[Senate Hearing 114-230]
[From the U.S. Government Publishing Office]
S. Hrg. 114-230
BUILDING A COMPETITIVE
U.S. INTERNATIONAL TAX SYSTEM
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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
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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
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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.*
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* 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.
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[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.)
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\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\
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\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\
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\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\
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\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
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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\
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\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\
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\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.
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\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
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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.
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\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.
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\3\ U.S. Department of Commerce, Bureau of Economic Analysis,
November 2014.
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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\
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\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
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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\
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\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\
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\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.
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\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\
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\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
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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\
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\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.
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\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
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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.
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\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).
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\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.
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\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.
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\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\
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\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.
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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.
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\16\ See Fleming, Peroni and Shay, Cross-Border Earnings Stripping,
supra note 11.
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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\
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\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
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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.
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\19\ The surrogate for a corporate level tax would apply to a U.S.
portfolio shareholder that is a U.S. tax-exempt organization, just as a
U.S. corporate level tax would apply in relation to earnings of a
domestic corporation. The taxing structure described is used in current
law I.R.C. Sec. 962, which permits an individual U.S. shareholder in a
CFC to elect to take a credit for a foreign corporate tax against the
U.S. tax on a Subpart F inclusion, but conditions the election on (i)
the shareholder being subject to a notional U.S. corporate level tax
against which the foreign corporate tax is credited, and (ii) the
shareholder being subject to normal U.S. tax when the earnings are
actually distributed (though reduced by any additional tax paid under
(i)). The Section 962 election is rarely used under current law. A U.S.
portfolio shareholder owning less than 10 percent (10%) by voting power
of the foreign corporation could be allowed to rely on the foreign
corporation's published financial statements to make reasonable
estimates of retained earnings and foreign taxes. In the absence of
such information, gain would be attributed to earnings.
\20\ A similar deemed corporate level tax is used as a limitation
on the tax of an individual U.S. shareholder on dividend treatment of
stock sale gain under Section 1248. See I.R.C. Sec. 1248(b).
These modifications of shareholder taxation would bear on the
corporate residence decision, particularly by domestic corporations
that have a substantial U.S. shareholder base and may consider
expatriation, not just in terms of the tax in connection with an
expatriation, but in relation to ongoing shareholders. More generally,
we need to scrutinize all of our international rules more closely to
see where we may inadvertently be favoring non-U.S. over U.S. economic
activity.
iv. conclusion
International business income is but a part of the larger mosaic
that comprises the U.S. economy. There is no normative reason to
privilege foreign business income beyond allowing a credit for foreign
income taxes. If any group of taxpayers does not bear its share of tax,
others must make up the difference sooner or, if the deficit is debt-
financed, later. The efforts of former Chairmen Camp and Baucus to
lower tax rates in a revenue neutral tax reform illustrates the
necessity of maintaining and expanding the tax base, including foreign
business income of U.S. MNCs. Dynamic scoring will not alter this
fundamental reality.
In no area of business are tax planning skills more acute and
heavily deployed to take advantage of exceptions, special deductions
and lower effective rates than in relation to earning cross-border
business income. My recommendation is to tax foreign business income
broadly and allow a credit for foreign income taxes. It always is
possible to relieve a tax rule; it is very difficult in our system to
make a tax rule tougher. I encourage you not to gamble with dividend
exemption or an ACE deduction when there are more established and less
risky ways to address the actual problems.
I would be pleased to answer any questions the Committee might
have.
______
Prepared Statement of Anthony Smith, Vice President of Tax and
Treasurer, Thermo Fisher Scientific Inc.
Chairman Hatch, Ranking Member Wyden, and distinguished members of
the committee, it is an honor to appear before you today to discuss how
this committee and the Senate can build a more competitive U.S.
international tax system.
