[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
BIDEN'S GLOBAL TAX SURRENDER HARMS
AMERICAN WORKERS AND OUR ECONOMY
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TAX
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
JULY 19, 2023
__________
Serial No. 118-TAX01
__________
Printed for the use of the Committee on Ways and Means
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
_______
U.S. GOVERNMENT PUBLISHING OFFICE
54-908 WASHINGTON : 2024
COMMITTEE ON WAYS AND MEANS
JASON SMITH, Missouri, Chairman
VERN BUCHANAN, Florida RICHARD E. NEAL, Massachusetts
ADRIAN SMITH, Nebraska LLOYD DOGGETT, Texas
MIKE KELLY, Pennsylvania MIKE THOMPSON, California
DAVID SCHWEIKERT, Arizona JOHN B. LARSON, Connecticut
DARIN LaHOOD, Illinois EARL BLUMENAUER, Oregon
BRAD WENSTRUP, Ohio BILL PASCRELL, Jr., New Jersey
JODEY ARRINGTON, Texas DANNY DAVIS, Illinois
DREW FERGUSON, Georgia LINDA SANCHEZ, California
RON ESTES, Kansas BRIAN HIGGINS, New York
LLOYD SMUCKER, Pennsylvania TERRI SEWELL, Alabama
KEVIN HERN, Oklahoma SUZAN DelBENE, Washington
CAROL MILLER, West Virginia JUDY CHU, California
GREG MURPHY, North Carolina GWEN MOORE, Wisconsin
DAVID KUSTOFF, Tennessee DAN KILDEE, Michigan
BRIAN FITZPATRICK, Pennsylvania DON BEYER, Virginia
GREG STEUBE, Florida DWIGHT EVANS, Pennsylvania
CLAUDIA TENNEY, New York BRAD SCHNEIDER, Illinois
MICHELLE FISCHBACH, Minnesota JIMMY PANETTA, California
BLAKE MOORE, Utah
MICHELLE STEEL, California
BETH VAN DUYNE, Texas
RANDY FEENSTRA, Iowa
NICOLE MALLIOTAKIS, New York
MIKE CAREY, Ohio
Mark Roman, Staff Director
Brandon Casey, Minority Chief Counsel
------
SUBCOMMITTEE ON TAX
MIKE KELLY, Pennsylvania, Chairman
DAVID SCHWEIKERT, Arizona MIKE THOMPSON, California
JODEY ARRINGTON, Texas LLOYD DOGGETT, Texas
DREW FERGUSON, Georgia JOHN LARSON, Connecticut
KEVIN HERN, Oklahoma LINDA SANCHEZ, California
RON ESTES, Kansas SUZAN DelBENE, Washington
LLOYD SMUCKER, Pennsylvania GWEN MOORE, Wisconsin
DAVID KUSTOFF, Tennessee DON BEYER, Virginia
BETH VAN DUYNE, Texas BRAD SCHNEIDER, Illinois
RANDY FEENSTRA, Iowa
NICOLE MALLIOTAKIS, New York
C O N T E N T S
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OPENING STATEMENTS
Page
Hon. Mike Kelly, Pennsylvania, Chairman.......................... 1
Hon. Mike Thompson, California, Ranking Member................... 3
Advisory of July 19, 2023 announcing the hearing................. V
WITNESSES
Panel 1:
Michael Plowgian, Deputy Assistant Secretary for International
Tax Affairs, United States Department of the Treasury.......... 4
Panel 2:
Mindy Herzfeld, Professor of Tax Practice, University of Florida
Levin College of Law........................................... 60
Adam Michel, Director of Tax Policy Studies, CATO Institute...... 79
Anne Gordon, Vice President, International Tax Policy, National
Foreign Trade Council.......................................... 94
David Schizer, Dean Emeritus and Harvey R. Miller Professor of
Law and Economics, Columbia Law School......................... 106
Peter Barnes, International Tax Advisor and Of Counsel, Caplin &
Drysdale....................................................... 113
MEMBER QUESTIONS FOR THE RECORD
Member Questions for the Record to and Responses from Michael
Plowgian, Deputy Assistant Secretary for International Tax
Affairs, United States Department of the Treasury.............. 146
Member Questions for the Record to and Responses from Adam
Michel, Director of Tax Policy Studies, CATO Institute......... 163
Member Questions for the Record to and Responses from Anne
Gordon, Vice President, International Tax Policy, National
Foreign Trade Council.......................................... 165
PUBLIC SUBMISSIONS FOR THE RECORD
Public Submissions............................................... 168
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BIDEN'S GLOBAL TAX SURRENDER HARMS
AMERICAN WORKERS AND OUR ECONOMY
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WEDNESDAY, JULY 19, 2023
House of Representatives,
Subcommittee on Tax,
Committee on Ways and Means,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:03 p.m. in
Room 1100, Longworth House Office Building, Hon. Mike Kelly
[Chairman of the Subcommittee] presiding.
Chairman KELLY. The committee will come to order for this
Tax Subcommittee hearing, and thank you, Mr. Plowgian, for
joining us today.
We are here to discuss a matter critical to our nation's
economic success. Perhaps it became, innocently enough, the
U.S. had just enacted a historic reform of our tax laws,
including the world's first Global Minimum Tax, which only
applied to U.S. companies. Now, at the same time, a few
European countries were beginning to target some of our largest
and fastest-growing companies with discriminatory taxes known
as Digital Service Taxes, or DSTs.
And I got to tell you, I have a glossary here for those of
you that are fans of acronyms. I am not. I wish we could just
say exactly what we are talking about. But to save time, I
won't go through all that.
Look, the original idea of engaging in negotiations at the
OECD was this: other countries could join the U.S. with their
own Global Minimum Taxes, and we could stop the proliferation
of DSTs. Unfortunately, that is not what happened. With active
encouragement from the Biden Treasury Department, the OECD, in
its Pillar Two agreement, failed to recognize our pioneering
Global Minimum Tax as a qualifying tax. Instead, the agreement
they came back with is so inconsistent with our tax laws that
it would tilt the playing field in favor of foreign firms.
Now, it also destabilizes a network of constitutionally
ratified bilateral tax treaties negotiated over the past half
of a century. Now, for the first time, through Undertaxed
Profit Rules, or UTPRs, the Pillar Two agreement authorizes
foreign governments to tax income generated outside its border,
including U.S.-sourced income. Now, this is all based on an
arbitrary set of rules approved by the OECD, foreign
governments, and international accounting bureaucrats where the
U.S. has minimal representation. Congress has absolutely no
say.
It also favors the tax incentives Europe likes: refundable
tax credits, over the non-refundable business credits more
common in the U.S. In this sense, it would constrain the
ability of the U.S. Congress to write tax laws that promote
growth and jobs, as Congress has done since the beginning of
our republic.
Now, this agreement is totally unacceptable, and it is no
wonder the Biden Administration sought to avoid consulting with
Congress, because they knew Congress would never approve it.
OECD Pillar One, intended to stop DSTs, is no better. Under
Pillar One, U.S. companies would pay far more than any other
country and more than all of Europe. Now, that is right, the
U.S. pays more than Europe. That is according to an analysis by
a European Union think tank.
Now, 60 percent of the revenue divided up under the Pillar
One agreement would come from U.S. firms--60 percent. Our own
Treasury Department acknowledges that about 50 percent of the
firms are subject to the Pillar One agreement would be U.S.
companies. Republicans have repeatedly requested a detailed
analysis of how the agreement would impact American companies
and workers, but Treasury has rejected those requests. All the
while, foreign governments continue to collect DSTs from
American companies.
Now, given the economic stagnation in Europe since 2008,
these DSTs should come as no surprise. The U.S. will continue
to be a revenue target.
Now, going into these OECD negotiations, Treasury should
have recognized that governments in Europe would be looking for
ways to rein in successful American companies and extract
additional tax revenue to prop up their own poor domestic
finances. As one author in Tax Notes put it, ``this effort has
to be understood as a primarily European project and, in the
larger picture, a way to sustain the euro.'' The Biden
Administration has called for additional business taxes to fund
their own domestic spending agenda.
So why, then, would Treasury negotiate an OECD deal that
surrenders over $120 billion? That is $120 billion in U.S. tax
revenues to foreign countries. This makes absolutely no sense.
Now, the OECD Global Tax Project is effectively controlled
by Europe. Why? Because Europe controls one-third of the seats
on the steering committee, and the broader inclusive framework
includes over 30 tiny former European colonies. Members of this
group include the Cook Islands, the Bahamas, Saint Lucia, and
the Samoa.
The bottom line is the deck is stacked against America at
the OECD. That is why it has never made sense for Treasury to
negotiate behind closed doors with a group of 140 nations on a
one-country/one-vote basis when the U.S. accounts for 25
percent of global GDP and pays almost that percentage of dues
at the OECD.
I am going to close with this. My whole life has been in
the retail automobile business, and I spent a lifetime
negotiating. And it just doesn't take a rocket scientist to
understand that the U.S. has signed up for a bad deal. It is a
bad deal for the American taxpayers, it is a bad deal for
American workers, it is a bad deal for American businesses just
trying to keep their doors open for the next generation of U.S.
workers.
I am trying to figure what are we trying to accomplish by
doing something like this? I have never seen an instance where
we are always so willing to give up market share and pick up
the tab for other places that can't pay their own bills. It all
falls on the American people.
It is bizarre that we even have to discuss this today, but
we do. And I would like to know--I am not sure that I
understand, constitutionally, that what the Administration has
done is even possible. There is a reason we are here. There is
a reason why all of this starts in the House. There is no
reason why Treasury has not sat down and talked with us about
what they have done and failed to be able to answer any
questions on it.
So, with that, I welcome Mr. Plowgian, and I want to thank
you. You are giving up a day to come here and talk with us, and
I think this is not a Democrat issue or a Republican issue. I
said earlier, this is about jobs and companies and our ability
to sustain market share, globally.
Why would the United States hamper itself to be successful?
It makes no sense to me.
Chairman KELLY. Now, I am pleased to recognize the
gentleman from California, Ranking Member Mr. Thompson, for his
opening statements.
Mr. THOMPSON. Thank you, Mr. Chairman, and thank you, Mr.
Plowgian, for being with us today.
Mr. Chairman, our economic recovery from the pandemic has
not only broken all of our own records, it has put us far and
above the world's major economies. Despite naysayers and wish-
casters betting against the American worker, we have been able
to defy all odds. Thanks to President Biden and congressional
Democrats investing in workers and families, over 13 million
jobs have been added, inflation has declined consecutively for
the last 12 months, and we have had the strongest economic
growth of all the world's major economies.
And instead of building on this success, in the first Tax
Subcommittee hearing of the 118th Congress my colleagues are
choosing to double down on their race to the bottom in
protecting multi-national corporations. From examining how we
can extend the Child Tax Credit to looking at how our tax code
treats victims of disasters, there is much on the individual
side for our committee to discuss, and I regret that my
colleagues didn't want to start there.
American workers and taxpayers have paid the price for a
system that rewards large, multi-national corporations that do
business in one country and then park their profits in the
country with the lowest tax rate they can find. Republicans'
desperate attempts to preserve this system is more of the same:
sparing the largest, most profitable companies from paying
their fair share, while honest taxpayers are left with the
bill.
The Global Minimum Tax is designed to level the playing
field and put an end to underhanded profit shifting. For one,
it brings parity to our small businesses, those who don't have
the ability to move their profits offshore, who have already
been paying their fair share. Second, it will encourage
businesses to keep their incomes in the United States of
America.
There is widespread agreement around the world that the
wealthiest corporations have an obligation to pay their fair
share, and they won't wait for us to move forward in the
process. More than 50 countries, large economies, are already
implementing the Global Minimum Tax. This is not the time to
wish away reality. And the longer my colleagues take a head-in-
the-sands approach, the more damage will be done to our
taxpayers, our businesses, and our treasury. While we have led
the other large economies around the world in our recovery, our
economy does not exist in isolation. And coordination will
strengthen our commerce ties around the world.
The truth is that abandoning these negotiations would be
unambiguously worse for Americans and American businesses than
continuing to negotiate and to ensure that we get the details
right. Pulling out of this process puts other countries in
charge of our fate and abandons American companies, American
workers, and, ultimately, American taxpayers.
Too much is at stake for our businesses and economy to let
this train leave the station without American leadership and
input.
Mr. THOMPSON. Thank you, and I yield back.
Chairman KELLY. Thank you, Mr. Thompson. Now, I would like
to introduce the first panel for today's hearing.
Michael Plowgian is the deputy secretary for international
tax affairs at the Department of Treasury.
Mr. Plowgian, I want to thank you for being here. You have
five minutes to deliver your oral remarks. And thank you, sir,
again, for being here. We appreciate it.
STATEMENT OF MICHAEL PLOWGIAN, DEPUTY ASSISTANT SECRETARY FOR
INTERNATIONAL TAX AFFAIRS, DEPARTMENT OF TREASURY
Mr. PLOWGIAN. Chairman Kelly, Ranking Member Thompson, and
members of the subcommittee, I am Michael Plowgian, deputy
assistant secretary for international tax affairs at the
Department of the Treasury's Office of Tax Policy.
Chairman KELLY. Is your mic on?
Mr. PLOWGIAN. I think so, yes.
Mr. THOMPSON. Maybe get a little closer.
Mr. PLOWGIAN. Okay.
Chairman KELLY. There you go.
Mr. PLOWGIAN. Thank you.
Chairman KELLY. Okay.
Mr. PLOWGIAN. I appreciate the opportunity to testify
before the Ways and Means Tax Subcommittee regarding U.S.
engagement on the two-pillar solution in the G20 OECD inclusive
framework on BEPS.
I would like to begin by placing the work that we are doing
on the two-pillar solution, and particularly on Pillar Two, in
context. The two-pillar solution grew out of the Organization
for Economic Cooperation and Development project known as BEPS,
for Base Erosion and Profit Shifting. The BEPS project began in
2012 at the request of the Group of 20 who were concerned about
the ability of multi-national corporations to avoid tax by
shifting profits into low or no-tax jurisdictions.
Since the BEPS project began over a decade ago, the United
States has had a strong interest in its success. The active
participation of the executive branch and the support of
Congress has been crucial in protecting our tax base from being
eroded by multi-national businesses. Prior to our engagement in
BEPS, multi-nationals' ability to shift paper profits to low-
tax jurisdictions resulted in an unproductive race to the
bottom in corporate tax rates. Unilateral attempts to address
this problem led to uncertainty and instability for both U.S.
taxpayers and the U.S. Government.
The BEPS project led countries to enact changes to
international tax rules to limit profit shifting. In the United
States, the BEPS project provided the foundation for several
Tax Cuts and Jobs Act provisions, including the global
intangible, low-tax income, or GILTI, provisions; the interest
deduction limitation; and the anti-hybrids provisions.
However, starting in 2018, it became clear that further
work was needed to stabilize the international tax system and
enable U.S. businesses to compete on a level tax playing field.
That work has continued across multiple congresses and
administrations. As part of that process, this Administration
has pushed to reach a global framework on a two-pillar solution
to reform the international tax system.
Pillar One, when implemented, will get rid of the
unilateral and discriminatory Digital Services Taxes that
largely impact U.S. businesses and will reallocate a portion of
taxing rights to reflect the way business is done in the 21st
century.
