[Senate Hearing 115-384]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 115-384
 
                        INTERNATIONAL TAX REFORM

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

                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 3, 2017

                               __________
                               
                               
                               
                               
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                               

                                     
                                     

            Printed for the use of the Committee on Finance
            
            
            
            
                                   _________ 

                       U.S. GOVERNMENT PUBLISHING OFFICE
                   
 32-785-PDF                      WASHINGTON : 2018      
           


                          COMMITTEE ON FINANCE

                     ORRIN G. HATCH, Utah, Chairman

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

                     A. Jay Khosla, Staff Director

              Joshua Sheinkman, Democratic Staff Director

                                  (ii)
                                  
                                  
                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman, 
  Committee on Finance...........................................     1
Wyden, Hon. Ron, a U.S. Senator from Oregon......................     5

                               WITNESSES

Wells, Bret, professor of law and George R. Butler research 
  professor of law, Law Center, University of Houston, Houston, 
  TX.............................................................     8
Clausing, Kimberly A., Ph.D., Thormund A. Miller and Walter Mintz 
  professor of economics, Reed College, Portland, OR.............     9
Shay, Stephen E., senior lecturer on law, Harvard Law School, 
  Harvard University, Cambridge, MA..............................    11
Grinberg, Itai, professor of law, Georgetown University Law 
  Center, Washington, DC.........................................    13

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Clausing, Kimberly A., Ph.D.:
    Testimony....................................................     9
    Prepared statement...........................................    47
Grinberg, Itai:
    Testimony....................................................    13
    Prepared statement...........................................    57
Hatch, Hon. Orrin G.:
    Opening statement............................................     1
    Prepared statement...........................................    66
Shay, Stephen E.:
    Testimony....................................................    11
    Prepared statement...........................................    69
Wells, Bret:
    Testimony....................................................     8
    Prepared statement...........................................    78
Wyden, Hon. Ron:
    Opening statement............................................     5
    Prepared statement...........................................    83

                             Communications

American Council of Life Insurers (ACLI).........................    85
A. Philip Randolph Institute et al...............................    90
Association of Americans Resident Overseas (AARO)................    92
Center for Fiscal Equity.........................................    93
Democrats Abroad.................................................    95
FACT Coalition...................................................    96
Hunt, Gina M.....................................................    98
Investment Company Institute (ICI)...............................    99
Kadet, Jeffery M.................................................   101
Reinsurance Association of America (RAA).........................   106
Tax Innovation Equality (TIE) Coalition..........................   108


                        INTERNATIONAL TAX REFORM

                              ----------                              


                        TUESDAY, OCTOBER 3, 2017

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:05 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. 
Orrin G. Hatch (chairman of the committee) presiding.
    Present: Senators Roberts, Thune, Isakson, Portman, Toomey, 
Cassidy, Wyden, Stabenow, Cantwell, Nelson, Carper, Cardin, 
Bennet, Casey, Warner, and McCaskill.
    Also present: Republican Staff: Jay Khosla, Staff Director; 
Jennifer Acuna, Senior Tax Counsel and Policy Advisor; Tony 
Coughlan, Senior Tax Counsel; Jennifer Kuskowski, Health Policy 
Director; Alex Monie, Professional Staff Member; Eric Oman, 
Senior Policy Advisor for Tax and Accounting; and Jeff Wrase, 
Chief Economist. Democratic Staff: Joshua Sheinkman, Staff 
Director; Ryan Abraham, Senior Tax Counsel; and Tiffany Smith, 
Chief Tax Counsel.

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

    The Chairman. I want to thank everyone for attending this 
morning. Before we begin, I just want to say something about 
the awfulness of this past weekend. I think I speak for the 
entire committee when I say that our thoughts and prayers go 
out to those who were impacted by the horrific shootings in Las 
Vegas and to everyone in that community and across the country. 
It has been shocking to everybody.
    Nevada and Utah share a border, and a number of people from 
both States frequently travel back and forth. I have gotten to 
know a number of great people from Nevada over the years, not 
the least of whom is our colleague on this committee, Senator 
Heller. I am sure he is hurting today, as are so many people in 
that community.
    Our hearts go out to all of them, and I am praying that 
everyone who has been impacted by this terrible tragedy will be 
able to find peace, comfort, and, hopefully, a speedy recovery.
    With that, I would like to turn to the business at hand. 
Today's hearing will focus on another piece in the complex tax 
reform puzzle. But before I get to the details of international 
tax reform, let me briefly address the elephant in the room.
    Last week, I joined with the Secretary of the Treasury, the 
National Economic Council Director, the Senate Majority Leader, 
the House Speaker, and the chairman of the Ways and Means 
Committee to put forward a broad, unified framework for tax 
reform. As the document makes clear, this is just one step in 
the larger tax reform effort. But let us not mince words: it is 
a big step.
    I would be hard-pressed to remember the last time the White 
House and the House and Senate leadership were in agreement on 
an issue as complicated as tax reform.
    We began discussions earlier this year, and at that time 
there were a number of high-profile differences among us. I am 
very pleased that we have been able to bridge so many divides, 
and I am optimistic about our chances going forward.
    I particularly want to thank our ranking member for his 
open mind and his ability to look at these matters and do so in 
a constructive way. He has worked very hard on tax reform for 
years, and, frankly, I hope we can do something together.
    I want to express my gratitude to the others who worked on 
the framework and to the members of the committee who have 
helped us move the tax reform effort forward. I particularly 
want to acknowledge the work of Senator Grassley who, as a 
former chairman and ranking member of this committee, laid much 
of the groundwork for the ideas we are discussing and for the 
progress we have made. It was under Senator Grassley's 
chairmanship that the Finance Committee in 2003-2004 initiated 
the last package of international tax reforms.
    Now, as some have already pointed out, the framework 
released last week is not, by design, a complete plan. Of 
course, that has not stopped think tanks and analysts from 
speculating about its fiscal and distributional impact. We have 
already seen groups attempting to reverse-engineer a completed 
tax plan from the framework, generally filling in blanks with 
their own ideas and assumptions and reaching conclusions about 
a plan they have essentially written themselves. Generally 
speaking, it seems that the blank-filling exercise is designed 
to cast the framework in the worst possible light.
    The framework does not include any specific information 
about things like the break points for the individual tax 
brackets, the value and indexing of the enhanced Child Tax 
Credit, or the precise rate for the top bracket. Without those 
and other key pieces of information, there is simply no way for 
any outside party to produce a credible analysis of the 
framework, let alone a detailed estimate of revenue and the 
distribution of tax burden.
    But that did not stop a certain think tank from issuing a 
``preliminary analysis'' of the framework at the end of last 
week, nor did it stop any of the framework's critics from 
citing that analysis as authoritative. It is odd, however, that 
the analysis came with a disclaimer that it was expressing only 
the views of the authors, not the think tank itself. Even more 
unusual, no specific authors were listed on the analysis, 
probably because no respectable academic or researcher was 
willing to have their name associated with something so 
haphazardly cobbled together.
    But I digress.
    As the framework makes clear, this committee will be 
responsible for writing the Senate tax reform bill, and I am 
going to work with members of the committee to make sure we are 
successful. For now, everyone should take every estimate or 
analysis about the plan from outside groups with an 
exceptionally large grain of salt.
    Moving on, I also want to say that my preference has always 
been for this to be a bipartisan effort. And I think there are 
several elements in the framework where Democrats and 
Republicans can work together, and I hope we will be able to do 
so.
    The subject of today's hearing is a great example of an 
area where both parties are largely in agreement. Under our 
current system, U.S. multinationals that accrue overseas 
earnings can defer U.S. tax on those earnings until they are 
brought back to the United States.
    In 1962, due to concerns that businesses were moving 
passive and highly mobile income-producing assets offshore, 
Congress enacted subpart F of the Internal Revenue Code. Under 
subpart F, income from these sources is immediately subject to 
U.S. tax, while taxes on active and less-mobile offshore income 
remain deferred until the earnings are repatriated.
    This is a bit confusing in the abstract, so let me provide 
a hypothetical. Imagine that an American company headquartered 
in the United States and subject to our corporate tax rates 
opens a factory in Germany, incorporating a subsidiary there. 
The income generated by the subsidiary, legally a German 
company, will be subject to German taxes paid to German 
authorities. So long as the American company does not bring 
that income back to the United States, its income from the 
German subsidiary will not be subject to U.S. taxes. And in 
fact, we are finding that many American companies have been 
keeping this type of income offshore in order to avoid our 
punitive corporate taxes.
    Now, imagine if the American company parked its money in 
stocks, bonds, or other passive investments and moved the 
income generated from those assets to an offshore low-tax 
jurisdiction. Under subpart F, that type of passive and highly 
mobile income is immediately subject to U.S. tax without any 
deferral. Now, I know this is a bit arcane. And frankly, I 
would be nodding off if I did not know how this story ended.
    As a result of subpart F, American companies have engaged 
in a number of sophisticated and complex tax-planning schemes 
to keep earnings offshore to avoid the U.S. corporate tax. 
According to the Joint Committee on Taxation, American 
companies are currently holding more than $2.6 trillion in 
earnings offshore, thanks in large part to our worldwide tax 
system, something often referred to as the, quote, ``lock-out'' 
effect.
    That is $2.6 trillion held by foreign subsidiaries of U.S. 
corporations that the parent companies are unable to invest 
here at home. That is income that could be used to create more 
American jobs and grow wages for American workers. And that 
income has attracted the interests of foreign tax authorities, 
particularly in Europe, who wish to tap into what is, by all 
rights, part of the U.S. tax base.
    Now, I know some of my colleagues have proposed to solve 
this problem of earnings being locked out of the United States 
by transitioning to a pure worldwide system with no deferral. 
And while that would rid us of the lock-out problem, it would 
significantly increase pressures for American multinationals to 
invert or be acquired by foreign-based multinationals.
    Many of us have talked at length about inversions in recent 
years and the problems they pose for our economy and our tax 
base. Perhaps even worse than an inversion is when a larger 
foreign corporation simply acquires a smaller American 
corporation. Either way, the result is the same. A foreign 
corporation becomes the parent of the restructured 
multinational group.
    Companies takes these routes for a number of reasons. 
First, they want to escape the high corporate tax rate in the 
United States, which, as we have heard in our last hearing, is 
the highest in the industrialized world. Second, they want to 
minimize the damage caused by our worldwide tax system. If an 
American multinational can successfully move its tax situs out 
of the U.S., it will only owe taxes on the earnings accrued 
here.
    There is also the matter of earnings stripping, which is 
another complicated topic that I look forward to our witness 
panel discussing today. All of these problems are key for 
today's hearing because they highlight the shortcomings of our 
outdated worldwide tax system.
    The solution to these and other problems, to put it very 
simply, is to transition to a territorial-based system like 
virtually all of our foreign competitors. Under such a system, 
an American company would owe taxes only on income earned in 
the United States. Income earned in foreign jurisdictions would 
only be taxed by those jurisdictions, not here.
    This type of reform would have to be accompanied by 
enforceable anti-base-erosion rules to make sure companies, 
both domestic and foreign, do not exploit loopholes in order to 
unduly avoid paying taxes here. That approach is endorsed in 
the united framework. It was also suggested in the last 
Congress by our committee's bipartisan working group on 
international tax, which was co-chaired by Senator Portman and 
by current Senate Minority Leader Schumer.
    Other members of the committee have also made significant 
contributions in the area of international tax reform, 
including both my colleague Senator Wyden, whom I have great 
respect for--I have respect for everybody on this committee--
and of course, Senator Enzi, who is always working to try to do 
good things here.
    Finally, as many of you know, I have been interested for 
some time in the idea of better integrating our individual and 
corporate tax systems. I continue to believe that corporate 
integration by means of a dividends paid deduction can 
significantly help with some of our existing problems. And I 
look forward to talking more about that today as well.
    Once again, international tax reform is an area that is 
rife for bipartisanship if we are willing to work together on 
goals that members from both parties share. I hope people will 
note that the international portion of the framework is 
particularly short on details. That is because these problems 
cannot be solved in a nine-page framework document. That will 
require the work and effort of this committee.
    Long story short: today's hearing will surely be 
informative, important, and timely.
    And with that, I turn to my good friend and ranking member, 
Senator Wyden, for his opening remarks.
    [The prepared statement of Chairman Hatch appears in the 
appendix.]

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

    Senator Wyden. Thank you, Mr. Chairman.
    I will turn to taxes in just a moment, but like you, I want 
to comment briefly on the horrifying shooting in Las Vegas.
    Mr. Chairman and colleagues, here is my takeaway from this. 
It is just unconscionable that this epidemic of violence goes 
on and on and on and on, and policymakers in Washington, DC sit 
on their hands and do nothing about it.
    Now, we are going to talk about a different subject today, 
but I think all of us are just heartsick about this. I continue 
to believe that there is an opportunity for common sense to 
prevail and reduce gun violence in America.
    Mr. Chairman, on taxes, let me first of all thank you for 
your very kind words. And I continue to believe that there is 
an opportunity for us in the Finance Committee to find common 
ground.
    Democrats have laid out principles that are important to 
us. And I would just say, colleagues, the principles Democrats 
have laid out in the letter very much resemble the bipartisan 
bill I wrote with Senator Dan Coats, now a member of the Trump 
Cabinet. And I see Senator Cassidy--that is where Dan Coats sat 
when we put together the bill.
    And Chairman Hatch has ideas that are important that we 
talked about. So I continue to believe that there is an 
opportunity for common ground here. And I think the principles 
that Democrats have talked about in our letter--where our 
caucus was thoroughly united around where we ought to be 
headed--and some of the ideas Chairman Hatch has talked about, 
are an opportunity to find common ground here.
    Now, the Trump team says their international tax framework 
is about creating jobs and firing up the country's economic 
engine. The details, however, show it is really a con job on 
America's middle class.
    Behind the scenes, the administration recently scrubbed 
from the Treasury website a 2012 paper showing that workers do 
not primarily benefit from a corporate rate cut--that trickle-
down economics are pretty much a fantasy. Apparently, that 
mainstream economic analysis had to be purged because it 
basically did not jibe with the Trump team's patter.
    They claimed the study was out of date, but they did not 
find reason to take down any of the other papers that date back 
as far as the 1970s. That sure makes it look like the Trump 
team is simply afraid of the American people getting the facts 
about taxes.
    And the con job is not just about hiding those facts that 
are inconvenient. The administration is currently working to 
pick apart the rules that were designed to curb the scourge of 
inversions, what we call the inversion virus, which is a big 
factor in decimating our tax base.
    Now, folks at home in Oregon at town halls tell me they 
want tough policies to stop companies from shipping jobs 
overseas, especially in towns where mills and factories are 
shuttered and Main Street is vacant. The American people want 
red, white, and blue jobs with good wages. They believe 
corporations ought to pay their fair share.
    What is on offer, based on what we know today about the 
Trump plan, is going to disappoint. The Republican tax 
framework that has been okayed is essentially a corporate wish 
list, a massive rate cut, a pure territorial system, barely a 
nod to tough rules to prevent companies from sending jobs 
abroad or running away to set up a headquarters on some zero-
tax island.
    Base erosion, a minimum tax--these vital parts of the 
international tax debate seem to be an afterthought. This is an 
invitation for corporations to game the system, and the tax 
lobby has got to be licking its chops this morning.
    Bottom line, the President is giving multinationals a green 
light to pay no taxes. Then, for the benefit of people reading 
the news, there is a lot of happy talk about jobs, economic 
growth, and the biggest tax cut ever. It is not hard to predict 
what will happen if this multi-trillion-dollar tax giveaway to 
the wealthy and corporations is enacted.
    Our tax base will keep eroding, and the deficit will 
skyrocket. Lawmakers are going to come after Social Security, 
Medicare, and Medicaid yet again. And by the way, this is not 
without precedent. Privatizing Social Security was the first 
priority, the very first priority, of the Bush administration's 
second term after its big, 
unpaid-for tax cuts.
    Let us remember that every percentage point decrease in the 
corporate rate results in a loss of $100 billion in revenue. 
Perhaps that is the kind of issue that caused Senator Corker 
over the weekend, when I caught him on one of the TV shows, to 
say that he has some big concerns about the deficit.
    Democrats have reached out to the majority with our 
principles for tax reform. There are a lot of members on this 
side with big ideas of how to help the middle class, create 
jobs, bring some fairness to the tax code through bipartisan 
reform. As I said, that is the kind of thing Dan Coats and I 
put our names on; that is the kind of reform that Ronald Reagan 
signed into law back in 1986.
    But the framework that was released last week does not 
resemble what Ronald Reagan accomplished, and it is nowhere 
near, as I say, the reforms built on fairness and fiscal 
responsibility that Senate Republicans over the years have 
worked with Democrats to write into bipartisan plans.
    And wrapping up, I believe international taxation is going 
to be a key part of the debate and involves a lot of very 
complicated questions.
    The committee has a terrific panel of witnesses here. I am 
particularly pleased that Kim Clausing, professor at Reed 
College from my neighborhood in southeast Portland--which 
Senator Stabenow has visited, by the way--is going to give us a 
very thoughtful presentation, as Oregonians invariably do.
    And I also respect the views of our other witnesses as 
well, and we have heard from a number of them over the years.
    Mr. Chairman, thank you, and I look forward to working with 
you.
    The Chairman. Thank you, Senator.
    [The prepared statement of Senator Wyden appears in the 
appendix.]
    The Chairman. International taxation is a very complex 
issue area, and we are grateful to each of our witnesses for 
being with us today to discuss it with us. We will hear from 
each of the witnesses in the order they are introduced.
    First, we will hear from Professor Bret Wells, a professor 
of law and George Butler research professor at the University 
of Houston Law Center. Professor Wells teaches in the fields of 
tax law and oil and gas law. Prior to joining the University of 
Houston Law Center, Professor Wells served as the vice 
president, treasurer, and chief tax officer for BJ Services 
company. He received his bachelor's degree from Southwestern 
University and then went on to earn his law degree from the 
University of Texas School of Law.
    Next up will be Dr. Kimberly Clausing, the Thormund A. 
Miller and Walter Mintz professor of economics at Reed College. 
Dr. Clausing's research is focused on the taxation of 
multinational firms and how their decisions are impacted by 
government decisions. She is the recipient of two Fulbright 
Research Awards and has worked on related policy research with 
many different think tanks. She has worked previously as a 
staff economist for the Council of Economic Advisers and also 
served as an associate professor of economics at Wellesley 
College. Professor Clausing received her B.A. from Carleton 
College and her Ph.D. from Harvard University.
    Third will be Professor Stephen Shay, a senior lecturer on 
law at Harvard Law School. Before joining the Harvard Law 
School faculty, Professor Shay served as the Deputy Assistant 
Secretary for International Tax Affairs at the U.S. Treasury. 
Before that, Professor Shay was a tax partner for 22 years with 
Ropes and Gray LLP. Prior to that work, Professor Shay served 
in the Office of International Tax Counsel at the Department of 
Treasury, including as International Tax Counsel from 1982 to 
1987. Professor Shay graduated from Wesleyan University with 
his undergraduate degree and earned both his J.D. and M.B.A. 
degrees from Columbia University.
    And finally, we will hear from Professor Itai Grinberg, a 
professor of law at Georgetown University Law Center. Professor 
Grinberg's research interests center on cross-border taxation 
and development and U.S. tax policy. Prior to his work at 
Georgetown, Professor Grinberg worked at the Office of 
International Tax Counsel at the Department of Treasury. Before 
that, Professor Grinberg practiced tax law at Skadden, Arps, 
Slate, Meagher, and Flom LLP. In 2005, Professor Grinberg 
served as counsel to the President's Advisory Panel on Federal 
Tax Reform. Professor Grinberg earned his B.A. from Amherst 
College and his J.D. from Yale Law School.
    I want to thank you all again for being here, and you are a 
particularly great panel. We all look forward to hearing your 
testimony here today and your expert views on these important 
matters.
    So, Mr. Wells, will you please get us started then?

STATEMENT OF BRET WELLS, PROFESSOR OF LAW AND GEORGE R. BUTLER 
 RESEARCH PROFESSOR OF LAW, LAW CENTER, UNIVERSITY OF HOUSTON, 
                          HOUSTON, TX

    Mr. Wells. All right. Thank you. My name is Bret Wells, and 
I want to thank Chairman Hatch, Ranking Member Wyden, and the 
other members of the committee for inviting me to testify.
    Before addressing international taxation, I want to make a 
preliminary statement about the related topic of business tax 
reform.
    As to business tax reform, Chairman Hatch is to be 
commended for his work on corporate integration. Under his 
partial dividends paid deduction proposal, the dividend 
deduction can be limited to preserve corporate-level taxation 
for earnings in an amount broadly equal to the equity ownership 
of nontaxable shareholders. A partial dividends paid deduction 
regime narrows the tax distinction between debt and equity.
    A partial dividends paid deduction regime in combination 
with a dividends and capital gains preference can result in a 
combined tax rate on corporate business profits that 
approximates the individual rate, thus eliminating the 
disparity in tax rates between C corporations and pass-through 
entities. Thus, a partial dividends paid deduction regime is a 
critical step in the right direction and should be part of the 
final business tax reform legislation.
    Now I want to make a few statements about outbound 
international taxation, but I want to start this thought 
process from the perspective of the foreign-based multinational 
enterprise.
    From the perspective of the foreign-based multinational 
enterprise, outside of its country of residency, only the 
business profits attributable to a particular territory are 
subject to taxation in the various inbound host countries. So 
the inbound, foreign-based enterprise is afforded a territorial 
result regardless of the formal international tax choices that 
might be made by a particular inbound host country. Faced with 
this reality, each country must decide whether or not to have a 
system of international taxation that would disadvantage their 
own resident corporations or would instead afford comparable 
territorial tax results for resident multinational enterprises 
as are afforded by the country to inbound, 
foreign-based enterprises.
    This committee is well aware that every other G7 country, 
after facing this Hobson's choice, has opted for some form or 
variant of a territorial tax regime. For the same 
competitiveness reasons that motivated those decisions, this 
Congress should now adopt a territorial tax regime to level the 
playing field. But at the same time, this Congress must take 
steps to protect the U.S. tax base from inappropriate profit-
shifting strategies. Under current law, the U.S. subpart F 
regime provides a fairly narrow set of exceptions to the 
deferral privilege, and these anti-deferral provisions serve as 
an important backstop to prevent tax avoidance of U.S.-origin 
profits.
    Another means to attack profit shifting with respect to 
U.S.-
origin profits would be to adopt greater source-taxation 
measures. Attacking the profit-shifting problem with a source-
taxation solution has the favorable benefit of implementing 
base protection measures that apply equally to both U.S.-based 
multinational enterprises and foreign-based multinational 
enterprises.
    In contrast, solutions that rely on residency taxation 
principles, such as a minimum tax under the U.S. subpart F 
regime, only protect against the profit-shifting strategies of 
U.S.-based multinationals. Thus, I favor source-taxation 
measures over an expanded subpart F regime, exactly because 
subpart F measures create divergent tax results for U.S.-based 
multinational enterprises and leave in place the inbound 
earnings-stripping advantages for 
foreign-based multinational enterprises.
    With the balance of my time, I want to highlight three key 
issues with respect to inbound international tax reform.
    First, leveling the playing field requires that Congress 
address each type of inbound earnings-stripping technique that 
unfairly advantages the U.S. activities of foreign-based 
multinational enterprises and companies that have engaged in 
corporate inversions. We should not treat those companies more 
harshly than U.S. companies, but they should not have an unfair 
earnings-stripping advantage.
    Second, corporate inversions are a telltale symptom of the 
larger inbound earnings-stripping cancer. Thus, instead of 
attacking the corporate inversion messenger in isolation, 
Congress should focus attention on the inversion message, 
namely that the earnings-
stripping techniques available to foreign-based multinational 
enterprises, if left unchecked, create an unlevel playing field 
that motivates U.S. companies to engage in corporate 
inversions. Corporate inversions are simply the alter ego of 
the inbound earnings-
stripping problem and should not be viewed as a separate policy 
problem.
    Third, Congress needs a new approach to the earnings-
stripping problem. And again, Congress must address this 
problem in a comprehensive way. I believe that a base-
protecting surtax does comprehensively address the inbound 
earnings-stripping problem, so I urge this committee to 
seriously include this proposal in the final legislation.
    This concludes my opening statement. Thank you for allowing 
me to speak at today's hearing. I would be happy to answer any 
of your questions.
    The Chairman. Thank you so much.
    [The prepared statement of Mr. Wells appears in the 
appendix.]
    The Chairman. We will now go to you, Dr. Clausing. And we 
are looking forward to hearing your testimony as well.

 STATEMENT OF KIMBERLY A. CLAUSING, Ph.D., THORMUND A. MILLER 
    AND WALTER MINTZ PROFESSOR OF ECONOMICS, REED COLLEGE, 
                          PORTLAND, OR

    Dr. Clausing. Chairman Hatch, Ranking Member Wyden, members 
of the committee, thank you for inviting me to share my views 
on international tax reform.
    The most essential trade-off we face in international tax 
reform is between tax competitiveness and corporate base 
protection.
    First, let us think about this idea of competitiveness. 
When folks talk about competitiveness, they are usually 
referring to multinational companies. These companies are 
mobile and they are very profitable, but they also tend to face 
low effective tax rates.
    Of course, we also have many smaller companies that face 
higher tax rates. But our most mobile multinational companies 
simply do not have a competitiveness problem. These companies 
are some of the most successful companies on the planet.
    If you look at after-tax corporate profits over the last 10 
years, they have averaged 9 percent of national income, 50 
percent higher than they averaged over the previous 40 years. 
Our companies dominate lists of the world's most successful 
companies, and their dominance has not dimmed in recent years.
    And our corporate tax revenues are about one-third lower 
than those in peer countries relative to our economy's size. It 
is therefore difficult to claim that our companies need even 
more after-tax profits to be successful or to unleash 
investment.
    That said, there is far more to competitiveness than tax. 
We do need more investments in infrastructure, education, and 
research to equip workers for the modern global economy.
    Now, let us also consider our serious corporate tax base-
erosion problem. My past research shows that international 
profit shifting to tax havens now costs the U.S. Government 
more than $100 billion every year. This is big money, money 
that could be used to lower tax rates or pay for key 
investments. Our corporate tax base is also quite narrow.
    Beyond that, the proposed new preferential rates on pass-
through income are likely to create a huge new base-erosion 
problem. This step will drain revenue from our tax system on a 
large scale. So I suggest four guiding principles for future 
international tax reform.
    First, let us not make a bad base-erosion problem worse. 
Moving to a territorial system further tilts the playing field 
toward earning income abroad, and it will make our base-erosion 
problem larger.
    If a territorial system is adopted, lawmakers should be 
very serious about tough base-erosion protection mechanisms. 
Slashing the tax rate is not going to be enough here. There 
will always be jurisdictions with lower and even zero rates. 
Over 80 percent of our profit-shifting problem is with havens 
that have rock-bottom tax rates.
    To reduce profit shifting, a per-country minimum tax could 
be helpful. And this would be far more effective than a global 
minimum tax. But a simpler and more intellectually coherent 
plan would be to simply combine a rate reduction with the 
elimination of deferral. This evens the tax treatment of 
foreign and domestic income, no longer tilting the playing 
field toward tax havens. And this is the approach behind 
several bipartisan proposals put together by Senator Wyden and 
his Republican cosponsors. This approach should be combined 
with steps to limit inversions, such as toughening earnings-
stripping laws and other measures.
    A second principle is regarding repatriation. It simply 
does not make good economic sense from either an efficiency or 
an equity perspective to give a big tax break for income that 
has already been earned and moved to tax havens. Special tax 
breaks on haven earnings are not warranted, and evidence 
suggests they will not help investment, they will not help 
employment, and they will not help the middle class.
    Third, let us pay serious attention to the middle class. 
Business tax cuts primarily benefit those at the top of the 
income distribution. All major respected models distribute 
business tax cuts primarily to capital or shareholders, and 
there is a good reason for that.
    Recent analysis of the Big Six framework by the highly 
respected and nonpartisan Tax Policy Center showed that, when 
fully phased in, it would give the top 1 percent 80 percent of 
the tax cuts with an average tax cut of over $200,000, whereas 
the bottom 80 percent of the distribution get a tax cut that 
averages less than $300. After decades of increasing inequality 
and middle-class economic stagnation, tax policy should be 
working to counter, not reinforce these inequalities.
    Finally, let us not increase the deficit. We already have a 
debt-to-GDP ratio over 75 percent, and our Social Security and 
Medicare commitments are due to increase deficits by 2 
percentage points over the coming decade. We need to keep 
budget flexibility so we are ready if another recession 
arrives.
    Deficits are basically taxes on our children and 
grandchildren. And on this topic, we also owe future 
generations a serious response to climate change. Recent 
hurricanes in Houston and forest fires in Oregon serve as a 
reminder of this urgent priority. A carbon tax is both a very 
effective response but also a key step towards more efficient 
taxation. Economists throughout the political spectrum back 
this idea, for good reasons.
    Thank you so much for your invitation to testify today. I 
look forward to your questions.
    The Chairman. Thank you.
    [The prepared statement of Dr. Clausing appears in the 
appendix.]
    The Chairman. Mr. Shay, we will turn to you now.

 STATEMENT OF STEPHEN E. SHAY, SENIOR LECTURER ON LAW, HARVARD 
         LAW SCHOOL, HARVARD UNIVERSITY, CAMBRIDGE, MA

    Mr. Shay. Thank you, Mr. Chairman. Good morning, Ranking 
Member Wyden, members of the committee.
    I want to start with two general observations before 
getting into international tax reform in particular. I agree 
with Professor Clausing. Tax reform should be revenue-neutral 
or increase net revenues. We need to raise the revenue to fund 
needed public expenditure, not add trillions to the national 
debt. In the face of pressing needs for public investment in 
human capital and infrastructure, and demographic trends that 
cannot be reversed, we will be forced to spend more in the 
future, even as we need to spend today to help our neighbors in 
Texas, Florida, Puerto Rico, and elsewhere where there are 
crises.
    It would be foolhardy to adopt a revenue-losing tax reform, 
particularly one that would benefit those with high incomes, in 
the unsupported hope based on ``tooth fairy'' economics that 
short-term growth will outweigh longer-term effects on interest 
rates and inflation.
    The second general observation I would make is that tax 
reform should maintain or enhance our tax system's current 
level of progressivity in distributing the benefits and burdens 
of government. The taxation of cross-border income of U.S. 
multinationals should be analyzed under the same fairness 
standards that apply to other income. In particular, a reduced 
holiday tax rate on U.S. multinationals' pre-effective-date 
offshore earnings will overwhelmingly benefit high-income 
Americans and foreigners who are shareholders of these 
companies. And it is not justified on policy grounds.
    Turning to international taxation, my first choice also 
would be to proceed along the lines of the Wyden-Coats 
Bipartisan Tax Fairness and Simplification Act of 2011. Why do 
I say this?
    The evidence does not support claims that U.S. 
multinationals are overtaxed or noncompetitive as a consequence 
of U.S. tax rules. In April 2016, the U.S. Treasury Department 
found that the average tax paid by U.S. companies from 2007 to 
2011 on their book earnings plus foreign dividends--actual 
dividends, not deemed dividends--was 22 percent. I have charts 
in my testimony at pages 4 and 5 that illustrate that study.
    The most recently available statistics of income data for 
2012, which is the most recent year, show that foreign 
subsidiaries of U.S. multinationals--so this is the income that 
was not paid out in actual dividends--paid in the aggregate an 
average foreign tax rate of 12 percent. This is not just a few 
outliers, this is the average rate of foreign tax on foreign 
subsidiaries' earnings and profits before tax--12 percent. If 
you are thinking in terms of a minimum tax on foreign income, 
you have to deal with that.
    And I also have a chart in my testimony at page 6 that 
shows that 52 percent of those low-taxed earnings are earned at 
even lower tax rates in some of those countries, in five 
countries that I consider tax havens.
    So a territorial system has been suggested, at least in the 
GOP tax reform plan that was issued on September 27th. If not 
designed properly, it can leave us worse off than we are today. 
I have suggested several principles that will help maintain a 
strengthened minimum tax that has some prospect to actually 
improve from where we are today.
    First, the minimum tax should be a relatively high 
percentage of the regular U.S. tax rate adopted in tax reform, 
no less than 60 percent and preferably 80 percent of the 
regular rate that you end up at. And I personally think 20 
percent is fantasy in a revenue-neutral deal, so we are talking 
higher rates.
    Second, it absolutely needs to be applied on a country-by-
country basis and not a global basis. If you do it on a global 
basis, people like myself in my prior career can blend high and 
low foreign tax rates, and in some cases this will incentivize 
foreign investments. You need to do it country by country.
    You should allow a foreign tax credit, but the foreign tax 
credit should be prorated so that the amount of foreign taxes 
you credit will not be greater than the portion of those taxes 
that the minimum tax rate you choose bears to your regular tax 
rate.
    That is complicated. I will be happy to take it up with 
your staffs. But it is absolutely critical to prevent foreign 
taxes from eroding any minimum tax you actually adopt.
    So, Mr. Chairman, I have other ideas in my testimony.
    I agree with the sentiment that we need to strengthen our 
source taxation rules. I disagree perhaps with Professor 
Wells's specific proposal, but directionally we are very much 
on the same page there, so I think there is a lot to work with.
    And I thank you for your time, and I will be happy to 
answer any questions.
    The Chairman. Well, thank you.
    [The prepared statement of Mr. Shay appears in the 
appendix.]
    The Chairman. Professor Grinberg, we will turn to you.