I am Tony Smith, Vice President of Tax and Treasury and Treasurer
for Thermo Fisher Scientific Inc. Prior to joining the company over 10
years ago, I worked as a tax professional, beginning my career 25 years
ago in the United Kingdom and focusing largely on U.K. tax matters. I
then shifted my focus to U.S. tax matters in 1993 and moved here in
1998. My experience qualifies me to comment on U.S. and overseas tax
regimes as well as company and shareholder reaction to tax rules and
reforms. I have appreciated the opportunity to meet with many of your
staffs over the past couple of years to discuss the pressing need for
international tax reform.
I recognize that the committee is faced with difficult decisions
and complex trade-offs as you consider corporate, small business and
personal tax reform that will result in an optimal tax system for the
United States in today's global economy. My focus today is on corporate
tax reform--with particular emphasis on international tax reform. I
appreciate this opportunity to provide perspectives from the front
lines on why international tax reform is so important to U.S.-based,
globally engaged companies like Thermo Fisher. I'll also speak to the
kinds of changes that I believe will make a real difference to the
competitiveness of U.S.-based companies and their contributions to
economic growth and jobs in the United States.
thermo fisher scientific's business
First, a little background on our company. Thermo Fisher Scientific
is the world leader in serving science. Our mission is to enable our
customers to make the world healthier, cleaner and safer, and we
fulfill this mission by providing advanced technologies, products and
services that help our customers address some of the most important
challenges facing society today. For example, we have helped our
customers screen for and contain the Ebola virus, discover better
cancer treatments, monitor the environment to understand climate change
and protect the safety of our citizens.
Thermo Fisher is headquartered in Massachusetts, but is a globally
engaged company with 50,000 employees worldwide. Approximately half of
that workforce is in the United States. We are proud to have major
facilities in many of the states represented on this committee--
including facilities in Logan, Utah, and Eugene, Oregon.
Our portfolio consists of some 1.3 million products, including
analytical instruments used in research labs and production lines,
specialty diagnostics that test for myriad health conditions, life
sciences solutions to accelerate research, discovery and diagnosis, and
a comprehensive offering of laboratory products and services.
Thermo Fisher's global revenue is approximately $17 billion. That
revenue is split roughly 50/50 between the United States and overseas.
We have a significant overseas customer base, and much of this revenue
is derived from ``Made in America'' products that we sell to science
customers around the world. These products come from not just Logan and
Eugene, but also Lenexa, Austin, Asheville, Marietta, Allentown,
Rochester, Kalamazoo, Fair Lawn, Rockville, Lafayette and Middletown,
to name but a few.
Thermo Fisher's revenues have grown at an average rate of 10
percent per year since 2000. We continue to invest in technology
innovation, commercial capabilities and emerging markets to grow our
existing businesses. We have also acquired businesses to further
strengthen our strategic position. In the last five years alone, we
have spent more than $20 billion on acquisitions--both within and
outside of the United States.
thermo fisher's tax profile
Thermo Fisher manufactures a substantial volume of products in the
United States. The company spends over $500 million per year in the
United States on research and development to support new and existing
products. The company benefits from the R&D tax credit when it is
available. In 2014, the R&D tax credit was worth $25 million to Thermo
Fisher. The company also benefits from the reduced effective corporate
tax rate on domestic manufacturing under section 199, which was worth
about $30 million to us last year. In addition, the company benefits
from some timing items provided for in the current tax law, including
use of the LIFO inventory valuation method.
Given our active acquisition history, Thermo Fisher has
approximately $14 billion of debt. The company's interest expense is
approximately $400 million per year.
In addition to our large U.S. manufacturing presence, Thermo Fisher
manufactures products overseas in multiple jurisdictions, including
China, Finland, Germany, Lithuania, Singapore, Sweden, Switzerland and
the United Kingdom. We sell products in nearly every jurisdiction
through both distribution affiliates and unrelated distributors. In all
cases, the corporate tax rate imposed on profits earned in those
jurisdictions is lower than the U.S. corporate tax rate.