Pillar Two will level the playing field between U.S. and
foreign businesses and end the race to the bottom in corporate
tax rates by establishing a Global Minimum Tax on the earnings
of large multi-nationals, regardless of where they are
headquartered or where they operate. It will ensure the United
States can tax U.S. multi-nationals at reasonable levels
without being undercut by other countries using their tax
systems to induce our multi-nationals to shift their profits,
operations, or residency offshore.
Over the past two years, the Administration has engaged in
the inclusive framework to work through the details of this
package. The inclusive framework has reached consensus on model
rules on Pillar Two, and many countries are implementing those
model rules. Continued U.S. engagement in the inclusive
framework is essential to ensure consistent interpretation of
those rules. Discussions in the inclusive framework have
resulted in additional guidance, including guidance issued this
week that would treat transferable credits appropriately as
equivalent to refundable credits.
Treasury negotiators have also been working in the
inclusive framework to develop a complete Pillar One agreement,
though there are still important elements of Pillar One that
remain open.
The Executive Branch and Congressional Partnership on
International Tax is a longstanding, important relationship
with a shared goal of protecting U.S. taxpayer interests and
providing certainty and stability in the international tax
system. It goes without saying that Pillar One and Pillar Two
can only be implemented in the U.S. with the support of
Congress. We hope to have a complete Pillar One package soon
and intend to continue to seek input.
Similarly, with respect to Pillar Two, we stand ready to
work with Congress to enact the reforms proposed in the
President's budget to implement Pillar Two, which would
increase U.S. revenue and strengthen our tax system.
We will also continue to work with Congress to prioritize
issues for interpretive guidance.
As always, we would like to offer our technical assistance
to any relevant legislative effort. And with that I would be
pleased to respond to any questions.
[The statement of Mr. Plowgian follows:]
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Chairman KELLY. Mr. Plowgian, Ms. Gordon, in the concluding
paragraph of her testimony, raises the analogy of the USMCA to
the current situation Congress finds itself in.
Now, my friend, the ranking member, Mr. Thompson, may
recall the Trump Administration, on that trade agreement, took
the same position as this Administration in taking on Pillar
Two. That is the deal, as negotiated, and Congress should
consider the deal signed, sealed, and delivered. As members
will recall, that agreement was reopened and renegotiated
largely at the direction of my Democrat friends on this
committee.
Now, Mr. Plowgian, in your testimony you state the
Administration wants to work with Congress to take Pillar Two
process to conclusion. I appreciate the constructive tone, but
if you want this agreement to become domestic law, as you just
stated in your statement, are you willing to go back to the
negotiating table and take care of the issues of importance to
members of this committee?
Mr. PLOWGIAN. Thank you, Chairman.
So only Congress has the authority to implement or not
implement changes to U.S. law. That is true with respect to
Pillar Two, it is true with respect to Pillar One. We have
received a lot of input from Congress, from the tax writing
committees, as well as from U.S. businesses and other
stakeholders. We take that input very seriously. We take that
into the negotiations, and we would like to continue to work
with Congress to take that input and take that into the
discussions.
Chairman KELLY. You know, and I appreciate your tone
because we went through this same thing with the USMCA.
My question is, if there is this willingness to work
through the Congress, why is the Congress denied information
when they try to find out what exactly was negotiated, how it
was negotiated, and why we considered it a done deal?
Now, I would like to see this go back. I think members of
this panel--not the panel, but us up here--including both sides
of the aisle, should be more involved with this. I just--I
don't like it whether it was the Trump Administration, or the
Biden Administration forgoing and going around the--taking an
end run on Congress. There is a reason for that structure to be
in place, and I would like to see it taken care of.
So, I am going to yield now to my friend from California,
Mr. Thompson.
Mr. THOMPSON. Thank you, Mr. Chairman.
Mr. Plowgian, thank you again for being here. You mentioned
in your testimony that the changes you have been able to secure
are thanks to congressional input. Could you provide more
details on the issues that Treasury has negotiated that will
benefit the United States?
Mr. PLOWGIAN. Thank you, Ranking Member Thompson. Yes, I am
happy to.
Protecting U.S. interests has been a consistent priority
for the multiple administrations that have been involved in
these negotiations. And the Pillar Two model rules and
interpretive guidance reflect that. I can't speak to every
decision that has been made, but a few examples, I think, will
paint the picture.
Many important U.S. provisions, including accelerated
depreciation, are specifically identified in the model rules as
book tax differences that do not give rise to adjustments to
the effective tax rate, and do not give rise to top-up tax
under Pillar Two.
Treasury negotiators have also been able to secure a GILTI
coordination rule that reduces the burden for U.S. businesses
in allocating taxes paid under GILTI for purposes of Pillar
Two.
On Monday, there was also guidance that was released that
provides for a safe harbor on the UTPR that provides temporary
taxpayer relief and time to resolve outstanding issues in the
application of the UTPR, two parent jurisdictions.
I also want to highlight the guidance on the treatment of
credits. So credits through tax equity partnerships, structures
that are commonly used in the Low-Income Housing Tax Credit
context, as well as for certain green energy credits, have also
been protected under administrative guidance.
Monday's guidance also, as I mentioned, protects the value
of transferable credits like those enacted under the Inflation
Reduction Act by treating them appropriately as refundable tax
credits. And I think that administrative guidance really
demonstrates that the U.S. should remain at the table as the
world moves forward and implements Pillar Two.
Mr. THOMPSON. Thank you, and I think the transferable
credits provision speaks loudly about the importance of us
being at that table. I appreciate that. It seems to me that
your recent accomplishments are proof of the importance of
remaining at that table.
One thing is really clear to me, and that is that the OECD
is going to forge ahead, and the United States can't just put
our head in the sand and pretend that it isn't, as some of my
colleagues on the other side of the aisle seem to think we
should be doing. I am glad that, notwithstanding some
resistance from my colleagues on the other side, the Biden
Administration, Secretary Yellen, and you have been steadfast
in your commitment to representing the United States at the
OECD. I appreciate that, and I want you to know that you have
the full support of folks on my side of the aisle.
A lot has been said about the JCT revenue estimates. It
seems to me that estimating the revenue effects of adopting or
not adopting Pillar Two is an extremely difficult exercise,
even for the most qualified economists at JCT. In your opinion,
what should we take away from these estimates that we have
seen?
Mr. PLOWGIAN. Well, I think that is a really important
issue, and I think there are several things to keep in mind
when reviewing the JCT revenue estimates.
First is the modified baseline that JCT uses. The JCT
analysis says that if the 40-plus jurisdictions that have
announced plans to implement Pillar Two do, in fact, adopt
Pillar Two and the U.S. does nothing, then the impact of Pillar
Two on U.S. revenues could vary by $400 billion, depending on
their assumptions on profit shifting. If you just look at the
midpoint of that range, what they are saying is that Pillar Two
adoption by those 40-plus jurisdictions and no action by the
U.S. is an increase in U.S. tax receipts of $25 billion.
In addition, I think it is important to note that in every
scenario that the JCT analyzed, U.S. adoption of Pillar Two
increases U.S. tax receipts as compared to inaction by the U.S.
For instance, scenario five, which shows U.S. adoption of
Pillar Two and adoption by those 40 baseline countries, would
increase U.S. revenue by $236.5 billion.
So overall, the takeaway is, if other major members of the
global economy are moving ahead, and they are moving ahead to
implement Pillar Two, it is better from a revenue perspective
for the U.S. to take action than to remain on the sidelines.
Mr. THOMPSON. Thank you very much.
I yield back, Mr. Chairman.
Chairman KELLY. Thank you, sir. Mr. Schweikert from Arizona
is recognized for five minutes.
Mr. SCHWEIKERT. Thank you, Mr. Chairman.
Mr.--is the proper term Deputy Secretary?
Mr. PLOWGIAN. Deputy Assistant Secretary.
Mr. SCHWEIKERT. Deputy Assistant. That gets a little long,
doesn't it?
Mr. PLOWGIAN. It does.
Mr. SCHWEIKERT. Forgive me for--because I think you
actually have one of the most fascinating jobs someone could
have if you are a tax geek. But I think, actually, one of the
things you just said was a little duplicitous, so forgive me
for being cruel.
So we are here two years from now, after what you are
calling the victory has functionally timed out. What is the
effect 24 months or 36 months from now--then, compared to
today? Not what our friends across the other parts of the
world--on tax receipts. What is good for America?
Mr. PLOWGIAN. Well, I think, as I mentioned, the JCT
analysis shows----
Mr. SCHWEIKERT. No, no, no, no, stop, Mr.--what you said is
the JCT analysis. If we did nothing--I am just asking, ceteris
paribus, then until 36 months from now, do we have more tax
receipts or less?
Mr. PLOWGIAN. I am sorry, what is the hypothetical? If the
U.S. does nothing?
Mr. SCHWEIKERT. Today, three years from now.
Mr. PLOWGIAN. Three years from now?
Mr. SCHWEIKERT. It is not hard.
Mr. PLOWGIAN. And the U.S. does what?
Mr. SCHWEIKERT. Nothing. No, no, no, just from today's tax
receipts----
Mr. PLOWGIAN. Right.
Mr. SCHWEIKERT [continuing]. To this new scheme, as we will
call it. What happens to U.S. tax receipts? Are they up or
down?
Mr. PLOWGIAN. The JCT analysis----
Mr. SCHWEIKERT. The JCT analysis was based on the concept
that if we did nothing and our trading partners did something.
I am just asking, are we up or down?
Mr. PLOWGIAN. The JCT analysis does not answer that
question. It shows a range----
Mr. SCHWEIKERT. Actually, it alludes to it.
Mr. PLOWGIAN. I am sorry.
Mr. SCHWEIKERT. Please, go on.
Mr. PLOWGIAN. It does not answer that question. It shows a
range, a variable range of $400 billion. Again, the midpoint of
that range is an increase in U.S. tax receipts of $25 billion.
Mr. SCHWEIKERT. Really? Because we white-boarded this last
night, and we actually had just the opposite, that once we got
beyond the two-year reprieve that seemed so joyful, we actually
had the U.S. receipts going down. Why do you believe we see the
difference?
I mean, I am not asking for you to talk about JCT. You have
smart people over with Treasury. What are you seeing?
Mr. PLOWGIAN. I am not an estimator. The Treasury
estimators have estimated the effects of enacting the
President's budget proposals, which would enact Pillar Two, and
those raise considerable revenue for the U.S.
Mr. SCHWEIKERT. Okay, so we agree to this, and that is with
the two years, and even with what you have also done in regards
to R&D tax credits and how that amortization is treated, and
you actually see receipts going up. And do you think that is
what the next panel is going to tell us?
Mr. PLOWGIAN. I don't know what the next panel is going to
tell you.
Mr. SCHWEIKERT. So you haven't read any of their testimony?
Mr. PLOWGIAN. I have not.
Mr. SCHWEIKERT. Really? I am glad for the level of
professionalism we are dealing with.
You are making our job more difficult because, for many of
us, we are trying to just defend. Are we taking in receipts?
Does this increase U.S. economics and opportunity and jobs? Are
we basically giving it away? Because we have other analysts
coming to us and saying this is not actually good for the
robustness of the American economy.
Okay. In the last minute we have here or so, walk me
through what is happening in R&D credits.
Mr. PLOWGIAN. So, with respect to R&D credits, this is an
issue that we have heard quite a bit of input from Congress and
from U.S. businesses and other stakeholders on. It is an issue
that we have raised----
Mr. SCHWEIKERT. What is happening with them?
Mr. PLOWGIAN. By what is happening with them, you mean how
are they treated under Pillar Two?
Mr. SCHWEIKERT. What--how are they being treated and how
does it affect U.S. economic expansion?
Mr. PLOWGIAN. Yes, so U.S. R&D credits generally are non-
refundable. There is a small portion that is refundable, but
typically for taxpayers who are within scope of Pillar Two,
they would be non-refundable. That would reduce the effective
tax rate. It would be treated as a reduction in taxes with
respect----
Mr. SCHWEIKERT. And therefore, it would be subject to?
Mr. PLOWGIAN. It would depend on the effective tax rate of
the taxpayer. So it would reduce the effective tax rate of the
taxpayer.
Mr. SCHWEIKERT. And so therefore, it would be subjected to
the--functionally, the OECD sanction.
Mr. PLOWGIAN. It could be. It could be----
Mr. SCHWEIKERT. It could be? Or----
Mr. PLOWGIAN. The taxpayer could be subject to top-up tax--
--
Mr. SCHWEIKERT. All right.
Mr. PLOWGIAN [continuing]. Depending on the effective tax
rate of----
Mr. SCHWEIKERT. Mr. Chairman, I am sorry it took so long to
get there, but something we all claim we sort of agree upon is
now somewhat put at risk on how it is being modeled,
particularly in the tax rate. So, with that, I yield back.
Mr. THOMPSON. Mr. Chairman, are you going to point out that
the witness's testimony has been embargoed?
Chairman KELLY. No, I am glad you pointed it out. Thank
you.
Mr. THOMPSON. Thank you.
Chairman KELLY. I recognize the gentleman from Texas, Mr.
Doggett.
And also, Mr. Plowgian, if you could, could you get a
little closer to the mic, so it comes across a little bit
louder? Okay?
Mr. PLOWGIAN. I will try.
Chairman KELLY. Okay. Thank you, sir.
Mr. DOGGETT. Thank you.
Chairman KELLY. Mr. Doggett.
Mr. DOGGETT. Thank you, Mr. Chairman.
Since first joining this Ways and Means Committee more than
20 years ago, one of my top priorities has been shutting down
abusive offshore tax havens. In all that time, Republicans have
been doing all that they can to protect that tax evasion.
Back in 2001, then-Republican leader Dick Armey was
castigating the OECD in almost the very same words we have just
heard today. They favor allowing the biggest corporations to
dodge their responsibility to fairly contribute to our national
security and other vital public services.
When these profitable multi-nationals can shift profits,
profits they have earned designing new products right here in
America, profits they have earned selling to American
consumers, and move that into tax havens, we all lose. Small
businesses and other domestic businesses like a car dealer
cannot secret their earnings in some offshore tax haven.
International tax dodging shifts more of the tax burden to
those businesses like that, and to working Americans, to a
nurse, to a firefighter, to a teacher, many of whom end up
paying a greater proportion of their earnings into our treasury
than the largest, most profitable multi-nationals in the world.
The Joint Committee on Taxation looked at the facts, at the
effect of the 2017 Trump Republican tax scam, what impact it
had on the 88 largest American multi-nationals. Before their
scam was enacted, those 88 multi-nationals averaged an
effective tax rate of only 16 percent. After the tax scam,
their rate was cut to 7.8 percent. Certainly, a rate any police
officer would be delighted to pay but is unable to do so.
Now we can understand why Republicans are working so hard
to shield these profitable companies from a 15 percent tax
minimum. Last year U.S. multi-nationals booked $325 billion in
profits in the top 7 offshore tax havens. This contrasts with
their reporting only $50 billion in 7 of the world's largest
economies where they were doing business. IRS data shows that
American firms reported far more earnings in the Cayman
Islands, population 65,000, than they did in China and Canada
combined.
Indeed, American multi-nationals reported $60 billion in
profits in the Cayman Islands in 2019. This, of course, is
impossible, since the total economic output of the Cayman
Islands is only $6 billion. Just think about that $60 billion
on which they paid an effective rate of 6/10 of 1 percent. This
is a fraud on the American people, pure and simple. And those
that defend it are aiding and abetting that fraud.
