    [Senate Hearing 114-230]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 114-230

                            BUILDING A COMPETITIVE
                         U.S. INTERNATIONAL TAX SYSTEM

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

                                    HEARING

                                   before the

                              COMMITTEE ON FINANCE
                              UNITED STATES SENATE

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION
                                   __________

                                 MARCH 17, 2015
                                   __________

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                Printed for the use of the Committee on Finance
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                              COMMITTEE ON FINANCE

                         ORRIN G. HATCH, Utah, Chairman

    CHUCK GRASSLEY, Iowa                 RON WYDEN, Oregon
    MIKE CRAPO, Idaho                    CHARLES E. SCHUMER, New York
    PAT ROBERTS, Kansas                  DEBBIE STABENOW, Michigan
    MICHAEL B. ENZI, Wyoming             MARIA CANTWELL, Washington
    JOHN CORNYN, Texas                   BILL NELSON, Florida
    JOHN THUNE, South Dakota             ROBERT MENENDEZ, New Jersey
    RICHARD BURR, North Carolina         THOMAS R. CARPER, Delaware
    JOHNNY ISAKSON, Georgia              BENJAMIN L. CARDIN, Maryland
    ROB PORTMAN, Ohio                    SHERROD BROWN, Ohio
    PATRICK J. TOOMEY, Pennsylvania      MICHAEL F. BENNET, Colorado
    DANIEL COATS, Indiana                ROBERT P. CASEY, Jr., Pennsylvania
    DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
    TIM SCOTT, South Carolina

                         Chris Campbell, Staff Director

                  Joshua Sheinkman, Democratic Staff Director

                                      (ii)

                                C O N T E N T S

                                   __________

                               OPENING STATEMENTS

                                                                       Page
    Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman,
      Committee on Finance...........................................     1
    Wyden, Hon. Ron, a U.S. Senator from Oregon......................     3

                                   WITNESSES

    Olson, Hon. Pamela F., U.S. Deputy Tax Leader and Washington
      National Tax Services Leader, PricewaterhouseCoopers LLP,
      Washington, DC.................................................     5
    Smith, Anthony, vice president of tax and treasurer, Thermo
      Fisher Scientific, Inc., Waltham, MA...........................     7
    Altshuler, Rosanne, Ph.D., professor of economics and dean of
      social and behavioral sciences, Rutgers University, New
      Brunswick, NJ..................................................     8
    Shay, Stephen E., professor of practice, Harvard Law School,
      Harvard University, Cambridge, MA..............................    10

                   ALPHABETICAL LISTING AND APPENDIX MATERIAL

    Altshuler, Rosanne, Ph.D.:
        Testimony....................................................     8
        Prepared statement...........................................    37
    Hatch, Hon. Orrin G.:
        Opening statement............................................     1
        Prepared statement...........................................    43
    Olson, Hon. Pamela F.:
        Testimony....................................................     5
        Prepared statement...........................................    44
    Portman, Hon. Rob:
        ``Tax Inversion Curb Turns Tables on US,'' by David Crow,
          James Fontanella-Khan, and Megan Murphy, Financial Times,
          March 15, 2015.............................................    56
    Shay, Stephen E.:
        Testimony....................................................    10
        Prepared statement...........................................    57
    Smith, Anthony:
        Testimony....................................................     7
        Prepared statement...........................................    63
    Wyden, Hon. Ron:
        Opening statement............................................     3
        Prepared statement...........................................    67

                                 Communication

    The LIFO Coalition...............................................    69

                                     (iii)

                            BUILDING A COMPETITIVE
                         U.S. INTERNATIONAL TAX SYSTEM

                                  ----------

                            TUESDAY, MARCH 17, 2015

                                           U.S. Senate,
                                          Committee on Finance,
                                                        Washington, DC.
        The hearing was convened, pursuant to notice, at 10:11
    a.m., in room SD-215, Dirksen Senate Office Building, Hon.
    Orrin G. Hatch (chairman of the committee) presiding.
        Present: Senators Crapo, Roberts, Thune, Portman, Coats,
    Heller, Scott, Wyden, Schumer, Stabenow, Cantwell, Menendez,
    Carper, Cardin, Brown, Bennet, and Warner.
        Also present: Republican Staff: Mark Prater, Deputy Staff
    Director and Chief Tax Counsel; Eric Oman, Senior Policy
    Advisor for Tax and Accounting; Tony Coughlan, Tax Counsel; and
    Jim Lyons, Tax Counsel. Democratic Staff: Joshua Sheinkman,
    Staff Director; Tiffany Smith, Senior Tax Counsel; and Todd
    Metcalf, Chief Tax Counsel.

     OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
                  UTAH, CHAIRMAN, COMMITTEE ON FINANCE

        The Chairman. The committee will now come to order.
        I want to welcome everyone to today's hearing on Building a
    Competitive U.S. International Tax System. I also want to thank
    our witnesses for appearing before the committee today.
        Reforming our international tax system is a critical step
    on the road toward comprehensive tax reform. Not surprisingly,
    the failures of our current system get a lot of attention. That
    is why Senator Wyden and I designated one of our five tax
    reform working groups to specifically look into this issue. I
    know that my colleagues serving on that working group, and all
    of our working groups, are looking very closely at all the
    relevant details, and I look forward to their recommendations.
        As we look at our international tax system, our primary
    goals should be to make the U.S. a better place to do business
    and to allow American job creators to more effectively compete
    with their foreign counterparts in the world marketplace. Our
    corporate tax rate has been the highest in the developed world,
    and effective tax rates facing U.S. corporations are higher
    than average. In my opinion, our high corporate tax rate has to
    come down significantly.
        I think most of my colleagues on both sides of the aisle
    would agree with that. In addition, our current system creates
    disincentives that lock out earnings made by U.S.
    multinationals abroad and keep those earnings from being
    reinvested domestically. This also needs to be addressed in tax
    reform.
        Additionally, I will note that the tax base is much more
    mobile than it used to be. For example, thanks to advances in
    technology and markets, capital and labor have become
    increasingly more mobile.
        The most mobile assets of all, intangible assets, have
    taken up the greater share of wealth around the world. The
    problem we have seen is that intangible assets and property can
    easily be moved from the United States to another country,
    particularly if that country has a lower tax burden.
        This is a disturbing trend, one that I think all of us
    would like to see reversed. Some, like President Obama in his
    most recent budget, have responded to this trend by calling for
    higher U.S. taxation of foreign-source income, claiming that by
    extending the reach of U.S. taxes, we can eliminate incentives
    for businesses to move income-producing assets to other
    countries.
        The problem, of course, is that assets are not the only
    things that can be moved from one country to another. Companies
    themselves can also migrate away from our overly burdensome tax
    environment. We have seen that, with the recent wave of
    inversions, that has really been the case.
        Indeed, many companies have already decided that our
    current regime of worldwide taxation with absurdly high tax
    rates is simply too onerous and have opted to locate their tax
    domiciles in countries with lower rates and territorial tax
    systems. In other words, if we are serious about keeping assets
    and companies in the United States, we should not be looking to
    increase the burdens imposed by our international tax system.
    Instead, we should be looking to make our system more
    competitive.
        Not only must our corporate tax rate come down across the
    board, we should also shift significantly in the direction of a
    territorial tax system. Most witnesses have testified that way.
    If we want companies to remain in the U.S. or to incorporate
    here to begin with, we should not build figurative or legal
    walls around America. We should fix our broken tax code.*
    ---------------------------------------------------------------------------
        * For more information, see also, ``Present Law and Selected Policy
    Issues in the U.S. Taxation of Cross-Border Income,'' Joint Committee
    on Taxation staff report, March 16, 2015 (JCX-51-15), https://
    www.jct.gov/publications.html?func=startdown&id=4742.
    ---------------------------------------------------------------------------
        [The prepared statement of Chairman Hatch appears in the
    appendix.]
        The Chairman. We have a lot to discuss here today. I know
    that there are some differing opinions among members of the
    committee on these issues, particularly as we talk about the
    merits of a worldwide versus a territorial tax system. But I
    think we have assembled a very good panel that will help us get
    to some answers on this front and hopefully aid us in our
    efforts to reach consensus as we tackle this vital element of
    tax reform.
        Let me just turn to our ranking member, Senator Wyden.

                 OPENING STATEMENT OF HON. RON WYDEN,
                       A U.S. SENATOR FROM OREGON

        Senator Wyden. Thank you very much, Chairman Hatch. I think
    this is a particularly important hearing, and I look forward to
    working with you and the working groups on this and the other
    topics in a bipartisan way.
        Colleagues, 9 months ago the Finance Committee gathered in
    this room for a hearing on how the broken U.S. tax code hurts
    America's competitiveness around the world, how that tax code
    is hindering the drive to create what I call red, white, and
    blue jobs that pay strong middle-class wages.
        That discussion was dominated by the wave of tax inversions
    that was cresting at the time, pounding our shores and eroding
    our tax base. Headline after headline last summer announced
    that American companies were putting themselves on the auction
    block for foreign competitors. They would find a buyer,
    headquarter overseas, and then shrink their tax bills to the
    lowest possible level.
        In the absence of comprehensive tax reform from the
    Congress, the Treasury Department undertook extraordinary
    measures aimed at slowing that erosion. Nine months later, the
    Finance Committee is back for yet another hearing on
    international taxation, and the headlines are back once more.
        Once again, there is a wave cresting, and this wave is even
    bigger. Now it is foreign firms circling in the water and
    looking to feast on American competitors, often in hostile
    takeovers. Just like before, American taxpayers could be on the
    hook, subsidizing these deals. So there is an obvious lesson
    here. I see my friend from Indiana, Senator Coats, here. We
    have talked about this often.
        Our tax code is deeply broken. The next flaw that exposes
    itself, the next wave that appears on the horizon, may not be
    about inversions or hostile takeovers. But whenever one wave
    breaks, you can bet that there will be another one rolling in,
    ready to pound the American economy and erode the American tax
    base even more. The deal makers are always going to get around
    piecemeal policy changes. Nothing short of bipartisan,
    comprehensive tax reform, in my view, is going to end that
    cycle.
        Now, there has been an awful lot of ink spilled on the
    business pages and in magazines about the many ways our tax
    code is outdated and anti-competitive. The corporate tax rate
    puts America at a disadvantage. The system of tax deferral
    blocks investment in the United States like a self-imposed
    embargo. How fitting it is on St. Patrick's Day to shine a
    spotlight on mind-numbing strategies like the ``Double Irish
    with a Dutch Sandwich'' that is used to winnow down tax bills.
        A modern tax code should fight gamesmanship and bring down
    the corporate rate to make our businesses more competitive in
    the tough global markets. That's what our bipartisan proposal
    would do. In fact, it has the lowest rate of any proposal on
    offer.
        Colleagues, it is legislative malpractice to sit by and let
    this situation fester. The Congress cannot expect the Treasury
    Department to keep playing whack-a-mole with every issue that
    pops up. The latest wave of cross-border gamesmanship shows
    that cannot work.
        So the Finance Committee is going to need to lead the way
    on tax reform. In my view, our end goals are bipartisan: a tax
    code that supercharges American competitiveness in tough global
    markets; draws investment to the United States; and creates
    high-skill, high-wage jobs in Oregon and across the country.
        It is going to take a lot of work and a lot of bipartisan
    will to get there, but, in the meantime, the waves are going to
    keep crashing, and our tax base is going to keep eroding. So it
    ought to be clear to all what our challenge is. I thank our
    witnesses today. I think this is going to be a fruitful
    discussion.
        Mr. Chairman, I thank you again. I think we have seen how
    important it will be to have a bipartisan approach here, and I
    look forward to working with you.
        The Chairman. Well, thank you, Senator.
        [The prepared statement of Senator Wyden appears in the
    appendix.]
        The Chairman. We have an excellent group of witnesses
    today. Let me introduce them. Our first witness is Pam Olson.
    She is the Deputy U.S. Tax Leader for PricewaterhouseCoopers,
    as well as PWC's leader for the Washington National Tax
    Services. Ms. Olson received her bachelor's degree, her Juris
    Doctor, and MBA from the University of Minnesota.
        Prior to joining PWC, Ms. Olson was a partner with the law
    firm of Skadden, Arps, Slate, Meagher, and Flom. She also
    served as Assistant Secretary of the U.S. Treasury for Tax
    Policy from 2002 to 2004. We welcome you back. We have always
    enjoyed having you come and visit with us in this committee.
        Our next witness is Tony Smith. I am just going to
    introduce all of you at once. Mr. Smith is the vice president
    of tax and treasurer at Thermo Fisher Scientific. He has more
    than 20 years of experience in global tax treasury operations
    and, of course, pension investments. Before joining Thermo
    Fisher Scientific, Mr. Smith was a partner at
    PricewaterhouseCoopers, as well as a partner at Pannell, Kerr,
    and Forster.
        Mr. Smith holds a bachelor's degree in Economics from
    Loughborough in the U.K. and is a U.K.-chartered accountant.
    That is pretty impressive to me. We are glad to have you here.
        Our next witness is Roseanne Altshuler. Dr. Altshuler is
    the dean of social and behavioral sciences at Rutgers
    University. Her research focuses on Federal tax policy, and her
    work has appeared in numerous journals and books. Dr. Altshuler
    holds a bachelor's degree from Tufts University and a Ph.D. in
    economics from the University of Pennsylvania.
        Dr. Altshuler was formerly an assistant professor at
    Columbia University and a visiting professor at Princeton
    University and New York University. These are great
    credentials. She was formerly the editor of the National Tax
    Journal and a member of the board of directors at the National
    Tax Association.
        Our final witness is Stephen Shay. Mr. Shay is a professor
    of practice at Harvard Law School. He has extensive experience
    in the international tax area and has been recognized as a
    leading practitioner by various organizations. Mr. Shay
    graduated with his master's from Wesleyan University, and he
    earned his J.D., Juris Doctor, and MBA from Columbia
    University.
        Prior to joining Harvard Law School, Mr. Shay was a tax
    partner at Ropes and Gray, LLP for over 20 years and served as
    Deputy Assistant Secretary for International Tax Affairs at the
    U.S. Treasury. So we feel very honored to have all four of you
    here with us today, and we look forward to your testimony.
        So we turn to you, Ms. Olson, as the first witness.

     STATEMENT OF HON. PAMELA F. OLSON, U.S. DEPUTY TAX LEADER AND
    WASHINGTON NATIONAL TAX SERVICES LEADER, PRICEWATERHOUSECOOPERS
                          LLP, WASHINGTON, DC

        Ms. Olson. Thank you, Chairman Hatch, Ranking Member Wyden,
    distinguished members of the committee. I appreciate the
    opportunity to appear as the committee considers the important
    topic of the competitiveness of our international tax laws.
        I should say that I am here today on my own behalf and not
    on behalf of PWC or any client, and the views I express are my
    own. I have submitted a longer statement for the record, which
    I assume will be included, Mr. Chairman?
        The Chairman. It will be included in the record.
        [The prepared statement of Ms. Olson appears in the
    appendix.]
        Ms. Olson. Thank you.
        I agree with both your and Senator Wyden's opening
    comments. It seems particularly appropriate that the committee
    chose to hold this hearing on St. Patrick's Day, given
    Ireland's competitive tax system. As one of my colleagues has
    been known to joke, the U.S. has had a patent box for years: we
    call it Ireland.
        Reform of our international tax rules is essential to
    growth of the U.S. economy and to the success in today's global
    marketplace of American businesses, their workers, and the many
    businesses on which they depend for goods and services.
    Unfortunately, our current system is a barrier to their success
    and is driving business away.
        This morning I would like to highlight some of the changes
    in the global economy and in other countries' tax systems that
    I think make U.S. reform important. First, the U.S. has had a
    worldwide tax system since the inception of the income tax in
    1913. The last significant change to our international
    framework was the enactment of the anti-base erosion provisions
    of subpart F in 1962.
        Our international rules remain locked in a time of rotary
    phones and telephone operators, while we carry smartphones with
    1,000 times the computing power of the Apollo guidance computer
    that put man on the moon. Meanwhile, global business operations
    and the global economy have changed significantly in the last
    50 years. Advances in communication, information technology,
    and transportation have accelerated the growth of a worldwide
    marketplace for goods and services. The U.S. tax system simply
    does not position U.S.-based companies to serve it well.
        The U.S. role in the global economy has also changed. In
    1962, the U.S. was the dominant economy, accounting for over
    half of all multinational investment in the world. By contrast,
    PWC projects that by 2050 the combined GDP of the seven largest
    emerging economies will be twice the size of the combined GDP
    of the G-7. As President Obama noted in his State of the Union
    address, 95 percent of the world's customers live outside the
    United States. U.S. busineses cannot serve those rapidly
    growing markets by staying home.
        Just as the global economy has changed, tax systems around
    the world have evolved in response to the growing importance of
    IP, the reorganization of economic activity across national
    borders, and the mobility of capital. Other countries have
    reduced their statutory corporate income tax rates, added
    incentives for research and development, and adopted
    territorial systems that limit the income tax to activities
    within their borders, all in order to attract the capital and
    IP that yield high-paying jobs.
        Other countries rely more heavily on consumption-based
    taxes, such as a value-added tax or goods and services tax, to
    fund government needs, giving them a base that is more
    reliable, more easily measured, less mobile, and more conducive
    to economic growth. By contrast, the U.S. has the highest
    statutory income tax rate among major global economies and a
    high effective tax rate relative to our competitors. At the
    same time, other countries have adopted generous incentives for
    patents and innovation to attract research and development
    activities.
        Our currently expired U.S. research credit is ranked 27th
    out of 41 countries in terms of the tax incentives provided for
    research and development activities, and that ranking does not
    include the benefit of a patent or innovation box that is
    employed by an increasing number of other countries.
        On the international side, the U.S. is the only G-7 country
    with a worldwide tax system. Twenty-eight of 34 OECD member
    countries have territorial systems that limit tax to income
    from activity within their borders.
        Countries with territorial systems have adopted a variety
    of anti-abuse rules to discourage income shifting. Their anti-
    abuse rules are aimed at preventing the erosion of the domestic
    tax base, not at preserving a world-wide base. There is no
    country that imposes a minimum tax on active business income
    like that proposed by the Obama administration.
        A tax system should create a level playing field that does
    not favor one owner over another, but our worldwide tax system
    places a premium on the value of U.S. companies' assets in the
    hands of a foreign bidder. Eliminating the disadvantage U.S.
    companies face by aligning our rules with the rest of the world
    would be a far more effective response than building higher
    walls around an uncompetitive tax system.
        The globalized world in which we live increases both the
    competition American businesses and workers face and the
    opportunities available to them. If we want to build a
    sustainably revenue-neutral tax system, then, as Jon Moeller,
    the CFO of Procter and Gamble, observed last month, we must
    have a competitive system.
        Our international tax rules have fallen behind other
    countries' efforts to promote economic growth by attracting
    investment and jobs. It is time for Congress to do the same.
        Thank you. I would be pleased to answer any questions.
        The Chairman. Well, thank you very much. We appreciate your
    comments.
        We will go to you, Mr. Smith.

         STATEMENT OF ANTHONY SMITH, VICE PRESIDENT OF TAX AND
         TREASURER, THERMO FISHER SCIENTIFIC, INC., WALTHAM, MA

        Mr. Smith. Chairman Hatch, Ranking Member Wyden, and
    distinguished members of the committee, good morning. It is an
    honor to appear before you. My name is Tony Smith. I am vice
    president of tax and treasurer of Thermo Fisher Scientific. I
    am here today to appeal for tax reform, specifically
    international tax reform. I applaud the committee's interest in
    building a more competitive U.S. international tax system.
        Thermo Fisher manufactures, sells, and services analytical
    instruments, specialty health diagnostics, and lab products. We
    supply products wherever scientific research is carried out.
    The company is headquartered in Massachusetts, with sites in 30
    States and employees serving customers in every State. We have
    50,000 employees worldwide, with about half the workforce in
    the U.S.
        Our global revenue also is split roughly 50/50 between the
    U.S. and overseas. Our markets are global, and we sell a lot of
    our products overseas through U.S. exports and local
    manufacturing. Thermo Fisher manufactures a substantial volume
    of products in the United States. We benefit from the reduced
    tax rate on domestic manufacturing under section 199. The
    company conducts substantial R&D in the U.S. and benefits from
    the R&D tax credit when it is available.
        We have significant outstanding debt. The proceeds of this
    debt, along with funds generated from operations, are used to
    make strategic acquisitions. While approximately half of the
    company's annual cash flow is generated overseas, we currently
    have very little cash overseas because the vast majority of the
    funds are reinvested in the business.
        The combined effect of the high U.S. corporate tax rate and
    the U.S. worldwide tax system limits the flexibility of Thermo
    Fisher and other U.S. companies to deploy foreign earnings in
    productive uses in their U.S. businesses. Most U.S. companies,
    including Thermo Fisher, allow their foreign earnings to remain
    overseas rather than face a large tax cost to repatriate the
    funds. If funds are needed in the U.S., we and other companies
    borrow, rather than access the earnings trapped overseas.
    Having a tax regime that creates a disincentive for U.S.
    companies to pay down debt and actually creates the incentive
    to incur new debt is not good policy.
        A tax policy that results in cash being trapped offshore
    creates an incentive for acquisitions of foreign companies,
    sometimes leading U.S. companies to over-pay for such
    acquisitions. The current U.S. tax system also puts U.S.
    companies at a disadvantage when bidding against a foreign
    company for both U.S. and foreign companies. As a result,
    Thermo Fisher has been out-bidden several times in the
    competition for strategic acquisitions. I firmly believe that a
    reduced corporate tax rate and more flexibility to repatriate
    foreign earnings would encourage investment and generate jobs
    in the U.S.
        A corporate tax rate between 25 percent and 30 percent
    would put the U.S. closer to other developed economies. There
    will always be significant advantages to being headquartered in
    the U.S., so it is not necessary for the U.S. to match the
    world's lowest tax rates. In addition, we should retain the
    section 199 manufacturing incentive.
        Repatriation of foreign earnings should be allowed at a
    lower, but not necessarily zero, tax cost. A tax on repatriated
    earnings in the U.S., at a rate of 5 percent or slightly
    higher, would not be a significant barrier to bringing funds
    home because most U.S. companies will value the flexibility to
    redeploy earnings in the U.S.
        Tax reform should include provisions that incentivize
    research in the U.S. Making the R&D tax credit permanent would
    encourage the development of intellectual property in the U.S.
    A targeted reduction of the tax rate on IP earnings would
    encourage ownership and use of valuable IP in the U.S.
        Simplifying the subpart F and foreign tax credit rules
    would reduce administrative burdens and uncertainties and
    better target the rules to their intended purposes. However, I
    also recognize that there must be trade-offs. Consideration
    could be given to a limit on deductions for interest expense.
    An appropriately structured limitation would encourage
    repatriation to pay down debt where the other reforms make such
    a repatriation feasible.
        One-off tax incentives and holidays should be avoided. I
    view eliminating LIFO inventory accounting and accelerated
    depreciation as an acceptable trade-off for other reforms that
    provide permanent benefits.
        These priorities would create a more stable and more
    competitive environment for U.S. companies operating in today's
    global economy. In my opinion, the goal of international tax
    reform is not to reduce U.S. tax paid, but rather to reduce the
    ways in which the U.S. tax system impedes the flexibility and
    productivity of U.S. companies with global operations.
        This committee has already done significant work on tax
    reform. I urge you to continue the effort to get the
    international tax reform over the finish line soon.
        Thank you for the opportunity to present these
    perspectives. I am happy to answer any questions.
        The Chairman. Thank you so much.
        [The prepared statement of Mr. Smith appears in the
    appendix.]
        The Chairman. Dr. Altshuler?

     STATEMENT OF ROSANNE ALTSHULER, Ph.D., PROFESSOR OF ECONOMICS
    AND DEAN OF SOCIAL AND BEHAVIORAL SCIENCES, RUTGERS UNIVERSITY,
                           NEW BRUNSWICK, NJ

        Dr. Altshuler. Chairman Hatch, Ranking Member Wyden, and
    distinguished members of the committee, it is an honor to
    appear before you today to discuss the very important topic of
    international tax reform. I believe there is broad agreement
    among policymakers and companies that our current system for
    taxing the income earned abroad by U.S. corporations is very
    complex and induces inefficient behavioral responses.
        The system provides incentives to invest in some locations
    instead of others, to engage in costly strategies to avoid U.S.
    taxes on foreign dividends, and to shift income from high- to
    low-tax locations by using inappropriate transfer prices or
    paying inadequate royalties. Where the tax burden under U.S.
    rules exceeds what could be achieved through a non-U.S. parent
    structure, pressure exists to change the parent corporation's
    domicile to a foreign jurisdiction. Many are calling for reform
    and support moving to a territorial tax system.
        I recently worked with Steve Shay of Harvard Law School and
    Eric Toder of the Urban-Brookings Tax Policy Center on a report
    that explores other countries' experiences with territorial tax
    systems. We examined the approaches and experiences of four
    countries: Germany and Australia, both of which have
    longstanding territorial systems, and the U.K. and Japan, both
    of which, within the last 6 years, enacted territorial systems
    by exempting from home country taxation either all or 95
    percent of the dividends their resident multinationals receive
    from their foreign affiliates, what is commonly called a
    dividend exemption system.
        We examined the factors that drove their policy choices and
    put forward lessons we believe the United States can take away
    from their experiences. I would like to highlight six
    conclusions from this work that I believe are important for
    policymakers as they contemplate reform. I will end by briefly
    discussing the benefits of a reform that would remove the U.S.
    tax upon repatriation of foreign profits and impose a minimum
    tax on foreign income.
        The six lessons are as follows. First, the classification
    of tax systems as worldwide or territorial oversimplifies and
    does not do justice to the variety of hybrid approaches taken
    in different countries. All tax systems, including ours, are
    hybrids that tax some foreign business income at reduced
    effective rates. As in so much else in taxation, the devil is
    in the details.
        Second, the circumstances that have caused other countries
    to maintain or introduce territorial systems do not necessarily
    apply to the United States; therefore, other experiences do not
    necessarily dictate that the United States should follow the
    same path.
        Third, the tax policies of countries with dividend
    exemption systems have been greatly influenced by their
    separate individual circumstances.
        Fourth, the burden of the tax due upon repatriation of
    foreign earnings may be a lot higher in the United States than
    it was in the United Kingdom and Japan before they adopted
    dividend exemption systems.
        Fifth, the fact that the United States raises relatively
    little corporate tax revenue as a share of GDP than other
    countries, while having the highest statutory corporate rate in
    the OECD, has multiple explanations and does not necessarily
    suggest that U.S.-based companies in any given industry are
    more aggressive at income shifting than foreign-based
    companies.
        Sixth and finally, the ability of the U.S. to retain higher
    corporate tax rates and tougher rules on foreign income is
    declining. In the last 2 decades, differences between the U.S.
    and other countries' tax systems have widened. The global tax
    environment has changed and will continue to do so.
        The U.S. need not follow others' tax policies, but our
    reform process should not be done in a vacuum. It is
    fundamental to understand the forces that have shaped reforms
    of our competitors and recognize that, while our economies are
    different, we do indeed face some of the same pressures.
        What should we do? Harry Grubert of the U.S. Treasury and I
    recently evaluated a variety of reforms and proposed one that
    makes improvements along a number of behavioral margins that
    are distorted under the current system. We would start by
    eliminating the lock-out effect by exempting all foreign
    earnings sent home via dividends from U.S. tax. This reduces
    wasteful tax planning and simplifies the system.
        Then we would impose a minimum tax of, say, 15 percent on
    foreign income. As a result, companies would lose some of the
    tax benefits they enjoy from placing valuable and tangible
    intellectual property like patents in tax havens and from other
    methods of income shifting. The minimum tax could be on a per-
    country basis, but it could also be on an overall basis, which
    would be much simpler.
        As an alternative to an active business test, the tax could
    effectively exempt the normal profits companies earn on their
    investments abroad by allowing them to deduct their capital
    costs. That way the tax would apply only to foreign profits
    above the normal cost of capital, and companies would not be
    discouraged from taking advantage of profitable opportunities
    abroad. Only super-profits or excess profits above the normal
    return typically generated from intellectual property, which
    are most easily shifted and would be made in the absence of the
    tax, would be subject to the minimum tax.
        There are other options, but my analysis with Harry Grubert
    suggests that combining a minimum tax with dividend exemption
    can make improvements across many dimensions, including the
    lock-out effect, income shifting, the choice of location, and
    complexity.
        Thank you. I would be happy to answer questions.
        The Chairman. Thank you.
        [The prepared statement of Dr. Altshuler appears in the
    appendix.]
        The Chairman. Mr. Shay?