Like many companies that have grown in part through acquisitions
funded partly from U.S. sources and partly from overseas cash, Thermo
Fisher has a complex overseas treasury and legal structure. Nearly all
of the company's external debt is owed by U.S. members of the Thermo
Fisher group to U.S. lenders. This is because it is optimal for a
corporate group to issue debt through one face to the capital markets
and because the capital markets in the United States are the most
efficient in the world. The proceeds of this debt, along with funds
generated from operations, are then used by our U.S. or overseas
businesses to make acquisitions. While approximately half of the
company's annual cash flow is generated overseas, Thermo Fisher
currently has very little cash overseas. The vast majority of the cash
from our overseas earnings is reinvested in the business or used for
strategic acquisitions that increase our competitiveness and stimulate
growth.
Some of Thermo Fisher's overseas income is subject to current tax
in the United States under the Subpart F regime. This is because of the
complex overseas treasury and legal structure just mentioned, which is
a byproduct of the company's significant international growth via
acquisition.
the need for international tax reform
The current U.S. international tax rules are unwieldy, subject to
varying interpretation, and difficult to comply with. All of this gives
rise to uncertainty for U.S.-based companies that are globally engaged.
Investors and companies want predictability and certainty. And the
entire marketplace remains cautious as a result of questions about
when--or if--Congress will reform the U.S. tax code. Recent inversion
activity is a sign of frustration with an uncompetitive U.S. system and
lack of confidence that reforms to make the system more competitive are
imminent.
The combined effect of the high U.S. corporate tax rate and the
U.S. worldwide tax system limits the flexibility of U.S.-based global
companies to deploy the cash earned in their foreign businesses where
it would be most productive. Given the high U.S. tax rate, U.S.
multinationals will have overseas subsidiaries that make profits that
are subject to taxes lower than in the United States. Most U.S.
multinationals allow these earnings to remain overseas rather than face
a large tax cost to repatriate the funds. If funds are needed in the
United States, such companies borrow in the United States rather than
access the earnings trapped overseas. Having a tax regime that creates
a disincentive for U.S.-based companies to pay down debt--and indeed
creates an incentive to incur new debt--is not sustainable in the
longer term.
The current U.S. tax system also impedes the ability of U.S.-based
global companies to undertake acquisitions that make good business
sense and that would contribute to our domestic economy.
The existing tax rules can have the unintended effect of
encouraging U.S.-based global companies to overpay for overseas
acquisition targets because they have no other more productive use for
the cash generated from their overseas operations. As a result, in
pursuing non-U.S. acquisition targets, Thermo Fisher has been outbid
several times by other U.S. multinationals that were willing to pay
what we considered to be an above-market price for the foreign target.
The other bidders had available cash from overseas operations and
limited options for deploying this cash without incurring the
prohibitive costs of repatriating funds to the United States; because
of this, they were willing to pay a premium for the foreign target.
Ultimately, this distortion of the acquisition market extends to
similar targets in the same industry, because the excessive price paid
sets an artificial new benchmark.
Conversely, the current tax system also places U.S.-based companies
at a significant disadvantage when bidding against a foreign entity,
regardless of where the target may be incorporated. Recent large
acquisitions of U.S. targets by foreign acquirers have been valued more
highly by the foreign buyers as compared to would-be U.S. buyers
because their home country's tax laws allow them to structure
transactions more efficiently and access the targets' global earnings
without the home country tax that a U.S. buyer would face.
To restate: When it comes to M&A activity, the combined effect of
the high U.S. corporate tax rate and the U.S. worldwide tax system
means that:
U.S. companies are more likely to be bought by foreign companies;
and
U.S. companies are more likely to overpay for foreign
acquisitions.
Such a result--which is detrimental to the growth of U.S.
companies--could not have been what the designers of the U.S. tax law
intended. But this is the reality that currently exists.
Corporate inversion transactions are a related phenomenon.
Notwithstanding the chilling effect of the notice issued by the
Treasury Department last summer, the current U.S. tax system encourages
inversion-type structuring in large M&A transactions. Like my example
earlier, this can lead U.S. purchasers to overpay for target foreign
companies. The market has seen the price for foreign targets being bid
up simply because they are large enough for a U.S. company of the right
size profile to invert into without a tax penalty. The long-term tax
savings from inverting out of the United States can support the higher
cost of the deal.