Thankfully, because of the leadership of Secretary Yellen,
the Biden Administration has been a leader. They have led the
world, more than 140 countries, in what even the Wall Street
Journal has reported as the most important tax deal to be
agreed upon by such a large group of countries within a
century. In none of the top 10 countries where U.S. multi-
nationals employ workers are they paying less than a 20 percent
tax rate, and in none of the 10 countries where they book their
profits do they pay more than 7 percent, with rates going down
to the 6/10 of 1 percent in the Caymans.
Mr. Plowgian, what is required to stop this outrage and
this fraud on small businesses and individual American
taxpayers?
Mr. PLOWGIAN. One straightforward way to address the issue
of profit shifting in--by multi-nationals would be to reform
our GILTI rules so that they apply on a country-by-country
basis. The current law, GILTI, applies on a globally-blended
basis, which means that foreign tax credits for taxes paid in
high-tax jurisdictions shield the profits in low-tax
jurisdictions.
Mr. DOGGETT. And how would other countries increasing their
taxes to make these multi-nationals pay at least 15 percent
minimum tax, how would that actually make America more
competitive?
Mr. PLOWGIAN. Yes, it makes America more competitive in
multiple ways. It allows the U.S. to maintain a robust
corporate tax system because it prevents the shifting of
profits offshore and allows the U.S. to tax multi-nationals at
reasonable rates.
Mr. DOGGETT. And to compete based on our education system,
our workforce, our justice system, our national security.
Thank you so much for your service and your testimony.
Chairman KELLY. I thank the gentleman. Now I am recognizing
Mr. Arrington from Texas. Now we are going to go in accordance
with committee practice. We are going to go on a two-to-one
questioning.
Mr. Arrington.
Mr. ARRINGTON. Thank you, Mr. Chairman.
Mr. Plowgian, you just said that American companies will be
more competitive if we tax them at a higher rate. We are at a
12 percent Global Minimum Tax. And you think it is going to
make American companies more competitive to levy more taxes--
taxes, by the way, corporate taxes that are passed through in
higher cost of goods and services to consumers, which will
exacerbate inflation. It will also impact wages by reducing
wages and income.
So, tell me again how America is more competitive if we
increase taxes on American companies, just kind of taking off
where you all left off in the last Q&A.
Mr. PLOWGIAN. Right, right, thank you. So Pillar Two levels
the playing field for U.S. multi-nationals, which were up to
this point, the only multi-nationals that face a minimum tax on
their foreign earnings.
Pillar Two ensures that all multi-nationals, wherever they
are headquartered, wherever they operate, are subject to a
minimum level of tax.
Mr. ARRINGTON. Shouldn't other sovereign nation states
decide what their tax system should be, and what their
international tax policy should be? Why are we--why do we need
this one world order of tax regime?
Well, let me ask you a more direct question. You had
Democrat control of the Senate, Democrat control of the House
in last Congress, and a Democrat President. Did you increase
the Global Minimum Tax from 12 to 15 percent in the Democrat--
all Democrat, total partisan Democrat tax policy--that is, the
so-called Inflation Reduction Act, did you raise the Global
Minimum Tax?
Mr. PLOWGIAN. Changes consistent with Pillar Two were
passed in the House, and were----
Mr. ARRINGTON. Did you raise the tax rate from 12 to 15? It
is a simple question.
Mr. PLOWGIAN. And they were close to being passed in the
Senate----
Mr. ARRINGTON. Did it pass from 12 to 15, yes or no?
Mr. PLOWGIAN. But one of the concerns that was raised
with----
Mr. ARRINGTON. Just----
Mr. PLOWGIAN [continuing]. Other countries----
Mr. ARRINGTON. Listen, if I may, if I may reclaim my time,
you won't answer the question. It is a simple question. And if
the American people were sitting here wondering why in the
world we would allow our companies to be less competitive in
the global market, and why we would cede our sovereignty in
terms of tax policy to other countries along with our tax
base--what you are doing is a backdoor coercive strategy to
force Congress to have to raise taxes from the 12 percent
Global Minimum Tax to the 15.
If we don't, here is what you are setting up. Here is what
the Biden Administration is setting up. Other countries will
tax not just U.S. operations in their jurisdiction, they will
tax U.S. companies. They will take our revenue to support their
policies, their programs, their people without any say, without
any say in the matter.
Well, I guess they did have a say. They rejected the Global
Minimum Tax increase. They rejected it, even with Democrat
control. And in addition to other countries, this is the set-
up, this is the back door scheme. They not only take the taxes
from this country--and JCT says, in one estimate, $56 billion,
$56 billion--are you going to tax more to offset that loss?
President Biden's budget includes almost $5 trillion of new
taxes. So we are going to tax the American people more?
I think the most outrageous aspect of this whole thing--not
to mention the fact that we have pleaded with you all to
consult with Congress, and we got nothing, no response--is the
fact that the tax base will be ceded to foreign jurisdictions
for their people, their programs, and their policies, that we
will subsidize, that United States hardworking taxpayers will
subsidize, but we will also undermine our sovereignty.
We have set policy, Mr. Chairman and Ranking Member. We
have set policies. Whether I agree with them or not, they are
the law of the land, and they are tax policies to incentivize
behavior like we want to encourage investment in R&D or the
Work Opportunity Tax Credit. That is--so if a company takes
their liability lower than 15 percent because they are taking
advantage of the Work Opportunity Tax Credit to help veterans,
to help people on food stamps and other public assistance to
get jobs, they are penalized for that because of the top-up
tax.
This thing is completely off the rails and upside down. It
is absurd, and it is demeaning to the Tax Policy Subcommittee
that you didn't even respond to our request for consultation.
I apologize. Thanks for the indulgence.
Chairman KELLY. That is okay, that is okay. You are
deserving of the indulgence. Thank you, Mr. Arrington.
Now the gentleman from Georgia, Dr. Ferguson, is recognized
for five minutes.
Mr. FERGUSON. Thank you, Mr. Chairman.
Mr. Plowgian, I will start with a simple question. Why do
you think that you and your colleagues in the Administration
are so gifted and talented that you can override the
Constitution and write tax policy and usurp our authority
there?
Mr. PLOWGIAN. I do not think that.
Mr. FERGUSON. Well, good. Then you should stop doing it.
Tax policy belongs with this committee of jurisdiction, not
a rogue administration running out and cutting deals with
foreign countries that make America less competitive. This
whole notion that somehow or another we need to be in bed with
the same tax rate as the rest of the world is absolute lunacy.
It is lunacy. Our mission, our goal every single day should be
defending those things that make America great, and making sure
that we are the most competitive place in the world to invent,
innovate, manufacture, and sell around the globe.
Americans today really care about their jobs and being able
to provide for their families. Americans today care about being
able to afford a decent, safe place to live. Americans today
really care about their kids' education. And most importantly,
they care about their freedoms, deeply. And our entire
philosophy should be around preserving those four things, not
putting us on par with a bunch of other countries that don't
share our values or our competitive nature.
Why in the world would you allow countries with higher and
more generous R&D credits have an advantage over Americans? Why
would you do that?
Mr. PLOWGIAN. Congressman, we share your concerns about
making sure that America remains a competitive place to do
business. In fact, we think it is the best place in the world
to do business. Pillar Two is about leveling the playing field
for U.S. businesses.
Again, Pillar Two----
Mr. FERGUSON. Leveling the playing field for U.S.
businesses? Wait a minute. We are about the American people,
the American workers, and American businesses and innovators
and creators. We are not about leveling the playing field with
the rest of the country. We are about being number one day in
and day out.
This whole business of leveling the playing field is a--it
is a farce. We are either going to be number one in the world
or we are not. I don't want to be number one tied with 5 other
countries or 20 other countries. We need to be number one. We
need to be doing things that increases productivity, that
allows Americans to have better jobs. We need to be doing
things that allow Americans to live in decent, safe housing. We
need to be doing things that make sure that our children are
educated in a way that can--they can compete on the global
stage. And we need to be defending our freedoms. The only way
that we can do that is to have a vibrant, strong economy, and
we should be drawing treasure from around the world, not
sending our treasure across our borders.
How in the world can you justify sending American tax
dollars to foreign jurisdictions?
How can you justify France being able to tax a U.S.
company? That is absolutely crazy. We have real problems. We
have real challenges in making sure that we can meet the needs
of the American people, and all of a sudden you are going to
suck billions of dollars of taxes out of the U.S. economy and
send it to people that don't necessarily share our values. Why
in the world would you do that?
Mr. PLOWGIAN. I share your concerns.
Mr. FERGUSON. I don't care if you share them or not. I
don't care if you like them or not. I am asking you, why would
you do it?
Mr. PLOWGIAN. We believe that, on a level playing field,
American businesses and American workers will win. We believe
that, when there is a level tax playing field, U.S. businesses
will be able to compete and win. We believe----
Mr. FERGUSON. How--wait, stop. Stop right there, sir. Let
me reclaim my time.
How is--again, I don't think this is leveling the playing
field. I think this puts us behind the eight ball, and here is
why. If all of a sudden, here in America, if we are sending our
tax dollars overseas, and our spending continues to go up
because we have got some real challenges with the population,
if we continue to go down that road then we are going to have
to tax our traditional taxpayers more. It is going to put more
of a burden on our job creators and our American workers. As
that happens, our productivity goes down, our ability to invest
in new technologies and training goes down. We don't have the
resources to take care of our most vulnerable. The only way you
can do it is to raise taxes. As you raise taxes, that makes us
less competitive.
I do not see the logic. I do not understand how in the
world that you can go through the mental gymnastics--you or
anybody else in the Administration--to land where you have. If
you are taking revenue out of the U.S. and delivering it to
other countries, then how does that help us meet the needs of
the American people?
Mr. PLOWGIAN. Pillar Two reduces the incentive to shift
profits offshore, and it allows the U.S. to maintain a robust
corporate----
Mr. FERGUSON. But you didn't really care about that a
couple of years ago. You didn't really fight for GILTI. As a
matter of fact, you kind of delayed everything, putting us
behind the eight ball.
I would ask you to do this. Think about the things that
American families wake up and think about every day: a job, a
house, an education for their kids, safety, and security, and
think about the freedoms that we have. And ask yourself, does
this policy make--put--advance those goals or not? And the
answer is no.
With that, Mr. Chairman, I yield back.
Chairman KELLY. I thank the gentleman. The gentleman from
Connecticut, Mr. Larson, is recognized for five minutes.
Mr. LARSON. Thank you, Mr. Chairman.
And Mr. Plowgian, thank you, and I hope you get to speak
now. We have heard a lot of speeches.
I didn't think we were going back to isolationism, but
apparently that is the new road that we are setting out on, is
that we are going to stand isolated and alone.
Also, just for the record, you know, about the Democratic
majorities. They have this body called the Senate and they have
something called the cloture vote. I am sure all of you are
aware of that, where it takes 60 votes. Where in the
Constitution does it say you need 60 votes to pass a bill? But
Mitch McConnell swears by that, that that is exactly what is
needed for things to happen and transpire. The House of
Representatives should wake up. More than 500 of our bills,
Democrat and Republican and non-partisan, don't get taken up in
the United States Senate--I wish the press would write about
that--because of the cloture vote. So let's have that for the
record.
Now, Mr. Plowgian, apparently in the age of isolationism,
apparently the United States exists alone in a global economy.
And these other 50 countries, as has been articulated by Mr.
Thompson and was also articulated by Mr. Doggett, are they
simply going to--if nothing happens, if the United States
doesn't approve this, does Pillar Two just simply goes away?
Mr. PLOWGIAN. No, Congressman, that is not what would
happen. There are jurisdictions that have already implemented
Pillar Two, South Korea and Japan being two of those. And all
EU member states----
Mr. LARSON. South Korea and Japan. Are they pretty active
economies?
Mr. PLOWGIAN. They are.
Mr. LARSON. Oh, all right. And so South Korea and Japan.
What other economic impacts would that mean?
Mr. PLOWGIAN. Well, the----
Mr. LARSON. Because we want to be isolationist, right?
Mr. PLOWGIAN. Right. All EU member states are also
obligated to implement Pillar Two, and most have legislation at
this point. And there are many of our other major trading
partners--the UK, Canada, Australia--that are moving forward--
--
Mr. LARSON. UK, Canada, Australia.
Mr. PLOWGIAN [continuing]. As well.
Mr. LARSON. Boy, those sound like awful partners for us. Do
you really--you know, don't you think we ought to isolate from
them, and--no?
Mr. PLOWGIAN. I don't think so, Congressman. I think we
need to be at the negotiating table in order to represent U.S.
interests in these discussions. And as you know, the
Administration has proposed reforms to implement Pillar Two in
the United States, as well.
Mr. LARSON. And you kept on talking about a level playing
field and allowing the U.S. to compete. How is that to our
advantage, especially given this great nation of ours and our
ability, as is demonstrated in the global economy, to compete?
Mr. PLOWGIAN. Absolutely. So up to now, U.S. multi-
nationals have been the only multi-nationals that are subject
to a minimum tax on their foreign earnings. Now, under Pillar
Two, all multi-nationals, wherever they are headquartered,
wherever they operate----
Mr. LARSON. So previously it was only U.S. internationals,
and now everyone is subject to that. Hmm, that seems like it is
leveling the playing field to me.
Mr. PLOWGIAN. It does. And we believe that U.S. businesses
will be able to compete and win in that environment.
It also levels the playing field for small businesses and
purely domestic firms who cannot shift their profits offshore
to avoid paying tax, and so they can compete better----
Mr. LARSON. And why is that important?
Mr. PLOWGIAN. That is important because they also need to
be able to compete and grow our economy. Small businesses are
major employers in the U.S., and that benefits American
workers.
Mr. LARSON. So it is the small businessman that really is
going to be advantaged as much as the large multi-national is
going to be advantaged through competition, as well, because it
will be the first time that the other global multi-nationals
will be subject to the same tax. Is that correct?
Mr. PLOWGIAN. That is correct.
Mr. LARSON. And that is why the Administration is pursuing
this policy----
Mr. PLOWGIAN. That is----
Mr. LARSON [continuing]. For business in general to level
the playing field and allow the United States to compete and
succeed and to grow jobs and grow this economy.
Mr. PLOWGIAN. That is exactly right.
Mr. LARSON. Thank you. I yield back.
Chairman KELLY. Thank you. I now recognize the chairman of
the Ways and Means Committee, Mr. Smith.
Chairman SMITH. Let me begin by thanking Chairman Kelly for
allowing me here, and for your leadership. We are incredibly
grateful that you are at the realm [sic] of this committee with
your experience, your knowledge, and your passion. And I am
glad to have you leading our tax-writing committee.
Mr. Plowgian, no one in the Biden Administration has the
power to write U.S. tax policy. The Supreme Court has said that
the power to tax involves the power to destroy. It is among the
most solemn responsibilities of government, and, under the
Constitution, it is strictly controlled. The power to tax
demands the highest level of accountability to the American
people, especially when masses of jobs are at risk. And, while
every member seated here today is accountable to voters, you
and Secretary Yellen are not.
I have eight specific questions on Treasury's engagement
with the tax-writing committees over the OECD negotiations, and
I ask that you please just answer yes or no.
Was Congress consulted prior to Treasury agreeing to a UTPR
surtax that would allow foreign governments to tax the U.S.
operations of U.S. companies?