   STATEMENT OF ITAI GRINBERG, PROFESSOR OF LAW, GEORGETOWN 
             UNIVERSITY LAW CENTER, WASHINGTON, DC

    Mr. Grinberg. Chairman Hatch, Ranking Member Wyden, and 
distinguished members of the committee, good morning. My name 
is Itai Grinberg. I am a professor of law at Georgetown. It is 
a pleasure to appear before you today.
    There is now a widespread consensus the United States needs 
to abandon its abhorrent worldwide corporate tax system, lower 
the rate, and go territorial. Although some of today's other 
panelists disagree, this general consensus was even reflected, 
to some extent, in the final proposals of the Obama 
administration.
    Our corporate tax rate and international tax rules are just 
totally out of line with international norms. Continuing to lag 
behind would cost us an opportunity and employment for our 
kids.
    The United States statutory corporate income tax rate is 
the highest in the OECD, and our effective corporate tax rate 
is also very high. We are the only major developed economy that 
has not adopted a territorial tax system.
    But what I want to emphasize today is that dropping the 
rate and going territorial are not enough. One of the most 
senseless aspects of our current law is that, more than any 
other major economy, we create relative tax disadvantages for 
being a U.S. multinational as opposed to a foreign 
multinational, most upsettingly with respect to income earned 
in the United States.
    We make foreign ownership of almost any business more 
attractive than U.S. ownership from a tax perspective. That 
creates incentives for foreign takeovers, for inversions, for 
U.S. companies to produce abroad, and for income shifting.
    The consequence is obvious: we are creating incentives for 
companies to become foreign with negative consequences to U.S. 
employment. Our reliance on subpart F, a regime that affects 
only U.S. multinationals, as our main anti-base-erosion device, 
is the source of the problem.
    Some may argue that rectifying the situation and leveling 
the playing field would discourage foreign investment. But last 
year, 97 percent of inbound foreign direct investment was an 
acquisition of an existing U.S. business rather than a new 
investment. Acquisitions of existing U.S. businesses do not 
necessarily create jobs, and they can cost U.S. jobs.
    Foreign acquisitions of U.S. businesses can also be 
beneficial. We should welcome them when it makes a business 
more economically productive on a pre-tax basis and, therefore, 
liable to create employment. But if a business is acquired 
primarily because of the tax benefit of being foreign-owned, 
that is not economically efficient, and it can hurt U.S. 
employment. Unless we lower the corporate tax and level the 
playing field, the benefits in terms of jobs that prior 
generations obtained from the United States being the world's 
most important headquarters country for multinationals, will 
simply bleed away. Meanwhile, the relative tax advantage given 
to foreign multinationals results in a revenue loss to the 
United States.
    Separately, the foreign tax credit that comes with our 
worldwide system encourages revenue grabs from U.S. companies. 
As the committee knows, this has become a massive problem in 
recent years.
    Globally, we used to have multilateral principles that 
organized the international tax architecture around residence-
country taxation. That is all simply falling apart. Countries 
around the world are shifting towards greater source-based 
taxation, and that is irreversible. Moreover, that process, 
which has already harmed us, is liable to be long, messy, and 
arbitrary.
    At this point, if we sit still, both our fisc and our 
companies are disadvantaged. If we continue to insist on the 
idea of worldwide residence-country taxation with a foreign tax 
credit for U.S. multinationals and current law advantages for 
inbound multinationals--neither of which other countries do 
anymore--we will simply make our companies uncompetitive 
outliers subject to further foreign revenue grabs and continue 
to lose businesses and revenue at home.
    Meanwhile, with respect to source taxation, there is simply 
no international status quo. As a result, this time, inbound 
reform will not be a one-step process. We are going to have to 
respond over time to the policies of other countries.
    So, when addressing inbound corporate tax reform now, 
policymakers should give the United States leverage. It is 
important to put the United States in a good position to 
bargain internationally about future rules that will most 
likely be agreed to multilaterally at a later date. For now, we 
should choose a pragmatic administrable policy that levels the 
playing field for our national interests and our companies 
alike.
    Unlike Europe, our policies should be based on a defensible 
principle, for instance, an inbound corporate minimum tax that 
applies to U.S. and foreign multinationals alike. An inbound 
minimum tax can provide base protection without all the 
negative consequences of a subpart F-type minimum tax.
    Moreover, the inbound policy we come up with now need not 
be perfect. That can come later, either through global 
negotiation, domestic legislation, or both.
    The key for now is to choose inbound measures that maximize 
our national interests, do not give implicit approval to things 
we would not want to see done abroad, and provide the U.S. 
leverage to help end this period of instability in the 
international tax regime and shape a principled global 
settlement.
    Thank you, and I would be happy to answer any questions you 
may have.
    The Chairman. Well, thank you.
    [The prepared statement of Mr. Grinberg appears in the 
appendix.]
    The Chairman. This has been an excellent panel. I really 
appreciate you.
    This is a question for all of you to briefly respond to. I 
want to be clear that our view is that foreign direct 
investment fuels new jobs across the country. In fact, if the 
corporate rate drops from 35 percent to 20 percent, foreign and 
domestic investments should grow markedly.
    It is important to distinguish legitimate business 
transactions from tax-driven earnings-stripping deals. So I am 
very concerned about that.
    So the question for the witnesses is, do you believe that 
foreign multinational companies have significant tax-planning 
opportunities such as earnings stripping that U.S. 
multinational companies do not have?
    I think some of you have talked on that a little bit, and I 
would just have you repeat.
    Professor Wells, we will start with you.
    Mr. Wells. There is just no question that that is the case. 
There is just no question. And the reason there is no question 
is that our main base-protection measure since 1962 is subpart 
F that only applies to resident companies.
    So if you are not a resident company, you are not subject 
to that regime; you get a pass. You can be excused from the 
room.
    Senator Hatch, when I was vice president of tax, half of my 
peer group engaged in a corporate inversion transaction. Our 
executive officers were compensated based upon relative 
performance versus a peer group. So I spent quite a lot of time 
trying to understand, what were the tax advantages that reduced 
their taxes on their U.S. operations in our sandbox, in the 
United States?
    And it is clear to me--and it should be clear to everyone 
here--that a corporate inversion is the U.S. company saying, I 
just want to be treated like a foreign-based multinational with 
respect to owning U.S. assets.
    And what techniques are they using to strip the U.S. tax 
base? The same ones that inbound investors use every day.
    When I put together my tax footnote disclosures for SEC 
filings, in the footnotes to that you can see a rate table of 
what taxes you pay in the U.S. versus what taxes you pay 
internationally. Professor Shay is exactly right: 
internationally, the U.S. is competitive in the international 
markets and able to achieve a tax rate that is comparable 
outside of the United States. But in the United States, the tax 
rate that is applied on U.S. companies--because they do not 
have the same earnings-stripping benefits--is significantly 
higher than exists for a foreign-owned company that runs those 
exact same U.S. activities. I think that that is a huge issue 
that ought to be addressed.
    We do not want to treat foreign companies in a 
discriminatory way, but we should not give them an advantage 
that we do not give our own domestic businesses.
    The Chairman. Professor Clausing?
    Dr. Clausing. I agree that we should even the treatment of 
foreign and U.S. firms in the U.S. And it is easier for foreign 
firms to strip income out. My understanding is that there are 
off-the-shelf remedies that would help with that, including 
tougher 
earnings-stripping regulations.
    There was an article in Tax Notes that went over 10 
different proposals to tighten earnings-stripping regulations. 
I believe that is 163(j), but I will leave that to the lawyers. 
So I would suggest something like that to create a more even 
treatment.
    The Chairman. Professor Shay?
    Mr. Shay. I have said previously that I agree that we need 
to take steps to improve our source taxation.
    But I think it is very important for all the members to 
understand that there are structural advantages in every income 
tax system of the world for a company that is not a local 
resident to invest locally. So this is not a United States-only 
problem, and our companies are vigorous in taking advantage of 
their external status in relation to other countries.
    So we should take steps to strengthen our source taxation, 
but we should do so mindful that what we do is likely to be 
copied by other countries and that we have to be balanced and 
nondiscriminatory.
    Notwithstanding that, it seems to me that the concept of 
nondiscrimination has been taken too far in formal terms and 
not been applied in substantive terms.
    And when we look at the kinds of issues that Professor 
Wells is talking about, I think our substantive differences 
give us plenty of room, and not just room, but encourage us to 
adopt strengthened source taxation to make sure that we do have 
a level playing field for carrying on business in the United 
States.
    The Chairman. Thank you.
    Professor Grinberg, you will be the last one.
    Mr. Grinberg. Thank you, Chairman Hatch. Look, I love 
foreign investment and want it to create jobs when it is 
actually creating jobs. But basically the reality is, 
multinationals can structure their internal affairs between 
their relateds as they choose, subject to legal constraints. 
And U.S. law keeps a U.S. multinational from having its foreign 
affiliates loan the U.S. money or charge the U.S. royalties to 
lower U.S. tax and increase the tax base in a low- or no-tax 
jurisdiction. U.S. multinationals cannot do that because of 
subpart F, as Professor Wells explained.
    In contrast, foreign multinationals can. They get their 
U.S. affiliates to agree to pay their foreign affiliates for 
expensive intercompany obligations, subject to much less 
binding constraints under our law. All they need are basically 
good transfer pricing studies, and they have to live with the, 
by international standards, weak limitations of section 163(j). 
That gives them a significant financial advantage, because it 
allows them to reduce their U.S. tax liability effectively 
through self-dealing.
    So why does this link back to jobs? Well, this advantage 
makes foreign acquisitions of U.S. firms more common than U.S. 
acquisitions of foreign firms. And firms continue to have a 
home-country bias for headquarters and R&D jobs as well as the 
support jobs that go around those.
    And you know, if you want to see the data about this, look, 
there is this great German ZEW--Centre for European Economic 
Research--study by Feld and Voget that basically finds that, if 
we went territorial, we would make the U.S. the acquirer 
instead of the acquired 17 percent more of the time.
    Meanwhile, you know, since the productivity of assets 
depends in part on their owners, if tax reasons are producing 
less productive ownership, the underlying business is going to 
grow less well and produce fewer jobs.
    So not only is the U.S. losing jobs, actually, globally we 
are decreasing well-being, because the most productive owner is 
not necessarily owning the asset.
    The Chairman. Senator Wyden?
    Senator Wyden. Thank you very much, Mr. Chairman.
    And I am very glad that we have the four of you 
distinguished academics, professors, spanning the philosophical 
spectrum. And I think that is exactly why this is an important 
hearing.
    And I want to start by mentioning, tomorrow the Senate 
Republicans are going to start, apparently, discussion of a 
budget that eliminates the requirement that the reported tax 
bill be scored at all. Now, I am not sure there is a precedent 
for it. But what I know is, we are going to hear an awful lot 
of talk about this magical growth fairy. And I want to get into 
with all of you specifically what we are talking about.
    Now, Secretary Mnuchin on Sunday said, again, that the tax 
cuts pay for themselves. He said the President's framework is 
going to cost $1.5 trillion on a static basis. Through a budget 
gimmick arguing for a policy baseline, you can take $500 
billion off the score.
    Then he said the tax cuts are going to create $2 trillion 
of economic growth so that the bill would actually raise a 
trillion dollars. It was almost like this administration was 
comatose for Reagan trickle-down economics.
    Now, here we are with this terrific panel. And I would just 
like to put to rest this growth fairy theory with respect to 
tax cuts. So I would like to just kind of go down the list, go 
down the four of you, and have a ``yes'' or ``no'' answer to 
the question.
    Do you believe tax cuts pay for themselves?
    Professor Wells?
    Mr. Wells. From my perspective, other things need to be in 
the system to offset the revenue. So by themselves, I do not 
think tax cuts are going to pay for themselves.
    Senator Wyden. We will count that as a ``no.'' Okay.
    Dr. Clausing?
    Dr. Clausing. No, I do not think so.
    Senator Wyden. Professor Shay?
    Mr. Shay. No.
    Senator Wyden. Professor Grinberg?
    Mr. Grinberg. Appropriate tax reform can increase economic 
growth, but only by a certain amount.
    Senator Wyden. So tax cuts do not pay for themselves?
    Mr. Grinberg. Yes.
    Senator Wyden. Look, the reason I am asking is, it is very 
important we define what this debate is all about. I am one who 
believes, when we talk about our bipartisan bill and the 
Democratic principles, behavior does matter. That is not the 
debate. The debate is whether we are going to have this magical 
growth fairy, and then we are not even going to score the 
proposal.
    I do not even know of a precedent like that. And it 
certainly defies the public interest to do a major outline for 
tax reform and budget judgments for years to come and then just 
say, well, gee, we are not going to score this thing at all. So 
I appreciate your being clear about that.
    Now, let me go to you, Dr. Clausing, with respect to the 
Trump tax framework claims. One of the arguments for the 
corporate rate reduction is--and again, we understand you need 
competitive rates--they say that the corporate cut is going to 
primarily benefit the U.S. worker.
    My question to you--and I am certainly willing to have 
anyone else be part of this discussion--my understanding is, 
the mainstream consensus of economists is that overwhelmingly 
the benefit of corporate tax cuts goes not to the U.S. worker, 
but it goes to the shareholders. Is that true?
    And my understanding is it might be, in terms of the 
ballpark, at most 20 or 25 percent as it relates to the 
benefits that get to workers.
    Dr. Clausing. That is correct. And all the mainstream 
models, and this includes the CBO, the JCT, the Treasury----
    Senator Wyden. Go slowly on that.
    The mainstream models, colleagues.
    Dr. Clausing. All the mainstream models, yes.
    Senator Wyden. The Joint Committee on Taxation----
    Dr. Clausing. The Congressional Budget Office, the 
Treasury--in the study that you can still find on the National 
Tax Journal website and from the nonpartisan Tax Policy 
Center--all of them give the benefits of corporate tax cuts, 
about 80 percent, to capital or shareholders.
    And if you want to think intuitively about why this is, we 
have to recognize that businesses really do understand their 
own interests. If they are coming in to talk about lower tax 
rates and how it is important to them, but it is actually the 
case that the workers would pay the tax and not them, then you 
are presuming that businesses do not understand their own 
economic interests.
    And I am inclined to think that businesses do understand 
their economic interests, which is why they push for these 
corporate rate cuts which primarily benefit managers and 
shareholders.
    Senator Wyden. Thank you, Mr. Chairman.
    The Chairman. We next go to Senator Thune.
    Senator Thune. Thank you, Mr. Chairman.
    Professor Grinberg, you note in your testimony that the 
number of U.S. multinationals in the Fortune 500 has declined 
by over 25 percent from 202 in 2000 to 147 in 2016.
    I would argue, clearly, that the United States' antiquated 
international tax rules contribute to that and bear much of the 
blame. And we have an opportunity in tax reform to modernize 
these rules, which have not kept pace with our economy or the 
global marketplace over the past half century. So we have a 
chance to seize this opportunity to make our code competitive 
again.
    So let me ask you this: if we fail to capture or pick up on 
these recent trends in international tax reform that a lot of 
other countries have implemented, what do you see as the cost 
of failing to do so?
    Mr. Grinberg. I mean, I think there are many costs. The 
cost I am most concerned about is opportunity for our kids. I 
think that multinationals, both U.S. and foreign, produce jobs 
that the data shows pay about a third higher than anything else 
in the private sector, on average. And you know, having more 
U.S. multinationals produces more of those jobs at home, 
because companies are not totally de-centered yet. There is 
still a home-country bias to R&D, headquarters, and support 
jobs. And that probably will not change for the duration of 
this tax reform.
    So fewer U.S. companies means fewer high-quality 
opportunities for our kids, and that is my biggest fear.
    The other thing is, and you know, the CBO estimates show 
this too, slowly the corporate tax base is going to whittle 
away. So it is maybe pennywise but pound foolish to try to get 
more revenue there.
    That is why the CBO long-term scores show erosion of the 
U.S. corporate tax base, because they are concerned about this 
trend too.
    Senator Thune. Thank you. I would direct my next question 
to you and to Dr. Wells as well. Do you see reforming our 
international tax system and, generally, overall tax reform, as 
is being contemplated here, leading to greater economic growth? 
Does it contribute to growth?
    Mr. Wells. Yes, I do believe it will contribute to greater 
economic growth, absolutely. But more importantly than that, I 
think that when we think about base-protection measures that 
will level the playing field, that will provide revenue for 
this Congress to meet the other needs.
    And I think what you and others need to consider is, 
foreign-based companies and corporate inverted companies, they 
have self-helped themselves to a territorial regime. No matter 
what you do, this country is territorial as to them.
    You really have just one question: are you going to have 
the same playing field for U.S. companies? That is the 
question.
    And if we are concerned about earnings stripping and base 
erosion, let us set up a set of rules that applies to U.S. and 
foreign companies equally to raise the revenue that you need, 
then the tax system is not creating winners and losers. You are 
collecting revenue in a thoughtful way.
    Proposals like subpart F only apply to U.S. companies and 
excuse the foreign-based companies. That is the issue that I 
would address.
    So yes, I believe it raises economic growth, but I also 
believe that the way to raise revenue is by leveling the 
playing field.
    Senator Thune. But growth would generate revenue as well.
    Mr. Wells. Growth would also generate more revenue.
    Senator Thune. I think this was in your response or maybe 
part of a statement that you made, Mr. Grinberg, too, but you 
talked about, when addressing inbound corporate tax reform in 
this Congress, policymakers should seek to give the United 
States leverage. ``It is important to put the United States in 
a good position to bargain internationally about a future set 
of broadly accepted rules that will most likely be agreed to 
multilaterally at a later date;'' and that is your quote.
    Would you elaborate on that point? And specifically, what 
form do you see that leverage taking? And how do we balance 
that with the important role that foreign direct investment 
plays in this country, which you also noted?
    Mr. Grinberg. So again, I do believe that foreign direct 
investment that creates new investment or otherwise supports 
increases in jobs is important. And therefore, I believe that 
we should try to level the playing field. I do not want to be 
understood as protectionist, we should simply level the playing 
field.
    But the bottom line is that, abroad we see countries taking 
a series of measures that are intended to go after U.S. 
multinationals. So two obvious examples are the state aid 
investigations out of the EU and the recent suggestion by the 
EU that it would do a turnover tax on just digital businesses, 
which means just U.S. tech. This is not principled.
    Instead, what I am suggesting is a principled approach in 
which we create an inbound minimum tax that treats U.S. 
multinationals and foreign multinationals alike and that 
defends the base that we can protect, which is the base of 
income earned in the United States from U.S. citizens and 
customers.
    Senator Thune. Okay, thank you.
    Mr. Chairman, thank you. My time is expired.
    The Chairman. Okay, thank you.
    Senator Stabenow?
    Senator Stabenow. Thank you very much, Mr. Chairman, for 
this hearing.
    And I want to talk about one specific industry as we are 
talking about moving production facilities and profits 
overseas.
    One of the concerns I hear the most from Michigan families 
is about the rapidly rising cost of prescription drugs. Drug 
prices in the United States are increasing at an astronomical 
rate, outpacing the increase in Social Security benefits, 
wages, and inflation by a factor of 10.
    Despite record profits from the sale of prescription drugs, 
many pharmaceutical companies have moved their production 
facilities and profits overseas to get out of paying their fair 
share in taxes. These companies have aggressively taken every 
possible approach to lower their tax liabilities, from 
inversions to abusing tax havens.
    Dr. Clausing and Mr. Shay, do you think the proposal put 
forward last week will help solve any of these problems?
    Dr. Clausing. I did not see anything that really addresses 
in a serious way tax base erosion in that proposal last week.
    There was mention of a global minimum tax. And as Steve 
Shay already mentioned, with a global minimum tax you have this 
opportunity to use taxes paid in one country to offset the 
minimum tax that would be due in another country. So in a way, 
it encourages foreign income in both high- and low-tax 
countries. So I did not think that was a serious response, so 
far at least, to the corporate tax base erosion problem.
    Senator Stabenow. So nothing at this point yet to solve 
that.
    Dr. Clausing. Nothing yet.
    Senator Stabenow. Mr. Shay?
    Mr. Shay. Well, in fairness, nothing other than the word 
``global'' has been specified, so we have no idea what is being 
contemplated. And the idea of moving forward without knowing 
what is being contemplated and without a score for what is 
ultimately done is indefensible as a policy matter.
    But if it is under any normal conception of a global 
minimum tax--and of course we do not know what that is, so I 
hope I am not impugned for inferring from what we do not know. 
But if it is any normal conception of a global minimum tax--I 
have already testified that the average rate of taxes paid on 
all foreign CFCs as reflected in the 2012 data is 12 percent, 
12.10 to be precise, so if the minimum tax is anywhere below 
that, then you almost certainly have not accomplished a lot. 
You have accomplished maybe a little for Ireland, which has 
about a 2-percent effective rate.
    But without a per-country approach, it will be relatively 
toothless. That and the height of the rate are the two key 
points, and we just do not know what those are yet.
    Senator Stabenow. So we are at a point where we have 
companies raising prices through the roof, getting tax benefits 
to do research and to create new kinds of medicines that they 
are charging astronomical prices for, many of them lifesaving 
medicines, and at the same time being subsidized by taxpayers 
through Medicare and Medicaid expenditures. And yet, there is 
nothing in here to address what is one of the most important 
issues I hear about from my constituents.
    What specific steps should we be taking to address the 
problem of drug companies not paying their fair share?
    Dr. Clausing?
    Dr. Clausing. Yes, I think this is a big problem. And if 
you look at the Fortune 500 companies, the ones that have 
achieved effective tax rates in the single digits are often 
those such as pharma that have a lot of intangible value, which 
makes it easier for them to shift profits abroad.
    So there is a lot that we can do here, from very simple, 
small, incremental steps to big steps. I think the approach 
that both Mr. Shay and I have recommended is to simply lower 
the rate and combine that with eliminating deferral. You have 
no disincentive to repatriate, and you are treating income 
abroad the same as you are treating income at home.
    But if you do go to a territorial approach, a per-country 
minimum tax, I think, is a more promising step than many. And 
the higher that rate is and the closer it is to the U.S. rate, 
the less distortion there is and the less incentive to move 
income to tax havens.
    Senator Stabenow. Thank you.
    I would like to ask each of you just really quickly in my 
time, one of the most important things for me is closing tax 
loopholes that send our jobs overseas, and basically supporting 
American businesses. And there is a simple bill called the 
Bring Jobs Home Act I have introduced for multiple years that 
would just take away the deduction for moving expenses. At 
least we should not be paying for the moving expenses when a 
company is moving overseas.
    Do you think--I would like to ask each of you, would you 
support stopping the deduction for ordinary and necessary 
business expenses for a business moving their jobs overseas?
    Mr. Wells?
    Mr. Wells. I think that the problem is larger than that. 
For example, on your pharma question----
    Senator Stabenow. Well, no question it is larger, but----
    Mr. Wells [continuing]. A minimum tax under subpart F would 
not apply to any of the pharma companies, because they are not 
U.S. companies anymore. And so if you are looking for a minimum 
tax or a subpart F regime or worldwide, all that discussion you 
heard does not apply to that sector. We need another discussion 
about base protection.
    Senator Stabenow. Well, let me ask though, simply, for any 
company picking up and moving overseas, should their workers, 
the community, through their taxes, pay for the move?
    Mr. Wells. I think that what we should have is a base 
protection that is broad and comprehensive to protect the U.S. 
tax base. I think cherry-picking one observation and allowing 
all the other earnings stripping to occur is the bigger 
problem. So I think targeted reforms are not a solution.
    Senator Stabenow. I realize that is not enough, but it 
certainly would help, though, if they did not have the insult 
of having to pay for the move.
    Dr. Clausing? Just ``yes'' or ``no,'' I know my time is up.
    Dr. Clausing. Yes, I think that is justified, but there are 
bigger things I would worry about too.
    Senator Stabenow. Of course, of course.
    Mr. Shay?
    Mr. Shay. I am reluctant to pick out pieces. I think as a 
symbolic matter, it could be helpful.
    Senator Stabenow. Yes.
    Mr. Grinberg?
    Mr. Grinberg. It is peanuts. We should do something much 
more comprehensive. I do not see any reason for just making 
that change.
    Senator Stabenow. I agree with you: we should have a big 
bowl of peanuts, a lot more than just that, but that would be a 
nice place to start.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Portman?
    Senator Portman. Mr. Chairman, thank you. Thanks for 
holding this hearing. And I appreciate our witnesses today. And 
what a great opportunity we have before us.
    There is a big bowl of peanuts, as my colleague from 
Michigan just said, and that is a tax code that is outdated, 
antiquated, and broken. And it is no wonder; I mean, it goes 
back to the 1960s. Our tax code could qualify for AARP benefits 
on the international side.
    Many of the members on this panel, at least to my left, 
were not even born when this thing was thought up, and it does 
not make any sense. And you look at the G7 countries, you know, 
all of them are territorial except us.
    And with all due respect, Dr. Shay and Dr. Clausing, I 
appreciate your testimony, and I know you actually agree with a 
lot of what I think, at least in terms of base-erosion rules, 
but we have to catch up.
    I mean, at one point we were the leader in terms of global 
tax policy. Now, you know, we are struggling to catch up, and 
it is hurting us. And it is hurting the workers I represent. 
And, darn it, we have to figure this out as a committee.
    So you know, E&Y recently came up with a study, Ernst and 
Young, saying there would be 4,700 companies that would be 
American companies today, just in the last 13 years, if we had 
a 20-percent rate and a territorial system--4,700 companies.
    Laura Tyson, former chair of the Council of Economic 
Advisers for President Clinton, just came out with her study 
showing that if you went to this kind of a policy we are 
talking about, 20-percent rate and territorial, it would result 
in $144 billion a year ongoing in repatriations coming back and 
about 154,000 jobs a year. And by the way, she said more in the 
short term because, during the transition, it would be even 
more positive. She is a Democrat, and she looks at this and 
just says, this makes no sense.
    And companies are voting with their feet. Between 2003 and 
2011, there were seven inversions. Between 2012 and 2016, just 
in those 4 years, 33 inversions.
    And by the way, inversions are the tip of the iceberg. It 
really is not the bigger problem. The bigger problem is 
acquisitions. Foreign companies, as was said here today by Mr. 
Wells--I think all four of you agree with this--have a huge 
advantage. They can pay a premium for U.S. companies.
    And you know, it makes all the sense in the world that we 
would be losing companies. So here are the numbers. In 2016, 
foreign acquisitions of U.S. companies were over three times 
greater than U.S. acquisitions of foreign companies. That is by 
volume.
    You could either look at that or look at the study Mr. 
Grinberg cited, which is some German study he referenced: 17 
percent more U.S. acquisitions of companies. So it would flip, 
and the U.S. companies would have an advantage.
    Why does this matter? We did a study in the Permanent 
Subcommittee on Investigations. It was bipartisan. We all 
really drilled down into these inversions and acquisitions, 
what is really happening.
    I am not from Missouri, but if I was, on this committee, I 
would care a lot about this, because when Anheuser-Busch 
decided to move overseas, they took 5,400 jobs with them. I 
mean, they did--and it is all documented; we have all the 
information. It is a study you can look at.
    We went behind the curtain in these corporate boardrooms to 
listen to what Mr. Wells talked about today, and I appreciate 
your candor. What goes on in these boardrooms is, they want to 
be foreign companies for one simple reason: our tax code.
    And when they change their headquarters, they do not just 
move their situs, they move people and investment and 
commitment to the community. That does not include all the 
nonprofits and charitable institutions in St. Louis that lost 
out.
    So we have to do this; we have to fix it. And I know there 
are different ways to look at it, I get that, but I do not 
sense an urgency here today. And I hope that we can get to it.
    Now, in terms of this issue of balancing inbound and 
outbound so you do not end up continuing to benefit foreign 
investment in foreign companies here, we do need to do 
something. It has to be balanced, because we want FDI. It is 
important in my home State of Ohio; it is important in all of 
our States, but it has to be a level playing field.
    And I think Mr. Grinberg has laid out some interesting 
ideas of how we can come up with a way to have that right 
balance while we are encouraging investment here.
    I want to ask you about outbound for a second, because that 
is something we have not talked about as much today.
    Professor Grinberg, countries that have a minimum tax 
system that was talked about by Dr. Clausing and Mr. Shay--
France, Germany, Japan, the entire EU, by the way, starting in 
2019 after they implemented their new policies--they have a 
carve-out for active business exceptions. Can you comment on 
these European-style carve-outs and how we should think about 
them when designing our own outbound base-erosion rules?
    Mr. Grinberg. Thank you for that question, Senator Portman. 
So territorial systems often have some rules for base 
protection that then allow an active business exception. The 
active business exception under EU law is incredibly narrow. In 
other words, all you need are five guys and a dog. Okay?
    And the reason you only need five guys and a dog is because 
of this case called Cadbury Schweppes out of the European Court 
of Justice that said that anything but wholly artificial 
arrangements have to be respected. And so the active business 
exception rule that is used in European jurisdictions is quite 
narrow, and we should understand that, if we are thinking about 
having a similar rule in the United States.
    We would not want to create a rule that required a higher 
level of substance, because the problem with rules that say you 
only get deferral if you put substance in a foreign 
jurisdiction is that the higher the substance bar is, the more 
jobs you are asking to move offshore.
    So those active business exception rules require a very 
limited amount of people and activity, especially the EU ones. 
And one should be concerned, if one writes a similar rule, that 
the IRS would up the bar and effectively ask U.S. companies to 
put more people offshore in order to avoid a minimum tax.
    Senator Portman. My time has expired. I appreciate that 
fact. Hopefully, we will have a second round and we can talk 
more about the outbound issues. But thank you very much.
    The Chairman. Well, thank you.
    Our next one is Senator Cassidy. You are up.
    Senator Cassidy. Mr. Shay, in your testimony you speak 
about not, I think, bifurcating cash, cash equivalence from 
non-cash. Very briefly, could you just comment on that, please, 
because I do not think you spoke to that in your spoken 
testimony.
    Mr. Shay. Yes. I was pretty clear in my testimony, I think, 
that I am not in favor of a reduced rate on pre-effective-date 
earnings.
    But if, as has been proposed, there is a different rate on 
earnings that are reinvested in illiquid assets--that is the 
term that is used in the framework--versus cash, so there is a 
higher rate on cash, it is not good. It is not a good idea to 
announce to sophisticated business people that if you shift 
your offshore earnings from cash into illiquid assets, which 
has already, in essence, been announced, you are going to get a 
lower rate by something like 4 percent. And then what is really 
an illiquid asset will become the subject of a definition.
    My strong recommendation----
    Senator Cassidy. So, can I interrupt you?
    Mr. Shay. Yes.
    Senator Cassidy. You are implying that it is perhaps 
ambiguous as to what is cash or cash equivalence as opposed to 
illiquid?
    Mr. Shay. It is unspecified at this point. But whatever you 
do as a rule, I will be testing the line of that rule as a tax 
planner.
    Senator Cassidy. Okay.
    Mr. Shay. And the issue for cash is--the reason there is a 
higher rate for cash, presumably, is liquidity. For the 
companies, as I demonstrate in my testimony, that have the most 
offshore earnings--and the vast preponderance are credit-worthy 
companies--you are better off picking a single rate, whatever 
it may be, forget what my preference may be, than a bifurcated 
rate, or else you are going to have----
    Senator Cassidy. Okay, let me interrupt, just because we 
have limited time.
    Mr. Wells, you have been in the boardroom and you have 
helped with those strategies, not that Mr. Shay has not been. 
Would you agree with that assessment?
    Mr. Wells. Again, I think that I agree with his assessment 
that people are going to do tax planning to try to minimize 
that outbound tax. So whatever system you put in place, there 
is going to be a reactionary planning.
    But the discussion we are having is only for U.S. 
companies. We are giving a complete pass----
    Senator Cassidy. I accept that; I totally accept your 
premise of that.
    Mr. Wells. Then the question is, well, why are we doing 
that? I mean, what we should do is have rules that are going to 
apply across the board.
    Senator Cassidy. I get that, but I want to narrow the thing 
right there.
    Mr. Grinberg, any comments on this?
    Mr. Grinberg. You know, on this point, I agree with the 
concern Steve describes. One needs to be careful about 
announcing in advance that if you take certain planning steps, 
you will receive a lower rate on previously unrepatriated 
earnings.
    Senator Cassidy. And, Dr. Clausing, I presume you feel the 
same way?
    Dr. Clausing. That is correct.
    Senator Cassidy. Okay.
    Mr. Grinberg, Mr. Shay is making the point that we should 
have a country-by-country variation.
    I think I follow what you said, Mr. Shay, that if you have 
a lower effective tax rate in one country and that is the 
country of domicile of the company of which we are--I am saying 
it in as complicated a way as you, but you know far more than 
I.
    Mr. Grinberg, would you agree with that?
    Mr. Grinberg. So my view is that we should have an inbound 
minimum tax, not an outbound minimum tax. And therefore, this 
question would drop away, so that would be my strong 
preference.
    But if one were to have an outbound minimum tax, then I 
would simply point out that a country-by-country approach is 
not consistent with the way multinationals do business around 
the world.
    In Europe, you know, you have a completely integrated 
economy. In Asia, it is that way too. Global supply chains 
cross borders.
    If you go with a country-by-country approach, it is pretty 
inadministrable because now you have to police the transfer 
pricing decisions on transactions between France and 
Luxembourg. Do not kid yourself that people will not manipulate 
that stuff in order to make sure that they get around the 
country-by-country approach.
    There are a series of reasons why we got rid of----
    Senator Cassidy. So, tax law arbitrage.
    Mr. Grinberg. Yes. A country approach is unworkable.
    Senator Cassidy. Mr. Wells, any comments?
    Mr. Wells. Yes, I think it would be extremely complicated, 
for the reasons Itai just said.
    Senator Cassidy. Okay, I am almost out of time. I yield 
back. Thank you.
    The Chairman. Senator Carper and then Senator Cardin.
    Senator Carper. All right. We are happy you are here. 
Thanks very much for taking a really complex subject and making 
it even more so. [Laughter.]
    I expect someday a light is going to go on in my head and I 
will say, oh, I get it now. It probably will not happen today, 
but it is not your fault.
    Thank you for joining us.
    I have four questions I always ask--my colleagues have 
heard me say this a few times--four questions I always ask 
whenever somebody comes to us and says, this is my proposal for 
tax reform. I ask these questions. One, is it fair? Two, does 
it stimulate economic growth? Three, does it simplify the tax 
code or make it more complex? And four, what is the fiscal 
impact, the budget impact, of what is being proposed?
    And I do not ask ``yes'' or ``no'' questions very often. 
But I am just going to ask a question of you, just starting 
with you, Mr. Grinberg. Are those four reasonable questions to 
ask? You can just say ``yes'' or ``no'' or you could say 
``maybe.''
    Mr. Grinberg. They are reasonable questions to ask. I 
happen to believe that in the corporate tax space, revenue-
losing corporate tax reform is better than revenue-neutral tax 
reform.
    Senator Carper. Okay, thanks. All right. Thank you.
    Are those, Mr. Shay, reasonable questions to ask?
    Mr. Shay. In the context of international tax reform, 
simplification is less important than it is for individuals, 
low- and middle-income individuals who have to struggle to do 
their returns.
    Senator Carper. Okay.
    Mr. Shay. And multinationals have more capacity to deal 
with complexity. And frankly, you need it more to deal with 
their economic issues.
    Senator Carper. Fair enough, thank you.
    Yes, please?
    Dr. Clausing. Yes, those are the questions I would ask too.
    Senator Carper. Thank you.
    Mr. Wells. In the multinational context, assuming ``fair'' 
means a level playing field among multinational companies so 
that everyone is treated fairly, equally, then, yes, I think 
those are four great questions.
    Senator Carper. Thanks so much.
    One of the things we like to do here is, when we have a 
difficult subject to consider, and where there is a wide range 
of opinions on how to go about addressing it, one of the 
questions I like to ask is, where do you find consensus among 
the four of you?
    If we could just assume, maybe not a good assumption, that 
we are going to move closer to a territorial tax system as we 
go through these debates and legislation, where do you think 
there is some agreement amongst the four of you?
    And just very briefly, where do you think there is some 
consensus?
    Mr. Wells. I think we have broad agreement that on earnings 
stripping, inbound base erosion, source taxation, if not the 
preferred solution by everyone, is at least a respected point 
of view, that we need to broaden the base and protect against 
the inbound earnings-stripping problem that would exist for 
both in a territorial world.
    Senator Carper. Good; thank you.
    Where do you think there is some agreement here?
    Dr. Clausing. I think there is an agreement to have a 
combination of a lower rate and closing loopholes and better 
base protection.
    I think at least three of us are worried about the base 
protection aspect of this on both an outbound and an inbound 
basis. And I think that it is important to keep both of those 
margins in mind.
    Senator Carper. Thank you.
    Mr. Shay?
    Mr. Shay. I agree. There is a consensus that there needs to 
be some strengthening of the source taxation and, I think for 
all of us, anti-abuse constraints on territorial, but the 
difference within that is very substantial.
    Senator Carper. Good; thank you.
    Mr. Grinberg?
    Mr. Grinberg. Yes. I think we all agree that one needs to 
look at inbound reform and that one needs to lower the rate. 
That is where I have heard consensus.
    Senator Carper. All right; thanks.
    Mr. Shay, looking at your resume, my recollection is that 
you were serving in Treasury from 1982 to 1987, which is when 
we were trying to debate and adopt comprehensive tax reform 
during the Reagan administration. And it is interesting that 
now you are a panelist here. But drawing back on the process 
that we went through, the reason why we were successful in 
finding a compromise--it was difficult then, God knows it is 
difficult now. What advice can you share with us from your 
experience, 1980 to 1987 when this was running front and 
center, that would be helpful to us now?
    Mr. Shay. At the time, the Senate and the administration 
were under control of one party, and the House was under 
control of another party. There had to be a bipartisan starting 
point. That was one.
    Senator Carper. We need to flip. So you are saying we need 
to flip either the House or the Senate to get real, true tax 
reform? [Laughter.]
    Mr. Shay. I think bipartisanship is very important for a 
reform that will be sustainable. And there were arguments as to 
how much the 1986 act would sustain. In fact, it has. We are 
still dealing with huge portions of it today.
    Secondly, tax reform is in the details. You cannot get it 
done--it started at the beginning of 1984. We took a year to 
draft the proposals in Treasury. They went through the Baker-
Darman political review in the first part of 1985. They got 
through the House at the end of 1985. They went to the Senate 
side at the beginning of 1986. There was a conference committee 
at the end of 1986.
    Every single step of the way we made corrections, 
improvements, changes. This cannot be done on the fly. It is 
just beyond my comprehension that we would try to make a major 
tax change as quickly as is being contemplated for political 
objectives.
    Senator Carper. All right; thank you all. Very good.
    The Chairman. Okay.
    Senator Cardin?
    Senator Cardin. Thank you, Mr. Chairman.
    I have been listening very carefully to this hearing, and I 
think the last point, Mr. Shay, is pretty telling because, as I 
understand it, the budget instructions would have us complete 
our work in the next 5 or 6 weeks, at least the Senate, so that 
is not realistic.
    But I was listening--and on the business tax issues, you 
all talk about harmonizing, that the United States business tax 
is an outlier, that we would like to have a level playing field 
for American businesses globally. All those I hear are 
objectives.
    And then I look at the Big Six proposal, Mr. Chairman, and 
I see that their way of getting there is to reduce the business 
tax rates so that we can be more competitive on business tax 
rates, but no real way to pay for it. The traditional ways of 
using the Joint Tax Committee and traditional scoring are not 
going to be done. They have identified very few of the offsets, 
even with knowing that they are going to blow a hole in the 
deficit.
    So we do not have time to analyze the consequences, Mr. 
Shay, of some of the issues you are talking about. We do know 
that State and local deductions will have an impact on real 
estate, will have an impact on federalism, will have an impact 
on the ability of our States to do their business. We do know 
that restrictions on business interest deductions will have a 
direct impact on businesses. They will be losers in that 
regard.
    And I mention all that because I think the point of 
harmonizing, the point of a level playing field, is legitimate. 
And I think the tax rate issues are certainly legitimate 
concerns. So if we want to significantly reduce our business 
tax rates, then the major difference that we have with 
harmonizing in the global community is the fact that we get 
virtually all of our income from income taxes, whereas every 
other country we are talking about has consumption taxes.
    And it is very interesting that, as we developed the 
international trade rules that Senator Portman is very familiar 
with, we had no difficulty in doing border adjustment on 
consumption taxes, but we do not have border adjustment on 
income taxes. So it is a double insult to the United States on 
international competitiveness.
    So it seems to me that if we really are looking at 
harmonizing, we have to tackle that problem. And I think the 
Big Six proposal underscores how difficult, if not impossible, 
it will be--impossible--to have competitive business tax rates, 
which is the driving force behind all of the base-erosion 
things you are talking about, unless we look at harmonizing 
with other revenues coming in other than income tax revenues.
    It seems like that is the only way that we are going to be 
able to get to deal with the fundamental problems that you are 
talking about. Where is my logic wrong?
    Mr. Wells. I would not say you are wrong. But what I would 
say is that an unlevel playing field needs to be fixed.
    Senator Cardin. And is it not the rates that we are mainly 
concerned about?
    Mr. Wells. What I am concerned about----
    Senator Cardin. Is it mainly the rates or not?
    Mr. Wells. To me, it is not mainly the rates.
    Senator Cardin. So we can continue with a 35-percent 
corporate rate and still be competitive?
    Mr. Wells. I think it would be great to drop the rates. But 
I think if a foreign----
    Senator Cardin. No, I want to drill down on that, because I 
was under that impression. So you believe we can be competitive 
globally with a 35-percent corporate rate?
    Mr. Wells. No, I think we need to have a lower rate.
    Senator Cardin. Okay, so you are agreeing with me that we 
have to lower the rate.
    Mr. Wells. Yes.
    Senator Cardin. Now, let me take it to the next step. The 
United States, as far as its percentage of its economy invested 
in governmental services, is near the bottom of the global 
community. And yet, we have the highest marginal tax rates. 
Have we not given away our competitive advantage because we 
have been stubborn, as we are--Americans are very stubborn--
saying that income taxes are the way to finance the Federal 
Government?
    Mr. Grinberg?
    Mr. Grinberg. Senator Cardin, as I say in my testimony, I 
agree we should find a way to lower the corporate tax rate even 
further and not just meet, but beat our foreign competitors. 
But I would urge you not to make the perfect the enemy of the 
good. And I specifically reference your proposal in my 
testimony. And I am an advocate of having a value-added tax to 
let us sharply reduce corporate and individual income tax 
rates. But we need to move on corporate tax reform.
    Senator Cardin. I could not agree with you more. And I 
agree with that. I am prepared to move on corporate tax reform, 
but not by increasing the deficit, not by dealing with 
additional problems that are going to be created because of the 
unintended consequences, not by jeopardizing entitlement 
programs that are critically important to the American people. 
I am not going to do it under those terms.
    But I am prepared to deal with it, but we have not seen any 
real effort here to isolate international tax reform. We have 
offered proposals coupled with infrastructure reform, different 
ways to do it. But if you look at the Big Six plan, I think we 
are heading down a proposed path that will be devastating and 
will not accomplish what you are trying to accomplish.
    Thank you, Mr. Chairman.
    The Chairman. Okay.
    Senator Bennet?
    Senator Bennet. Thank you, Mr. Chairman.
    And just to piggyback on what my colleague was saying, I 
think in the 9-page proposal, there are roughly 200 words, I 
think, devoted to international taxation. That is what this 
committee is looking at right now.
    And I gather--I apologize for being in the Education 
Committee this morning, which is where I was--but I gather from 
the conversation today, what we have learned is how complex 
this undertaking is and the possibility that real, unintended 
consequences can flow if we do not get it right.
    And we face now, because of our own fecklessness, an 
artificial deadline of November 13th here as a procedural 
matter, which is 23 legislative days away. That is when that 
deadline is. And it does not have anything to do with creating 
a better tax code, it just has to do with the legislative 
antics of the United States Congress.
    And I want to ask each of you for your honest view of 
whether you think we can reform the tax code in a way that is 
going to be productive to the American people without a bunch 
of unpredicted mistakes if we rush it through in a period of 23 
legislative days; in fact, you do not even need to use my 
language, if we use 23 legislative days to do it.
    Mr. Wells?
    Mr. Wells. Without seeing legislation, it is difficult to 
know how far apart you are.
    Senator Bennet. And that is another important point. We 
have no legislative language; we have not seen legislation.
    Dr. Clausing?
    Dr. Clausing. I think this will be very difficult. And if 
you try to rush it in that way, I think you run the risk of 
losing a lot of revenue by doing the tax-cutting part but not 
taking seriously the base-protection part. And that would be 
very costly in the future.
    Senator Bennet. Mr. Shay?
    Mr. Shay. I agree with that. And it is mind-boggling that 
you could think about having a major change with that little 
consideration.
    Senator Bennet. Mr. Grinberg?
    Mr. Grinberg. Thank you, Senator Bennet. I mean, we have 
had, like, a 6-year process on tax reform, so I think it just 
depends what the legislative text says. I mean, that is the 
thing. I assume we are not starting from zero, so I think it 
depends.
    Senator Bennet. Well, I think that is a fair comment, and 
we will see whether there is legislative language coming later.
    What is the risk that we could leave loopholes or make 
other mistakes that multinational corporations could take 
advantage of if we do not do the work thoroughly and well?
    Mr. Wells. It is hard to imagine that we could make more 
than we already have. I mean, we have earnings-stripping 
problems that are unaddressed. And the resulting legislation 
needs to fix inbound taxation, and we should be more 
competitive internationally.
    From my perspective, there is very little in the way of 
inbound base-protection measures today. And so for me, I think 
you have an open field with no tacklers in the area. I mean, I 
think moving forward is going to make progress, given how bad 
the current system is right now.
    But I think we should have a thoughtful move forward, but I 
do not think we need to, as Itai said, let the perfect get in 
the way of the good enough. We need to get a system that better 
balances the multinational and the business environment in the 
United States, because we are lagging behind and we need a 
sense of urgency to fix that.
    Senator Bennet. We also do not want the highly imperfect to 
be the enemy of the imperfect either.
    Dr. Clausing?
    Dr. Clausing. We have a very large problem at present, but 
that does not mean it cannot be an even larger problem.
    And we have been talking a lot about the inbound side, but 
let us look at the outbound side. My estimates suggest that 
multinational profit shifting to tax havens is costing $100 
billion a year. We have $2.6 trillion sitting offshore in tax 
havens. If we move to a toothless territorial system where we 
exempt all foreign income and we do not try to protect the 
base, those revenue losses will definitely increase, not 
shrink. And I think that that is a big risk here.
    Senator Bennet. Anybody else?
    Mr. Shay. I would agree with that. If you do not have 
strong anti-base-erosion, the clients who used to come into my 
office and say, ``Can I do what the big people do?'' and my 
question is, ``Do you really run your business back in the 
U.S., do you really need your money back in the U.S.?'' and 
they say, ``Yes,'' I say, ``Well, then you cannot do it very 
effectively.''
    If you move from deferral and its current restrictions on 
using that money in the U.S. to exemption, then any mom-and-pop 
business that is of even modest size, at that point can create 
a foreign office, use the five people and a dog that Itai was 
talking about, allocate income there, and then it is exempted.
    This system can be so much worse. Do not go there without 
knowing what you are buying into.
    Mr. Grinberg. An inbound corporate minimum tax is not a 
toothless territorial system, it is just a fundamentally 
different approach. Moreover, it takes advantage of the 
immobility of the U.S. customer base, something that Dr. 
Clausing praised in her testimony to the House Ways and Means 
Committee only a few months ago.
    Senator Bennet. Mr. Chairman, I am out of time, so I just 
want to thank you.
    I also want to thank the excellent witnesses here today 
whom I think give us a sense of how broad the array of choices 
are that we have to make, and I hope we will take the time to 
make them well, because this is something we only get to do 
once every 30 years.
    The Chairman. Okay. Let us go to Senator Isakson.
    Senator Isakson. Thank you, Mr. Chairman.
    Dr. Clausing, continue on this subject for a minute about 
the toothless territorial tax system. If it were yours to do 
and you were told to change the U.S. to a territorial tax 
system, what teeth would you install in that system to make it 
palatable for you?
    Dr. Clausing. I would have a tough per-country minimum tax. 
And I think that having it on a per-country basis is absolutely 
essential here. If you earn income in Bermuda, say, where the 
tax rate is zero, that per-country minimum tax would tax the 
Bermuda income right away.
    If you have a global minimum tax, you can just use taxes 
paid in Germany to offset the Bermuda income. And then you have 
an incentive to move income to both Germany and Bermuda.
    I would also protect the earnings stripping, have tougher 
earnings-stripping regulations. And there are other anti-
inversion things that are off-the-shelf that Congress could 
have done a long time ago, things like an exit tax and raising 
the threshold that is required to invert. And I think those 
would be important off-the-shelf, easy things to do to help 
protect the tax base.
    Senator Isakson. In Georgia we benefit from a lot of 
foreign direct investment into our State and have been a big 
growth State in the last decade. If you had selected countries 
that you had different tax levels for, for those coming to 
invest in the country, could that possibly turn some of that 
around and send it somewhere else?
    Dr. Clausing. I am not suggesting different tax rates for 
inbound investment, so I do not think that that would apply in 
this context.
    Senator Isakson. Okay.
    Mr. Wells, what about you? If you were going to design a 
territorial system, what teeth would you install?
    Mr. Wells. The teeth I would have would be that we want the 
business profits that are in the United States subject to one 
level of tax in the United States, so that whether you are a 
U.S.-owned company or a foreign-owned company, you will pay one 
level of tax, that there is not one group of companies that can 
strip their profits to Bermuda or somewhere else.
    We do not want to tax the inbound investor in a punitive 
way that causes them to have a double tax or a triple tax. But 
they ought to be on the same playing field with respect to the 
profits in their U.S. business, whether you are a U.S. company 
or a foreign company.
    I think there are a lot of revenue offsets that are there 
if you leveled the playing field. And I think what you would 
say to the inbound investor is, if you can be on the same 
playing field as everyone else, do not have a tax disadvantage 
but do not have a tax advantage, you are not being 
competitively disadvantaged.
    And what I would say to the U.S. companies is, you do not 
need to do corporate inversions anymore because you are now on 
the same level playing field with respect to operating a 
business in the United States.
    So from my perspective, if you have a territorial regime, 
you need to make sure that the round-tripping problem that 
Professor Shay mentioned is not going to be possible. But 
please understand, that round-tripping problem is what 
multinational foreign-based companies are able to do today 
because we have not instituted any rules yet as to them.
    Senator Isakson. Effectively, going to a territorial system 
ends the repatriation issue for the Congress, because it goes 
away. Is that not correct?
    Mr. Wells. Depending on what you do with the one-time tax 
on the foreign earnings, but yes.
    Senator Isakson. Right, which is behind the question I am 
asking about the teeth. It is also important to all of us; we 
want to do the right ones.
    Mr. Wells. Correct.
    Senator Isakson. Dr. Clausing, one other question. I read 
your testimony, and one thing really struck me about it that I 
had not thought about. I knew it was happening, but I had not 
thought about it. Ninety percent of the people born in the 
1940s have out-earned their parents in their lifetime, but only 
about 50 percent of those born in the 1980s are going to out-
earn their parents.
    And you talked about a number of solutions--or I do not 
know whether they are solutions, but ways to get to adjust that 
in our policy. One was increasing the EITC, if I remember 
correctly, and the other, I think, had to do with wage 
stabilization, which I took as probably a minimum wage or a 
wage table that people would have to meet. Am I right in that?
    Dr. Clausing. I talked about the EITC as an excellent tool. 
And I think economists and policymakers from throughout the 
political spectrum really like the Earned Income Tax Credit, 
because it encourages work and it brings more income to those 
lower in the income distribution.
    I also mentioned a wage insurance, which is different from 
what you just characterized. But basically, the wage insurance 
would mean if you lost your job due to technological change, 
domestic competition, or international competition, effectively 
you would be insured for some fraction of the difference 
between your current wage and the old wage.
    And that is part of our Trade Adjustment Assistance now for 
a small number of workers, but that could be expanded and would 
be an important ingredient to sort of help the middle-class 
workers adjust to a modern and technologically sophisticated 
economy.
    Senator Isakson. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Toomey?
    Senator Toomey. Thank you, Mr. Chairman.
    A couple of my colleagues on the other side have raised 
issues about the budget resolution that the Senate Budget 
Committee will be taking up tomorrow, and I just wanted to 
clarify.
    First of all, under the terms of the budget resolution that 
we will be considering tomorrow, the subsequent tax reform, 
should this committee report out a bill, will be scored. Let us 
just be clear about that: it will be scored.
    And in fact, the way the budget is drafted, it is my 
understanding that the score will have to be on a static basis 
against a current-law baseline, a legislation that would not 
expand the deficit by more than $1.5 trillion over the budget 
window, and if it were to do so, it would lose the 
reconciliation protection that it is meant to have. So I would 
like to be clear about that.
    Second point: several people have suggested that there is 
this 5- or 6-week deadline for getting the tax reform done. I 
happen to believe that there has been a tremendous amount of 
work done for years which can be compiled, much of which has 
been intensified over the last year, and we in fact can produce 
a very constructive tax reform in that period of time.
    But I would point out that the goal in the budget 
resolution is not binding. The reconciliation instructions do 
not expire until September 30th of 2018.
    A second point I want to push back on: Senator Wyden asked 
the question of whether tax cuts pay for themselves. To 
characterize this effort as simply a tax cut, I think is a 
gross oversimplification of what we hope to achieve here. And 
specifically, what I am referring to is, what we are 
contemplating is a multi-trillion-dollar series of pro-growth 
reforms, most of which would be offset by a multi-trillion-
dollar series of base broadenings.
    So we are hoping to have significant rate reductions, a 
significant move towards expensing CapEx, a significant 
simplification which helps compliance, and, of course, a move 
to a territorial system to be mostly offset by diminishing the 
extent to which the tax code currently favors certain 
activities over others.
    Now, if the pro-growth elements are on the order of $4 
trillion and the base broadeners are on the order of $3 
trillion, there is what appears on a static basis to be a net 
tax cut of a trillion dollars, but until we have defined those 
things, I do not know how anyone can suggest that we can know 
in advance that we would not have enough growth to pay for the 
small fraction of this reform that will score statically as a 
negative. So I just wanted to make that point.
    Professor Grinberg, we have had a considerable discussion 
this morning about how uncompetitive the U.S. international tax 
system is. The combination of a very, very high statutory rate, 
together with being one of the very few countries in the world 
that has a global system, contributes to that.
    You have also made the point repeatedly that foreign direct 
investment in the United States, investment in American 
businesses, can be a constructive thing. And if it is done for 
economic reasons, then America wins, the foreign investor wins, 
the global economy is better off. But I wonder if you could 
just elaborate a little bit on how it is that the current 
uncompetitive international system is harmful to American 
workers.
    Mr. Grinberg. The system is harmful in a plethora of ways. 
First of all, there is just the fact that in lots of foreign 
markets U.S. companies are disadvantaged relative to foreign 
corporations because they face a worldwide system with 
deferral, whereas other companies face a territorial system. So 
you know, the other companies will only pay tax in the country 
where they are operating, not at home.
    But then beyond that, and what I tried to emphasize in my 
remarks, is that we have created a disadvantage for U.S. 
companies in the United States. And to the extent that we 
believe that U.S. companies, everything else being equal, 
right--I mean, I love foreign direct investment when it makes 
the asset most productive and when it adds jobs in the United 
States. And I do not want to be understood as discouraging 
that. I am for that; I welcome that kind of investment.
    But at the end of the day, there remains a headquarters 
bias for U.S. companies. And you know, you see it when you see 
an inversion happen, right? In an inversion, what we see happen 
is that, at first, you have just the tax re-domiciliation. But 
then there are a whole bunch of tax-based pressures, both in 
terms of our law and in terms of foreign law and in terms of 
the way the IRS audits, that create pressures to move the 
actual headquarters abroad, right, to move senior management 
abroad, to move R&D abroad, to move the support jobs associated 
with that abroad.
    And initially, amazingly, the company actually, when it 
does that, moves Americans, right? So Americans leave the 
United States.
    But here is the thing. Five years later, they want their 
kids to go to high school or college here, and so they come 
back. And who replaces them? Who replaces them is a European. 
And now you have taken a tax-driven re-domiciliation and you 
have turned it into a substantive change in the corporation, a 
substantive change in its leadership and its leadership's bias 
at the margins for where they are going to put jobs.
    Senator Toomey. So I will just finish, Mr. Chairman.
    So the bottom line is, we have a tax code that creates an 
incentive, apparently a powerful incentive, to headquarter 
multinationals somewhere other than the United States of 
America. And headquarters are very often a source of really 
good jobs.
    Mr. Grinberg. Yes.
    Senator Toomey. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Before I go to Senator Cantwell, I have been hearing some 
complaints about the committee's process for considering tax 
reform. Now, let me remind my colleagues, in the 6 years that I 
have been the lead Republican on this committee we have held 
roughly 70 hearings on tax reform. We have had the options 
papers that we have come forth with. There was the Baucus plan. 
There was the 200-page committee staff report on tax reform. We 
had the bipartisan working groups and all of their reports.
    Now, this is the third hearing we have had in the last 
month on tax reform. And I might add that we are going to have 
a robust and fair markup.
    Long story short, we have been at this a long time, and 
there are very few ideas and proposals that have not been 
exhaustively examined by this committee. So anybody arguing 
that we are rushing or ramming anything through has a pretty 
selective memory. So I just wanted to make that one point 
before I call on----
    Senator Wyden. Mr. Chairman?
    The Chairman. Yes, Senator Wyden?
    Senator Wyden. Just briefly to respond.
    The Chairman. Okay.
    Senator Wyden. Mr. Chairman, as you know, I and my 
colleagues on this side have enormous respect for you and your 
desire to have this committee work in a bipartisan way----
    The Chairman. Vice versa.
    Senator Wyden [continuing]. And of course your history, 
which we are going to talk about tomorrow with the CHIP bill, 
where you started with Senator Kennedy. So I want to be really 
specific what is so troubling.
    Gary Cohn, the President's top economic adviser, said last 
Thursday that he was presenting his first and last offer. His 
words, not mine. And when I heard that, I was just stunned by 
how dramatic the difference his words were with your words, 
which I know are very sincere, about wanting to do a bipartisan 
proposal, and I would say how different it was from the process 
that Ronald Reagan followed in 1986.
    I talk to Bill Bradley a fair amount, another tall Democrat 
who was on the committee, with a lot better jump shot than me. 
But the point is, Mr. Chairman, he has described many times the 
process where the administration spent time with leaders on the 
committee who worked with the administration trying to find 
common ground. There has been none of that--none of that.
    So I want it understood, this is not commentary about your 
intentions; quite the opposite. And I have appreciated your 
comments with respect to my work with Senator Coats and Senator 
Gregg, because I think that shows some bona fides for trying to 
get a bipartisan bill. And I continue to believe that the 
Democratic principles, particularly given some of your ideas, 
are very consistent.
    But let us make no mistake about it. When Gary Cohn says he 
has put his first and final offer on the table and we are 
completely in the dark about details, that is stepping all over 
the history of successful tax reform, which is to do it in a 
bipartisan way.
    And I just wanted to have that on the record. I did not 
want to take the time of my colleague.
    The Chairman. Well, thank you. Thank you.
    Senator McCaskill, you are next, and then we will go to 
Senator Cantwell.
    Senator McCaskill. Thank you, Mr. Chairman.
    Can any of you point to anything specific in the plan that 
has been laid out that would prevent the problem we have now, 
which is a wide disparity among U.S. companies in terms of how 
much they pay?
    We know the effective rate is 22 percent--not the 
percentage. We know that service providers, construction, 
retail, and agriculture are paying 28 or more. And lots of 
industries have effective rates in the teens. And this is for a 
variety of reasons; it is not just territorial. There are a 
variety of reasons why there is a wide disparity in what 
corporations pay.
    I have scoured this plan, and I see nothing that levels the 
playing field here. Is there anything specific that you see in 
this plan--or maybe this is a detail to be determined later? Do 
you see anything specific in the plan, Dr. Clausing, that would 
level the playing field among the various corporations?
    Dr. Clausing. No. As it is specified now, there is not much 
to hang your hat on in terms of leveling the playing field 
between different corporations. I mean, they are lowering the 
top rate, which means that the most you could pay would be 
less.
    Senator McCaskill. Right.
    Dr. Clausing. So I guess by definition that lowers the 
discrepancy.
    Senator McCaskill. No, I am talking about between 
corporations.
    Dr. Clausing. Yes, but on a relative basis, you are right, 
yes.
    Senator McCaskill. Right. On a relative basis, I see 
nothing here that gets away from some paying zero and others 
paying at the top of the rate.
    Dr. Clausing. That is right.
    Mr. Grinberg. So just one thing, Senator McCaskill. I just 
want to correct you on this 22-percent number. So that is a 
very particular way of calculating an average actual tax rate. 
Let me quote what the Obama Treasury in its final document said 
about that version of calculation. This is on page 42 and 43: 
``Because it is backwards-looking, determined by tax rules, 
decisions, and economic events that occurred in the past, it is 
not necessarily helpful as an indication of the effect of taxes 
on a new investment, one whose returns will accrue in the 
future.''
    It is also very different in scope than other measures. 
Other people tend to look at effective marginal tax rates or 
effective average tax rates where the studies clearly show that 
U.S. companies are uncompetitive internationally. And I would 
urge you to look at those numbers, not the 22-percent number.
    Senator McCaskill. The point of my question--and I 
understand the point you are making, and it is a valid one--but 
the point of my question is this disparity between corporations 
based on other loopholes that are in the code. There is nothing 
being done that we can see to eliminate those problems, that 
you are going to have one type of industry that may have a 
certain business model pay very, very little and others pay at 
the top of the bracket. That is the point I was trying to make. 
And we have to address that.
    Mr. Grinberg. And I agree that we should try to clean that 
stuff out of the code.
    Mr. Shay. Senator McCaskill, in some respects, the proposal 
would worsen it to the extent it applies expensing to all 
assets.
    Senator McCaskill. Right.
    Mr. Shay. Some assets have longer lives, some shorter 
lives. It can have a disparate effect depending on the 
footprint of the business in particular. It also is quite 
costly from a revenue point of view; at least in the early 
periods. It turns eventually. But if you really want to get 
more equality in terms of treatment, I think you would move 
towards economic depreciation for all assets.
    That gets pretty much into the weeds and requires, frankly, 
a lot of work and a lot more effort. But that would go in the 
direction that you are asking about.
    Senator McCaskill. That makes sense.
    I want to make sure I spend just a moment at the end of my 
time here to talk about pass-throughs. The reason they are 
called pass-throughs is because the income passes through at 
the taxable rate of the person who receives it.
    So let us assume for purposes of this discussion that you 
have somebody who is in the top tax bracket. Right now that is 
almost 37 percent. Let us assume they have hundreds and 
hundreds of pass-throughs, like they were a real estate 
developer. And now all of a sudden, they are going to go from a 
tax rate of 30, almost 40 percent to a tax rate of 25. And this 
would be true for upwards of 90 percent of the businesses 
formed in America. And the vast majority of the income we are 
getting from these pass-throughs is in fact coming from people 
in the top tax bracket. This is real estate developers, law 
firms, doctors--you name it.
    So in essence, this is why, when you say ``pass-through,'' 
most Americans' eyes glaze over. We are only talking about C 
corps when we talk about a lower corporate rate. We are 
dramatically lowering by 14 points the tax burden on anybody 
who is wealthy who has pass-throughs. Is that correct? Am I 
explaining that correctly?
    Dr. Clausing. That is correct. And if you look at the 
estimates, about 88 percent of the benefit of a tax cut on 
pass-throughs goes to the top 1 percent of the income 
distribution. It creates a massive new base-erosion problem as 
people will seek to characterize their labor income as business 
income, and you will also lose a lot of income out of the 
personal income tax base. So this is a huge problem.
    Senator McCaskill. A huge problem. Eighty-eight percent of 
the income coming from pass-throughs is for the 1 percent. And 
I guarantee you, anybody who looks somebody straight in the eye 
and says, ``This is not going to benefit me,'' who has hundreds 
and hundreds of LLCs, is just lying to the American people--
flat out lying.
    Thank you, Mr. Chairman.
    Senator Wyden. Mr. Chairman?
    Senator Portman [presiding]. Senator Wyden?
    Senator Wyden. Per an agreement with Chairman Hatch, I just 
want to make a unanimous consent request to add section 4111 of 
Chairman Enzi's budget mark, which would repeal existing points 
of order requiring a budget score on a reported bill.* Thank 
you.
---------------------------------------------------------------------------
    * SEC. 4111. REPEAL OF CERTAIN LIMITATIONS.
    Sections 3205 and 3206 of S. Con. Res. 11 (114th Congress), the 
concurrent resolution on the budget for fiscal year 2016, are repealed.
---------------------------------------------------------------------------
    Senator Portman. Without objection.
    Senator Cantwell?
    Senator Cantwell. Thank you, Mr. Chairman.
    I want to note the impressive list of witnesses we have 
from prestigious universities here today. I am specifically 
speaking of the University of Houston and Reed College. Thank 
you.
    The other two institutions get a lot of credit, but we like 
the out-of-the-box thinking that comes from other parts of the 
country as well. So thank you both for being here.
    Dr. Clausing, on your statement about broader notions of 
competitiveness, you outline this issue of making investments 
in other things that help our economy grow and require earning 
higher wages, such as a well-educated workforce. I see later in 
your testimony you also talk about this from the perspective of 
the fact that there have been sharply declining shares of GDP 
that go to labor versus increasing shares of GDP that go to 
profits.
    So one of the things that I see, at least in my State, 
which I guarantee you has lots of economic activity, is the 
importance of skilling up the workforce. How important do you 
think this is to our competitiveness, and how much should our 
tax incentives reflect something that would help us get the 
skill level to maintain U.S. competitiveness?
    Dr. Clausing. Yes, I think that is an excellent question. 
There are a lot of aspects to competitiveness that are 
underappreciated in this debate. And if you think about what 
makes a business really succeed, there are a lot of components. 
Do they have skilled, innovative workers? Is the middle class 
healthy enough that they can purchase their products? Is our 
infrastructure sound? Do we have healthy spending on R&D? All 
of these can make our businesses more successful.
    And many of those things also require government revenue. 
So that makes attention to deficits particularly important 
because, if you are giving away the government revenue that you 
would use to repair bridges and roads and to fund education, 
that is a big hit to the potential for economic growth.
    Back when they were looking at repatriation tax breaks in 
previous years, they often paired that with the idea of the 
infrastructure investment. These days it seems to be paired 
with the idea of deficits. So I think that that is more 
problematic for competitiveness.
    Senator Cantwell. Well, I was thinking more specifically 
about incentivizing apprenticeships. You know, given the fact 
that there are so many people who are not skilled in the jobs 
that we have open--something like 67 percent of companies are 
saying they cannot find the skilled workers that they need--
what about investing in that as a way to keep our 
competitiveness?
    Dr. Clausing. Yes, I think that is going to be a really 
important issue in the future, not just because of global 
competition, but also because of technological change. We have 
had a huge transformation in the economy with the role of 
technology. And computers and robots can do a lot of the things 
that unskilled workers used to do, which means that if you want 
good job opportunities, you need to have skills. So paying for 
programs and education to make our workers more skilled, I 
think, is essential.
    Senator Cantwell. What would you say, Mr. Wells? A more 
robust workforce--I think we define that in the Northwest as 
people who are flexible to change, that is in the context of 
being able to do a variety of things as models and businesses 
change. You know, going from aluminum in aerospace to 
composites is a big move and needs new skills.
    Mr. Wells. Yes, I agree with what Professor Clausing is 
saying. I think all of those are important factors. And to 
achieve those goals, we are going to need to have revenue to 
the government to be able to fund those objectives.
    And from my perspective, the question then is, what is the 
fair way to raise the revenue? And base protection, preventing 
earnings stripping in a way that levels the playing field, is a 
nice way to get the revenue to meet the goals that you said and 
that I agree with are important goals for the country.
    Senator Cantwell. Yes.
    Mr. Wells. So I see those as being--when you think about 
tax reform legislation, we need to have a competitive, neutral 
system, but we need to have a system that really does collect 
tax in a way that will fund the things that the government 
desires to promote.
    Senator Cantwell. Well, I feel like if I cannot convince a 
guy who had a TV show called The Apprentice to be for 
apprenticeships, then I do not know what I can convince him of. 
I am pretty sure that what we need to do to maintain the shares 
of that GDP going in the right direction for higher wages and 
better jobs is to make sure we make the investment in those 
people whom the companies are saying they need. So it is not 
like they are not saying they need them.
    So thank you, Mr. Chairman.
    Senator Portman. Senator Cassidy, do you have a question 
you would like to ask?
    Senator Cassidy. Yes.
    One of our challenges seems to be the treatment of highly 
mobile intangibles. I have read each of your testimonies, but I 
cannot recall which of you specifically addressed that. But I 
suspect you all have thoughts.
    And with the rise of the so-called modified nexus in the EU 
patent box regimes, we are seeing jobs and business activity 
move offshore--and I think you referenced this earlier, Mr. 
Grinberg--not just the intangible assets themselves.
    So I guess the question is--now, by the way, I mentioned 
this to Mnuchin, and Mnuchin said, ``Well, we have modeled it, 
and having an IP box actually costs the U.S. economy money.'' 
So in their modeling, they did not think it worked.
    Now, that is a conversation over coffee, and I cannot say 
that that is their final position. I am just saying that at the 
time, that is what he raised.
    So I guess my question for any of you or all of you is, 
what is the proper balance of carrots and sticks for IP income? 
Because, by the way, I look at these companies with a lot of 
cash overseas, and a lot of them have a lot of IP. I gather 
that a lot of them park that license in Dublin and the income 
thereof goes to Dublin and not to us.
    Mr. Wells, do you want to take a crack?
    Mr. Wells. Okay. So I very much appreciate this question, 
because it will get me back to a dialogue I had earlier. Let us 
think about countries that have very strict rules on charging 
related party royalty arrangements, like China and Brazil. I 
cannot charge for those, so I will do interest stripping; I 
will do related party leasing into those countries; I will do 
supply chain transactions; I will charge my costs in in other 
ways.
    So a multinational comes to a jurisdiction with a toolbox 
of 
earnings-stripping strategies that are in a variety of 
categories. And then they just ask the question, ``Well, which 
ones work here?''
    So if you enact a targeted rule that deals with royalty 
stripping, that is great. But if you leave the other 
opportunities available, all that is going to do is allow for 
the multinational to say, ``Well, I cannot use a hammer, so I 
will use a different tool in my toolbox to do the same 
earnings-stripping technique.''
    And so what I would caution the Congress to consider is, 
instead of targeting IP or instead of targeting moving 
expenses, we need to deal with this as a holistic question. 
What are the things that are related party payments that are 
reducing the U.S. tax base and shifting profits overseas?
    Senator Cassidy. Now, I accept that point, but there are 
some industries that seem very IP-heavy, if you will. Now, this 
is more than moving expenses. This is the fact that you are 
generating such a percent of your income from a license.
    Mr. Wells. Yes. So there are two different aspects to that: 
inbound royalty stripping for the use of IP in the United 
States--and I think we need better earnings-stripping 
protections on that. On IP migration, this is something 
Professor Shay and I have written and spoken about in other 
contexts. I think, from my perspective, the Treasury Department 
should do more under section 367(d) to prevent the shifting of 
intangibles from the United States to a foreign jurisdiction. I 
think they have the authority to do that and have not done 
that. But that is a separate issue that would need to be dealt 
with.
    Senator Cassidy. Let me just work down the line.
    Dr. Clausing?
    Dr. Clausing. Yes, I think intangibles are an important 
part of this tax base-erosion problem. And one thing I would 
encourage you to think about, as you think about other 
countries' tax systems, is also to look at some of the things 
that other countries are doing to protect their tax base.
    It seems that we are in an important period where we can 
either, you know, all race to the bottom effectively, cutting 
rates and making tax evasion easier, or we can work together to 
try to combat that problem.
    The EU recently adopted an anti-tax-avoidance directive 
that works with CFC rules, exit taxes, earnings stripping, 
general anti-abuse rules. Member states are going to apply 
those----
    Senator Cassidy. A little bit more slowly. My ears turned 
60 years old this past week, so I apologize. [Laughter.]
    Dr. Clausing. Sure. Yes, so the EU is working on this anti-
tax-avoidance directive with many components, including 
controlled foreign corporation rules, exit taxes to address 
inversions, 
earnings-stripping rules, and general anti-abuse rules. And the 
member states of the EU are going to be applying these rules as 
of 2019.
    And you know, I think it is clear that if we do not tax 
this intangible income, other countries will, but there are 
ways that we can support each other in these anti-tax-avoidance 
efforts.
    To the extent that we prevent our companies, for instance, 
from moving income to Bermuda, that also helps Germany and 
France and other countries where foreign-to-foreign stripping 
will occur too. So I think that there are a lot of ways that 
countries can work together to protect their tax bases in a way 
that will help the countries that are trying to tax, as opposed 
to the havens.
    Senator Cassidy. Mr. Shay?
    Mr. Shay. Can I take it back one step? I agree with 
everything that Dr. Clausing just said. But by the time we are 
talking about income shifting, we are talking about successful 
intangibles that have been moved--really paper shuffling by 
good tax lawyers to get profits to move.
    What we care about as a country is, where is the R&D 
conducted? R&D is a deduction. And so really, our ultimate 
focus is, we want the thinking, the knowledge economy to be in 
the United States. And for that, it is not just taxes or it is 
really not even taxes, it is education, starting from the 
primary, moving into secondary, going into higher education.
    My town and city of Boston and Cambridge lost a 
headquarters to Senator Portman's State a number of years ago, 
Gillette, when P&G took them. We just got back General 
Electric, a large amount. We got General Electric. Some of it, 
of course, was incentives, but most of it was a knowledge 
economy that they valued, because they know they need to bring 
their businesses into the digital age.
    Moreover, we have a very significant R&D center for 
Novartis, the Swiss-based company. We have to keep our eye on 
the ball here. It is not just about taxes. We need to preserve 
our revenue so we can fund the education and infrastructure and 
other things that really allow our people to----
    Senator Cassidy. But then the paper shuffling can still 
occur. And once that R&D has developed the marketable license, 
it could then be moved overseas.
    Mr. Shay. Under current law, and that can be substantially 
affected by the steps that Dr. Clausing was referring to.
    Senator Cassidy. Mr. Grinberg?
    Mr. Grinberg. You know, my view is that we need appropriate 
R&D incentives. We should have very, very strong R&D 
incentives.
    I have previously expressed concerns about a patent box, 
but I have made the point before--and it goes specifically to 
why Dr. Clausing is wrong--that both the BEPS project and the 
EU have blessed patent boxes. And that has made patent boxes 
less of a bad idea than they were before. And that was a 
decision of the Obama administration, so let us understand 
that.
    Nevertheless, what I think is, we should have appropriate 
R&D incentives that try to incentivize R&D. And if you have 
inbound rules that are appropriate, then there is less of an 
incentive to move to a jurisdiction with a patent box in the 
first place.
    Senator Cassidy. Okay. I yield back. Thank you.
    Senator Portman. I thank the witnesses for providing us 
some great input today.
    I am just going to end with a couple of questions that dig 
a little deeper into the outbound side.
    We have talked a lot about inbound. It is very important, 
and I appreciate the focus that all four of you have had on 
that issue. I do think we have to have a level playing field. 
And as difficult as it is to find sometimes, I think we have 
gotten some good ideas here today.
    We all want this FDI to be here in the United States, 
because foreign direct investment creates jobs. But at the same 
time, we do not want to be disadvantaging U.S. companies, 
particularly by putting in place round-tripping rules and other 
things on the outbound side.
    The one thing I will say about intangible income leaving 
our country--which is more mobile, and that, to me, is the 
primary problem--is that Mr. Grinberg just mentioned patent 
boxes. Increasingly, our competitive countries in the OECD are 
saying, it is fine if you want to take advantage of our patent 
box, but you also have to move your R&D.
    So to Mr. Shay's point, absolutely I agree we need a more 
competitive economy and a knowledge economy and trained 
employees who can handle it. But ultimately, if a company wants 
to take advantage of the lower rates from a patent box and they 
are told you can take advantage of it only if you include R&D 
work in that country, Ireland is an example, there is an 
incentive to move out of Boston or, in your Gillette case, 
Cincinnati. So I do think that has to be part of our focus 
here.
    I guess I would just ask you, on the outbound side, the 
balancing act is to prevent that base erosion, particularly 
intangible income going to a low-tax jurisdiction, but not 
making U.S. multinationals uncompetitive. So how do we strike 
that balance?
    Mr. Wells talked about 367(d) and how Treasury could do 
more with existing law. What do you all think about his idea? 
And what else can we do on the outbound side, particularly with 
regard to intangible income?
    I will start right in the middle with Mr. Shay, and then we 
will move out right and left.
    Mr. Shay. The patent boxes that I have examined, and I have 
examined quite a few, they are very difficult to design; they 
are very difficult to limit. They end up being essentially rate 
reductions. So let us be clear that generally they are very 
poor so far, and I am not sure we have seen much effect of 
anything other than changing titles to patents.
    With respect to how we achieve the balance of competitive 
versus uncompetitive, I think today we have had a suggestion of 
an array of ideas, but I think it does come down to--we cannot 
just look at source taxation, we cannot just look at outbound 
taxation; we need to have both be robust and protect U.S. 
interests. And U.S. interests are a level playing field in the 
United States and discouraging the kind of massive income 
shifting that Dr. Clausing's research has described.
    And I think if you go in the direction of territorial, if 
you do not have a robust minimum tax, then you are going to 
have an issue. The European Union minimum tax is only five 
people and a dog within the EU. They have a different standard 
with respect to non-EU countries. So we should really be--
again, this comes down to details, and we need to be very 
careful in how we do it.
    Senator Portman. Mr. Grinberg?
    Mr. Grinberg. So the most important thing we can do is 
lower the rate, lower the rate as sharply as possible. That is 
the bottom line.
    Senator Portman. Lowering the rate helps, because if you 
have a 20-percent rate, you handle a lot of the potential tax 
avoidance problems. But still, there are jurisdictions well 
below that, some with as low as zero, others in the, you know, 
10 to 15 range.
    Mr. Grinberg. The other thing that I would hope we do is 
make it relatively easy in a transition to repatriate IP back 
into the United States so that, if you want to locate here, you 
can pretty easily.
    And then you want appropriate, strong R&D incentives to do 
work in the United States. And then, frankly, if the U.S. moves 
to a system that looks more like the rest of the world, then 
instead of the BEPS process harming us, it can begin to provide 
us some support, because it is getting harder to move IP, as 
you pointed out, to zero-rate jurisdictions where you do not do 
anything.
    And if there is an inbound tax, well, suddenly, you know, 
even if you go to the zero-rate jurisdiction, you are not going 
to pay nothing coming into the United States, so that is less 
of an attraction. You are not round-tripping, and you are not 
round-tripping successfully.
    And the same thing applies equally for foreign-based 
multinationals, so you are not concerned that you cannot do it, 
but your foreign competitors can, which is a big problem under 
current law that round-trippers rightly complain about.
    And so I think that you end up in a better place if you 
just lower the rate as much as you can, create strong R&D 
incentives, let people bring intellectual property back. That 
is my instinct. Do not create substance rules to force people 
to take jobs out.
    Senator Portman. Mr. Wells?
    Mr. Wells. Okay. I think I agree, and maybe all of us 
agree, lowering the rate is a wonderful idea that will help.
    I think that if you move to a territorial regime, which I 
think you should and you must, then what we are saying is that 
subpart F should not serve as an important backstop or it 
should not be expanded as a base-protection measure.
    As today's hearing has said, many times we say we worry 
about earnings stripping. Well, the answer to that is not 
simply to apply a tax on only U.S. companies under subpart F. 
And what I hope has come out of this hearing is that, no, 
subpart F is not the answer to base erosion.
    And if we do go toward a territorial regime and we do not 
make a robust subpart F regime with it, then we really do need 
source taxation. We have to get busy about, how do we protect 
the U.S. tax base from interest stripping, royalty stripping, 
and related party payments generally?
    And I think if we do that, then I think that you can come 
up with a system that will be a level playing field.
    And again, I would just caution with this comment. Every 
time we seem to talk about protecting what is the rate of tax 
in the U.S., to the extent an inbound company can get a tax 
advantage, that puts them at a competitive advantage versus 
U.S. companies. And we need a system that levels that playing 
field for competitiveness reasons.
    Senator Portman. Dr. Clausing, I am going to ask you to at 
least base part of your answer on the possibility of a 
territorial system, because I think that is what we are talking 
about in general here. And not that I am not interested in your 
other comments, but if you could think about, if there were a 
territorial system, how would it work?
    Dr. Clausing. Absolutely. The first thing I would note is 
that lowering the tax rate is definitely not enough, and it is 
not going to get you there. If you look at the actual data on 
the profit-shifting problem, over 80 percent of the profit 
shifting for U.S. multinational firms is destined to seven 
havens. And those havens have effective tax rates that are 
typically 2 or 3 percent or sometimes less. So simply slashing 
the rate is not going to handle that base-erosion protection.
    So, assuming you go with a territorial system, I think the 
key is to do tough base-erosion protection measures, including 
a per-
country minimum tax, which I think would be one of the more 
effective measures you could take. This should be coupled with 
off-the-shelf remedies to deal with the inversion problem, like 
a 50-percent ownership threshold, exit tax, earnings-stripping 
limits, and the like.
    You can also address the check-the-box regulations and work 
with some of our trading partners on the BEPS steps. Some of 
these steps are Band-Aids, but they are better than nothing at 
all.
    And focusing on the fundamentals of the economy, I think, 
is also a really important thing that I would come back to--
paying for your tax cuts, funding education, funding 
infrastructure.
    Senator Portman. Great.
    Well, listen, thank you all. I could stay here all morning 
and afternoon, but I am afraid you probably have better things 
to do. We have not even gotten into the repatriation and, you 
know, whether it should be bifurcated or not. Any thoughts on 
that are helpful--not today--but presenting those to the 
committee and the staff. Whether there should be differences, 
as the Camp draft had, with regard to subpart F is important.
    So, thank you for what you have done.
    I would just end by saying two things. One, there is an 
urgency here. And I know that people are saying we need more 
time, more time. We have spent, I think Mr. Grinberg said, 6 
years--it seems more like 20 years--talking about this. And 
there have been, you know, dozens of hearings, broadly 
speaking, on tax reform. This is not something that has not had 
a lot of debate, not to say we should not have more--I am all 
for it. And I am really happy we are in the committee process 
here, because we need to have public debate.
    Infrastructure--our health care was not subject to that, 
and that was a mistake, in my view. I hope that infrastructure 
will have that kind of debate as an example.
    And then finally, I just want to say I think we need to be 
very careful when we talk about this notion that somehow this 
is tax cuts that will pay for themselves. That is not what 
Secretary Mnuchin said over the weekend. I saw his comments. 
What he said was, there will be economic growth that will 
accompany good tax reform, the right kind of tax reform, which 
includes the business side, because our code is so out of date 
right now.
    There is an enormous opportunity to repatriate profits, but 
also to just allow American companies to be competitive and add 
more jobs here, and that will raise economic growth. And if you 
increase growth--I think it is about .4 percent over what the 
projections would otherwise be--I think that accounts for about 
the trillion and a half that is talked about.
    So it is not that tax cuts pay for themselves, it is that 
the right kinds of tax relief and, more importantly for me, 
reform will lead to better economic growth. And we should take 
that into account. And that is my view, anyway.
    For any of my colleagues who have written questions for the 
record, I ask that you submit them by close of business on 
October 13th.
    And with that, again, thank you so much for your time 
today. And please continue to give us input.
    This hearing is adjourned.
    [Whereupon, at 12:27 p.m., the hearing was concluded.]