Finally, it is important to note that the U.S. tax system generally
is more complex than foreign tax rules. Available R&D credits and other
incentives are much lower in the United States than in many countries.
And the U.S. R&D credit is rife with uncertainty due to its perpetually
temporary and short-term nature. This encourages the development of
high-value research centers, and the associated creation of high-value
jobs, overseas where generous and stable incentives are available.
key elements of tax reform
I commend the committee for its focus on tax reform in general and
international tax reform in particular. I urge you to continue the
effort to get much needed international tax reforms across the finish
line as soon as possible. Such reforms are critical to the
competitiveness of U.S.-based companies and to the continued
strengthening of the U.S. economy.
Reforms should be designed to end the uncertainty that currently
pervades the tax system for U.S. companies with global operations.
Clearer and more stable rules would enable better investment decisions.
I am convinced that many investment decisions are currently on hold
while companies and investors wonder whether much-needed tax reforms
will advance. This is a drag on the economy in the United States.
Tax reform should stimulate the U.S. economy, create jobs and
strengthen the ability of U.S.-based global companies to succeed in an
ever more competitive marketplace. And it should incentivize companies
to make decisions--about mergers and acquisitions as well as general
investment--based on total value rather than localized tax policies.
We should all recognize that other countries are taking measures to
stimulate their own economies, including lowering their corporate tax
rates and providing tax incentives, while the continuation of the high
U.S. tax rate puts our future competiveness at risk.
Finally, I want to be clear: Thermo Fisher recognizes that Congress
needs to achieve a delicate balance in terms of revenue and understands
that corporations may need to be prepared to cede certain long-standing
tax benefits in the interests of improving the overall corporate tax
system.
My suggestions for international tax reform are as follows:
1. Reduce the corporate tax rate:
A corporate tax rate between 25 percent and 30 percent
would put the United States closer to other developed
economies. There will continue to be lower rates in other
countries, so this would not be any kind of a race to the
bottom.
There will always be significant advantages to being
headquartered in the United States. Therefore, it would not
be necessary for the United States to match the world's
lowest tax regimes. But we ought to lower the U.S.
corporate tax rate to prevent the job leakage and other
unintended consequences that arise with our current
corporate tax rate that is out of line with the rest of the
developed world.
2. Move closer to a territorial system by allowing repatriation of
foreign earnings at a lower--but not zero--tax cost:
Repatriated overseas earnings should be taxed at a lower
rate than the regular corporate rate. A U.S. tax on
repatriated foreign earnings at a rate of 5 percent or
slightly higher would not be a significant barrier to
repatriation because most U.S.-based companies will value
the flexibility to redeploy earnings in the United States
rather than having to retain such earnings overseas.
This tax should be imposed when the earnings are
repatriated to the United States.
3. Incentivize research in the United States:
Incentivize the development of intellectual property in the
United States by making permanent the R&D credit.
Incentivize the utilization of intellectual property in the
United States and generation of income here by a reduction
in the rate of tax on earnings from that activity.
4. Simplify the Subpart F and foreign tax credit rules:
The existing rules are an administrative burden, over-
complicated and too prone to different interpretations.
Simplifying the rules could reduce the administrative
burdens and uncertainties and better target the rules to
their intended purpose.
5. Impose an appropriate limit on interest deductibility:
Consideration could be given to a limit on deductions for
interest expense, based on an appropriate ratio of net
interest expense to U.S. taxable income, with any surplus
interest deductions being deferred. Today's historically
low interest rate environment makes clear that any such
limit would have to be based on a ratio that adjusts by
being tied to prevailing interest rates. An appropriately
structured limitation would encourage repatriation to pay
down debt where the other reforms make such repatriation
feasible from a cost perspective.
6. Avoid one-off tax incentives and holidays and reduce the number
of cash-flow-only items:
In my opinion, LIFO inventory accounting and accelerated
depreciation are timing items only and eliminating these
benefits could be an acceptable trade-off for longer term
permanent rate reduction and the other items mentioned
here.