     STATEMENT OF STEPHEN E. SHAY, PROFESSOR OF PRACTICE, HARVARD
             LAW SCHOOL, HARVARD UNIVERSITY, CAMBRIDGE, MA

        Mr. Shay. Thank you, Mr. Chairman. Chairman Hatch, Ranking
    Member Wyden, members of the committee, it is an honor to
    appear before you today. I am testifying at the invitation of
    the committee, and the views I express are my own and not those
    of any institution or entity with which I am associated, and in
    some respects also not my co-author. As you will see, we have
    some differences in terms of prescriptions.
        I recommend that our income tax system have a very broad
    base and a progressive rate structure that retains public
    support through apportioning tax burdens according to ability
    to pay. Rates should be set to provide revenue needed for
    public goods that support high-wage jobs, innovation,
    productive investment, income security for those in need, and
    personal security from domestic and international threats.
    These public goods include education; basic research; legal,
    physical, and spectrum infrastructure; income security
    transfers; and defense. These are what support a high standard
    of living for all Americans. One thrust of these observations
    is that we should design our tax system to raise the revenue
    that we spend and stop using a tax system as a back-door tool
    to regulate the size of government and to make non-transparent,
    de facto public expenditures for specific industries or
    interest groups.
        The taxation of U.S. multinationals' foreign business
    income is just one part of our overall tax system and should
    not be viewed as separate and distinct. If we are going to
    provide a tax advantage for this income, then the revenue saved
    by those taxpayers will be paid by somebody else.
        The evidence is that most U.S. multinationals are not
    paying high effective rates of tax on foreign earnings. Based
    on 2006 tax return data, 46 percent of earnings of foreign
    subsidiaries that reported positive income and some foreign
    tax, were taxed at foreign effective tax rates of 10 percent or
    less. These foreign effective rates are not fully explained
    just by lower foreign corporate tax rates in major U.S. trading
    partner countries, but reflect ongoing corporate multinational
    structuring to minimize tax by source and residence countries.
        Today, most international tax structures employ
    intermediary legal entities that do not bear a meaningful
    corporate tax because they are located in countries that
    facilitate very low effective tax rates on the income.
    Aggregate and firm-level financial data evidence substantial
    U.S. tax base erosion under current law.
        My reading of the evidence and my experience is that the
    U.S. taxes U.S. multinationals' foreign business income too
    little in too many cases, and not too much. I do not think the
    evidence supports claims that U.S. multinationals are non-
    competitive as a result of U.S. international tax rules. This
    leads me to recommend that the committee consider three areas
    for reform.
        First, improve taxation of foreign business income. My
    first choice would be to follow the Wyden-Coats approach of
    taxing foreign earnings on a current basis. If that is not
    feasible, then I recommend a minimum tax on foreign business
    income, that is, an advanced payment against full U.S. tax when
    earnings are distributed from the business. I would not give up
    the residual U.S. tax on foreign earnings.
        Second, I would strengthen the U.S. corporate tax residence
    rules and the earnings stripping rules in order to reduce the
    incentives of U.S. companies to move their corporate residence
    abroad.
        Third, I would recommend reducing the U.S. tax advantages
    for portfolio investment in foreign portfolio stock over U.S.
    portfolio stock.
        So let me just move for a moment to the advanced minimum
    tax that I have described in my testimony. Under this tax, a
    U.S. shareholder and controlled foreign corporation would be
    required to include in income the portion of the CFC's earnings
    that would bring its residual U.S. tax up to achieve a minimum
    tax on the foreign earnings. The target minimum effective tax
    rate would be based on a percentage of the U.S. corporate tax
    rate so we adapt as U.S. corporate rates change. Deductions by
    U.S. affiliates allocable to the CFC's earnings only would be
    allowed to the extent the CFC's earnings were actually or
    deemed distributed. This is a proposal that fits well within
    current law.
        I am going to skip to my last proposal on portfolio
    dividends and portfolio holdings, because I think it has been
    least addressed. Under current U.S. law, a U.S. portfolio stock
    investor can earn a higher after-tax return on foreign business
    and earned income earned through a foreign corporation than
    through a domestic corporation carrying on exactly the same
    business.
        One alternative would be to determine the foreign portfolio
    shareholder-level U.S. tax in two parts, one part to top up the
    corporate level tax that is not being paid abroad and then to
    tax the remaining earnings as under current law.
        I would be happy to answer any questions that the committee
    might have, and I appreciate the opportunity to testify.
        [The prepared statement of Mr. Shay appears in the
    appendix.]
        The Chairman. Well, thank you. We appreciate all of you
    being here, and we appreciate your various, respective points
    of view.
        Let me just ask you this, Professor Shay. You wrote in an
    article that was published in Tax Notes just yesterday, if I
    recall it correctly, that a reduced rate of U.S. tax on $2
    trillion or more of untaxed U.S. multinational earnings to pay
    for highways and infrastructure is, to truly put it politely,
    not advisable.
        Would you please just briefly elaborate? And is it the
    reduced tax rate that you find objectionable, or that it would
    not be very long-term in nature, or something else?
        Mr. Shay. A combination of all of the above. The tax on
    offshore earnings, if we are going to make changes in that,
    which I have questions about, that should be part of the
    broader reform. I think everybody has agreed with that.
        But the notion that it somehow is acceptable to do that
    because it is being used for infrastructure on a one-off basis
    does seem to me to be very bad policy. I think what we should
    be doing with respect to those needs is, first, we should be
    looking at tax instruments that might be more effective,
    including taxes on energy, and then second, that should be
    ongoing and able to sustain the ongoing needs of the
    infrastructure investment.
        So I do not think that we should have such a low rate on
    offshore earnings, particularly earnings that are invested in
    productive investment, even though they are invested outside of
    the United States. So, I think there are problems with that
    proposal across a variety of margins.
        The Chairman. Dr. Altshuler, let me turn to you. In your
    written testimony, you talk a fair amount about the current
    international rules creating a lock-out effect, whereby U.S.
    corporations do not want to bring back earnings to the U.S. You
    think this creates a fair amount of inefficiency, is that
    correct?
        Dr. Altshuler. Yes, that is correct.
        The Chairman. All right. Let me just--you can go on and
    talk if you would like.
        Dr. Altshuler. No, go right ahead.
        The Chairman. All right. Let me just ask you a follow-up.
    You propose a 15-percent immediate minimum tax on the earnings
    of foreign subsidiaries of U.S. parent corporations, together
    with a dividend exemption. Now, I have worried that a minimum
    tax as high as 15 percent would increase the pressure to invert
    from what corporations are experiencing today. Now, do you
    think that there would be considerable pressure to invert if
    there were an immediate minimum tax of 15 percent?
        Dr. Altshuler. What I talk about in the testimony is a
    proposal in which only the excess returns or super-normal
    returns that corporations earn abroad would be subject to that
    15-percent tax. So, for corporations that are just earning the
    normal rate of return, there would not be an increase in the
    incentive to expatriate. There would not be an increase in
    inversions, for instance, or foreign acquisitions if the tax is
    just on the excess returns, which are usually the returns from
    intellectual property.
        Now it is the case, and I agree with you, that there would
    be pressure to invert and/or expatriate if we had that minimum
    tax of 15 percent for the firms that have the intellectual
    property. But the question that you have to ask is whether or
    not the system itself is less distortionary than the current
    system, and whether or not a dividend-exemption system with a
    minimum tax is less distortionary than a dividend-exemption
    system without a minimum tax. So you have to put the whole
    package together.
        The Chairman. Mr. Smith, as I know you are aware, there are
    many different measurements for tax rates. For example, there
    are book tax rates, cash tax rates, average effective tax
    rates, and marginal effective tax rates. Now, given these
    different types of tax rates, what is the tax rate that is most
    important to you or to your company, and, if you would, tell us
    why that is the case. If you could also, elaborate on how
    operating in the global marketplace particularly impacts the
    tax rate calculation.
        Mr. Smith. Certainly. Thank you for the question. So the
    most important measure of tax rate to myself, and to a lot of
    the investment community out there, is what I call the long-
    term global cash tax rate. So that is different from the
    accounting tax rate that we see in our reported accounts. That
    is actually an accrual tax rate, and there is an adjustment to
    that when you have your reported accounts, because of
    acquisitions and disposals.
        So we think in terms of the cash taxes that we pay
    globally, and we look on a long-term basis at what the average
    will be over time. So, think about the cash taxes we paid in
    2014. That was about $600 million in cash taxes we paid in
    2014. Something between $300 and $400 million of that was in
    the U.S.
        The way the calculation is done in the case of Thermo
    Fisher--think of about half our income as being in the U.S. and
    half as being overseas. That is simply because half our revenue
    is there, half our workforce is there. So the half of the
    income that is in the U.S. is subject to U.S. taxation. We have
    the R&D credit, we have the 199 incentive, we have other
    things.
        So the average tax rate from a cash point of view on U.S.
    earnings is around 30 percent. The other half of income is
    subject to tax overseas. We have lower tax rates overseas, we
    have higher R&D incentives, other rulings, U.K. patent box,
    lower tax rates generally.
        So because of all that, the overseas tax rate on the other
    half of the earnings from a cash point of view is much lower.
    The average rate of tax for Thermo Fisher, when you add those
    up from a cash point of view, is somewhere between 15 and 20
    percent. That is the average cash rate. So that is how I think,
    because that is the amount of cash taxes that we pay. That is
    an important measure for us. It is also an important measure
    for investors.
        The Chairman. Well, thank you. My time is up.
        Senator Wyden?
        Senator Wyden. Thank you, Mr. Chairman.
        Let me start with you, Ms. Olson.
        The Chairman. Could I mention that I have to go to--pardon
    me, Senator Wyden. I have to go to the Judiciary Committee, and
    Senator Wyden has kindly offered to make sure this speeds along
    with the various questions.
        Senator Wyden. Thank you very much, Chairman Hatch. We are
    going to work in a bipartisan way on this.
        Let me start with you, Ms. Olson, because I have always
    admired that you have been interested in moving on these issues
    in a bipartisan way and have given good counsel to people on
    both sides of the aisle. I thought it would be smart, at least
    for my questions, to start with this issue of base erosion and
    profit shifting.
        I define this as, in effect, tax planning strategies that
    exploit gaps and mismatches in tax rules to artificially shift
    profits to low- or no-tax locations where there is not much, if
    any, economic activity, so people do not end up paying many
    taxes.
        What is so troubling and challenging about this is that,
    with the piecemeal changes, it just seems that clever lawyers
    and accountants always find their way around it. Now, you have
    been working on this since your days in the Bush
    administration, and you were focused on approaches that I
    thought had some real promise and unfortunately were not picked
    up on: earnings stripping and others. But take a minute and
    give the committee some of your counsel on what you think would
    most effectively stop base erosion and profit shifting at this
    point.
        Ms. Olson. The thing I would say that could be most
    effective in stopping base erosion would be reducing the U.S.
    rate. Clearly a high rate is a disincentive to locate your most
    profitable activities here in the U.S. It is also an attraction
    for deductions, for leverage, such as the kinds of earnings
    stripping that the Bush administration proposal went after back
    in 2002 to 2004 when I was at the Treasury Department.
        So probably the best thing that we could do would be to
    dramatically lower the U.S. rate. If there is a country that is
    willing to offer a lower rate than the U.S., particularly on
    activity that is mobile, like intellectual property and
    tangible assets, that activity is going to migrate there if it
    can. European countries in particular that are willing to offer
    patent and innovation boxes with rates in the 5- to 10-percent
    range are going to continue to attract that kind of activity.
        So, if we are serious about preventing shifting of profits,
    base erosion out of the U.S., we should bring down the rate. We
    ought to have an anti-base erosion feature that does look at
    our own base and that protects our own base, but I think it
    would make sense for us to define our own base the way that
    other countries have defined their own base. They are looking
    at activities within their own borders and trying to make sure
    that the income generated by those activities within their own
    borders is not eroded.
        So those would be the things I would do.
        Senator Wyden. I very much share your view that a
    competitive rate is essential as part of this. I just think
    there are going to need to be some other steps--and you alluded
    to them at the end--that we need to take in this country to
    prevent base erosion.
        Just in the interest of time, I am going to move on to you,
    Dr. Altshuler, if I might, with respect to simplifying the tax
    system. We know that the international tax system is inherently
    complicated. My question to you is, would not rolling back
    deferral go a significant way towards corporate tax
    simplification by eliminating this incredibly byzantine,
    complicated system that exists to, in effect, track unused
    foreign tax credits and the related earnings and profits?
        I mean, in effect, if you roll it back--and I am using
    those words deliberately--it would seem that income would
    either be subject to immediate taxation or be exempt, and the
    current foreign tax credits would be utilized against current
    taxable income. So rolling it back, in my view at least, offers
    an opportunity towards some measure of simplification. What is
    your take on that?
        Dr. Altshuler. My take on that is that you are correct,
    that there would be some measure of simplification if we were
    to roll back deferral. One thing that we cannot forget when we
    think about a full inclusion system is that there would still
    be a situation in which firms have excess credits. I do not
    think that we will be able to get rid of that. As soon as firms
    have excess foreign tax credits that they cannot use, you are
    back in a situation like the current system in which you will
    be able to use credits to shelter royalties, and you are going
    to get into all of that tax planning.
        So the rate that you end up at is really important, and
    just taking into account that you do not solve all problems by
    going that way, that you still have these excess foreign
    credits to deal with. Once you have those, you have the same
    incentives that you have under the current system.
        Senator Wyden. A fair point.
        Senator Roberts?
        Senator Roberts. Yes. Thank you, Mr. Chairman. I know the
    chairman has made a very good statement with which I agree, and
    I agree with your statement with regards to crashing waves. I
    might point out that if you have crashing waves, you are going
    to have base erosion.
        I would like to state that Mr. Smith has come to Washington
    with a very good comprehensive review. Thank you for your
    extensive investment and employment in Lenexa, KS. We are very
    proud to have you there. Thank you for your testimony.
        I am pleased you are here representing a company with
    significant operations in Kansas, where we take pride in the
    growth and development of our life-science and our bio-tech
    sectors. You are a world leader in innovation in those sectors,
    and your perspective is important, especially in regards to the
    general need for predictability, certainly in the tax
    environment, the lock-out effect of current policy, and the
    impact of these policies on your ability to grow your company.
        There has been a lot of discussion about that lock-out. I
    am worried about that simply leading to increased taxes. We are
    not under-taxed in this country, and that is a concern of mine
    when we talk about general tax reform.
        You call for a reduction in the business tax rate--note I
    did not say corporate--something which I think is very
    important to achieve. Given your sensitivity to rates, would
    you support moving reform of the international tax system on a
    separate track from the overall business tax reform?
        Mr. Smith. I certainly would, and the reason I say that is
    because I think that international tax reform can be done on a
    compartmentalized basis. I think if we bring business tax
    reform into the mix as well--I think trying to bring in a
    broader reform makes everything much more complicated.
        So I do think we need to try to achieve a focus on
    international tax reform to achieve a result. I really think we
    can get that done in a reasonable time frame. If you broaden
    the scope of reforms, it just takes longer to do.
        Senator Roberts. I appreciate that. Summing up: let us do
    what we can do first and get it done.
        I know from your testimony that Thermo Fisher is a heavy
    R&D company. You recommend additional stable incentives for R&D
    in the utilization of intellectual property in the U.S. Would
    you support the implementation of a patent box regime in the
    United States?
        Mr. Smith. I certainly would encourage that. I spent a lot
    of time, as you can imagine, in the U.K., looking at the U.K.
    patent box regime. It does work. It does incentivize companies
    to spend more money and patent more things in the U.K., and so
    I think we should mirror something like that in the U.S. I do
    think that would incentivize more research in the U.S. and the
    generation of more income, and therefore more jobs, in the U.S.
    So, I think we should do that.
        Senator Roberts. Mr. Chairman, I want to thank all members
    of the panel for their testimony. I know we have a whole bunch
    of votes coming up, so I yield back.
        Senator Wyden. Thank you, Senator Roberts.
        Senator Schumer is next.
        Senator Schumer. Well, thank you. I thank the chairman and
    Ranking Member Wyden for organizing the hearing.
        As you know, Senator Hatch and you, Senator Wyden, have
    asked Senator Portman and I, along with several other members
    of the committee--Warner, Carper, Brown, Enzi, Roberts,
    Cornyn--to find a consensus in the area of international tax
    reform, and I have to say we are making good progress. I am
    pretty heartened by how it is going.
        So I have a number of questions. I am going to get right to
    them. First, a little discussion about what is happening around
    the world, specifically with regard to the OECD--we call it
    BEPS, for Base Erosion and Profit Shifting. Yes, I know. I hate
    that word: BEPS project.
        I have been talking about international tax reform with a
    number of U.S. CEOs over the past several weeks. One point that
    has really stood out to me, one that I do not think we are
    paying enough attention to on the Hill up here, is the fact
    that the rest of the world is already acting. We sit around
    talking in theory about tax reform; other G-20 governments are
    proactively enacting new tax policies that are, to put it
    bluntly, stealing our tax base and forcing our U.S.
    multinationals to send jobs and assets overseas. It is a game
    of Hungry, Hungry Hippos. We are sitting on our hands, and
    other countries are trying to gobble up the field.
        As we all know, many European countries already have in
    place patent box regimes intended to provide a discounted
    corporate rate on certain intellectual property. Belgium,
    France, Hungary, Italy, Luxembourg, Netherlands, Portugal,
    Spain, and the U.K. all have them, and Ireland proposed one.
        In the context of BEPS, the idea of ``a nexus requirement
    for patent boxes'' is being discussed. I know this sounds
    technical, but stay with me. What this means is that, in order
    to receive the benefit of the discounted rate on IP in these
    countries, the business will have to prove that R&D activity
    associated with the IP was performed in that country, and that
    is a good thing in terms of combating the ability of
    multinationals to stash their IP in low- or no-tax
    jurisdictions.
        It is a wake-up call for all of us who want to keep R&D and
    associated manufacturing jobs in the U.S. It is actually a very
    good thing for us if we can move forward. It would really help
    us. In addition, as Ms. Olson points out in her testimony, a
    lack of resolution on BEPS is resulting in many countries
    contemplating unilateral action. So that is the worst thing
    that we can do as policymakers: sit on the sidelines and watch
    this happen. That is my view.
        So here is the question to all the witnesses: how concerned
    are you about the impact of either BEPS activity or unilateral
    tax policy changes in other countries on our domestic corporate
    tax base? CEOs have told me they think the impact will be felt
    in months, not years. Would you agree? I want our jobs to be
    this red, white, and blue, not the E.U.
        So, go ahead.
        Ms. Olson. As you mentioned, Senator Schumer, my testimony
    does address what is happening at the OECD with respect to
    BEPS. It is something that I think the U.S. Congress should be
    paying more attention to than it is. The OECD project was
    intended to address what was viewed as an unraveling global
    consensus about the allocation of taxing rights, but, as a
    practical matter, there has been a lot of heated political
    rhetoric surrounding it, and that has caused a lot of other
    governments to decide to move forward with unilateral actions
    that indeed could take part of our tax base.
        Even our close ally and strong proponent of the BEPS
    project, the U.K. government, has announced a diverted profits
    tax that is even nicknamed after a U.S. company, and that is
    slated to take effect on April 1st. So other governments
    clearly are moving, and it really is important for the U.S. to
    pay attention to this, to follow what is going on at the OECD,
    and take unilateral actions.
        Senator Schumer. Mr. Smith?
        Mr. Smith. Certainly I view BEPS as being an attempt by
    overseas jurisdictions to put forth legislation which drives
    income and jobs back into their jurisdictions and then
    encourages those jobs to stay there through other means, be it
    R&D or patent boxes, or something like that. So it is driven to
    reduce base erosion, but it is also driven to incentivize
    growth of jobs in overseas jurisdictions. We need to compete
    with that, so we need to keep up with those changes.
        Senator Schumer. Does anyone else have anything to add? Dr.
    Altshuler, Mr. Shay?
        Dr. Altshuler. I think what is going on just shows again,
    and forcefully, that we need to be looking at our international
    tax system, and we need to be looking at our corporate tax
    rate.
        Senator Schumer. Mr. Shay?
        Mr. Shay. I will be the dissenter here, I think. I come
    from Cambridge, MA. Within 4 miles of my house are the greatest
    research institutions in the world. Patent boxes did not create
    those institutions. Solid education did, and funding for people
    who end up in those institutions.
        I am worried that we are being distracted by noise and we
    are not paying attention to the fundamentals. The fundamentals
    are, we should design a broad-based tax. The notion that we can
    use the tax system and target this and target that--I spent
    decades as a tax planner. Every time you create an exception or
    a rule, if I can use it, I will use it.
        I have written an extensive article on an earlier version
    of the Camp report. In that article I demonstrated different
    ways we would end-run those rules. I encourage you to step
    back, keep the big picture in mind: broad base, lower rates.
    Certainly a lower corporate rate would help, but it is very
    difficult to pay for. If we are being realistic, we are not
    going to drive it down to the levels that people are talking
    about.
        Senator Schumer. Correct.
        Mr. Shay. So we are going to need anti-base erosion
    proposals ourselves. They are in my testimony. We need to
    strengthen our definition of corporate residence. We need to
    strengthen our earnings stripping rules. There is no magic
    pill, and a patent box is absolutely not a magic pill.
        Senator Schumer. So just to clarify--and I will be quick;
    my time is up--if we could not get the rate down low enough to
    make a real difference, you still would not enact a patent box?
        Mr. Shay. I think a patent box is terrible policy.
        Senator Schumer. All right. Thank you.
        Mr. Shay. But everything is in the details.
        Senator Schumer. Thank you.
        Senator Wyden. Thank you, Senator Schumer. It sounds very
    encouraging that Senator Schumer and Senator Portman are making
    some real headway.
        Colleagues, we have a vote already on. I think we can get
    Senator Stabenow in before the vote. The question is whether we
    will have one or two votes, but we are going to just try to
    keep moving.
        So, Senator Stabenow?
        Senator Stabenow. Thank you very much, Mr. Chairman, for
    this hearing, for you and Senator Hatch providing this hearing.
        Let me ask, Mr. Shay, as a follow-up, talking about policy
    options as they relate to tax policy on jobs going overseas. I
    have had legislation for some time that is pretty simple, the
    Bring Jobs Home Act, that just would stop companies from being
    able to deduct their moving costs, their costs incurred when
    they physically move overseas.
        I do not think the taxpayers or workers whom they leave
    behind should be subsidizing that. We have talked a lot about
    inversions and earnings stripping and so on, but we should also
    look at the fact that companies are able to gain other tax
    benefits from off-shoring American jobs using a foreign
    subsidiary, making something, bringing it back to the United
    States and so on, selling it here while they are competing with
    companies that are staying here in America.
        I wonder if you might speak more about this particular
    problem, and policy options as we go forward, making sure that
    we are in fact supporting American businesses that are choosing
    to be here in America and invest in America.
        Mr. Shay. Well, one general observation that I have made in
    my testimony is, if we provide more favorable taxation for
    foreign earnings, then it ends up affecting the rest of the
    system. So, if we want to encourage operating in the United
    States, one way--from a policy point of view I think a
    preferred way--is to try to make the taxation of income as
    equal as possible.
        We cannot control what other countries do, but, as I have
    suggested in my testimony, either we take the approach that is
    described in the Wyden-Coats proposal of trying to broaden the
    base and bring down rates but then tax foreign earnings
    currently, or, if we are not going to get that far and it is a
    daunting task, I have proposed an advanced minimum tax that
    would take away basically the benefits of putting operations or
    trying to shift income into tax havens in low-tax countries.
        I think those are approaches, combined with anti-abuse
    rules, that are practical and that we are going to end up
    needing under any plausible scenario where we come out in this
    process.
        Senator Stabenow. Thank you.
        Mr. Smith, your company does a lot of manufacturing,
    including in Kalamazoo, MI. We are happy to have you. If there
    is time, I would certainly welcome anyone else on the panel to
    respond as well. But as you know, or at least as I would say,
    we do not have a middle class unless somebody makes something.
        A quarter of working people worked in manufacturing in the
    1970s; now it is about one out of 10. So, lots of challenges on
    the one hand: productivity is up. I mean, there are lots of
    reasons for that, but it is still very important that we
    manufacture in this country.
        So what are some of the key components of tax reform that
    in your mind would support and promote American manufacturing
    and new investments in the United States as opposed to those
    investments going overseas?
        Mr. Smith. That is a great question. Thank you for that.
    So, if you look at Thermo Fisher, in Thermo Fisher's case,
    about half of our earnings are overseas. That is just the way
    we do business.
        So if we had an incentive, or at least not a disincentive,
    to bring our earnings from overseas back to the U.S. and then
    reinvest them in the U.S., then we could reinvest them in the
    U.S. because we have a lower tax rate and maybe a patent box or
    some lower tax rate from generating income from those jobs in
    manufacturing higher-tech, higher-IP products.
        That would certainly grow jobs in the U.S. So the lock-out
    effect to me, whereby offshore earnings are basically stuck
    offshore, if we end that and we bring the earnings back to the
    U.S., we will reinvest them in the U.S., and then we will grow
    jobs. I think if you combine that with a lower tax rate, the
    job growth would be pretty substantial.
        Senator Stabenow. When we look at things like the R&D tax
    credit--and about 70 percent of that is auto companies,
    manufacturing using the R&D tax credit--or we look at
    accelerated depreciation on equipment purchased here and so on,
    in your mind are those things important for us to maintain as
    part of encouraging investments here and R&D here?
        Mr. Smith. So the R&D credit is an important credit. I do
    think a lower tax rate on income generated from intellectual
    property, whatever that might be, is very important. I think
    that tax incentives, which I consider to be one-off cash-based
    incentives like accelerated depreciation, I think because they
    are one-off in nature, I am not in favor of those. Those are
    things that I certainly think we should consider giving up if
    we can get the other things I talked about.
        Senator Stabenow. Interesting. There are varying views on
    that. I certainly hear the other side of that.
        Well, I think my time is up. Thank you, Mr. Chairman.
        The Chairman. Senator Scott?
        Senator Scott. Thank you, Mr. Chairman. I think there is an
    opportunity for both myself and Senator Portman to be heard
    before we have to leave for our vote, so I am going to just ask
    one quick question of Mr. Smith. Of course, you have come to
    Washington, as Mr. Roberts has suggested, so you obviously have
    all the information that I will need on my question on how the
    fact of the complexity and the higher rates and the worldwide
    reach of our current tax code is really causing our tax
    inversions.
        No matter how many corporations invert, there are a couple
    of things that I believe are inherent within the American
    psyche and our competitive position--our education and
    workforce--and particularly in South Glen where we have seen
    foreign investment create more than 116,000 jobs. And over
    65,000 of those jobs are in manufacturing.
        I think it speaks to the strength of our education system,
    our strong workforce, our desire to be competitive globally.
    Companies like Michelin have 8,900 jobs in the State; Daimler
    just announced a $500-million expansion, adding 1,200
    additional employees in South Carolina.
        The challenge is that inversions are a natural result of an
    unnatural tax code, bottom line. So, as we look at many options
    to eliminate tax inversions without dealing with the fact that
    we need a lower tax rate, I am worried that our proposals might
    have the effect of discouraging foreign direct investment,
    which has brought millions of jobs to our shores, obviously
    over 100,000 in South Carolina.
        Mr. Smith, do you have any thoughts on this based on your
    experience in a multinational corporation?
        Mr. Smith. So, when I look at inversions, some of the jobs
    that may move when companies invert are really in terms of the
    head-office function. So, when you have a U.S. company that
    becomes headquartered overseas, then head-office functions do
    go overseas.
        I do not actually see a lot of change in the manufacturing
    jobs in the U.S. I think it is those higher-level head-office
    jobs which do move. They are still jobs. They are highly paid
    jobs. We certainly should not be incentivizing moving those
    overseas. But I think manufacturing jobs--I do not think they
    change very much because of inversions or lack of inversions. I
    think that is a fairly stable situation.
        Senator Scott. Thank you.
        I will yield the rest of my time, with the chairman's
    permission, to Senator Portman.
        The Chairman. Senator Portman?
        Senator Portman. Thank you, Mr. Chairman, and thanks to my
    colleague from South Carolina for yielding.
        First of all, I really appreciate you all being here, and I
    wish we had all day to talk about this. So many questions!
    Senator Schumer mentioned that we are heading up this
    international working group together, and we have had some good
    success in identifying the problem, and now we are moving
    toward solutions. I think there is a good deal of consensus
    here. We have heard a lot of consensus from the table here,
    including a lower rate.
        I guess what I would like to focus on is three things,
    quickly. One is, although inversions are reduced thanks to the
    regulations and threat of more, what we are seeing is more
    foreign takeovers. I would ask unanimous consent to enter into
    the record the Financial Times story from yesterday which says,
    ``Crackdown on tax inversions allowed U.S. companies to slash
    their tax bills and had the perverse effect of prompting a
    sharp increase in foreign takeovers.''
        [The article appears in the appendix on p. 56.]
        Senator Portman. This is also consistent with what we are
    seeing generally. The Wall Street Journal ran a story, and
    recently the Ernst and Young report, which some of you have
    seen, talks about what is happening, and what has happened over
    the last--not just recently, not just because of these
    regulations.
        The Salix acquisition is probably the best case in point
    recently where they did not invert because of the rules and
    then they were bought by a foreign company that had inverted.
    Of 12 suitors, I am told 11 were foreign companies. The twelfth
    is in the process of inverting. So this notion that we are not
    losing companies and headquarters and so on--it is happening.
        The second one, though, goes to your ability to expand as a
    U.S. company. Everybody here has great expertise in this, but,
    Mr. Smith, since you are representing the company here today--
    and thanks for what you do in Ohio. I loved visiting your plant
    last year. Talk about that for a second.
        I think it is one thing we are missing in this debate. I
    think we understand what is going on. We have more foreign
    transactions, more U.S. companies being taken over, and that
    will continue to happen. I am a beer drinker. Try to find a
    U.S. beer. The biggest one is Sam Adams, with a 1.4-percent
    market share.
        But in terms of this notion of being able to grow as a U.S.
    company, when you are competing overseas, particularly for an
    acquisition--and by the way, there are all sorts of new data on
    what that means for U.S. jobs. To acquire a U.S. company, an
    overseas entity adds jobs right here. But what are you
    competing with?
        Mr. Smith. So we are competing in two different situations.
    The U.S. multinational population, a lot of those companies do
    have earnings and cash overseas. So, when a foreign target is
    actionable and when a foreign company could be purchasable,
    there are lots of bidders for that, and so the price goes up.
        So we do see situations where people who have a substantial
    amount of cash overseas will bid the price up for a foreign
    target simply because there is no other productive use for it.
    That is just not good policy. We should not be doing that. That
    is incentivizing increasing purchase prices.
        The other situation is, we cannot get, in the U.S., to all
    our global earnings because half are locked out, in the case of
    Thermo Fisher. So when we compete for purchasing other U.S.
    companies or other foreign companies, whatever it might be,
    only half our earnings are available to us because the other
    half are locked out. That puts us at a substantial
    disadvantage.
        If we were able to make those acquisitions, I do think jobs
    would grow in the U.S. because of it. But because of the way
    that our cash builds up overseas because of our structure,
    because of those offshore earnings that we have through
    operations, we cannot do it. We cannot compete.
        Senator Portman. I have a story. Recently an Ohio company
    wanted to expand and purchase a subsidiary in Korea where they
    do business, the Republic of Korea. After they were done with
    the negotiations, a European company stepped forward and said
    they would pay 18 percent more of whatever was negotiated
    because their after-tax profit is greater because of their tax
    system. Their point to me was, we cannot expand. We are
    handicapped. You are nodding your head.
        So the final question that I have has to do with BEPS again
    and this notion of the patent box and what we ought to do. The
    administration, I think, has a lot of common ground with this
    committee in terms of addressing this issue, but one issue that
    troubles me a little in terms of what the Europeans are doing
    is to put a minimum tax in place.
        If you had a 19-percent minimum tax, as the administration
    has proposed, it does not provide the incentive to locate IP
    here. It may create some disincentives for companies to go
    overseas with the IP because there is a 19-percent minimum
    rate, but, particularly with the direction the E.U. is going
    with its nexus requirement, it seems to me IP located overseas
    is going to necessarily bring more R&D with it. So maybe, Ms.
    Olson, since you have done a lot of work in this area, you
    could comment on that.
        But given where the world is, not where we might wish it to
    be, but given how it has changed since the 1960s when we last
    reformed our international tax system in any substantial way,
    and given the specific issue of what is going on with patent