Mr. PLOWGIAN. We did receive input from Congress on the
UTPR during the----
Chairman SMITH. So that is a yes.
Mr. PLOWGIAN [continuing]. Negotiations.
Chairman SMITH. That is a yes?
Mr. PLOWGIAN. We did receive input from Congress, yes.
Chairman SMITH. Okay. I have followed this issue very
closely over the past three years, and I don't think that is
the case. I know that Treasury has never consulted with
Republican members prior to a decision. And unless you would
like to revise your testimony, please provide to this committee
in writing the date of the consultation, the names of Treasury
personnel involved, and the names of Members of Congress that
Treasury met with. Can you give me that information?
Mr. PLOWGIAN. We get input from Congress in many different
ways, from hearings----
Chairman SMITH. Can you give me that information?
Mr. PLOWGIAN [continuing]. From letters, from consultation
with staff, as well.
Chairman SMITH. Yes or no, can you provide this committee
that information?
Mr. PLOWGIAN. I do not have that information currently.
Chairman SMITH. So how do you know what you just testified
before Congress is accurate?
Mr. PLOWGIAN. We receive input from Congress in multiple
ways, as I said, through----
Chairman SMITH. What are those multiple ways, and from what
Members?
Mr. PLOWGIAN. Through hearings, through letters from
Congress from Members.
Chairman SMITH. What hearings?
Mr. PLOWGIAN. Treasury is called before House Ways and
Means. Secretary Yellen has testified before Ways and Means.
Chairman SMITH. Testified after she made the negotiations
in regards to it.
Mr. PLOWGIAN. We receive letters from Members, as well.
Chairman SMITH. Let me ask you another question. Was
Congress consulted prior to Treasury accepting this recent
offer by foreign countries to delay the UTPR surtax by just one
year?
Mr. PLOWGIAN. Again, we received input from Congress and
from taxpayers with concerns----
Chairman SMITH. You did not consult with the chairman of
the tax-writing committee. So who did you consult with?
Mr. PLOWGIAN. We received input from the tax-writing
committees on the UTPR, and concerns about----
Chairman SMITH. No one from our committee on the Republican
side. So was it only the Democrat side you spoke with?
Mr. PLOWGIAN. We speak with staff of the tax-writing
committee on a bipartisan basis on a regular basis.
Chairman SMITH. Did you, in regards to this delay for one
year, did you speak to the majority in the tax-writing
committee of Ways and Means?
Mr. PLOWGIAN. We received input on concerns about the UTPR
and concerns about application of the UTPR to parent
jurisdictions, especially in the early years of----
Chairman SMITH. You received letters from us----
Mr. PLOWGIAN [continuing]. The Pillar Two.
Chairman SMITH [continuing]. But did you consult with us
before this decision? Yes or no.
Mr. PLOWGIAN. We speak with the tax-writing committees on a
regular basis.
Chairman SMITH. Well, I am the chairman of this committee,
and it is almost crickets. So you might want to do a little bit
better in regards to that.
Was Congress consulted prior to Treasury agreeing that the
U.S. R&D credit would be disadvantaged versus the R&D credits
of other countries like the UK?
Mr. PLOWGIAN. I cannot speak to that decision. This has
been an ongoing process for multiple years, and that is a
longstanding distinction in the Pillar Two rules.
Chairman SMITH. Yes, it is pretty detrimental to U.S.
businesses. Were you part of the negotiation?
Mr. PLOWGIAN. I joined--rejoined Treasury in October of
2021. The Pillar Two negotiations have been going on since
2018.
Chairman SMITH. So since 2021, when you were in the
negotiations, R&D hasn't been discussed around you?
Mr. PLOWGIAN. We have raised the R&D credit as an important
issue in the negotiations.
Chairman SMITH. Did anyone in Congress sign off on the
decision to give generous refundable corporate tax credits and
Chinese state subsidies an advantage over more typical tax
incentives like those enacted by Congress on a bipartisan
basis? Yes or no?
Mr. PLOWGIAN. Again, I was not part of the negotiations
when that decision was made. That has been an issue in the
Pillar Two negotiations. That is longstanding.
Chairman SMITH. Can you find that answer out for me?
Mr. PLOWGIAN. I will check on that and come back to you.
Chairman SMITH. I would love that to be submitted.
Did Treasury consult with Congress prior to Treasury
conceding that the U.S. GILTI rule would not receive full
grandfathering status as the only Global Minimum Tax in the
world? Yes or no?
Mr. PLOWGIAN. I was not part of the negotiations at that
juncture.
Chairman SMITH. So once again, can you provide me the
answer to that question with whoever at Treasury that was?
Mr. PLOWGIAN. I will check on that.
Chairman SMITH. Did anyone in Congress sign off on
Treasury's decision to surrender U.S. tax revenues from GILTI
and Subpart F because of the OECD's preference for local
corporate minimum taxes?
Mr. PLOWGIAN. You are speaking about the qualified domestic
minimum taxes. So we, again, received input on that. The
qualified domestic minimum taxes are consistent with all
international tax rules that provide the primary taxing rights
to a jurisdiction when it taxes its residents on income that
arises----
Chairman SMITH. I understand what it is.
Mr. PLOWGIAN [continuing]. In that jurisdiction.
Chairman SMITH. But my question was did anyone in Congress
sign off on Treasury's decision?
Mr. PLOWGIAN. Again, we receive input from Congress in many
ways.
Chairman SMITH. Once again I ask, unless you would like to
revise your testimony, please provide to the committee in
writing the date of the consultation with the Members of
Congress, the names of Treasury personnel involved, and the
names of Members of Congress that Treasury met with.
Did anyone in Congress sign off on the decision for a 15
percent Global Minimum Tax rate to replace the 12 to 13 percent
rate that the OECD was considering prior to President Biden
taking office?
Mr. PLOWGIAN. I was not part of the negotiations at that
stage.
Chairman SMITH. Can you get that information for the
committee?
Mr. PLOWGIAN. I will check on that.
Chairman SMITH. Was Congress consulted prior to Treasury
agreeing on the scope of the Pillar One profit allocation,
which skews heavily against U.S. companies while exempting
their foreign-headquartered competitors?
Mr. PLOWGIAN. I am sorry. What was the question?
Chairman SMITH. Was Congress--once again, was Congress
consulted prior to Treasury agreeing on the scope of the Pillar
One profit allocation which skews heavily against U.S.
companies while exempting their foreign-headquartered
competitors?
Mr. PLOWGIAN. I don't think that it exempts foreign MNEs
under Pillar One, so I am not sure I understand the----
Chairman SMITH. From my understanding----
Mr. PLOWGIAN [continuing]. The question.
Chairman SMITH [continuing]. It does. So would you be
opposed to it if it did not exempt those foreign-headquartered
competitors?
Mr. PLOWGIAN. Sorry, I don't----
Chairman SMITH. Would Treasury be opposed to it?
Mr. PLOWGIAN. I don't think that it does exempt foreign-
headquartered multi-nationals in Pillar One.
Chairman SMITH. So in regards to Pillar One profit
allocation period, did Treasury consult with any Members of
Congress?
Mr. PLOWGIAN. We continue to consult with Congress about
Pillar One. Pillar One remains open. There are many open issues
on Pillar One.
Chairman SMITH. So it goes back to my simple question. You
said yes, you have. I would love for you all to provide in
writing to this committee who you consulted with, what members
of Treasury that consulted with us, and what date.
If Treasury had consulted with Congress, we would have
avoided the multitude of Biden Administration losses in the
OECD negotiations.
My final question: Most observers are skeptical that China
will ever truly comply with this OECD agreement. Secretary
Yellen recently traveled to China to meet with the Chinese
Communist Party officials. During that trip was she able to
obtain commitments from China that it would adopt the OECD
agreement and implement it fairly?
Mr. PLOWGIAN. Secretary Yellen did meet with her Chinese
counterparts, and in an attempt to reset the relationship with
China. I do not know whether they spoke about Pillar Two, but
the UTPR is an important part of Pillar Two that ensures that
China and other jurisdictions do not gain an advantage if they
do not adopt Pillar Two. And that is why the UTPR is an
important part of Pillar Two. It ensures--it provides an
enforcement mechanism that ensures that Chinese multi-nationals
will be subject to the same minimum tax as other multi-
national----
Chairman SMITH. We know China is really not that great of
following rules and agreements. We have seen that with our
country. That is why I was hopeful that the Treasury Secretary,
in her long visit to China, would definitely have talked to
them about whether they would adopt OECD and the agreement and
implement it fairly. Since it is so important, I figured that
would be top of her list.
Whether by manipulating financial statements or by creating
new state subsidies, China will find ways to evade these OECD
rules. And allowing CCP-supported companies to gain a
competitive advantage against the United States is yet another
failure in these negotiations by the Biden Administration.
I yield back, Mr. Chairman.
Chairman KELLY. Thank you, Chairman Smith. I now recognize
Mr. Hern from Oklahoma.
Mr. HERN. Thank you, Mr. Chairman, for holding this
important meeting.
Mr. Plowgian, I want to piggyback a little bit off what the
chairman had to talk about, but I am glad to hear you have been
here for a year-and-a-half, so we know we are talking to the
person that would have the answer. So I appreciate the chairman
asking you for resolve in the conversations that you have
specifically had or your team has had with Congress or with
Ways and Means, specifically the tax-writing committee that you
are speaking to today.
You mentioned that you and--the chairman mentioned about
responding in writing. In November of last year, Chairman--or
Ranking Member Brady and I wrote a letter together asking you
for modeling data and estimates on how U.S. companies and
Federal tax revenue would be impacted by the OECD Pillar One
agreement, and how does the Treasury plan to achieve
ratification of an MLC by December 31 without sharing essential
information with the Congress that has not been involved in the
Treasury's unilateral negotiations.
I know you say you have talked about this, I mean, the
response to the November letter by myself and Ranking Member
Brady and then again from myself solely in March of this year.
I mean, the responses could be, you know, what do you want for
Christmas. They were not responding to the letters at all. So I
am not sure who is writing you letters. I find it hard to
believe, until you prove us all differently, that you have been
dialoging with the committee that has jurisdiction over this in
Congress.
I am asking again. Please share these projections with the
Ways and Means Committee. And will you commit to sharing this
information?
I will be nice, but, you know--there wasn't a timeframe put
on it, but within 30 days. That is not too much to ask.
Mr. PLOWGIAN. Congressman, first of all, I want to say that
Pillar One cannot be approved without congressional support.
Mr. HERN. Oh, we are keenly aware of that. But I am just
asking why couldn't you have responded to the letters in
November and March of this year?
Mr. PLOWGIAN. There are open issues that I mentioned in the
Pillar One discussions. And specifically, those open issues as
mentioned in the outcome statement last week that was issued by
the inclusive framework relate to issues that have to do with
the economics of Pillar One, and specifically issues around how
the Pillar One taxing right is coordinated with the existing
international tax system.
So, for example, there are issues around how much should
existing taxes offset the Pillar One taxing right. There are
questions about how withholding taxes imposed by jurisdictions
should be treated. There are questions about what is the
threshold for residual profits on which the Pillar One taxing
rights should be made.
And so the Pillar One agreement is not complete, and we are
concerned that providing estimates would not provide Congress
with a complete picture of the Pillar One negotiations.
Mr. HERN. So, Mr. Plowgian, again, following up on what the
chairman said about China and its--and actually, I asked
Secretary Yellen this specifically sitting in your seat when
she was here last. What assurances do we have that China is
going to follow these model rules to do the things that you are
talking about as you related to the UTPR?
What are the punishments?
You know, Secretary Yellen went to China and said the world
is big enough for both of us to play in in a level playing
field. Do we honestly believe, based on our relationship right
now with China, that they are going to play by the rules when
their whole mission in life, as stated by the president of
their country, the general secretary of the communist Chinese
people, has said time and time again that their goal in life is
to become the number-one nation in the world, both economically
and militarily, do we honestly think that their goal in life is
to be on a level playing field with us?
Mr. PLOWGIAN. Well, we know, Congressman, as you suggest,
that China does often try to undermine or circumvent
international institutions, international partnerships and
agreements. And we go into negotiations with our eyes open
about that.
Mr. HERN. So we don't have a--we don't have any way to be
punitive to that.
I just want to say a couple last things here, and then I
will yield back.
You know, the EU Tax Observatory released an EU-funded
report this month that goes into detail on the country-by-
country breakdown of covered groups and their Amount A profits.
Treasury's argument that any release of impact analysis or
modeling data--would undermine current negotiation is a facade,
and is not sufficient for the tax writers on this committee. Do
you have a better reason for not complying with my request?
You just alluded to the fact that there was--it was
incomplete, but you didn't share it quite like that. Could
you--do you have any way of fulfilling my request?
Mr. PLOWGIAN. Once again, there are open issues in the
Pillar One negotiations. Once we can resolve those issues, we
plan to share estimates with Congress.
Mr. HERN. And you will follow up in writing to the
questions that we asked in those letters, both Kevin Brady and
myself, and then again me. I would really appreciate those in
writing, as the chairman said.
I yield back.
Chairman KELLY. Thank you, Mr. Hern. Now we recognize the
gentlelady from California, Ms. Sanchez, for five minutes.
Ms. SANCHEZ. Thank you, Mr. Chairman.
Today, Republicans are once again demonstrating their
unfailing commitment to shielding large corporations from
paying their fair share in taxes. Rather than working towards
real solutions, Republicans want to let massive multi-national
corporations move their profits to no-tax or low-tax
jurisdiction so that they can avoid paying their fair share.
And rather than working towards real solutions, Republicans are
willing to put nearly nine million U.S. workers out of a job.
In contrast, Democrats recognize that we must remove
profit-shifting incentives from our international tax system.
We support the Biden Administration's work to protect domestic
tax incentives. Those incentives include many of the Inflation
Reduction Act's green tax credits that represent the largest
single climate investment in American history. Protecting those
green energy tax incentives would deliver lower costs for
working families and take a huge step in the right direction in
protecting our planet. And anybody who doubts that we are in
dire need to protect our planet only must look to the extreme
heat that we are currently experiencing to understand what
exactly is at stake.
I want to focus on a crucial part of the Inflation
Reduction Act, which are the transferable tax credits. Firms
that don't have the tax capacity to claim non-refundable
credits can still benefit from the IRA's transferable credits
spurring green energy development. The OECD guidance released
on Monday was certainly favorable on the transferable credits
issue. This is going to help protect billions of dollars that
Democrats invested in clean manufacturing, for instance.
Assistant Secretary Plowgian, thank you for being here.
Despite the way that you have been badgered a bit, you are
answering, I think, as honestly as you can. And I just want to
say I assume that the favorable guidance on the transferable
credits wasn't a result of your staying home and watching
reruns of the Golden Girls. So, I want to thank you for your
service, and I want to thank you for taking multiple trips
across the Atlantic to advocate on behalf of the United States
in these negotiations.
I think it is important for the committee to get a sense of
the type of work that goes into your advocacy here on behalf of
the United States. Can you describe some of the opposition that
you faced, and how did the United States' persistence at the
negotiating table pay off?
Mr. PLOWGIAN. Thank you, Congresswoman. Yes, so this was an
issue on which we received a lot of input from Congress and
from U.S. businesses about the importance of these credits and
their treatment under Pillar Two.
As you suggest, approximately nine months ago many
countries opposed treating transferable credits as refundable.