7. Continue to incentivize manufacturing activity and the
generation of earnings in the United States through the reduced rate of
tax on manufactured earnings under section 199.
8. Simplify reporting as much as possible.
These priorities echo themes that are reflected in tax reform
proposals that have been proposed in recent years in the Senate and the
House of Representatives and by the President. I believe the work that
this committee and your colleagues in the House have already done
provides a strong foundation for the development of a detailed tax
reform package.
As I have emphasized throughout these comments, this committee's
goal ought to be providing a more stable and more competitive
environment for U.S.-based companies operating in today's global
economy. This ultimate goal is more important than achieving the lowest
possible corporate tax rate. But lowering the corporate tax rate is an
important element of competitive, pro-growth international tax reform.
I stand ready to provide whatever assistance I can in this important
initiative.
Thank you for the opportunity to present Thermo Fisher Scientific's
perspective. I am happy to answer any questions that the committee may
have.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator from Oregon
Nine months ago, the Finance Committee came together in this very
room for a hearing on how the broken U.S. tax code hurts our
competitiveness around the world--how it hinders the drive to create
red, white, and blue jobs that pay strong middle-class wages.
The discussion was dominated by the wave of tax inversions that was
cresting at the time, pounding our shores and eroding our tax base.
Headline after headline last summer announced that American companies
were putting themselves on the auction block for foreign competitors.
They'd find a buyer, headquarter overseas, and shrink their tax bills
to the lowest possible levels. In the absence of comprehensive tax
reforms from Congress, the Treasury undertook extraordinary measures
aimed at slowing the erosion.
Nine months later, the Finance Committee is back for another
hearing on international taxation. And the headlines are back, too.
Once again, there's a wave cresting--and this one's even bigger.
These days, it's foreign firms circling in the water and looking to
feast on American competitors, often in hostile takeovers. And just
like before, American taxpayers could be on the hook subsidizing these
deals.
There's an obvious lesson here. Our tax code is deeply broken. The
next flaw that exposes itself--the next wave that appears on the
horizon--may not be about inversions or hostile takeovers. But whenever
one wave breaks, you can bet there's another one rolling in, ready to
pound our economy and erode our tax base further. The dealmakers will
always get around piecemeal policy changes. Nothing short of
comprehensive tax reform will end the cycle.
There's been an awful lot of ink spilled on business pages and in
magazines about the many ways our tax code is outdated and
anticompetitive. The corporate tax rate puts the U.S. at a
disadvantage. The system of tax deferral blocks investment in the U.S.
like a self-imposed embargo. How fitting it is on St. Patrick's Day to
shine a spotlight on mind-numbing strategies like the ``Double Irish
with a Dutch Sandwich'' used to winnow down tax bills.
A modern tax code should fight gamesmanship and bring down the
corporate rate to make American businesses more competitive. That's
what my own bipartisan proposal would do--in fact, it has the lowest
rate of any proposal to date.
It's legislative malpractice to sit by and let this situation
fester. Congress can't expect the Treasury to keep playing whack-a-mole
with every issue that pops up. The latest wave of cross-border
gamesmanship shows that cannot work. So the Finance Committee will need
to lead the way on tax reform.
In my view, our end goals are bipartisan--a tax code that
supercharges America's competitiveness in tough global markets, draws
investment to the U.S. and creates high-skill, high-wage jobs in Oregon
and across the country. It'll take a lot of work and political will to
get there, but in the meantime, the waves will keep crashing and our
tax base will keep eroding. So it should be clear to everybody what has
to be done.
Thank you to all our witnesses for being here today--I'm looking
forward to a fruitful discussion.
______
Communication
----------
The LIFO Coalition
1325 G Street N.W., Suite 1000, Washington, DC 20005
TEL: 202-872-0885
March 31, 2015
Senate Committee on Finance
Attn. Editorial and Document Section
Rm. SD-219
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
To The Finance Committee:
I am writing on behalf of the LIFO Coalition in response to testimony
provided to the Committee at its March 17th hearing.