    boxes, what would the impact be of this minimum tax rate in
    terms of where R&D would occur?
        Ms. Olson. Well, I do not think it would bring R&D back to
    the U.S. I think it would be a disincentive to relocate, as you
    have indicated. But as good as our researchers are, including
    the ones in Cambridge, I do not think any of us have learned
    how to make water flow uphill.
        So if other countries are offering a 5-percent rate or a
    10-percent rate and our companies cannot access that, but other
    companies can, then the result is going to be that other
    companies are going to get those opportunities and our
    companies are not. So it is definitely going to disadvantage
    us.
        I think it is important for us to recognize, as Mr. Smith
    has indicated, that U.S. companies are serving a global
    marketplace. This is not just about what happens here in the
    U.S., it is about what happens around the world and the fact
    that, as you indicated, we benefit. We create more jobs here in
    the U.S. when we do a better job of serving those markets
    outside the U.S.
        Senator Portman. Thank you all. I am literally going to run
    to the vote.
        Thank you, Mr. Chairman.
        The Chairman. Ms. Olson, let me ask you a question. You
    were clear in your testimony that the corporate tax rate needs
    to be reduced significantly. I would like you to elaborate on
    your point that a reduction in the corporate tax rate would, by
    itself, reduce the amount of intellectual property migration.
        Also, you stated the recent economic study suggests that a
    significant portion of the corporate income tax is ultimately
    paid for by labor, not just by the shareholders of the
    corporations. Could you elaborate on that as well?
        Finally and specifically, does this suggest that a cut in
    the corporate income tax rate is actually, at least in part, a
    cut in tax for the American worker?
        Ms. Olson. Starting with the last part of the question
    relating to the corporate tax and who bears the burden, there
    has been some very good work done by the Congressional Budget
    Office, the Joint Committee on Taxation, and the U.S. Treasury
    Department, along with a lot of private researchers, who have
    concluded that some substantial part of the corporate tax
    burden--while the checks are written by the corporations--is
    actually borne by U.S. workers because of the mobility of
    capital and so forth in the global economy.
        The estimates are 20 to 70 percent. There are some who
    suggest an even higher rate. But it is clear that, in the
    global economy today, a substantial part of the burden of the
    corporate tax is in fact borne by workers in the form of lower
    wages.
        So, if we were to reduce the corporate tax, then part of
    the benefit of that would be distributed, I think, according to
    the revenue estimators of the Joint Committee, to the
    individuals who are employed. So it would show up as a
    reduction in the tax burden borne by the employees and not just
    the shareholders of the company.
        Reducing our corporate rate, I think, is a very important
    thing to do. Our country is a wonderful country, a wonderful
    market, with wonderful research institutions, wonderful
    governance structures. It is a wonderful place to be, but there
    is only so much of an additional burden that U.S. companies can
    carry against the rest of the world. We are so far out of line
    right now with the rest of the world on corporate tax rates
    that I think we have to bring our rates down.
        In thinking about rates, we need to look at the Federal
    burden, but we also need to look at the burden imposed by State
    and local governments, which is why, when we look at the all-in
    burden, we are looking at 39.1 percent on corporate income.
    That, of course, does not count the additional tax that is paid
    by shareholders on dividends and corporate capital gains.
        When you put that all together, we have something north of
    a 50-percent tax burden on corporate income here in the United
    States, and that is way out of line with where other countries
    are.
        The Chairman. You write in your testimony that many other
    OECD countries are developing various patent box regimes or
    intellectual property box regimes. You discuss extensively how
    capital is increasingly mobile. This, I would say, suggests a
    need to change the tax laws.
        So my question is this: is the main reason for a patent box
    to encourage research and development, and, if so, could not
    the R&D tax credit simply be increased to be a more generous
    provision? Or is the main reason for a patent box a recognition
    that any attempt to tax intellectual property at anything more
    than a very low rate will only result in chasing intellectual
    property away?
        Ms. Olson. My view is that our R&D credit has served more
    the purpose of getting companies to locate their R&D activities
    here in the U.S. than it has actually incented R&D activity to
    occur that would not otherwise have occurred.
        I think the most important point at this time is location.
    Other countries have R&D incentives at the front end, when you
    are actually undertaking the research and development activity,
    and then on the back end as well with a lower rate on the
    returns to the results of those efforts.
        So other countries are going after it on both sides. We
    could provide a far more generous R&D credit than we currently
    have to incentivize performing the activities here, but there
    is probably some benefit in looking at the patent box end as
    well where we would have a reduced rate on the returns from the
    endeavors.
        The Chairman. All right.
        Mr. Smith, you provide several suggestions for
    international tax reform in your remarks. One of those
    suggestions is to ``incentivize the utilization of intellectual
    property in the United States and generation of income here by
    reduction in the rate of tax on earnings from that activity.''
        Now, this is generally referred to as a patent box or
    innovation box regime. Do you have any recommendations for us
    on how a system might be designed, and, more specifically, how
    might we address the concerns that some have raised regarding
    the complexity and game-playing that would occur in the
    determination of the income attributable to intellectual
    property?
        Mr. Smith. My greatest experience on R&D credits and patent
    boxes working well is in the U.K., so I think what we need to
    do is incentivize expenditure on R&D in the U.S., because that
    generates very high-level jobs. Mr. Shay mentions the best
    scientists--a lot of the best scientists--are here in the U.S.
        So, we need that credit. We then need a patent box, because
    then we need to utilize the intellectual property we just
    developed from the research. What we would need to do is find a
    way to define what the intellectual property might be, and that
    could be, do you patent it, is it registered, whatever it might
    be. There are ways to define what the intellectual property
    might be.
        Then there will be ways to identify what the earnings might
    be from that. So, if you go to the Netherlands, what is the
    royalty stream coming from that trademark? That is not a good
    system, in my view. What you need to encourage is manufacturing
    the product that is subject to the IP. That creates jobs. That
    is the income stream that should be subject to a lower rate of
    tax. I do think it should be fairly easy to identify the
    intellectual property and what U.S. companies made in terms of
    earnings from that property.
        The Chairman. All right.
        Senator Wyden?
        Senator Wyden. Thank you. Thank you, Mr. Chairman.
        I want to ask one question with respect to the territorial
    issue, because this is going to be an important part of the
    debate. First, so we are clear on the definition--because I
    think there has been a lot of debate about what territorial is
    all about--my understanding is, under a territorial system, a
    company would pay tax on the earnings in their home country and
    pay no tax on earnings outside of the home country. Is that
    correct? Does anybody disagree with that?
        Dr. Altshuler. I disagree. Go ahead, Stephen.
        Mr. Shay. Go ahead.
        Dr. Altshuler. It is not all foreign. Territorial taxation
    does not relieve the U.S. tax burden on all foreign-source
    income abroad.
        Senator Wyden. Right. I understand.
        Dr. Altshuler. All right.
        Senator Wyden. All right.
        Dr. Altshuler. It is on active income abroad.
        Senator Wyden. Correct. Fair enough. Good.
        Mr. Shay. And there is a second point, which is, the
    proposals differ as to whether or not they provide exemption to
    foreign branches as opposed to subsidiaries. Some are only for
    income from subsidiaries, others, such as the administration
    proposal, cover both. That is a very significant design
    difference. So, that is to respond to your question.
        Senator Wyden. That point really relates to the question I
    wanted to get at, because what has concerned me most about the
    debate about territorial, and I know in this kind of decade-
    long odyssey that I have been part of with Senator Gregg,
    Senator Coats, Senator Begich, what always struck me is that
    going to a pure territorial system does not eliminate the use
    of game-playing and tax havens and the like, which I think is
    where Dr. Altshuler was going with her reaction to my first
    comment. And your writings addressed that too, Mr. Shay. Is
    that right? We can get the whole panel involved in it.
        But it just seems to me that the debate about territorial
    will be a fierce one, and it has been ever thus. But the idea
    that it will eliminate tax havens strikes me as an important
    issue as well, and I do not see how it eliminates tax havens.
    So, for any of you--Mr. Shay, you have written on this. We can
    get all four of you involved in this.
        Mr. Shay. Well, if I may start, I do not think there is a
    proposal out there today in the U.S. that would provide
    exemption without also having some form of minimum tax to
    prevent use of tax havens. It is that exact same phenomenon.
        All of the proposals--Camp, Baucus, administration--would
    be stronger than many of our peer countries. Yet without them,
    we are going to lose a lot of revenue, which is why, coming
    back to an earlier question, it is not enough just to focus on
    that one piece. We are going to still need anti-inversion,
    anti-base erosion provisions.
        But even if you have a minimum tax, there is a real
    difficulty in designing it so it cannot be gamed. You are
    correct. I published an article which went through ways to game
    at least that version of the Camp proposal. You give me any
    proposal where there is a significant rate difference, and I
    will find a way to push more income into it than is expected,
    which does also bring up the patent box.
        The U.K. patent box, as I understand it--and Tony can
    correct me--is drafting a way that you deem a return to certain
    assets, and the excess above that return is treated as
    intangible income. That is a very broad, low rate. It is not
    well-targeted, and it is very hard to target. It is very hard
    to design that.
        Senator Wyden. Let us, for purposes of discussion--Ms.
    Olson, is there anything Mr. Shay just said on that point that
    you would take exception with?
        Ms. Olson. Well, I might. I do not think that we can move
    to a pure territorial system. I do not think anybody wants to
    move to a pure territorial system. We have to protect our tax
    base so that smart advisors do not take advantage of the
    opportunity to erode the base.
        I think the real question is whether we focus on our own
    base and making sure that we capture all of the income that is
    attributable to our own base, or whether we decide we want to
    try to trace the income around the rest of the world.
        Professor Altshuler's recommendation of a minimum tax is
    much simpler administratively. If it does not put us too far
    out of line with what companies in other countries are allowed
    to do, then it would also have the benefit of keeping
    activities here. If it is too broad, then it will not matter
    how much more administrable it is because we are going to have
    fewer companies to apply it to. So those are the things that we
    need to look at, and that is what I think we need to focus on:
    how do we design a system that encourages activity here in the
    U.S. and that safeguards our own base?
        Senator Wyden. Thank you.
        Let me just apologize to all of you. We have votes, and
    Chairman Hatch has been very gracious. I think we have to race
    off to get another vote. But I look forward to working closely
    with all four of you. You have been very, very constructive and
    very good.
        Thank you, Mr. Chairman.
        The Chairman. I understand Senator Menendez has some
    questions, so we will keep this open for him. But let me just
    ask a question until he gets here. This is for you, Mr. Shay,
    but I also invite Mr. Smith to answer this question after Mr.
    Shay.
        Mr. Shay, in your Tax Notes article published just
    yesterday, you wrote, ``A material portion of U.S. global
    business untaxed earnings are invested in active foreign
    business assets. Presumably, managements do not seek to
    repatriate earnings invested in active business assets until
    the assets are sold or disposed of. It is difficult to argue
    that lock-out is a problem in relation to these earnings while
    they are so invested.''
        But could it be the case that at least some of those
    earnings are invested in active foreign business assets because
    of the lock-out effect? That is, but for the lock-out effect,
    the earnings would instead be invested in active U.S. business
    assets. Is that possible?
        Mr. Shay. It certainly is possible. There almost certainly
    is some linkage there. Tony alluded to that in his testimony,
    but I was relieved to read that Thermo Fisher does not make bad
    investments. But some other companies might.
        It is actually buried in a footnote in my article. As I
    point out in the article, the real question is, is the extent
    of sub-optimal investment in real assets in the foreign
    subsidiaries greater than the extent of sub-optimal investment
    domestically? The reason I ask that is, I have been involved
    in, or had as clients, companies that have made absolutely
    terrible acquisitions in the United States. What happens when
    you get into a deal is, deal fever can take over, and you can
    pay a bad price. It happens over and over again.
        The question is, how much does lock-out contribute to that
    in connection with foreign assets, and how great is the
    differential from just what happens normally? I am not
    persuaded--and particularly given the very high levels of cash
    holdings, there is not a lot of evidence to me that the amount
    of bad deals is disproportionate, which it would have to be in
    order to ascribe to lock-out, the effect that we are talking
    about.
        I worry much more about unused cash sitting offshore.
    Frankly, as I argue in the article, I think a lot of that is
    invested in the U.S. economy, so I do not think it is as big a
    problem. But if I am an investor in a company, I start to worry
    about it.
        The Chairman. Mr. Smith, do you care to comment?
        Mr. Smith. So, from a treasury perspective, the treasury
    within Thermo Fisher, I would love to be in a situation where
    all of our global cash is available to us in the U.S., and
    right now it is not, because we generate, as I said, about half
    of our cash overseas through earnings, and it stays there, so
    it is locked out.
        If I am able to get to all that cash in the U.S. with a
    minimum tax cost, then I have a broad array of choices where I
    can invest. So I can still invest in overseas assets if I want
    to, or I can invest in U.S. assets too. So the choice, to me,
    is much, much broader. That means the competition for foreign
    assets goes down and we can compete better for U.S. assets
    because we just have a bigger cash pool, if you would like,
    back in the U.S.
        So I think the lock-out effect really does limit our
    ability to deploy our funds globally, and that is what I really
    want to do.
        The Chairman. Thank you.
        Let me direct one other question to you, Dr. Altshuler. You
    discussed the idea of there being an implicit cost in deferring
    foreign income. You say that the implicit cost of the
    repatriation tax in our current worldwide-with-deferral regime
    is 5 to 7 percentage points today.
        Would you elaborate on this a little bit more, please, so
    that we can understand it maybe a little bit better here in the
    committee? What do you mean by ``implicit cost''? Is this
    mostly just a deadweight loss in the economy? Who is bearing
    the brunt of such a deadweight loss, if that is what it is?
        Dr. Altshuler. Well, it is a deadweight loss. One way to
    think about it is how much companies would be willing to pay to
    avoid the tax. So that is a good way to think about it, a way
    that I would use to explain it to my classes. How much would
    you be willing to pay to not be subject to this tax in the
    future? The implicit cost is an estimate that Harry Grubert of
    the U.S. Treasury and I came up with using data from tax
    returns of U.S. companies.
        The implicit cost is generated by having to undertake
    inefficient behavior to access the funds that you want to use
    abroad, so borrowing against the assets that you hold abroad.
    The more you hold abroad, the more you borrow against assets
    held abroad, the costlier it is for you to raise funds to
    invest in the United States. So it really is a cost. It is the
    cost that the tax system imposes on a company by not allowing
    them to bring the money back. It is imposed and it is borne by
    the company itself.
        The Chairman. All right. Thank you.
        Senator Menendez, you are the last one. I am going to have
    to go vote. Let me see. I cannot tell who was first.
        Senator Menendez. Mr. Chairman, I am not going to ask for
    unanimous consent for anything in your absence. [Laughter.]
        The Chairman. I am glad to hear that. Senator Thune would
    be first, and then you would be second.
        Senator Menendez. All right.
        The Chairman. But I am going to have to leave. I have to go
    to Judiciary. So, if you will shut it down, I would appreciate
    it.
        Senator Thune [presiding]. Well, thank you, Mr. Chairman.
        Thanks to our panel today for your excellent testimony.
    With everybody bouncing around between different things going
    on today, I am glad I got a chance to get back and ask a couple
    of questions.
        Anybody can answer this, but over the past few years we
    have seen a number of proposals to overhaul--and I am sure you
    have covered a lot of this--international tax rules, from
    Wyden-Coats, to Senator Enzi's proposal, to the proposal by
    former Chairman Camp. Given that each of you is an expert in
    this area, I would be curious to know which of the recent
    proposals you believe would be the best reform of our
    international tax system, and why. Feel free.
        Ms. Olson. Of the proposals, I think the one that comes
    closest would be Chairman Camp's proposal. But I would make
    some modifications on the international side with respect to
    the minimum tax, because I think it is too broadly applied. So
    I think the base on which the tax is imposed should be
    narrowed, more focused on protecting the U.S. base as opposed
    to circling the globe.
        Senator Thune. All right. What do you think about the rate?
        Ms. Olson. The rate is on the high side.
        Senator Thune. All right.
        Ms. Olson. I think a lot of these things end up being the
    result of what the revenue estimators tell the drafters they
    have to go with, so something that was lower, 10 percent,
    something on that order, would be more effective.
        Senator Thune. All right.
        Mr. Smith?
        Mr. Smith. So I think, again, Chairman Camp's proposals are
    mostly in line with what I am recommending, although I would
    make some changes. I do think repatriation should be taxed in
    the U.S. when the cash actually comes back to the U.S., so I do
    not think there should be any tax imposed whilst the earnings
    are offshore.
        That also goes to, I guess, the minimum tax or the overseas
    income tax. My preference would be to only have the income
    taxed in the U.S. when the cash actually comes back, but
    otherwise I think we are fairly close on it.
        Senator Thune. All right.
        Dr. Altshuler. So, I like the idea of a dividend-exemption
    system, getting rid of that repatriation tax and combining it
    with a minimum tax. I think the administration rates are too
    high, the 14 percent on the earnings held abroad and the 19-
    percent minimum tax. I would go with a minimum tax of 15
    percent. This all has to be combined, of course, with the lower
    corporate tax.
        Senator Thune. Right. All right.
        Mr. Shay?
        Mr. Shay. As I say in my testimony, my first choice would
    be the Wyden-Coats approach with respect to the international
    provisions, but it does presume a fairly low rate. If that is
    not going to be achieved--and realistically then you would not
    get agreement to tax foreign income currently--then I prefer
    some form of minimum tax. Of the ones that are out there, I do
    think the administration's is the best. I think it has some
    problems, like I have suggested, and that is why I have
    suggested an alternative in my testimony.
        Senator Thune. All right.
        It is a reality that we have fewer and fewer of these
    Fortune 500 companies that are based in the U.S., and they
    continue to be acquired by a lot of their foreign competitors.
    How much of that do you think is due to America being one of
    the few developed countries in the world with a worldwide
    system of taxation and the highest statutory tax rate? Put
    another way, are foreign acquisitions driven primarily by
    business considerations, or do tax considerations play a major
    role in that? To anyone on the panel.
        Ms. Olson. My view is that there is a lot of activity that
    occurs because the U.S. is a very attractive market, so foreign
    companies want to invest here. Foreign companies are happy to
    acquire U.S. companies.
        I do think that if you have, for example, a merger of two
    similarly sized companies, one being foreign and one being
    U.S., that when it comes time to decide where the company
    should be domiciled or headquartered for tax purposes, the
    answer today is not likely to be the U.S. because of our very
    high corporate rate. So I think that lowering our corporate
    rate would go a long way towards having the decision made to
    have the U.S. be the headquarters in those kinds of situations.
        Senator Thune. All right.
        Mr. Smith. So, in my view, the acquisition by foreign
    corporations of U.S. corporations, a lot of that is driven by
    business, because we have great corporations in the U.S. But I
    think it is inevitable that there is a tax element to that
    decision, so tax savings definitely would weigh into that, in
    my opinion.
        Senator Thune. All right.
        Dr. Altshuler. I agree with what has been said before. I
    think we cannot ignore that taxes are playing a role here, a
    major role--that is an open question--but a role that we need
    to focus in on.
        Mr. Shay. As I think Tony's testimony indicated, you are
    facing a series of trade-offs. I would not be distracted too
    much by looking at acquisitions that are within one quarter or
    two quarters, I would look over a longer period. I think, while
    tax is without doubt a factor and was a very big factor in
    inversions, that part of it, I think, has been, at least for
    the interim, addressed.
        I agree with the sentiment, I think, of the other
    panelists. I would guess by far the predominant portion of
    acquisitions is driven by business and not tax, on the scale we
    are talking about. There is just too much risk to be doing
    something primarily for a tax reason. The inversions were the
    exception, and that is why it was appropriate to take actions
    to stop them.
        Senator Thune. All right. Very quickly, because my time has
    expired, is earnings stripping contributing to corporate
    inversions?
        Mr. Shay. Yes. Absolutely.
        Senator Thune. All right. Agreed?
        Dr. Altshuler. Yes.
        Senator Thune. All right. Thank you all very much. I will
    yield to the Senator from New Jersey.
        Senator Menendez. Thank you, Mr. Chairman. Welcome all.
    Thank you for your testimony. I want to particularly welcome
    Dr. Altshuler, who is from a great New Jersey institution,
    being professor and dean at Rutgers University.
        A lot of the discussion today has been focused on how
    uncompetitive the corporate tax rate is, and critics correctly
    argue that our 35-percent statutory rate is the highest of all
    OECD countries. But I think we neglect to mention that our
    effective tax rate is actually right in the middle of that
    curve. According to the Congressional Research Service, the
    effective U.S. corporate rate in 2011 was 27.1 percent,
    slightly lower than the OECD average of 27.7 percent.
        Now, having said that, I do see myself supporting a tax
    reform package that seeks to reduce the corporate rate, but
    also, while I think that that is important, I do not know that
    it is the Holy Grail of tax reform. I am concerned about the
    gap between the United States and the rest of the world, about
    reducing the infrastructure and education gaps that we have.
        We were long the envy of the world in infrastructure, and
    we now rank just 12th globally, with billions of dollars of
    maintenance backlogs for roads, rails, and ports. American high
    school students ranked a dismal 26th out of 34 OECD countries
    in math.
        So, Professor Shay, let me start with you. It is estimated
    that for every point we reduce the corporate rate, we lose $100
    billion in money to the Treasury. How do we look at this in the
    context of the desire to lower corporate rates, but the
    necessity, I think, of infrastructure investment, both in
    infrastructure broadly defined and in educational pursuits?
        Mr. Shay. Well, a key question that is at the heart of this
    hearing is, how do you think about the taxation of cross-border
    income in that regard? My view is, it should not be left off
    the table if you are going to try to expand your base.
        Expanding the tax base by having tax at least up to some
    number, at least a minimum tax on income that is earned at
    very, very low foreign rates and very likely as a result of tax
    planning and incentives to achieve that, I think that would
    help contribute to the $100-billion point that you are
    referring to. In other words, I do not think we should be
    excluding international income from the base in achieving a
    lower rate.
        At that point, there are quite a few corporate tax
    expenditures, and they are just going to be very clear
    decisions. My preference is, as I say in the testimony, a much
    broader base. Take away as many expenditures as is feasible and
    either invest that in the rate or invest it in infrastructure
    or other things that would be valuable for the country.
        Senator Menendez. Can we agree that a critical
    infrastructure and educational excellence in a globally
    challenged economy are incredible elements as well to future
    prosperity?
        Mr. Shay. You certainly have my agreement on that.
        Senator Menendez. All right.
        Let me ask this, Ms. Olson. We have been working on
    something that has broad bipartisan support in Congress, which
    is reforming the Foreign Investment in Real Estate Property
    Act, or FIRPTA, which is basically a punitive tax that acts as
    a roadblock to investments in the U.S. at a time when it seems
    to me we should be doing the opposite and incentivizing
    investment.
        Does it make any sense to create obstacles like FIRPTA for
    foreign investments in the U.S., particularly considering our
    needs, for example, in infrastructure and a still-looming
    commercial debt that is out there that has to be refinanced?
        Ms. Olson. Can I give a one-word answer?
        Senator Menendez. Sure.
        Ms. Olson. No. It does not.
        Senator Menendez. All right.
        Ms. Olson. Clearly, FIRPTA does distort investment
    decisions about which sector of the economy to invest in, as
    well as whether to invest here in the U.S. or to invest in
    another country that does not have that kind of a tax.
        Senator Menendez. I hope we can take your ``no'' and
    convert it into a powerful ``yes'' here to reform it. The other
    day, we started some of that.
        Finally, let me ask about inversions. I find this
    particular activity absolutely reprehensible and un-American,
    companies that benefit from our intellectual property laws, the
    protection of our military power and diplomatic expertise, the
    benefits afforded American businesses in operating abroad, the
    benefits of our universities and graduate schools, our
    highways, our infrastructure, the right to claim First
    Amendment rights in elections, then walk away from the table
    when the bill comes due. It is almost parasitic, in my mind.
        So, Professor Shay, do you believe that a lower tax rate
    and a territorial tax system alone can end the problem of
    inversions in the U.S., or will we continue to have a need to
    address inversions directly?
        Mr. Shay. I do not think that would end inversions alone,
    because a territorial system, as we have said, would almost
    certainly be accompanied by other provisions that would need to
    protect the U.S. tax base. There is still going to be pressure
    to try to move to some country that just taxes less, so there
    is going to need to be a whole series of provisions.
        But most importantly, we need to re-think our concept of
    corporate residence. In my testimony, I suggest that we should
    be taking account of shareholder composition. When the
    companies are trading on U.S. exchanges, if they have
    substantial U.S. shareholdings, we should--and it will take a
    fair amount of designing and thinking to make this a clear
    proposal--move towards making those companies U.S. tax
    residents.
        Senator Menendez. Thank you, Mr. Chairman.
        Senator Thune. Thank you, Senator Menendez.
        Does the Senator from Delaware desire to ask questions?
        Senator Carper. He does. Thanks.
        Hi, everyone. Nice to see you. Thanks for joining us and
    for sharing your wisdom with us.
        In the last Congress, I chaired a committee and helped lead
    a committee with a Republican from Oklahoma named Tom Coburn,
    and we focused a fair amount on cyber-security legislation. A
    couple of Congresses ago, we tried to pass comprehensive cyber-
    security legislation. It involved a bunch of committees in the
    Senate, the administration, and we found, at the end of the
    day, that we could not get it done.
        So Dr. Coburn and I started in the last Congress in 2013
    and said, ``Rather than trying to find a silver bullet on
    cyber-security, why don't we see if there might be a number of
    silver BBs that, put together, would actually add up to
    something significant?'' That is what we actually did and
    passed three or four bills out of committee, and the President
    signed them into law and significantly strengthened the ability
    of the Department of Homeland Security to help defend us on the
    cyber-side.
        I like to go big. With respect to comprehensive tax reform,
    I would like to go big in this instance as well. But at the end
    of the day, we may not be successful in doing that. We may not
    be able to find that silver bullet all the way through, but
    there might be a number of silver BBs. Sometimes we talk around
    here about getting a half-loaf, a quarter-loaf, or three-
    quarters of a loaf.
        So let us think in terms of either silver BBs or half-
    loaves. If we cannot get the full loaf or the silver bullet,
    starting with you, Ms. Olson, what should we at the very least
    try to get done--not on a temporary basis, not on an extender
    kind of basis, but on a permanent basis, please?
        Ms. Olson. The constraint is always revenue neutrality. If
    we could walk away from revenue neutrality or if we could take
    a perhaps more realistic look at what is sustainably revenue-
    neutral, that might be a good place to start.
        But clearly we need to do something to bring our corporate
    rate down so it is more closely aligned with that of other
    governments. So, if you can only do one thing, I would say try
    to move in the direction of reducing the corporate rate.
        Senator Carper. Thank you. One of the pay-fors we never
    think much about or talk much about is actually investing in
    the IRS in terms of people and technology. It is a huge pay-
    off. I think it is like $10 for every $1 we invest. When are we
    going to wake up and say, well, maybe we should do that to help
    pay for some of this stuff?
        Mr. Smith?
        Mr. Smith. So I think international reform should focus on
    making U.S. companies more competitive in the global
    marketplace, and it should also incentivize job growth in the
    U.S. So I think very targeted international tax reform, which
    would focus on repatriation at a reasonable cost, further R&D
    credits on a consistent basis, some level of patent boxes I
    would call it, which is a lower tax rate on earnings in the
    U.S. from utilization of intellectual property, and also a
    lower general corporate tax rate, would generate jobs growth.
        Senator Carper. Thank you.
        Dr. Altshuler?
        Dr. Altshuler. I agree with Ms. Olson about getting the
    corporate rate down. I guess if there was another BB, this one
    might be bigger: thinking about a dividend exemption system
    with a minimum tax on it.
        Senator Carper. All right. Thanks.
        Mr. Shay?
        Mr. Shay. I put three BBs in my testimony. They would be an
    advance Alternative Minimum Tax, strengthening the corporate
    residence rules, and addressing some problems that we have
    today that advantage investment in foreign portfolio stocks
    rather than U.S. portfolio stocks, which is interactive with
    U.S. corporate taxation.
        Senator Carper. Thank you.
        Ms. Olson, in your testimony you provided, I believe, a
    chart that sought to compare research tax incentives that are
    offered in some of the major OECD countries. In it, I think we
    found that the United States--we are not in the top 20. I do
    not think we are in the top 25. I think we are at a rate as low
    as 27. Many of our major trading partners, including China, the
    U.K., Canada, Japan, all offer, as we know, strong incentives.
        To help address this issue, last month one of my colleagues
    on this committee, Senator Toomey from the neighboring State of
    Pennsylvania--which was once part of Delaware--and I introduced
    legislation. We called it The Compete Act. That would address
    many of the problems by permanently extending, increasing, or
    simplifying the R&D credit. I view this legislation as the
    beginning of a dialogue, not the end, on how to reform and
    improve the Federal tax policy with respect to research.
        I would be interested in hearing from the members of this
    panel about this idea of strengthening our tax incentives to
    innovate, either from an improved R&D tax credit or
    supplementing that credit with a so-called patent box. How can
    we design such a patent box, and can we do so effectively while
    also avoiding the base erosion associated with highly mobile
    income from intangible assets such as patents? I am going to
    ask you, Ms. Olson, if you would lead off. I would love to hear
    from Mr. Smith and Dr. Altshuler as well.
        Ms. Olson. Thank you. I think that one of the features of a
    patent box is that it would serve as an anti-base erosion
    feature because it would attract income to the U.S. So a well-
    designed patent box or innovation box that was focused on those
    kinds of activities and the income from those activities could
    attract that kind of activity, as well as the income associated
    with it. So it would be an anti-base erosion feature in itself.
        Senator Carper. All right. Thank you.
        Mr. Smith?
        Mr. Smith. So to continue that, I think the combination of
    continued R&D credits where we generate new ideas and new
    intellectual property, and then to encourage companies in the
    U.S. to generate income in the U.S., is the correct
    combination. I think that is the best combination we could get
    to and that would certainly--as I said before, I do think that
    would create jobs.
        Senator Carper. All right. Thanks.
        Dr. Altshuler?
        Dr. Altshuler. I think it is important to note that, under
    the current system, you can use excess credits to absorb taxes
    that would be paid on royalties, so the royalties are really
    not taxed to a large extent under the current system. So I
    would not even consider a patent box unless we were to go into
    a dividend exemption-type, territorial-type system.
        Senator Carper. All right. Thank you.
        Senator Thune, Mr. Chairman, I know that the witnesses are
    hungry for another question from me, but I am over my time, so
    why don't I yield back?
        Senator Thune. Thank you. I thank the Senator from
    Delaware. We are ready to wrap up here in just a minute. I want
    to ask one last question.
        Mr. Smith, in your testimony, you advocated for moving
    toward a territorial system by providing for a reduced tax rate
    on repatriated earnings in the range of 5 percent or slightly
    higher, and you also said that the tax should not be assessed
    until the earnings are repatriated to the United States, not
    when they are earned. Now, in contrast, the President's latest
    proposal and the proposal from Dr. Altshuler include an
    immediate tax on foreign earnings, 19 percent under the
    President, 15 percent under Dr. Altshuler's proposal.
        Tell me why you believe that your proposal is a better path
    forward.
        Mr. Smith. I look at what we are trying to achieve, and I
    compare it to other international tax reforms from other
    jurisdictions and other international tax systems in other
    countries. I cannot see a minimum tax existing in any other
    foreign tax legislation that I can think of.
        So the only complete system of taxing everyone's income,
    even at different rates, that I can think of is in Brazil, to
    be honest with you. So I think we should look hard at what
    other countries have in terms of tax systems and try to mirror
    that, because, at the end of the day, I do view this as a
    competition.
        Senator Thune. What would be the practical implications to
    your company and your ability to compete with companies based
    in countries with a territorial tax system if a 19-percent or
    15-percent minimum tax were imposed on your foreign earnings?
        Mr. Smith. So we have a lot of foreign earnings generated
    offshore, about half our earnings. That equates to about $1.5
    billion of earnings generated offshore every year. Some of
    those, we would like to invest in further acquisitions
    overseas, and so, if there is a minimum tax which basically
    taxes all our earnings overseas at an additional tax rate, then
    we have lost some of that money.
        So our capacity to go spend that money on other things
    overseas has gone down, so I think that would not allow us to
    compete better, that would allow us to compete worse. That is
    not my ideal for tax reform in the U.S.
        Senator Thune. All right. Well, we appreciate very much,
    again, your testimony. Thank you for your willingness to come
    and respond to our questions. This is a complicated subject,
    but we are long overdue to reform the tax code and to get us to
    a place where we are more competitive in the global
    marketplace. Your thoughts and suggestions were very helpful in
    that regard. So, thanks so much.
        With that, this hearing is adjourned.
        [Whereupon, at 12:09 p.m., the hearing was concluded.]