                            A P P E N D I X

              Additional Material Submitted for the Record

                              ----------                              


 Prepared Statement of Kimberly A. Clausing, Ph.D., Thormund A. Miller 
         and Walter Mintz Professor of Economics, Reed College
    Chairman Hatch, Ranking Member Wyden, members of the committee, 
thank you for inviting me to share my views on the international 
aspects of business tax reform. Business tax reform is an important 
priority, and it should reflect the needs of our country. We need to 
raise revenue in a way that is simple, fair, and efficient. We can do 
this without resorting to increasing the budget deficit. And we can do 
this in a way that focuses on the needs of the American middle class.

    In my testimony today, I will discuss several crucial issues 
related to good business tax reform. First, I will discuss the concept 
of competitiveness, the contribution of our business tax system to the 
Nation's competitiveness, and other important features of national 
competitiveness. Second, I will address the issue of corporate tax base 
erosion, an issue that has plagued our business tax system. Third, I 
will suggest important priorities in business tax reform, discussing 
how the corporate tax can be modernized to make our tax system better 
suited to a globally integrated economy. Toward this end, our tax 
system must serve the interests of American middle-class workers, 
workers too often left behind in tax reform proposals.
                    are u.s. companies competitive?
    By any broad measure, our Nation's businesses are incredibly 
successful. Corporate profits are a higher share of GDP than they have 
been at any time in history, whether one considers corporate profits in 
before-tax or after-tax terms. Over the past 10 years, after-tax 
profits have averaged 9.3% of GDP, whereas over the 40 years before, 
they averaged 6.2% of GDP. In light of these clear facts, it is 
difficult to argue that our economy is being held back by a scarcity of 
after-tax profits. Indeed, our companies are awash in cash, but they 
are missing investment opportunities, due in part to the economic 
weakness of middle-class consumers. (See Figure 1.) Also, our companies 
dominate the Forbes Global 2000 lists of the world's most important 
companies. (See Figure 2.) While our economy is about one-fifth the 
size of the world economy (16% in purchasing power parity terms (PPP) 
\1\ and 22% in U.S. dollar terms), we have larger fractions of the 
world's top 2,000 firms: 28% by count, 33% by sales, 37% by profits 
(consolidated), 24% by assets, and 44% by market capitalization.
---------------------------------------------------------------------------
    \1\ PPP numbers adjust for price differences across countries. This 
makes the United States a smaller share of the world economy since 
price levels are lower in most developing countries.

[GRAPHIC] [TIFF OMITTED] T0317.001


[GRAPHIC] [TIFF OMITTED] T0317.002


Is the U.S. Tax System Competitive?
    While our corporate tax system certainly has problems, high tax 
burdens for multinational corporations are not one of them. Due to the 
aggressive use of corporate loopholes, many U.S. multinationals have 
effective tax rates in the single digits, far lower than the U.S. 
statutory rate.\2\ And, our purportedly ``worldwide'' system of 
taxation generates no revenue from taxing foreign income, while our 
trading partners that use purportedly ``territorial'' systems of 
taxation frequently tax more foreign income than we do.\3\ Further, 
U.S. corporate tax revenues are lower than the corporate tax revenues 
of our peer trading partners by about 1 percent of GDP. Part of the 
revenue shortfall is explained by profit shifting to tax havens, and 
there are also other reasons for weak U.S. corporate tax revenues.\4\ 
These considerations do not mean that U.S. business taxation cannot be 
substantially improved; I make suggestions below.
---------------------------------------------------------------------------
    \2\ The U.S. statutory rate is high relative to peer nations, but 
this is not the relevant measure of corporate tax burdens since most 
companies pay effective tax rates that are far lower than the statutory 
rate. See footnote 5 for evidence.
    \3\ Under the U.S. system, some types of foreign income are more 
lightly taxed. For example, foreign tax credits can be used to shield 
royalty income from taxation. Also, other countries often have tougher 
base-erosion laws, and their adoption of the OECD/G20 BEPS guidelines 
will continue this trend. See Joint Committee on Taxation JCX-42-11. In 
addition to tough CFC laws, many territorial countries have other 
provisions aimed at countering corporate tax base erosion, including 
thin capitalization (earnings stripping) rules, which are widely used. 
Beyond these measures, there are also new anti-base erosion measures 
such as the European Union Anti-Tax Avoidance Directive and Australia's 
anti-avoidance law.
    \4\ Much business income is earned by pass-through organizations; 
this is discussed below. Beyond that, the U.S. tax base is notoriously 
narrow and there are important distortions within the corporate tax 
code. For example, debt-financed investments are tax-favored relative 
to 
equity-financed investments. This increased leverage creates financial 
vulnerability for the U.S. economy.

[GRAPHIC] [TIFF OMITTED] T0317.003


Broader Notions of Competitiveness
    In discussions about the ``competitiveness'' of U.S. multinational 
firms, corporate interests often emphasize tax burdens as a 
determinative influence. Yet, for many companies, the U.S. statutory 
rate and our purportedly ``worldwide'' system have more bark than bite, 
and multinational firms are often able to achieve very low effective 
tax rates.\5\ In terms of the ability to generate after-tax profits and 
market dominance, U.S. multinational companies are already quite 
competitive.
---------------------------------------------------------------------------
    \5\ See Matthew Gardner, Robert S. McIntyre, and Richard Phillips, 
``The 35 Percent Corporate Tax Myth,'' ITEP Report, March 2017. See 
also these studies on effective tax rates: Congressional Research 
Service: https://fas.org/sgp/crs/misc/R41743.pdf; General Accounting 
Office: https://www.gao.gov/products/GAO-16-363; Treasury: https://
www.treasury.gov/resource-center/tax-policy/Documents/Report-
Responsible-Business-Tax-Reform-2017.pdf; and the appendix of this 
academics letter: https://americansfortaxfairness.org/files/24-
International-Tax-Experts-Letter-to-Congress-9-25-15-FINAL-for-
printing.pdf.

    But broader notions of competitiveness emphasize the fundamentals 
that determine the health and well-being of our broader economy. Are 
workers well-educated, and do they have the skills required to earn 
high wages in the global economy? Are customers economically secure and 
sufficiently prosperous that they are not overleveraged? Are standards 
of living for the middle class rising at a pace that is consistent with 
societal expectations and a healthy middle class? Is our infrastructure 
sound? Are our political and economic institutions stable? Are we 
avoiding fragility in our financial system and other weak spots that 
---------------------------------------------------------------------------
could lead to recessions or crises?

    While we often take such things for granted, they are essential to 
the success of U.S. businesses and the workers within them. In short, 
the attractiveness of a particular country as a location for production 
depends on much more than the corporate tax environment. And many 
crucial ingredients for a competitive economy require government 
revenue to finance investments in education, infrastructure, and 
essential services. The investments in our economy that make the middle 
class prosperous will also make our businesses successful.
                     corporate tax base protection
    Offshore profit shifting has become a huge problem. My research 
suggests that this problem has increased dramatically over the past 20 
years, and profit shifting to tax havens now costs the U.S. Government 
more than $100 billion each year.\6\
---------------------------------------------------------------------------
    \6\ See Kimberly A. Clausing, ``The Effect of Profit Shifting on 
the Corporate Tax Base in the United States and Beyond,'' 2016, 
National Tax Journal, December, 69(4), 905-934. Similar facts regarding 
the scale of the problem are reported by many sources, including 
Keightly (2013), Dowd, Landefeld, and Moore (2017), and Guvenen, 
Mataloni, Rassier, and Ruhl (2017). These practices also hurt our 
trading partners, as discussed in Clausing (2016).

    Figure 4 shows the dramatic increase in the revenue lost to profit 
shifting in recent years, and Figure 5 shows that most profit shifting 
is artificially directed toward tax havens. Indeed, the income booked 
in low-tax havens is implausibly high by any reasonable metric. In 
2010, U.S. affiliate firm profits were many multiples of island havens' 
entire GDP: over 16 times GDP in Bermuda and over 20 times GDP in the 
Caymans.\7\ Further, estimates indicate that U.S. multinational firms 
have accumulated over $2.6 trillion in permanently reinvested earnings 
in tax havens, over $1 trillion of which is held in cash.
---------------------------------------------------------------------------
    \7\ See Jane Gravelle, ``Policy Options to Address Profit Shifting: 
Carrots or Sticks?'', Tax Notes, July 4, 2016.
    \8\ For the full analysis behind Figures 4 and 5, see Kimberly 
Clausing, ``The Effect of Profit Shifting on the Corporate Tax Base in 
the United States and Beyond,'' 69 National Tax Journal 905, 905-934 
(2016).

[GRAPHIC] [TIFF OMITTED] T0317.004


    The tax havens that are destinations for profit shifting abroad 
have extremely low effective tax rates, often less than 5%. My research 
suggests that 82% of our profit shifting problem is with just 7 tax 
havens, the ones shown in Figure 5. And 98% of the profit shifting 
occurs with countries that have effective tax rates that are less than 
15%. These facts clearly show that lowering the corporate tax rate is 
not enough to stem this type of tax avoidance. Absent tough measures to 
combat tax base erosion, haven tax rates under 5% will remain big 
magnets for internationally mobile income, even if the U.S. corporate 
---------------------------------------------------------------------------
tax rate declines substantially.

[GRAPHIC] [TIFF OMITTED] T0317.005

More Base Erosion: The Problem of Favorable Pass-Through Taxation
    While multinational companies almost always operate in corporate 
form, in part due to the benefits of deferral of U.S. taxation on 
foreign income until income is repatriated, much domestic business 
activity has moved from corporate to pass-through form. Pass-through 
income is now over half of business income. For domestic companies, tax 
burdens are often far lower in pass-through form, and tax avoidance is 
a big problem. Pass-through businesses often feature opaque 
organizational forms that facilitate tax avoidance. The average Federal 
rate on pass-through income is 19%, a rate lower than the rate on 
corporate income, and the movement of business income into pass-through 
form has reduced corporate tax revenues by about $100 billion each 
year.\9\
---------------------------------------------------------------------------
    \9\ See Michael Cooper, et al., 2016, ``Business in the United 
States: Who Owns It and How Much Tax Do They Pay?'', Tax Policy and the 
Economy, 30(1), 91-128.

    Providing a tax preference for pass-through income risks more tax 
base erosion. Rates below the top personal rate will open up massive 
new opportunities for tax avoidance, as (typically high-income) 
individuals with discretion will be tempted to reorganize their income 
as business rather than personal income. This type of tax avoidance was 
endemic in Kansas after their experiment with lower pass-through rates, 
and in general, it is very difficult to combat without adding immense 
complexity to the tax system. While some small businesses are the sorts 
of endeavors that are easily romanticized in these types of committee 
hearings, pass-through organizational form is also popular among very 
wealthy individuals, including President Trump, who owns many pass-
through businesses. According to estimates from the nonpartisan Tax 
Policy Center, an astonishing 85% of a pass-through tax cut would 
accrue to those in the top 1% of the income distribution.\10\
---------------------------------------------------------------------------
    \10\ See http://www.taxpolicycenter.org/sites/default/files/
publication/141541/2001271-options
-to-reduce-the-taxation-of-pass-through-income.pdf.
---------------------------------------------------------------------------
           why is it important to protect the corporate tax?
    1. Revenue. As demonstrated in Figure 3, U.S. corporate tax 
revenues are lower than those of peer nations, due to both profit 
shifting and the importance of the pass-through sector. In the wake of 
record high corporate profits in recent years, the low, flat trend of 
our corporate tax revenues is particularly noticeable. Protecting the 
corporate tax base would help ensure adequate government revenues in a 
time when the labor share of income is steadily shrinking.\11\ Revenues 
are particularly important to finance urgent priorities that are 
important for the competitiveness of our economy and the economic 
health of the middle class: priorities like infrastructure, education, 
and research and development.
---------------------------------------------------------------------------
    \11\ See Kimberly Clausing, ``Labor and Capital in the Global 
Economy,'' Democracy: A Journal of Ideas, 43, 2017, http://
democracyjournal.org/magazine/43/labor-and-capital-in-the-global-
economy/.

