tax savings were an important driver of the 
deal, particularly because you told us that, you all are 
disciplined about it--which makes sense from a business point 
of view that you are disciplined about your financial 
guidelines and ``across the board, the majority of our 
transactions are delivered above that targeted 20-percent rate 
of return.''
    Again, this is not about criticizing a company for looking 
at what the rate of return is and considering tax rates as part 
of that projection. But it is very clear to me in looking at 
the material you provided us--and this will come as no surprise 
to anybody who has looked at the U.S. tax system--that this is 
a significant reason that you all have proceeded not just with 
this transaction but with other transactions, including the 
other two we have looked at in some depth, because there you 
were able to make your 20-percent return on acquisitions, and 
without the tax advantage, you would not have been able to.
    So, again, I appreciate your providing the information to 
us. I do think this is an opportunity for us to dig a little 
deeper in these examples, as we have in our report, to be able 
to understand what the real consequences are of the United 
States refusing to change its Tax Code and what it means in 
terms of not just losing U.S. company headquarters, but also 
losing jobs and investment.
    I am going to have to go to another Committee to mark up 
one of my bills, and I am going to ask Senator McCaskill if she 
would please take the chair, and, again, gentlemen, both of 
you, thank you very much for coming and for your willingness to 
provide us important information that will help us in our 
objective here, which is to come up with a Tax Code that makes 
sense for our country and for our workers. Thank you.
    Senator McCaskill [Presiding.] Thank you, Mr. Chairman.
    I just have a couple more questions, and we will let you 
go. For both of you, Mr. Galvin--did you all hear the previous 
panel's testimony? So Mr. Galvin from Emerson talked about a 
25-percent tax rate making us competitive because of other 
factors and he said if we went down to 10 or 12 percent, then 
you would have a race to the bottom by other countries that 
perhaps do not have the same leverage as we have and that the 
key is to make us competitive.
    Do you agree with his statement that a 25-percent rate 
would make us competitive?
    Mr. Schiller. Honestly, we have never spent a lot of time 
analyzing what rate in the United States would even the playing 
field. It is a tough analysis because security, rule of law, 
quality of workforce, infrastructure, there are so many other 
factors that go into play. And taxes is one cost item out of a 
very complex analysis.
    Being competitive with--and you also have to take into 
account all the other rules around rates. Harmonizing rules and 
harmonizing rates would clearly take tax out of the equation. 
So I think it is a bit more complex than just is 25 percent the 
right number.
    Senator McCaskill. Yes?
    Mr. Kobza. As I mentioned in my opening remarks and in 
response to Senator Portman's question, our decision to 
domicile the combined company in Canada was driven by a number 
of factors which were outside of tax considerations. So it is 
not a question that we considered in great detail, and I am not 
an expert in United States or global tax, so I would have 
difficulty to respond to what exact rate would make the U.S. 
competitive.
    Senator McCaskill. Would it be helpful for both of your 
companies--both of your companies are examples of companies 
that make--you still make the majority of your money in 
America, don't you?
    Mr. Kobza. In fact, for the combined company with 
Restaurant Brands International, only about 25 percent of our 
combined earnings are in the United States.
    Senator McCaskill. OK. So you do not, but you do, Mr. 
Schiller, and I think there is a boatload of companies out 
there that still do, even though they may be parking money 
offshore because of tax reasons or being acquired by foreign 
investors for tax reasons or inverting for tax reasons. I think 
it would be important for us to get input about this. I think 
we need to know as much as possible, because tackling the Tax 
Code is hard around here, and it is not something we are going 
to go back and do again the next year. If we get this done, it 
will be in place for a while. So I think the more input we get, 
the better.
    And the other question I had for you, Mr. Schiller, that I 
did not get to on my first round was: What were the benefits to 
your company of shipping manufacturing activity to Canada? I 
know that you did most of the contract manufacturing for both 
Medicis and Salix out of Canada. What were the advantages of 
manufacturing moving there?
    Mr. Schiller. Well, up until Bausch & Lomb, we had no 
manufacturing facilities in the United States. Bausch & Lomb 
had some; Salix had none. So Valeant and Salix were using 
contract manufacturers.
    We did have two plants, two large--we had three plants, but 
two large facilities in Canada--one in Steinbach, Manitoba, and 
one in Laval. And when we bought it, it was really looking at 