The LIFO Coalition (the Coalition), organized in April 2006, has more
than 125 members including trade associations representing hundreds of
thousands of American employers in the manufacturing, wholesale
distribution, and retail sectors, as well as companies of every size
and industry sector that use the LIFO method. A list of the LIFO
Coalition members is enclosed.
The last-in, first-out (LIFO) method of inventory is used by a diverse
array of American companies, including hundreds of thousands of pass-
through businesses, to most accurately record inventories and measure
income. Despite the widespread use of LIFO, LIFO repeal has been
considered several times in recent years as a way to raise revenues to
offset various spending initiatives or to pay for certain tax reform
objectives.
An executive of a multi-national corporation testified before the
Finance Committee on March 17th, at the Committee hearing on
international tax. In his testimony, the executive made recommendations
on tax reform, among them a suggestion that LIFO repeal ``could be an
acceptable trade-off for longer term permanent rate reduction. . . .''
LIFO Coalition members were both surprised and disturbed to read that
testimony because for the overwhelming majority of LIFO users, a
reduction in income tax rates would not in any way offset the repeal of
LIFO. The situation facing pass-through companies on LIFO is even worse
inasmuch as, based on the current debate, they could lose the use of
LIFO without a reduction in the individual tax rates that they pay.
Because the testimony of this witness was so inconsistent with the
position of the LIFO users who comprise the LIFO Coalition, the
Coalition counsel reviewed the Form 10K filed by the executive's
corporation to better understand its LIFO usage. Our review determined
that less than 15 percent of the company's inventory is on LIFO, and
that its LIFO reserve is very small.
With so little of its inventory on LIFO and such a small LIFO reserve,
repeal of LIFO may well not be burdensome for this company. However,
these are both unrepresentative statistics in comparison to most
companies on LIFO.
To demonstrate that point, following the Finance Committee hearing, we
quickly surveyed the members of the National Association of Wholesaler-
Distributors (NAW) which are LIFO companies to determine the percentage
of their inventories that are on LIFO. Of the 86 companies that
responded to the survey, more than half (44 of 86) have 100 percent of
their inventory on LIFO. And for more than 72 percent of the companies
(62 of the 86), more than 70 percent of their inventory is on LIFO.
Further, a tax firm which specializes in LIFO systems advised the
Coalition that, ``of the hundreds of LIFO calculations we prepare
annually for manufacturers, wholesalers and retailers . . . the vast
majority, over 80%, use LIFO for all of their inventory.''
This data and that of the NAW members is consistent with that of the
diverse cross-section of industries that comprise the LIFO Coalition.
The Coalition would be happy to substantiate that observation and
provide additional data if the Committee requests that we do so.
The LIFO Coalition would ask the members of the Finance Committee to
bear in mind the very different circumstances of the witness who
testified that repeal of LIFO would be acceptable as they consider his
recommendation on LIFO repeal.
For the overwhelming majority of the LIFO companies which have most or
all of their inventory on LIFO and which have significant LIFO
reserves, the repeal of LIFO is not only an unacceptable component of
tax reform, it would both impose a punitive retroactive tax increase on
them and force them to use an inventory accounting method prospectively
that is totally inconsistent with their business models. For many of
those companies, particularly thinly capitalized companies with small
profit margins, repeal of LIFO would simply force them out of business.
The LIFO Coalition urges the Finance Committee to oppose LIFO repeal,
as a separate measure or as part of a comprehensive tax reform effort.