    Business tax reform that is not (at least) revenue neutral 
increases the government budget deficit. The deficit is already 
scheduled to increase by about 2% of GDP over the next decade due to 
our aging population and our important commitments to Social Security 
and Medicare. Debt held by the public is now about 75% of GDP. Further 
increasing our indebtedness at this moment in time is unwise. When 
another recession occurs, and unfortunately recessions do always come, 
we will need room for the natural increases in budget deficits that 
occur as the economy collects less tax revenue and spends more on 
unemployment. Our current levels of indebtedness already provide little 
wiggle room. Also, monetary policy will have limited ability to respond 
to the next recession since interest rates are already quite low. This 
---------------------------------------------------------------------------
is a bad time for tax cuts.

    Deficit-financed tax cuts increase tax burdens on our children and 
grandchildren. Also, government budget deficits reduce any growth-
enhancing effects of tax cuts, since they either raise interest costs 
(due to greater government borrowing) or they pull in foreign sources 
of financial capital, which have the advantage of keeping interest 
rates lower, but result in future repayments of debts abroad, lowering 
standards of living at home during that period.

    The nonpartisan Tax Policy Center has calculated that base 
broadening can only finance a limited revenue-neutral corporate rate 
reduction. Ignoring deferral, if you eliminate every single business 
tax expenditure (some of which are very popular), it only pays for a 
rate reduction to 26%, a far higher rate than those in the news 
lately.\12\
---------------------------------------------------------------------------
    \12\ TPC Staff, ``The Tax Reform Tradeoff: Eliminating Tax 
Expenditures, Reducing Rates,'' September 13, 2017. Of course, ending 
deferral would enable further rate reduction; however, a move toward a 
territorial system is likely to worsen erosion.

    2. A Fair Tax System. Any proposed business tax plan follows 
several decades of dramatically increasing income inequality, sharply 
declining shares of GDP that go to labor, sharply increasing shares of 
GDP that go to corporate profits, and middle class wage stagnation. Tax 
---------------------------------------------------------------------------
policy should work to counter, not reinforce, such trends.

    Business taxation has an important role to play in the 
progressivity of the tax system. As already noted, 85% of pass-through 
tax rate cuts accrue to the top 1% of the income distribution. And, 
aside from the estate tax, the corporate tax is our most progressive 
tax. All conventional models of corporate tax incidence assign the vast 
majority of the burden of the corporate tax to capital or shareholders, 
including models used by the Joint Committee on Taxation, the 
Congressional Budget Office, the U.S. Treasury, and the nonpartisan Tax 
Policy Center.\13\ Given the strong advocacy by shareholders and the 
business community for corporate tax cuts, it should not be surprising 
that these groups are the ones who would benefit from the tax cuts. 
They understand their own economic interests.
---------------------------------------------------------------------------
    \13\ For JCT, see https://www.jct.gov/
publications.html?func=startdown&id=4528. For CBO, see https://
www.jct.gov/publications.html?func=startdown&id=4528. For Treasury, see 
https://www.ntanet.org/NTJ/66/1/ntj-v66n01p239-62-distributing-
corporate-income-tax.html. (This was previously available at https://
www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/TP-
5.pdf, but it was mysteriously pulled from the Treasury website in 
recent weeks.) For the TPC, see http://www.taxpolicycenter.org/
publications/how-tpc-distributes-corporate-income-tax.

    Those concerned about the well-being of workers might usefully 
advocate for tax cuts on taxes that workers pay: economists agree that 
workers bear the burden of the payroll tax and the labor income tax. 
For corporate tax cuts to benefit workers, the resulting increase in 
corporate after-tax profits needs to fuel new investments, those new 
investments need to increase the productivity of labor, and the higher 
productivity needs to boost wages. Why rely on such indirect mechanisms 
to help workers when we have far more direct tools? If the aim is to 
help workers, then policymakers should go straight to the taxes that 
---------------------------------------------------------------------------
fall on them.

    Further, much of the U.S. corporate tax base at present is excess 
profits, which are profits above the normal level accruing due to 
intangible sources of economic value and market power. U.S. Treasury 
economists now calculate that three quarters of the corporate tax base 
is excess profits, often in the hands of very few superstar 
companies.\14\ Giving a tax cut to this part of the tax base just makes 
excess profits even larger, without stimulating capital investment or 
wages.
---------------------------------------------------------------------------
    \14\ See http://www.ntanet.org/NTJ/69/4/ntj-v69n04p831-846-excess-
corporate-returns-increasing.pdf for evidence on excess profits.

    Finally, if burgeoning corporate after-tax profits were the key to 
investment and wage growth, then the previous 15 years should have 
already been a paradise of wage growth, as after-tax profits in recent 
years have been about 50 percent higher than in decades prior (as a 
---------------------------------------------------------------------------
share of GDP), and higher than at any point in the past half-century.

    I would urge the committee to focus on the distribution tables when 
designing tax law changes, relying on the well-regarded, nonpartisan 
economists at the Joint Committee on Taxation and the Congressional 
Budget Office to estimate the effects of tax and budget changes. The 
ultimate test of whether tax legislation will help American workers is 
the distribution analyses. In these analyses, it is important to 
consider the tax system as a whole: business taxes, individual income 
taxes, and estate taxes should all be considered together.

    3. An Efficient Tax System. Taxing corporate income helps make the 
tax system function better. Without the corporate tax, individuals 
could use the corporate form itself as a tax shelter. The corporate tax 
is also our only effective tool for taxing capital income. In my recent 
research with Leonard Burman and Lydia Austin of the Tax Policy Center, 
we show that only about 30% of U.S. equity income is taxed at the 
individual level by the U.S. Government; the rest is earned in tax free 
accounts, in non-taxable endowments, or by foreign investors.\15\
---------------------------------------------------------------------------
    \15\ Leonard Burman, Kimberly Clausing, and Lydia Austin, ``Is U.S. 
Corporate Income Double-Taxed?'', National Tax Journal, September 2017.

    Taxing all types of income at the same rate of taxation is a good 
ideal for tax policy. After the last great tax reform (that emerged 
from this very body) in 1986, both capital and labor income were taxed 
at the same rate. This sort of uniformity is consistent with the latest 
research on the ideal efficient tax policy design.\16\ Taxing different 
types of income at the same rate also cuts down on the many gimmicks 
and shenanigans that litter our tax system when tax rates differ.
---------------------------------------------------------------------------
    \16\ As examples, see Peter Diamond and Emmanuel Saez, 2011, ``The 
Case for a Progressive Tax: From Basic Research to Policy 
Recommendations,'' Journal of Economic Perspectives 25: 165-90; 
Emmanuel Farhi, Christopher Sleet, Ivan Werning, and Sevin Yeltekin, 
2012, ``Non-
Linear Capital Taxation Without Commitment,'' Review of Economic 
Studies forthcoming: 1-25; Thomas Piketty and Emmanuel Saez, 2012, ``A 
Theory of Optimal Capital Taxation,'' National Bureau of Economic 
Research Working Paper No. 17989, April; Thomas Piketty and Emmanuel 
Saez, 2013, ``A Theory of Optimal Inheritance Taxation,'' Econometrica 
81 (5): 1851-86.

    Finally, since the vast majority of the corporate tax base is 
excess profits, this also has efficiency implications. Taxing excess 
profits does not distort capital investment or hiring decisions, and 
excess profit taxes are far more efficient than taxes that target 
capital or labor.
                  implications for business tax reform
1. First, Do No Harm: A Toothless Territorial System Heads in the Wrong 
        Direction
    Many in the multinational community use the notion of 
``competitiveness'' to suggest that that the United States should adopt 
a territorial system of taxation. Yet, as noted above, multinational 
firms already face low effective tax rates that are comparable to those 
of firms headquartered in other countries, and very little tax is 
presently collected on foreign income. Indeed, a well-designed 
territorial system could easily raise the tax burden on foreign income, 
as noted by many observers.\17\
---------------------------------------------------------------------------
    \17\ Leslie Robinson, 2014, testimony of Leslie Robinson before the 
United States Senate Committee on Finance, presented at the hearing on 
international corporate taxation, Washington, DC, July 22; Jane G. 
Gravelle, 2012, ``Moving to a Territorial Income Tax: Options and 
Challenges,'' Washington DC: Congressional Research Service.

    So, presumably, those that push for adoption of a territorial 
system under the guise of competitiveness concerns truly have in mind a 
``toothless territorial'' system that would lower the tax burden on 
foreign income. A toothless territorial system, without serious and 
effective base erosion protection measures, risks worsening an already 
large corporate tax base erosion problem. Exempting foreign income from 
taxation would relax the remaining constraint on shifting income 
abroad, the potential tax due upon repatriation. This turbocharges the 
already large incentive to book profits in low-tax havens, likely 
generating large revenue losses.
2. Cutting Business Rates Below Personal Tax Rates Risks More Tax Base 
        Erosion
    Discrepancies between the top personal rate and the business rate 
will create new avoidance opportunities as wealthy individuals seek to 
earn their income in tax-
preferred ways, reducing their labor compensation in favor of business 
income. Companies would be inclined to tilt executive compensation 
toward stock-options and away from salary income, and high-income 
earners would be inclined to earn income through their businesses in 
pass-through form. Thus, serious tax revenue leakage in the personal 
income tax system is also likely.
3. Much Ado About Repatriation . . . Why Give Windfalls for Income 
        Already Earned?
    U.S. multinational companies have accumulated over $2.6 trillion in 
offshore profits, sitting in countries with very low effective tax 
rates, typically less than 5%. Companies are able to borrow against 
these funds, and even invest these funds in U.S. financial markets, but 
they are not able to distribute the funds to shareholders in the form 
of dividends and share repurchases without triggering U.S. tax on the 
repatriated funds. As a consequence, companies have left funds piling 
up offshore, in the hope that Congress will give them a special holiday 
rate again (as in the 2004 American Jobs Creation Act), or even enact 
permanently favorable treatment of foreign income.

    Company decisions about when to pay dividends and repurchase shares 
are distorted by these tax incentives. However, it is unlikely that 
repatriation tax is reducing U.S. investment. The companies that have 
accumulated these earnings abroad are the most credit-worthy companies 
on the planet, and they can easily borrow to finance worthy new 
investments in the United States. In fact, borrowing achieves the 
equivalent of a tax-free repatriation, since the funds abroad 
accumulate interest income that offsets the interest deduction on funds 
borrowed at home, giving companies the same access to financial capital 
at no tax cost.

    Despite the hopeful title of the legislation, the 2004 American 
Jobs Creation Act's repatriation tax holiday did not create jobs or 
spur investment.\18\ Instead, it was effectively a tax windfall to 
shareholders based on companies' past tax avoidance. The only effect 
was a substantial increase in share repurchases and dividend issues.
---------------------------------------------------------------------------
    \18\ See Jane G. Gravelle and Donald J. Marples, 2011, ``Tax Cuts 
on Repatriation Earnings as Economic Stimulus: An Economic Analysis,'' 
R40178, Congressional Research Service. This paper provides an 
extensive review of several papers, all of which show no jobs or 
investment stimulus resulting from the repatriation tax holiday.

    Further, preferential rates on income that has already been earned 
and that is stashed in tax havens makes no economic sense from either 
an efficiency or equity perspective. Giving shareholders a tax windfall 
on income they have already earned does not encourage job creation or 
investment. Instead, it merely enriches those at the very top of the 
income distribution. We have far more effective tools to encourage new 
investment, job creation, and the prosperity of the middle class.
4. Tackling Base Erosion
    Congress should focus on a revenue-neutral (or revenue-increasing) 
business tax reform that reduces the statutory corporate tax rate and 
eliminates the major corporate tax expenditures including deferral, 
taxing accumulated offshore earnings in full. Eliminating deferral 
would eliminate the incentive to earn income in low-tax countries, by 
treating foreign and domestic income alike for tax purposes. Pairing 
that reform with a lower corporate tax rate need not raise tax burdens 
on average, although it would create winners and losers among corporate 
taxpayers. A more fundamental reform would require worldwide corporate 
tax consolidation; this would align the tax system with the reality of 
globally-integrated corporations.\19\ These reforms should be combined 
with anti-inversion measures such as better earnings stripping rules 
and an exit tax.
---------------------------------------------------------------------------
    \19\ One proposal for worldwide consolidation is within Kleinbard's 
proposal for a Dual BEIT: Edward D. Kleinbard, ``Business Taxes 
Reinvented: A Term Sheet'' (September 25, 2017), Tax Notes, Vol. 156, 
2017. Another fundamental reform worthy of long-run consideration is 
formulary apportionment. See Reuven S. Avi-Yonah and Kimberly A. 
Clausing, 2008, ``Reforming Corporate Taxation in a Global Economy: A 
Proposal to Adopt Formulary Apportionment.''

    Taxing foreign income currently also eliminates the incentive to 
build up large stocks of unrepatriated foreign income, now estimated at 
$2.6 trillion. Settling the future tax treatment of foreign income 
---------------------------------------------------------------------------
should be a key goal of reform efforts.

    In terms of more incremental reforms, even a per-country minimum 
tax would be a big step toward reducing profit shifting toward tax 
havens and protecting the corporate tax base. A minimum tax would 
currently tax income earned in the lowest tax countries. Ninety-eight 
percent of the profit shifting out of the United States is destined for 
countries with foreign tax rates below 15%.\20\ However, a ``global'' 
minimum tax is a far less effective step. Since companies could use 
taxes paid in higher-tax countries to shield income booked in tax 
havens from the minimum tax, there would still be a very substantial 
incentive to earn income in tax havens. The playing field would be more 
tilted toward both haven income and other types of foreign income; the 
two streams of income would work together to reduce tax burdens.
---------------------------------------------------------------------------
    \20\ See Kimberly Clausing, ``The Effect of Profit Shifting on the 
Corporate Tax Base in the United States and Beyond,'' 69 National Tax 
Journal 905, 905-934 (2016).

    In general, making our tax system compatible with the global 
economy is an important goal. We need a simplified corporate tax system 
that actually collects the tax that is due. As it is, too many people 
waste their careers pursuing tax-related gimmicks and shenanigans. 
Profit shifting costs the U.S. Government over $100 billion each year. 
Simple reforms like a per-country minimum tax--or better yet, ending 
deferral--would address that problem and make our corporate tax system 
more compatible with the global operations of multinational firms.
5. Paying Attention to the Middle Class
    The truth is in the distribution tables. Any tax law changes should 
not worsen income inequality. The tax plans of this committee follow 
decades of dramatically increasing income inequality, sharply declining 
shares of GDP that go to labor, sharply increasing shares of GDP that 
go to corporate profits, and middle class wage stagnation. Our tax 
policy should be working to counter these trends, making sure that all 
American workers benefit from the gains in national income that 
steadily increase our GDP.
---------------------------------------------------------------------------
    \21\ See Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, 
``Distributional National Accounts: Methods and Estimates for the 
United States,'' December 2016.

[GRAPHIC] [TIFF OMITTED] T0317.006


    In earlier decades, the middle class did better. Figure 6 shows 
that pre-tax income growth over the period 1946 to 1980 exceeded 100% 
for the bottom 90% of the population, and income growth was actually 
lower for the top shares of the population. However, between 1980 and 
2014, the growth of the bottom 50% is literally invisible in the chart, 
at 1%. Growth in incomes for the middle 40% is 42 percent, and it 
accelerates from there. As a result, there has been an increasing 
concentration of national income at the top of the income distribution. 
The top 1% now have a fifth of national income, 50% more income than 
---------------------------------------------------------------------------
the bottom half of the income distribution. (See Figure 7.)

[GRAPHIC] [TIFF OMITTED] T0317.007


    These figures help explain why typical American households are not 
content with the pace of economic progress. The standard expectation 
that every generation would be better off than the prior generation has 
been disappointed. Nearly 90% of children born in the 1940s out-earned 
their parents, but that share has fallen steadily. For children born in 
1970, only 60% out-earn their parents; for those born in the 1980s, 
only half do.\22\
---------------------------------------------------------------------------
    \22\ See Raj Chetty et al., ``The Fading American Dream: Trends in 
Absolute Income Mobility Since 1940,'' NBER Working Paper No. 22910, 
December 2016.

    Our tax system needs to reflect these changing realities by making 
sure that tax cuts are directed to those that are not in the top 1%, 
focusing instead on the bottom 80% of the population that has been 
frustrated by our prior record of economic progress. The tax system can 
better serve American workers by expanding the earned income tax 
credit, by providing wage insurance for workers who have lost their job 
due to technological disruption or due to competitive pressures, and by 
making sure that tax cuts are larger for the middle class than for the 
rich. We also need to work to solidify the economic fundamentals of our 
economy. This requires responsible tax legislation that gives us the 
revenue we need for vital investments in education, infrastructure, 
healthcare, and other urgent priorities.
6. Fund the IRS; They Need More Resources to Do Their Job
    In order to administer the tax system in a way that is fair to 
taxpayers and that meets the needs of the country, the IRS needs 
adequate resources and technology.
7. Finally, a New Revenue Source Can Make Tax Policy Trade-Offs Less 
        Vexing
    Whatever happens with tax policy in the months and years ahead, we 
will likely aim for more ideal tax policy in the future. To do this, 
we'll need a planet that is fit for habitation. Climate change is a 
real and pressing problem, but it is also an opportunity for efficient 
taxation. Normally, taxes burden things we actually want to encourage, 
like work or savings. But carbon dioxide emissions are wreaking havoc 
on the world's climate, and a tax on carbon is an ideal way to counter 
them, without resorting to burdensome regulations. A carbon tax raises 
a lot of revenue; a tax of $25/per metric ton is estimated by the 
Congressional Budget Office to generate about a trillion dollars in 
revenue over 10 years.\23\ And, unlike most sources of revenue, a 
carbon tax makes the economy more efficient by discouraging something 
that the market, left to its own devices, over-produces.
---------------------------------------------------------------------------
    \23\ This tax rate is lower than many estimates of the tax rate 
that would truly cause market participants to find the ideal level of 
carbon dioxide emissions, but it would be a sizable step in the right 
direction, and the tax rate could be increased over time. Arguably, the 
rate should be about twice as high, eventually.

    A carbon tax can help keep other tax rates lower than would 
otherwise be necessary. Several very prominent Republican economists 
have recently suggested a novel way to tax carbon in their 
``Conservative Case for Climate Action.'' \24\ They propose simply 
refunding the carbon tax to ordinary Americans in equal amounts. This 
is a masterful policy that will help workers in the bottom 70% of the 
income distribution (since they will receive more from the rebate than 
they pay in tax).\25\ The large revenue source keeps overall tax 
burdens much lighter for those Americans who have struggled the most in 
recent decades. It will lead to new investments and new jobs in cleaner 
technologies and a healthier planet. A very good idea indeed.
---------------------------------------------------------------------------
    \24\ See Martin Feldstein, Ted Halstein, and Greg Mankiw, ``A 
Conservative Case for Climate Action,'' New York Times, February 8, 
2017, https://nyti.ms/2kMKE4u.
    \25\ See https://www.treasury.gov/resource-center/tax-policy/tax-
analysis/Documents/WP-115.
pdf.

    Thank you again for inviting me to testify today. I look forward to 
your questions.

Further Reading

    This testimony draws on several other works by the author, 
including those below. In some cases, sections of text are excerpted. 
Interested readers are referred to the following articles by the author 
for more detail on these arguments.

      ``Strengthening the Indispensible U.S. Corporate Tax,'' 
Washington Center for Equitable Growth, August 2016, http://
equitablegrowth.org/report/strengthening-the-indispensable-u-s-
corporate-tax/.
      ``The Effect of Profit Shifting on the Corporate Tax Base in the 
United States and Beyond,'' 2016, National Tax Journal, December, 
69(4), 905-934, https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=2685442.
      ``Competitiveness, Tax Base Erosion, and the Essential Dilemma 
of Corporate Tax Reform,'' 2016, (6) BYU Law Review, 1649-1680, http://
digital
commons.law.byu.edu/cgi/viewcontent.cgi?article=3075&context=lawreview.
      ``Labor and Capital in the Global Economy,'' Democracy: A 
Journal of Ideas, 43, 2017, http://democracyjournal.org/magazine/43/
labor-and-capital-in-the-global-economy/.
      ``Is U.S. Corporate Income Double-Taxed?'' (with Leonard Burman 
and Lydia Austin), September 2017, National Tax Journal, 70(3), 675-
706.

                                 ______
                                 
        Prepared Statement of Itai Grinberg, Professor of Law, 
                    Georgetown University Law Center
    Chairman Hatch, Ranking Member Wyden, and members of the committee, 
it is an honor to participate in these hearings on international tax 
reform. I am a professor of law at the Georgetown University Law 
Center. I served in the Office of International Tax Counsel in both the 
George W. Bush and Obama administrations. Before joining the Treasury 
Department I practiced international tax law at Skadden Arps in 
Washington, and in 2005 I served as counsel to the bipartisan 
President's Advisory Panel on Federal Tax Reform.

    The interconnectedness of today's global economy and the mobility 
of capital, intellectual property, and high-skilled labor make all 
attempts to impose high income tax rates on multinational corporations 
(MNCs) counterproductive. The global market for corporate control 
combined with the home-country bias for high-quality headquarters and 
R&D jobs means that lagging in this area will be increasingly costly in 
terms of employment and opportunity, especially for younger generations 
of Americans.

    Our singularly high corporate tax rate and worldwide system are 
severely out of line with international norms. The United States' 
statutory corporate income tax rate is the highest in the Organisation 
for Economic Cooperation and Development (OECD), and our effective 
corporate tax rate is also high.\1\ Every other G7 country and 29 of 
the other 34 OECD member countries allow their resident companies to 
repatriate active foreign business income to their home country without 
paying a significant additional domestic tax. This system of taxation 
is usually referred to as ``dividend exemption'' or a ``territorial tax 
system.''
---------------------------------------------------------------------------
    \1\ For instance, Philip Bazel and Jack Mintz find that the United 
States has a marginal effective tax rate on corporate investment that 
is more than 15 percentage points higher than the OECD average and 
represents the 3rd-highest marginal effective tax rate in the OECD, 
after only France and Japan. Philip Bazel and Jack Mintz, ``2015 Tax-
Competitiveness Report: Canada is Losing its Attractiveness,'' 9:37 SPP 
Research Papers (Nov. 2016), https://www.
policyschool.ca/wp-content/uploads/2016/12/Tax-Competitiveness-Bazel-
Mintz.pdf.

    There is now a widespread consensus that the United States needs to 
reform its aberrant worldwide corporate tax system and that such reform 
should involve lowering the tax rate and adopting a territorial tax 
system. Other countries have been taking these steps for years, while 
also increasing their reliance on consumption taxes and decreasing 
their reliance on corporate income taxes. Indeed, since the 1986 Act, 
other OECD countries have reduced their collective average corporate 
tax rate by more than 19 percentage points.\2\
---------------------------------------------------------------------------
    \2\ See ``U.S. Tax Code: Love It, Leave It, or Reform It,'' hearing 
before the Senate Committee on Finance, 113th Congress 2 (2014) 
(statement of Peter R. Merrill, Director of the National Economics and 
Statistics Group at PricewaterhouseCoopers LLP), https://
www.finance.senate.
gov/download/merrill.

    The committee has examined these issues since at least 2010, and 
many hearings have focused on these matters.\3\ Substantially reducing 
the corporate income tax rate and moving to a territorial system are 
important steps the United States should take. But these steps are not 
enough.
---------------------------------------------------------------------------
    \3\ Indeed, at the committee's July 2017 hearing, John Talisman, 
who served as Assistant Secretary of the Treasury for Tax Policy in the 
Clinton administration, pointed out that he had testified at a hearing 
in front of the committee in 2011 entitled ``How Did We Get Here?'' and 
joked that he wondered why the July 2017 hearing wasn't titled ``Why 
Are We Still Here?'', ``Comprehensive Tax Reform: Prospects and 
Challenges,'' hearing before the Senate Committee on Finance, 115th 
Congress 1 (2017) (statement of John Talisman). Those of us who have 
been following these matters for years appreciated the humor, but I 
feel confident the country would appreciate the benefits of corporate 
tax reform a great deal more.

    Rather than restate the rationale for lowering the corporate rate 
and moving to a territorial system, which has been eloquently explained 
by many witnesses at earlier committee hearings over the course of this 
decade,\4\ my testimony will focus on one significant issue within 
international tax reform that has received much less attention in prior 
hearings and from U.S. policymakers generally. The issue involves 
rectifying the relative advantages that U.S. law gives to foreign MNCs 
investing in the United States that make foreign status more attractive 
than U.S. status.
---------------------------------------------------------------------------
    \4\ See, e.g., ``Comprehensive Tax Reform: Prospects and 
Challenges,'' hearing before the Senate Committee on Finance, 115th 
Congress (2017) (statement of Pamela F. Olson), https://
www.finance.senate.gov/imo/media/doc/30827.pdf; ``The U.S. Tax Code: 
Love It, Leave It, or Reform It,'' hearing before the Senate Committee 
on Finance, 113th Congress 9 (2014) (statement of Mihir A. Desai); 
``Navigating Business Tax Reform,'' hearing before the Senate Committee 
on Finance, 114th Congress 11 (2016) (statement of James Hines).

    The current U.S. international tax regime makes foreign ownership 
of almost any asset or business more attractive than U.S. ownership 
from a tax perspective, thereby creating tax-driven incentives for 
foreign takeovers of U.S. firms and foreign acquisition of business 
units previously owned by U.S. MNCs. It also creates substantial 
financial pressures that encourage U.S. MNCs to ``invert'' (move their 
headquarters abroad), produce abroad for the U.S. market, and shift 
business income to low-tax jurisdictions abroad. Finally, given a 
global business environment in which corporate tax residence is 
increasingly elective, new firms have significant incentives to 
incorporate their parent firm outside the United States at the moment 
of formation. The worldwide system and high rate that creates these tax 
---------------------------------------------------------------------------
incentives is not in America's interest.

    As is the case with our worldwide system and high rate, in failing 
to address the taxation of foreign direct investment into the United 
States (known as ``inbound taxation''), the United States is a global 
outlier. In the rest of the world, governments have been focusing their 
policy efforts in the last decade almost exclusively on inbound 
taxpayers that minimize their income in local jurisdictions. Especially 
given this global reality, U.S. corporate tax reform must also focus on 
how the U.S. tax system disfavors U.S. MNCs relative to the treatment 
of inbound taxpayers.

    In the past, the tax disadvantages of U.S. status were balanced 
against the non-tax advantages of being a U.S.-resident firm. However, 
foreign firms are increasingly able to replicate the non-tax benefits 
of being a U.S. tax-resident MNC. The globalization of securities 
markets has made it relatively easy to raise funds in foreign capital 
markets and to access U.S. capital markets as a foreign firm. The 
globalization of best practices in corporate governance has made U.S. 
corporate governance rules less of a factor in firm valuations.\5\ As a 
result, the tax disadvantage increasingly outweighs the non-tax 
advantages of U.S. residency.\6\ In our globalized economy, the result 
over time is a long-term trend towards foreign-resident MNCs and away 
from U.S.-resident MNCs. The inversion phenomenon is just one symptom 
of that trend.\7\ Since 2000, the number of U.S.-resident MNCs among 
the 500 largest public companies in the world as measured by Forbes has 
declined by over 25%, from 202 in 2000 to 147 in 2016.
---------------------------------------------------------------------------
    \5\ Julie A. Roin, ``Inversions, Related Party Expenditures, and 
Source Taxation: Changing the Paradigm for the Taxation of Foreign and 
Foreign-Owned Businesses,'' 2016 BYU Law Review 1837, 1852 (Apr. 2017); 
see also Daniel N. Shaviro, ``Fixing U.S. International Taxation'' 
(2014).
    \6\ Indeed, corporations have also become increasingly 
``decentered'' in recent years, such that corporate tax residence need 
not necessarily dictate the location of business functions. Mihir 
Desai, ``The Decentering of the Global Firm,'' 32 World Economics 
(Special Issue) 1271 (Sept. 2009). However, as discussed below, the 
BEPS project put a premium on shifting management and research and 
development jobs to the locations where an MNC wishes to be taxed.
    \7\ See, e.g., Eric Solomon, ``Corporate Inversions: A Symptom of 
Larger Tax System Problems,'' 67 Tax Notes 1203 (Sept. 24, 2012).
---------------------------------------------------------------------------
         the role of u.s. and foreign mncs in the u.s. economy
    Globally engaged MNCs, whether they be U.S. or foreign-parented 
firms, provide jobs for a large part of the American work force and 
higher wage employment than other parts of the American private sector. 
U.S.-headquartered MNCs employ 26.6 million workers in the United 
States.\8\ Majority-owned U.S. affiliates of foreign MNCs employ 
another 6.8 million workers in the United States.\9\ Together U.S. and 
foreign-headquartered MNCs represent more than 25% of total private 
sector payroll employment in the United States.\10\ Total compensation 
per American worker employed by both U.S. and foreign-headquartered 
MNCs averages about one-third more than the rest of the U.S. private 
sector.
---------------------------------------------------------------------------
    \8\ Sarah P. Scott, ``Activities of U.S. Multinational Enterprises 
in the United States: Preliminary Results From the 2014 Benchmark 
Survey,'' 96:12 Survey of Current Business, Dec. 2016, https://
www.bea.gov/scb/pdf/2016/12%20December/
1216_activities_of_us_multinational_enter
prises.pdf.
    \9\ Sarah Stutzman, ``Activities of U.S. Affiliates of Foreign 
Multinational Enterprises in 2015,'' 97:8 Survey of Current Business, 
Aug. 2017, https://www.bea.gov/scb/pdf/2017/08-August/0817-activities-
of-us-affiliates-of-foreign-multinational-enterprises.pdf.
    \10\ Moreover, both U.S. and foreign multinationals purchase 
trillions of dollars of intermediate inputs each year from other U.S. 
companies, helping sustain other private-sector employment in America. 
Kevin B. Barefoot, ``U.S. Multinational Companies: Operations of U.S. 
Parents and Their Foreign Affiliates in 2010,'' 92:11 Survey of Current 
Business 51, 52, Nov. 2012, https://www.bea.gov/scb/pdf/2012/
11%20November/1112MNCs.pdf.

    There are various explanations for why MNCs generally offer better 
wages and jobs than most purely domestic firms. For instance, 
multinationals may require a higher-skilled labor force because of the 
technological requirements and competitive need to produce higher 
quality goods associated with competing globally. Given that MNCs 
require a higher-quality product, they may pay efficiency wages--as 
higher quality products require higher quality workers, MNCs pay more 
---------------------------------------------------------------------------
to induce more effort from workers.

    U.S. MNCs, however, are more closely tied to the United States than 
their foreign competitors. The domestic affiliates of U.S. MNCs perform 
84.3% of the worldwide research and development undertaken by U.S. 
MNCs.\11\ These domestic affiliates also represented more than two-
thirds of worldwide U.S. MNC employment.
---------------------------------------------------------------------------
    \11\ Barefoot, supra note 10, at 54.
---------------------------------------------------------------------------
         the importance of encouraging mncs to remain american
    In order to maximize the opportunity for well-paid employment for 
future generations of Americans, we need to ensure that multinationals 
can be U.S.-headquartered and still compete effectively with their 
foreign MNC competitors. Expansion abroad by affiliates of U.S. 
multinationals tends to support their U.S.-
parent jobs. Economic research shows that more affiliate investment and 
employment is generally associated with more investment and employment 
back in U.S. parents. For instance, Mihir Desai and James Hines find 
based on 1982-2004 U.S. Bureau of Economic Analysis data that on 
average, a 10% increase in foreign subsidiary sales is associated with 
a 6.5% increase in U.S. exports.\12\ They also find that a 10% 
expansion of foreign employment by U.S. MNCs is associated with a 3.7 
percent expansion of domestic employment by the same firms at the same 
time. As the Senate Finance Committee's bipartisan international tax 
working group report highlighted, the data suggests that for each 
dollar of additional wages paid in U.S. foreign affiliates, U.S. wages 
increase by $1.84.\13\ Relying on still other studies, Greg Mankiw and 
Phillip Swagel conclude that for U.S. MNCs, ``success overseas leads to 
job gains in the United States.'' \14\
---------------------------------------------------------------------------
    \12\ Mihir Desai, C. Fritz Foley, and James R. Hines, Jr., 
``Domestic Effects of the Foreign Activities of U.S. Multinationals,'' 
American Economic Journal: Economic Policy, no. 1 (Feb. 2009).
    \13\ U.S. Senate Committee on Finance, ``The International Tax 
Bipartisan Tax Working Group Report'' (2015), https://
www.finance.senate.gov/imo/media/doc/The%20International%20Tax%
20Bipartisan%20Tax%20Working%20Group%20Report.pdf.
    \14\ N. Gregory Mankiw and Phillip Swagel, ``The Politics and 
Economics of Offshore Outsourcing'' (National Bureau of Economic 
Research, Working Paper No. 12398, 2006).

    No study reaches the same conclusion about foreign expansion by 
foreign MNCs. Indeed, the results of the studies described above 
regarding the effects of U.S. MNC growth abroad would suggest that when 
foreign companies expand outside the United States, related 
headquarters investment and employment would tend to accrue in their 
home country.\15\ Importantly--this turns out to be the case even with 
formerly U.S.-tax resident corporations that have substantial presence 
in the United States but change their country of tax residency. 
Nirupama Rao has shown that former U.S. MNCs that undertake inversions 
subsequently develop higher shares of their employees and capital 
expenditures abroad after inversion, relative to similar firms that 
remain U.S. tax resident.\16\ In effect, the data suggests that a tax-
motivated inversion may subsequently create other incentives to 
offshore more jobs, just like being a historically foreign-
headquartered MNC exerts a kind of gravitational force that keeps a 
higher percentage of the best jobs in the firm outside the United 
States.
---------------------------------------------------------------------------
    \15\ It is clear that policymakers in other major developed 
economies have this intuition. As with some other economic issues, U.S. 
data in this regard is often more robust than foreign data. Study of 
Japanese MNCs similarly shows that Japanese outbound investment is 
correlated with increased Japanese domestic employment. Mitsuyo Ando 
and Fukunari Kimura, ``International Production/Distribution Networks 
and Domestic Operations in Terms of Employment and Corporate 
Organization: Microdata Analysis of Japanese Firms,'' REITI Discussion 
Paper Series 07-E-063 (2007).
    \16\ Nirupama Rao, ``Corporate Inversions and Economic 
Performance,'' 68 National Tax Journal 1073 (2015). As Rao's paper 
highlights, the changes in hiring and investment resulting from 
inversion are not attributable to the onetime effects on the data due 
to the inclusion of the foreign acquiring firm's existing workforce and 
investments. Rather, foreign shares of employment and investment are 
systematically higher two and more years after inversion, relative to 
the first year after inversion.
---------------------------------------------------------------------------
          greenfield and brownfield foreign direct investment
    Foreign investment into the United States is broadly categorized 
into two buckets by the U.S. Department of Commerce: the establishment 
of new U.S. businesses or the expansion of existing U.S. businesses 
(referred to as ``greenfield investment''), and the acquisition of 
existing U.S. businesses (``brownfield investment''). Greenfield 
investment in the United States by foreign firms should unquestionably 
be welcomed by the United States. When a foreign MNC purchases a 
business unit from a U.S. MNC, or acquires a U.S. MNC, for the reason 
that the foreign MNC can use that business more productively, and 
therefore generate higher levels of output and employment from that 
business, we should also welcome that inbound investment.

    Importantly, however, the data suggests that the vast majority of 
inbound foreign direct investment represents the transfer of ownership 
of businesses rather than greenfield investment. In 2016, expenditures 
by foreign direct investors made to acquire U.S. firms totaled $365.7 
billion, whereas expenditures by foreign direct investors to establish 
new U.S. businesses totaled $5.6 billion and expenditures to expand 
existing foreign-owned U.S. businesses totaled $2.2 billion.\17\ In 
other words, less than 3% of 2016 foreign direct investments were 
greenfield investments. The Department of Commerce Bureau of Economic 
Analysis data for earlier years in this century also shows that the 
vast majority of foreign direct investment consists of acquisitions of 
existing U.S. businesses rather than the establishment of new U.S. 
businesses or the expansion of existing U.S. businesses.
---------------------------------------------------------------------------
    \17\ Bureau of Economic Analysis, U.S. Department of Commerce, 17-
35, ``BEA Expenditures by Foreign Direct Investors for New Investment 
in the United States,'' 2014-2016 (2017), https://www.bea.gov/
newsreleases/international/fdi/fdinewsrelease.htm.

    What drives foreign direct investor acquisitions is that the 
domestic business being acquired has greater financial value to a 
foreign firm than it does to the prior domestic owner. When that higher 
value is based on the ability of the foreign direct investor to make 
the domestic business more productive, the acquisition is likely to 
support American employment. In other cases, though--as shown in 
Senator Portman's Permanent Subcommittee on Investigations study 
entitled ``Impact of the U.S. Tax Code on the Market for Corporate 
Control and Jobs,'' ``foreign acquirers that hail from more favorable 
tax jurisdictions are able to create value simply by restructuring the 
affairs of the U.S. target companies to improve their tax profile.'' 
\18\ In the subset of foreign acquisitions where that greater value in 
the hands of a foreign firm is driven by increased opportunities for 
tax minimization, the resulting increase in foreign direct investment 
(and the resulting apparent ``increase'' in employment of Americans by 
U.S. affiliates of foreign firms and ``decrease'' in employment of 
Americans by domestic firms) is simply not in the national interest of 
the United States. Indeed, a tax system that artificially encourages 
foreign ownership of originally U.S. assets that would otherwise be 
owned by more productive U.S. owners is not just disadvantageous for 
the United States--it will tend to reduce global well-being.\19\
---------------------------------------------------------------------------
    \18\ ``Impact of the U.S. Tax Code on the Market for Corporate 
Control and Jobs,'' Permanent Subcommittee on Investigations, Senate 
Committee on Homeland Security and Governmental Affairs, 114th Congress 
2 (2015) (Majority Staff Report).
    \19\ As Mihir Desai and James Hines have persuasively shown, ``if 
the productivity of capital depends on the identities of its owners 
(and there is considerable reason to think that it does), then the 
efficient allocation of capital is one that maximizes output given the 
stocks of capital in each country. It follows that tax systems promote 
efficiency if they encourage the most productive ownership of assets 
within the set of feasible investors.'' Mihir Desai and James R. Hines, 
Jr., ``Evaluating International Tax Reform,'' 56 National Tax Journal 
487, 494 (2003).
---------------------------------------------------------------------------
   favoring foreign mncs over u.s. mncs reduces economic opportunity
    While both U.S. MNCs and foreign MNCs support high-value jobs in 
the United States, U.S. MNCs tend to be more dedicated to U.S. 
employment. In those cases where a business asset would otherwise be 
equally productive under U.S. or foreign ownership, one should on 
average expect that business asset in the hands of a MNC with U.S. tax 
residence to produce more skilled jobs for Americans than the same 
business asset owned by a foreign MNC. For more than a generation, the 
labor market here and globally has been characterized by an increase in 
returns to skilled vs. semi-skilled and unskilled labor. Since there is 
no reason to believe this trend is likely to change, fewer skilled jobs 
located in the United States would reduce the opportunity set for 
younger Americans, and lead to both greater inequality and lower 
standards of living for our children and grandchildren.

    We may one day reach a point where multinational firms are totally 
``decentered,'' such that national residence will have no effect on 
country of employment. But that day has not arrived. Moreover, there is 
no reason to believe it is likely to arrive during the probable 
lifetime of this round of corporate tax reform. Thus, in order to 
maximize opportunity for our kids, we must level the playing field and 
change the tax code to stop discouraging the formation, asset ownership 
by, and continued existence of U.S. MNCs relative to foreign MNCs. To 
do so, the United States must remove the incentives for tax-motivated 
foreign takeovers of U.S. firms, corporate ``inversions,'' and initial 
foreign tax domiciliation to avoid U.S. tax-resident status. To achieve 
that result it is necessary--but not sufficient--for the United States 
to lower its corporate rate and move to a territorial system. The 
United States also has to deal with the problem of under-taxation of 
foreign-owned U.S. corporations.\20\
---------------------------------------------------------------------------
    \20\ A recent article by Julie Roin addresses the technical 
questions associated with this problem in depth, and I recommend it to 
the committee. Roin, supra note 5.
---------------------------------------------------------------------------
                       our unlevel playing field
    Most debates on international tax reform have thus far focused on 
income earned abroad by U.S. MNCs. However, arguably the greatest 
structural tax disadvantage of being a U.S.-resident corporation 
relates to the taxation of income earned in the United States. U.S. 
MNCs are much more constrained than foreign MNCs from stripping income 
out of the U.S. tax base. A foreign MNC can reduce the amount it owes 
to the U.S. Government through deductible interest and royalty payments 
from its U.S. affiliates to its foreign affiliates, as well as by 
charging its U.S. affiliates prices for goods or services that include 
the value of foreign-owned intangibles in high-priced products for 
resale in the United States.\21\ A U.S. MNC cannot use deductible 
related party interest and royalty payments in the same way. U.S. MNCs 
are also somewhat more constrained in reducing their U.S. tax liability 
by embedding foreign-owned intellectual property in products sold into 
the United States.
---------------------------------------------------------------------------
    \21\ Other deductible payment streams, including rents, premiums, 
and management service fees made from foreign-controlled domestic 
affiliates to foreign affiliates can also be used by foreign MNCs to 
strip the U.S. tax base.

    The relative tax advantages that benefit foreign MNCs are in large 
measure the result of specific structural features of our tax law. Most 
notably, royalty and interest income earned by foreign affiliates of 
U.S. MNCs is generally subject to inclusion on a current basis as part 
of ``subpart F.'' The subpart F regime applies only to U.S. MNCs. It 
imposes U.S. tax on certain items of foreign income earned by the 
foreign affiliates of U.S. MNCs. Planning techniques exist to limit the 
impact of these rules with respect to income generated by foreign 
affiliates in sales made outside the United States, but these 
techniques generally do not work for payments made by U.S. affiliates 
of a U.S. MNC to its foreign affiliates. For example, the benefits of 
section 954(c)(6)--which can limit the impact of subpart F with respect 
to payments made between foreign affiliates--are not available for 
payments made by a U.S. affiliate of a U.S. MNC to a foreign affiliate 
of a U.S. MNC. As a result, U.S. MNCs can use section 954(c)(6) to 
reduce the tax burden on their foreign earnings but not on their 
---------------------------------------------------------------------------
domestic earnings.

