[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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                          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
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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
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Connecticut Food Association         Nebraska Grocery Industry
                                      Association
Copper & Brass Fabricators Council   New Hampshire Grocers Association
Copper & Brass Servicenter           New Jersey Food Council
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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
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McKesson Corporation
 



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