the cost of manufacturing through the contract manufacturing 
operations (CMOs), through the contract manufacturers, as to 
what we could do internally. And the plant in Laval was a 
dermatology plant, so it had all the capabilities of making the 
Medicis products--we have not done anything with Salix. We just 
closed Salix April 1, and I do not suspect we are going to be 
moving any Salix products anytime soon. So a few of the Medicis 
products we did, and some of the legacy Valeant products we 
have moved from CMOs as well, but it is based on the cost of 
manufacturing in our own plant versus what the contract 
manufacturers charge.
    The Bausch & Lomb plants continue to run well, and we are 
looking to add capacity there because they are very good. The 
Clearwater and Tampa, Florida, plants and the Greenville, South 
Carolina, plants are very efficient plants, and we are looking 
to add capacity there when we can.
    Senator McCaskill. Well, to whatever extent you can share 
with the Committee the analysis of contract manufacturing in 
Canada versus the United States and what the differentials 
are----
    Mr. Schiller. In Canada, it is not a contract manufacturer. 
It is our own plants.
    Senator McCaskill. You do not have any contract 
manufacturing in Canada?
    Mr. Schiller. I do not think we use contract manufacturers 
in Canada.
    Senator McCaskill. Well, what would be helpful to us is to 
see what the differentials are on contract manufacturing in the 
United States and other places. If you analyze contract 
manufacturing, I am assuming you looked at analysis that would 
include contract manufacturing in the United States, and it 
would be helpful for us to understand what factors weighed in 
there against contract manufacturing.
    Mr. Schiller. Each product is unique, but in general, 
contract manufacturers have 15-to 20-percent margins, and the 
question is whether or not--so that is the margin they are 
earning for providing a service.
    Senator McCaskill. Right.
    Mr. Schiller. So that we would certainly save. Then the 
question is whether we can manufacture--the raw material costs 
are not going to be very different. It is a question of whether 
our operating costs are lower, higher, or the same, and it is 
really a product-by-product analysis.
    Senator McCaskill. I guess one of the reasons I am 
interested is that if there was an analysis that went on on the 
cost of contract manufacturing, if there was an analysis of 
contract manufacturing in the United States, that is going to 
have an add-on--right? But so is contract manufacturing in 
Canada. If that analysis was done, it would be very helpful for 
us to see it, because we have a lot of people complaining that, 
the reason that Canada is more attractive is that labor costs 
are lower, but they have a single-payer system up there. And so 
I am trying to figure out how that all works, and as we analyze 
the Tax Code, including what is deductible and what is not, it 
would be important for us to have the benefit of any analysis 
your company has done. We need to see what you see so we can 
understand how we can be more competitive.
    I think that the record will remain open for 15 days and 
will close on August 14 for this hearing. There may be other 
questions that we might have for you and for the other 
witnesses. We have a hard job, and it is exacerbated by the 
fact that we all do not see things the same way around here. So 
we are going to try to do our best to make the United States as 
competitive as it should be with all the other countries in the 
world in terms of job growth and economic strength. In the 
process, I just want to make sure that we do not diminish the 
natural strengths that still make our country a beacon to the 
world for R&D and innovation. I am sorry to say I am going to 
try to talk the Chairman into trying to figure out how we can 
look at--it is astounding--the merger and acquisitions that are 
going on in pharmaceuticals. What did my briefing say, what 
percentage of the income came from M&A over the last year, like 
45 or--yes, I mean, a huge percentage over the last 3 or 4 
years has just been through M&A. And in that process, how these 
drugs are being priced I think is a fascinating thing for us to 
understand, because that is what drives our debt right now, is 
health care costs. That is the big problem we have in terms of 
our competitiveness in the future, is how do we get a handle on 
our entitlement debt, which is driven by and large by health 
care costs in Medicare. Sorry, but your company--I am sure you 
are not outside the realm of what is going on with other 
companies. I do not mean to pick on your company. But that drug 
is a great example of, I think, questions we need to ask about 
how this is happening and why.
    Thank you both for being here, and I thank the first panel, 
and we will try to work together to see if we can level this 
playing field.
    [Whereupon, at 11:59 a.m., the Subcommittee was adjourned.]

                            A P P E N D I X

                              ----------                              


   [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                 [all]