                                A P P E N D I X

                  Additional Material Submitted for the Record

                                  ----------

    Prepared Statement of Dr. Rosanne Altshuler, Professor of Economics and
     Dean of Social and Behavioral Sciences, School of Arts and Sciences,
                               Rutgers University
        Chairman Hatch, Ranking Member Wyden, and Members of the Committee,
    it is an honor to appear before you today to discuss the very important
    topic of international tax reform.

        I am a Professor in the Economics Department and Dean of Social and
    Behavioral Sciences at the School of Arts and Sciences of Rutgers
    University. During various leaves from Rutgers University, I have
    served as Special Advisor to the Joint Committee on Taxation, Chief
    Economist for the President's Advisory Panel on Federal Tax Reform in
    2005, and Director of the Urban-Brookings Tax Policy Center. In each of
    these positions, I have advocated the compelling case for tax reform,
    evaluated the economic consequences of different tax reforms, and
    studied the implementation issues and transition costs associated with
    various reforms. My primary area of expertise is international tax
    policy.

        Under our current system, all income of U.S. corporations is
    subject to U.S. corporate income tax whether it is earned at home or
    abroad. This ``worldwide'' or ``residence'' approach is used by only a
    handful of advanced countries. All other G-7 countries and all but six
    other OECD countries (Chile, Ireland, Israel, Mexico, Poland, South
    Korea) have adopted systems that exempt some (or all) active foreign
    earnings of resident multinational corporations (MNCs) from home
    country taxation. These countries are commonly referred to as having
    ``territorial'' tax systems. It is more accurate, however, to call this
    approach a ``dividend exemption'' system since the removal of home
    country tax liabilities on active foreign income is typically
    accomplished by exempting dividend remittances from foreign affiliates
    to home country parent corporations from tax. In contrast, the United
    States defers taxation of foreign affiliates' active income until it is
    distributed as a dividend, but then taxes the income at its full
    corporate rate and allows a credit for foreign taxes paid on the
    earnings.

        I believe there is broad agreement among policy makers and
    companies that our current system for taxing the income earned abroad
    by U.S. corporations is very complex and induces inefficient behavioral
    responses. The system provides incentives to invest in tangible and
    intangible capital in some locations instead of others, to engage in
    costly strategies to avoid U.S. taxes on foreign dividends, and to
    shift reported income from high- to low-tax locations by using
    inappropriate transfer prices or paying inadequate royalties. Where the
    tax burden under U.S. rules exceeds what could be achieved through a
    non-U.S. parent structure, pressure exists to change the parent
    corporation's domicile to a foreign jurisdiction.

        Many in the United States are calling for reform of our system for
    taxing international income and support moving to a territorial tax
    system. I recently worked with Stephen Shay of Harvard Law School and
    Eric Toder of the Urban-Brookings Tax Policy Center on a report that
    explores other countries' experiences with territorial tax systems.\1\
    We examined the approaches and experience of four countries--Germany
    and Australia--both of which have long-standing territorial systems--
    and the UK and Japan--both of which within the last six years enacted
    territorial systems by exempting from home country taxation either all
    or 95 percent of the dividends their resident MNCs receive from their
    foreign affiliates. We examined the factors that drove the policy
    choices of these four countries and put forward some lessons we believe
    the United States can take away from their experiences. In my testimony
    today, I highlight six conclusions from this work that I believe are
    important for policy makers in the United States as they contemplate
    reform of our international tax system. I also briefly discuss the
    benefits of adopting a reform that would remove the U.S. tax due upon
    repatriation of foreign profits and impose a minimum tax on foreign
    income.
    ---------------------------------------------------------------------------
        \1\ Rosanne Altshuler, Stephen E. Shay, and Eric J. Toder,
    ``Lessons the United States Can Learn from Other Countries' Territorial
    Systems for Taxing Income of Multinational Corporations,'' Urban-
    Brookings Tax Policy Center Research Paper, January 21, 2015, http://
    www.tax
    policycenter.org/UploadedPDF/2000077-lessons-the-us-can-learn-from-
    other-countries.pdf.

    1. The classification of tax systems as ``worldwide'' or
    ``territorial'' oversimplifies and does not do justice to the variety
    ---------------------------------------------------------------------------
    of hybrid approaches taken in different countries.

        In practice, when exceptions and anti-abuse rules are taken into
    account, the difference in corporate tax policy between the United
    States and other advanced economies is nowhere near as stark as the
    labels ``worldwide'' and ``territorial'' suggest. The details of a
    system are more important than which broad definitional category is
    applied to a particular system.

        All tax systems are hybrid systems that tax at reduced effective
    rates some foreign business income. Under the current U.S.
    ``worldwide'' system, MNCs are allowed to defer tax on most income
    earned in their foreign subsidiaries until that income is repatriated
    as a dividend to the U.S. parent company and are provided a liberal
    credit for foreign income taxes paid. As a result of deferral and the
    foreign tax credit, the United States collects little tax on the
    dividends its MNCs receive from their foreign affiliates.\2\ Under the
    prior ``worldwide'' UK and Japanese systems, in which they also
    deferred tax on foreign affiliate earnings, their MNCs could bring back
    foreign earnings through related party loans without it being treated
    as a taxable repatriation. Most ``territorial'' countries impose tax on
    some foreign-source income as accrued in order to protect their
    domestic corporate tax base. In any assessment of international tax
    policy, as in so much else in taxation, the devil is in the details.
    ---------------------------------------------------------------------------
        \2\ Because of deferral, the foreign tax credit, and the electivity
    of operating through a foreign branch, the United States does not
    collect much corporate tax in any form on foreign income earned from
    operating directly in another country. In recent work using U.S.
    Treasury tax data, Harry Grubert and I estimate that the United States
    collected $32 billion of revenue on all categories of corporate foreign
    source income in 2006. This amount was approximately nine percent of
    2006 corporate tax revenues but less than four percent of all foreign-
    source income of U.S. MNCs (including profits deferred abroad, but
    before allocated parent expense). U.S. taxes paid on repatriated
    dividends accounted for a very small portion of this revenue. The
    remainder came from taxes on royalties, portfolio income, export income
    and income from foreign branches. See, Harry Grubert and Rosanne
    Altshuler, ``Fixing the System: An Analysis of Alternative Proposals
    for the Reform of International Tax,'' National Tax Journal, September
    2013, 66(3), 671-712.

    2. The circumstances that have caused other countries to maintain or
    introduce territorial systems do not necessarily apply to the United
    States. Therefore, others' experiences do not necessarily dictate that
    ---------------------------------------------------------------------------
    the United States should follow the same path.

        The countries we studied (Australia, Germany, Japan and the UK)
    differed greatly in the extent to which they weighed conflicting policy
    concerns, such as effects on domestic investment, residence decisions
    of MNCs, tax avoidance through profit shifting, the burden of the tax
    due upon repatriation of foreign profits, and taxation of inbound
    investments. Countries also differed as to their levels of concern
    about potential budgetary effects of corporate tax policy changes. We
    were somewhat surprised to discover that the policy decisions of the
    countries we studied do not appear to have been based on analysis of
    how foreign source income was effectively being taxed. In other words,
    the changes do not seem to have been driven by analysis of
    administrative data and seem, instead, to have been driven by anecdotal
    evidence to the extent decisions were ``evidence based.''

    3. The tax policies of countries with dividend exemption systems have
    been greatly influenced by their separate individual circumstances.

        As a net capital importing country, Australia's main goal for its
    corporate tax has been to collect taxes from foreign corporate
    investors. There is less concern with treatment of outbound investment
    by Australian companies. Australia has an imputation system, which
    allows domestic, but not foreign shareholders, to claim credits for
    domestic but not foreign corporate taxes paid by Australian companies.
    This in part may reduce tax avoidance by Australian companies through
    shifting profits overseas, because Australian shareholders are not
    allowed credits if domestic corporate taxes have not been paid.

        Germany adopted their dividend exemption system many years ago in
    order to foster foreign investment by German companies. Other European
    Union (EU) countries also had exemption systems, which influenced
    German practice. German anti-avoidance rules appear to be more
    effective than most in limiting profit shifting by German-based
    companies, except to the extent that these rules are limited to conform
    to EU rules.\3\
    ---------------------------------------------------------------------------
        \3\ Germany is concerned about avoidance of German tax on inbound
    investment, which their rules to limit tax avoidance by German-resident
    companies cannot combat. There is a concern that this gives foreign
    companies a competitive advantage over domestic-based firms in the
    German market.

        Japan adopted an exemption system in 2009 to make its companies
    more competitive and encourage them to bring back accrued overseas
    profits to Japan. The Japanese also believed that exemption would be
    simpler to administer than the system they had in place. A notable
    feature of the Japanese tax environment is a compliant international
    tax planning culture. Advisers report that Japanese MNCs are not
    aggressive tax planners. Accordingly, the Japanese government was not
    concerned that eliminating taxes on repatriated dividends would
    encourage income shifting and base erosion behavior by their MNCs.
    Japan did not enact any new anti-avoidance rules to accompany the
    switch to a territorial system and did not adopt a transition tax on
    ---------------------------------------------------------------------------
    repatriations from pre-effective date profits.

        The United Kingdom went to a territorial tax system in 2010 and
    lowered their top corporate tax rate to 21 percent. It also enacted
    ``patent box'' legislation that reduced the tax rate on intangible
    income to 10 percent. Like Japan, the United Kingdom applied their new
    dividend exemption system to distributions of foreign earnings prior to
    the effective date. But the UK moves had much different motivations
    than the Japanese reforms. The United Kingdom was mainly concerned with
    losing corporate headquarters. This was facilitated by a number of
    factors including the proximity of the United Kingdom to other
    countries (Ireland, Luxembourg) with lower corporate tax rates and
    territorial systems, and the absence of any anti-inversion rules in the
    United Kingdom (and EU restrictions against adopting such rules). The
    United Kingdom was less concerned about tax avoidance and had close to
    the equivalence of an exemption system before the change because of
    rules that allowed their MNCs to return borrowed funds to their
    shareholders without paying the repatriation tax. In addition to tax
    competition from European countries for corporate headquarters, the
    decision of the United Kingdom to adopt dividend exemption seems to
    have been driven by requirements to satisfy European Court of Justice
    case law interpreting EU treaties and the recession brought on by the
    2008 financial global crisis.

    4. The burden of the tax due upon repatriation of foreign earnings may
    be a lot higher in the United States than it was in the United Kingdom
    and Japan before they adopted dividend exemption systems.

        Deferral of U.S. tax allows foreign business income of U.S. MNCs to
    be taxed at a lower effective rate than it would be if it were earned
    in the United States. When combined with financial accounting rules
    that effectively treat deferred earnings as permanently exempt,
    deferral creates a ``lockout'' effect with associated efficiency costs.
    Corporations will engage in inefficient behavior--they will take
    actions that they would not find attractive were it not for the tax--to
    avoid the tax due upon repatriation and the associated reduction in
    after-tax book income. For example, a parent corporation that wants to
    invest in a project in the United States, distribute dividends to
    shareholders or buy back its shares may borrow at home instead of
    remitting foreign profits in order to extend the deferral of U.S. tax
    on foreign earnings. This maneuver allows the U.S. parent to defer the
    U.S. corporate tax, but raises the cost of capital for domestic uses.

        The burden of the tax on foreign subsidiary dividends is a key
    issue for understanding both the benefits and detriments of moving to a
    dividend exemption system and how the current system differs from
    dividend exemption.\4\ The burden of the tax includes both the actual
    tax paid upon repatriation and the implicit costs of deferring income
    which likely increase as retentions abroad grow. These implicit costs
    include, for example, the cost of using parent debt to finance domestic
    projects as a substitute for foreign profits (which will increase as
    debt on the parent's balance sheet expands), payments to tax planners,
    foregone domestic investment opportunities and foreign acquisitions
    that may not have been undertaken in the absence of the tax.
    ---------------------------------------------------------------------------
        \4\ Pressure from U.S. MNCs arguing that the burden was costly to
    their business operations and a desire by Congress to induce U.S. MNCs
    to reinvest accrued foreign profits in the United States resulted in a
    ``repatriation tax holiday'' in 2005. Not surprisingly, pressure for a
    similar tax holiday surfaced not long after the holiday expired and has
    continued.

        In a recent paper, Harry Grubert of the U.S. Treasury Department
    and I used data from the U.S. Treasury tax files to derive an estimate
    of the cost of deferring foreign income that takes into account the
    growing stock of profits retained abroad.\5\, \6\ This
    implicit cost can be thought of as the amount a company would be
    willing to pay to have the repatriation tax on an extra dollar of
    foreign earnings removed. Our work suggests that the implicit cost of
    the tax on foreign profits for a highly profitable company is about
    five to seven percentage points today. This burden is higher than
    previous estimates and increases as deferrals accumulate abroad.
    ---------------------------------------------------------------------------
        \5\ See Harry Grubert and Rosanne Altshuler, ``Fixing the System:
    An Analysis of Alternative Proposals for the Reform of International
    Tax,'' National Tax Journal, September 2013, 66(3), 671-712.
        \6\ A recent analysis reported in Bloomberg News estimates the
    stock of profits held abroad by U.S. companies at $2.1 trillion. See
    http://www.bloomberg.com/news/articles/2015-03-04/u-s-companies-are-
    stashing-2-1-trillion-overseas-to-avoid-taxes.

        As mentioned above, the United Kingdom and Japan allowed
    corporations to move foreign profits from affiliates to parents without
    any home country tax via subsidiary loans to or investment in parent
    corporations.\7\ In those countries, it seems that it was relatively
    easy for parent corporations to access foreign profits without paying
    home country tax. The U.S. tax code, however, would treat such loans or
    investments as distributions with respect to stock and subject them to
    U.S. tax to the extent of un-repatriated earnings.
    ---------------------------------------------------------------------------
        \7\ Section 956 of the Internal Revenue Code prevents companies
    from avoiding home country taxation while implicitly receiving the
    benefits of the foreign earnings of their controlled foreign affiliates
    through loans or investments in U.S. property by treating these
    transactions as constructive dividends. I am not aware of these types
    of rules being in place in any other OECD country.