Respectfully,
Jade West, Executive Secretariat
The LIFO Coalition
Enclosure
The Lifo Coalition
1325 G Street N.W., Suite 1000, Washington, DC 20005 TEL: 202-872-0885
Aeronautical Repair Station MDU Resources Group
Association
Alabama Grocers Association Metals Service Center Institute
American Apparel & Footwear Mid-America Equipment Retailers
Association Association
American Chemistry Council Midwest Equipment Dealers
Association
American Foundry Society Minnesota Grocers Association
American Fuel & Petrochemical Minnesota-South Dakota Equipment
Manufacturers Dealers Association
American Gas Association Missouri Grocers Association
American International Automobile Missouri Retailers Association
Dealers Association
American Iron & Steel Institute Montana Equipment Dealers
Association
American Petroleum Institute Moss Adams LLP
American Road & Transportation NAMM-The International Music
Builders Association Products Association
American Supply Association National Association of Chemical
Distributors
American Veterinary Distributors National Association of Convenience
Association Stores
American Watch Association National Association of Electrical
Distributors
American Wholesale Marketers National Association of
Association Manufacturers
Americans for Tax Reform National Association of Shell
Marketers
AMT--The Association for National Association of Sign Supply
Manufacturing Technology Distributors
Associated Equipment Distributors National Association of Sporting
Goods Wholesalers
Association for High Technology National Association of Wholesaler-
Distribution Distributors
Association for Hose & Accessories National Automobile Dealers
Distribution Association
Association of Equipment National Beer Wholesalers
Manufacturers Association
Auto Care Association National Electrical Manufacturers
Association
Automobile Dealers Association of National Federation of Independent
Alabama Business
Brown Forman Corporation National Grocers Association
Business Roundtable National Lumber and Building
Material Dealers Association
Business Solutions Association National Marine Manufacturers
Association
California Independent Grocers National Paper Trade Alliance
Association
Cardinal Health National Roofing Contractors
Association
Caterpillar Inc. National RV Dealers Association
Ceramic Tile Distributors National Stone Sand & Gravel
Association Association
Connecticut Food Association Nebraska Grocery Industry
Association
Copper & Brass Fabricators Council New Hampshire Grocers Association
Copper & Brass Servicenter New Jersey Food Council
Association
Deep South Equipment Dealers North American Equipment Dealers
Association Association
Deere & Company North American Wholesale Lumber
Association
East Central Ohio Food Dealers Ohio Equipment Distributors
Association Association
Equipment Marketing & Distribution Ohio Grocers Association
Association
Far West Equipment Dealers Ohio-Michigan Equipment Dealers
Association Association
Farm Equipment Manufacturers Paperboard Packaging Council
Association
Financial Executives International Pet Industry Distributors
Association
Food Industry Alliance of New York Petroleum Equipment Institute
State
Food Marketing Institute Petroleum Marketers Association of
America
Forging Industry Association Power Transmission Distributors
Association
Gases and Welding Distributors Printing Industries of America
Association
Greater Boston Chamber of Commerce Professional Beauty Association
Health Industry Distributors Retail Grocers Association of
Association Greater Kansas City
Healthcare Distribution Management Retail Industry Leaders Association
Association
Heating, Airconditioning & SBE Council
Refrigeration Distributors
International
Illinois Food Retailers Association Security Hardware Distributors
Association
Independent Lubricant Manufacturers Service Station Dealers of America
Association and Allied Trades
Industrial Fasteners Institute Society of Independent Gasoline
Marketers of America
Industrial Supply Association SouthEastern Equipment Dealers
Association
International Foodservice Southern Equipment Dealers
Distributors Association Association
International Franchise Association SouthWestern Association
International Sanitary Supply Souvenir Wholesale Distributors
Association Association
International Sealing Distribution SPI: The Plastics Industry Trade
Association Association
International Wood Products State Chamber of Oklahoma
Association
Iowa Grocers Industry Association Textile Care Allied Trades
Association
Iowa Nebraska Equipment Dealers Tire Industry Association
Association
Jewelers of America U.S. Chamber of Commerce
Kansas Food Dealers Association Washington Food Industry
Association
Kentucky Association of Convenience Wholesale Florist & Florist
Stores Supplier Association
Kentucky Grocers Association Wine & Spirits Wholesalers of
America
Louisiana Retailers Association Wine Institute
Marine Retailers Association of the Wisconsin Grocers Association, Inc.
Americas
Maryland Retailers Association Wood Machinery Manufacturers of
America
McKesson Corporation
[all]