There were a few allies early on who were very important to
building momentum, but the majority view was, you know, deep
skepticism of this position. The process of changing the view
in the room is really a multi-pronged one.
So Secretary Yellen spent time with her counterparts
explaining the importance of these credits economically and
from a climate perspective, as well. International affairs
engaged with their counterparts in other countries. The rest of
the Administration engaged, as well. I certainly spent time
with the lead tax negotiators from key jurisdictions building
support.
And then my team and--I just cannot say enough good things
about my team. They have been amazing and tireless through this
whole process. They have to convince negotiators that our
position is the right policy one, the right technical one, and
come up with a technical solution. They have been working
nights, weekends, holidays, early mornings, and just really
have been tireless and amazing throughout the entire process.
And of course, none of that would have been possible if we
were not at the table in the inclusive framework representing
U.S. interests in these discussions.
Ms. SANCHEZ. And how favorable was that ultimate guidance
to U.S.?
Mr. PLOWGIAN. I think it was very favorable. So it
addressed two main issues for the originators of these credits,
the taxpayers who engage in the projects that give rise to the
credits. It treats the credits as refundable, meaning that they
are treated as income, rather than as a reduction in tax
expense, which helps protect the value of the credits. With
respect to the purchasers, they treat just the net amount--so
the difference between the value of the credit and the amount
paid for the credit--as a benefit, and that was a huge request
from stakeholder community with respect to these credits.
Ms. SANCHEZ. Again, I thank you for your service.
And I yield back.
Chairman KELLY. I thank the gentlelady. I now recognize the
gentleman from Kansas who is celebrating his birthday today.
Mr. Estes, five minutes, please.
Mr. ESTES. Thank you, Mr. Chairman. And I am grateful you
are holding this hearing. We need to take every opportunity to
remind the Biden Administration that the Constitution provides
that Congress, not the executive branch, with the sole
authority to lay and collect taxes.
With that in mind, I introduced legislation with Chairman
Smith last night that builds upon the first retaliation [sic]
bill that we passed, or that we dropped in May. It increases
the exposure that foreign companies have on Base Erosion and
Anti-abuse Tax, the so-called BEAT, if their home country
introduces the OECD's so-called Undertaxed Profit Rule, or
UTPR. I just want to jump right into questions.
Mr. Plowgian, do you think U.S. businesses should pay more
taxes to other countries?
Mr. PLOWGIAN. First of all, Congressman, happy birthday.
Mr. ESTES. Thank you.
Mr. PLOWGIAN. I think it is important to, as I have
mentioned, level the playing field for U.S. businesses. And
Pillar Two does level that playing field by ensuring that other
countries' multi-nationals pay a minimum level of tax, as well.
Mr. ESTES. So I think a level playing field, a more level
playing field would be introduce GILTI and BEAT in other
countries' tax codes, as opposed to this process.
With the addition of the UTPR, I mean, the 10-year
projections are that the U.S. Treasury will lose $120 billion
and that corporations, U.S. corporations, will pay more in
taxes that will go to other companies and--or other countries.
I am trying to understand why the Administration would do a
deal that would take taxes over a 10-year period out of the
U.S. Treasury, and it would cause U.S. businesses to have to
pay more in taxes.
I mean, what value do we get out of that over the 10-year
period that--I mean, my colleague, Mr. Schweikert, talked about
the first two years, as you would mentioned. But over this 10-
year estimate from JCT, it is $120 billion loss of Treasury--to
the Treasury if we do not change our laws. And if we do change
our laws, it is almost a $60 billion loss to the U.S. Treasury.
Mr. PLOWGIAN. Well, I think it is important to look at the
JCT analysis as an entire picture, right?
So as I mentioned, the JCT analysis describes its baseline
as being 40-plus jurisdictions that it has identified that have
announced plans to implement Pillar Two, and what would happen
if those jurisdictions implement Pillar Two and the U.S. does
not. And that is a, as I mentioned, a $400 billion swing,
depending on the profit shifting assumptions that JCT uses.
And again, the midpoint of that range is an increase in
U.S. tax revenue from other countries implementing Pillar Two.
Mr. ESTES. So what--but what the JCT projected is that we
would--that the U.S. Treasury would lose roughly $120 billion,
and that is the piece that concerns us the most when we look at
UTPR and the impact on this.
And so let me go--we have limited time, let me go. The next
question on there is why didn't Treasury focus on getting
credit, full and complete credit, for the current U.S. tax
code? Things like an R&D depreciation, and GILTI, and BEAT, and
some of the other provisions that are in the current U.S. tax
code? Why wasn't that included in the complete negotiations
through this process?
Mr. PLOWGIAN. Well, I can't speak to the negotiations prior
to when I rejoined Treasury. This has been an ongoing process
for several years.
One of the things that is clear from the Pillar Two
blueprint is that a common tax base was needed in order to be
able to have a level playing field among jurisdictions. And so
that is why--as far as I understand it, that is why a financial
accounting tax base was adopted for Pillar Two purposes.
Mr. ESTES. But you are supportive of those provisions that
were negotiated before you came on board. Otherwise, you would
work to correct those. So you believe they are okay?
Mr. PLOWGIAN. We are engaged in ongoing discussions on
Pillar Two. And again, I think it is very important for us to
continue to be engaged in those negotiations. We think it is
important to take congressional input into those negotiations
to interpret the rules under Pillar Two.
Mr. ESTES. So I am glad to hear you say that, because I
think there is a strong consensus not just in this committee,
but across the country, and certainly in the taxpaying
community, that provisions such as UTPR are something that we
don't want to agree with going forward, and that it is punitive
and anti-American in terms of the approach, that it misses
that.
And so there is going to be some additional work done
before this is ever implemented. Thank you.
And my time is expired, and I will yield back, Mr.
Chairman.
Chairman KELLY. I thank the gentleman. I now recognize Mr.
Kustoff from Tennessee.
Mr. KUSTOFF. Thank you, Mr. Chairman.
Thank you, sir, for appearing today. I kind of want to
follow back up on Mr. Estes's question about JCT, and maybe Mr.
Arrington's.
So we have heard the JCT estimate about the loss of $120
billion. You have disputed that, or you gave your argument
against that. Has Treasury presented its argument to JCT to
challenge their assumption?
Mr. PLOWGIAN. Well, Congressman, I am not challenging JCT's
assumptions. All I am doing is pointing out the totality of
JCT's analysis, which, again, assumes a baseline of 40-plus
jurisdictions implementing Pillar Two, and then analyzes five
scenarios. And in each of those, again, adoption of Pillar Two
by the U.S. increases U.S. tax revenue as compared to not
adopting.
But I do think it is important to take into account the
baseline adoption by 40 major economies in the world and many
of our largest trading partners.
Mr. KUSTOFF. Well, let me ask it a different way. Do you
dispute JCT's assertion about the loss of $120 billion?
Mr. PLOWGIAN. All I am pointing out is that the JCT
analysis is for multiple scenarios, many of which show U.S. tax
revenue increases.
Mr. KUSTOFF. You would agree with me that JCT is non-
partisan, correct?
Mr. PLOWGIAN. Yes.
Mr. KUSTOFF. All right. And I asked you a question; I don't
think I got a direct answer. Treasury has not disputed or gone
to JCT and disputed their analysis, have they?
Mr. PLOWGIAN. I----
Mr. KUSTOFF. Has Treasury disputed that with JCT?
Mr. PLOWGIAN. I am not aware of Treasury disputing that
analysis with JCT.
Mr. KUSTOFF. All right. So let's assume Pillar Two goes
into effect. What I have heard from different businesses and
companies is the issue of compliance and compliance cost--I
mean, a real, practical, pragmatic matter--and if I could,
Deloitte, from their website, when they talk about Pillar Two--
I want to read you this quote and see if you can help me figure
it out. ``Completing the new OECD Pillar Two information return
represents a global undertaking requiring hundreds of data
points, many of which are complex composites of underlying
data. The size and complexity of the data requirements are
further complicated by timing. While in many cases the first
return has an 18-month lead time following the accounting
period end, subsequent returns must be filed in less time. So
even before you complete your first return, you will need to
make decisions about ongoing compliance and reporting.''
Mr. Plowgian, has the Treasury Department conducted any
study or any analysis on the compliance--I must say burden--
compliance burden or cost as it relates to Pillar Two for U.S.
businesses?
Mr. PLOWGIAN. We share the concern about compliance burden,
and this has been a central issue for our team in these
discussions, and we are seeking to reduce compliance burden
wherever possible.
So, for example, there is a country-by-country reporting
safe harbor for two years that provides that no top-up taxes
due with respect to a jurisdiction if the country-by-country
reporting shows an effective tax rate in a jurisdiction above a
certain threshold. That is intended to provide taxpayers with
time to phase in their compliance in various jurisdictions,
focusing first on the highest risk jurisdictions.
Mr. KUSTOFF. Right.
Mr. PLOWGIAN. There is also a--in the globe information
return, so the Pillar Two tax return that was released on
Monday, there is a five-year transition period that provides
for jurisdictional reporting as opposed to entity-by-entity
reporting. That, again, was intended to reduce compliance
burden for taxpayers by reducing the amount of specific
information that needs to be provided.
Mr. KUSTOFF. Thank you, I appreciate the answer. Let me ask
my question again. Has Treasury conducted any study as it
relates to the issue of compliance or compliance cost?
Mr. PLOWGIAN. I am not aware of any such study.
Mr. KUSTOFF. Okay, fair enough. So, Treasury--let me just
ask as my time expires--Treasury has no data as it relates to
the issue of compliance or compliance cost, correct?
Mr. PLOWGIAN. Again, I am not aware of any study in that
regard.
Mr. KUSTOFF. If there was, would you agree to share that
with this committee?
Mr. PLOWGIAN. I can check on that and get back to the
committee.
Mr. KUSTOFF. Can you let us know, one way or the other,
whether that exists? Will you agree to that?
Mr. PLOWGIAN. I will check on that and get back to you.
Mr. KUSTOFF. Thank you. I yield back.
Chairman KELLY. I thank the gentleman. I now recognize the
gentlelady from California, Ms. DelBene, for five minutes.
Ms. DelBENE. From the great state of Washington, Mr.
Chairman. Yes, not California. [Laughter.]
Chairman KELLY. From the great state of Washington.
Ms. DelBENE. There you go, there you go. Thank you, thank
you, Mr. Chairman.
And Mr. Plowgian, thank you so much for being here today
and for your time. You have highlighted the many reasons why
the United States needs to stay engaged in the Pillar Two
negotiations. And, given that the treatment of various tax
credits has been a key part of the conversation, I wondered if
you could talk specifically about a particular credit that I
know has been strongly supported in a bipartisan fashion as
very supported in our communities, which is the Low-Income
Housing Tax Credits, and kind of how Pillar Two would treat
LIHTC.
Mr. PLOWGIAN. Absolutely. So this was an issue that, when
the model rules were released, we received input from Congress
and from stakeholders about the need for additional guidance
about economic development credits and, in particular, the Low-
Income Housing Tax Credit. And, certainly, the Administration
has shared those concerns.
And we have been able, through the negotiations, to secure
administrative guidance that was released in February that
provides that what is known as qualified flow-through tax
benefits are protected under the Pillar Two rules. And what
that means is that tax credits that are used in tax equity
partnerships, which are the common structure for investments in
Low-Income Housing Tax Credits, are protected. They are treated
as qualified, flow-through tax benefits. And this was
definitely something that is unique to the U.S., these
structures.
And so it took a while to explain, really, to our
counterparts what these were, why they were needed. But it is
something that was very important to us. And the LIHTC is the
largest and most effective Federal program that we have that
encourages development of affordable housing.
Ms. DelBENE. Thank you. Thank you very much. Also, we saw
the announcement last week that more than 130 countries have
agreed to refrain from imposing Digital Services Taxes for an
additional year, while work continues on the implementation of
global tax reform. But Canada was one of five countries who did
not agree to the moratorium extension.
Mr. Plowgian, I wondered if you could describe the steps
that U.S. Treasury and the Administration are taking to address
the Canadian Government's continued interest in pursuing a
Digital Services Tax that targets U.S. companies and workers,
given that this would have serious tax and trade implications
for us going forward. And so I wondered if you could address
that, and what steps you might be taking.
Mr. PLOWGIAN. Absolutely. This is a critical issue. And as
you stated, the outcome statement, 138 countries joined in
extending the standstill on DSTs.
Treasury is engaged with Canada at all levels, including
Secretary Yellen, to dissuade them from implementing a
discriminatory DST. The Administration more broadly is engaged
with Canada, as well, through the interagency process, and
other agencies have raised this issue with their Canadian
counterparts.
Implementation of a DST by Canada would seriously undermine
the Pillar One negotiations. And as you saw, actually, Canada
was isolated on this issue. The other countries were not
necessarily objecting to DST standstill; it was other issues
that caused them not to join the outcome statement. But, with
respect to Canada, we are exploring all options, and we would
like to work with Congress to address that issue.
Ms. DelBENE. Thank you. Thank you again for being with us
today.
I yield back, Mr. Chairman.
Chairman KELLY. I thank the gentlelady from Washington. I
now recognize the gentlelady from Texas, Ms. Van Duyne.
Ms. VAN DUYNE. Well, I appreciate the time, Mr. Chairman.
I continue to be shocked that this Administration would
cede U.S. sovereignty to allow other countries to dictate
changes to the U.S. tax code. And this Administration could not
convince Congress to pass its extremist tax hike agenda, so it
has basically given the keys to our tax writers to Paris. You
know, whoever drafted this plan has to understand that this
attacks our tax base, our economic strength, and it transfers
wealth from the U.S. to countries abroad, and it benefits
countries abroad. It benefits workers abroad, not American
workers. So we have talked about this, but I am not sure I have
really gotten an answer.
So the Joint Commission on Taxation estimates that the U.S.
would lose over $120 billion in tax revenues. Do you agree with
that number?
I mean, you have given reasons why it may or may not, but
do you agree with how they got to that number?
Mr. PLOWGIAN. Well, as I have mentioned, the JCT analysis
looks at multiple scenarios, right?
And again, I think it is important to look at the baseline
in the JCT analysis. The JCT analysis baseline is adoption of a
Pillar Two by 40-plus jurisdictions, many of our largest
trading partners and major economies. And again, the midpoint
of their range for the impact of adoption by other countries of
Pillar Two on U.S. tax receipts is a $25 billion increase in
U.S. tax receipts.
Ms. VAN DUYNE. So that is the midpoint. But that is--as you
mentioned, I mean, they are looking at a number of different
scenarios, which I would hope that our own Treasury would look
at.
So can you tell me what the U.S. Treasury has defined as
would be the loss or the gain?
Mr. PLOWGIAN. The Treasury Department has provided
estimates on the adoption of the Administration's Green Book
proposals to enact Pillar Two, and those would----
Ms. VAN DUYNE. So you have done an independent analysis.
Mr. PLOWGIAN. On the adoption of the Administration's
proposals to enact Pillar Two, yes.
Ms. VAN DUYNE. Okay. So have those been shared with
Congress?
Mr. PLOWGIAN. Those have been shared with Congress, and
have been made publicly available.
Ms. VAN DUYNE. Okay. So what was your number?
Mr. PLOWGIAN. I, unfortunately, do not recall off the top
of my head, but it is multiple hundreds of billions of dollars.