    In contrast, foreign-resident MNCs can strip the U.S. tax base with 
very few limitations by structuring related party interest and royalty 
payments with their U.S. affiliates. They do not need to rely on 
subpart F planning techniques because subpart F does not apply to them. 
By statute, interest and royalty payments these foreign MNCs make to 
their foreign affiliates are theoretically subject to U.S. withholding 
taxes, but such taxes almost never apply under our tax treaties, which 
generally reduce these withholding taxes to zero.\22\
---------------------------------------------------------------------------
    \22\ 26 U.S.C. Sec. 871 (2012), U.S. Model Income Tax Convention 
Article 11-12 (Treasury Department, 2006); U.S. Model Income Tax 
Convention Article 11-12 (Treasury Department 2016).

    Another way to see the senselessness of focusing our international 
tax policy debate primarily on residence country taxation of U.S. MNCs 
is to consider the so-called ``round-tripping'' debate. Round-tripping 
is used in the international tax debate as a pejorative term meant to 
characterize a strategy employed by a limited group of U.S. MNCs to 
reduce their U.S. tax liability on U.S. sales by making deductible 
payments to foreign affiliates owning the U.S. rights to intellectual 
property incorporated into goods and services sold into the United 
States. ``Round-
tripping'' by a subset of U.S. MNCs has been treated as a separate 
question deserving of special scrutiny in the international tax debate 
for at least the last 6 years. For example, concerns regarding round-
tripping motivated the decision to limit the reduced U.S. tax rate on 
putatively foreign intangible income provided in former House Ways and 
Means Chairman Camp's tax reform proposal to income derived from 
foreign customers.\23\
---------------------------------------------------------------------------
    \23\ See H.R. 1, 113th Congress, Sec. 4211 (2nd Session, 2014).

    However, the same basic planning technique used by ``round-
trippers''--owning abroad the U.S. rights to intellectual property 
associated with the sale of goods and services into the United States--
is also routinely used by foreign MNCs. Yet when undertaken by foreign 
MNCs this same planning technique has received almost no attention, let 
alone criticism. The lack of attention is despite evidence showing that 
European MNCs (for example) very disproportionately hold their 
intellectual property in low- or no-tax jurisdictions.\24\ Given the 
malleability of corporate residence, as well as the evidence that in 
general U.S. MNCs tend to produce more high-
quality jobs in the U.S. than foreign MNCs, why would the Congress 
attack a tax planning technique when undertaken by U.S. MNCs, but leave 
it untouched when employed by foreign MNCs?
---------------------------------------------------------------------------
    \24\ See Matthias Dischinger and Nadine Riedel, ``Corporate Taxes 
and the Location of Intangible Assets Within Multinational Firms,'' 95 
Journal of Public Economies 691 (2011) (examining a dataset of 
intangible holdings of the affiliates of EU-headquartered firms and 
finding ``a robust inverse relation between the subsidiary's corporate 
tax rate relative to other group affiliates and its intangible asset 
holdings'').

    Another perverse fact is that foreign MNCs can manufacture in the 
United States and still strip the U.S. tax base, whereas U.S. MNCs 
cannot. Under subpart F, a foreign affiliate of a U.S. multinational is 
able to earn IP income from embedded intangibles on both foreign and 
domestic sales without being subject to current taxation in the United 
States only if the foreign affiliate conducts the related manufacturing 
outside the United States. Thus, U.S. law in effect discourages U.S. 
MNCs from manufacturing in the United States.\25\
---------------------------------------------------------------------------
    \25\ See Paul Oosterhuis and Moshe Spinowitz, presentation at the 
Brookings Institute/Urban Institute Tax Policy Center/ITPF Conference 
on Tax Policy and U.S. Manufacturing in a Global Economy: ``Tax 
Incentives to Conduct Offshore Manufacturing Under Current Law'' (March 
15, 2013).

    Given the fungibility of tax residence for business units (which 
can be acquired), new businesses (which can incorporate initially 
abroad), and multinationals as a whole (which are now routinely 
acquired by foreign firms), differentiating tax burdens based on U.S. 
tax residence or foreign tax residence is simply untenable. Yet our law 
is heavily based on an antiquated residence principle, and penalizes 
U.S. tax residence relative to foreign tax residence. This legal regime 
may have been appropriate when it came into being more than half a 
century ago, when cross-border mergers and acquisitions were rare and, 
when cross-border acquisitions did happen, they overwhelmingly involved 
U.S. MNC acquisitions of foreign firms. Now, however, this legal regime 
makes no sense.
                           the global context
    The U.S. debate regarding corporate tax reform is happening in a 
broader international tax context: the international tax environment 
around the world is becoming both less stable and less favorable to 
American business. The Base Erosion and Profit Shifting (BEPS) project 
at the OECD was justified as an attempt to prevent the old framework 
for international taxation from falling apart and being replaced by 
unilateral actions, double taxation of cross-border business, and what 
the OECD termed ``global tax chaos.'' \26\ Unfortunately, the post-BEPS 
environment already shows signs of becoming characterized by much of 
the global tax chaos the BEPS project was supposed to prevent. In 
particular, countries around the world are moving away from residence 
country taxation and towards source country taxation in a variety of 
often uncoordinated ways.
---------------------------------------------------------------------------
    \26\ 11 Organisation for Economic Co-Operation and Development 
(OECD), ``Action Plan on Base Erosion and Profit Shifting,'' https://
www.oecd.org/ctp/BEPSActionPlan.pdf.

    As a result of the BEPS project, transfer pricing norms globally 
were generally adjusted to, in the parlance of the OECD, ``align income 
taxation with value creation.'' The key practical consequence of this 
agreement is to require MNCs to move high-skilled jobs (rather than 
merely shifting income) if they wish to benefit from the lower 
corporate tax rates available from America's competitor countries. 
Thus, a key outcome of the agreements reached in the BEPS project was 
to increase the negative consequences to American workers if the United 
States failed to lower our corporate tax rate and adopt a territorial 
---------------------------------------------------------------------------
system.

    Since the BEPS project ended, countries as diverse as Australia, 
Chile, France, Germany, India, Israel, Italy, Japan, Mexico, New 
Zealand, Poland, Spain, and the United Kingdom have taken additional 
unilateral legislative or administrative actions. These unilateral 
actions are not limited by or consistent with the BEPS agreements and 
are designed to increase levels of inbound corporate income taxation. 
Moreover, a number of these actions have been designed so that, as a 
practical matter, they are targeted to primarily hit U.S. MNCs.

    For example, in the last few years the European Commission invented 
a new ``state aid'' theory to target U.S. MNCs.\27\ And last month the 
European Commission went further and considered a joint Franco-German-
Italian-Spanish proposal to impose a so-called ``equalization levy'' on 
U.S. tech companies based on their gross turnover in EU countries, 
which is supposed to make up for their paying insufficient corporate 
income tax. At the September European Union Economic and Financial 
Affairs Council (``ECOFIN'') meeting, finance ministers expressed 
unanimous support for some form of action to tax ``enterprises that use 
digital technology.'' The ministers agreed to move forward swiftly and 
to reach a common understanding at the ECOFIN in December. Moreover, 
the current presidency of the ECOFIN asserted that ``[i]f we can agree 
on the approach inside the European Union, then we can also affect the 
global rules in a way that is favorable to us.'' \28\ Less than a week 
later the European Commission followed up with a statement that 
``unilateral initiatives in the EU and internationally will continue to 
develop,'' and made proposals for various gross-basis taxes on revenues 
from digital business only.\29\ As a practical matter, this proposed 
tax is quite obviously targeted at U.S. companies.
---------------------------------------------------------------------------
    \27\ For more on this issue, see my 2016 testimony before the House 
Ways and Means Committee, ``Global Tax Environment in 2016 and 
Implications for International Tax Reform,'' hearing before the 
Committee on Ways and Means, 114th Congress 2 (2016) (statement of Itai 
Grinberg).
    \28\ European Commission press release, September 16, 2017, 
Economic and Financial Affairs Council, ``EU finance ministers agreed 
to develop new digital taxation rules'' (Sept. 16, 2017), https://
www.eu2017.ee/news/press-releases/eu-finance-ministers-agreed-develop-
new-digital-taxation-rules.
    \29\ Communication from the Commission to the European Parliament 
and the Council, ``A Fair and Efficient Tax System in the European 
Union for the Digital Single Market,'' COM (2017) 547 Final (Sept. 21, 
2017).

    The strategic questions implied by the unsettled state of 
international tax affairs should feature as an important consideration 
in the policy discussions surrounding U.S. international tax reform. 
Unfortunately, to date many analysts have maintained the historic 
American tendency to treat the diplomatic and competitive processes 
entailed in multilateral discussion of international tax rules as a 
second-order matter. In effect, some analysts pretend that if the 
United States takes decisive action the rest of the world will just 
follow, or behave in ways that will not fundamentally alter the policy 
---------------------------------------------------------------------------
consequence of U.S. policy.

    Despite being the world's largest economy, in the international tax 
diplomatic space the United States has been losing for a number of 
years. We have failed to successfully defend our national interests, 
and have been repeatedly out-negotiated. One underlying cause of these 
failures has been our inability to enact international tax reform that 
defines a corporate tax base that we can successfully defend.

    Historically the multilateral international tax architecture was 
heavily focused on residence country taxation. The international tax 
architecture around the world is shifting towards greater source-based 
taxation, but that transition is liable to be long and messy.

    If we continue to insist on the idea of worldwide residence country 
taxation of U.S. MNCs, we will simply make U.S. MNCs uncompetitive 
outliers subject to foreign revenue grabs. Moreover, with respect to 
inbound taxation, it is important to understand that we have no 
international status quo, and we are likely taking the first steps in a 
multistage, multi-country game.

    As a result, the inbound policy result the United States reaches in 
tax reform in this Congress will almost certainly be revisited 
repeatedly, spurred on by both unilateral actions by other countries 
and multinational negotiations. This time the inbound piece of 
international tax reform will not be a once in a generation event. 
Therefore, when addressing inbound corporate tax reform in this 
Congress, policymakers should seek to give the United States leverage. 
It is important to put the United States in a good position to bargain 
internationally about a future set of broadly accepted rules that will 
most likely be agreed to multilaterally at a later date.
          the u.s. response must be administrable unilaterally
    In crafting our inbound taxation policy we should keep in mind 
whether any given regime requires multilateral cooperation to be 
effective. For example, proposals that are only administrable with 
significant new information-sharing with foreign sovereigns require 
international agreement. In the short-term, such agreement seems 
unlikely.

    The difficult international tax diplomatic environment means that 
for the time being it may be more important that U.S. legal changes be 
administrable by the U.S. alone, rather than being as intellectually or 
technically robust as possible. At the same time, changes to our law 
should not involve technical innovations that we would strenuously 
oppose if used abroad. For example, it would be difficult for the 
United States to maintain that virtual permanent establishments are 
inappropriate abroad and simultaneously move forward with a deemed 
permanent establishment arrangement as part of income tax reform at 
home.

    To ensure that our policy reflects the principle that we are 
working to level the playing field, the primary inbound measures the 
United States adopts should affect all industries and treat domestic 
and foreign firms equivalently in theory and practice. That must be one 
of the principles for eventual international agreement, and--unlike 
Europe--the United States' Wilsonian tradition stands for being a 
beacon of principle in international relations. Treating U.S. and 
foreign MNCs equivalently also helps preserve international economic 
law rules that generally prohibit discrimination against foreigners on 
the basis of national origin.

    Nevertheless, within any inbound piece of tax reform, we also 
should consider including a punitive measure to discourage the 
imposition of particularly economically destructive taxes. For example, 
the gross basis turnover taxes on digital business proposed by the 
European Commission represent a mercantilist effort to target U.S. 
firms. The European Commission is proposing to revive a form of 
particularly inefficient taxation that was largely abandoned long ago. 
If actions like these are being proposed by our trading partners, we 
need U.S. legislation to make clear that attacks targeted at U.S. MNCs 
would have meaningful consequences. In that circumstance the balance of 
economic power would make it possible to reach a principled global 
settlement.

    In sum, despite the unsettled global environment, the United States 
needs to act on reforming its inbound rules. What we need for the time 
being on inbound is a pragmatic, administrable policy that helps level 
the playing field between U.S. and foreign MNCs. The policy should be 
based on a defensible principle--for instance an inbound corporate 
minimum tax.\30\
---------------------------------------------------------------------------
    \30\ Arguing that some part of income in part attributable to 
intellectual property should be taxed by the source state is not a new 
idea. See, e.g., Lawrence Lokken, ``The Sources of Income From 
International Uses and Dispositions of Intellectual Property,'' 36 Tax 
Law Review 233, 243 (1981). Some version of this point arguably dates 
all the way back to the work of the International Chamber of Commerce 
in the 1920s. See, e.g., Bret Wells and Cym Lowell, ``Income Tax Treaty 
Policy in the 21st Century: Residence vs. Source,'' 5 Columbia Journal 
of Tax Law 1 (2014).
---------------------------------------------------------------------------
  a minimum tax targeted at u.s. mncs should not be the focus of the 
                        anti-base erosion regime
    One anti-base erosion proposal that has received prominent 
consideration in recent congresses is some form of minimum tax built 
onto the infrastructure of subpart F and used to reach intangible 
income. Unlike an inbound corporate minimum tax, such proposals target 
U.S. MNCs and only U.S. MNCs. In effect a minimum tax imposed on only 
U.S. MNCs is just a worldwide system with a lower rate for foreign 
source income than domestic source income. No other country on Earth 
has such a system. To the extent we impose such a tax at a significant 
rate we will continue to discourage U.S. tax residence and encourage 
foreign tax residence for all cross-border business.

    Subpart F-based minimum tax proposals target U.S. MNCs to pay more 
tax to the United States just as foreign sovereigns are targeting these 
same MNCs to pay more source country tax. However, because residence 
taxation is a residual obligation, the end result of enacting a high 
subpart F based minimum tax would not likely be that U.S. MNCs would 
pay more tax to the United States.

    Rather, because foreign taxes are generally creditable against U.S. 
tax liability, in a minimum tax system U.S. MNCs will tend to be 
indifferent to increased foreign taxes relative to MNCs resident in 
territorial countries. Why take the risk of planning to avoid a foreign 
tax, when under a minimum tax combined with a foreign tax credit, the 
ultimate cost of foreign source country income taxes (up to the level 
of the minimum tax) will generally be borne by the U.S. fisc rather 
than the company? Moreover, as other countries increase their source-
based taxes, a residence-based minimum tax coupled with a foreign tax 
credit positively encourages other countries to specifically target 
U.S. MNCs with their own source-based taxes. Thus, the most likely 
consequence of enacting a significant minimum tax that applies only to 
U.S. MNCs is that business people and tax professionals will conclude 
that the best way to protect a business asset from attack by both the 
U.S. and foreign tax authorities is to take it out of the U.S. tax net, 
and make that asset tax resident somewhere else. The medium-term 
consequence of such decisions would be fewer jobs for U.S. workers.

    The recently released ``Unified Framework for Fixing Our Broken Tax 
Code'' makes two key commitments to protect the U.S. tax base. The 
framework suggests the committee will ``incorporate rules to level the 
playing field between U.S.-headquartered parent companies and foreign-
headquartered parent companies.'' \31\ It also states that ``the 
framework includes rules to protect the U.S. tax base by taxing at a 
reduced rate and on a global basis the foreign profits of U.S. 
multinational corporations.'' To the extent this means that the 
committee may include a subpart F-based minimum tax proposal as part of 
tax reform, it should set the rate as low as possible, provide for 
foreign tax credit haircuts, and pair that idea with an inbound 
corporate minimum tax. In this way a subpart F-based minimum tax 
proposal could incentivize U.S. multinationals to risk tax disputes 
with foreign sovereigns rather than decreasing tax payments to the 
United States, while limiting the degree to which a subpart F-based 
minimum tax would make the playing field less level.\32\ Adopting a 
form of corporate integration that passes the benefit of only U.S. 
taxes paid by U.S. MNCs through to taxable U.S. shareholders could also 
help ameliorate the foreign tax payment incentive that could be created 
by even a low-rate subpart F-based minimum tax.\33\
---------------------------------------------------------------------------
    \31\ ``Unified Framework for Fixing Our Broken Tax Code'' (Sept. 
27, 2017), https://www.treasury.gov/press-center/press-releases/
Documents/Tax-Framework.pdf.
    \32\ See Daniel Shaviro, ``The Case Against Foreign Tax Credits'' 
(N.Y.U. Law and Economic Working Paper No. 208, March 2010).
    \33\ For further discussion, see ``Integrating the Corporate and 
Individual Tax Systems: The Dividends Paid Deduction Considered,'' 
before the Senate Finance Committee, 114th Congress 2 (2016) (statement 
of Michael J. Graetz, Wilbur H. Friedman Professor of Tax Law and 
Columbia Alumni Professor of Tax Law at Columbia University), https://
www.finance.senate.gov/imo/media/doc/16MAY2016Graetz.pdf; Bret Wells, 
``International Tax Reform by Means of Corporate Integration,'' 20 
Florida Tax Review 70 (2016).

    The most effective anti-base erosion proposal, however, would be to 
find a way to lower the corporate tax rate even further, and not just 
meet, but beat our global competitors. When corporate income tax rates 
are significantly lower than those of competitor countries, other anti-
base erosion measures become both less contentious and less important. 
The most plausible approach to accomplish such an achievement would be 
to adopt a value-added tax and use there venue to sharply lower both 
corporate and individual income tax rates. A number of highly esteemed 
witnesses appearing before the committee have made this point,\34\ and 
Senator Cardin has introduced a bill with some of these admirable 
features. While adding another tax base is likely outside the scope of 
the current tax reform effort--as a destination-based tax, the value-
added tax naturally taxes an immobile factor and therefore is much less 
susceptible to base erosion. Moreover, the revenue generated by a 
value-added tax could be used to cut income taxes sharply across the 
board without raising concerns regarding fiscal sustainability. 
Finally, as a tax on consumption, the VAT is just more efficient and 
pro-growth than business income taxes. It also could be a fairer way to 
address the intergenerational consequences of our unfunded entitlement 
liabilities and help ensure greater prosperity and opportunity for our 
children.
---------------------------------------------------------------------------
    \34\ See, e.g., statement of Michael J. Graetz, id., 
``Comprehensive Tax Reform: Prospects and Challenges,'' hearing before 
the Senate Committee on Finance, 115th Congress (2017) (statement of 
Pamela F. Olson), https://www.finance.senate.gov/imo/media/doc/
Pamela%20Olson
%20Testimony.pdf.
---------------------------------------------------------------------------
                               conclusion
    As both Chairman Hatch and Ranking Member Wyden have pointed out in 
the past, the United States corporate and international tax rules are 
an anticompetitive mess.\35\
---------------------------------------------------------------------------
    \35\ At the committee's 2014 international tax hearing, while 
Senator Wyden described our system as anti-competitive, Pascal St. 
Amans--a French socialist who testified in his role as Director of the 
OECD's Centre for Tax Policy and Administration--went further and chose 
to describe the U.S. corporate tax system as ``diseased.'' ``U.S. Tax 
Code: Love It, Leave It, or Reform It,'' hearing before the Senate 
Committee on Finance, 113th Congress 2 (2014).

    Among taxes currently in use by developed economies, the corporate 
income tax is (as the OECD has pointed out repeatedly) \36\ the tax 
that is the most harmful to economic growth. Unsurprisingly, then, 
governments around the world have come to view reducing corporate 
income tax rates and moving to a territorial system as tools to attract 
investment and jobs.
---------------------------------------------------------------------------
    \36\ See Organisation for Economic Co-Operation and Development 
(OECD), ``Tax Policy Reform and Economic Growth,'' OECD Tax Policy 
Studies, No. 20 (Nov. 3, 2010); see also, Asa Johnansson, Organisation 
for Economic Co-Operation and Development (OECD), ``Public Finance, 
Economic Growth, and Inequality: A Survey of the Evidence,'' ECO/WKP 
(2016) 70 (Nov. 22, 2016); Asa Johansson, Organisation for Economic Co-
Operation and Development (OECD), ``Tax and Economic Growth,'' ECO/WKP 
(2008) 28 (July 11, 2008).

    Lowering the corporate income tax rate and moving to a territorial 
system are important to maintain U.S. prosperity and improve growth 
prospects for our economy. The United States cannot stand apart from 
corporate tax competition in a globalized economy and is falling 
---------------------------------------------------------------------------
further behind each year.

    To ensure that corporate income tax reform maximizes opportunity 
for well-paid employment for as many of our children and grandchildren 
as possible, the United States must also level the playing field 
between U.S. and foreign-headquartered MNCs. Leveling the playing field 
requires addressing the relative tax advantages available to foreign-
owned U.S. corporations that represent one of the most senseless 
aspects of our current corporate tax code.

                                 ______
                                 
              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 hearing on 
reforming the international code. The goal of the hearing is to examine 
how Congress can update the United States' system of taxing cross-
border income to level the playing field for American companies and 
keep more jobs and investment here at home.

    Today's hearing will focus on another piece in the complex tax 
reform puzzle. But before I get to details of international tax reform, 
let me briefly address the elephant in the room.

    Last week, I joined with the Secretary of the Treasury, the 
National Economic Council director, the Senate Majority Leader, the 
House Speaker, and the Chairman of the Ways and Means Committee to put 
forward a broad unified framework for tax reform.

    As the document makes clear, this is just one step in the larger 
tax reform effort. But, let's not mince words: it is a big step.

    I would be hard-pressed to remember the last time the White House 
and House and Senate leadership were in agreement on an issue as 
complicated as tax reform. We began discussions earlier this year, and, 
at that time, there were a number of high-profile differences among us. 
I'm very pleased that we have been able to bridge so many divides and I 
am optimistic about our chances going forward.

    I want to express my gratitude to the others who worked on the 
framework and to the members of this committee who have helped us move 
the tax reform effort forward. I particularly want to acknowledge the 
work of Senator Grassley, who, as a former chairman and ranking member 
of the committee, laid much of the groundwork for the ideas we're 
discussing and for the progress we've made. It was under Senator 
Grassley's chairmanship that the Finance Committee, in 2003-2004, 
initiated the last package of international tax reforms.

    Now, as some have already pointed out, the framework released last 
week is not, by design, a complete plan. Of course, that hasn't stopped 
think tanks and analysts from speculating about its fiscal and 
distributional impact. We've already seen groups attempting to reverse-
engineer a completed tax plan from the framework, generally filling in 
blanks with their own ideas and assumptions, and reaching conclusions 
about a plan they've essentially written themselves. Generally 
speaking, it seems that the blank-filling exercise is designed to cast 
the framework in the worst possible light.

    The framework does not include any specific information about 
things like the break points for the individual tax brackets, the value 
and indexing of the enhanced Child Tax Credit, or the precise rate for 
the top bracket. Without those and other key pieces of information, 
there is simply no way for any outside party to produce a credible 
analysis of the framework, let alone a detailed estimate of revenue and 
the distribution of tax burden.

    But, that didn't stop a certain think tank from issuing a 
``preliminary analysis'' of the framework at the end of last week, nor 
did it stop any of the framework's critics from citing that analysis as 
authoritative. It's odd, however, that the analysis came with a 
disclaimer that it was expressing only the views of the authors, not 
the think tank itself. Even more unusual, no specific authors were 
listed on the analysis, probably because no respectable academic or 
researcher was willing to have their name associated with something so 
haphazardly cobbled together.

    But I digress.

    As the framework makes clear, this committee will be responsible 
for writing the Senate tax reform bill and I'm going to work with 
members of the committee to make sure we are successful. For now, 
everyone should take every estimate or analysis about the plan from 
outside groups with an exceptionally large grain of salt.

    Moving on, I also want to say that my preference has always been 
for this to be a bipartisan effort, and I think there are several 
elements in the framework where Democrats and Republicans can work 
together and hope we will be able to do so. The subject of today's 
hearing is a great example of an area where both parties are largely in 
agreement.

    Under our current system, U.S. multinationals that accrue overseas 
earnings can defer U.S. tax on those earnings until they are brought 
back to the United States. In 1962, due to concerns that businesses 
were moving passive and highly mobile 
income-producing assets offshore, Congress enacted subpart F of the 
Internal Revenue Code. Under subpart F, income from these sources is 
immediately subject to U.S. tax, while taxes on active and less-mobile 
offshore income remain deferred until the earnings are repatriated.

    This is a bit confusing in the abstract, so let me provide a 
hypothetical.

    Imagine that an American Company--headquartered in the United 
States and subject to our corporate tax rates--opens a factory in 
Germany, incorporating a subsidiary there. The income generated by the 
subsidiary--legally a German company--will be subject to German taxes 
paid to German authorities.

    So long as the American Company doesn't bring that income back to 
the United States, its income from the German subsidiary will not be 
subject to U.S. taxes. And, in fact, we are finding that many American 
companies have been keeping this type of income offshore in order to 
avoid our punitive corporate taxes.

    Now, imagine if the American Company parked its money in stocks, 
bonds, or other passive investments and moved the income generated from 
those assets to an offshore, low-tax jurisdiction. Under subpart F, 
that type of passive and highly mobile income is immediately subject to 
U.S. tax, without any deferral.

    Now, I know this is a bit arcane. And frankly, I'd be nodding off 
if I didn't know how this story ended.

    As a result of subpart F, American companies have engaged in a 
number of sophisticated and complex tax planning schemes to keep 
earnings offshore to avoid the U.S. corporate tax.

    According to the Joint Committee on Taxation, American companies 
are currently holding more than $2.6 trillion in earnings offshore, 
thanks, in large part, to our worldwide tax system--something often 
referred to as the ``lock-out'' effect.

    That's $2.6 trillion held by foreign subsidiaries of U.S. 
corporations that the parent companies are unable to invest here at 
home. That is income that could be used to create more American jobs 
and grow wages for American workers. And, that income has attracted the 
interests of foreign tax authorities, particularly in Europe, who wish 
to tap into what is, by all rights, part of the U.S. tax base.

    I know some of my colleagues have proposed to solve this problem of 
earnings being locked out of the United States by transitioning to a 
pure worldwide system with no deferral. And while that would rid us of 
the lock-out problem, it would significantly increase pressures for 
American multinationals to invert, or be acquired by foreign-based 
multinationals.

    Many of us have talked at length about inversions in recent years 
and the problems they pose for our economy and our tax base. Perhaps 
even worse than an inversion is when a larger foreign corporation 
simply acquires a smaller American corporation. Either way, the result 
is the same--a foreign corporation becomes the parent of the 
restructured multinational group.

    Companies take these routes for a number of reasons.

    First, they want to escape the high corporate tax rate in the 
United States, which, as we heard in our last hearing, is the highest 
in the industrialized world.

    Second, they want to minimize the damage caused by our worldwide 
tax system. If an American multinational can successfully move its tax 
situs out of the U.S., it will only owe taxes on the earnings accrued 
here. There is also the matter of earnings stripping, which is another 
complicated topic that I look forward to our witness panel discussing 
today.

    All of these problems are key for today's hearing because they 
highlight the shortcomings of our outdated worldwide tax system.

    The solution to these and other problems, to put it very simply, is 
to transition to a territorial-based system like virtually all of our 
foreign competitors. Under such a system, an American company would owe 
taxes only on income earned in the United States. Income earned in 
foreign jurisdictions would only be taxed by those jurisdictions, not 
here.

    This type of reform would have to be accompanied by enforceable 
anti-base-
erosion rules to make sure companies--both domestic and foreign--do not 
exploit loopholes in order to unduly avoid paying taxes here. That 
approach is endorsed in the united framework.

    It was also suggested in the last Congress by our committee's 
bipartisan working group on international tax, which was co-chaired by 
Senator Portman and by current Senate Minority Leader Schumer. Other 
members of the committee have also made significant contributions in 
the area of international tax reform, including both Senator Wyden and 
Senator Enzi.

    Finally, as many of you know, I've been interested for some time in 
the idea of better integrating our individual and corporate tax 
systems. I continue to believe that corporate integration, by means of 
a dividends paid deduction, can significantly help with some of our 
existing problems and I look forward to talking more about that today 
as well.

    Once again, international tax reform is an area that is rife for 
bipartisanship, if we're willing to work together on goals that members 
from both parties share. I hope people will note that the international 
portion of the framework is particularly short on details. That's 
because these problems can't be solved in a nine-page framework 
document. That will require the work and effort of this committee.

                                 ______
                                 
    Prepared Statement of Stephen E. Shay,* Senior Lecturer on Law, 
                 Harvard Law School, Harvard University
---------------------------------------------------------------------------
    * Senior lecturer on law, Harvard Law School. I thank Megan 
McCafferty for assistance with editing and visual aids and Lisa Brem, 
Kim Clausing, Cliff Fleming, and Steven Rosenthal for comments on 
earlier drafts. The views expressed in this testimony are my own, are 
in my personal capacity, and do not reflect those of any organization 
for which I render paid or pro bono services nor any client. I disclose 
certain activities not directly connected with my position at Harvard 
Law School at http://hls.harvard.edu/faculty/directory/10794/Shay/.
---------------------------------------------------------------------------
    Good morning, Chairman Hatch, Ranking Member Wyden, and members of 
the committee. My name is Stephen Shay. Thank you for the opportunity 
to testify before you today on international tax reform. It is a 
pleasure and honor to be with the committee once again. By way of 
background, I am a senior lecturer on law at Harvard Law School. I have 
served twice in the Treasury Department, the first time in the Reagan 
Administration \1\ and the second time as Deputy Assistant Secretary 
for International Tax Affairs in the first term of the Obama 
administration, and practiced international tax law for over 2 decades 
as a partner at Ropes and Gray LLP in Boston.
---------------------------------------------------------------------------
    \1\ I participated as Treasury Deputy International Tax Counsel and 
then as International Tax Counsel in each step of the process leading 
to the Tax Reform Act of 1986, starting with the initial 1984 Treasury 
international proposals that became President Reagan's proposals in 
1985, to House passage of the bill in 1985 and Senate passage in 1986, 
through conference committee to final legislation in November 1986. I 
resigned from the Treasury in 1987 after publication of an initial 
round of regulations interpreting international provisions of the Act.

    My topic today is international tax reform. I set out what I 
believe should be the objectives for tax reform and their implications 
for international tax reform in the next section. I next provide data 
on tax burdens on U.S. multinational corporations (MNCs) and their 
foreign subsidiaries. Based on conclusions I draw from this data and my 
decades of experience in international taxation, I set out my 
recommendations for the direction that the committee should take to 
reform U.S. international tax rules. Although I do not favor a 
territorial system, I offer suggestions on how to improve this 
approach, if that path is chosen.
                           executive summary
Objectives for Tax Reform
    Tax reform should maintain or enhance our tax system's current 
level of progressivity in distributing tax burdens and benefits. The 
most significant social welfare fact today is that the income of 
middle- and lower-income workers has stagnated in recent decades and a 
disproportionate share of income growth has accrued to those with 
highest incomes--the top 1%. While we have recovered from the recession 
and middle- and lower-income workers have made some gains, the 
disparity between high-income and middle- and lower-income has grown 
substantially and income mobility is more constrained than for prior 
generations.\2\ The taxation of cross-border income of U.S. MNCs should 
be analyzed under the same fairness standards that apply to any other 
income.\3\ In particular, as I discuss later in this testimony, a 
reduced ``holiday'' tax rate on U.S. MNCs' pre-effective date offshore 
earnings will overwhelmingly benefit high-income Americans (and 
foreigners) and is not justified on any policy ground.\4\ Its sole 
purpose is to provide a one-time source of revenue that disguises the 
future revenue loss from shifting to a weak territorial system.
---------------------------------------------------------------------------
    \2\ Professor Lily Batchelder's September 13, 2017 testimony before 
this committee provides an excellent summary of the relevant data and 
references to literature. Lily L. Batchelder, Professor of Law, New 
York University, ``Opportunities and Risks in Individual Tax Reform,'' 
testimony before the Senate Committee on Finance, hearing on 
``Individual Tax Reform'' (Sept. 13, 2017).
    \3\ See J. Clifton Fleming, Jr., Robert J. Peroni, and Stephen E. 
Shay, ``Fairness in International Taxation: The Ability-to-Pay Case for 
Taxing Worldwide Income,'' 5 Florida Tax Review 299 (2001).
    \4\ J. Clifton Fleming, Jr., Robert J. Peroni, and Stephen E. Shay, 
``Getting From Here to There: The Transition Tax Issue,'' 154 Tax Notes 
69 (2017).

    Tax reform should be revenue-neutral or increase net revenues. The 
central importance of our tax system to national competitiveness and 
growth is to fund public goods, such as education, basic research, 
infrastructure, health-care and income security transfers, and national 
defense. These government services and capital expenditures support a 
high standard of living, income security, and physical security for all 
Americans. It is the job of the tax system to raise the necessary 
revenue to fund needed public expenditure and not add trillions to the 
national debt as proposed in the Senate Budget proposal and the GOP Tax 
Reform Plan.
Objectives for International Tax Reform
    International tax reform should maintain or increase, not reduce, 
the aggregate tax on U.S. MNCs' foreign income. There is no policy 
justification to advantage international business income of 
multinational corporations (MNCs) beyond allowing a credit for foreign 
income taxes. Moreover, evidence does not support claims that U.S. MNCs 
are overtaxed or are non-competitive as a consequence of U.S. tax 
rules. The U.S. Treasury Department found that the average tax paid by 
U.S. companies from 2007-2011 on their book earnings plus foreign 
dividends was 22%.\5\ The most recent publicly available Statistics of 
Income data for 2012 shows that foreign subsidiaries of U.S. MNCs in 
the aggregate paid an average foreign tax rate of 12%. Foreign income 
should be taxed currently or, if that is not politically feasible, 
under a per-country minimum tax regime that is effective in 
discouraging tax avoidance through transfer pricing and related 
techniques that shift income to low tax countries and directly and 
indirectly erode the U.S. tax base.
---------------------------------------------------------------------------
    \5\ U.S. Treasury, Office of Tax Analysis, ``Average Effective 
Federal Corporate Tax Rates,'' Table 1 (April 1, 2016).

    International tax reform should assure that the tax rules for 
foreign multinational companies on U.S. business activity do not 
provide them an advantage in relation to U.S. companies. Tax reform 
should undertake a fundamental review of U.S. source taxation of cross-
border activity having a U.S. destination including remote digital 
sales into the United States. In addition, tax reform should strengthen 
---------------------------------------------------------------------------
U.S. corporate residence and earnings stripping rules.

    Taxation of international portfolio income should be fundamentally 
re-examined. Under current rules, there are U.S. tax advantages for 
portfolio investment by U.S. investors in foreign stock over domestic 
stock. Similarly, foreign pension funds that benefit principally 
foreign workers receive exemptions and relief from U.S. tax that are 
not reciprocated by foreign countries on U.S. pension funds benefitting 
U.S. workers. A fundamental tax reform effort should re-examine from 
scratch the U.S. rules for taxing cross-border portfolio income, 
however, the treatment of portfolio income is a subject for development 
on another occasion.
                        background to tax reform
    I draw on the testimony of Professor Lily Batchelder from last 
month's hearing for three background facts that are critical to 
sensible tax reform. First, real median after-tax and after-transfer 
income for a working-class household of three has only grown 3% from 
1997 to 2015--even with the expansion of the earned income tax credit. 
Second, generational advantages and disadvantages are passed on more 
here than in peer countries, leading to less intergenerational mobility 
here. This is not the result of government regulation, but of a failure 
of government to foster genuinely equal opportunity and assure that we 
contribute to society according to our ability to pay. Third, we face a 
shortfall in revenues to pay for the services we demand. The CBO 
estimates of revenues and expenditures under current law project 
unprecedented levels of national debt as a share of GDP.

    In the face of the pressing needs for public investment in human 
capital and infrastructure, and demographic trends that cannot be 
reversed, we will be forced to spend more in the future. It would be 
foolhardy to adopt a revenue-losing tax reform, particularly one that 
would benefit those with high incomes, in the unsupported hope, based 
on tooth fairy economics, that short-term growth will outweigh longer 
term effects on interest rates and inflation.\6\ When spending exceeds 
revenues, the debt issued to pay the difference simply represents 
future taxes. What is needed is to re-build the income tax base so that 
it can raise revenues necessary to fund expenditures while honoring 
ability to pay principles. If the income tax base proves over time to 
be unable to support U.S. needs, then it would be necessary to employ 
additional revenue instruments.
---------------------------------------------------------------------------
    \6\ As Milton Friedman was said to explain, ``Who do you suppose 
pays for the difference? The tooth fairy? Hardly. You do.'' Gene 
Epstein, ``Tooth-Fairy Economics Triumphs in GOP Tax-Cut Plan,'' 
Barron's (Sept. 25, 2017).

    U.S. companies are not over-taxed, domestically or abroad. The U.S. 
Treasury estimated the average effective ``actual'' tax rate on U.S. 
companies, excluding foreign subsidiaries, for 2007 to 2011 to be 22%. 
The Treasury's measure of the average effective ``actual'' tax rate is 
corporate-level tax actually remitted (after credits for foreign taxes 
paid on foreign income earned directly and credits for foreign taxes 
deemed paid on actual foreign dividends) as shown on tax filings 
divided by book or financial statement income (rather than taxable 
income). The average rate of tax is appropriate for measuring cash 
flows (used in valuations) and distributional burdens.\7\ It also is 
the most appropriate measure for evaluating whether to make a new 
direct investment in one country or another country--a discrete choice 
between two mutually exclusive locations.\8\
---------------------------------------------------------------------------
    \7\ U.S. Department of the Treasury, Office of Tax Analysis, ``The 
Case for Responsible Business Tax Reform,'' 21 (Jan. 2017) 
(hereinafter, Treasury, ``Responsible Business Tax Reform''); Don 
Fullerton, ``Which Effective Tax Rate?'', 37 National Tax Journal 23, 
30 (1984).
    \8\ Michael P. Devereux and Rachel Griffith, ``Evaluating Tax 
Policy for Location Decisions,'' 10 International Tax and Public 
Finance 107 (2003). The ATR measure may be contrasted with the 
effective marginal tax rate (EMTR), a metric used to make a decision 
whether to make a new investment or not by evaluating the impact of tax 
on the cost of capital. Treasury, ``Responsible Business Tax Reform,'' 
supra note *, at 5-7; Devereux and Griffith, at 107.

[GRAPHIC] [TIFF OMITTED] T0317.008


    When examined on an industry basis, the disparity in effective 
average actual taxation between different industries becomes clear with 
---------------------------------------------------------------------------
rates ranging from 28% for services to 10% for utilities.

    These differences justify reducing tax incentives that treat 
investments in separate sectors differently and insert the government 
unnecessarily into economic decision making.\9\ The ATR data, however, 
do not support a claim that U.S. companies are over-taxed.
---------------------------------------------------------------------------
    \9\ For differences in EMTRs by asset groupings and form of 
financing, see Treasury, ``Responsible Business Tax Reform,'' supra 
note 7, at 7.

[GRAPHIC] [TIFF OMITTED] T0317.009


    But what about foreign subsidiaries of U.S. companies? Are they 
unable to compete in the countries in which they operate? The preceding 
corporate average actual effective tax rates do not reflect the even 
lower average effective foreign tax rates that controlled foreign 
corporation (CFC) subsidiaries of U.S. MNCs pay on their foreign 
income. In 2012, the most recent year for which IRS CFC data is 
publicly available, 52% of all U.S. CFCs' earnings and profits before 
tax was generated by companies in five tax haven or low-tax 
countries.\10\ Moreover, the ratio of these CFCs' foreign taxes paid 
(as reflected on IRS tax filings) to earnings and profits before taxes 
(under U.S. tax principles) was 12.10% in 2012.\11\
---------------------------------------------------------------------------
    \10\ IRS, Statistics of Income Division, September 2015, U.S. 
Corporations and CFCs, Table 2 and author's calculations.
    \11\ IRS, Statistics of Income Division, September 2015, U.S. 
Corporations and CFCs, Table 2 and author's calculations.

[GRAPHIC] [TIFF OMITTED] T0317.010


    The CFC data undercut the claim that U.S. MNCs' foreign 
subsidiaries are over-taxed on their foreign income. The low effective 
tax rates on the earnings of foreign subsidiaries contradicts the claim 
---------------------------------------------------------------------------
that the subsidiaries cannot compete globally because of taxes.

    The very low average taxes paid on foreign subsidiary income are a 
major factor for retaining the low-taxed earnings to maximize after-tax 
profits reported on financial statements by relying on the claim to 
auditors that these amounts are ``indefinitely reinvested'' in 
investments that do not trigger deemed repatriation under U.S. tax 
rules.\12\ This position is maintained even though large amounts 
(approximately 40%) of these retained earnings are held offshore in 
U.S. dollar cash or marketable securities.\13\ Bloomberg assembled 
these amounts for public companies with the 50 largest reported cash 
holdings.\14\ The amounts and ratios of offshore to total cash for the 
10 companies with the highest cash holdings (totaling US$702 billion 
for these companies alone) are shown in the next chart.
---------------------------------------------------------------------------
    \12\ See letter from Tom Barthold to Kevin Brady and Richard Neal 
(Aug. 31, 2016) (estimating $2.6 trillion in post-1986 not previously 
taxed CFC earnings for 2015). For a description of the relevant 
investment in U.S. property rules, see Stephen E. Shay, ``The 
Truthiness of `Lockout': A Review of What We Know,'' 146 Tax Notes 1393 
(2015).
    \13\ The Financial Times has run a series of articles examining the 
investment strategies employed with respect to these cash and 
securities holdings and implications for financial markets. See, e.g., 
Eric Platt, ``Corporate America's patchy disclosure on cash piles 
raises risks,'' Financial Times (Sept. 27, 2017) (30 companies studied 
have a portfolio of more than $400bn of U.S. corporate bonds, 
representing nearly 5 percent of the outstanding market).
    \14\ Laurie Meisler, ``The 50 Largest Stashes of Cash Companies 
Keep Overseas'' (June 13, 2017).

[GRAPHIC] [TIFF OMITTED] T0317.011


    It bears repeating the Treasury Department's assessment from 
January of this year of the economic effect of the unrepatriated 
---------------------------------------------------------------------------
earnings (held in cash or marketable securities):

        The broader economic effects of the unrepatriated income are 
        likely to be small, however, because that income is generally 
        held in dollar-denominated assets, deposited at U.S. banks, and 
        actively invested in productive uses by the financial system. A 
        common misconception is that income reported as ``permanently 
        reinvested abroad'' must be physically held or invested outside 
        of the United States. Instead, that is a tax reporting 
        convention intended to differentiate income that is immediately 
        subject to U.S. tax from that which is deferred from tax; while 
        there are limitations on how those funds may be used by the 
        corporation, in general those assets are held for investment at 
        U.S. financial institutions, and thus contribute to investment 
        and capital formation in the United States, even if the 
        earnings are not ``repatriated'' by the MNC.\15\
---------------------------------------------------------------------------
    \15\ Treasury, ``Responsible Business Tax Reform,'' supra note 7, 
at 38.