        I am not aware of any estimates of the burden of repatriation taxes
    in the United Kingdom or Japan, but my understanding of their systems
    suggests that the burden of the tax on foreign dividends in those
    countries was much smaller than it is in the United States. For this
    reason, their decisions to eliminate the tax on active foreign earnings
    offer relatively little direct guidance for resolving the disagreement
    in the United States over the optimal approach to reducing this key
    ---------------------------------------------------------------------------
    burden of the current system.

    5. The fact that the United States raises relatively little corporate
    tax revenue as a share of GDP than other countries while having the
    highest statutory corporate rate in the OECD has multiple explanations
    and does not necessarily suggest that U.S.-based companies in any given
    industry are more aggressive at income-shifting than foreign-based
    companies.

        According to the OECD Tax Database, only Germany had a lower ratio
    of corporate receipts to GDP than the United States in 2012 (the most
    recent year reported).\8\ This ratio was 1.8 percent for Germany, 2.5
    percent for the United States, 2.7 percent for the UK, 3.7 percent for
    Japan and 5.2 percent for Australia. The United States had the second
    highest corporate rate at 39.1 percent (including subnational taxes)
    among the five countries in 2012 with Japan at the top at 39.5 percent.
    Germany and Australia had rates of 30.2 and 30 percent, respectively,
    and the United Kingdom had a rate 24 percent. (Since 2012, the Japanese
    rate has fallen to 37 percent and the rate in the United Kingdom has
    been reduced to 21 percent.)
    ---------------------------------------------------------------------------
        \8\ OECD, Revenue Statistics 2014, 2014, OECD Publishing, Paris,
    http://www.oecd-ilibrary.org/taxation/revenue-statistics-
    2014_rev_stats-2014-en-fr.

        One reason the United States raises little corporate revenue as a
    share of GDP with a relatively high corporate tax rate is that a
    relatively large share of business activity in the United States comes
    from firms that do not pay corporate income tax. We estimate that the
    United States among the five countries has the lowest share of business
    profits that comes from companies that are subject to a corporate
    profits tax (34 percent). Germany appears also to have a relatively low
    share of business profits subject to the corporate tax (45 percent). In
    contrast, very large shares of business profits in Japan (87 percent),
    Australia (82 percent), and the United Kingdom (80 percent) are subject
    to their country's corporate income tax.\9\
    ---------------------------------------------------------------------------
        \9\ For further information and figures see Rosanne Altshuler,
    Stephen E. Shay, and Eric J. Toder, ``Lessons the United States Can
    Learn from Other Countries' Territorial Systems for Taxing Income of
    Multinational Corporations,'' Urban-Brookings Tax Policy Center
    Research Paper, January 21, 2015, http://www.taxpolicycenter.org/
    UploadedPDF/2000077-lessons-the-us-can-learn-from-other-countries.pdf.

        A second reason that the United States raises relatively little
    revenue as a share of GDP from corporate taxes in spite of its high
    statutory corporate rate is the extent of tax preferences it allows in
    relation to business income. Based on estimates and projections
    reported by the U.S. Office of Management and Budget, we calculate that
    corporate tax expenditures, excluding international provisions, will
    reduce U.S. corporate tax receipts by about 15 percent between fiscal
    years 2015 and 2019.\10\ Including international provisions would raise
    this figure to 23 percent, but the major international tax expenditure,
    deferral, is less generous than the exemption of foreign-source income
    in the tax laws of the four comparison countries. While the domestic
    tax preferences reduce the effective U.S. corporate rate below the
    statutory rate, the effective corporate rate is also lower than the
    statutory rate in most other OECD countries, although less so. The
    ratio of the effective rate to statutory rates is slightly lower in the
    United States than it is for the four comparison countries.\11\
    ---------------------------------------------------------------------------
        \10\ U.S. Office of Management and Budget, Analytical Perspectives:
    Budget of the United States Government, Fiscal Year 2015, 2014, Table
    14.2: 210-215.
        \11\ See Kevin A. Hassett and Aparna Mathur, ``Report Card on
    Effective Corporate Tax Rates: U.S. Gets an F,'' American Enterprise
    Institute, February 9, 2011.

        To what extent does income shifting explain the comparatively low
    level of corporate receipts as a share of GDP relative to the high U.S.
    statutory rate? The United States does have relatively large high-tech
    and pharmaceutical sectors, which are the ones mostly likely to have a
    large share of their capital in the form intangible assets that are
    easy to shift to entities in low-tax jurisdictions. While there is
    evidence of income shifting by U.S. companies, there are insufficient
    comparable data on companies from other countries to conclude that U.S.
    companies are more or less aggressive than their peer competitors from
    other countries.\12\
    ---------------------------------------------------------------------------
        \12\ For the most rigorous evidence of income shifting of U.S.
    multinational corporations, see Harry Grubert, ``Foreign Taxes and the
    Growing Share of U.S. Multinational Company Income Abroad: Profits, Not
    Sales are Being Globalized,'' National Tax Journal, June 2012. Grubert
    demonstrates using Treasury tax data that the differential between U.S.
    and foreign effective tax rates has a significant effect on the share
    of U.S. multinational income abroad and that this effect works
    primarily thorough changes in domestic and foreign profit margins and
    not through the location of sales.

    6. The ability of the U.S. to retain higher corporate tax rates and
    ---------------------------------------------------------------------------
    tougher rules on foreign income is declining.

        The United States is subject to many of the same pressures facing
    other countries that have lowered corporate tax rates and have
    eliminated taxation of repatriated dividends. The United States faces
    growing competition as an investment location versus jurisdictions with
    lower corporate tax rates. U.S.-based MNCs face growing competition
    from MNCs based in countries with exemption systems.\13\
    ---------------------------------------------------------------------------
        \13\ No country, however, has a pure territorial system. Countries
    with territorial tax systems have adopted rules to prevent abuse and
    protect the corporate tax base and one must take these provisions into
    account when comparing the ``competitiveness,'' for example, of
    different systems. At least on the surface, however, it does appear
    that other countries anti-abuse rules are not more robust than U.S.
    rules (Brian J. Arnold, ``A Comparative Perspective on the U.S.
    Controlled Foreign Corporation Rules,'' Tax Law Review, Spring 2012).

        The advantages of foreign residence have increased incentives for
    some U.S.-based firms to ``re-domicile'' as foreign-based firms. The
    rising costs of repatriations as U.S. firms accumulate more cash
    overseas and foreign corporate income tax rates decline, combined with
    the ability of expatriated firms to circumvent taxes that would
    otherwise be payable on repatriations from accrued assets in U.S.
    controlled foreign subsidiaries puts increased pressure on firms to
    consider giving up U.S. residence.\14\ And foreign-residence makes it
    easier for corporations to strip income out of the United States
    through earnings stripping techniques involving interest and
    royalties.\15\
    ---------------------------------------------------------------------------
        \14\ Edward D. Kleinbard, ``Competitiveness Has Nothing to Do with
    It,'' Tax Notes, September 1, 2014.
        \15\ Stephen E. Shay, 2014. ``Mr. Secretary, Take the Tax Juice Out
    of Corporate Expatriations,'' Tax Notes, July 28, 2014.

        The U.S. market is large and has enough unique productive resources
    that companies will invest here (albeit somewhat less) even if U.S.
    corporate rates are higher than elsewhere. The United States has some
    of the world's leading MNCs with unique assets in certain areas (e.g.,
    high-tech, finance, and retailing). But as the economic differences
    between the United States and other countries narrow and the United
    States share of world output declines, the ability of the United States
    to sustain ``U.S. tax exceptionalism'' will decline.
                                   conclusion
        In the last two decades differences between the United States and
    other countries' tax systems have widened. The United States is now the
    only major country that imposes a home country tax on foreign business
    income when it is returned to home country parents. And there are other
    ways that the United States has become more different that are also
    important: the United States is the only country that does not employ a
    VAT to raise revenues; statutory and effective tax rates around the
    world have continued to decline relative to U.S. rates, sharpening the
    ``competitiveness'' issue; and the share of business income in the
    United States that is taxed at the corporate level has been declining
    since the 1980s and today is less than 40 percent, while in most other
    countries business income is typically subject to corporate income tax.
    At the same time, emerging economies have acquired importance in
    international tax policy discussions and generally have adopted the
    perspective of a host country seeking to attract inbound investment.
    Accumulating evidence that MNCs are shifting more of their reported
    income to very low-tax countries is driving discussion of reform around
    the world and the OECD has initiated a Base Erosion and Profit Shifting
    project (BEPS) to develop coordinated actions to prevent the erosion of
    the corporate tax base.

        There is no question that the global tax environment has changed
    greatly and will continue to do so. One of the lessons of my study with
    Stephen Shay and Eric Toder is that the United States need not follow
    others tax policies. But that does not mean that our reform process
    should be done in a vacuum. It is fundamental to understand the forces
    that have shaped the reforms of our competitors and recognize that
    while our economies are different we do, indeed, face many of the same
    pressures.

        In a recent paper, Harry Grubert and I evaluated a variety of
    reforms and proposed one that makes improvements along a number of
    behavioral margins that are distorted under the current tax system.\16\
    We would start by eliminating the lockout effect by exempting all
    foreign earnings sent home via dividends from U.S. tax. This reduces
    wasteful tax planning and simplifies the system. Then we would impose a
    minimum tax of, say, 15 percent on foreign income. As a result,
    companies would lose some of the tax benefits they enjoy from placing
    valuable intellectual property like patents in tax havens and from
    other methods of income shifting. If companies continue to route income
    to havens, at least the U.S. would collect some revenue.
    ---------------------------------------------------------------------------
        \16\ Harry Grubert and Rosanne Altshuler, ``Fixing the System: An
    Analysis of Alternative Proposals for the Reform of International
    Tax,'' National Tax Journal, September 2013, 66(3), 671-712.

        Our reform would restore some sanity to the system. For example,
    investments in low-tax countries are now effectively subsidized due to
    the opportunities for income shifting they create. Under our minimum
    tax reform these investments would face positive U.S. effective tax
    rates. The minimum tax could be imposed on a per country basis but it
    could also be on an overall basis which would be much simpler. As an
    alternative to an active business test, the tax could effectively
    exempt the normal profits companies earn on their investments abroad by
    allowing them to deduct their capital costs. That way the tax would
    apply only to foreign profits above the normal cost of capital and
    companies would not be discouraged from taking advantage of profitable
    opportunities abroad. Only ``super'' profits above the normal return--
    typically generated from intellectual property--that are most easily
    shifted would be subject to the minimum tax. There are other options.
    But my analysis with Harry Grubert suggests that combining a minimum
    tax with dividend exemption can make improvements across many
    dimensions including the lockout effect, income shifting, the choice of
    ---------------------------------------------------------------------------
    location and complexity.

        I applaud the Senate Committee on Finance for holding this hearing
    on building a competitive U.S. international tax system and urge the
    Committee to tackle the challenge of reforming our system.

        Thank you. I would be happy to answer any questions you may have.

                                     ______

                  Prepared Statement of Hon. Orrin G. Hatch,
                            a U.S. Senator From Utah
    WASHINGTON--Senate Finance Committee Chairman Orrin Hatch (R-Utah)
    today delivered the following opening statement at a committee hearing
    on the international tax system:

        The committee will come to order.

        I want to welcome everyone to today's hearing on Building a
    Competitive U.S. International Tax System. I also want to thank our
    witnesses for appearing before the committee today.

        Reforming our international tax system is a critical step on the
    road toward comprehensive tax reform. Not surprisingly, the failures of
    our current system get a lot of attention. That's why Senator Wyden and
    I designated one of our five tax reform working groups to specifically
    look into this issue.

        I know that my colleagues serving on that working group--and all of
    our working groups--are looking very closely at all the relevant
    details. I look forward to their recommendations.

        As we look at our international tax system, our primary goals
    should be to make the U.S. a better place to do business and to allow
    American job creators to more effectively compete with their foreign
    counterparts in the world marketplace.

        Our corporate tax rate has been the highest in the developed world
    and effective tax rates facing U.S. corporations are higher than
    average. In my opinion, our high corporate tax rate has to come down
    significantly. I think most of my colleagues--on both sides of the
    aisle--would agree with that.

        In addition, our current system creates incentives that lock out
    earnings made by U.S. multinationals abroad and keep those earnings
    from being reinvested domestically. This also needs to be addressed in
    tax reform.

        Additionally, I'll note that the tax base is much more mobile than
    it used to be. For example, thanks to advances in technology and
    markets, capital and labor have become increasingly more mobile. And,
    the most mobile assets of all--intangible assets--have taken up a
    greater share of wealth around the world. The problem we've seen is
    that intangible assets and property can easily be moved from the United
    States to another country--particularly if that country has a lower tax
    burden.

        This is a disturbing trend, one that I think all of us would like
    to see reversed.

        Some, like President Obama in his most recent budget, have
    responded to this trend by calling for higher U.S. taxation of foreign-
    source income, claiming that, by extending the reach of U.S. taxes, we
    can eliminate incentives for businesses to move income-producing assets
    to other countries.

        The problem, of course, is that assets aren't the only thing that
    can be moved from one country to another. Companies themselves can also
    migrate away from our overly burdensome tax environment. And, we've
    seen that with the recent wave of inversions. Indeed, many companies
    have already decided that our current regime of worldwide taxation with
    absurdly high tax rates is simply too onerous and have opted to locate
    their tax domiciles in countries with lower rates and territorial tax
    systems.

        In other words, if we're serious about keeping assets and companies
    in the U.S., we should not be looking to increase the burdens imposed
    by our international tax system. Instead, we should be looking to make
    our system more competitive.

        Not only must our corporate tax rate come down across the board, we
    should also shift significantly in the direction of a territorial tax
    system. If we want companies to remain in the U.S. or to incorporate
    here to begin with, we should not build figurative or legal walls
    around America--we should fix our broken tax code.

        We have a lot to discuss here today. I know that there are some
    differing opinions among members of the committee on these issues--
    particularly as we talk about the merits of a worldwide versus a
    territorial tax system. But, I think we've assembled a panel that will
    help us get to some answers on this front and, hopefully, aid us in our
    efforts to reach consensus as we tackle this vital element of tax
    reform.

        With that, I now turn it to Ranking Member Wyden for his opening
    statement.

                                     ______

    Prepared Statement of Hon. Pamela F. Olson, U.S. Deputy Tax Leader and
      Washington National Tax Services Leader, PricewaterhouseCoopers LLP
        Chairman Hatch, Ranking Member Wyden, and distinguished members of
    the Committee, I appreciate the opportunity to appear this morning as
    the Committee considers the importance of ensuring that our Nation's
    tax laws serve to make the United States competitive globally. I had
    the honor of serving as Assistant Treasury Secretary for tax policy
    from 2002 to 2004, and am currently U.S. Deputy Tax Leader of
    PricewaterhouseCoopers LLP and leader of PwC's Washington National Tax
    Services practice. I am appearing on my own behalf and not on behalf of
    PwC or any client. The views I express are my own.
                                  introduction
        The subject of this hearing is the legislative actions necessary
    for a competitive U.S. international tax system, and I applaud the
    Committee for holding the hearing. It is my view that reform of our
    international tax rules is imperative to promoting the economic growth
    that will yield increased job opportunities and higher wages for the
    American people. Our tax system should serve to facilitate, not impede,
    the efficient, effective, and successful operation of American
    businesses in today's global marketplace. Success for America's
    globally engaged businesses is essential to the success of their
    workers as well as the many businesses on which they depend for goods
    and services. Unfortunately, it is increasingly the case that the
    divergence of our current tax system from the systems of the rest of
    the world makes it a barrier to their success and drives business away.

        My testimony is focused on tax policy issues specific to making the
    United States a more hospitable environment for headquartering global
    operations and for domestic investment, both of which will lead to more
    American jobs and a rising standard of living. My testimony describes
    changes in the global economy that make international tax reform vital,
    changes in other countries' tax systems, the features of our tax system
    most in need of reform, and the implications and risks to the United
    States and U.S. businesses of the global effort to address base erosion
    and profit shifting (BEPS) led by the Organisation for Economic
    Cooperation and Development (OECD).
                           a changing global economy
        The changing global economic landscape must set the stage for
    considering the tax reforms necessary for American business to compete
    and succeed. But first some background is useful on the age of our
    international tax framework. Since the inception of the income tax in
    1913, the United States has taken a worldwide approach to taxing the
    foreign income of U.S. companies and their subsidiaries. Shortly after
    enactment, Congress added a foreign tax credit to reduce the adverse
    economic impact of a second layer of tax on foreign income. Limitations
    on the foreign tax credit soon followed. The general rule is that
    foreign income is subject to U.S. tax only when it is repatriated to
    the United States, but there are many exceptions that dictate current
    U.S. tax on foreign income. Those exceptions are found in subpart F of
    the Internal Revenue Code and date to 1962. Although a number of
    changes have been made to the subpart F rules over the last 50 years,
    the rules remain locked in a time when global business operations
    differed significantly from today. Congress' reform of the rules to
    reflect changes in the global economy, such as the exception for active
    financing income, has been limited and temporary. We have a tax system
    designed for rotary phones and telephone operators while we carry
    smartphones with 1,000 times the processing power of the Apollo
    Guidance Computer that put man on the moon. The 21st century is
    calling. The rest of the world has answered and enacted a tax system
    that fits it. It is time we did the same.

        The global economy has changed enormously since 1962.
    Globalization--the growing interdependence of countries' economies--has
    resulted from increasing international mobility and cross-border flows
    of trade, finance, investment, information, and ideas. Technology has
    continued to accelerate the growth of the worldwide marketplace for
    goods and services. Advances in communication, information technology,
    and transportation have dramatically reduced the cost and time it takes
    to move goods, capital, information, and people around the world. In
    this global marketplace, firms differentiate themselves by being nimble
    around the globe and by innovating faster than their competitors.

        The U.S. role in the global economy has changed as well over the
    last 50 years. In 1962, the United States was the dominant economy,
    accounting for over half of all multinational investment in the world.
    U.S. dominance has diminished as the significance of the rest of the
    developed world in the global economy has grown. In recent years, there
    has been a massive shift in economic power to emerging markets. PwC
    projects that the combined GDP of G-7 countries including the United
    States will grow from $29 trillion in 2009 to $69.3 trillion by 2050,
    while the combined GDP of seven emerging economies (the E-7) that
    include China, India, and Brazil will grow from $20.9 trillion to
    $138.2 trillion over the same period.

        The changing U.S. role reflects less the waning of the U.S. economy
    than the rapid rise from poverty of the most populous parts of the
    globe. As President Obama noted in his State of the Union address, 95
    percent of the world's customers live outside the United States. That
    represents more than 80 percent of the world's purchasing power. U.S.
    businesses can't serve those rapidly growing markets by staying home.
    Facilitating U.S. businesses in serving those markets increases the
    value of the assets of American businesses and leads to increased
    American jobs.

        To thrive in the changing global marketplace, it is critical that
    we ensure our international tax system promotes the competiveness of
    U.S. business in the global marketplace. A tax system that allows U.S.
    companies to serve foreign markets more effectively will translate to
    increased success for American businesses, increased American jobs, and
    higher wages.

        Today, there are few U.S.-based businesses unaffected, directly or
    indirectly, by the operation of the U.S. international tax rules.
    Advances in communication, information technology, and transportation
    have opened the global marketplace to small and medium sized businesses
    along with large globally engaged business. Businesses operating
    domestically provide goods and services to other businesses operating
    internationally. According to a recent study, the typical U.S.
    multinational business in 2008 bought goods and services from 6,246
    American small businesses; collectively U.S. multinationals purchased
    an estimated $1.52 trillion in intermediate inputs from American small
    businesses.\1\ Further, many small and medium sized businesses have
    their own direct foreign operations. Commerce Department data show that
    26 percent of U.S. multinational businesses meet the U.S. government
    definition of a small or medium sized business.\2\ The result is that
    all businesses, whether large or small, benefit from a tax system that
    promotes the global competitiveness of American businesses, and their
    success is linked to a strong global economy.
    ---------------------------------------------------------------------------
        \1\ Matthew J. Slaughter, ``Mutual Benefits, Shared Growth: Small
    and Large Companies Working Together,'' a report prepared for the
    Business Roundtable, 2010.
        \2\ Matthew J. Slaughter, ``American Companies and Global Supply
    Networks,'' prepared for the Business Roundtable, 2013.

        A globally competitive tax system is critical not only for U.S.-
    headquartered companies to succeed but also to attract continued
    investment by foreign-headquartered businesses in the United States.
    Today the U.S. operations of foreign companies employ 5.8 million
    American workers and account for 21.9 percent of all U.S. exports of
    goods.\3\ Tax policies that attract foreign capital to the United
    States will create American jobs and should be part of building a
    competitive U.S. tax system.
    ---------------------------------------------------------------------------
        \3\ U.S. Department of Commerce, Bureau of Economic Analysis,
    November 2014.
    ---------------------------------------------------------------------------
                   a changing global view of corporate taxes
        When the United States had a dominant role in the global economy,
    we were free to make decisions about our tax system with little regard
    to what the rest of the world did. As a practical matter, our trade
    partners generally followed our lead in tax policy. That is no longer
    the case.

        Just as the global economy has changed, tax systems around the
    world have evolved. Governments in the developed and developing world
    have adopted policies that reflect a changing view of corporate income
    taxes. This changing view may have been occasioned by economics or
    practicality, but as discussed below, the result is a growing gap
    between the United States and the rest of the world.

        In recent decades, the share of GDP attributable to intangible
    assets, such as patents, know-how, and copyrights, has increased
    substantially. Unlike property, plant, and equipment, intangible assets
    are highly mobile and more likely to be exploitable on a global basis,
    increasing their value. This shift has been accompanied by the
    reorganization of economic activity around global value chains and
    strategic networks that flow across national borders. It has been
    estimated that roughly one-third of world trade takes place within
    multinational companies.\4\ Trade between related parties accounted for
    47% ($172 billion) of total EU-U.S. merchandise trade in 2002 and
    increased to 50% ($307 billion) by 2012.\5\
    ---------------------------------------------------------------------------
        \4\ Pol Antras, ``Firms, Contracts, and Trade Structure,''
    Quarterly Journal of Economics (2003), p. 1375.
        \5\ C. Lakatos and T. Fukui, ``EU-U.S. Economic Linkages: The Role
    of Multinationals and Intra-firm Trade,'' Trade, Chief Economist Note,
    Issue 2, European Commission (2013).

        The rise in the value of intangibles and the interconnected nature
    of the global economy leads to two points. The first point is that it
    is more difficult today to measure income earned within a country's
    ---------------------------------------------------------------------------
    borders and to tax it. Manuel Castells observed that:

            [A]s accounting of value added in an international production
            system becomes increasingly cumbersome, a new fiscal crisis of
            the state arises, as the expression of a contradiction between
            the internationalization of investment, production, and
            consumption, on the one hand, and the national basis of
            taxation systems on the other.\6\
    ---------------------------------------------------------------------------
        \6\ Castells, The Power of Identity, The Information Age: Economy,
    Society, and Culture, Vol. II (2nd ed., 2010), p. 306.

        As a practical matter, other countries have dealt with this issue
    by relying more heavily on consumption based taxes, such as value-added
    or goods and services taxes, that are applied to a tax base that is
    ---------------------------------------------------------------------------
    more easily measured and less mobile, to fund the government.

        The second point is tied to the rise in economic power of the rest
    of the world, which has broadened and deepened the markets in which
    capital can be raised and profitably invested. Capital is mobile. It is
    more easily deployed in a globally interconnected economy where much of
    the value comes from intangible assets that are also mobile.

        Many foreign governments have recognized the global mobility of
    capital and intangible assets and have come to view business income
    taxes as a competitive tool that can be used to attract investment. By
    reducing statutory corporate income tax rates, adding incentives for
    research and development, innovation, and knowledge creation, and
    adopting territorial systems that limit the income tax to activities
    within their borders, governments have sought to attract capital that
    will yield jobs, particularly high-skilled jobs for scientists,
    engineers, and corporate managers. They've recognized the benefits that
    flow from making their country hospitable to investment from globally
    engaged businesses. These benefits include the creation of sustainable
    jobs, both directly and through the goods and services the businesses
    and their employees purchase.

        There are other reasons for governments to move away from reliance
    on the corporate income tax as a significant source of revenue. They
    include the fact that capital mobility affects the reliability of the
    corporate income tax and makes proposals to increase taxes on corporate
    income less likely to succeed. They also include the fact that
    economists have concluded that consumption-based taxes are the most
    efficient way of raising revenue, and the corporate income tax the most
    destructive form. These conclusions appear to have been accepted by
    foreign governments. Their increased reliance on consumption-based
    taxes positions them to raise the revenue required to fund government
    needs on a basis more conducive to economic growth than is the case in
    the United States.

        The extent to which U.S. tax policy is out of sync with the
    competitive and pro-growth tax policies of other nations can be seen in
    the chart below which shows the federal government's primary reliance
    on income taxes in contrast to most of the world's major economies,
    which rely to a significant degree on consumption taxes.
          federal/state taxes as a share of total taxation, oecd, 2011

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Reliance on consumption taxes is not limited to OECD countries.
    Their widespread usage can be seen in the map below.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Although consumption taxes are often criticized as regressive,
    recent economic studies have concluded that the corporate income tax
    falls on labor to a significant extent. This has been recognized by
    economists at the Congressional Budget Office, the Joint Committee on
    Taxation, and the U.S. Treasury Department. Estimates of the share
    borne by labor range from 20 percent to 70 percent.

        Joseph Sneed observed nearly six decades ago:

            A tax on corporate income at the corporate level has a deep
            appeal to many people and assertions addressed to them to the
            effect that they, and not the corporations, pay the tax make
            little headway against the observable fact that corporate
            accountants prepare the returns and corporate treasurers write
            the checks in payment of the tax. To them a tax on corporate
            income is a tax on corporations which, more often than not in
            their opinion, are sufficiently evil to deserve their fate.\7\
    ---------------------------------------------------------------------------
        \7\ Joseph Sneed, ``Major Objectives and Guides for Income Tax
    Reform,'' in Tax Revision Compendium, Committee Print, Committee on
    Ways and Means (GPO, November 16, 1959), p. 68.

        Despite the economic studies, there continues to be a widespread
    and persistent perception that the corporate tax is somehow borne by
    the corporation without effect on its employees, customers, or
    shareholders, and without impact on its ability to succeed in an
    increasingly competitive global economy. When considering how to build
    a competitive international tax system that will create jobs in the
    United States, it will be important for the Committee to lay that myth
    aside. The reality is that our globally engaged businesses are the
    engine that delivers the products and services of America's workers to
    the world and the benefits of globalization to America's consumers.
               u.s. tax policy is out of sync with global trends
        An understanding of the full impact of U.S. international tax rules
    must begin by recognizing the fact that the United States has the
    highest statutory tax rate among major global economies. The top U.S.
    statutory corporate tax rate, including state corporate income tax, is
    39.1 percent, more than 14 percentage points higher than the 2014
    average (24.8 percent) for other OECD countries, and 10 percentage
    points higher than the average (29.0 percent) for the other G7
    countries.

     top statutory (federal and state) corporate tax rates, oecd 1981-2014

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Other nations have continued to implement tax reforms that will
    result in the non-U.S. OECD average rate falling even lower in 2015.
    For example, the United Kingdom is scheduled to reduce its corporate
    rate from 21 to 20 percent and Japan is reducing its combined national
    and local corporate tax rate from 34.62 to 32.11 percent in April.
    Portugal and Spain also are scheduled to reduce their corporate tax
    rates, while among OECD countries, only Chile is moving to increase its
    rate to 27 percent by 2018--still far below the U.S. statutory rate.