Ms. VAN DUYNE. So the Treasury is saying that, as a result
of this, we are going to make a ton of more money, even though
what we are doing is allowing foreign nations to be able to
define our tax codes. And we are so sure that European
countries are going to be so favorable to U.S. companies and
not want to be competitive at all?
Mr. PLOWGIAN. I am sorry, I don't understand the question.
No, the Treasury has provided estimates of U.S. adoption of
Pillar Two, yes.
Ms. VAN DUYNE. And this is based on which of the scenarios
that JCT used?
Mr. PLOWGIAN. This is based on U.S. adoption of Pillar Two.
Ms. VAN DUYNE. Correct. But JCT used a number of different
variables. What is Treasury's variables?
Mr. PLOWGIAN. I don't think it aligns perfectly with JCT's
analysis.
Ms. VAN DUYNE. So how could they be so far off?
Mr. PLOWGIAN. Well, I think they do analyze different
scenarios.
Ms. VAN DUYNE. But you just said that you are using the
same. So which is it?
Mr. PLOWGIAN. I----
Ms. VAN DUYNE. Is it similar or is it not similar? And what
is the different numbers that they are using that you are not
using?
Mr. PLOWGIAN. I did not say that they were the same.
So our--Treasury's analysis assumes no change in foreign
law, which is the----
Ms. VAN DUYNE. Okay.
Mr. PLOWGIAN [continuing]. Convention for revenue
estimating.
Ms. VAN DUYNE. So we are expecting that they are not going
to change anything in that. We are just going to have a
freefall of dollars. Okay. Makes sense.
I mean, no offense to our European friends, but the U.S.
has taken a much more aggressive approach when it comes to
corporate tax rates. And we have seen that we have been
rewarded with growth. In 2008 the U.S. and EU were equally the
same size. By 2022 the U.S. economy had grown to $25 trillion,
whereas the EU and the UK together had only reached $19.8
trillion. America's economy is now nearly one third bigger. It
is more than 50 percent larger than the EU without the UK.
So to be--this tax deal seems like a race to the bottom,
and not what Republicans have been accused of at all. We
continue to hear from the other side of the aisle that TCJA was
a tax scam and created corporate loopholes. Yet in 2022
corporate tax revenues reached a record high of $425 billion,
or 43 percent higher than the final year of the Obama
Administration. And on top of that, the TCJA included the
world's first Global Minimum Tax.
So can you please define what is meant for companies by the
phrase ``pay their fair share'' that continues to be used to
justify this continued attack on U.S. corporate base?
Mr. PLOWGIAN. Well, I think the goals of the Pillar Two
project are to level the playing field for----
Ms. VAN DUYNE. No, I am asking can you define ``pay their
fair share''? Is there a percentage that the Administration
would deem fair? Is there an amount, a dollar amount?
Mr. PLOWGIAN. Again, I can speak to the Pillar Two project,
which is to level the playing field for U.S. businesses----
Ms. VAN DUYNE. Well, maybe----
Mr. PLOWGIAN [continuing]. Including----
Ms. VAN DUYNE. But you are repeating the same talking
points. Specifically, the phrase ``pay their fair share''
continues to be used. And I am asking, is there a dollar
amount? Is there a percentage that is ``fair''?
Mr. PLOWGIAN. I do not have a dollar amount.
Ms. VAN DUYNE. Do you have a percentage?
Mr. PLOWGIAN. No.
Ms. VAN DUYNE. Okay, I yield back. Thank you.
Chairman KELLY. I thank the gentlelady. The gentleman from
Iowa, Mr. Feenstra, is recognized for five minutes.
Mr. FEENSTRA. Thank you, Mr. Chair.
As you know, Mr. Plowgian, we don't live in a parliamentary
system like many of our negotiating partners, and the Treasury
does not have the authority to rewrite tax law and our system,
and we just noted that. But you noted that we--that you think
it is a need for a common international tax base to exist, and
yet you don't have any authority.
Did you tell our counterparts that you guys have really no
authority, that you can negotiate but you have no authority to
pass this?
Mr. PLOWGIAN. I think it is well known that only Congress
has the authority to change U.S. tax laws. And, certainly, my
counterparts are aware of that.
Mr. FEENSTRA. Okay, thank you for saying that. So how does
this move forward if we can't get it through Congress?
Mr. PLOWGIAN. Well, other countries are moving forward with
Pillar Two----
Mr. FEENSTRA. Yes, but----
Mr. PLOWGIAN [continuing]. And implementing them, and----
Mr. FEENSTRA. But if they go down that path and a
government says--you know, they say we are not going to pay the
tax, I mean, don't you see this as a massive lawsuit just
waiting to happen?
You guys are trotting down this path. But if I am a multi-
national corporation or a business, whatever, I am going to
say, wait a minute, no.
Mr. PLOWGIAN. They would not comply with foreign countries'
laws? I am not sure I understand the question.
Mr. FEENSTRA. Well, we already have GILTI, all right? I
mean, that was passed through Congress. So the multi-national
companies would simply say, no, we are not going to pay, you
know, this extra--I mean, it could happen that we don't have to
do the top-up tax or whatever it might be.
Mr. PLOWGIAN. The Pillar Two rules are taxes imposed by a
jurisdiction on residents----
Mr. FEENSTRA. Correct.
Mr. PLOWGIAN [continuing]. In that jurisdiction.
Mr. FEENSTRA. I fully understand.
Mr. PLOWGIAN. Yes.
Mr. FEENSTRA. Okay, so let me push this a little further.
Did Treasury recognize that the UTPR's treatment of non-
refundable credits would disproportionately harm U.S.
competitiveness?
I mean, what you are doing here is Treasury is favoring
cash grants and refundable credits over non-refundable credits,
which, in essence, uniquely harms U.S. Is that a fair
statement?
Mr. PLOWGIAN. Well, the Pillar Two rules, again, level the
playing field for U.S. multi-nationals by ensuring that all
multi-nationals pay a minimum level of tax.
Mr. FEENSTRA. Right, right. Refundable credits do. But how
about all the non-refundable credits, right?
Again, we have got a massive problem here that you didn't
take into consideration that everything--you know, from Europe,
they do a lot of refundable credits. We don't, and so we are at
a dramatic disadvantage. Correct?
I mean, look at the R&D credit. You know, we don't have a
refundable R&D credit. So now that can't be used. That puts us
at a dramatic disadvantage, correct?
Mr. PLOWGIAN. The----
Mr. FEENSTRA. Correct?
Mr. PLOWGIAN. So certainly we share the concerns about the
R&D credit. We think that is an important incentive for----
Mr. FEENSTRA. But it is not only the R&D credit, it is many
of our credits, right? We have very few refundable credits. A
lot of European nations, they have gone down that path of
refundable credits. We haven't. I mean, it dramatically puts us
at a competitive disadvantage?
Why did Treasury agree to allow UTPR to stack on top of the
corporate minimum tax and the U.S. GILTI tax rules--why did the
Treasury allow this to happen? Why did the Biden Administration
de-prioritize the fair treatment of GILTI?
Mr. PLOWGIAN. Again, the Pillar Two rules are necessary in
order to create a level playing field, and----
Mr. FEENSTRA. But you are--again, so we are not--really
care about GILTI? I mean, we are de-prioritizing GILTI, then?
Mr. PLOWGIAN. Then the UTPR, which you asked about, is
necessary as an enforcement mechanism to ensure that there is
not a competitive advantage that could be gained by China or
other jurisdictions.
Mr. FEENSTRA. So, what you are doing is you are giving the
middle finger to all our corporations and saying, you know
what? We are going to stack these things on top of each other.
In essence, that is what you are doing.
Why did the Treasury agree to allowing Pillar Two domestic
top-up taxes with their special carve-outs to the CCP state
subsidiaries take priority over U.S. anti-abuse rules of
subpart F and GILTI?
Mr. PLOWGIAN. The qualified domestic minimum top-up tax
rules are consistent with all other international tax rules
which provide a primary taxing right to a jurisdiction, taxing
its own residents on income that is sourced to that
jurisdiction.
The way our foreign tax credit rules work, we provide a
foreign tax credit for taxes paid to foreign jurisdictions.
Mr. FEENSTRA. So China gets special privilege, but not the
U.S. I mean, this is my great concern, is every time we look at
this Pillar Two we are at a disadvantage. And I just laid out
three different things, how we are at a disadvantage, not to
say that it is non-binding. I mean, you have no jurisdiction to
allow this to occur.
Thank you, and I yield back.
Chairman KELLY. I thank the gentleman. The gentlelady from
Wisconsin, Ms. Moore, is recognized for five minutes.
Ms. MOORE of Wisconsin. Thank you so much, Mr. Chairman and
colleagues, and thank you, Mr. Deputy Assistant Secretary, for
your patience here today.
I had one compliment for the Republicans regarding their
Tax Cut and Jobs Act, and it was that they imposed GILTI to
make sure that we were not contributing or leading a race to
the bottom. I thought it was a very bold move on their part.
Many of our colleagues have already asked you today of why
you didn't find GILTI--or why the OECD didn't find GILTI to be
totally compliant with what is now the proposed GloBE rule. Is
it because it continues to blend those tax rates, and still
creates the incentive to seek out low-tax jurisdictions?
Mr. PLOWGIAN. Well, as I mentioned, I cannot speak
precisely to the negotiations before my arrival. The October
2021 statement does suggest that the global blending of GILTI
was a significant consideration in that regard.
Ms. MOORE of Wisconsin. I am sorry, it was a consideration?
It was--but, I mean, my question to you was--okay, I will just
move on, since you don't seem to know.
Let me ask you it this way. Does GILTI still provide the
opportunity for the United States multi-national enterprises to
blend, and still incentivizes them to place their profits in
low-tax jurisdictions?
Mr. PLOWGIAN. Yes, absolutely.
Ms. MOORE of Wisconsin. So the race to the bottom is still
on. Thank you.
Mr. PLOWGIAN. Yes.
Ms. MOORE of Wisconsin. I want to ask you a series of
questions about the JCT report with the wide $400 billion
swing.
And so many here just say we just should do nothing. And if
we do nothing, there is no indication that the rest of the
world is not going to adopt GloBE. And that is when we would
lose hundreds of billions of dollars by not participating. Is
that right?
Mr. PLOWGIAN. Yes. In every scenario that the JCT
analyzes----
Ms. MOORE of Wisconsin. Okay, thank you.
Mr. PLOWGIAN [continuing]. It is better for the U.S. to
adopt Pillar Two.
Ms. MOORE of Wisconsin. Okay. Then they also talked about,
even if we comply, that there would be a loss. Is the reason
that you can't tease out these differentiations is because if
you leave, you know, your taxing authority in Ireland or your
product in Ireland versus France, which has a 25 percent
corporate tax rate versus Ireland, which has 12 percent, that
that matters with regard to how much profit you will earn?
Mr. PLOWGIAN. Yes. And in fact, the--one of the major
assumptions that drives the range is the effect of Pillar Two
on profit shifting. And the analysts that have looked at this
have concluded that Pillar Two would reduce the profit shifting
by multi-nationals in----
Ms. MOORE of Wisconsin. So in other words, if you kept the
profit in the United States, that is when you get to those
upper limits----
Mr. PLOWGIAN. Yes.
Ms. MOORE of Wisconsin [continuing]. Of revenue.
Mr. PLOWGIAN. Absolutely.
Ms. MOORE of Wisconsin. Keeping money here, in the great,
old USA. Thank you.
Other members have questions about providing monies to
other places. I am thinking now of, like, so-called third-world
countries. Does this legislation, the GloBE framework,
incentivize other countries--not forcing them, but incentivize
them to raise their corporate taxes to inure to the benefit of
their country?
And, of course, we would get a foreign tax credit for
having to pay that. Is that correct?
Mr. PLOWGIAN. That is right that--you know, especially as
you mentioned, developing countries do rely heavily on the
corporate income tax, and they rely on corporate income tax
incentives to attract investment analysts----
Ms. MOORE of Wisconsin. So it could really help out a lot,
huh?
Mr. PLOWGIAN. Absolutely. Analysts expect----
Ms. MOORE of Wisconsin. Okay, thank you.
Mr. PLOWGIAN [continuing]. Pillar Two will help with that.
Ms. MOORE of Wisconsin. Thank you. You know, I don't have
as much time as the chairman, so let me move on. [Laughter.]
Ms. MOORE of Wisconsin. The UTPR, there is a lot of focus
on that. And so my question is that there is a lot of rage
about it, but if we are compliant with the regimen, is there
some scenario where, you know, countries all over willy-nilly
will be grabbing our money if we are compliant? Isn't the point
of this to make sure that people comply?
Mr. PLOWGIAN. Yes. If the U.S. companies are subject to a
15 percent minimum tax in the U.S., they would not pay the----
Ms. MOORE of Wisconsin. So if I have got two children, and
I tell two sisters, and I say, ``Look, I am going to give your
allowance to your sister if she has to make up your bed every
day. You make your bed up,'' and then the other sister just
decries, ``Oh, she is going to take my allowance away, take it
away, take it away''--if you just make your bed up, that
wouldn't happen.
Thank you, and I yield back.
Chairman KELLY. I thank the gentlelady. I now recognize the
gentlelady from New York, Ms. Malliotakis, for five minutes.
Ms. MALLIOTAKIS. Thank you, Mr. Chairman. First, I want to
echo my colleagues' concerns and opinions, which is the truth,
which is that Treasury is taking Congress's tax-writing
authority and giving it to unelected bureaucrats in Paris. They
are giving it to foreign governments. It really doesn't make
any sense, and it is not something I think that this committee
will be tolerating. Congress is giving our opinion.
And, you know, in response to Chairman Smith, you said that
you take our input. Well, I hope you actually listen to it. And
I hope you are listening to the input of American businesses
all across the country that are concerned about what this means
in terms of compliance, how they are going to be able--it is
very complicated. It sounds like it is going to be a complete
accounting nightmare that will require them to divulge
proprietary information, a massive number of data points to
comply.
And there has been no regulations put out so far for--you
know, there is some guidance that came out earlier this week,
but I think there is a lot of people all across the country
that are concerned that this will certainly put American
businesses at a disadvantage.
And look, the deal is just a bad deal for the United
States, no matter how you look at it, as my colleague just laid
out a couple of points. It eliminates our competitive
advantage, and our government can lose $120 billion in tax
revenue to foreign governments. And that is not according to
Republicans on this committee. That is according to the Joint
Committee on Taxation.
And Treasury does not protect our status as the first
country to enact a Global Minimum Tax, and the U.S. will be
targeted with 40 percent of the tax burden under Pillar Two and
60 percent of the tax pillar--under Pillar One. I don't know
how you can agree to that.
China's state subsidies are more protected than ordinary
tax incentives like R&D tax credits here in the United States.
And I think that we have all alluded to this, and we believe
it, that China will, you know, avoid these higher taxes that
are under Pillar Two because the CCP will use direct state
subsidies to hide the true tax rate paid by, you know, Chinese-
controlled entities.
So how does--how do you intend to enforce this UTPR tax
rule, both for--domestically, with American companies, but also
with our competitors like communist China?
Mr. PLOWGIAN. Well, I would like to say that we do take
congressional input very seriously. We do meet with U.S.
businesses and other stakeholders regularly in the Office of
Tax Policy, and we take that input into the negotiations.