    Looking at filings for Fortune 500 companies, the Institute on 
Taxation and Economic Policy found that in 2016 10 companies alone 
reported over $1 trillion of the Fortune 500's estimated $2.6 trillion 
---------------------------------------------------------------------------
(or 38%) of ``indefinitely reinvested'' offshore earnings.

[GRAPHIC] [TIFF OMITTED] T0317.012


    The primary businesses of these 10 companies rest on one or more 
of: (i) technology patents, copyrights, and trademarks created under 
the protection of U.S. laws; (ii) U.S. food and drug approvals 
authorizing access to and assurance to U.S. healthcare consumers; (iii) 
the internet developed by the U.S. government and transitioned to 
private hands; or (iv) leases of valuable rights to U.S. oil and gas 
natural resources. All of these are fruits of U.S. public goods and 
legal infrastructure developed and maintained with U.S. taxpayer 
dollars. Yet, these companies have been permitted to routinely use 
transfer pricing and stateless income planning techniques to pay 
extraordinarily low rates of tax on vast swathes of their income--and 
now the plan is to give them an amnesty rate on pre-effective date 
earnings?

    My co-authors Cliff Fleming and Bob Peroni and I have explained why 
a low rate on pre-effective date earnings is unjustified on policy 
grounds.\16\ In addition to the observations we made in that article, I 
want to emphasize that the benefit of a low tax rate on pre-effective 
date earnings will go to the highest income Americans (and foreigners) 
that are shareholders of these largest MNCs.\17\
---------------------------------------------------------------------------
    \16\ See J. Clifton Fleming, Jr., Robert J. Peroni, and Stephen E. 
Shay, ``Getting From Here to There: The Transition Tax Issue,'' Tax 
Notes, Apr. 3, 2017, p. 69 (proposing immediate taxation of accumulated 
offshore earnings at regular corporate rates with an option to pay the 
tax in interest-bearing installments). An important practical 
implication of our analysis is that it would be normatively justifiable 
to dial up the tax rate on pre-effective date earnings, indeed to the 
full pre-effective date tax rate of 35%, if necessary to meet the 
revenue objectives of a tax reform.
    \17\ See Steven M. Rosenthal, ``A Tax Break on Repatriated Earnings 
Will Not Trickle Down to U.S. Workers,'' TaxVox: Individual Taxes 
(Sept. 25, 2017), available at http://www.
taxpolicycenter.org/taxvox/tax-break-repatriated-earnings-will-not-
trickle-down-us-workers (last viewed Sept. 27, 2017).

    On this point, Donald Marron's testimony before this committee on 
September 19th was crystal clear: ``Retroactive tax cuts do not help 
workers; the benefits would go solely to shareholders.'' \18\ The most 
recent data show that companies publicly traded on U.S. securities 
markets are approximately 75% owned by U.S. shareholders, including 
principally individuals (directly and through mutual funds) and tax-
favored retirement accounts.\19\ The Tax Policy Center finds that 76% 
of a retroactive corporate tax change would go to the highest quintile 
of income earners, 40% goes to the top 1% and 27% of the benefit goes 
to the top 0.1% of taxpayers.\20\ The remaining shares are owned by 
foreign shareholders.
---------------------------------------------------------------------------
    \18\ Donald B. Marron, institute fellow, Urban Institute and Urban-
Brookings Tax Policy Center, testimony before the Senate Committee on 
Finance, hearing on ``Business Tax Reform'' 3 (Sept. 19, 2017).
    \19\ See Leonard E. Burman, Kimberly A. Clausing, and Lydia Austin, 
``Is U.S. Corporate Income Double Taxed?'' (May 4, 2017) (building on 
work of Rosenthal and Austin); Steven M. Rosenthal and Lydia S. Austin, 
``The Dwindling Taxable Share of U.S. Corporate Stock,'' 151 Tax Notes 
923 (2016).
    \20\ Tax Policy Center, ``Share of Change to Corporate Income Tax 
Burden by Expanded Cash Income Percentile,'' T17-0180 preliminary 
results (June 6, 2017), available at http://www.
taxpolicycenter.org/model-estimates/distribution-change-corporate-tax-
burden-june-2017/t17-0180-share-change-corporate, last viewed Sept. 27, 
2017.

[GRAPHIC] [TIFF OMITTED] T0317.013


                       directions for tax reform
    The preceding discussion leads me to recommend that the committee 
consider the following proposals or areas for reform.
Improve Taxation of Foreign Business Income
    My first recommendation would be to follow the Wyden-Coats and 
Trump campaign proposals to tax U.S. MNCs' foreign subsidiary earnings 
currently and allow deductions allocable to foreign subsidiary earnings 
in full.\21\ This would address U.S. multinational base erosion and 
profit shifting that is pervasive under current law and would be 
exacerbated under a final global minimum tax. The claim that U.S. MNCs 
would not be able to compete if the corporate rate is reduced to 20% 
(or 24% under the Wyden-Coats proposal) is unsupported and a claim for 
special treatment for foreign income that should be justified with 
evidence.
---------------------------------------------------------------------------
    \21\ See S. 727, Bipartisan Tax Fairness and Simplification Act of 
2011, 112th Congress, 1st Session, Sec. 204(c) (2011). The GOP Tax 
Reform Plan of September 27th appears to describe a minimum tax 
combined with a form of dividend exemption. An important element from a 
revenue perspective is how deductions are allocable to foreign 
subsidiary earnings eligible for a reduced rate of tax. The effects of 
the minimum tax are not easy to discern without a specific proposal, 
including a specific tax rate.

    A second best approach would be adopt an advance minimum tax on 
foreign business income under the current law deferral regime and to 
defer U.S. deductions allocable to deferred foreign income until the 
foreign income is taxed. This is described in my 2015 Senate Finance 
Committee testimony and is developed in greater detail in a co-authored 
Florida Tax Review article.\22\
---------------------------------------------------------------------------
    \22\ See Stephen E. Shay, J. Clifton Fleming, Jr., and Robert J. 
Peroni, ``Designing a 21st Century Corporate Tax--An Advance U.S. 
Minimum Tax on Foreign Income and Other Measures to Protect the Base,'' 
17 Florida Tax Review 669 (2015) (proposing a minimum tax that would 
partially end deferral by effectively serving as an advance withholding 
tax with respect to the ultimate U.S. levy on repatriated foreign-
source active-business income). 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. 
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. 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).

    A territorial system such as one referred to but not specified in 
the GOP Tax Reform Plan of September 27 is a least good proposal and 
indeed can, if not designed properly, leave the tax system materially 
worse off than under current law. My co-authors and I detailed design 
features that should characterize a principled territorial system in a 
2012 article.\23\ In a new Tax Notes article we describe how to 
incorporate a principled minimum tax in a territorial regime.\24\ Key 
design features of such a minimum tax that are critical to protecting 
the tax base include the following:
---------------------------------------------------------------------------
    \23\ See J. Clifton Fleming, Jr., Robert J. Peroni, and Stephen E. 
Shay, ``Designing a U.S. Exemption System for Foreign Income When the 
Treasury Is Empty,'' 13 Florida Tax Review 397 (2012) (hereinafter 
Fleming, Peroni, and Shay, ``Designing Exemption'').
    \24\ J. Clifton Fleming, Jr., Robert J. Peroni, and Stephen E. 
Shay, ``Incorporating a Minimum Tax in a Territorial System,'' 156 Tax 
Notes 54 (Oct. 2, 2017).

    1.  To avoid gaming, a U.S. territorial system should apply to both 
---------------------------------------------------------------------------
foreign branch income and dividends received from foreign subsidiaries.

    2.  There should be no deferral; the minimum tax should apply to 
the foreign-source income of U.S. MNCs as the income is earned either 
directly or by foreign affiliates.

    3.  The minimum tax should be a relatively high percentage of the 
regular U.S. tax rate (no less than 60% and preferably 80%).\25\ The 
minimum tax should be applied on a country-by-country and not a global 
basis as is suggested in the GOP framework. Allowing blending of high 
and low foreign taxes will in some cases incentivize high-taxed foreign 
investments and shifting of U.S. income to be low-taxed foreign income 
in other cases.
---------------------------------------------------------------------------
    \25\ For example, if the corporate rate were 20%, the minimum tax 
should be at least 12% and preferably 16%.

    4.  A foreign tax credit should be allowed against the minimum tax 
but only in the ratio that the U.S. minimum tax rate bears to the 
regular U.S. corporate tax rate.\26\ Only the pro-rated amount of 
foreign taxes allocable to minimum taxed income on a country-by-country 
basis should be creditable against the U.S. tax on that income. Cross-
crediting should be severely limited or there again will be incentives 
to mix and match investment by the level of tax on the return from the 
investment.
---------------------------------------------------------------------------
    \26\ The foreign income taxes eligible for the credit would be 
limited to the ratio that the minimum tax rate bears to the regular 
U.S. rate. This is the same approach taken in the section 965 temporary 
tax holiday provision. See IRS Notice 2005-64, Sec. 4.03, 2005-36 IRB 
471, 476-478.

    5.  A U.S. territorial system should exempt only dividends paid out 
of foreign-source active business income that has borne a meaningful 
tax and only 
foreign-source branch income that has the same characteristic. No sound 
policy objective is achieved by going further and exempting other 
income. An exemption should not apply to foreign-source income that was 
treated as a deductible payment in the foreign country--royalties, 
rents, and interest should be fully taxed and only withholding taxes on 
that income allowed as a credit against the U.S. tax on that income. 
Consistent with practice in other developed countries, current taxation 
of passive income (under subpart F) should be retained so that the 
exemption does not encourage tax avoidance on passive income.\27\
---------------------------------------------------------------------------
    \27\ With respect to private equity and other investment funds, 
subpart F should be modified so that it applies at the level of the 
fund (whether the fund is a domestic or a foreign partnership) and U.S. 
investors can no longer escape current taxation of subpart F income by 
being less than 10 percent owners of the fund.

    6.  Corporate overhead, interest, and research and development 
deductions should be properly and fully allocated to exempt income and 
disallowed. Limiting the exemption to 95% (or some other percentage) of 
otherwise qualifying income as a substitute for properly allocating 
deductions between exempt income and non-exempt income inappropriately 
expands the exemption subsidy to domestic income. Foreign losses should 
be prorated between exempt foreign income and taxable income. The 
portion allocable to exempt foreign income should be disallowed; only 
---------------------------------------------------------------------------
losses allocable to taxable income should be deductible.

    If these design principles are followed, it is possible for such a 
regime to improve current taxation of international operations over 
current law.
Honor 2004 Congressional Commitment to One-Time-Only Amnesty; If Not, 
Use the Highest Possible Single Rate

    The committee should resist taxing pre-effective date earnings of 
the largest U.S. MNCs at a low amnesty rate that will overwhelmingly 
benefit high income American and foreign shareholders. This is 
unjustified on policy and distributional grounds. Moreover, the 
additional revenue will be sorely needed to reduce the massive deficits 
that would result from the GOP Tax Reform Plan of September 27th.

    There should not be a higher rate on cash and cash equivalents and 
certainly not one announced in advance without an immediate effective 
date. A dual rate structure will require a definition of cash and cash 
equivalent and a measurement on a set date that, if prospective, will 
be subject to planning and manipulation. At a minimum, it would create 
an incentive for pre-effective date investment in ``illiquid assets'' 
which could have unintended effects on markets in which U.S. MNCs hold 
large portions of outstanding securities. If experience with the 
manufacturing deduction is any guide (where Starbucks coffee roasting 
can obtain a tax benefit for manufacturing), definitions will be 
stretched with the well-paid assistance of K Street denizens. If any 
relief is given, which is poor policy, use a single rate as close to 
the historic rate as possible (and certainly not below the new regular 
corporate tax rate).
Strengthen U.S. Corporate Residence Rules
    If taxation of foreign income is reformed along the lines described 
above, or with most plausible anti-base erosion provisions in a further 
development of the tax reform legislation, there will be continued 
pressure on U.S. corporations to change corporate residence. The United 
States should broaden its definition of a resident corporation to 
provide that a foreign corporation would be a U.S. tax resident if it 
satisfied either a shareholder residency test or the presently 
controlling place of incorporation test. 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 my colleagues and I have explored many of the relevant issues 
and I strongly encourage the committee to pursue this avenue.
Strengthen U.S. Source Taxation Rules
    The first and most direct way to generally strengthen U.S. source 
taxation is through improved earnings stripping rules that should not 
be limited to interest.\28\ If the committee does not adopt a general 
limitation on deductions for net interest expense, which would subsume 
earnings stripping, then it is important to adopt a limitation on 
deduction for excess related party interest. There have been robust 
proposals by Representative Camp and the Obama administration so 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. It would be a significant mistake for the administration to 
undo the substance of the recently finalized section 385 regulations 
before a replacement of equal strength is firmly in place.\29\
---------------------------------------------------------------------------
    \28\ See J. Clifton Fleming, Jr., Robert J. Peroni, and Stephen E. 
Shay, ``Getting Serious About Cross-Border Earnings Stripping: 
Establishing an Analytical Framework,'' 93 North Carolina Law Review 
673 (2015).
    \29\ This committee should discourage any such steps. For various 
reasons, including inducing inversions in any interim period, it would 
be especially foolish to encourage repeal of the regulations in hopes 
of improving a revenue score for a legislative change.

    It is foolish to believe that the U.S. tax base is immune from the 
same source tax avoidance, base erosion, and profit shifting that has 
afflicted other developed countries and given rise to the G20/OECD BEPS 
project. Structural advantages for foreign-controlled domestic 
companies constitutes an integral part of the current international tax 
architecture and is found in almost every country's tax system. The 
sources of advantage include remote sellers using digital commerce and 
foreign businesses using treaties and information technology advances 
to avoid direct local activity. In addition to adopting robust anti-
earnings stripping rules that extend beyond interest to other 
deductible payments, it is time to engage in a more fundamental review 
of U.S. source taxation interests and legal rules. It is striking that 
a so-called fundamental tax reform effort over many years has 
disregarded this area that badly needs re-thinking and updated rules.
                               conclusion
    International business income is but a part of the larger mosaic 
that comprises the U.S. economy. 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.

    There is no normative reason to privilege foreign business income 
beyond allowing a credit for foreign income taxes. My recommendation is 
to tax foreign business income broadly and allow a credit for foreign 
income taxes. I encourage you not to gamble with a territorial system 
with weak protections and not to give away tax benefits to the 
undeserving rich and foreigners. 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. Neither the tooth fairy nor 
dynamic scoring will alter this fundamental reality.

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

                                 ______
                                 
Prepared Statement of Bret Wells, Professor of Law and George R. Butler 
      Research Professor of Law, Law Center, University of Houston
    My name is Bret Wells, and I am the George R. Butler professor of 
law at the University of Houston Law Center. I would like to thank 
Chairman Hatch, Ranking Member Wyden, and the other members of the 
committee for inviting me to testify. I am testifying in my individual 
capacity, and so my testimony does not necessarily represent the views 
of the University of Houston Law Center or the University of Houston. I 
request that my full written testimony be included in the record.

    Before addressing international taxation, I want to make a 
preliminary statement about the related topic of business tax reform. 
As to business tax reform, Chairman Hatch is to be commended for his 
work on corporate integration as part of tax reform--specifically, his 
partial dividends paid deduction proposal. A partial dividends paid 
deduction regime provides a corporate tax deduction that can 
approximate the stock ownership held by U.S. taxable investors.\1\ The 
existing scholarship makes a compelling case that significant 
efficiencies can be achieved through corporate integration.\2\ By 
limiting the dividend deductibility to the amount of equity held by 
U.S. taxable shareholders, the partial dividends paid deduction regime 
preserves corporate level taxation for earnings in an amount broadly 
equal to the equity ownership of nontaxable shareholders. A partial 
dividends paid deduction regime narrows the distinction between the tax 
treatment of debt and equity. A partial dividends paid deduction 
regime, in combination with a dividends and capital gains preference, 
in tandem can result in a combined tax rate on corporate business 
profits that approximates the individual tax rate, thus eliminating the 
disparity in tax rates between C corporations and pass-through 
entities. Thus, a partial dividends paid deduction regime is a critical 
step in the right direction and should be part of the final business 
tax reform legislation.
---------------------------------------------------------------------------
    \1\ For a more detailed analysis of my views on an earlier 
iteration of a dividends paid deduction proposal, see Bret Wells, 
``International Tax Reform By Means of Corporate Integration,'' 19 
Florida Tax Review 71 (2016); see also testimony of Bret Wells at the 
hearing on ``Integrating the Corporate and Individual Tax Systems: The 
Dividends Paid Deduction Considered'' before the Senate Finance 
Committee (May 17, 2016).
    \2\ See, e.g., Michael J. Graetz and Alvin C. Warren, ``Integration 
of the U.S. Corporate and Individual Income Taxes: The Treasury 
Department and the American Law Institute Reports'' (1998); see also 
staff of the Joint Committee on Taxation, ``Overview of Approaches to 
Corporate Integration,'' JCX-44-66 (May 13, 2016); Republican staff of 
the Senate Finance Committee, ``Comprehensive Tax Reform for 2015 and 
Beyond'' at 122-237, 113th Congress, S. Prt. No. 113-31 (Dec. 2014).

    Now, I want to address outbound international taxation. This 
committee is well aware that our major trading partners have all opted 
for some variant of a territorial tax regime and that the divergent 
approach taken by the United States poses competitiveness concerns.\3\ 
This reality creates an urgent need for this Congress to consider how 
to structure a territorial tax regime that provides parity with the tax 
systems of our major trading partners but at the same time protects the 
U.S. tax base from inappropriate profit shifting strategies. Under 
current law, the U.S. subpart F regime provides a fairly narrow set of 
exceptions to the deferral privilege, and these anti-deferral 
provisions serve as an important backstop to prevent tax avoidance of 
U.S. origin profits by U.S.-based multinational enterprises. Another 
means to address the tax avoidance concerns that underlie the U.S. 
subpart F regime would be to adopt greater source taxation measures to 
protect the U.S. tax base. Relying on a source taxation solution to 
address the profit shifting problem is consistent with a territorial 
tax regime and has the favorable benefit of implementing base 
protection measures that apply across-the-board to both U.S.-based 
multinational enterprises and foreign-based multinational enterprises. 
In contrast, solutions that rely on residency taxation principles (such 
as the U.S. subpart F regime) only protects against the profit shifting 
strategies of U.S.-based multinational enterprises. Thus, I favor 
source taxation measures over an expanded subpart F regime exactly 
because subpart F measures create divergent and discriminatory tax 
results for U.S.-based multinational enterprises and leaves in place 
the inbound earning stripping advantages for foreign-based 
multinational enterprises. Thus, for competitiveness reasons, this 
Congress must consider a territorial tax regime, and as part of that 
consideration Congress must utilize tax base protection measures that 
are even-handed.\4\ Expanding residency-based solutions via an 
expansion of the U.S. Subpart F regime creates artificial winners and 
losers based on the ultimate place of residence of the global parent 
company. The United States needs an international tax system that 
protects U.S. taxation over U.S. origin profits and is consistent with 
the tax regimes of our major trading partners.
---------------------------------------------------------------------------
    \3\ See Republican staff of the Senate Finance Committee, 
``Comprehensive Tax Reform for 2015 and Beyond'' at 249-293, 113th 
Congress, S. Prt. No. 113-31 (Dec. 2014); see also staff of the Joint 
Committee on Taxation, ``Background and Selected Issues Related to the 
U.S. International Tax System and Systems That Exempt Foreign Business 
Income,'' JCX-33-11 (2011) (analyzing nine major trading partners of 
the United States that provide for an exemption system); staff of the 
Joint Committee on Taxation, ``Present Law and Issues in U.S. Cross-
Border Income,'' JCX-42-11 (2011) (reviewing policy considerations 
between a territorial and worldwide tax system).
    \4\ For a more detailed analysis of my views on a territorial tax 
regime and the earning stripping issues inherent in such a regime, see 
Bret Wells, ``Territorial Taxation: Homeless Income is the Achilles 
Heel,'' 12 Houston Business and Tax Law Journal 1 (2012).

    For the balance of my time, I want to highlight three key issues 
with respect to inbound international tax reform.
   1. earning stripping is multifaceted and requires a comprehensive 
                                solution
    For corporate tax reform to be sustainable in a global environment, 
the United States tax system must be designed to ensure that business 
profits earned within the United States are subject to U.S. taxation 
regardless of where a multinational corporation is incorporated. 
Today's tax system does not achieve this objective, and its failure to 
do so creates earning stripping opportunities for foreign-based 
multinational enterprises that allow them to achieve a lower tax burden 
with respect to their U.S. operations than can be achieved by U.S.-
based multinational enterprises conducting those same operations.\5\ 
Thus, U.S.-based multinational enterprises are competitively 
disadvantaged by our own tax system.
---------------------------------------------------------------------------
    \5\ Earning stripping has been identified as a systemic challenge 
that requires a further legislative policy response. See, e.g., staff 
of the Joint Committee on Taxation, ``Present Law and Background 
Related to Possible Income Shifting and Transfer Pricing,'' JCX-37-10 
(2010). For a more detailed analysis of my views on how U.S.-based 
multinational enterprises are competitively disadvantaged because of 
the extra earning stripping opportunities that exist for foreign-based 
multinational enterprises that do not exist for U.S.-based 
multinational enterprises, see Bret Wells, ``Territorial Taxation: 
Homeless Income is the Achilles Heel,'' 12 Houston Business and Tax Law 
Journal 1 (2012).

    How does this inbound earning stripping problem arise? When a U.S. 
subsidiary makes a cross-border tax deductible payment to a low-taxed 
offshore affiliate, the overall income of the multinational enterprise 
has not changed. The multinational enterprise has simply moved assets 
from one affiliate entity's pocket to another affiliate's pocket. But, 
from a U.S. tax perspective, this related party (intercompany) 
transaction is quite lucrative. This intercompany transaction affords 
the U.S. affiliate with a U.S. tax deduction that reduces the U.S. 
corporate tax liability of the U.S. affiliate. The intercompany payment 
creates income in the hands of the low-taxed offshore affiliate that 
often escapes U.S. taxation and often avoids any meaningful taxation in 
the offshore jurisdiction. There are five intercompany techniques that 
can be utilized to strip out this U.S. origin ``homeless income'' \6\ 
from the hands of the U.S. affiliate: (1) related party Interest 
Stripping Transactions; (2) related party Royalty Stripping 
Transactions;\7\ (3) related party Lease Stripping Transactions; (4) 
Supply Chain restructuring exercises; and (5) related party Service 
Stripping Transactions.
---------------------------------------------------------------------------
    \6\ By Homeless Income, I mean to refer to that category of a 
multinational corporation's consolidated income that has been removed 
from the tax base of the country of origin via a related-party tax 
deductible payment and relocated to an offshore affiliate's country of 
residence that chooses not to tax this extra-territorial income or 
provides concessionary taxation to this category of income. Thus, the 
income is ``homeless'' in the sense that it lost its tax home in the 
country of source. The origins of the homeless income mistake is dealt 
with extensively in my earlier writings in Bret Wells and Cym Lowell, 
``Tax Base Erosion and Homeless Income: Collection at Source is the 
Linchpin,'' 65 Tax Law Review 535 (2012); Bret Wells and Cym Lowell, 
``Income Tax Treaty Policy in the 21st Century: Residence vs. Source,'' 
5 Columbia Tax Journal 1 (2013).
    \7\ The outbound migration of foreign-use intangibles is another 
systemic challenge to the current U.S. international taxation regime 
that does not involve an inbound Royalty Stripping Transaction and thus 
would not be prevented by a Base Protecting Surtax. But, the Treasury 
Department can and should amend its existing cost sharing regulations 
to disregard a funding party's tax ownership of an intangible above its 
actual functional contribution toward the intangible's creation apart 
from funding. For a further detailed analysis of this issue, see Bret 
Wells, ``Revisiting Sec. 367(d): How Treasury Took the Bite Out of 
Section 367(d) and What Should Be Done About It,'' 16 Florida Tax 
Review 519 (2014).

    Multinational enterprises come to every jurisdiction, including the 
United States, with a toolbox of tax planning techniques that utilize 
all five of the above earning stripping categories. So, to have a 
sustainable system of business taxation, the United States simply must 
address earnings stripping by addressing each of the categories of 
earning stripping transactions. Foreclosing one, but not all, of the 
earning stripping categories simply motivates a foreign-based 
multinational enterprise to use other tax planning tools.
   2. corporate inversions are not a stand-alone problem but merely 
         the alter ego of the inbound earning stripping problem
    Corporate inversions are a telltale symptom of the larger inbound 
earning stripping cancer. Thus, corporate inversions cannot be handled 
as a stand-alone problem. Again, my first key point bears repeating: 
the current tax system provides significant earning stripping 
advantages that afford a better tax result for the U.S. activities of 
foreign-based multinational enterprises than exist for U.S.-based 
multinational enterprises that conduct similar U.S. activities.\8\ This 
reality causes U.S.-based multinational enterprises to want to become 
foreign-based multinational enterprises, or in other words to enter 
into a corporate inversion transaction so that the post-inversion 
company can avail itself of the same earning stripping opportunities as 
its foreign-based competitors without the impediment of the U.S. 
subpart F regime.
---------------------------------------------------------------------------
    \8\ The U.S. subpart F rules serve as a backstop to prevent a U.S.-
based multinational enterprise from stripping U.S. source profits via 
inbound Interest Stripping, Royalty Stripping, and Lease Stripping 
transactions. For a more detailed analysis of my views on how the U.S. 
subpart F regime serves as a backstop to prevent U.S.-based 
multinational enterprises from benefitting from these earnings 
stripping techniques and how this subpart F backstop regime does not 
apply to foreign-based multinational enterprises, see Bret Wells and 
Cym Lowell, ``Tax Base Erosion and Homeless Income: Collection at 
Source is the Linchpin,'' 65 Tax Law Review 535 (2012); see also Bret 
Wells, ``Territorial Taxation: Homeless Income is the Achilles Heel,'' 
12 Houston Business and Tax Law Journal 1 (2012).

    This is the point to be learned from the corporate inversion 
phenomenon: \9\ corporate inversions are an effort by U.S.-based 
multinational enterprises to become foreign-based enterprises exactly 
because the inbound earning stripping advantages available to foreign-
based multinational enterprises are coveted by U.S.-based 
companies.\10\ Thus, instead of attacking the corporate inversion 
messenger in isolation, Congress should focus its attention on the 
inversion message, namely that the earning stripping techniques 
available to foreign-based multinational enterprises, if left 
unchecked, create an unlevel playing field that motivates U.S.-based 
multinational corporations to find pathways to successfully engage in 
corporate inversions. Said differently, corporate inversions tell 
Congress that it must solve the inbound earning stripping problem on a 
holistic basis if it wants to eliminate the tax incentives for these 
transactions. Corporate inversions are simply the alter ego of the 
inbound earning stripping problem and should not be viewed as a 
separate policy problem.
---------------------------------------------------------------------------
    \9\ Corporate inversions cause significant revenue losses and 
ongoing policy concerns. See Congressional Budget Office, ``An Analysis 
of Corporate Inversions'' (September 2017), available at https://
www.cbo.gov/system/files/115th-congress-2017-2018/reports/53093-
inversions.pdf. In the past, Congress has attacked the corporate 
inversion phenomenon as a stand-alone problem. In my view, Congress 
will not eliminate the corporate inversion phenomenon until Congress 
eliminates the inbound earning stripping advantages that motivate these 
transactions.
    \10\ For a more in-depth discussion of my views on why the 
corporate inversion phenomenon is best understood as a commentary on 
the broader inbound earning stripping problem and should not be viewed 
as a stand-alone problem, see Bret Wells, ``Corporate Inversions and 
Whack-a-Mole Tax Policy,'' 143 Tax Notes 1429 (June 23, 2014); Bret 
Wells, ``Cant and the Inconvenient Truth About Corporate Inversions,'' 
136 Tax Notes 429 (July 23, 2012); Bret Wells, ``What Corporate 
Inversions Teach Us About International Tax Reform,'' 127 Tax Notes 
1345 (June 21, 2010).
---------------------------------------------------------------------------
             3. a base protecting surtax should be part of 
                    inbound international tax reform
    Congress needs a new approach to address the earning stripping 
problem, and it should address this problem in a comprehensive manner. 
I believe that a base protecting surtax is a solution that 
comprehensively addresses the inbound earnings stripping problem, and 
so I urge this committee to seriously consider it as part of 
international tax reform.\11\ By imposing a base protecting surtax on 
all five categories of earning stripping transactions, a surtax would 
be collected upfront in an amount equal to the amount of tax that would 
have been collected had the intercompany payment instead been paid as 
an intercompany dividend distribution. A base protecting surtax is 
essential even if Congress were to enact a partial dividends paid 
deduction regime because a foreign-based multinational enterprise can 
strip ``homeless income'' out of the U.S. tax base in a manner that 
achieves a better result than can be achieved via a partial dividends 
paid deduction. Thus, Congress needs to level the playing field with a 
base protecting surtax.
---------------------------------------------------------------------------
    \11\ Although adoption of a Base Protecting Surtax is my preferred 
policy response, the committee should consider this proposal alongside 
other thoughtful reform proposals that have been offered by other 
scholars. See, e.g., J. Clifton Fleming, Jr., Robert J. Peroni, and 
Stephen E. Shay, ``Getting Serious About Cross-Border Earnings 
Stripping: Establishing an Analytical Framework,'' 93 North Carolina 
Law Review 673 (2015) (provides a comprehensive expense disallowance 
approach to earning stripping transactions); Michael C. Durst, 
``Statutory Protection for Developing Countries,'' 69 Tax Notes 
International 465 (Feb. 4, 2013) (endorses disallowance of related 
party payments made to tax haven affiliates); Reuven S. Avi-Yonah, ``A 
Coordinated Withholding Tax on Deductible Payments,'' 119 Tax Notes 
993, 995-96 (June 2, 2008) (endorses a withholding tax on earning 
stripping payments that is refundable if subjected to meaningful 
taxation in the offshore jurisdiction).

    If appropriately designed, a base protecting surtax would be 
applied on the payer in each of the five types of earning stripping 
transactions. As such, it is not a withholding tax on the payee. The 
base protecting surtax collects a surtax upfront on the payer's share 
(not the payee's share) of the residual profits that are earned by the 
multinational enterprises from within the United States and remitted as 
a tax deductible payment to a jurisdiction outside of the U.S. tax 
base. Thus, the surtax protects the U.S. tax base from being reduced by 
reason of earning stripping transactions and as such would provide tax 
revenue for tax reform. Moreover, by eliminating the tax benefits 
associated with earning stripping transactions, Congress will eliminate 
the fuel that drives the corporate inversion phenomenon. And finally, a 
comprehensively applied base protecting surtax levels the playing field 
between U.S.-based multinational enterprises and foreign-based 
multinational enterprises.
                               conclusion
    Let me conclude my testimony by stating that this committee is to 
be commended for considering fundamental business tax reform. Business 
tax reform requires a careful consideration of international tax 
reform, and in my view any resulting legislation must be structured to 
withstand the systemic inbound earning stripping challenges that face 
the United States. Thank you for allowing me to speak at today's 
hearing. I would be happy to answer any of your questions.

                                 ______
                                 

                               Appendix A

    The base protecting surtax that I and a co-author originally 
proposed \12\ in 2012 is updated in this testimony to mesh with a 
corporate integration proposal that would utilize a partial dividends 
paid deduction with the following elements:
---------------------------------------------------------------------------
    \12\ For a more detailed analysis of the original formulation of 
the Base Protecting Surtax set forth in this testimony, see Bret Wells 
and Cym Lowell, ``Tax Base Erosion and Homeless Income: Collection at 
Source is the Linchpin,'' 65 Tax Law Review 535 (2012).

    1.  Base Protecting Surtax on Base Erosion Payments. A related-
party U.S. payer of a base erosion payment would be subjected to a Base 
Protecting Surtax on the earnings that are transferred to a foreign 
affiliate in an amount equal to the amount that would have been 
collected had those earnings instead been distributed as a partially 
deductible dividend. The purpose of the Base Protecting Surtax is to 
collect, as a surtax, a tax calculated on the gross amount of the 
earning stripping payment so that an equivalent tax is collected for 
what would have been due if the base erosion payment instead had been 
remitted as a tax deductible dividend to the foreign affiliate. The 
rebuttable presumption is that the base erosion payment represents, in 
---------------------------------------------------------------------------
its entirety, a transfer of residual profits.

    2.  Refund Process. If the U.S. payer believes that the amount of 
the Base Protecting Surtax is in excess of the amount needed to protect 
the U.S. tax base because, in fact, a portion of the base erosion 
payment represents a reimbursement of actual third-party costs and does 
not represent, in its entirety, a transfer of U.S. origin profits 
between affiliates, then the U.S. payer could request a redetermination 
by the Internal Revenue Service (Service) through a ``Base Clearance 
Certificate'' process. However, the burden is on the U.S. payer to 
demonstrate that the Base Protecting Surtax was assessed on an amount 
that exceeded the amount of residual profits that were actually 
transferred by the U.S. affiliate to a foreign affiliate, and this 
burden would only be satisfied if the taxpayer demonstrated that a 
correct application of a profit split methodology \13\ confirmed the 
taxpayer's assertion. Until the taxpayer meets this burden of proof, 
the surtax would not be refunded. So, the audit incentives for 
transparency in this posture are reversed as the government has 
collected the tax upfront and it falls to the taxpayer to develop the 
case for a refund, and so the taxpayer now has every incentive for 
transparency and expeditious handling of the audit proceeding.
---------------------------------------------------------------------------
    \13\ For further detail on why I believe transactional transfer 
pricing methodologies are inadequate to address the transfer pricing 
issues of multinational enterprises and why I believe all transfer 
pricing results in the multinational enterprise context should utilize 
a profit split methodology as the primary transfer pricing methodology 
or alternatively should be used as a mandatory confirmatory check to 
all other transactional transfer pricing methodologies, see Bret Wells 
and Cym Lowell, ``Tax Base Erosion: Reformation of Section 482's Arm's 
Length Standard,'' 15 Florida Tax Review 737 (2014).

    The purpose of the base protecting surtax is to serve as a backstop 
to prevent elimination of the residual U.S. taxation on any of the five 
categories of inbound earning stripping transactions that create 
``homeless income'' out of U.S. origin business profits. By imposing a 
base protecting surtax on all five of the enumerated inbound Homeless 
Income strategies, the base protecting surtax collects an upfront tax 
in an amount equal to the amount that would have been collected had 
those earnings instead been distributed as a dividend subject to the 
applicable withholding tax on the grossed-up dividend. A Base 
Protecting Surtax is essential in a dividends paid deduction regime 
because without it the foreign-based multinational enterprise has 
inbound earning stripping strategies at its disposal that affords it 
the opportunity to strip profits from its U.S. subsidiary in a manner 
that circumvents U.S. taxation over U.S. origin profits that are 
---------------------------------------------------------------------------
unavailable to U.S.-based multinational enterprises.

    The proposed Base Protecting Surtax is a surtax on the payer and is 
not a withholding tax on the payee. The Base Protecting Surtax seeks to 
collect the tax that is due on the payer's share (not the payee's 
share) of the residual profits that are earned by the multinational 
enterprises from the United States. The surtax makes the following two 
assumptions about inbound earning stripping strategies: (1) base 
erosion payments represent, in their entirety, a transfer of residual 
profits to the offshore recipient, and (2) the onshore payer should 
have reported and paid source country taxes on those residual profits 
that arose from the U.S. affiliate's activities within the United 
States. The transfer pricing penalty and documentation provisions do a 
fine job of ensuring that routine profits are reported by the onshore 
U.S. subsidiary, but these provisions have not been successful at 
ensuring the self-reporting of residual profits by the U.S. affiliate.

    If the U.S. multinational enterprise discloses its overall books 
and proves that the combined profits of the multinational enterprise 
are less than the full gross amount of the base erosion payment, then a 
refund of the surtax (in whole or in part) could be made, but in this 
refund determination the taxpayer would be required to utilize a profit 
split methodology, not one of the transactional transfer pricing 
methodologies. The proposed Base Protecting Surtax relies on a profit 
split methodology (which is one of the accepted transfer pricing 
methods) and the surtax is refundable if it overtaxes the combined 
income. Moreover, the technical taxpayer for the surtax is the U.S. 
affiliate payer. Thus, because the surtax can be reconciled with the 
arm's length standard and because the surtax is not a withholding tax 
on the recipient, the proposal is consistent with existing treaty 
obligations.

                                 ______
                                 
                 Prepared Statement of Hon. Ron Wyden, 
                       a U.S. Senator From Oregon
    The Trump team says their international tax framework is about 
creating jobs and firing up the country's economic engine, but the 
details show that's just part of the con job being pulled on the middle 
class. Behind the scenes, the administration recently scrubbed from the 
Treasury website a 2012 paper showing that workers do not primarily 
benefit from a corporate rate cut--that trickle down economics are a 
fantasy. Apparently that mainstream economic analysis had to be purged 
since it didn't jibe with the Trump Team's patter.

    They claimed the study was out of date, but they didn't find reason 
to take down any of the other papers that date back as far as the 
1970s. This sure makes it look like the Trump team is afraid of a well-
informed public. And the con job isn't just about hiding inconvenient 
facts. The administration is currently working to pick apart the rules 
that were designed to combat the inversion virus and the decimation of 
our tax base.

    People at town halls tell me they want tough policies in place to 
stop companies from shipping jobs overseas. Especially in towns where 
mills and factories are shuttered and Main Street is vacant, Americans 
are desperate for more red, white, and blue jobs with good wages. And 
they want corporations to pay their fair share. What's on offer in the 
Trump plan is likely to disappoint.

    The Republican tax framework okayed the entire corporate wish list. 
A massive rate cut. A pure territorial system. But there was barely a 
nod to tough rules to prevent companies from sending jobs abroad or 
running away to set up HQ on some zero-tax island. Base erosion, a 
minimum tax--these vital parts of the international tax debate appear 
to be an afterthought. This is an invitation for corporations to game 
the system, and the tax lobby must be licking its chops.

    Bottom line, the President is giving multinationals a green light 
to pay no taxes. Then for the benefit of people reading the news, 
there's a lot of happy talk about jobs, economic growth, and the 
biggest tax cut ever.

    It's not hard to predict what will happen if this multi-trillion 
dollar tax giveaway to the wealthy and corporations is enacted, our tax 
base continues to erode, and the deficit skyrockets. Lawmakers will 
come after Social Security, Medicare and Medicaid yet again. And this 
isn't without precedent--privatizing Social Security was the first 
priority of the Bush administration's second term after its big, 
unpaid-for tax cuts. Let's remember that every percentage point 
decrease in the corporate tax rate results in a loss of $100 billion in 
revenue. Perhaps that's the kind of issue that caused Senator Corker to 
say that he's got big concerns over the deficit.

    Democrats have reached out to the majority with our principles for 
tax reform. There are a lot of members on this side with big ideas of 
how to help the middle class, create jobs, and bring some fairness to 
the tax code through bipartisan reform. That's the kind of reform that 
Ronald Reagan signed into law back in 1986, but the framework that was 
released last week is nowhere near what Reagan accomplished. And it's 
nowhere near the reforms built on fairness and fiscal responsibility 
that my colleagues Dan Coats, Judd Gregg, and I worked to write into 
our bipartisan plans more recently.

    As I wrap up, international taxation is going to be a key part of 
the tax reform debate, and it involves a lot of extraordinarily complex 
questions. The committee has an excellent panel of witnesses here today 
who can address international tax much more thoughtfully than the Trump 
framework does. So I look forward to the discussion.

                                 ______
                                 

                             Communications

                              ----------                              


                American Council of Life Insurers (ACLI)

                      101 Constitution Avenue, NW

                       Washington, DC 20001-2133

                              www.acli.com

The American Council of Life Insurers (ACLI) is pleased to submit this 
statement for the record for the October 3, 2017 Senate Finance 
Committee hearing regarding international tax reform. We thank Chairman 
Hatch and Ranking Member Wyden for holding this hearing.

The American Council of Life Insurers (ACLI) is a Washington, DC-based 
trade association with approximately 290 member companies operating in 
the United States and abroad. ACLI advocates in state, federal, and 
international forums for public policy that supports the industry 
marketplace and the 75 million American families that rely on life 
insurers' products for financial and retirement security. ACLI members 
offer life insurance, annuities, retirement plans, long-term care and 
disability income insurance, and reinsurance, representing 95 percent 
of industry assets in the United States.

As the Committee considers updating the United States' international 
tax system in order to make our nation more competitive in the global 
economy and preserve our tax base, there are industry-specific matters 
to consider for life insurance companies with global interests that 
relate directly to our growth and competitiveness overseas. Our hope is 
that international tax reform reflects policies that treat our active 
business income on par with the income of non-financial services 
companies, though such income would likely be treated as ``passive 
income'' if earned by a non-financial services company. Our bricks and 
mortar and working capital ``assets'' are unique to this industry, thus 
meriting attentive consideration.

Locally Regulated Business With Existing Robust Anti-Base Erosion Rules

U.S.-based global life insurance companies operate where our customers 
are. U.S.-based global life insurance companies are highly regulated in 
the countries in which we do business and by federal and state 
regulators in the United States, and our local investments are heavily 
regulated and used to support our long-term product guarantees. The 
industry has long been subject to robust anti-base erosion rules--the 
active financing exceptions to Subpart F, or ``AFE'' rules. These rules 
apply at the entity level to ensure that each company is a properly 
regulated insurance company and that a substantial portion of our 
business is with local customers. The rules also apply similarly to 
test that our investments and related income are qualifying insurance 
investments and income. For the most part, these rules have reflected 
the way we do business.

As the committee contemplates shifting from our current complex 
international tax rules to a territorial system, the industry applauds 
the stated goals of lower corporate tax rates, the ability to be more 
competitive globally and, of course, future tax structure simplicity. 
Additionally, we ask that several sector-specific issues be considered.

Transition Tax Should Apply Lower Rate to Reserves Required to Stay 
Local

First, under the recently released ``United Framework For Fixing Our 
Broken Tax Code'' (9/27/17) (the ``Tax Framework proposal''), the 
transition to a new territorial tax system includes a one-time deemed 
repatriation tax with bifurcated taxes for foreign earnings held in 
illiquid versus cash or cash equivalent foreign earnings. Earnings and 
profits (``E&P'') invested in cash deposits and marketable investment 
assets of insurance companies that support their regulatory required 
reserves are, as a practical matter, invested in assets that are 
similarly illiquid. The transition tax should be so applied and a 
practical method for doing so can be found under the current AFE rules.

Transition Tax Should Apply on One-CFC Basis

Second, the amount of E&P and foreign tax credits subject to the deemed 
repatriation tax should be calculated on a ``one-CFC basis,'' so that 
all of the foreign entities owned by members of a U.S. group are 
treated as a single foreign corporation. Under such a proposal, the 
aggregate amount of foreign earnings subject to the tax would be 
reduced by any earnings deficits. In addition, the pool of foreign 
taxes deemed to have been paid in respect of those earnings would 
reflect all taxes paid by companies whose earnings deficits were taken 
into account in determining the amount deemed to have been repatriated.