        U.S. effective tax rates also are high relative to other developed
    economies. For example, a recent report issued by the Tax Foundation
    found that the United States has the second highest marginal effective
    tax rate on corporate investment in the developed world at 35.3
    percent--behind only France.\8\ The chart below references several
    recent studies that have consistently demonstrated the high effective
    tax rate of the United States relative to other peer groups.
    ---------------------------------------------------------------------------
        \8\ Jack M. Mintz and Duanjie Chen, ``U.S. Corporate Taxation:
    Prime for Reform,'' Tax Foundation Special Report, Feb. 2015, No. 228.

               alternative corporate effective tax rate measures

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        U.S. international tax rules also are out of sync with the rest of
    the world. As noted above, the vast majority of foreign governments
    have shifted their income taxes from a worldwide basis to a territorial
    basis that limits the tax base to income from activity within their
    borders; they have enacted anti-base erosion measures, but those
    measures are aimed at protecting their domestic tax base from erosion,
    not at preservation of a worldwide base. Every other G-7 country and 28
    of the other 33 OECD member countries have international tax rules that
    allow their resident companies to repatriate active foreign earnings to
    their home country without paying a significant additional domestic
    tax. This approach, sometimes referred to as a ``participation
    exemption'' or ``dividend exemption'' tax regime, differs markedly from
    the U.S. worldwide tax system in which the foreign earnings of U.S.
    companies are subject to U.S. corporate tax with a credit for taxes
    paid to the foreign jurisdiction.

        The United Kingdom and Japan, in 2009, became the most recent major
    economies to adopt territorial tax systems, leaving the United States
    as the only G-7 country that has not adopted a modern territorial tax
    system. Of the 28 OECD countries with territorial tax systems, only
    two--New Zealand and Finland--have switched from territorial to
    worldwide tax systems, and both nations subsequently switched back to
    territorial tax systems. The growth in the number of OECD nations
    adopting territorial tax systems since 1986 when the United States last
    overhauled its tax laws is shown in the chart below.\9\
    ---------------------------------------------------------------------------
        \9\ Source: PwC report, Evolution of Territorial Tax Systems in the
    OECD, prepared for the Technology CEO Council, April 2, 2013.

    number of oecd countries with dividend exemption (territorial) systems,
                                   1986-2011

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        The high U.S. statutory corporate income tax rate in combination
    with the worldwide income tax system has negative consequences for
    American businesses and workers in an increasingly global economy.
    First, it discourages both U.S. and foreign companies from locating
    their more profitable assets and operations inside the United States.
    Second, it encourages both U.S. and foreign companies to locate their
    borrowing in the United States, as the value of interest deductions is
    greater against a higher corporate tax rate. Third, it discourages U.S.
    companies from remitting foreign profits to the United States.

        Evidence of the competitive disadvantage created by our
    international tax rules can be seen in the increase in foreign
    acquisitions of U.S. multinationals and in the number of cross-border
    merger and acquisitions in which the combined company has chosen to be
    headquartered outside the United States. The current system tilts the
    playing field against U.S. companies competing for acquisitions of
    foreign companies and U.S. companies with foreign operations. If the
    ultimate parent company were incorporated in the United States,
    distributions of foreign income to the ultimate parent company would be
    subject to the U.S. repatriation tax--a tax that would not apply (or
    could be mitigated) if the parent company were headquartered in a
    country with a territorial tax system. The tax system should create a
    level playing field that does not favor one owner over another. Our
    worldwide tax system essentially places a premium on the value of U.S.
    companies' assets in the hands of a foreign bidder.

        If the United States were to adopt a territorial tax system similar
    to those adopted by most other OECD countries, U.S.-based companies
    would face the same effective tax rates in foreign markets as the
    foreign-based firms with which they compete. Eliminating the
    disadvantage U.S. companies face by aligning our rules with the rest of
    the world would be a far more effective response than ad hoc efforts to
    build higher walls around a U.S. worldwide tax system that places
    American companies and workers at a competitive disadvantage globally.
                   other elements of a competitive tax system
        The U.S. tax system also lags behind many developed countries in
    other aspects that affect our global competitiveness. As shown in the
    chart below, the (expired) United States research credit is ranked 27th
    out of 41 countries in terms of the tax incentives provided for
    research and development activities.
                     research credit and patent box regimes

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        In addition, an increasing number of countries are acting to
    provide ``patent boxes'' and related incentives for innovation, which
    also can be seen in the chart above.

        Patent boxes have been considered as part of the harmful tax
    practices workstream in the OECD's BEPS action plan. The result of the
    debate is an agreement to permit patent boxes so long as they satisfy a
    nexus requirement that will link tax benefits to the performance of R&D
    activities. The nexus requirement thus may result in the relocation of
    R&D jobs from the U.S. to foreign countries to obtain the enhanced
    benefits.

        As Dr. Laura Tyson noted in her recent testimony before this
    Committee, other countries ``are using tax policy as a `carrot' to
    attract the income and operations of U.S. companies with significant
    intangible assets and the positive externalities associated with them--
    including the spillover effects boosting innovation, productivity, and
    wages.'' \10\ Two industries with particularly significant intangible
    assets and associated positive externalities are the technology and
    pharmaceutical sectors of the economy. Both industries are highly
    mobile and sell their products in global markets. The positive
    spillover effect on the local market noted by Dr. Tyson and other
    economists has led many governments to enact significant incentives for
    research-dependent operations in order to attract investment by
    technology and pharmaceutical companies. In the European Union in
    particular, many governments have concluded it is better to tax at a
    low rate the profits of these industries than to attempt to apply a
    higher tax rate and see these highly mobile activities leave the
    country to be performed in another location, costing the country tax
    revenue and the valuable jobs and spillover benefits that go with them.
    ---------------------------------------------------------------------------
        \10\ Dr. Laura D'Andrea Tyson, U.S. Senate Committee on Finance
    hearing on ``Tax Reform, Growth, and Efficiency,'' February 24, 2015.

        The chart below details the patent box regimes available in the
    ---------------------------------------------------------------------------
    European Union.

                           EU Patent Box Regimes, 2015
    ------------------------------------------------------------------------
                    Standard                  Fully
                    Corporate  Patent Box   Phased-In
       Country       Rate in     Rate in   Patent Box          Notes
                      2015        2015        Rate
    ------------------------------------------------------------------------
    Belgium           33.99%        6.8%        6.8%   80% patent income
                                                        deduction
    ------------------------------------------------------------------------
    Cyprus             12.5%        2.5%        2.5%   80% exemption for
                                                        income generated
                                                        from owned IP or
                                                        profit from sale of
                                                        owned IP
    ------------------------------------------------------------------------
    France             38.0%       15.0%       15.0%   15% tax rate on
                                                        royalty income
    ------------------------------------------------------------------------
    Hungary            19.0%        9.5%        9.5%   50% deduction for
                                                        royalty income from
                                                        qualified patents
    ------------------------------------------------------------------------
    Ireland *          12.5%        n.a.     5.0% to   The 2015 Irish budget
                                               6.25%    proposes a
                                                        ``Knowledge
                                                        Development Box.''
                                                        While the budget did
                                                        not specify the
                                                        reduced rate, it
                                                        appears that a rate
                                                        in the range of 5%
                                                        to 6.25% may be
                                                        under consideration.
    ------------------------------------------------------------------------
    Italy              27.5%      19.25%      13.75%   30% exemption for
                                                        income derived from
                                                        qualifying
                                                        intangible assets.
                                                        Exemption increases
                                                        to 40% in 2016 and
                                                        50% in 2017 and
                                                        beyond.
    ------------------------------------------------------------------------
    Luxembourg        29.22%       5.84%       5.84%   80% tax exemption of
                                                        the net income
                                                        deriving from the
                                                        use and the right to
                                                        use qualifying IP
                                                        rights
    ------------------------------------------------------------------------
    Malta              35.0%        0.0%        0.0%   Full tax exemption
                                                        for qualified IP
                                                        income
    ------------------------------------------------------------------------
    Netherlands        25.0%        5.0%        5.0%   5% tax rate with
                                                        respect to profits,
                                                        including royalties,
                                                        derived from a self-
                                                        developed intangible
                                                        asset
    ------------------------------------------------------------------------
    Portugal           29.5%      14.75%      14.75%   50% exemption for
                                                        income derived from
                                                        the sale or granting
                                                        of the temporary use
                                                        of industrial
                                                        property rights
                                                        (i.e. patents and
                                                        industrial drawings
                                                        and models)
    ------------------------------------------------------------------------
    Spain              28.0%       11.2%       10.0%   60% exemption for
                                                        income derived from
                                                        the licensing of
                                                        qualifying IP
                                                        rights. Corporate
                                                        tax rate will fall
                                                        to 25% in 2016.
    ------------------------------------------------------------------------
    United             20.0%       12.0%       10.0%
     Kingdom **
    ------------------------------------------------------------------------
    * Proposed.
    ** UK standard corporate tax rate will be reduced from 21% to 20%
      effective April 1, 2015.

        Dr. Tyson also noted the contrast between the carrot policies
    employed by other countries and the ``stick'' approach of the minimum
    tax proposal put forth in the Obama Administration's FY 2016 budget. As
    Dr. Tyson observed, the minimum tax approach would deprive U.S.
    companies, but not companies based elsewhere, of the tax benefits of
    patent box regimes.
               the current state of u.s. international tax rules
        To understand the disadvantage faced by U.S.-based companies in the
    global marketplace, it is useful to understand the operation of the
    current U.S. international tax rules.

        Under the worldwide system of taxation, income earned abroad may be
    subject to tax in two countries--first in the country where the income
    is earned, and then in the taxpayer's country of residence. As noted
    above, the United States provides relief from this potential double
    taxation through the mechanism of a foreign tax credit under which the
    U.S. tax may be offset by tax imposed by the source country. The
    complexity of the foreign tax credit rules--income and expense
    allocations and other limitations--combined with the relatively high
    U.S. statutory rate limit their usefulness. As a result, even with
    foreign tax credits, U.S. companies often incur significant taxes when
    repatriating active foreign earnings. The added tax burden can make it
    more beneficial to reinvest foreign earnings abroad and accounts for
    the earnings of U.S. businesses designated as indefinitely reinvested
    abroad. For example, a U.S. company earning active income in the United
    Kingdom subject to the 20 percent UK rate would pay an additional 15
    percent U.S. tax on that income if it were returned to the United
    States. As previously noted, the U.S. tax system should create a level
    playing field, not one biased against reinvesting profits in the United
    States.

        In addition to complex foreign tax credit rules, the United States
    has unusually broad and complex rules that impose current tax on the
    active income of foreign affiliates, subjecting them to high U.S. tax
    rate on their foreign income even though the income remains abroad. As
    noted above, under U.S. international tax rules, foreign income of a
    foreign subsidiary generally is subject to U.S. tax only when such
    income is distributed to the U.S. parent in the form of a dividend. The
    subpart F exceptions to this rule impose current U.S. tax on certain
    income of foreign subsidiaries, and extend well beyond passive income
    to encompass certain active foreign business operations.
                        protecting the domestic tax base
        With the highest corporate tax rate among OECD countries, U.S.-
    based multinationals have a significant incentive to keep their foreign
    earnings abroad. The Obama Administration has cited reports that the
    amount of accumulated foreign earnings of U.S. companies exceeds $2
    trillion. Although some of these earnings are in cash and liquid
    assets, a significant amount has been reinvested in expansion of the
    foreign operations of U.S. businesses to serve emerging markets.

        A territorial system similar to those in other advanced economies
    would allow U.S. companies to invest their foreign earnings in the
    United States on the same basis as they invest them abroad and on the
    same basis as foreign companies invest in the United States. Rather
    than moving to territorial taxation, under which active foreign
    business income is taxed once at the foreign rate, the Obama
    Administration's recent budget proposal would impose immediate U.S. tax
    on foreign business income if the foreign effective tax rate is less
    than 22.4 percent. The difference between the stated minimum rate of 19
    percent and the actual 22.4 percent rate is due to the fact that the
    minimum tax would apply to the extent 19 percent exceeds 85 percent of
    the foreign effective tax rate.

        Imposition of a minimum tax of this scale and structure would put
    American companies at a competitive disadvantage in global markets,
    especially those that earn a large share of their income in global
    markets with effective rates below 22.4 percent. In Europe, for
    example, a significant share of the foreign income earned by
    subsidiaries of U.S. companies would be subject to the proposed minimum
    tax. Of 28 EU countries, more than half had statutory tax rates below
    22.4 percent in 2014, and effective tax rates generally were lower.

        Other developed countries with territorial systems have adopted a
    variety of anti-abuse rules to discourage income shifting without
    imposing a minimum tax rate. Those anti-abuse rules are aimed at
    preventing the erosion of the domestic tax base, not at imposing a
    global minimum tax rate that would handicap their globally engaged
    companies with operations in lower tax jurisdictions. The experience of
    other nations shows that safeguarding the domestic tax base need not
    entail disadvantaging domestic businesses in the global marketplace.
    Examples of anti-abuse rules employed by other countries include ``thin
    cap'' rules that limit excessive interest expense deductions and rules
    aimed at taxing foreign passive income on a current basis. Some
    countries have chosen not to extend territorial tax treatment to
    foreign affiliates in specific tax haven jurisdictions. But no other
    country imposes a minimum tax on active business income such as
    proposed by the Obama Administration.

        The OECD BEPS action plan discussed below includes more stringent
    controlled foreign corporation (CFC) rules (like those of subpart F)
    and minimum taxes as one of the anti-base erosion items for study. In
    addition, the transfer pricing paper on action items 8, 9, and 10
    includes a U.S. Treasury proposal regarding the minimum tax as a
    ``special measure'' to backstop transfer pricing rules. It is too soon
    to tell whether the OECD will embrace stronger CFC rules or the minimum
    tax, but public comments suggest that neither concept has been warmly
    received. If the United States were to enact a minimum tax while the
    rest of the world rejects the concept, it would push the United States
    even further from international norms to the disadvantage of U.S.
    companies and their employees.

        In addition to the minimum tax proposal, the Obama Administration's
    recent budget includes proposed limitations on interest expense
    deductions that would significantly tighten the limitations of current
    law. Thin cap rules are also one of the items in the OECD BEPS action
    plan discussed below. As the Committee considers international reform,
    it will be important to consider the difference in rate between the
    United States and other countries. The value of deductions decreases as
    the tax rate is reduced. Thus a lower U.S. tax rate decreases the
    incentive to reduce U.S. taxable income, and in itself is a strong base
    protection measure. As a result, domestic reform aimed at lowering the
    statutory tax rate complements reforms to modernize our international
    tax system. Limitations on interest deductions that go beyond
    international norms will further tilt the playing field against
    investment in the United States to the detriment of the American
    worker, a result that should be avoided.
     impact of the oecd's beps project on the u.s. treasury and tax reform
        The OECD's BEPS project, launched in 2012 by G-20 governments,
    including the United States, presents a challenge for the U.S. Treasury
    negotiators and for U.S. businesses and a threat to the U.S. tax base.
    As the Committee is aware, the BEPS project is intended to forge a
    global consensus on how to address base erosion and profit shifting. In
    July 2013, the OECD issued a 15-point BEPS Action Plan \11\ that is
    scheduled to be completed by December 2015. Several reports have
    already been issued, and the OECD is on track to issue the plan's final
    reports this year. Although nominally a project aimed at a narrow
    problem--the erosion of governments' tax bases and profit shifting--the
    reality is that the 15-point action plan opens the door to rewriting
    the rules of international taxation in nearly every respect, and doing
    so in a period of two years. Therein lay both the challenge and the
    threat as the United States considers a long-overdue reform of our
    nation's tax laws.
    ---------------------------------------------------------------------------
        \11\ OECD (2013), Action Plan on Base Erosion and Profit Shifting,
    OECD Publishing. http://dx.doi.org/10.1787/9789264202719-en.

        There is no doubt that the international tax regime is in need of
    an update, nor is there any doubt that international consensus is
    critical with respect to the allocation of taxing rights on cross
    border income. There is no better organization to facilitate the
    discussion necessary to achieve that consensus than the OECD. However,
    OECD history shows that building consensus takes time. True consensus
    around a single solution chosen from an array of technically complex
    options has proven difficult to achieve even with ample time for
    consideration and debate. The rapid pace of the BEPS project, with
    discussion drafts being released and finalized quickly (sometimes with
    less than 30 days allowed for public comments) is in sharp contrast to
    the traditional approach of OECD consensus building. Moreover, it is
    clear from public statements and unilateral actions of the governments
    participating in the BEPS project that their positions diverge
    significantly, making even more challenging the efforts to harmonize
    ---------------------------------------------------------------------------
    their views.

        The difference between source and residence countries provides one
    example of the divergent views and the challenge the negotiators face.
    At the inception of the project in February 2013, the OECD paper
    referred to the ``balance between source and residence taxation'' as an
    issue the project was intended to address, perhaps in deference to
    expectations of the developing countries that are part of the G-20 (but
    not the OECD) that BEPS would permit a discussion of the reallocation
    of taxing authority between source and residence countries. At the
    insistence of the United States, however, redrawing the line between
    source and residence was explicitly rejected in the BEPS action plan
    released in July 2013. While the explicit rejection was critically
    important, the allocation of taxing rights remains at the heart of many
    of the BEPS papers. Pandora's Box has been opened. The fact that
    redrawing the line is not part of the discussion has not diminished the
    participating governments' interest in doing so.

        Given the reality of the fundamental rewrite of the international
    tax rules the BEPS project entails, failing to address divergent views
    head on means many issues hover beneath the surface unresolved. Even
    when there is basic agreement on issues, there can be disagreements
    over intent and meaning of words. In this case, the lack of resolution
    is likely to result in continuing intergovernmental disagreements once
    the ink has dried. Without agreement on clear rules, strains in
    resolving cross-border tax disputes--evident even before the BEPS
    Action Plan was initiated and reflected in the annual OECD report on
    mutual agreement procedure (MAP) statistics--are likely to increase.

        While the BEPS project was intended to shore up the global
    consensus on the rules of international taxation, which was perceived
    to be unraveling, many governments have not waited for the BEPS process
    to play out and consensus rules to emerge. Harsh political rhetoric
    accompanying the effort has prompted some taxing authorities to seek an
    immediate increase in the tax paid by U.S. companies through audit
    adjustment. Others are using the BEPS project to advance a domestic tax
    agenda and to claim their ``fair share'' of corporate tax revenues. The
    risk inherent in this trend is that as soon as one country moves ahead
    of the OECD consensus process, others are spurred to action, not
    wanting to be left behind. As a result, the danger of ``global tax
    chaos marked by the massive re-emergence of double taxation,'' of which
    the OECD Action Plan itself warned, may have markedly increased.

        Even our close ally and proponent of the BEPS project, the United
    Kingdom, moved ahead of the project, proposing a ``diverted profits
    tax'' that is scheduled to take effect on April 1. Under this proposal,
    a 25 percent tax--5 percentage points higher than the UK corporate
    rate--would be imposed on profits that are considered to be
    artificially diverted from the United Kingdom. The proposed tests to
    determine whether this tax would apply are complex and subjective and
    appear to be aimed at U.S. companies. While the UK government is
    expected to release additional details on these proposals before the
    end of March, the basic structure of the UK diverted profits tax is
    likely to remain intact. The greater risk is that the UK approach may
    encourage other countries to propose similar policies affecting
    companies operating in their jurisdictions.

        Issues regarding taxation of e-commerce were resolved in BEPS
    against a special set of rules for e-commerce. Just last month,
    however, a French government sponsored report \12\ aimed at e-commerce
    recommended, among other things, the creation of a ``sharing rule for
    corporate profits.'' The rule would reflect ``the number of users in
    the jurisdiction of the tax authority.'' The report states that the
    existing taxation of multinationals ``based on transfer pricing and
    territorial definitions'' is obsolete. The report suggests the sharing
    rule should be developed as part of the existing OECD BEPS and EU
    initiatives, and cites a number of U.S.-headquartered multinational
    corporations as examples.
    ---------------------------------------------------------------------------
        \12\ France Strategie, ``Taxation and the digital economy: A survey
    of theoretical models,'' Final Report, February 26, 2015,
    www.strategie.govr.fr.

        Additional countries, including Germany, Poland, Russia, Spain,
    Australia, Japan, India, Mexico, and Chile, have initiated unilateral
    actions since 2014 in advance of any formal consensus agreements under
    the OECD BEPS initiative. The French report highlights the risk of BEPS
    to the U.S. tax base. Although BEPS is aimed at base erosion and profit
    shifting, it would appear that some governments believe BEPS should
    provide for profit sharing. When governments look for the corporate
    profits of which they would like a share, the targets are usually U.S.
    ---------------------------------------------------------------------------
    companies.

        This Committee has provided oversight to the BEPS project through a
    hearing in July of last year. Given that nothing is more fundamental to
    a nation's sovereignty than the right to tax, a point acknowledged by
    the OECD, it is important for the Committee to continue its oversight
    to assure that the OECD's historic goals of promoting economic growth
    and reducing regulatory burdens are given due consideration and not
    overrun by the unilateral actions of other countries in an effort to
    address concerns about base erosion and profit shifting. The extensive
    consultation with Congress involved in negotiating an international
    trade agreement should serve as a model in advance of any global effort
    to rewrite the international tax rules. As you noted during last year's
    hearing, Mr. Chairman, ``we should not be rushed into accepting a bad
    deal just for sake of reaching an agreement.''
                                   conclusion
        The United States is operating in a global economy that increases
    both the competition American businesses and workers face and the
    opportunities available to them. At the annual Tax Council Policy
    Institute last month, Jon Moeller, CFO of Procter & Gamble, made the
    point that we cannot ``pretend that if we don't have a competitive
    system it's going to be sustainably revenue-neutral.'' Since U.S. tax
    laws were last reformed, our international tax rules in particular have
    fallen behind other countries' efforts to attract investment and
    promote economic growth. In the absence of action by Congress to enact
    a more competitive U.S. international tax system, there will be an
    increase in the pace of U.S. companies being acquired by foreign
    competitors, and our current worldwide tax system will continue to
    effectively subsidize the treasuries of other countries seeking to tax
    U.S. multinationals. It is time for Congress to promote economic growth
    and enhance opportunities for the American people by enacting tax
    reform that, without increasing the deficit, reduces the U.S. corporate
    tax rate, broadens the tax base, and establishes a competitive
    international tax system.

                                     ______

                     Article Submitted by Hon. Rob Portman

    Financial Times, March 15, 2015

    Tax Inversion Curb Turns Tables on US

    By David Crow and James Fontanella-Khan in New York
    and Megan Murphy in Washington

        A crackdown by the Obama administration on ``tax inversion'' deals,
    which allowed US companies to slash their tax bills, has had the
    perverse effect of prompting a sharp increase in foreign takeovers of
    American groups.

        In September the US Treasury all but stamped out tax inversions,
    which enabled a US company to pay less tax by acquiring a rival from a
    jurisdiction with a lower corporate tax rate, such as Ireland or the
    UK, and moving the combined group's domicile to that country.

        The move was designed to staunch an exodus of US companies and an
    erosion in tax revenues, but it has left many US groups vulnerable to
    foreign takeovers. Once a cross-border deal is complete, the combined
    company can generate big savings by adopting the overseas acquirer's
    lower tax rate.

        Since the crackdown, there have been $156bn of inbound cross-border
    US deals announced, compared with $106bn in the same period last year
    and $81bn a year earlier, according to data from Thomson Reuters.

        By far the biggest acquirers have come from countries with lower
    tax rates such as Canada and Ireland, which have announced $26bn and
    $22bn of deals respectively, highlighting the competitive advantage
    that their companies have when it comes to mergers and acquisitions.
    Before the crackdown, groups from Germany and Japan were the biggest
    buyers of US companies.

        So far this year, foreign buyers have announced $61bn worth of US
    acquisitions, an increase of 31 per cent on last year and the strongest
    start to a year for inbound cross-border deals since 2007, according to
    the data.

        When the Obama administration changed the rules governing tax
    inversions, many bankers and politicians warned it would not stop the
    exodus of companies from the US unless it was accompanied by a
    reduction in the headline rate of US corporation tax, which stands at
    35 per cent. However, gridlock in Washington has made it very difficult
    to achieve a comprehensive overhaul of the tax code.

        Senator Rob Portman, an Ohio Republican, said the jump in foreign
    takeovers since the crackdown ``shows that one-off solutions instead of
    tax reform simply won't work. . . . The need for reform is urgent, and
    it's not a Republican or Democrat thing, it's non-partisan.''

        Investment bankers have been advising US clients--especially those
    in the pharmaceuticals and energy sectors--to seek foreign buyers so
    they can offer quick rewards to their investors via lower tax bills.

        Furthermore, several American companies have built sizeable cash
    reserves outside the US in recent years, after they stopped the
    repatriation of overseas revenues to avoid being taxed at home. Being
    acquired by a foreign company would give them easy access to their cash
    piles.

        However, George Bilicic, a vice-chairman of Investment Banking at
    Lazard, said there were other reasons for the jump in foreign
    takeovers. ``Cross border M&A is being driven by US companies' desire
    to go global and non-US companies seeking to expand in America, which
    is enjoying a period of strong economic growth.''

        A Treasury spokesperson said: ``The targeted anti-inversion action
    we took last year removed some of the economic benefits of inversions.
    But the only way to completely close the door on inversions is with
    anti-inversion legislation, and we have consistently called on Congress
    to act.