And with respect to the UTPR----
Ms. MALLIOTAKIS. I find it hard to believe that you are
taking input from American businesses and from Members of
Congress that would put us at such a disadvantage and would
really put American companies at a disadvantage.
But go on with the communist China. How would you--how are
you going to make sure that they commit to their end?
And I guess I will add a second part to that question. What
about the countries that have not joined this agreement? Aren't
there concerns that now America will be less competitive with
them?
Mr. PLOWGIAN. Well, I think that is exactly the point that
you raise with the UTPR. The UTPR is the enforcement mechanism
for the Pillar Two rules, and the UTPR provides that
implementing jurisdictions will impose tax on their residents.
And if--the multi-national group is not subject to a 15 percent
minimum rate in each jurisdiction in which it operates. And so
that is how the rules work. That is how they ensure a level
playing field. That is how we ensure that China and other
jurisdictions that don't implement the rules do not have a
competitive advantage by staying outside of the deal.
Ms. MALLIOTAKIS. Okay. That doesn't really, I don't think,
make sense to most people.
But Secretary Yellen has yet to share Treasury's economic
analysis of Pillar One with Congress. Why? What is she--why
does she refuse to share this information with Congress, when
she knows that all tax treaties must be ratified by two-thirds
of the Senate?
I mean, how do you expect a deal to be ratified if she
won't even share this critical information to be able to
evaluate it on its merits?
All we have seen so far is generic guidance adopted in
France.
Mr. PLOWGIAN. Yes. So the Pillar One negotiations, as I
mentioned, continue to have important economic terms that
remain open. And those include how the Pillar One taxing right
is coordinated with the existing international tax system. And
when we are able to resolve those issues, we plan to share
estimates with Congress.
Ms. MALLIOTAKIS. When do you anticipate that?
Mr. PLOWGIAN. I don't know exactly when that will be. I
need to--obviously, those issues need to be resolved with
negotiating partners.
Ms. MALLIOTAKIS. Okay. Well, my time is expired. Thank you.
Chairman KELLY. I thank the gentlelady. I now recognize the
gentlelady from West Virginia, Mrs. Miller.
[Pause.]
Chairman KELLY. Gentlelady, turn your mic on, please.
Mrs. MILLER. Can you hear me?
Chairman KELLY. Carol, we still can't hear you.
Mrs. MILLER. We will try a different one then.
Chairman KELLY. There we go.
Mrs. MILLER. I will have to get a real long neck going
here. Okay. Thank you, Chairman Kelly and Member Thompson.
I am pleased that you, Mr. Plowgian, have come here today
to answer some of our questions. However, I am really
incredibly disappointed and, quite frankly, disgusted by the
Biden Administration's abject failure to negotiate in America's
best interests at the OECD. In my view, you and your colleagues
have completely failed your fiduciary responsibility to the
American taxpayers, American workers, and American companies.
I realize that you haven't been involved in all of this,
but you are here now, and this Administration's failure is
shameful. It is reprehensible and downright outrageous. It is
really hard for me to believe. The American people empower you
to negotiate on their behalf. And instead you have surrendered
to a global socialist tax scheme that will ultimately make
America poorer and less competitive, placing our children and
grandchildren--our children and our grandchildren--their future
at risk, not to mention that you have denigrated our nation's
status as a beacon of strength, democracy, and capitalism in an
increasingly dangerous world.
There are two news headlines just this week. On July 17 the
Wall Street Journal wrote that Europeans are becoming poorer.
``Yes, we are all worse off,'' says the Bank of England's chief
economist. And from The Washington Post just yesterday,
``Britain should stop pretending it is a rich country.'' These
articles drive into how Europe's heavy subsidies, over-promised
social spending, and the lack of innovation have led to slow
growth, lower wages, and less spending and prosperity.
Mr. Chairman, I would like to submit these two articles for
the record.
Chairman KELLY. So approved.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mrs. MILLER. Mr. Plowgian, I just can't comprehend why the
Treasury would put the United States in a position to be forced
by unelected global bureaucrats to give up our strong economy
to match the failures of our allies abroad. Is the Biden
Administration willing to reverse course and fight at the OECD
to ensure our proven tax incentives like the Research and
Development Credit or the Low-Income Housing Tax Credit are
fully protected?
Mr. PLOWGIAN. It has been a shared and consistent priority
across the administrations that have participated in these
negotiations to protect U.S. interests, to protect U.S.
businesses, and to protect American workers.
Mrs. MILLER. That sounds like ``no'' to me.
Mr. PLOWGIAN. We continue to take input from Congress and
from U.S. businesses into these discussions and continue to
raise these important issues for the United States.
Mrs. MILLER. Like our chairman, I would like to have proof
of that, please.
Do you consider socialism to be a key goal of the Biden
Administration?
Mr. PLOWGIAN. Congresswoman, I----
Mrs. MILLER. I guess that is a no.
The OECD Tax Project is a thinly veiled attempt to neuter
the U.S. economy and drive America into the arms of global
socialism. Europe's economy struggles to adapt to the modern
year--world, and these countries aim to capture our U.S.
dollars to fund their socialist programs and government
handouts.
So I am just really concerned. While the OECD's proposed
deal would protect refundable tax credits, also known as direct
subsidy, most U.S. tax credits are not refundable, and for good
reason. The U.S. is the most innovative nation on the planet,
and we attract the best and brightest to start and grow their
businesses here. We do not need direct government checks
payable to industry, nor should we offer them. Many countries
in Europe don't prize innovation or competitiveness like we do,
and that is why so many of them come to the United States.
So these countries have the sovereign right to determine
their own tax code, incentive structures, and national agendas.
They do not have the right to try and fund themselves with U.S.
tax dollars, no matter what the Treasury Department might
think. Congress writes the rules, the administration
administers them.
I will yield back my time.
Chairman KELLY. I thank the gentlelady. I now recognize the
gentleman from Virginia, Mr. Beyer.
Mr. BEYER. Mr. Chairman, thank you very much.
Mr. Plowgian, thank you for sitting through this. I greatly
appreciate all of your work negotiating.
And I have great affection and respect for my Republican
friends on this committee, but I think, in my only four-and-a-
half years on this committee, this is the greatest
misunderstanding of what this legislation does that I have ever
seen.
I was ambassador U.S. ambassador to Switzerland for four
years in the midst of all the fights over taxes. And one of the
things I saw there is that there was an enormous amount of tax
evasion and tax cheating by major global corporations, not just
American, hiding assets or putting all of their costs in the
high-tax states like the United States and the UK and the like,
and putting all of their revenues in the low-tax places, three
percent, zero percent, one percent. I won't do ad hominem
attacks on countries, but, you know, you don't have to be
really creative. I will be happy to tell you who they were.
And this is the entire world community coming together and
saying we need to stop the tax cheating. We need to make sure
that we stand up to those small little countries, many of them
just islands who take all the revenue, don't charge any taxes
at all, but that one percent or two percent is enough to make
them happy.
In the meantime, my family business--we just celebrated our
50th anniversary Sunday morning--has been paying 37 percent for
years. And before that, as Mike knows, 39.6 percent. And it
makes me upset that somebody much, much bigger than I am is
paying three percent, five percent, six percent.
This lack of sovereignty--the sovereignty thing is the
emptiest issue I have ever seen. Mr. Plowgian and Janet Yellen
cannot impose this tax on us. We can do it. We are the only
people who can raise the tax from 10.5 percent to 15 to 20,
whatever. We have complete autonomy. We have not given our
sovereignty away to anybody else.
When we say those other people will be able to tax us, they
are just looking at undertaxed jurisdictions and saying we are
now going to charge them more in Poland, in Ukraine, in France,
in India, because--for the country that is undertaxed itself.
That is designed not to go after U.S. at 10.5 or 11 percent, it
is designed to go after the country that is at 3 percent and 2
percent and 1 percent. We are not changing. They are changing
their own tax policies for U.S. companies that are doing
business in their countries and are being undertaxed.
Most of these arguments just have not made any sense at
all. The one that has--Mrs. Miller brought up--is the concern
that we should have about our tax incentives, things like the
housing tax credit, the green energy tax credit, things like
that.
Mr. Plowgian, I have been told by Administration officials
that we are working hard to make sure that our tax incentive
structures we put in place are not going to hurt our companies,
because that is not a matter of us hiding revenues in low-tax
jurisdictions. That is taking advantage of everything. Can you
assure me that we are going to work as hard as we can to make
sure that this new GILTI regime--we are going to do our best to
avoid them affecting our tax credits?
And before you answer, one last point. LPTR is not a
decision we make. These are decisions that other countries
around the world are making to tax--increase their own taxes on
revenues in their country to penalize the tax havens that are
under-taxing. And to the extent that we are under by 1.5
percent, 3 percent, it is a relatively small amount.
By the way, that is taxes that we were not collecting
anyway. We weren't collecting it, which is--and now we are--
they are saying they are going to collect it because we won't.
We are not shifting tax revenue at all.
Mr. Plowgian, I give the floor to you.
Mr. PLOWGIAN. Yes, absolutely. We continue to prioritize
U.S. incentives in these discussions. We have been able to
agree on interpretive guidance that protects many of the
incentives that we have been talking about today: the Low-
Income Housing Tax Credit, green energy credits, other
transferable credits. And we continue to raise these in the
discussions.
Mr. BEYER. Yes, I also want to make the point, Mr.
Plowgian, that in no way is insisting that international
corporations who have been purposefully cheating on their
taxes, avoiding taxes through great manipulation, is a move to
global socialism. It just doesn't make any sense at all. What
we are trying to do is make sure that everybody is playing by
the same rules, and at least that U.S. corporations are being
treated fairly at all times.
Mr. Chairman, thank you for leading this. I yield back.
Chairman KELLY. I thank the gentleman. I now recognize the
gentlelady from New York, Ms. Tenney.
Ms. TENNEY. Thank you, Mr. Chairman and Ranking Member. I
am grateful that we are holding this hearing today to examine
President Biden's global tax surrender.
Ways and Means Republicans have been sounding the alarm
over the framework negotiated between President Biden's
Treasury Department and Janet Yellen and the OECD. This
comprehensive rewrite of global tax rules championed by the
Administration would result in fewer U.S. tax revenues, reduce
the global competitiveness of U.S. companies, and erode our
overall economic strength. It amounts to nothing more than
surrendering American tax sovereignty with U.S. taxpayers,
sending a check to the tune of billions and billions of dollars
to foreign countries.
In fact, according to analysis from the Joint Committee on
Taxation, the United States could stand to lose as much as 120
billion in tax revenue under the Global Minimum Tax negotiated
by the Biden Administration. On top of that, OECD released
recent guidance which substantiated Republicans' concerns.
President Biden's tax deal is unworkable, and it is ill
conceived. This guidance does nothing to address my concerns,
it only to only serves to underscore the deal's fatal flaws,
particularly on the Undertaxed Profits Rule, which will send
critical research and development abroad.
Had Treasury consulted with Congress instead of completely
neglecting the American people, perhaps they would have avoided
these pitfalls. And I want to make sure I emphasize what the
chairman had talked about earlier. Just accepting letters from
the majority is not negotiating or working with us in terms of
consulting.
So I want to turn my questions to you and thank you, sir,
for your service and for being here. But Mr. Plowgian, the
United States is the world's economic superpower, but we
represent just 25 percent of the global GDP--15 percent, if
adjusted for purchasing power. Multiple independent economic
experts have found that the OECD deal would disproportionately
impact the United States.
My first question is why would Treasury agree to a Pillar
One framework where U.S. companies face 60 percent of the total
burden of profit reallocation?
Mr. PLOWGIAN. I am sorry, Congresswoman. With respect to
your question, are you--which pillar are you referring to?
Ms. TENNEY. Pillar One.
Mr. PLOWGIAN. Pillar One. So a consistent priority across
the administrations, the different administrations that have
been involved in these negotiations, has been to protect U.S.
interests, to protect U.S. businesses, and to protect U.S.
workers.
In particular with respect to Pillar One, the--one of the
main purposes behind the negotiations--and this is based on
input on a bipartisan basis from Congress--is to get rid of and
prevent----
Ms. TENNEY. Hang on. Okay, go ahead. Let me ask you, so do
you think it is beneficial to the United States companies to
pay more in taxes?
I guess that is--was that the decision that was made in
implementing this?
Mr. PLOWGIAN. Well, I don't think that Pillar One
necessarily does that. So what----
Ms. TENNEY. Well, let me--can I ask you, do you disagree
with the Joint Committee on Taxation's assessment of the $120
billion tax revenue loss under the Global Minimum Tax
negotiated by Janet Yellen, Secretary Yellen?
Mr. PLOWGIAN. So under Pillar Two, the JCT analysis
actually shows multiple different scenarios. And again, with
respect to the baseline that the JCT analysis uses, which is
implementation of Pillar Two by more than 40 of our largest
trading partners, the midpoint of their range is an increase in
U.S. tax revenue from other countries implementing Pillar Two.
And indeed, in scenario 5, which shows implementation by
those same 40-plus jurisdictions plus implementation by the
U.S., they show----
Ms. TENNEY. So let me ask--you didn't answer my question.
Do you think that the Joint Committee on Taxation's numbers are
wrong, regardless?
So, in your opinion, the U.S. companies will net a greater
tax revenue and will not be penalized under the entire plan?
Mr. PLOWGIAN. The JCT analysis shows that the U.S. gains
revenue in multiple of those scenarios.
Ms. TENNEY. But----
Mr. PLOWGIAN. And----
Ms. TENNEY. A net, they net gain----
Mr. PLOWGIAN. Yes.
Ms. TENNEY [continuing]. Revenue.
Mr. PLOWGIAN. Yes, and it is----
Ms. TENNEY. How do you come up with that conclusion?
Mr. PLOWGIAN. Scenario 5 by the JCT shows an increase in
U.S. tax revenues of $236.5 billion over the 10-year window.
Ms. TENNEY. And what is that analysis based on?
Mr. PLOWGIAN. That analysis is based----
Ms. TENNEY. Is that an assumption that there is going to be
greater trade, or we are not sure of that?
Mr. PLOWGIAN. That--the assumptions that the JCT uses for
scenario 5 is adoption by the 40-plus jurisdictions, and
adoption by the U.S. of Pillar Two.
Ms. TENNEY. But don't you think that is a surrender of our
sovereignty to give the right of other countries to tax our own
entities in a way that we are not even doing ourselves and then
to put this in an unfair trading position in the end?
Mr. PLOWGIAN. Well, all countries have the sovereign right
to tax their residents under their corporate tax----
Ms. TENNEY. Right, but aren't we surrendering our right? We
are letting--we are subjecting our U.S.-based companies, who
are competing abroad, to this unfair scheme.
Mr. PLOWGIAN. The Pillar Two rules are taxes imposed by
jurisdictions on their own residents.
Ms. TENNEY. I understand. So--but overall, we are going to
end up losing because we are penalizing our own U.S.-based
companies when they try to compete in the foreign market.
And I think my time has expired, so I will have to talk to
you about it further in another time. Thank you.
Chairman KELLY. I thank the gentlelady. We now recognize
the gentlelady from California, Mrs. Steel.
Mrs. STEEL. Thank you, Mr. Chairman, for hosting this
important hearing. I love to yield my colleague--to my
colleague from Oklahoma, Mr. Hern.
Mr. HERN. Mr. Plowgian, just to follow up on my two
letters, and then what Ms. Tenney just responded to, are the
JCT assumptions based on information, work product that you
have given them to do an analysis on their assumptions of
revenue loss or gain?