Pro-Competitive Reforms to Active Finance Rules Advisable

Third, as noted previously, the current international tax system 
applies the anti-base erosion Subpart F AFE rules to insurance 
companies. To the extent this set of rules remains intact in a new 
territorial system, three improvements should be considered. First, the 
AFE rules should be reformed to allow related-party reinsurance 
premiums to qualify as exempt from Subpart F as long as the related 
insurance company paying the reinsurance premium qualified under the 
AFE rules, and the insurance contract being reinsured was treated as 
qualifying and thus an exempt contract under the AFE. This would 
correct the current fact that U.S. tax law discourages the ability of 
U.S.-based global insurance companies to pool and diversify risks of 
their foreign affiliates by reinsuring risks to affiliated companies, 
which restriction runs counter to international norms, sound business 
practice, the way in which our global competitors operate their global 
insurance businesses and the expectation of regulators.

The second AFE-specific proposal is that the rules for calculating 
reserves of qualifying foreign insurance companies should be modernized 
and simplified. Under the AFE rules, foreign subsidiaries of U.S. life 
insurance companies must use U.S. tax principles to calculate reserves 
for purposes of determining the amount of investment income that 
qualifies under the AFE, rather than using the actual amount of local 
country reserves. This recalculation requirement was originally 
designed as an anti-abuse rule, but this requirement is too restrictive 
and overly complex, failing to take account of the capital requirements 
that insurance companies must satisfy in order to operate a business 
competitively in a local jurisdiction. Congress should further 
encourage the IRS to provide more generally applicable guidance that 
would apply on a country-by-country basis to allow local country 
reserves or capital requirements to be utilized for purposes of 
calculating the investment income that would be exempt from Subpart F.

Minimum Tax Application

We understand the need for anti-base erosion measures as part of a 
reformed international tax system. As the AFE rules serve that purpose 
for our industry, it would be unnecessary and overly complicated to 
apply another layer of restrictive rules to income that is already 
qualifying under the AFE, such as a minimum tax. If a minimum tax were 
to apply to our industry, such a tax would create tremendous anomalies 
unless it was computed on a global basis, as is suggested by the Tax 
Framework proposal, rather than on a CFC-by-CFC basis.

The American Council of Life Insurers appreciates the opportunity to 
file this statement for the record, along with an attached, more 
detailed, description of the issues outlined here. The life insurance 
industry stands ready to work with you in the interest of international 
tax reform whose goals--producing economic growth and ensuring 
competitiveness--are worthy.

                                 ______
                                 

          INTERNATIONAL TAX REFORM PRIORITIES FOR U.S.-BASED 
                    GLOBAL LIFE INSURANCE COMPANIES

                            October 3, 2017

The following proposals reflect the fact that U.S.-based global life 
insurance companies operate through local companies where our customers 
are, that we are highly regulated in the countries in which we do 
business and by federal and state regulators in the United States, and 
that our local investment income is heavily regulated and used to 
support our long-term product promises, or ``guarantees.''

In addition, it is important to note the industry is already subject to 
robust anti-base erosion rules--the active financing exceptions to 
Subpart F, or AFE rules--that have existed in their current form since 
1998, and that are now permanent. These rules apply at the entity level 
to ensure that each company is a properly regulated insurance company 
and that a substantial portion of our business is with local customers. 
The rules also apply similarly to test our income as qualifying 
insurance income. For the most part, these rules reflect the way we do 
business. However, one proposed exception is described below, and 
relates to our ability to reinsure and get coordinated capital and 
investment efficiencies for our local country businesses.

As tax reform turns to the priorities of anti-base erosion, growth and 
global competitiveness, our priorities reflect a desire to make the 
technical rules workable and fair for our industry. The following 
recommendations reflect policies that treat our active business income 
on par with the income of non-financial services companies, though such 
income would likely be treated as passive income if earned by a non-
financial services company.

    a.  Application of lower split-rate transition tax to insurance 
company earnings that can't be repatriated

The Unified Framework for Fixing Our Broken Tax Code (the 
``Framework'') released by President Trump and Congressional Republican 
leaders on September 17, 2017, recommends that Congress include a 
territorial tax system as part of a comprehensive tax reform bill. The 
Framework proposes a transition rule from the current worldwide system 
that would treat foreign earnings accumulated under the existing system 
as being repatriated, and that foreign earnings held in ``illiquid 
assets'' would be taxed at a lower rate than earnings held as cash or 
cash equivalents. Under the Tax Reform Act of 2014 (H.R. 1) introduced 
by House Ways and Means Committee Chairman Dave Camp (R-MI), 
accumulated post-1986 \1\ undistributed earnings and profits (E&P) of 
CFCs would be subject to a similar one-time transitional tax. The tax 
rate would be 8.75% for E&P held in cash or cash equivalents, and 3.5% 
for the remainder. The purpose of the lower rate for non-cash and cash 
equivalents is to ``moderate the tax burden on illiquid accumulated E&P 
that has been reinvested in the foreign subsidiary's business,'' 
according to the section-by-
section summary of the bill provided by committee staff. The House 
Republican Blueprint included a similar proposal. While E&P invested in 
cash deposits and marketable investment assets of insurance companies 
that support their regulatory required reserves is, as a practical 
matter, invested in assets that are similarly illiquid, the bill did 
not apply the lower rate to such E&P. We believe it should apply to 
such cash and investments that support regulatory required insurance 
reserves. A practical method for doing so can be found under the AFE 
rules.
---------------------------------------------------------------------------
    \1\ The Camp proposal literally referred to E&P earned after 
December 31, 1986 as being subject to the one-time transitional tax. 
Post-1986 undistributed earnings as defined in section 902(c)(3) only 
includes earnings in the first taxable year that a foreign corporation 
has a 10 percent U.S. shareholder. The one-time tax should only apply 
to post-1986 undistributed earnings. The U.S. shareholder paid for the 
E&P earned prior to a U.S. shareholder owning the foreign company, 
which should not be subject to the one-time tax.

Proposal: A method to identify these earnings for insurance groups can 
be found within the AFE rules that exempt certain insurance income from 
inclusion under the subpart F rules. Specifically, an insurance 
company's non-cash items could be defined in H.R. 1's section 
965(c)(2)(B) by limiting the ``liquid item'' to the extent that the 
insurance company has cash and investments in excess of the amount of 
reserves determined in section 954(i) with modifications. Thus, the 
amount that would be subject to the higher split-rate is an amount in 
excess of 110% of reserves for a life insurance company, which is as 
---------------------------------------------------------------------------
defined in sections 954(i)(2)(A) and 954(i)(2)(B)(i) and (ii).

The term ``qualified insurance company'' would be made by reference to 
section 953(e)(3) without regard to section 953(e)(3)(B) (imposing a 
50% limitation focused on home country risk) and the term ``exempt 
contract'' would be made by reference to section 953(e)(2) without 
regard to section 953(e)(2)(B) (imposing a 30% limitation focused on 
home country income).

While the higher split-rate might apply to the amount of a CFC's E&P 
held in cash or cash equivalents, that amount, in the case of a 
regulated insurance company, should exclude an amount attributable to 
assets that are necessary for any regulated insurance company to 
support its insurance obligations. Such an amount, like a 
manufacturer's plant and equipment, is recognized as being required to 
operate the local business and regulatory restrictions govern when a 
distribution of such amount is permissible.

By removing the home country limitations of section 953(e), section 965 
is able to focus on the amount of cash and cash-like items that 
insurance companies must maintain to satisfy their regulatory capital 
reserves and risk profiles. These home country limitations are 
important for determining whether an insurance company's income should 
be excluded from subpart F income because the income is active and 
maintained in the local home country, but section 965 has a different 
focus. Section 965 seeks to determine, in part, the amount of aggregate 
earnings that are not freely distributable (and thus illiquid) so that 
an appropriate lower split-rate can apply to those illiquid earnings. 
Maintaining these home country limitations in section 965 would exclude 
earnings of insurance companies that are not freely distributable 
because of local regulatory requirements.

Revisions to H.R. 1's language under section 965(c)(2)(B) for 
determining the cash portion have been provided to Senate Finance 
Committee staff.

    b.  Netting entities with positive and negative E&P pools as part 
of the transition to a new territorial tax system

Since foreign insurance companies are per se corporations for U.S. tax 
purposes, and are subject to local regulatory requirements, we cannot 
avail ourselves of the ability to create larger or combined entities 
via check the box elections, and we face regulatory restrictions on 
whether and how we can organize or restructure our regulated entities 
to similarly combine companies having positive accumulated E&P with 
others having E&P deficits. This is important for purposes of the 
transition tax on previously untaxed foreign earnings.

The Camp bill appropriately allowed for the netting of positive and 
negative earnings so that the one-time tax is applied to net E&P. In so 
doing, however, the Camp bill effectively put a limit on the amount of 
foreign tax credits that could be utilized as part of this process, 
potentially imposing double tax on some of the earnings subject to the 
transition tax simply because positive and negative E&P pools are 
allowed to be netted. Groups with no foreign subsidiaries having 
negative E&P would not face this haircut on their foreign tax credits, 
and those that are able to combine foreign CFCs through self-help would 
also not be subject to the haircut. In addition, the Camp bill failed 
to take account of so-called trapped foreign tax credits relating to 
CFCs that paid foreign taxes in years when they had positive earnings 
but happen to have a negative E&P pool at the time of the effective 
date of the transition tax. These trapped credits should also be 
allowed to be utilized; otherwise, they would never be allowed to be 
utilized going forward in the new territorial system.

Another oversight in the Camp bill is that the netting of positive and 
negative E&P was at the first-tier U.S. parent level and not at the 
consolidated U.S. parent level. Therefore, a U.S. consolidated group 
with two U.S. subsidiaries that have CFCs cannot net the E&P of all 
CFCs. The insurance industry is subject to foreign regulations that 
restrict the ability of the U.S. group to own all CFCs by the same U.S. 
entity.

Proposal: The amount of E&P and foreign tax credits subject to the 
deemed repatriation tax should be calculated on a ``one-CFC basis,'' so 
that all of the foreign entities owned by members of a U.S. group are 
treated as a single foreign corporation. Under such a proposal, the 
aggregate amount of foreign earnings subject to the tax would be 
reduced by any earnings deficits. In addition, the pool of foreign 
taxes deemed to have been paid in respect of those earnings would be 
all taxes paid by companies whose earnings deficits were taken into 
account in determining the amount deemed to have been repatriated.

    c.  The AFE rules should be reformed to allow related-party 
reinsurance premiums to qualify

An insurer's business is to accept others' risks and manage, under the 
supervision of regulators, the cost of maintaining sufficient capital 
to bear those risks. Insurers manage exposure to these risks by pooling 
and diversifying risks (often through reinsurance), and by aligning 
investment strategies with potential insurance liabilities. While 
reinsurance is a key function for an insurance company, U.S. tax law 
discourages the ability of U.S.-based global insurance companies to 
pool and diversify risks of their foreign affiliates by reinsuring 
risks to affiliated companies. It does so by treating premiums paid 
between affiliates in order to reinsure contracts as premium income 
that is taxed currently by the United States; the income is not 
eligible for deferral under the AFE rules. This restriction runs 
counter to international norms, sound business practice, the way in 
which our global competitors operate their global insurance businesses 
and the expectation of regulators. Pooling risk allows an insurance 
company to hold less capital as a result of the diversification of risk 
and manage investments in a more efficient manner.

Proposal: As part of the reform of the U.S. international tax rules, 
this restriction in the AFE rules should be fixed. Specifically, 
reinsurance premiums should be exempt from Subpart F as long as the 
reinsurer is a regulated insurance company, the related insurance 
company paying the reinsurance premium qualified under the AFE rules, 
and the insurance contract being reinsured was treated as qualifying 
and thus an exempt contract under the AFE. By limiting this rule to 
exempt contracts, the reinsurance of U.S. risks will continue to be 
subject to Subpart F. The Framework includes rules to protect the U.S. 
tax base by including a minimum tax on the foreign profits of U.S. 
multinational companies. To the extent the change in the AFE rules that 
we are suggesting in regards to related party reinsurance transactions 
outside the United States, it may be appropriate to apply such a 
minimum tax to premium income related to reinsurance that qualifies for 
this modified AFE treatment.

    d.  Modernize and simplify rules for calculating reserves of 
qualifying foreign insurance companies

Under the AFE rules, foreign subsidiaries of U.S. life insurance 
companies must use U.S. tax principles to calculate reserves for 
purposes of determining the amount of investment income that qualifies 
under the AFE, rather than using the actual amount of local country 
reserves. This recalculation requirement was originally designed as an 
anti-abuse rule, to prevent companies from aggressively overstating 
local country reserves in order to maximize the amount of investment 
income that could be subject to deferral from U.S. tax. However, in 
significant foreign markets subject to developed and modern insurance 
regulation and oversight, this requirement is too restrictive and 
overly complex. It fails to take account of the capital requirements 
that insurance companies must satisfy in order to operate a business 
competitively in a local jurisdiction. Moreover, since the financial 
crisis of 2008, foreign regulators are using or moving towards a risk-
based capital approach, wherein an insurance company's required capital 
is evaluated and measured taking into account the types of risks it has 
assumed (by looking at net premiums written--total premiums less 
reinsurance that has been ceded--in the local country and loss 
reserves). Then, the overall capital of the local company, including 
reserves and policyholder surplus, is taken into account to determine 
the company's risk-based capital position.

Thus, the level of regulatory capital that is required to be retained 
in a country, and that cannot be repatriated, is different from the 
level based on a calculation of reserves utilizing U.S. tax principles.

Present law does provide some relief for U.S. life insurance companies, 
by authorizing the Secretary to permit U.S. life insurance companies to 
request a ruling from the IRS to use foreign statement reserves. 
However, the ruling process is limited and is tremendously time 
consuming for both the IRS and taxpayers.

Proposal: Congress should further encourage the IRS to provide more 
generally applicable guidance that would apply on a country-by-country 
basis to allow local country reserves or capital requirements to be 
utilized for purposes of calculating the investment income that would 
be exempt from subpart F. Alternatively, the guidance could approve 
common reserving methods that the IRS has already reviewed and approved 
via the ruling process. The guidance would be issued only after the 
industry demonstrates to the satisfaction of the Secretary that 
adequate evidence exists that the local country regulator and 
regulation is robust and meaningful or that the reserving method is 
commonly accepted.

    e.  Anti-base erosion proposals and the AFE rules

The AFE rules define an active foreign insurance company for U.S. tax 
purposes and would define insurance income qualifying for a new 
dividend exemption system if the Subpart F rules were retained. The AFE 
rules are robust and restrictive, requiring qualifying income to have a 
significant nexus to the country where the CFC is organized or does 
business. We understand the need for anti-base erosion measures as part 
of a reformed international tax system. For our industry, the AFE rules 
serve that purpose; it would be unnecessary and overly complicated to 
apply another layer of restrictive rules to income that is already 
qualifying under the AFE, such as a minimum tax (except in the case of 
premiums related to reinsurance between affiliates, as noted in the AFE 
reform proposal related to reinsurance, suggested above).

Proposal 1: Any minimum tax that is imposed on earnings of a CFC that 
would otherwise qualify for the territorial system should exclude from 
its base earnings that already qualify under the AFE rules.

Proposal 2: If a minimum tax were to apply to our industry, such a tax 
would create tremendous anomalies unless it was computed on a global 
basis, as is suggested by the Framework, rather than on a CFC-by-CFC 
basis, as was the case with ``Option C'' in the final 2014 Camp bill. 
That bill raised the following issues:

      The tax base for determining Option C was earnings that exceed 
10% of the basis in the entity's tangible property. In an attempt to 
capture more mobile income including intangibles related income, this 
definition also captured the earnings of an entity with little or no 
tangible assets, including financial services companies. Option C 
failed to recognize that an insurance company's tangible asset and 
brick and mortar is its cash and investments that support its 
regulatory required reserves and capital.

      The CFC-by-CFC effective tax rate calculation requiring the use 
of U.S. tax concepts to compute the effective tax rate for the entity 
was never fleshed out in detail. For insurance companies, however, it 
is clear that there would be cases in which companies that pay a high 
effective tax rate in a local country would still suffer a minimum tax. 
This is because of significant differences in the calculation of 
taxable income between U.S. tax rules and local country tax rules, with 
the most likely differentiator being the calculation of insurance 
reserves and the timing of recognition of gains and losses on 
investments.

                                 ______
                                 
                  A. Philip Randolph Institute et al.

  100 GROUPS OPPOSING A TERRITORIAL TAX SYSTEM PROPOSED BY PRESIDENT 
                      TRUMP AND REPUBLICAN LEADERS

October 2, 2017

Dear Member of Congress:

We urge you to reject a proposal to give U.S. multinational 
corporations a huge tax break for sending jobs offshore and a huge 
loophole to help them avoid paying taxes.

President Trump and Republican leaders in Congress want to allow 
multinational corporations to pay no U.S. taxes on their offshore 
profits. This is called a ``territorial tax system.''

It is an incredibly bad idea. Ending taxation of offshore profits would 
give multinational corporations an incentive to send jobs offshore, 
thereby lowering U.S. wages. It would also be a giant loophole for 
corporations to use accounting gimmicks to move their profits to tax 
havens, resulting in the loss of billions of dollars in tax revenue for 
the United States.

Ending taxation of offshore profits would rig the rules in favor of 
multinational corporations, give them a competitive advantage over 
domestic businesses, and make our tax system more complicated.

We cannot afford to give multinational corporations a giant loophole to 
avoid paying their fair share of taxes at a time when we need more 
revenue to create jobs rebuilding infrastructure, educating our 
children, expanding healthcare coverage, researching new medical cures, 
and ensuring a secure retirement.

Voters are unalterably opposed to a territorial tax system. Three-
quarters of Americans say they would oppose a tax system that does not 
tax offshore profits. A June 2017 Hart Research poll found that 32 
percent of respondents believe that foreign profits of U.S.-based 
companies should be taxed at a higher rate than their U.S. profits 
while another 40 percent believe they should be taxed at the same rate. 
Only 8 percent believe foreign profits should be taxed at a lower rate, 
and only 4 percent said they should not be taxed at all--which is what 
a territorial tax system would do.

Please see this fact sheet (http://bit.ly/2hCiVn9) from the Institute 
on Taxation and Economic Policy for a more detailed explanation of why 
a ``territorial tax system'' would rig the rules for multinational 
corporations and against American businesses and working people.

We urge you to reject this terrible idea.

Sincerely,

A. Philip Randolph Institute
ActionAid USA
Agenda Project
Alliance for Retired Americans
Amalgamated Transit Union
American Family Voices
American Federation of Government Employees (AFGE)
American Federation of Labor and Congress of Industrial Organizations 
(AFL-CIO)
American Federation of Musicians of the United States and Canada
American Federation of State, County, and Municipal Employees (AFSCME)
American Federation of Teachers
Americans for Democratic Action (ADA)
Americans for Tax Fairness
Asia Initiatives
Asian Pacific American Labor Alliance
As You Sow
Brotherhood of Railroad Signalmen
Campaign for America's Future
Center for Biological Diversity
Center for Community Change
Center for Popular Democracy
Center of Concern
Citizens' Environmental Coalition
Coalition of Black Trade Unionists
Coalition of Labor Union Women
Coalition on Human Needs
Communications Workers of America
Congregation of Our Lady of Charity of the Good Shepherd, U.S. 
Provinces
Demand Progress
Earth Action, Inc.
EG Justice
Economic Policy Institute Policy Center
Fair Share
Financial Accountability and Corporate Transparency (FACT) Coalition
Financial Transparency Coalition (FTC)
Fix Democracy First
Food and Water Watch
Franciscan Action Network
Friends of the Earth
Global Financial Integrity
Health Care for America NOW!
Hip Hop Caucus
I.A.T.S.E., International Alliance of Theatrical Stage Employees
Institute for Agriculture and Trade Policy
Institute for Policy Studies--Inequality Program
Institute on Taxation and Economic Policy
International Association of Machinists and Aerospace Workers
In ternational Association of SMART, Sheet Metal, Air, Rail, and 
Transportation Workers
International Brotherhood of Boilermakers
International Brotherhood of Teamsters
International Corporate Accountability Roundtable (ICAR)
International Federation of Professional and Technical Engineers 
(IFPTE)
International Labor Rights Forum (ILRF)
International Longshoremen's Association
In ternational Union, United Automobile, Aerospace, and Agricultural 
Implement Workers of America, UAW
Islamic Society of North America
Jobs with Justice
Jubilee USA Network
Main Street Alliance
MomsRising
National Advocacy Center of the Sisters of the Good Shepherd
National Education Association
National Employment Law Project
National Federation of Federal Employees
National Organization for Women
National Priorities Project
National Women's Law Center
NETWORK Lobby for Catholic Social Justice
New Rules for Global Finance
Other98
Our Revolution
Oxfam America
Patriotic Millionaires
Pax Advisory
People Demanding Action
People's Action
Power Shift Network
Pride at Work
Progressive Change Campaign Committee
Progressive Congress Action Fund
Public Citizen
Responsible Wealth
Revolving Door Project
Rights and Accountability in Development (RAID)
RootsAction.org
Service Employees International Union
Social Security Works
Tax Justice Network USA
Tax March
The Hedge Clippers
The Language of Connection
The Leadership Conference on Civil and Human Rights
Unitarian Universalist Legislative Action Network
United Food and Commercial Workers International Labor Union
United for a Fair Economy
United Steelworkers (USW)
UNITE HERE
Wall-of-Us
Woodstock Institute
Working America
Worksafe

                                 ______
                                 
           Association of Americans Resident Overseas (AARO)

                           4 rue de Chevreuse

                          75006 Paris, France

                        Tel: +33 (0)1 4720 2415

                         Website: www.aaro.org

                         Email: [email protected]

14 October 2017

Senate Committee of Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
U.S.A.

Re: 3 October 2017 Full Committee Hearing on ``International Tax 
Reform''

Dear Chairman Hatch and other Committee Members,

On behalf of the Association of Americans Resident Overseas (AARO), I 
wish to make the following statement for the record with regard to the 
3 October 2017 full committee hearing on ``International Tax Reform.''

The full committee hearing on tax reform was an important step in the 
on-going effort to carry out reform of the United States' international 
tax system. The focus of this hearing was on taxation of corporations. 
In his opening statement, Chairman Hatch touched on a number of 
problems with the existing system. He then said this:

        All of these problems are key for today's hearing because they 
        highlight the shortcoming of our outdated worldwide tax system.

        The solution to these and other problems, to put it very 
        simply, is to transition to a territorial-based system like 
        virtually all of our foreign competitors. Under such a system, 
        an American company would owe taxes only on income earned in 
        the United States. Income earned in foreign jurisdictions would 
        only be taxed by those jurisdictions, not here.

Chairman Hatch then added:

        Finally, as many of you know, I've been interested for some 
        time in the idea of better integrating our individual and 
        corporate tax systems.

AARO agrees with Chairman Hatch that international tax reform should 
include individual taxation. AARO's position on individual 
international tax reform, as stated on our website, is this:

TAXATION: We believe that the United States puts itself at a 
competitive disadvantage by taxing its citizens abroad on the basis of 
their nationality. The ability to send an employee abroad to manage, 
direct, instructor train the employees of a foreign subsidiary is 
crucial to successful competition in today's global economy. The U.S. 
should put U.S. persons on a par with citizens of other countries and 
adopt Residence-Based Taxation (RBT). The current system of 
Citizenship-Based Taxation (CBT) imposes the risk of double taxation on 
people already taxed in the countries where they live and work. In 
addition, the compliance costs for U.S. persons abroad are as daunting 
as the enforcement costs for the IRS.

The Trump administration's interest in reforming taxation so as to 
create more jobs for Americans is best served by creating more jobs for 
Americans not only within the United States but also overseas. 
Switching from citizenship-based taxation of U.S. citizens to 
territorial-based taxation would put Americans interested in working 
overseas on an ``even playing field'' and would encourage U.S. 
companies operating overseas to hire more Americans.

It is a shame when Americans qualified for overseas executive 
positions, special skills positions or other good jobs are passed over 
by U.S. companies in order to avoid the cost of grossing up salaries 
and/or making double declarations. Had Americans been hired for these 
jobs rather than foreigners, a good deal of their earnings would sooner 
or later flow back to America; a large proportion of Americans overseas 
have close relatives Stateside and plan to retire back in their 
homeland.

As Chairman Hatch concluded in his opening statement, ``International 
tax reform is an area that is rife for bipartisanship.'' As a non-
partisan group of U.S. citizens living and working around the world, 
AARO urges all members of the Committee to include territorial-based 
taxation of American individuals as an essential part of the reform.

I thank you for your attention and would be most happy to discuss this 
with the Committee staff if there are any questions or concerns.

Sincerely yours,

Neil Kearney
President, Association of Americans Resident Overseas

                                 ______
                                 
                        Center for Fiscal Equity

                    Statement of Michael G. Bindner

Chairman Hatch and Ranking Member Wyden, thank you for the opportunity 
to submit these comments for the record to the Committee on Finance. As 
usual, we will preface our comments with our comprehensive four-part 
approach, which will provide context for our comments.

      A Value-Added Tax (VAT) to fund domestic military spending and 
domestic discretionary spending with a rate between 10% and 13%, which 
makes sure very American pays something.
      Personal income surtaxes on joint and widowed filers with net 
annual incomes of $100,000 and single filers earning $50,000 per year 
to fund net interest payments, debt retirement and overseas and 
strategic military spending and other international spending, with 
graduated rates between 5% and 25%.
      Employee contributions to Old-Age and Survivors Insurance (OASI) 
with a lower income cap, which allows for lower payment levels to 
wealthier retirees without making bend points more progressive.
      A VAT-like Net Business Receipts Tax (NBRT), which is 
essentially a subtraction VAT with additional tax expenditures for 
family support, health care and the private delivery of governmental 
services, to fund entitlement spending and replace income tax filing 
for most people (including people who file without paying), the 
corporate income tax, business tax filing through individual income 
taxes and the employer contribution to OASI, all payroll taxes for 
hospital insurance, disability insurance, unemployment insurance and 
survivors under age 60.

Attacking unions for the past 30 years has taken its toll on the 
American worker in both immigration and trade. That has been 
facilitated by decreasing the top marginal income tax rates so that 
when savings are made to labor costs, the CEOs and stockholders 
actually benefit. When tax rates are high, the government gets the cash 
so wages are not kept low nor unions busted. It is a bit late in the 
day for the Majority to show real concern for the American worker 
rather than the American capitalist or consumer. The current plan will 
make things worse.

Reversing the plight of the American worker will involve more than 
trade, but we doubt that the Majority has the will to break from the 
last 30 years of tax policy to make worker wages safe again from their 
bosses. Sorry for being such a scold, but the times require it.

The main international impact in our plan is the first point, the 
value-added tax (VAT). This is because (exported) products would shed 
the tax, i.e., the tax would be zero rated, at export. Whatever VAT 
congress sets is an export subsidy. Seen another way, to not put as 
much taxation into VAT as possible is to enact an unconstitutional 
export tax.

The second point, the income and inheritance surtax, has no impact on 
exports. It is what people pay when they have successfully exported 
goods and their costs have been otherwise covered by the VAT and the 
Net Business Receipts Tax/Subtraction VAT. This VAT will fund U.S. 
military deployments abroad, so it helps make exports safe but is not 
involved in trade policy other than in protecting the seas.

The third point is about individual retirement savings. As long as such 
savings are funded through a payroll tax and linked to income, rather 
than funded by a consumption tax and paid as an average, they will add 
a small amount to the export cost of products.

The fourth bullet point is tricky. The NBRT/Subtraction VAT could be 
made either border adjustable, like the VAT, or be included in the 
price. This tax is designed to benefit the families of workers, either 
through government services or services provided by employers in lieu 
of tax. As such, it is really part of compensation. While we could run 
all compensation through the public sector and make it all border 
adjustable, that would be a mockery of the concept. The tax is designed 
to pay for needed services. Not including the tax at the border means 
that services provided to employees, such as a much-needed expanded 
child tax credit--would be forgone. To this we respond, absolutely 
not--Heaven forbid--over our dead bodies. Just no.

The NBRT will have a huge impact on international tax policy, probably 
much more than trade treaties, if one of the deductions from the tax is 
purchase of employer voting stock (in equal dollar amounts for each 
worker). Over a fairly short period of time, much of American industry, 
if not employee-owned outright (and there are other policies to 
accelerate this, like ESOP conversion) will give workers enough of a 
share to greatly impact wages, management hiring and compensation and 
dealing with overseas subsidiaries and the supply chain--as well as 
impacting certain legal provisions that limit the fiduciary impact of 
management decision to improving short-term profitability (at least 
that is the excuse managers give for not privileging job retention).

Employee-owners will find it in their own interest to give their 
overseas subsidiaries and their supply chain's employees the same deal 
that they get as far as employee-ownership plus an equivalent standard 
of living. The same pay is not necessary, currency markets will adjust 
once worker standards of living rise.

Over time, this will change the economies of the nations' we trade 
with, as working in employee owned companies will become the market 
preference and force other firms to adopt similar policies (in much the 
same way that, even without a tax benefit for purchasing stock, 
employee-owned companies that become more democratic or even more 
socialistic, will force all other employers to adopt similar measures 
to compete for the best workers and professionals).

In the long run, trade will no longer be an issue. Internal company 
dynamics will replace the need for trade agreements as capitalists lose 
the ability to pit the interest of one nation's workers against the 
others. This approach is also the most effective way to deal with the 
advance of robotics. If the workers own the robots, wages are swapped 
for profits with the profits going where they will enhance consumption 
without such devices as a guaranteed income.

If Senator Sanders had been nominated and elected, this is the type of 
trade policy you might be talking about today. Although the staff at 
the Center supported the Senator, you can imagine some of us thought 
him too conservative in his approach to these issues, although we did 
agree with him on the $15 minimum wage. Economically, this would have 
had little impact on trade, as workers at this price point often 
generate much more in productivity than their wage returns to them. 
This is why the economy is slow, even with low wage foreign imports. 
Such labor markets are what Welfare Economics call monopsonistic 
(either full monopsony, oligopsony or monopsonistic competition--which 
high wage workers mostly face). Foreign wages are often less than the 
current minimum wage, however many jobs cannot be moved overseas.

As we stated at the outset, the best protection for American workers 
and American consumer are higher marginal tax rates for the wealthy. 
This will also end the possibility of a future crisis where the U.S. 
Treasury cannot continue to roll over its debt into new borrowing. 
Japan sells its debt to its rich and under-taxes them. They have a huge 
Debt to GDP ratio, however they are a small nation. We cannot expect 
the same treatment from our world-wide network of creditors, an issue 
which is also very important for trade. Currently, we trade the 
security of our debt for consumer products. Theoretically, some of 
these funds should make workers who lose their jobs whole--so far it 
has not. This is another way that higher tax rates and collection (and 
we are nowhere near the top of the semi-fictitious Laffer Curve) hurt 
the American workforce. Raising taxes solves both problems, even though 
it is the last thing I would expect of the Majority.

We make these comments because majorities change--either by deciding to 
do the right thing or losing to those who will, so we will keep 
providing comments, at least until invited to testify.

Thank you for the opportunity to address the committee. We are, of 
course, available for direct testimony or to answer questions by 
members and staff.

                                 ______
                                 
                            Democrats Abroad

                             P.O. Box 15130

                          Washington, DC 20003

                                  USA

                        www.democratsabroad.org

                         www.votefromabroad.org

U.S. Senate
Committee on Finance
Dirksen Senate Office Building
Washington, DC 20510-6200

October 3, 2017

Re: Senate Finance Committee hearing on ``International Tax Reform''

Dear Chairman Hatch, Ranking Member Wyden, and all Members of the 
Committee, Democrats Abroad greatly appreciates you holding this 
important hearing on international tax reform and allowing for 
stakeholders to submit testimony into the record. Like you, Democrats 
Abroad believes that comprehensive tax reform is long overdue for 
middle-class Americans, working-class families, small businesses, job 
creators, and especially so for American taxpayers living and working 
abroad.

As you know, millions of U.S. citizens reside overseas, normally for 
family reasons, but also for work, education or adventure. As 
Americans, we are all subject to tax-filing requirements in both our 
country of residence and to the U.S. even though our use of the 
services provided by our federal taxes is comparably negligible. 
Furthermore, the U.S. is only one of two countries in the world still 
taxing non-resident citizens based on the outdated system of 
citizenship-based taxation.

Fortunately, with Congress and the Administration ready to move forward 
together on the most significant tax reform in three decades, we 
believe that lawmakers are presented with an ideal opportunity to 
correct this injustice to Americans abroad and restore fairness to the 
taxation playing field.

Democrats Abroad joins the rest of the Americans abroad community in 
our strong support for a tax reform package which includes:

  Reforms to the U.S. tax code which reduce inequality, boosts 
opportunity, and raises revenue to meet public demands primarily from 
those with the greatest ability to pay;
  Residency-based taxation as a replacement for the current system of 
citizenship-based taxation;
  Safeguards to prevent tax abuse by those seeking to hide offshore 
income;
  Relief from foreign financial account reporting for Americans abroad 
genuinely residing in their country of residence;
  Simplified and improved tax filing for Americans living abroad; and
  Deficit-neutrality and revenue-neutrality to ensure tax cuts are 
fully paid for and Congress does not add to our nation's existing debt.

Itai Grinberg, your witness in today's hearing, previously wrote a 
paper on international taxation in which he stated, ``It is 
inappropriate for regulatory rules to make it difficult for [Americans 
living abroad] to maintain residence country financial accounts.'' \1\ 
We strongly agree with Mr. Grinberg's assessment in that everyday 
Americans abroad experience financial hardship which results in not 
being able to save for retirement or utilize financial services in the 
same manner as Americans living within U.S. borders.
---------------------------------------------------------------------------
    \1\  Grinberg, Itai, 2012, ``Beyond FATCA: an evolutionary moment 
for the international tax system,'' 27 January, Georgetown University 
Law Center, p. 59. http://scholarship.law.
georgetown.edu/cgi/viewcontent.cgi?article=1162&context=fwps_ papers.

Although we are disappointed that the Senate has decided to advance the 
FY18 budget resolution with reconciliation instructions on tax reform, 
we are encouraged by this hearing that all perspectives will be 
---------------------------------------------------------------------------
considered by the Senate in crafting tax legislation.

Thank you for your consideration of this submission for inclusion into 
the hearing record. If you or your staff have any questions regarding 
this letter or if you would like to discuss an expanded outline of our 
tax reform recommendations, please feel free to contact me or Ms 
Carmelan Polce, Chair of the Democrats Abroad Taxation Task Force, at 
[email protected].

Respectfully submitted,

Julia Bryan
International Chair, Democrats Abroad
E-mail: [email protected]
Phone: (843) 628-2280

                                 ______
                                 
                             FACT Coalition

                      1225 Eye St., NW, Suite 600

                          Washington, DC 20005

                           +1 (202) 827-6401

                             @FACTCoalition

                        www.thefactcoalition.org

October 3, 2017

The Honorable Orrin Hatch
Chairman
U.S. Senate
Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510-6200

The Honorable Ron Wyden
Ranking Member
U.S. Senate
Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510-6200

RE: October 3rd hearing on ``International Tax Reform''

Dear Chairman Hatch and Ranking Member Wyden, we are writing on behalf 
of the Financial Accountability and Corporate Transparency (FACT) 
Coalition to thank you for holding a public hearing on the 
international aspects of tax reform and to offer our recommendations on 
how to improve the American tax system.

The FACT Coalition is a non-partisan alliance of more than 100 state, 
national, and international organizations working toward a fair tax 
system that addresses the challenges of a global economy and promoting 
policies to combat the harmful impacts of corrupt financial 
practices.\1\
---------------------------------------------------------------------------
    \1\ For a full list of FACT Coalition members, visit https://
thefactcoalition.org/about/coalition-members-and-supporters/.

While the problems with the tax code span across many areas, we 
especially appreciate this hearing's focus on updating our 
international tax system and reforming the tax code so that it 
strengthens American business. The tax treatment of multinational 
corporations is one of the areas of the tax code most in need of 
substantial reform. In fact, a prominent tax economist estimates that 
up to $135 billion is lost each year to offshore corporate tax 
avoidance.\2\ The ability of companies to defer paying taxes on their 
offshore earnings has allowed them to accumulate a stunning $2.6 
trillion in earnings ``offshore'' on which they are avoiding $750 
billion in taxes.\3\
---------------------------------------------------------------------------
    \2\ Kimberly A. Clausing, ``Profit shifting and U.S. corporate tax 
policy reform,'' Washington Center for Equitable Growth, May 2016, 
http://equitablegrowth.org/report/profit-shifting-and-u-s-corporate-
tax-policy-reform/.
    \3\ Institute on Taxation and Economic Policy, ``Fortune 500 
Companies Hold a Record $2.6 Trillion Offshore,'' March 28, 2017, 
https://itep.org/fortune-500-companies-hold-a-record-26-trillion-
offshore/.

Allowing multinational corporations to continue to engage in large-
scale offshore tax avoidance hurts small and wholly domestic 
businesses. Every dollar companies avoid in taxes must be paid in one 
form or another. On the one hand, offshore tax avoidance means that we 
are short on the revenue to make needed public investments in things 
like infrastructure, education, and health care that make our economy 
competitive over the long term. On the other hand, small and domestic 
businesses are disadvantaged because they are the ones left picking up 
the tab for all the tax avoidance by their multinational competitors. 
In fact, one study found that the total potential burden on small 
businesses for the cost of federal tax avoidance could be as high as 
$4,481 per company on average.\4\
---------------------------------------------------------------------------
    \4\ Alexandria Robins and Michelle Surka, ``Picking Up the Tax 
2016,'' U.S. PIRG, November 29, 2016, http://www.uspirg.org/reports/
usp/picking-tab-2016.

We, as a coalition, believe that any tax reform effort should take four 
critical steps to dramatically cut back on the gaming by 
---------------------------------------------------------------------------
multinationals.

1. Stop Giving Multinationals an Advantage over Wholly Domestic and 
Small Businesses

We should immediately close the loophole that allows companies to defer 
paying taxes by moving their profits offshore. As U.S. citizens, you 
and I--and every domestic company--pay taxes on what we earn, 
regardless of where we earn it. None of us can defer our tax 
obligations. But multinational companies can create foreign 
subsidiaries, divide themselves in ways that game the system, and defer 
paying all or most of the taxes due on their foreign earnings. It's not 
fair, and it's anti-
competitive. They use our roads and bridges to ship their goods, 
recruit from our colleges and universities, and are protected by our 
laws and our military. They should not, through loopholes and 
accounting gimmicks, defer paying their share and leave the rest of us 
to pick up the tab.

Also, we should not favor multinationals over wholly domestic and small 
businesses by giving them a special rate. Shockingly, some--including 
the so-called ``Big Six''--have proposed a lower tax rate for those 
companies that shift jobs and money overseas.\5\ That makes no sense.
---------------------------------------------------------------------------
    \5\ Speaker Ryan Press Office, ``Unified Framework for Fixing our 
Broken Tax Code,'' Office of the Speaker of the House, September 27, 
2017, https://www.speaker.gov/sites/speaker.
house.gov/files/Tax%20Framework.pdf.

2. Stop U.S. Companies From Claiming Foreign Residence Simply to Dodge 
---------------------------------------------------------------------------
Taxes

Some large U.S. companies buy up smaller, foreign companies, move their 
legal residence to one of the tax haven countries (a paper transaction, 
no moving van required) and claim they are no longer U.S. residents to 
avoid paying taxes. They still have access to our markets and many of 
the privileges they enjoyed as U.S. companies, but stop paying the 
taxes needed to support that access. That means you and I are left 
paying their share. We should strengthen ``anti-inversion'' and 
earnings stripping rules to prevent that type of gaming.

3. Ensure Multinationals Play by the Rules by Publicly Reporting Their 
Profits and Taxes Paid

Multinational companies do not publicly report on where they are making 
their money or what taxes they are paying to whom. We have no idea 
exactly how they are gaming the system--what they tell us versus what 
they tell other countries. They should have to write it down in one 
place and report it on a country-by-country basis, so that the public 
can see what they are really paying.\6\
---------------------------------------------------------------------------
    \6\ The FACT Coalition, ``FACT Sheet: Public Country-by-Country 
Reporting,'' September 27, 2017, http://thefact.co/aldnl.
---------------------------------------------------------------------------

4. Don't Make Things Worse

Our current system allows U.S. companies to delay paying taxes on U.S. 
profits they shift overseas. That's bad enough. Some in Congress have 
proposed allowing the profit-shifting without ever having to pay what 
they owe. That's the ultimate loophole. If we move toward what's called 
a ``territorial tax system,'' which really means giving multinational 
corporations a zero tax on profits they shift abroad, the only 
companies left paying U.S. corporate income taxes would be those too 
small to game the system. It also means that multinational companies 
would face an incentive to offshore jobs to countries with lower tax 
rates than the U.S. That is why more than 100 organizations sent a 
letter to Congress on Monday urging legislators to reject a 
``territorial tax system.'' \7\
---------------------------------------------------------------------------
    \7\ Clark Gascoigne, ``Over 100 Organizations Urge Congress to 
Reject Giant Tax Loophole for Offshoring and Tax Avoidance,'' The FACT 
Coalition, October 2, 2017, http://thefact.co/3Kzko.

If there is one thing that policymakers, the media, and the public can 
agree on, it is that the tax code is long overdue for a substantial 
overhaul. We appreciate the diligent work you and committee staff have 
put into exploring these issues and hope to work with you moving 
---------------------------------------------------------------------------
forward on tax reform.

For additional information, please contact Clark Gascoigne at 
cgascoigne@
thefactcoalition.org or Richard Phillips at [email protected].

Sincerely,
Gary Kalman
Executive Director

Clark Gascoigne
Deputy Director

Richard Phillips
Policy and Communications Co-Chair

                                 ______
                                 
                    Letter Submitted by Gina M. Hunt
October 1, 2017

U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200

RE:  Full committee hearing, ``International Tax Reform,'' October 3, 
2017

Dear Sirs and Madams,

I am writing you today to request that you consider changing 
international tax laws governing American citizens living abroad, not 
just those governing American businesses and corporations abroad. I 
don't imagine that you have any idea what it is like for the 9,000,000 
of us, so I respectfully request that you read and consider every 
communication sent to you from one of us.

I earned a salary of just over =50,000 last year and paid 40% of that 
in French taxes. That means that I netted somewhere around $35,000 
USD--way, way, way under your salary, I am certain. I point this fact 
out because I need you to realize that I am not a rich person living 
abroad but a middle-class one. I own no home anywhere and have very 
little in total assets. And yet, I am required to file taxes in the 
U.S. every year because of citizen-based taxation. I also have my 
meager French bank accounts reported to the U.S. Government every year 
because of FATCA.