        ``As we've always said, we need to fix underlying problems in our
    tax code through business tax reform to address inversions and other
    creative tax avoidance techniques. We are committed to working with
    Congress to enact business tax reform that simplifies the tax code,
    closes unfair loopholes, broadens the base and levels the playing
    field.''
                                     ______

         Prepared Statement of Stephen E. Shay, Professor of Practice,
                     Harvard Law School, Harvard University
        Chairman Hatch, Ranking Member Wyden, and Members of the Committee,
    it is a pleasure to appear before you today to discuss the subject of
    how to build a competitive U.S. international tax system. I am a
    Professor of Practice at Harvard Law School. I practiced international
    tax law as a partner at Ropes & Gray for over 2 decades and have served
    twice in the Treasury Department--the first time in the Reagan
    Administration throughout the process leading to the Tax Reform Act of
    1986 and the second time as Deputy Assistant Secretary for
    International Tax Affairs in the first term of the Obama
    Administration.
                              i. executive summary
        The major points I would like to make follow:

        A competitive tax system is one that is able to fund effectively
            public goods, such as education, basic research,
            infrastructure, income security transfers and defense, which
            support a high standard of living for all Americans.
        The income tax is an important counterweight to increasing
            inequality in income and wealth in America. The Committee
            should focus on tax reform policies that preserve and increase
            the income tax base, including the corporate tax base, to be
            able to maintain a politically acceptable progressive rate
            structure.
        There is no normative policy justification for advantaging
            international business income of multinational corporations
            (MNCs) beyond allowing a credit for foreign income taxes.
            Evidence suggests that the U.S. taxes U.S. MNCs' foreign
            business income too little and not too much. The evidence does
            not support a claim that U.S. MNCs are non-competitive as a
            consequence of U.S. international tax rules.
        I recommend the Committee consider the following reforms to
            improve taxation of international business income. These
            reforms could be adopted as part of or independently of a
            broader business tax reform:
            Adopt a minimum tax on U.S. MNCs foreign business income
                that is an advance payment against full U.S. tax when
                earnings are distributed from the foreign business.
            Strengthen U.S. corporate residence and earnings stripping
                rules.
            Reduce the U.S. tax advantages for portfolio investment in
                foreign stock over domestic stock.
                           ii. background assumptions
        The following are background assumptions that provide the context
    for the policies I recommend in this testimony.

        Even after taking account of recent spending limitations and
            revenue increases, the U.S. will continue to run a deficit,
            which is projected to expand in budget out years.
        Absent policy changes, the distribution of income and wealth in
            the U.S. will continue to shift toward the wealthy and the
            social and economic significance of income and wealth
            inequality will grow over time.
        Although global economic integration will continue, the global
            economy will expand as a result of increased population,
            investment and trade among the current actors (i.e., the
            emergence in recent decades of China, India and Brazil as major
            new economic participants will not be replicated). There will
            be further expansion of the reach and efficiency of wireless
            and electronic communications and increased reliance on the
            Internet as a means of commerce.
        The effects of globalization in eroding national tax systems
            (including income and consumption taxes) will continue, but how
            far and how fast, and whether international tax systems can
            respond in a mutually cooperative and beneficial way, is
            uncertain.
        The U.S. will continue to rely on the personal income tax for the
            largest portion of its revenue. The U.S. income tax system will
            continue to rely on a partially integrated corporate tax to
            protect the U.S. personal income tax base and to collect
            revenue from U.S. tax-exempt and foreign shareholders.
        Cross-border investment will continue to be dominated by MNCs and
            intercompany transfer pricing will be based on separate
            accounting.
                             iii. policy benchmarks
        A competitive income tax system. A well-functioning U.S. tax system
    should provide revenue for the public goods that support high-wage
    jobs, innovation, productive investment, income security for those in
    need and personal security from domestic and international threats. A
    competitive income tax system would have a broad base and a progressive
    rate structure that retains public support through apportioning tax
    burdens according to ability to pay. A well-designed tax system should
    be capable of fulfilling revenue needs, including unforeseen needs of
    war or other emergency, through simple and transparent adjustments to
    tax rates.

        We should stop using the tax system as a back door tool to regulate
    the size of government and to make non-transparent de facto public
    expenditures for specific industries or interest groups. In all but a
    few cases, spending and appropriation are the appropriate mechanisms to
    address these issues openly and transparently. The collateral damage to
    the most efficient revenue raising system in the world from its use as
    a political football has been substantial.

        Role of the income tax. For over 100 years, the income tax has
    played a key role in developed countries in achieving a fairer
    distribution of the costs of public goods among national
    populations.\1\ The central feature of an income tax is to measure
    individuals' worldwide income, from labor and capital, and to tax
    individuals based on their ability to pay measured by total income. The
    United States, which relies more heavily on the income tax to raise
    revenue than most other countries, taxes the worldwide income of U.S.
    resident individuals including imposing tax on worldwide income of
    domestic corporations. Taxing U.S. MNCs foreign business income is
    important to achieve the desired ability-to-pay objectives of the U.S.
    Federal income tax.\2\
    ---------------------------------------------------------------------------
        \1\ See Thomas Piketty, Capital in the 21st Century, 498-502
    (Harvard Belknap 2013) (emphasizing the role of economic shocks from
    the World Wars in adoption of high progressive rates).
        \2\ There is dispute among economists regarding the extent to which
    corporate tax is borne by shareholders or by labor. Nonetheless, the
    Staff of the Joint Committee on Taxation and the U.S. Treasury allocate
    over 75 percent (75%) of the burden of the U.S. corporate tax to
    shareholders. See Staff of Joint Comm. on Taxation, Modeling the
    Distribution of Taxes on Business Income, at 4-5, 30 (JCX 14-13; 2013).
    Based on Federal Reserve data, at the end of the third quarter of 2014,
    approximately 16 percent (16%) of the equity in U.S. corporations (not
    just U.S. MNCs) was reported as owned by foreign residents leaving 84%
    to be owned by U.S. residents. See Board of Governors of the Federal
    Reserve System, Financial Accounts Guide, Table L.213 Corporate
    Equities, available at http://www.federalreserve.gov/releases/z1/
    current/z1r-4.pdf. Professor Sanchirico has questioned the ability to
    identify beneficial ownership of equities as a result of limitations in
    existing data sources and disclosures. See Chris William Sanchirico, As
    American as Apple Inc.: International Tax and Ownership Nationality, 68
    Tax L. Rev. (forthcoming). The issues Professor Sanchirico raises are
    important and the exact percentage of U.S. beneficial ownership of U.S.
    equities in fact is unclear. Moreover, even in the Federal Reserve data
    U.S. ownership has been trending slowly down in recent years, though it
    remains to be seen whether this will continue. Based on what we know,
    it nonetheless is likely that a fairly high percentage of shares in
    U.S. corporations is owned by U.S. residents.

        Factual paradigms underlying international tax rules have changed.
    International tax rules were formulated in a time when it could be
    assumed that income from business carried on through a foreign
    subsidiary in another country where goods and services were sold (the
    source country) would be taxed at rates comparable to the rates in the
    country of residence of the MNC. It was customary to organize a foreign
    subsidiary in each country where business was conducted in a bilateral
    relationship between the MNC residence country and each source country
    ---------------------------------------------------------------------------
    where business was conducted.

        The premise that a foreign subsidiary pays a tax comparable to a
    U.S. tax today is not just wrong, but very wrong for most U.S. MNC
    foreign subsidiary earnings. Based on 2006 tax return data, 45.9
    percent (45.9%) of earnings of foreign subsidiaries that reported
    positive income and some foreign tax were taxed at a foreign effective
    rate of less than 10 percent (10%).\3\ Such low foreign effective rates
    are not fully explained by lower foreign corporate tax rates in major
    U.S. trading partner countries, but also reflect ongoing MNC
    structuring to minimize tax by source and residence countries. Today,
    most international tax structures employ intermediary legal entities
    that do not bear a meaningful corporate tax because they are located in
    countries that facilitate very low effective tax rates on the
    income.\4\
    ---------------------------------------------------------------------------
        \3\ Harry Grubert and Rosanne Altshuler, Fixing the System: An
    Analysis of Alternative Proposals for the Reform of International Tax,
    66 Nat. Tax J. 671, Table 3 at 699 (Sept. 2013). 53.9 percent (53.9%)
    of these foreign subsidiaries' income was taxed at a foreign effective
    rate of 15 percent (15%) or less and less than one quarter of these
    foreign subsidiaries' income was taxed at an effective foreign rate of
    30 percent (30%) or more. Id.
        \4\ See, e.g., Staff of Joint Comm. on Taxation, Present Law and
    Background Related to Possible Income Shifting and Transfer Pricing, at
    122-127 (JCX 37-10; 2010) (in each of the six case studies, taxpayers
    use numerous intermediary legal entities to effect their tax avoidance
    strategies); Leslie Wayne, Kelly Carr, Marina Walker Guevara, Mar Cabra
    & Michael Hudson, Leaked Documents Expose Global Companies' Secret Tax
    Deals in Luxembourg, Int'l Consortium of Investigative Journalists
    (Nov. 5, 2014, 4:00 PM), available at http://www.icij.org/project/
    luxembourg-leaks/leaked-documents-expose-globalcompanies-secret-tax-
    deals-luxembourg (Luxembourg tax rulings for U.S. and non-U.S. MNE
    structures show multiple layers of companies).

        The importance of taxing foreign business income. Taxing income
    earned abroad is necessary to prevent the simplest form of avoidance of
    U.S. residence taxing jurisdiction.\5\ Aggregate and firm level
    financial data evidence substantial U.S. tax base erosion under current
    law.\6\ As one firm level example, the staff of the Senate Permanent
    Subcommittee on Investigations found that Microsoft transferred rights
    to software developed in the United States to a subsidiary operating in
    Puerto Rico so that digital and physical copies could be made for sale
    to customers in the United States. In fiscal year 2011, Microsoft's
    Puerto Rican subsidiary booked over $4 billion of operating income for
    financial statement purposes and paid under 1 percent in tax (after
    paying $1.9 billion in cost sharing payments).\7\ This income shifting
    from the United States is in the face of current transfer pricing
    regulations and Subpart F rules. As the Microsoft example demonstrates,
    one reason to tax foreign business income is to protect the U.S. tax
    base from erosion with respect to sales to U.S. customers.
    ---------------------------------------------------------------------------
        \5\ Daniel Shaviro, Fixing U.S. International Tax Rules 20-21
    (Oxford 2014). Taxing worldwide income of U.S. citizens and residents
    has been upheld by the Supreme Court since the earliest days of the
    income tax. Cook v. Tait, 265 U.S. 47 (1924).
        \6\ See Harry Grubert, Foreign Taxes and the Growing Share of U.S.
    Multinational Company Income Abroad: Profits, Not Sales, Are Being
    Globalized, 65 Nat'l Tax J. 247 (2012).
        \7\ See U.S. Senate Permanent Subcommittee on Investigations of the
    Committee on Homeland Security and Governmental Affairs, Hearing on
    Offshore Profit Shifting and the U.S. Tax Code, Exhibit 1, Memorandum
    from Chairman Carl Levin and Senator Tom Coburn to Subcommittee
    Members, Offshore Profit Shifting and the Internal Revenue Code, 20-22
    (Sept. 20, 2012) (hereinafter cited as ``Levin and Coburn, Memorandum
    on Microsoft and HP'') at http://www.hsgac.senate.gov/subcommittees/
    investigations/hearings/offshore-profit-shifting-and-the-us-tax-code
    (last visited May 30, 2013). The Puerto Rican subsidiary had 177
    employees whose compensation averaged $44,000. Intangible rights with
    respect to the software lay behind the Puerto Rican operation's claim
    to 47% of the operating profit on the U.S. sales.

        There also is a need to protect the U.S. tax base in respect of
    sales to foreign customers. The pricing of U.S. intermediate goods and
    services with respect to sales to a foreign subsidiary, as well as the
    foreign subsidiary's non-U.S. sales, are subject to the same risk of
    U.S. tax base erosion. Even in cases where the foreign subsidiary is
    selling to another foreign subsidiary, a low level of tax on the income
    attracts profit-shifting investment because of the higher after-tax
    return and our transfer pricing rules are not capable of defending
    large effective tax rate differences. The combination of low-tax
    intermediary entities in countries enabling tax avoidance, transfer
    pricing and a range of other tax planning techniques are largely
    ---------------------------------------------------------------------------
    responsible for very low effective rates of tax on foreign income.

        MNC competitiveness, lockout and dividend exemption. There is
    dispute whether U.S. MNCs are in fact tax disadvantaged under current
    law in relation to MNCs from other countries. The better case can be
    made that U.S. MNCs are advantaged, not disadvantaged.\8\ It also has
    been argued that the large retentions of offshore earnings by U.S.
    MNCs' foreign subsidiaries are an important reason, if not the primary
    reason, to shift to a territorial tax system.\9\ I respectfully
    disagree that the evidence we have supports that conclusion.\10\
    Adverse effects of offshore retentions on U.S. economic activity are
    very unclear and do not lead to a conclusion we should relieve foreign
    business income from taxation. Offshore earnings retentions could as
    readily be addressed with full current taxation of foreign business
    income. The minimum tax proposal I outline below also would relieve
    some pressure on repatriating offshore earnings.
    ---------------------------------------------------------------------------
        \8\ See J. Clifton Fleming, Jr., Robert J. Peroni & Stephen E.
    Shay, Worse than Exemption, 59 Emory L.J. 79, 85 (2009) (combination of
    deferral, defective source rules, foreign tax credits, weak transfer
    pricing and current use of branch losses give U.S. MNEs a net tax
    advantage over exemption country competitors); Edward D. Kleinbard, ``
    `Competitiveness' Has Nothing to Do With It,'' 144 Tax Notes 1055
    (Sept. 1, 2014). The Administration's minimum tax proposal is estimated
    by Treasury to raise $206 billion over FY 2016-2025, but it would lose
    $103 billion from extending the active finance exception to Subpart F
    and other taxpayer favorable changes, for a net revenue gain of roughly
    $103 billion (before taking account of $268 billion from a one-time tax
    on pre-effective date earnings). The Camp proposal for a 95 percent
    (95%) dividend exemption was estimated to lose $212 billion for the
    period 2014-2023, but its Subpart F reforms would raise $116 billion
    over the same period for a net revenue loss of $96 billion over the
    period. With $170 billion of revenue from a one-time tax on pre-
    effective date earnings, however, the Camp proposal would levy in the
    budget period roughly $70 billion in additional tax on U.S. MNCs
    (compared with the Administration's roughly $371 billion). While there
    are questions about revenue effects beyond the budget period, these
    proposals arguably could be interpreted as representing an emerging
    consensus that U.S. MNCs should pay more tax on foreign income with the
    only remaining issues being how much more, how rules should be designed
    and what the revenue should be spent on.
        \9\ Republican Staff, Committee on Finance, United States Senate,
    Tax Reform for 2015 and Beyond 254 (Dec. 2014).
        \10\ See Stephen E. Shay, The Truthiness of ``Lockout'': A Review
    of What We Know, 146 Tax Notes 1493 (Mar. 16, 2015).

        Foreign parent MNC's U.S. tax advantages. Foreign parent MNCs use
    debt and other earnings stripping techniques (that generally are not
    available to U.S. MNCs) to reduce U.S. tax on U.S. economic
    activity.\11\ Indeed, this tax avoidance opportunity has encouraged
    U.S. MNCs to shift their corporate residence outside the United
    States.\12\ A clear policy objective should be to neutralize a foreign
    parent MNC's advantage from using earnings stripping (which need not
    wait for passage of new legislation).
    ---------------------------------------------------------------------------
        \11\ See J. Clifton Fleming, Robert J. Peroni and Stephen E. Shay,
    Getting Serious About Cross-Border Earnings Stripping: Establishing an
    Analytical Framework, (forthcoming at 93 N.C. Law Rev. 101 (2015)
    (hereinafter ``Fleming, Peroni and Shay, Cross-Border Earnings
    Stripping'').
        \12\ Stephen E. Shay, Mr. Secretary, Take the Tax Juice Out of
    Corporate Expatriations, 144 Tax Notes 473, 479 (2014); U.S. Treasury
    Dep't, Earnings Stripping, Transfer Pricing and U.S. Income Tax
    Treaties 21-22 (2007); Willard B. Taylor, Letter to the Editor, A
    Comment on Eric Solomon's Article on Corporate Inversions, 137 Tax
    Notes 105, 105 (2012).

        U.S. resident's foreign portfolio stock tax advantages. In addition
    to corporate tax reforms, it is important to re-examine individual
    shareholder level portfolio income taxation. If an objective is to
    protect the U.S. individual income tax base, U.S. individuals'
    portfolio investments in a foreign corporation should not be
    advantaged, as often is the case today, over a portfolio investment in
    a domestic corporation carrying on exactly the same global business.
    Today a U.S. individual portfolio shareholder in a foreign corporation
    bearing a low or no foreign corporate tax on foreign business income is
    more favorably taxed than the shareholder would be investing in the
    same business conducted through a domestic corporation. In a range of
    cases, this encourages individual and tax-exempt ownership of foreign
    rather than domestic equities and may indirectly contribute to shifting
    of corporate tax residence outside the United States. The taxation of
    dividends and gains from foreign portfolio equity investments should be
    reviewed and reformed under any of the international tax reform
    proposals.
                              iv. policy proposals
        The preceding discussion leads me to recommend that the Committee
    consider the following proposals or areas for reform. Each of these
    ideas would address a current problem and would be helpful whether or
    not part of a more fundamental tax reform, but each also would work
    well as part of a broader reform.
    Improve Taxation of Foreign Business Income
        If the corporate rate were reduced materially, the first best
    choice would be to follow the Wyden-Coats proposal and tax foreign
    subsidiary earnings currently, in which case deductions allocable to
    foreign subsidiary earnings should be allowed in full.\13\ I am
    skeptical that a lower corporate tax rate will be achieved in this
    Congress, yet I think it is very important to address U.S. MNCs base
    erosion and profit shifting. Accordingly, I suggest as a second best
    approach an advance minimum tax on foreign business income that could
    be adopted today or as part of a broader reform.
    ---------------------------------------------------------------------------
        \13\ The Administration and Chairman Camp have each proposed a form
    of minimum tax combined with a form of dividend exemption. An important
    difference between the proposals from a revenue perspective is the
    Administration's limitation of interest deductions allocable to foreign
    subsidiary earnings eligible for a reduced rate of tax. The
    Administration and Camp proposals also vary in other important details
    but share the attribute of allowing foreign income to be exempt from
    U.S. tax so long as it is subject to an effective rate of tax that is
    less than the U.S. rate. The effects of the Administration minimum tax
    are not easy to discern without a specific proposal, including a
    specific corporate tax rate, particularly because the Administration
    proposal incorporates an allowance for corporate equity (ACE). Both the
    Camp and Administration proposals adopt design choices that, in quite
    different ways, directly or indirectly target MNCs that possess
    intangibles. My experience as a tax planner leads me to be skeptical of
    targeting income categories, such as intangibles, or adopting special
    relief provisions like the ACE, which experience in Belgium suggests
    can be difficult to design to achieve intended objectives. See Ernesto
    Zangari, Addressing the Debt Bias: A Comparison between the Belgian and
    the Italian ACE Systems (Working Paper No. 44, European Commission
    Taxation Papers), available at http://ec.europa.eu/taxation_customs/
    resources/documents/taxation/gen_info/economic_analysis/tax_papers/
    taxation_paper_44.pdf. The U.S. experience with the Section 199
    deduction for manufacturing activity provides another cautionary
    example of a misguided effort to target an ill-defined category. I
    suggest instead adopting a design for taxing foreign business income
    that is broader and does not exempt, as the Administration's ACE
    approach would, the primary layer of income from capital. With my co-
    authors Professors Fleming and Peroni, I have extensively critiqued a
    prior version of the Camp proposal and many of those observations
    remain relevant to the final proposal as well as to elements of the
    Administration proposal. Stephen E. Shay, J. Clifton Fleming, Jr. and
    Robert J. Peroni, Territoriality in Search of Principles and Revenue:
    Camp and Enzi, 141 Tax Notes 173 (Oct. 14, 2013) (hereinafter Shay,
    Fleming and Peroni, Territoriality in Search of Principles).

        Under an advance minimum tax, a United States shareholder in a
    controlled foreign corporation (CFC) would be required to include in
    income (under the Code's Subpart F rules) the portion of the CFC's
    earnings that would result in a residual U.S. tax sufficient to achieve
    the target minimum effective tax rate on the CFC's current year
    earnings. The target minimum effective tax rate would be based on a
    percentage of the of the U.S corporate rate, so that it would adapt to
    changes in the U.S. corporate tax rate.\14\ Deductions incurred by U.S.
    affiliates allocable to the CFC's earnings only would be allowed to the
    extent the CFC's earnings were actually or deemed distributed. For
    example, if the actual and deemed distributions caused 35% of the CFC's
    earnings to be distributed, then 35% of the deductions allocable to the
    CFC's income would be allowed and the remaining 65% would be suspended
    until the remaining earnings were distributed.
    ---------------------------------------------------------------------------
        \14\ The Obama Administration proposal for a final minimum tax
    would apply if a foreign effective rate is less than 22.35 percent
    (22.35%). If the Obama Administration is seeking to achieve a 28
    percent (28%) corporate tax rate, a minimum effective tax rate of 22.35
    percent (22.35%) would be approximately 80 percent (80%) of the
    domestic corporate tax rate. If the corporate tax rate remained 35
    percent (35%), however, the minimum effective tax rate would be
    approximately 64 percent (64%) of the domestic tax rate.

        The earnings deemed distributed would be treated as previously
    taxed as under current law and would be available for distribution
    without a further U.S. tax (which would reduce pressure on earnings
    held abroad). An advance minimum tax structured in this way could be
    readily adapted under the current infrastructure of U.S. international
    tax rules and could replace existing Subpart F income categories,
    including those for foreign base company sales and services income.
    This proposal could be implemented without waiting for a broader tax
    reform and without relying on a material reduction to the final
    corporate tax rate.\15\
    ---------------------------------------------------------------------------
        \15\ I also would be very concerned if the Administration's minimum
    tax proposal were ``cherry-picked'' and, for example, the deduction
    disallowance rule were not adopted or the minimum tax rate were reduced
    by even a few percent. Maintaining a full residual U.S. tax mitigates
    the substantial tax base risks of such changes in the course of the
    legislative process.
    ---------------------------------------------------------------------------
    Strengthen Corporate Residence and U.S. Source Taxation Rules
        If taxation of foreign income is reformed, there will be greater
    pressure on U.S. corporations to change corporate residence. It is
    important to reconsider existing corporate residence rules beyond cases
    involving expatriating entities. The United States should consider
    broadening its definition of a resident corporation to provide that a
    foreign corporation would be U.S. tax resident if it satisfied either a
    shareholder residency test or the presently controlling place of
    incorporation test. I acknowledge that there currently are limitations
    on identifying ultimate owners of stock in publicly-traded companies,
    but identity of shareholders' or their tax residence already is used
    under the Code and it is feasible to increase the ability of
    corporations to learn shareholder identity information through
    reporting or other means. Importantly, linking corporate residence to
    greater than 50% control by U.S. tax residents would align corporate
    residence with the primary reason the U.S. seeks to impose a corporate
    tax which is to tax resident shareholders. There are important details
    to be worked out in designing a shareholder residence test, but I
    strongly encourage the Committee to pursue this avenue.

        The first and most direct way to strengthen U.S. source taxation
    generally is through improved earnings stripping rules.\16\ This has
    been the focus of the Treasury Department and I do not address details
    here except to emphasize that, unless addressed, U.S. MNCs will
    continue to attempt to shift corporate residence to take advantage of
    the U.S. tax reduction opportunities from earnings stripping.
    ---------------------------------------------------------------------------
        \16\ See Fleming, Peroni and Shay, Cross-Border Earnings Stripping,
    supra note 11.
    ---------------------------------------------------------------------------
    Reduce U.S. Tax Advantages for Portfolio Investment in Foreign Over
            Domestic Stock
        Under current U.S. tax law, a U.S. portfolio stock investor can
    earn a higher after-tax return on foreign business income earned
    through a foreign corporation than through a domestic corporation. In
    order not to favor a foreign corporation over a U.S. corporation in
    relation to foreign business income, at a minimum, foreign dividends
    should not qualify for a lower tax rate allowed for ``qualified
    dividend income,'' or QDI, to the extent that the foreign corporate
    level effective tax rate is materially lower than the U.S. corporate
    tax rate.\17\ In addition, the preferential capital gains rate (if
    retained) should be denied for stock gain attributable to the foreign
    corporation's non-U.S. earnings.\18\
    ---------------------------------------------------------------------------
        \17\ See Shay, Fleming and Peroni, Territoriality in Search of
    Principles, supra note * [13], at 163-165; see also A.B.A. Tax Sec.
    Task Force on International Tax Reform, Report of the Task Force on
    International Tax Reform, 59 Tax Law. 649, 698-699 (2006) (calling for
    reconsideration of the scope of QDI treatment for a dividend from a
    foreign corporation); see also Michael J. Graetz and Rachael Doud,
    Technological Innovation, International Competition, and the Challenges
    of International Income Taxation, 113 Colum. L. Rev. 347, 361 (2013).
        \18\ In addition, with respect to corporate managers of expatriated
    companies, if foreign taxes are imposed at lower rates than U.S. taxes,
    Section 457A-type restrictions on compensation deferrals could be
    extended to all cases where the deferred amounts are not subject to a
    corporate tax equivalent to the U.S. corporate tax.

        A more fundamental alternative would be to determine the portfolio
    shareholder level U.S. tax on foreign earnings distributed from a
    foreign corporation in two parts. The first part would be a tax equal
    to the tax that would be paid on the foreign earnings if they were
    subject to domestic corporate tax including allowing foreign corporate-
    level taxes as a credit. This equalizing tax would be imposed on tax-
    exempt as well as taxable shareholders just as would occur in a
    domestic corporation. It is strange indeed to advantage investment by
    U.S. tax-exempts in foreign over U.S. corporations but that is the case
    today in relation to foreign corporations subject to low effective
    ---------------------------------------------------------------------------
    rates of tax.

        The distributed earnings (reduced by that amount of tax as though
    it were a corporate-level tax), then would be subject to the normal
    U.S. tax rules for that dividend income.\19\ The same mechanism could
    be applied to gains on the sale of foreign stock to the extent of
    untaxed deferred earnings.\20\ This would mitigate the advantage to a
    U.S. portfolio shareholder of earning foreign income through a foreign
    corporation not subject to U.S. corporate level tax.
    ---------------------------------------------------------------------------
        \19\ The surrogate for a corporate level tax would apply to a U.S.
    portfolio shareholder that is a U.S. tax-exempt organization, just as a
    U.S. corporate level tax would apply in relation to earnings of a
    domestic corporation. The taxing structure described is used in current
    law I.R.C. Sec. 962, which permits an individual U.S. shareholder in a
    CFC to elect to take a credit for a foreign corporate tax against the
    U.S. tax on a Subpart F inclusion, but conditions the election on (i)
    the shareholder being subject to a notional U.S. corporate level tax
    against which the foreign corporate tax is credited, and (ii) the
    shareholder being subject to normal U.S. tax when the earnings are
    actually distributed (though reduced by any additional tax paid under
    (i)). The Section 962 election is rarely used under current law. A U.S.
    portfolio shareholder owning less than 10 percent (10%) by voting power
    of the foreign corporation could be allowed to rely on the foreign
    corporation's published financial statements to make reasonable
    estimates of retained earnings and foreign taxes. In the absence of
    such information, gain would be attributed to earnings.
        \20\ A similar deemed corporate level tax is used as a limitation
    on the tax of an individual U.S. shareholder on dividend treatment of
    stock sale gain under Section 1248. See I.R.C. Sec. 1248(b).