I never owe anything in U.S. taxes, but the paperwork is complicated 
nonetheless. It is costly to have it completed correctly, and that's 
the least of the problems with these issues. If I were to make twice as 
much as I make now, I still would not be rich, and yet, I would have to 
pay income taxes on some of that income in both France and in the U.S. 
How can that be justified? It can't. And citizens who are unaware of 
the requirement to file or citizens who don't file for any reason can 
be fined outrageous fines even though they owe nothing in U.S. taxes. 
That is simply abusive.

As for FATCA, this is a clear violation of our 4th amendment rights, 
plain and simple. It is also the reason that 1 in 10 Americans living 
abroad cannot get a bank account, and that number is growing daily. 
Think about that for a minute. Could you function in your daily life 
without a bank account? Of course you couldn't.

You see, the rich can get around these things. They can pay accountants 
and lawyers and find a way around anything they want to find a way 
around. The banks find a way around steep fines charged by the U.S. 
Government for reporting mistakes that they may make and the like by 
refusing to open bank accounts for Americans.

But some Americans, those of us who are middle-class and who are the 
vast majority of Americans living abroad cannot afford to pay our way 
out of this noose that the U.S. Government has put around our necks and 
is tightening every day. So for the past several years, more and more 
Americans have renounced their American citizenship. In 2016, a record 
number of Americans renounced. Think about that for a minute. Record 
numbers of Americans renouncing citizenship. I never thought I'd see 
that day, and I am heartbroken that it is here. They aren't the rich, 
as some might have you believe. Again, the rich can get around 
oppressive regulations. These people are the backbone of America--the 
middle class, and they are renouncing citizenship because they feel 
that they have no other choice. This is nothing short of tragic.

You have the opportunity to fix this nightmare imposed on us by the 
Obama administration. Repeal FATCA. It is not catching fat-cats; it is 
pushing middle-class Americans over the edge. Change the U.S., the only 
country in the world other than Eritrea to impose citizen-based 
taxation, to a system of residency-based taxation. We should pay taxes 
where we live, and believe me, we do, but citizen-based taxation and 
FATCA are cruel and unusual tax regulations that are punishing law-
abiding, middle-class Americans just because they live outside of the 
U.S. We are the 9,000,000 unpaid ambassadors of the U.S. We are hard-
working Americans. And we deserve a government that does not treat us 
as criminals and ignore our constitutional rights.

Thank you.

Regards,

Gina M. Hunt

                                 ______
                                 
                   Investment Company Institute (ICI)

                           1401 H Street, NW

                       Washington, DC 20005-2148

                              202-326-5800

                              www.ici.org

The Investment Company Institute (``ICI'') \1\ appreciates the 
opportunity to provide the Committee its comments regarding 
international tax reform. ICI applauds the Committee for its efforts to 
improve and simplify the tax code in a manner that spurs U.S. economic 
growth and job creation.
---------------------------------------------------------------------------
    \1\ The Investment Company Institute (ICI) is the leading 
association representing regulated funds globally, including mutual 
funds, exchange-traded funds (ETFs), closed-end funds, and unit 
investment trusts (UITs) in the United States, and similar funds 
offered to investors in jurisdictions worldwide. ICI seeks to encourage 
adherence to high ethical standards, promote public understanding, and 
otherwise advance the interests of funds, their shareholders, 
directors, and advisers. ICI's members manage total assets of US$20.5 
trillion in the United States, serving more than 100 million U.S. 
shareholders, and US$6.7 trillion in assets in other jurisdictions. ICI 
carries out its international work through ICI Global, with offices in 
London, Hong Kong, and Washington, DC.

As the Committee is aware, an important component of any comprehensive 
tax reform initiative is updating our international tax system to make 
our nation more competitive in the global economy and to encourage 
---------------------------------------------------------------------------
foreign investment in the United States.

ICI supports changes to the Internal Revenue Code (``Code'') that would 
increase foreign investment in U.S. regulated investment companies 
(``RICs''), more commonly known as mutual funds. Specifically, ICI 
proposes an investment vehicle that would encourage foreign investment 
in RICs by reducing the disparate tax treatment between U.S. and 
foreign funds and thereby allow RICs to compete more effectively with 
foreign funds for foreign investors.

Foreign Investment in U.S. RICs Should Be Encouraged

ICI strongly supports increasing the international competitiveness of 
U.S. mutual funds. Almost 47 percent of all mutual fund assets are held 
by U.S.-domiciled funds.\2\ The percentage of global fund industry 
assets held by U.S. funds, however, has declined as investment markets 
have globalized.
---------------------------------------------------------------------------
    \2\ https://www.ici.org/pdf/2017_ factbook.pdf, Table 65.

Changes taking place in Asia, Europe, and elsewhere are providing many 
significant opportunities for growth in the asset management industry. 
``Cross-border mutual funds'' (i.e., mutual funds that are domiciled in 
one country but offered for sale in other countries) have enjoyed 
explosive growth. At the end of 2016, there were more than 100,000 
foreign mutual funds and ETFs in existence, compared to fewer than 
10,000 mutual funds and ETFs domiciled in the United States.\3\ Today 
virtually no U.S. mutual fund is marketed or offered on a cross-border 
basis, even though many cross-border mutual funds invest in U.S. 
assets.
---------------------------------------------------------------------------
    \3\ Id., Table 66.

The U.S. tax laws require U.S. mutual funds to distribute essentially 
all their income and gains on an annual basis to avoid double taxation. 
This distribution requirement creates a substantial barrier to 
marketing U.S. funds abroad because foreign investors incur a home-
country tax when such income and gain is distributed to them. Foreign 
investors may also be subject to higher tax rates if their home country 
treats capital gain dividends paid by RICs as dividends that are not 
eligible for preferential capital gains tax rates. Many foreign funds, 
in contrast, are permitted to retain (or ``roll up'') their income 
without either current taxation of the fund or any obligation to 
---------------------------------------------------------------------------
distribute the income to investors.

U.S. mutual funds could compete effectively against foreign mutual 
funds if they were not required to distribute their income currently to 
their foreign investors. U.S. products would offer several advantages 
to foreign investors. First, the size and sophistication of U.S. funds 
allow them to invest more efficiently and operate at lower cost than 
their smaller foreign counterparts. Second, the protection afforded by 
U.S. securities regulation is considered state of the art, including in 
particular the protections afforded by the Investment Company Act of 
1940. Third, the U.S. has a deep pool of highly skilled workers to run 
its investment products. Fourth, the U.S. already has underlying retail 
investment products in place for all major asset classes that would 
make the IRIC attractive to foreign investors.

Investment Vehicle to Encourage Foreign Investment in U.S. RICs

ICI proposes an investment product called an International Regulated 
Investment Company (``IRIC'') that is designed to reduce U.S. tax 
disadvantages that prevent U.S. mutual funds from competing effectively 
against foreign mutual funds. Prompt enactment of legislation creating 
IRICs is critical if U.S. mutual funds are to compete in the rapidly 
globalizing investment markets. If the IRIC proposal is not enacted, 
U.S. funds (particularly at small and medium sized fund companies) will 
continue to cede ground to foreign funds.

The IRIC provides foreign investors with a feeder vehicle through which 
they can access a U.S. mutual fund without triggering certain negative 
tax consequences in their home countries. An IRIC would be a U.S. 
mutual fund that could be acquired only by foreign shareholders (only 
nonresident alien individuals and their foreign estates, and qualified 
foreign pension funds) and that would invest only in the shares of a 
single U.S. mutual fund that qualifies as a RIC under Subchapter M of 
the Internal Revenue Code. The IRIC would register with the Securities 
and Exchange Commission under the Investment Company Act of 1940.

The IRIC would not be required to distribute its income or capital gain 
annually. IRIC investors, however, would effectively pay the same 
annual U.S. income tax as if they had invested directly in the RIC 
shares held by the IRIC. Instead of tax being collected on 
distributions by the RIC to the foreign investor, however, the tax 
would be paid by the IRIC on the distributions it receives from the 
underlying RIC. The tax rate applied to the IRIC's taxable income would 
be 30 percent (the current rate applied to taxable distributions, such 
as dividends, paid to foreign persons) or 15 percent (if all the IRIC's 
shareholders were entitled under applicable tax treaties with the U.S. 
to a rate of 15 percent or less) and the IRIC made a ``treaty IRIC'' 
election to pay tax at that rate.

Thus, the same U.S. tax revenue would be collected, but the foreign 
investor would not be subject to tax in his or her home country until 
the IRIC shares were sold (absent a current inclusion tax regime 
comparable to the PFIC regime in the U.S.). The RIC in which the IRIC 
invests would remain subject to the Internal Revenue Code's 
distribution requirements, as under present law.

Conclusion

ICI commends the Committee for its goal of modifying the international 
provisions of the Code in a manner that will improve U.S. 
competitiveness abroad and thereby enhance foreign investment in the 
U.S. The proposal that ICI advances is consistent with this goal and, 
if adopted, will increase foreign investment in U.S. RICs.

ICI would be pleased to work with the Committee on the IRIC proposal or 
other legislation that would level the playing field so U.S. mutual 
funds are able to better compete in the rapidly globalizing investment 
markets.

                                 ______
                                 
                  Letter Submitted by Jeffery M. Kadet
October 13, 2017

U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200

Dear Sirs:

I respectively submit the attached memorandums. I would be please to 
respond to any questions that you might have.

Yours very truly,

Jeffery M. Kadet

                                 ______
                                 

                             MEMORANDUM 1 
                  CONCERNING INTERNATIONAL TAX REFORM

Public discussion and what one sees in the press imply that some form 
of territorial tax system, perhaps with some safeguards to hold back 
profit shifting, is the only tax reform option to replace our present 
dysfunctional ``deferral'' system for taxing U.S. based multinational 
corporations. Maybe that's because 99% of the few persons who 
understand what ``deferral'' and ``territorial'' really mean work for 
either the multinationals (MNCs) that would benefit from adopting 
territoriality or the law, accounting and lobbying firms that are well 
paid to service the MNCs.

As for the other 1%, those are mostly law school professors without 
lobbyists. (Full disclosure: The writer provided international tax 
advice for more than 30 years to MNCs and is now an adjunct faculty 
member teaching lawyers how to do likewise within a graduate Tax LLM 
program within a law school.)

Some of the 1% strongly believe that a residence-based system for 
active business income is far far superior to the territorial system, 
even with safeguards built in.

There are various terms that are used for residence-based systems. They 
include worldwide consolidation and worldwide full-inclusion. In short, 
the idea is to tax any U.S. headquartered group on all of its income 
currently at the home country tax rate, no matter in which country or 
in which subsidiary that income is earned. There are a few different 
approaches regarding how such a system could be implemented (e.g., 
through subpart F income inclusions or through a consolidation 
computation), but that is not the purpose of this letter. Rather, the 
purpose of this letter is to set out in brief and concise terms why a 
residence-based system is vastly superior to a territorial system.\1\
---------------------------------------------------------------------------
    \1\ This memorandum is intentionally short and concise. For more 
detailed discussion, please see ``U.S. Tax Reform: Full-Inclusion Over 
Territorial System Compelling,'' 139 Tax Notes 295 (April 15, 2013), 
available at SSRN: http://ssrn.com/abstract=2275488.

The chart below summarizes the content of this letter.

           Contrasting Territorial and Residence-Based Systems
------------------------------------------------------------------------
                                                         System Best
 Policy Issue      Territorial      Residence-Based     Accomplishing
                      System            System         Policy Objective
------------------------------------------------------------------------
Competitivenes  A more level       Competitive       Territorial Psystem
 s: U.S. MNCs    playing field      disadvantage
 vs. foreign     but differences    for a few U.S.
 MNCs            will persist due   MNCs versus
                 to varying CFC     foreign MNCs
                 rules among
                 countries
Competitivenes  Advantages of      More level        Residence-based
 s: U.S. MNCs    U.S. MNCs over     playing field     Psystem
 vs. pure U.S.   domestic
 domestic        corporations
 corporations    increase further
Neutrality      Strong             Neutrality        Residence-based
 (including      encouragement to   achieved          Psystem
 the export of   move jobs,
 jobs)           activities, and
                 ownership of IP
                 from the U.S. to
                 overseas
Simplification  CFC rules and      Real              Residence-based
                 subjective areas   simplification    Psystem
                 like transfer      through
                 pricing critical   elimination of
                 due to exemption   some
                 of foreign         problematic
                 earnings           subjective
                                    areas (e.g., no
                                    subpart F and
                                    TP less
                                    important)
Broadening the  Narrowing the tax  True broadening   Residence-based
 tax base        base by            of the tax base   system
 (ability to     exempting          by making        This base
 generate tax    foreign earnings   currently         broadening can pay
 revenues)       from any federal   taxable all       for corporate rate
                 tax                foreign           reduction
                                    earnings
                                    whether
                                    repatriated or
                                    not
Encouragement   Even stronger      Eliminated or     Residence-based
 of ``game       encouragement      significantly     system
 playing'' to    than presently     curtailed
 shift profits   exists under our
 from U.S. to    deferral system
 low-tax
 countries
Lock-out        Not fully solved   Totally solved    Residence-based
 effect          if 95% dividend-                     system
                 received
                 deduction
                 mechanism used
------------------------------------------------------------------------


What will a residence-based system accomplish?

It promotes fair competition--``We need a level playing field with our 
foreign competitors.'' This is the rallying cry of the 99% as they 
argue for not only a lower corporate rate but also a territorial tax 
system. Yet an even more important competition issue is seldom 
mentioned. That is the present non-level playing field between U.S. 
corporations that operate solely within the U.S. and those that operate 
internationally.

Say two U.S. companies manufacture a widget. One does it in 
Poughkeepsie while the other does it through a subsidiary in Singapore. 
The first has its profits taxed at 35% (or in the future some lower 
rate) plus NY State tax, while the second is taxed by Singapore at a 
much lower rate . . . maybe even zero. This unfairness will be much 
worse under a territorial system. A residence-based system would 
eliminate it. And frankly, this domestic-international fairness issue 
is the tax policy issue that is more important to make sure we get 
right.

But what about the competition issue with foreign-based MNCs? Without 
meaning to be unkind, the continued whining of MNCs that competition 
justifies their paying little or no tax is simply a red herring. The 
roughly $3 trillion of accumulated overseas profits is powerful proof 
of this. And after the U.S. corporate tax rate is reduced to something 
within G20 norms, the competition issue will be completely put to rest.

It broadens the tax base, allowing for a reduced rate--This is a ``no 
brainer.'' A territorial tax system eliminates billions from the tax 
base and puts more pressure on the remaining U.S. taxpayers. Sure, take 
away more depreciation and other benefits from domestic U.S. taxpayers 
to give tax-free treatment to MNCs that conduct substantial activities 
outside the U.S.

A residence-based system broadens the base since foreign income now 
going untaxed becomes currently taxable. A broadened tax base supports 
the lower corporate tax rate that both political parties say they want. 
And, as noted above, this lower rate would make clear that there is no 
disadvantage faced by our MNCs from their foreign competitors.

It reduces the incentive to export jobs--Remember those widgets 
manufactured in Poughkeepsie? The tax incentive to move those jobs to 
Singapore under our current deferral system would become even stronger 
under a territorial system. Under a residence-based system, this 
incentive to move operations and jobs overseas virtually disappears.

It is neutral as to physical location and legal ownership--A tax system 
should not affect business decisions regarding the physical location of 
assets, personnel, and operations. Business factors such as being close 
to raw materials and/or customers, labor, and transportation costs, 
etc. should govern such decisions. The same can be said for the legal 
ownership of business operations and assets, importantly including high 
value intangibles (intellectual property).

The deferral system we have now strongly encourages companies to 
transfer actual or economic ownership of valuable intangible property 
created in the U.S. to tax havens. It also encourages supply chain and 
other structures that allow MNCs to move the bulk of their operating 
profits out of the U.S. to foreign subsidiaries in zero or low tax 
locations that assume business risk and hold rights to the MNC's 
intellectual property. ``Transfer pricing'' concepts and rules are 
aggressively used to maximize profits in these tax haven locations and 
minimize profits in the countries where actual R&D, manufacturing, and 
sales activities take place.

A territorial system will simply increase the motivation for the game 
playing that creates these convoluted legal and tax structures. A 
residence-based system, on the other hand, really approaches true 
neutrality. Under most circumstances, it should eliminate U.S. tax as a 
factor and allow business decisions to be made solely on the basis of 
relevant business factors.

It can promote simplification--Simplification is a mixed bag. Depending 
on how a residence-based system is implemented, it could eliminate some 
very troublesome areas of the tax law (e.g., fewer transfer pricing 
issues and elimination of subpart F). A territorial system, for the 
most part, will leave in place the current complications and likely 
make them much worse. These complications are necessary to counteract 
the increased game playing that the territorial system incentivizes.

It should be added here that the efforts of lobbyists to gut any 
safeguards against future profit shifting (e.g., stronger subpart F 
rules, a minimum tax, etc.) and the creativity of MNCs and their legal, 
accounting, and tax advisors to come up with new schemes mean that game 
playing under a territorial system will reach new heights. This will 
result in the exact opposite of any tax policy simplification goals.

It completely solves the ``trapped cash'' problem--Under the deferral 
system, returning foreign earnings to the U.S. via dividends triggers 
the up to 35% U.S. tax (and sometimes foreign withholding taxes as 
well). As is well known, many MNCs have stockpiled billions of such 
low- or zero-taxed foreign earnings outside the U.S. and often maintain 
that those earnings are permanently invested outside the U.S. to 
provide higher earnings-per-share, higher stock prices, and higher 
equity-based compensation for CEOs and other executives.

A territorial system should eliminate the trapped cash issue. However, 
a territorial system such as those presented in prior years \2\ 
unbelievably fails to do this. The mechanism that was chosen (a 95% 
dividend-received deduction) would continue to cause actual dividends 
to trigger tax to the extent of the 5% taxable portion.\3\ This may 
seem small. It will, though, impede dividend payments and continue the 
trapped cash problem. This issue is fixable if Congress decides on a 
100% dividend received deduction. If it does so, though, it must at the 
same time put in strong rules to deny any tax deduction for interest 
costs and all other expenses that are directly or indirectly 
attributable to foreign investment or foreign business, the profits of 
which would be exempt under the territorial system. Getting back to 
simplification, such expense disallowance rules and the need to 
counteract the accounting games that MNCs will play to minimize the 
disallowed expenses means more complication and less simplification.
---------------------------------------------------------------------------
    \2\ E.g., the October 2011 Discussion Draft from House Ways and 
Means Committee Chairman Dave Camp (R-MI) and the February 2012 
proposal from Senator Mike Enzi (R-WY).
    \3\ See suggested approach to fix this issue in ``Territorial W&M 
Discussion Draft: Change Required,'' 134 Tax Notes 461 (January 23, 
2012), available at SSRN: http://ssrn.com/abstract=1997515.

A residence-based system totally eliminates the trapped cash problem.

Conclusion

Territorial system vs residence-based system . . . it is not a toss-up. 
Without doubt, for the benefit of our country and from virtually all 
tax policy perspectives, a 
residence-based system is vastly superior.

The 99% downplay the above concerns (export of jobs, etc.) and explain 
that strong anti-avoidance rules will of course accompany any 
territorial system. Such rules, it is argued, would prevent many of 
these terrible results.

Yes, truly strong anti-avoidance rules could prevent some of the worst 
excesses. But, frankly, it is naive to think that such strong rules 
would be put in place. First, the rules under consideration within 
Congress would be understood by few and attacked viciously by corporate 
lobbyists. So, whatever gets enacted will be very weak. Second, even if 
something halfway strong were to be enacted, our high-powered tax 
consulting community has a century-long tradition of working around 
anti-avoidance rules. So, I have little faith that any strong or 
effective anti-avoidance rules will accompany a territorial system. And 
this will mean the continued and accelerated export of jobs along with 
erosion of the U.S. tax base.

                                 ______
                                 

                             MEMORANDUM 2 
                  CONCERNING INTERNATIONAL TAX REFORM

            Taxation of Accumulated Deferred Foreign Income 
                       as of the Transition Date

The Committee's work to develop international tax reform will 
undoubtedly include some transition from the present deferral system to 
some other system. As an integral part of that transition, it is 
expected as well that proposals will include taxation on all 
``accumulated deferred foreign income'' existing as of the transition 
date.

Tax Rate to Apply to Accumulated Deferred Foreign Income Upon 
Transition

At one end of the spectrum, some such as Citizens for Tax Justice say 
all such earnings should be taxed at the full 35%.\4\
---------------------------------------------------------------------------
    \4\ ``. . . Instead of rewarding corporations for dodging U.S. 
taxes, lawmakers should end the system of deferral that encourages them 
to do so, while taxing their offshore profits at the full 35 percent 
rate (while still allowing for a foreign tax credit).'' See ``$2.1 
Trillion in Corporate Profits Held Offshore: A Comparison of 
International Tax Proposals,'' Citizens for Tax Justice (July 14, 
2015), available at: http://ctj.org/pdf/repatriation0715.pdf.

At the other end of the spectrum, a number of the prior transition 
proposals would apply various rates far lower than 35%, some of them 
being in the single digits with Representative Camp's Tax Reform Act of 
2014 and the House Republican Blueprint bottoming out at 3.5% on 
---------------------------------------------------------------------------
earnings reinvested into non-liquid assets.

Under the CTJ approach, we would, so to speak, clobber every 
multinational (MNC) that has actually conducted real and legitimate 
activities in foreign countries in accordance with a consistent 
congressional intent that goes back almost forever.

Under the prior transition proposals, we would grant an major windfall 
to every MNC that has engaged in aggressive profit shifting in which 
they moved 35% profits out of the U.S. and into tax havens. They are 
waiting for this windfall with their tongues hanging out.

Whatever the Committee proposes needs an administratively workable 
mechanism that neither clobbers the former nor rewards the latter.

Two Approaches for an Administratively Workable Mechanism \5\
---------------------------------------------------------------------------

    \5\ See more detail in ``Fair Approaches for Taxing Previously 
Untaxed Foreign Income,'' 146 Tax Notes 1385 (March 16, 2015), 
available at: http://ssrn.com/abstract=2587103.
---------------------------------------------------------------------------
1. ``Camp'' Approach. In his 2014 discussion draft, Camp broke CFC 
earnings into two portions by imposing a higher 8.75% rate on earnings 
being held in cash and cash-equivalent forms. The remaining earnings 
would be subject to the lower 3.5% rate. This approach is 
administratively easy to apply, objective, and definitely a workable 
solution. However, it focuses on the form in which CFC earnings are 
held on the transition date and not on any measure of aggressive profit 
shifting. But having said this, the existence of earnings that have 
been subjected to relatively little or no foreign tax and that are held 
in cash or cash-equivalent form is pretty good evidence of tax 
avoidance planning. So, it will generally be a very fair and 
administratively workable approach.

With this in mind, the first suggested approach is to use Camp's 
solution with all CFC previously untaxed foreign income--on transition 
to a new tax system--being subject to 35% but with an FTC offset to the 
extent of cash and cash equivalents. All remaining previously untaxed 
foreign income would be taxed on transition at whatever favorable less-
than-35 % rate Congress chooses.

2. Tax-Structured Vehicle Approach. This approach defines ``tax-
structured vehicle.'' For any such vehicle, its previously untaxed 
foreign income--on transition to a new tax system--would be subject to 
35% with an FTC offset. The previously untaxed foreign income within 
all other CFCs would be taxed on transition at whatever favorable less-
than-35% rate Congress chooses.

As a first step to identifying tax-structured vehicles, Treasury would 
publish a listing of countries that can be used as the place of 
incorporation of CFCs that earn low- or zero-taxed foreign income 
through profit-shifting arrangements. Treasury would also provide 
examples of structures meant to achieve low- or zero-taxes.

A presumption of tax-structured vehicle status would be applied to each 
CFC established in the listed countries. A U.S. shareholder MNC 
involved with the vehicle could attempt to rebut this presumption by 
establishing to the satisfaction of the Treasury secretary or his 
delegate, based on a facts and circumstances review, that the 
establishment and operation of the specific CFC involved no tax-
motivated structuring. If this presumption is not successfully 
rebutted, any previously untaxed foreign income within the CFC would be 
subject to the 35% tax, with an FTC offset.

If the Committee chooses this ``tax-structured vehicle'' approach over 
the ``Camp'' approach, it is strongly suggested that applicable 
committee reports include a clear statement of the principles behind 
the definition of tax-structured vehicle and numerous examples.\6\ 
Clear legislative instructions would not only provide necessary 
guidance to Treasury and the IRS, but also should importantly limit 
taxpayer presumption-rebuttal efforts to situations that truly deserve 
consideration. Further, the rules should be clear that the burden of 
proof is on the taxpayer to support any effort at rebuttal of the 
presumption.
---------------------------------------------------------------------------
    \6\ See a partial listing of such structures in ``BEPS: A Primer on 
Where It Came From and Where It's Going,'' 150 Tax Notes 793 (February 
15, 2016).
---------------------------------------------------------------------------

Application of Interest

The various proposals and discussion drafts released over the past 6 
years have all provided for installment payments but have been 
inconsistent regarding interest. Several have been silent concerning 
any interest charge.

This section's discussion assumes that the Committee will include in 
its proposals the above suggestion for application of a 35% tax rate to 
all previously untaxed foreign income that results from profit 
shifting, as determined under the ``Camp'' approach, the ``tax-
structured vehicle'' approach, or any other approach that the Committee 
adopts.

For any previously untaxed foreign income that will qualify for a 
favorable less-than-35% rate, any interest charge is economically only 
an adjustment of the favorable tax rate. (This, of course, ignores any 
effect if the interest were tax deductible; in this context, if the 
Committee requires an interest charge, it should specifically be 
nondeductible.) It also seems likely that most taxpayers would choose 
to pay in installments to defer those tax payments. Given that earlier 
payment would be beneficial to our country's finances, perhaps 
discounts for early payment could be considered if there is no separate 
interest charge.

The previously untaxed foreign income that would be subjected to the 
35% tax rate has resulted from aggressive profit shifting. Therefore, 
the applicable taxpayer has already had the real economic benefit of 
deferral for years. There is no reason for extending the deferral 
period even more by allowing an interest-free installment payment 
scheme. Accordingly, the Committee's proposals should include an 
interest charge to the extent of any installment payments.

                                 ______
                                 
                Reinsurance Association of America (RAA)

                  1445 New York Avenue, NW, 7th Floor

                          Washington, DC 20005

                              202-638-3690

                          www.reinsurance.org

 Modernization of Rules Governing Foreign Insurance Operations of U.S. 
                               Companies

                           Executive Summary

 Current Tax Rules for U.S. Reinsurers Operating Abroad Do Not Achieve 
                     Their Goal and Must Be Updated

The Active Finance Exception (AFE), adopted in 1998, was intended to 
make U.S. insurers with foreign operations more competitive in foreign 
markets. Changes in foreign regulations, developed in the nearly 20 
years since the AFE rules were adopted, often impose high costs on 
reinsurers seeking to comply with AFE requirements. Worse yet, the AFE 
requirements are, in many respects, inconsistent with typical 
reinsurance group operations in international markets. As a result, 
many insurers' foreign subsidiaries do not qualify for the AFE 
exception.

Without the deferral of tax provided by the AFE, foreign reinsurance 
subsidiaries of an American insurer bear a higher tax burden than their 
local competitors and are placed at a competitive disadvantage. AFE 
rules must be updated if U.S. insurers with foreign operations are to 
be competitive internationally.

AFE rules should be revised to promote U.S. reinsurers' growth and 
competitiveness in international markets:

    1.  The related party reinsurance disallowance should be revised or 
eliminated so that internal reinsurance from members of a worldwide 
group does not disqualify a global reinsurance company from AFE status 
(as it does under current law).

    2.  The home country requirements should be repealed or revised.

    3.  The insurance rules should exclude the full amount of 
investment income from assets held to satisfy foreign regulatory 
capital requirements.

    4.  Property-casualty (P&C) insurance companies should be allowed 
to compute reserves using local rules, as life insurers can under 
current law.

    5.  If a minimum tax on foreign earnings is adopted in tax reform, 
it should exclude any insurance income that cannot be repatriated due 
to local regulatory requirements.

                               DISCUSSION

Reinsurance Association of America

The Reinsurance Association of America (RAA), headquartered in 
Washington, DC, is the leading trade association of property and 
casualty reinsurers doing business in the United States. The RAA is 
committed to promoting a regulatory environment that ensures the 
industry remains globally competitive and financially robust. RAA 
membership is diverse, including reinsurance underwriters and 
intermediaries licensed in the U.S. and those that conduct business on 
a cross border basis. The RAA represents its members before state, 
federal and international bodies.

Background

Reinsurance is a transaction in which one insurance company 
indemnifies, for a premium, another insurance company against all or 
part of the loss that it may sustain under its policies of insurance. 
Reinsurers play a critical role in the insurance industry, and thus the 
economy, through their ability to mitigate risk for individual 
insurance companies. Reinsurance enhances the solvency of direct 
insurers and thereby helps to protect insured individuals and 
businesses.

Reinsurance is a global business, with U.S. companies writing 
substantial foreign business, and foreign reinsurers writing 
substantial U.S. business. By assuming a variety of risks, diversified 
by line-of-business and geographic location, a reinsurer creates a more 
resilient portfolio, and one more likely to withstand the volatility of 
the property-casualty insurance business. A widely diversified 
portfolio enables a reinsurer to use its capital more efficiently, and 
thereby to hold down costs for primary insurers and policyholders.

After the 2008 financial crisis, insurance and reinsurance companies 
have become subject to increasing levels of regulation, such as 
stricter, risk-based capital requirements (EU Solvency II) and greater 
internal controls such as Own Risk and Solvency Assessments (ORSA). 
Compliance costs for local regulation have increased dramatically since 
the AFE was enacted in 1998. In the Senate Finance Committee's 
International Tax Working Group Report (2015), these problems were 
identified as requiring modification.

Modernizing the Active Finance Exception rules for foreign operations 
of U.S. insurers is consistent with the Administration and Congress's 
goals of simplifying the tax code, reducing the regulatory burden on 
American taxpayers, and growing the American economy. It will make U.S. 
reinsurers more competitive in foreign markets and expand jobs at U.S. 
headquarters that oversee foreign operations.

Modernization of Insurance Tax Rules

  Related party insurance income is excluded from qualifying insurance 
income under current law. This prohibition penalizes a reinsurance 
company for following standard industry practice. In order to operate 
efficiently, reinsurers must pool their global risks in order to 
achieve risk diversification and to manage capital more efficiently.

      The law should recognize that reinsurance from 
members of a worldwide group is not a related party risk if the 
underlying risks are from unrelated parties.

  The 30% home country requirement for ``Exempt Insurance Contract'' 
and 50% home country requirement for ``Qualifying Insurance Company'' 
status in AFE prevent foreign reinsurers from qualifying under AFE.

      The EU has become more integrated, and EU passporting 
rights now allow insurers regulated in one EU country to freely operate 
through the EU. The transfer of risks from many EU countries to a 
regional headquarters--standard industry practice--means that an EU 
headquartered company cannot meet the AFE's same country requirements.

      This freedom to operate through the EU from a single 
country causes the 30% home country requirement for an ``exempt 
contract'' and the 50% requirement for a ``Qualifying Insurance 
Company'' to be overly restrictive.

      These requirements are inconsistent with reinsurance 
company business models. Insurance groups in Europe, Asia and South 
America, as well as the EU, pool risks at a regional headquarters 
company, yet foreign subsidiaries of U.S. insurers following industry 
``best practices'' cannot satisfy the home country requirements because 
they transfer non-home country risks. U.S. insurers should be allowed 
to compete internationally without tax penalties.

      The home country requirement should be repealed or 
revised.

  AFE Should Recognize Regulatory Capital Requirements: Current APE 
rules limit the amount of investment income excluded to \1/3\ of 
premiums earned for P&C and health insurance, and 110% of reserves for 
life and annuity contracts, computed using U.S. tax principles. After 
the 2008 financial crisis, many foreign regulators imposed risk-based 
capital requirements for greater amounts than permitted under current 
AFE rules.

      The investment income from these assets is not 
available to the U.S. parent--the U.S. parent is being taxed on income 
it cannot receive.

      The AFE rules should exclude investment income from 
the full amount of assets held to satisfy regulatory capital 
requirements.

  Translation of Foreign Reserves: Current law's requirement that 
foreign insurance reserves must be restated using U.S. tax accounting 
principles, with respect to the computation of both underwriting income 
and investment income, should be streamlined to avoid burdensome 
recalculations.

      The need to allow ``more realistic assessment of 
insurance company reserves'' was specifically mentioned in the 2015 
International Tax Working Group Report (p.79).

      Life insurance companies are permitted to elect to 
use foreign reserves; P&C companies should also be permitted to use 
foreign reserves.

      The law should permit property-casualty insurers and 
reinsurers to compute reserves based on local regulatory principles, as 
life insurers can under current law.

  Tax on Deemed Repatriated Foreign Earnings: Since insurers and 
reinsurers are subject to regulatory restrictions on their ability to 
repatriate earnings, any one-time tax on accumulated foreign earnings 
should exclude income which cannot be repatriated due to local 
regulatory requirements.

      If there are two rates for the tax, as proposed in 
the Camp bill (H.R. 1, 2014), income associated with the insurance 
business (reserves and capital or ``surplus''), should be taxed at the 
lower rate, since it is used for the active conduct of an insurance 
business.

  Minimum Tax: If a minimum tax on future foreign earnings is adopted, 
income from insurance business should not be taxed twice, once as 
``insurance in come'' and, in addition, as ``intangible income,'' as 
was possible in the Camp bill.

                                 ______
                                 
                Tax Innovation Equality (TIE) Coalition

                          Washington, DC 20005

                         [email protected]

                         202-530-4808 ext. 109

The Tax Innovation Equality (TIE) Coalition \1\ is pleased to provide 
this statement for the record of the Finance Committee's hearing on 
International Tax Reform. The TIE Coalition comprises leading U.S. 
technology and bio-pharma companies that rely on and invest in 
intellectual property and intangible assets. Such investments help make 
companies innovative, successful and globally competitive. The TIE 
Coalition supports comprehensive tax reform that will modernize the 
U.S. tax system and help American businesses compete in a global 
market. The TIE Coalition believes that the U.S. must: (i) implement a 
competitive territorial tax system; (ii) lower the U.S. corporate tax 
rate to a globally competitive level; and (iii) not pick winners and 
losers in the tax code by discriminating against any particular 
industry or type of income--including income from intangible property 
(IP).
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    \1\ The TIE Coalition is comprised of leading American companies 
and trade associations that drive economic growth here at home and 
globally through innovative technology and biopharmaceutical products. 
For more information, please visit www.tiecoalition.com.

Unfortunately, some past proposals would tax IP income adversely 
compared to income from other types of assets, creating an unfair 
advantage for companies who don't derive their income from IP, and 
significantly disadvantaging innovative U.S. companies, especially 
compared to their foreign competition. For example, the Tax Reform Act 
of 2014 (H.R. 1) as introduced by former House Ways and Means Chairman 
Camp would seriously disadvantage innovative American companies. Under 
that proposal, Chairman Camp chose the anti-base erosion option known 
as Option C. The problem with Option C is that it would tax IP-based 
income at significantly higher rates than non-IP income, significantly 
disadvantaging U.S. IP-based companies who compete globally, which 
would result in more inversions of U.S. companies and more foreign 
acquisitions of U.S. companies. The TIE Coalition is opposed to Option 
C because it would have a devastating impact on both innovative 
technology companies and the nation's leading biopharmaceutical 
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companies.

Section 4211 of H.R. 1 specifically targets ``foreign base company 
intangible income'' for higher taxation by creating a new system in 
which that income will be immediately taxed in the U.S. at much higher 
rates (15% or 25%) rather than the 1.25% tax rate for all other foreign 
income, which is only taxed upon distribution back to the U.S. The 
provision does not provide a definition of an intangible asset 
generating IP-based income subject to Option C. Instead it uses a 
formula which essentially provides that if a company earns more than a 
10% return on its foreign depreciable assets, the income over the 10% 
threshold will be considered ``intangible income'' and subject to the 
higher immediate U.S. tax. Many innovative companies have higher 
margins and earn more than 10% on their depreciable assets, so they 
will be disproportionately affected by this adverse provision.

To understand the full scope of Option C, the TIE Coalition 
commissioned a study by Matthew Slaughter, the Dean of the Tuck School 
of Business at Dartmouth. See: ``Why Tax Reform Should Support 
Intangible Property in the U.S. Economy'' by Matthew J. Slaughter, 
http://www.tiecoalition.com/wp-content/uploads/2015/07/IP-White-
Paper_January-2015.pdf. According to the study, ``Policymakers should 
understand the long-standing and increasingly important contributions 
that IP makes to American jobs and American standards of living--and 
should understand the value of a tax system that encourages the 
development of IP by American companies.'' (Executive Summary)

The study found that Option C in the Camp legislation would 
fundamentally (and adversely) change the measurement and tax treatment 
of IP income earned by American companies abroad and would disadvantage 
IP income earned abroad by U.S. companies in three ways. First, it 
would tax IP income at a higher rate than under current law. Second, it 
would tax IP income more than other types of business income. Third, it 
would impose a higher tax burden on the IP income of U.S. companies 
compared to their foreign competitors. As a result, the study found 
that Option C ``would aggravate the nettlesome issue of corporate 
inversions and would create additional incentives for foreign 
acquisitions of U.S.-based IP-intensive companies.'' (Executive 
Summary)

According to the Slaughter study, since globally engaged U.S. companies 
have long performed the large majority of American's IP discovery and 
development, it is increasingly important to America's economic success 
that these companies operate profitably overseas. The Slaughter study 
finds that the ``United States, not abroad, is where U.S. 
multinationals perform the large majority of their operations. Indeed, 
this U.S. concentration is especially pronounced for R&D, which 
reflects America's underlying strengths of skilled workers and legal 
protections such as IP rights that together are the foundation of 
America's IP strengths, as discussed earlier'' (page 30). The Slaughter 
study concludes that the overseas operations of these companies 
complement their U.S. activities and support, not reduce, the inventive 
efforts, related jobs, and positive economic impact of their U.S. 
parents on the U.S. economy.

In addition to Option C, other international tax reform proposals have 
singled out income from IP for adverse treatment. In 2012, Senator 
Michael Enzi (D-WY) introduced an international tax reform bill, S. 
2091. While the Enzi bill did not propose lowering the corporate tax 
rate, it did propose a territorial system with a 95% dividends received 
deduction (DRD) for qualified foreign-source dividends. Unfortunately, 
while the bill reduced the scope of the current law Subpart F regime in 
some respects (by eliminating the current foreign base company sales 
and services income rules under Section 954), it proposed creating a 
new category of Subpart F income under which all income of a controlled 
foreign corporation (CFC) would be immediately taxable in the U.S. at 
the full U.S. rate unless the CFC's effective tax rate (ETR) exceeded 
half of the maximum U.S. corporate rate. Under Senator Enzi's bill, the 
ETR in the foreign country would have to be more than 17.5% to qualify 
for territorial tax treatment with a 95% DRD and avoid immediate 
taxation at the maximum U.S. tax rate.

However, ``qualified business income'' (as defined in the bill) would 
be excluded from this punitive tax treatment and qualify for the 95% 
DRD. But, ``qualified business income'' specifically would not include 
``intangible income'' as defined in Section 936(h)(3)(B). As such, 
Senator Enzi's proposal effectively repeals deferral for intangible 
income earned by CFC's and denies territorial tax treatment with the 
95% DRD for intangible income, clearly discriminating against income 
from intangible assets. In addition to discriminating against income 
from intangible assets, the Enzi bill would result in significant 
additional disputes between the IRS and taxpayers regarding how much 
income is from intangible property as broadly defined in Section 
936(h)(3)(B).

In designing a competitive territorial tax regime, both Congressman 
Camp and Senator Enzi decided that anti-base erosion provisions needed 
to be included to protect the U.S. tax base, but they both chose 
options that discriminate against IP income. The TIE Coalition has 
offered several anti-base erosion proposals that do not discriminate 
against income from intangibles. Two anti-base erosion measures that we 
could support are Option D and Option RS. If base erosion is a concern, 
it is a concern for all income, not just income from intangibles.

Option D proposes a territorial system with a graduated DRD based upon 
the effective tax rate paid by the CFC. The general rule of a 95% DRD 
would apply to foreign source dividends paid from a CFC that has an 
effective tax rate equal to or greater than 15%. But if the effective 
tax rate of the CFC is less than 15%, the DRD exemption would be 
reduced using a simple sliding scale. Under Option D, if the CFC tax 
rate is at least 7.5% but less than 15%, the DRD would drop to 85%. If 
the CFC effective tax rate is less than 7.5%, the DRD would be 75%. If 
the CFC effective tax rate is less than 7.5% and the CFC is domiciled 
in a jurisdiction that does not have a tax treaty/possession status/
TIEA (or similar relationship) with the U.S., the DRD would be 60%. All 
low-tax active foreign income is treated similarly. Income from 
intangibles is not singled out for especially harsh treatment.

Under Option RS, low-taxed foreign income of a CFC would be subject to 
immediate U.S. tax unless it is derived from a substantial local 
business in the foreign jurisdiction where the income is reported and 
subject to tax in that jurisdiction. Income would be considered low-
taxed if the foreign effective tax rate (ETR) is 15% or less. The 
substantial local business activity test would be met if all three of 
the following tests are met: (1) the income is derived in the active 
conduct of a trade or business in the foreign country; (2) substantial 
local activities are conducted in the foreign jurisdiction; and (3) the 
income is treated as taxable in the foreign country.

Both of these options would address the policy concerns about the 
possible erosion of the U.S. tax base by companies shifting income to 
low tax jurisdictions, but they would not single out income from 
intellectual property for special treatment. Targeting income from 
intangible property has sometimes been justified by describing it as 
``highly mobile'' income, but that description is not accurate. 
Transferring an intangible asset out of the U.S. is a taxable event 
under IRC Section 367(d) so that any company transferring an intangible 
asset to a foreign entity must pay an immediate tax on the transfer as 
if the property had been sold. Determining the value of an intangible 
asset can be difficult but companies and the IRS have been doing these 
valuations for years with greater and greater sophistication and 
accuracy. Moving intangible assets is not an easy or invisible process, 
and describing intangible assets as ``highly mobile'' gives the 
impression that somehow title to these assets can simply be transferred 
around the globe with no U.S. tax consequences, when in fact the 
transfer of intangible assets to a foreign entity is already subject to 
immediate taxation under Section 367(d).

In conclusion, the TIE Coalition supports comprehensive tax reform that 
modernizes the U.S. tax system, allowing American businesses to compete 
in global markets, in a manner that does not discriminate against any 
particular industry or type of income, including income from intangible 
property. At a time when many other countries are adopting tax rules 
designed to attract IP companies to their shores, it would be 
especially harmful to the U.S. economy to adopt a tax policy that will 
hurt, not help, American IP companies who compete globally. Now is not 
the time to drive high paying American jobs overseas.