        These modifications of shareholder taxation would bear on the
    corporate residence decision, particularly by domestic corporations
    that have a substantial U.S. shareholder base and may consider
    expatriation, not just in terms of the tax in connection with an
    expatriation, but in relation to ongoing shareholders. More generally,
    we need to scrutinize all of our international rules more closely to
    see where we may inadvertently be favoring non-U.S. over U.S. economic
    activity.
                                 iv. conclusion
        International business income is but a part of the larger mosaic
    that comprises the U.S. economy. There is no normative reason to
    privilege foreign business income beyond allowing a credit for foreign
    income taxes. If any group of taxpayers does not bear its share of tax,
    others must make up the difference sooner or, if the deficit is debt-
    financed, later. The efforts of former Chairmen Camp and Baucus to
    lower tax rates in a revenue neutral tax reform illustrates the
    necessity of maintaining and expanding the tax base, including foreign
    business income of U.S. MNCs. Dynamic scoring will not alter this
    fundamental reality.

        In no area of business are tax planning skills more acute and
    heavily deployed to take advantage of exceptions, special deductions
    and lower effective rates than in relation to earning cross-border
    business income. My recommendation is to tax foreign business income
    broadly and allow a credit for foreign income taxes. It always is
    possible to relieve a tax rule; it is very difficult in our system to
    make a tax rule tougher. I encourage you not to gamble with dividend
    exemption or an ACE deduction when there are more established and less
    risky ways to address the actual problems.

        I would be pleased to answer any questions the Committee might
    have.

                                     ______

        Prepared Statement of Anthony Smith, Vice President of Tax and
                    Treasurer, Thermo Fisher Scientific Inc.
        Chairman Hatch, Ranking Member Wyden, and distinguished members of
    the committee, it is an honor to appear before you today to discuss how
    this committee and the Senate can build a more competitive U.S.
    international tax system.

        I am Tony Smith, Vice President of Tax and Treasury and Treasurer
    for Thermo Fisher Scientific Inc. Prior to joining the company over 10
    years ago, I worked as a tax professional, beginning my career 25 years
    ago in the United Kingdom and focusing largely on U.K. tax matters. I
    then shifted my focus to U.S. tax matters in 1993 and moved here in
    1998. My experience qualifies me to comment on U.S. and overseas tax
    regimes as well as company and shareholder reaction to tax rules and
    reforms. I have appreciated the opportunity to meet with many of your
    staffs over the past couple of years to discuss the pressing need for
    international tax reform.

        I recognize that the committee is faced with difficult decisions
    and complex trade-offs as you consider corporate, small business and
    personal tax reform that will result in an optimal tax system for the
    United States in today's global economy. My focus today is on corporate
    tax reform--with particular emphasis on international tax reform. I
    appreciate this opportunity to provide perspectives from the front
    lines on why international tax reform is so important to U.S.-based,
    globally engaged companies like Thermo Fisher. I'll also speak to the
    kinds of changes that I believe will make a real difference to the
    competitiveness of U.S.-based companies and their contributions to
    economic growth and jobs in the United States.
                      thermo fisher scientific's business
        First, a little background on our company. Thermo Fisher Scientific
    is the world leader in serving science. Our mission is to enable our
    customers to make the world healthier, cleaner and safer, and we
    fulfill this mission by providing advanced technologies, products and
    services that help our customers address some of the most important
    challenges facing society today. For example, we have helped our
    customers screen for and contain the Ebola virus, discover better
    cancer treatments, monitor the environment to understand climate change
    and protect the safety of our citizens.

        Thermo Fisher is headquartered in Massachusetts, but is a globally
    engaged company with 50,000 employees worldwide. Approximately half of
    that workforce is in the United States. We are proud to have major
    facilities in many of the states represented on this committee--
    including facilities in Logan, Utah, and Eugene, Oregon.

        Our portfolio consists of some 1.3 million products, including
    analytical instruments used in research labs and production lines,
    specialty diagnostics that test for myriad health conditions, life
    sciences solutions to accelerate research, discovery and diagnosis, and
    a comprehensive offering of laboratory products and services.

        Thermo Fisher's global revenue is approximately $17 billion. That
    revenue is split roughly 50/50 between the United States and overseas.
    We have a significant overseas customer base, and much of this revenue
    is derived from ``Made in America'' products that we sell to science
    customers around the world. These products come from not just Logan and
    Eugene, but also Lenexa, Austin, Asheville, Marietta, Allentown,
    Rochester, Kalamazoo, Fair Lawn, Rockville, Lafayette and Middletown,
    to name but a few.

        Thermo Fisher's revenues have grown at an average rate of 10
    percent per year since 2000. We continue to invest in technology
    innovation, commercial capabilities and emerging markets to grow our
    existing businesses. We have also acquired businesses to further
    strengthen our strategic position. In the last five years alone, we
    have spent more than $20 billion on acquisitions--both within and
    outside of the United States.
                          thermo fisher's tax profile
        Thermo Fisher manufactures a substantial volume of products in the
    United States. The company spends over $500 million per year in the
    United States on research and development to support new and existing
    products. The company benefits from the R&D tax credit when it is
    available. In 2014, the R&D tax credit was worth $25 million to Thermo
    Fisher. The company also benefits from the reduced effective corporate
    tax rate on domestic manufacturing under section 199, which was worth
    about $30 million to us last year. In addition, the company benefits
    from some timing items provided for in the current tax law, including
    use of the LIFO inventory valuation method.

        Given our active acquisition history, Thermo Fisher has
    approximately $14 billion of debt. The company's interest expense is
    approximately $400 million per year.

        In addition to our large U.S. manufacturing presence, Thermo Fisher
    manufactures products overseas in multiple jurisdictions, including
    China, Finland, Germany, Lithuania, Singapore, Sweden, Switzerland and
    the United Kingdom. We sell products in nearly every jurisdiction
    through both distribution affiliates and unrelated distributors. In all
    cases, the corporate tax rate imposed on profits earned in those
    jurisdictions is lower than the U.S. corporate tax rate.

        Like many companies that have grown in part through acquisitions
    funded partly from U.S. sources and partly from overseas cash, Thermo
    Fisher has a complex overseas treasury and legal structure. Nearly all
    of the company's external debt is owed by U.S. members of the Thermo
    Fisher group to U.S. lenders. This is because it is optimal for a
    corporate group to issue debt through one face to the capital markets
    and because the capital markets in the United States are the most
    efficient in the world. The proceeds of this debt, along with funds
    generated from operations, are then used by our U.S. or overseas
    businesses to make acquisitions. While approximately half of the
    company's annual cash flow is generated overseas, Thermo Fisher
    currently has very little cash overseas. The vast majority of the cash
    from our overseas earnings is reinvested in the business or used for
    strategic acquisitions that increase our competitiveness and stimulate
    growth.

        Some of Thermo Fisher's overseas income is subject to current tax
    in the United States under the Subpart F regime. This is because of the
    complex overseas treasury and legal structure just mentioned, which is
    a byproduct of the company's significant international growth via
    acquisition.
                     the need for international tax reform
        The current U.S. international tax rules are unwieldy, subject to
    varying interpretation, and difficult to comply with. All of this gives
    rise to uncertainty for U.S.-based companies that are globally engaged.

        Investors and companies want predictability and certainty. And the
    entire marketplace remains cautious as a result of questions about
    when--or if--Congress will reform the U.S. tax code. Recent inversion
    activity is a sign of frustration with an uncompetitive U.S. system and
    lack of confidence that reforms to make the system more competitive are
    imminent.

        The combined effect of the high U.S. corporate tax rate and the
    U.S. worldwide tax system limits the flexibility of U.S.-based global
    companies to deploy the cash earned in their foreign businesses where
    it would be most productive. Given the high U.S. tax rate, U.S.
    multinationals will have overseas subsidiaries that make profits that
    are subject to taxes lower than in the United States. Most U.S.
    multinationals allow these earnings to remain overseas rather than face
    a large tax cost to repatriate the funds. If funds are needed in the
    United States, such companies borrow in the United States rather than
    access the earnings trapped overseas. Having a tax regime that creates
    a disincentive for U.S.-based companies to pay down debt--and indeed
    creates an incentive to incur new debt--is not sustainable in the
    longer term.

        The current U.S. tax system also impedes the ability of U.S.-based
    global companies to undertake acquisitions that make good business
    sense and that would contribute to our domestic economy.

        The existing tax rules can have the unintended effect of
    encouraging U.S.-based global companies to overpay for overseas
    acquisition targets because they have no other more productive use for
    the cash generated from their overseas operations. As a result, in
    pursuing non-U.S. acquisition targets, Thermo Fisher has been outbid
    several times by other U.S. multinationals that were willing to pay
    what we considered to be an above-market price for the foreign target.
    The other bidders had available cash from overseas operations and
    limited options for deploying this cash without incurring the
    prohibitive costs of repatriating funds to the United States; because
    of this, they were willing to pay a premium for the foreign target.
    Ultimately, this distortion of the acquisition market extends to
    similar targets in the same industry, because the excessive price paid
    sets an artificial new benchmark.

        Conversely, the current tax system also places U.S.-based companies
    at a significant disadvantage when bidding against a foreign entity,
    regardless of where the target may be incorporated. Recent large
    acquisitions of U.S. targets by foreign acquirers have been valued more
    highly by the foreign buyers as compared to would-be U.S. buyers
    because their home country's tax laws allow them to structure
    transactions more efficiently and access the targets' global earnings
    without the home country tax that a U.S. buyer would face.

        To restate: When it comes to M&A activity, the combined effect of
    the high U.S. corporate tax rate and the U.S. worldwide tax system
    means that:

        U.S. companies are more likely to be bought by foreign companies;
            and
        U.S. companies are more likely to overpay for foreign
            acquisitions.

        Such a result--which is detrimental to the growth of U.S.
    companies--could not have been what the designers of the U.S. tax law
    intended. But this is the reality that currently exists.

        Corporate inversion transactions are a related phenomenon.
    Notwithstanding the chilling effect of the notice issued by the
    Treasury Department last summer, the current U.S. tax system encourages
    inversion-type structuring in large M&A transactions. Like my example
    earlier, this can lead U.S. purchasers to overpay for target foreign
    companies. The market has seen the price for foreign targets being bid
    up simply because they are large enough for a U.S. company of the right
    size profile to invert into without a tax penalty. The long-term tax
    savings from inverting out of the United States can support the higher
    cost of the deal.

        Finally, it is important to note that the U.S. tax system generally
    is more complex than foreign tax rules. Available R&D credits and other
    incentives are much lower in the United States than in many countries.
    And the U.S. R&D credit is rife with uncertainty due to its perpetually
    temporary and short-term nature. This encourages the development of
    high-value research centers, and the associated creation of high-value
    jobs, overseas where generous and stable incentives are available.
                           key elements of tax reform
        I commend the committee for its focus on tax reform in general and
    international tax reform in particular. I urge you to continue the
    effort to get much needed international tax reforms across the finish
    line as soon as possible. Such reforms are critical to the
    competitiveness of U.S.-based companies and to the continued
    strengthening of the U.S. economy.

        Reforms should be designed to end the uncertainty that currently
    pervades the tax system for U.S. companies with global operations.
    Clearer and more stable rules would enable better investment decisions.
    I am convinced that many investment decisions are currently on hold
    while companies and investors wonder whether much-needed tax reforms
    will advance. This is a drag on the economy in the United States.

        Tax reform should stimulate the U.S. economy, create jobs and
    strengthen the ability of U.S.-based global companies to succeed in an
    ever more competitive marketplace. And it should incentivize companies
    to make decisions--about mergers and acquisitions as well as general
    investment--based on total value rather than localized tax policies.

        We should all recognize that other countries are taking measures to
    stimulate their own economies, including lowering their corporate tax
    rates and providing tax incentives, while the continuation of the high
    U.S. tax rate puts our future competiveness at risk.

        Finally, I want to be clear: Thermo Fisher recognizes that Congress
    needs to achieve a delicate balance in terms of revenue and understands
    that corporations may need to be prepared to cede certain long-standing
    tax benefits in the interests of improving the overall corporate tax
    system.

        My suggestions for international tax reform are as follows:

        1.  Reduce the corporate tax rate:
           A corporate tax rate between 25 percent and 30 percent
                would put the United States closer to other developed
                economies. There will continue to be lower rates in other
                countries, so this would not be any kind of a race to the
                bottom.
           There will always be significant advantages to being
                headquartered in the United States. Therefore, it would not
                be necessary for the United States to match the world's
                lowest tax regimes. But we ought to lower the U.S.
                corporate tax rate to prevent the job leakage and other
                unintended consequences that arise with our current
                corporate tax rate that is out of line with the rest of the
                developed world.

        2.  Move closer to a territorial system by allowing repatriation of
    foreign earnings at a lower--but not zero--tax cost:

           Repatriated overseas earnings should be taxed at a lower
                rate than the regular corporate rate. A U.S. tax on
                repatriated foreign earnings at a rate of 5 percent or
                slightly higher would not be a significant barrier to
                repatriation because most U.S.-based companies will value
                the flexibility to redeploy earnings in the United States
                rather than having to retain such earnings overseas.
           This tax should be imposed when the earnings are
                repatriated to the United States.

        3.  Incentivize research in the United States:

           Incentivize the development of intellectual property in the
                United States by making permanent the R&D credit.
           Incentivize the utilization of intellectual property in the
                United States and generation of income here by a reduction
                in the rate of tax on earnings from that activity.

        4.  Simplify the Subpart F and foreign tax credit rules:

           The existing rules are an administrative burden, over-
                complicated and too prone to different interpretations.
                Simplifying the rules could reduce the administrative
                burdens and uncertainties and better target the rules to
                their intended purpose.

        5.  Impose an appropriate limit on interest deductibility:

           Consideration could be given to a limit on deductions for
                interest expense, based on an appropriate ratio of net
                interest expense to U.S. taxable income, with any surplus
                interest deductions being deferred. Today's historically
                low interest rate environment makes clear that any such
                limit would have to be based on a ratio that adjusts by
                being tied to prevailing interest rates. An appropriately
                structured limitation would encourage repatriation to pay
                down debt where the other reforms make such repatriation
                feasible from a cost perspective.

        6.  Avoid one-off tax incentives and holidays and reduce the number
    of cash-flow-only items:

           In my opinion, LIFO inventory accounting and accelerated
                depreciation are timing items only and eliminating these
                benefits could be an acceptable trade-off for longer term
                permanent rate reduction and the other items mentioned
                here.

        7.  Continue to incentivize manufacturing activity and the
    generation of earnings in the United States through the reduced rate of
    tax on manufactured earnings under section 199.

        8.  Simplify reporting as much as possible.

        These priorities echo themes that are reflected in tax reform
    proposals that have been proposed in recent years in the Senate and the
    House of Representatives and by the President. I believe the work that
    this committee and your colleagues in the House have already done
    provides a strong foundation for the development of a detailed tax
    reform package.

        As I have emphasized throughout these comments, this committee's
    goal ought to be providing a more stable and more competitive
    environment for U.S.-based companies operating in today's global
    economy. This ultimate goal is more important than achieving the lowest
    possible corporate tax rate. But lowering the corporate tax rate is an
    important element of competitive, pro-growth international tax reform.
    I stand ready to provide whatever assistance I can in this important
    initiative.

        Thank you for the opportunity to present Thermo Fisher Scientific's
    perspective. I am happy to answer any questions that the committee may
    have.

                                     ______

                     Prepared Statement of Hon. Ron Wyden,
                           a U.S. Senator from Oregon
        Nine months ago, the Finance Committee came together in this very
    room for a hearing on how the broken U.S. tax code hurts our
    competitiveness around the world--how it hinders the drive to create
    red, white, and blue jobs that pay strong middle-class wages.

        The discussion was dominated by the wave of tax inversions that was
    cresting at the time, pounding our shores and eroding our tax base.
    Headline after headline last summer announced that American companies
    were putting themselves on the auction block for foreign competitors.
    They'd find a buyer, headquarter overseas, and shrink their tax bills
    to the lowest possible levels. In the absence of comprehensive tax
    reforms from Congress, the Treasury undertook extraordinary measures
    aimed at slowing the erosion.

        Nine months later, the Finance Committee is back for another
    hearing on international taxation. And the headlines are back, too.
    Once again, there's a wave cresting--and this one's even bigger.

        These days, it's foreign firms circling in the water and looking to
    feast on American competitors, often in hostile takeovers. And just
    like before, American taxpayers could be on the hook subsidizing these
    deals.

        There's an obvious lesson here. Our tax code is deeply broken. The
    next flaw that exposes itself--the next wave that appears on the
    horizon--may not be about inversions or hostile takeovers. But whenever
    one wave breaks, you can bet there's another one rolling in, ready to
    pound our economy and erode our tax base further. The dealmakers will
    always get around piecemeal policy changes. Nothing short of
    comprehensive tax reform will end the cycle.

        There's been an awful lot of ink spilled on business pages and in
    magazines about the many ways our tax code is outdated and
    anticompetitive. The corporate tax rate puts the U.S. at a
    disadvantage. The system of tax deferral blocks investment in the U.S.
    like a self-imposed embargo. How fitting it is on St. Patrick's Day to
    shine a spotlight on mind-numbing strategies like the ``Double Irish
    with a Dutch Sandwich'' used to winnow down tax bills.

        A modern tax code should fight gamesmanship and bring down the
    corporate rate to make American businesses more competitive. That's
    what my own bipartisan proposal would do--in fact, it has the lowest
    rate of any proposal to date.

        It's legislative malpractice to sit by and let this situation
    fester. Congress can't expect the Treasury to keep playing whack-a-mole
    with every issue that pops up. The latest wave of cross-border
    gamesmanship shows that cannot work. So the Finance Committee will need
    to lead the way on tax reform.

        In my view, our end goals are bipartisan--a tax code that
    supercharges America's competitiveness in tough global markets, draws
    investment to the U.S. and creates high-skill, high-wage jobs in Oregon
    and across the country. It'll take a lot of work and political will to
    get there, but in the meantime, the waves will keep crashing and our
    tax base will keep eroding. So it should be clear to everybody what has
    to be done.

        Thank you to all our witnesses for being here today--I'm looking
    forward to a fruitful discussion.

                                     ______

                                 Communication

                                  ----------

                               The LIFO Coalition

              1325 G Street N.W., Suite 1000, Washington, DC 20005

                               TEL: 202-872-0885

                                 March 31, 2015

    Senate Committee on Finance
    Attn. Editorial and Document Section
    Rm. SD-219
    Dirksen Senate Office Bldg.
    Washington, DC 20510-6200

    To The Finance Committee:

    I am writing on behalf of the LIFO Coalition in response to testimony
    provided to the Committee at its March 17th hearing.

    The LIFO Coalition (the Coalition), organized in April 2006, has more
    than 125 members including trade associations representing hundreds of
    thousands of American employers in the manufacturing, wholesale
    distribution, and retail sectors, as well as companies of every size
    and industry sector that use the LIFO method. A list of the LIFO
    Coalition members is enclosed.

    The last-in, first-out (LIFO) method of inventory is used by a diverse
    array of American companies, including hundreds of thousands of pass-
    through businesses, to most accurately record inventories and measure
    income. Despite the widespread use of LIFO, LIFO repeal has been
    considered several times in recent years as a way to raise revenues to
    offset various spending initiatives or to pay for certain tax reform
    objectives.

    An executive of a multi-national corporation testified before the
    Finance Committee on March 17th, at the Committee hearing on
    international tax. In his testimony, the executive made recommendations
    on tax reform, among them a suggestion that LIFO repeal ``could be an
    acceptable trade-off for longer term permanent rate reduction. . . .''

    LIFO Coalition members were both surprised and disturbed to read that
    testimony because for the overwhelming majority of LIFO users, a
    reduction in income tax rates would not in any way offset the repeal of
    LIFO. The situation facing pass-through companies on LIFO is even worse
    inasmuch as, based on the current debate, they could lose the use of
    LIFO without a reduction in the individual tax rates that they pay.

    Because the testimony of this witness was so inconsistent with the
    position of the LIFO users who comprise the LIFO Coalition, the
    Coalition counsel reviewed the Form 10K filed by the executive's
    corporation to better understand its LIFO usage. Our review determined
    that less than 15 percent of the company's inventory is on LIFO, and
    that its LIFO reserve is very small.

    With so little of its inventory on LIFO and such a small LIFO reserve,
    repeal of LIFO may well not be burdensome for this company. However,
    these are both unrepresentative statistics in comparison to most
    companies on LIFO.

    To demonstrate that point, following the Finance Committee hearing, we
    quickly surveyed the members of the National Association of Wholesaler-
    Distributors (NAW) which are LIFO companies to determine the percentage
    of their inventories that are on LIFO. Of the 86 companies that
    responded to the survey, more than half (44 of 86) have 100 percent of
    their inventory on LIFO. And for more than 72 percent of the companies
    (62 of the 86), more than 70 percent of their inventory is on LIFO.

    Further, a tax firm which specializes in LIFO systems advised the
    Coalition that, ``of the hundreds of LIFO calculations we prepare
    annually for manufacturers, wholesalers and retailers . . . the vast
    majority, over 80%, use LIFO for all of their inventory.''

    This data and that of the NAW members is consistent with that of the
    diverse cross-section of industries that comprise the LIFO Coalition.
    The Coalition would be happy to substantiate that observation and
    provide additional data if the Committee requests that we do so.

    The LIFO Coalition would ask the members of the Finance Committee to
    bear in mind the very different circumstances of the witness who
    testified that repeal of LIFO would be acceptable as they consider his
    recommendation on LIFO repeal.

    For the overwhelming majority of the LIFO companies which have most or
    all of their inventory on LIFO and which have significant LIFO
    reserves, the repeal of LIFO is not only an unacceptable component of
    tax reform, it would both impose a punitive retroactive tax increase on
    them and force them to use an inventory accounting method prospectively
    that is totally inconsistent with their business models. For many of
    those companies, particularly thinly capitalized companies with small
    profit margins, repeal of LIFO would simply force them out of business.

    The LIFO Coalition urges the Finance Committee to oppose LIFO repeal,
    as a separate measure or as part of a comprehensive tax reform effort.

    Respectfully,

    Jade West, Executive Secretariat
    The LIFO Coalition

    Enclosure

                               The Lifo Coalition
     1325 G Street N.W., Suite 1000, Washington, DC 20005 TEL: 202-872-0885

    Aeronautical Repair Station          MDU Resources Group
     Association
    Alabama Grocers Association          Metals Service Center Institute
    American Apparel & Footwear          Mid-America Equipment Retailers
     Association                          Association
    American Chemistry Council           Midwest Equipment Dealers
                                          Association
    American Foundry Society             Minnesota Grocers Association
    American Fuel & Petrochemical        Minnesota-South Dakota Equipment
     Manufacturers                        Dealers Association
    American Gas Association             Missouri Grocers Association
    American International Automobile    Missouri Retailers Association
     Dealers Association
    American Iron & Steel Institute      Montana Equipment Dealers
                                          Association
    American Petroleum Institute         Moss Adams LLP
    American Road & Transportation       NAMM-The International Music
     Builders Association                 Products Association
    American Supply Association          National Association of Chemical
                                          Distributors
    American Veterinary Distributors     National Association of Convenience
     Association                          Stores
    American Watch Association           National Association of Electrical
                                          Distributors
    American Wholesale Marketers         National Association of
     Association                          Manufacturers
    Americans for Tax Reform             National Association of Shell
                                          Marketers
    AMT--The Association for             National Association of Sign Supply
     Manufacturing Technology             Distributors
    Associated Equipment Distributors    National Association of Sporting
                                          Goods Wholesalers
    Association for High Technology      National Association of Wholesaler-
     Distribution                         Distributors
    Association for Hose & Accessories   National Automobile Dealers
     Distribution                         Association
    Association of Equipment             National Beer Wholesalers
     Manufacturers                        Association
    Auto Care Association                National Electrical Manufacturers
                                          Association
    Automobile Dealers Association of    National Federation of Independent
     Alabama                              Business
    Brown Forman Corporation             National Grocers Association
    Business Roundtable                  National Lumber and Building
                                          Material Dealers Association
    Business Solutions Association       National Marine Manufacturers
                                          Association
    California Independent Grocers       National Paper Trade Alliance
     Association
    Cardinal Health                      National Roofing Contractors
                                          Association
    Caterpillar Inc.                     National RV Dealers Association
    Ceramic Tile Distributors            National Stone Sand & Gravel
     Association                          Association
    Connecticut Food Association         Nebraska Grocery Industry
                                          Association
    Copper & Brass Fabricators Council   New Hampshire Grocers Association
    Copper & Brass Servicenter           New Jersey Food Council
     Association
    Deep South Equipment Dealers         North American Equipment Dealers
     Association                          Association
    Deere & Company                      North American Wholesale Lumber
                                          Association
    East Central Ohio Food Dealers       Ohio Equipment Distributors
     Association                          Association
    Equipment Marketing & Distribution   Ohio Grocers Association
     Association
    Far West Equipment Dealers           Ohio-Michigan Equipment Dealers
     Association                          Association
    Farm Equipment Manufacturers         Paperboard Packaging Council
     Association
    Financial Executives International   Pet Industry Distributors
                                          Association
    Food Industry Alliance of New York   Petroleum Equipment Institute
     State
    Food Marketing Institute             Petroleum Marketers Association of
                                          America
    Forging Industry Association         Power Transmission Distributors
                                          Association
    Gases and Welding Distributors       Printing Industries of America
     Association
    Greater Boston Chamber of Commerce   Professional Beauty Association
    Health Industry Distributors         Retail Grocers Association of
     Association                          Greater Kansas City
    Healthcare Distribution Management   Retail Industry Leaders Association
     Association
    Heating, Airconditioning &           SBE Council
     Refrigeration Distributors
     International
    Illinois Food Retailers Association  Security Hardware Distributors
                                          Association
    Independent Lubricant Manufacturers  Service Station Dealers of America
     Association                          and Allied Trades
    Industrial Fasteners Institute       Society of Independent Gasoline
                                          Marketers of America
    Industrial Supply Association        SouthEastern Equipment Dealers
                                          Association
    International Foodservice            Southern Equipment Dealers
     Distributors Association             Association
    International Franchise Association  SouthWestern Association
    International Sanitary Supply        Souvenir Wholesale Distributors
     Association                          Association
    International Sealing Distribution   SPI: The Plastics Industry Trade
     Association                          Association
    International Wood Products          State Chamber of Oklahoma
     Association
    Iowa Grocers Industry Association    Textile Care Allied Trades
                                          Association
    Iowa Nebraska Equipment Dealers      Tire Industry Association
     Association
    Jewelers of America                  U.S. Chamber of Commerce
    Kansas Food Dealers Association      Washington Food Industry
                                          Association
    Kentucky Association of Convenience  Wholesale Florist & Florist
     Stores                               Supplier Association
    Kentucky Grocers Association         Wine & Spirits Wholesalers of
                                          America
    Louisiana Retailers Association      Wine Institute
    Marine Retailers Association of the  Wisconsin Grocers Association, Inc.
     Americas
    Maryland Retailers Association       Wood Machinery Manufacturers of
                                          America
    McKesson Corporation

                                       [all]