Mr. PLOWGIAN. So certainly, the Treasury estimates----
Mr. HERN. That is a yes or no, if you have given them
information or not.
Mr. PLOWGIAN. My understanding is that the Treasury
estimators do speak with their JCT colleagues on a regular
basis.
Mr. HERN. So then it is a yes, you have given it to JCT
then. I was just curious because, again, we haven't seen it in
Congress. So as long as they have it, and we are basing these
estimates off of your work product, that would be interesting
to know.
Thank you. I yield back.
Mrs. STEEL. I am very generous with my time today, so I am
yielding to my colleague from Georgia, Mr. Ferguson.
Mr. FERGUSON. I thank the gentlelady.
Mr. Plowgian, is it appropriate to allow one state or
country to collect income tax on income earned outside its
border?
Mr. PLOWGIAN. So the way the international----
Mr. FERGUSON. Yes or no.
Mr. PLOWGIAN [continuing]. Tax rules----
Mr. FERGUSON. Is it appropriate to allow one state or
country to collect income tax earned on income outside its
border?
Mr. PLOWGIAN. Well, the United States collects income tax
on the income of CFCs that operate outside of the U.S. So the--
--
Mr. FERGUSON. So our treaties allow that?
Mr. PLOWGIAN. Our treaties allow that, yes.
Mr. FERGUSON. So if that is so, couldn't we just tax
foreign companies here on income earned outside the U.S.?
Mr. PLOWGIAN. The saving clause in our treaties allows the
parties to the treaty to tax their residents, generally,
without regard to the treaty. And so we have always taken the--
--
Mr. FERGUSON. I mean, if----
Mr. PLOWGIAN [continuing]. Position that GILTI and subpart
F are consistent with our treaties.
Mr. FERGUSON. But wouldn't that--if we start taxing
companies and other countries on income that they have earned
outside of the U.S., don't you think that would lead to tax or
trade disputes with the home country?
Mr. PLOWGIAN. We currently do tax income earned by entities
in other jurisdictions. So we tax the U.S. entity with respect
to income earned by CFCs in other jurisdictions under GILTI and
subpart F.
Mr. FERGUSON. Okay. Thank you.
Mrs. STEEL. Thank you, Mr. Chairman.
You know, this is very important discussions that we are
having. And thank you, Deputy Assistant Secretary, that, you
know, you are coming out. And I hope that Treasury, moving
forward, will work with this committee and fight for U.S.
businesses.
But having said that, your--on your statement you said
Pillar Two, which would increase U.S. revenue and strengthen
our tax system, and Pillar Two will be fairer--if I said
something that you didn't say, please let me know--on the world
stage, so better be in Pillar Two than not in Pillar Two.
So my concern on Pillar Two is--actually, all the members
already stated--that 60 percent of total--actually, that is the
Pillar One. Pillar Two, that total burden--that nearly 40
percent of additional tax burden for Pillar Two that--for U.S.
companies.
So could you explain, then, why you are saying that without
any detailed technical issues that we resolve before we
implement this, that you already saying that, that--how it can
increase U.S. revenue and strengthen, and then why it has to be
fairer, and then why we have to be in Pillar Two, not in Pillar
Two.
Mr. PLOWGIAN. Yes, absolutely. The JCT analysis shows that
in all scenarios that they analyzed, that U.S. adoption of
Pillar Two increases U.S. revenue as compared to not adopting
Pillar Two.
Similarly, the Treasury estimates for the Administration's
Green Book proposals to adopt reforms consistent with Pillar
Two show a significant revenue increase for the U.S. of
adopting those reforms.
Mrs. STEEL. Thank you. I still have a problem with double
taxation for our corporations here.
Having said that, I don't have enough time, so I am going
to just say really quick statement here. I was born in Korea
and raised in Japan. And it is great that we live in a global
world that allows international commerce. But I am here to
advocate for my constituents from southern California.
And could you and will you--you and Treasury--commit today
to negotiate with OECD rules that are equitable across
countries on behalf of my constituents?
And I can't in good faith sign off on policies without
knowing how it would affect our constituents and communities.
Will you commit today to provide Congress and--critical details
going forward, and bring all the important issues on Pillar Two
before we implement Pillar Two? Just yes-and-no question,
because my--I am already over my time.
Mr. PLOWGIAN. Yes, we do take U.S. interests and U.S.
business interests into the negotiations. And I can commit to
taking those into the negotiations, and we have provided
estimates on Pillar Two to Congress and made them publicly
available.
Mrs. STEEL. Thank you, Mr. Chairman. I yield back.
Chairman KELLY. I thank the gentlelady, and now would turn
to Mr. Schneider from Illinois for five minutes.
Mr. SCHNEIDER. Thank you, Mr. Chairman.
And Mr. Plowgian, thank you for your patience. I know it
has been a long afternoon. I am going to review some of the
things.
In your testimony we talked about the BEPS project, or the
Base Erosion and Profit Shifting project that was the genesis
of this whole initiative. What was the motivation for that
project?
Mr. PLOWGIAN. It was concern about the ability of multi-
nationals to shift profits into low-tax jurisdictions,
essentially.
Mr. SCHNEIDER. And what was [sic] the goals that the
countries participating set for the project?
Mr. PLOWGIAN. The basic idea was to try to develop reforms
to the international tax rules to prevent multi-nationals from
being able to shift profits into low-tax jurisdictions.
Mr. SCHNEIDER. And as we sit here now more than a decade
later, and we are talking about Pillar One and Pillar Two--that
often gets confusing, we have got initials like UTPR--what is
your sense of the commitment to the G20 countries to actually
moving forward and addressing the original motivations of the
BEPS project and what they are trying to achieve with Pillar
One and Pillar Two?
Mr. PLOWGIAN. Well, the G20 finance ministers this--earlier
this week reiterated their support for the two-pillar solution,
and the--in particular, the steps that countries are taking to
implement Pillar Two.
Mr. SCHNEIDER. So is it fair to say that, irrespective of
what we might do in the United States, countries around the
world, developed countries around the world are going to move
forward here?
Mr. PLOWGIAN. Yes, absolutely.
Mr. SCHNEIDER. Okay. Now, we have also talked about this
JCT analysis, and my colleagues have been focusing on one of
the scenario numbers. But there are multiple scenarios. What is
the key distinction between each of the different scenarios?
Mr. PLOWGIAN. The key distinctions between the different
scenarios are assumptions about which jurisdictions implement.
There are several scenarios in which the U.S. implements Pillar
Two. There are several scenarios in which the U.S. does not
implement Pillar Two. And then there is this distinction
between just the 40 baseline--or 40-plus baseline jurisdictions
adopting versus every single country in the world adopting.
Mr. SCHNEIDER. Okay. And what happens if the rest of the
world moves forward--and, as you noted, the leading economies
are committed to moving forward--and the United States stays on
the sidelines, what happens then?
Mr. PLOWGIAN. Yes. So if the entire rest of the world
adopts Pillar Two, which is the JCT scenario 1, and the U.S.
stays on the sidelines, that is the $122 billion number that
has been talked a lot about in this hearing. They find that the
U.S. would lose $122 billion of revenue.
Mr. SCHNEIDER. And the logic behind that is that--and one
of the numbers I saw is an estimate of 75 percent of the
profits that are now located in low-tax jurisdictions like the
Canary Islands, or the--or Bermuda is going to move to more
business, the G20 economies. The assumption is it would all
move to these other economies, not to the United States. Is
that correct?
Mr. PLOWGIAN. I think that is a large driver of the
numbers.
Mr. SCHNEIDER. Okay. But are things that the United States
could do to make it more attractive for these companies to move
their profits from Bermuda back to the United States?
Mr. PLOWGIAN. Yes. And in fact, we believe that Pillar Two
does make it more attractive for companies to move their
profits back to the United States because it reduces the tax
incentive to shift profits out of the U.S. to low-tax
jurisdictions.
And in fact, OECD and IMF analysis has suggested that
reducing the tax rate differentials between the U.S. and
offshore centers would significantly increase investment in the
U.S.
Mr. SCHNEIDER. So if instead of fighting amongst ourselves
we put our heads together and came up with strategic actions as
a body to make sure that the United States remains as the
innovative place in the world, actually, we wouldn't see a
decline in taxes, but, by the JCT model, we would see an
increase in revenues to the United States. Is that correct?
Mr. PLOWGIAN. That is correct. And certainly, Pillar Two is
part of that. In every scenario, if the U.S. adopts Pillar Two,
the JCT shows an increase in U.S. tax revenue as compared to
the U.S. not adopting.
Mr. SCHNEIDER. Okay. And let me finish on one other thing,
because I am worried about R&D, and I know we talked about it a
little bit. And this wasn't my observation, but I think it is
an important observation.
Two-and-a-half years ago we entered into what was a dark
moment for the country with the pandemic, for the world, as the
world shut down. All of the scientists around the world
gathered together or worked together to try to come up with
some response treatments for COVID, vaccines for COVID. And
countries tested some. As we sit here, two-and-a-half years
later, there are three vaccines that are standing that are
desired by the world. All three of those were invented here in
the United States because we have the greatest innovation R&D
system. We incentivize it, we motivate it, we support it.
I do want to make sure as we go forward--and I think it is
a fair concern--that whatever we do with Pillar Two makes sure
that we protect those incentives, those reasons for companies,
the best companies in the world, to base their research and
development in the United States, to bring the smartest people
and hire the smartest people in the United States, and make
sure, God forbid, if there is another pandemic or we have the
next revolution of AI, or whatever is coming next, that those
innovations are happening in the United States.
And with that, I yield back.
Chairman KELLY. I thank the gentleman.
Mr. Plowgian, I want to take a moment to thank you for
being here today, and for being patient, and enduring as we go
through this, because I got to tell you I think the main thing
that has bothered me since the beginning of when this--it is
the constitutionality of what the Administration is doing.
There is three distinct parts of our government. And I just
think, when we look at trade policy, when we look at tax
policy, all that begins in the House. And I am just trying to
understand why the Administration would go outside that model
and decide to do something on its own. So I am going to
encourage you to keep in touch with us. And the people that
asked you to get back with them, they asked you some questions
that you said you would get back with them, please do that. And
thank you so much for being here today.
Mr. PLOWGIAN. Thank you.
Chairman KELLY. We are now going to move to the second
panel.
[Pause.]
Chairman KELLY. I now recognize the second panel, and I
want to thank you all for going through this process. And I saw
you out in the back seats, but thank you all for staying with
us.
First of all, Ms. Mindy Herzfeld serves as a professor of
tax practice at the University of Florida, Levin College of
Law. She is also a counsel for the Potomac Law Group and a
contributing editor for the publication, ``Tax Notes.''
Ms. Herzfeld, thank you for being here.
Adam Michel is the director of tax policy studies at the
CATO Institute.
Mr. Michel, thank you so much for being here.
Anne Gordon is the vice president for international tax
policy at the National Foreign Trade Council.
Ms. Gordon, thank you so much for being here.
Mr. David Schizer is a dean emeritus and Harvey R. Miller
professor of law and economics at Columbia Law School.
Mr. Schizer, thank you for being here.
And Mr. Peter Barnes is an international tax adviser and
the counsel at Caplin & Drysdale. He is also a senior fellow at
Duke University.
It is nice to have the Blue Devils here. Thank you so much.
Thank you all for being here today, and I hope we can
continue on.
I just want to make sure that we understand the whole
purpose of what we are trying to do today. And I think that
sometimes we get caught up in the floor speeches. The real
problem--and I just addressed at the end of the first--is the
constitutionality of the Administration and the movement that
they are making without being the counsel of the Congress. And
so we will begin now.
Ms. Herzfeld, each of you, please, you have five minutes.
Mr. Hern is going to take over as the chairman. Thank you so
much.
STATEMENT OF MINDY HERZFELD, PROFESSOR OF TAX PRACTICE,
UNIVERSITY OF FLORIDA, LEVIN COLLEGE OF LAW
Ms. HERZFELD. Chairman Kelly, Ranking Member Thompson, and
members of the subcommittee, thank you for the opportunity to
testify here today on this important topic.
The background to my testimony is the Joint Committee on
Taxation's recent analysis estimating that Pillar Two of the
OECD agreement for a Global Minimum Tax will impose significant
costs on the U.S. Government.
To put the two-pillar project in perspective, I will start
by sketching out the international tax principles that have
been in place since the early 20th century, followed by changes
introduced by the OECD's project to crack down on cross-border
Base Erosion and Profit Shifting, known as BEPS, and the U.S.
Tax Cuts and Jobs Act. Together, BEPS and the TCJA set the
stage for the 2021 two-pillar agreement. I will explain why
certain aspects of that agreement negatively impact U.S.
revenues, but then turn to what might be done to fix it.
From its earliest days, the U.S. income tax system, as
applied to taxing U.S. persons' foreign earnings, can be
characterized by three principles: first, U.S. persons are
taxed on all of their income, regardless of where earned;
second, the United States provides U.S. taxpayers with a credit
for foreign taxes paid; and third, in general, U.S. tax law
respects corporate entities as separate taxpayers, and
historically has not subjected foreign companies' earnings to
U.S. tax until repatriated.
Now, beginning in 2013, the G20 and the OECD undertook a
project to address cross-border profit shifting and
digitalization of the economy. This BEPS project fell short,
though, in two respects. One, it didn't develop concrete
proposals for taxing the digitalized economy. And two, a U.S.
push to encourage expanded adoption of controlled foreign
corporation regimes mostly failed. But these missed
opportunities have been revived in the OECD's current work.
Now, partly in response to the same pressures that prompted
BEPS, the TCJA introduced a number of important changes to U.S.
international tax rules. Most importantly, in enacting GILTI,
the U.S. became the first mover in adopting a Global Minimum
Tax.
Now, unfinished business from the BEPS project led other
countries to propose and enact Digital Services Taxes. To limit
such efforts, the OECD undertook what is sometimes referred to
as BEPS 2.0, which includes the two pillars. Pillar One remains
focused on taxing large, highly profitable multi-nationals,
disproportionately impacting U.S. tech companies, and
reallocates a share of their profits to market economies.
Pillar Two, meanwhile, morphed into a Global Minimum Tax.
At a high level, other countries were trying to copy GILTI.
But in the OECD's hands, the scope of the idea has grown.
Now, if Pillar Two was simply a platform for other
countries to mimic GILTI, we wouldn't be here today. But three
changes made between the 2021 agreement and the release of the
OECD model rules turned the OECD minimum tax into a U.S.
revenue loser.
The first was that the UTPR, the Undertaxed Profits Rule,
provides other countries full rein to tax the domestic earnings
of U.S. multi-nationals.
Second, many U.S. general business credits, because they
are not refundable, are treated as reducing taxes paid and
increase the risk of a top-up tax being imposed.
And third, Pillar Two now encourages other countries to
enact their own qualified domestic minimum taxes, QDMTTs. The
details are complicated, but the principle is not. When other
countries increase taxes on U.S. multi-nationals, the U.S.
loses money because of the foreign tax credit. This is the
landscape we face today.
I would like now to sketch out possibilities for fixing the
deal to minimize its harmful impacts.
One, the U.S. could modify its domestic rules so that they
conform to Pillar Two. But this is unlikely to make up the
revenues lost to other countries, while also costing the U.S.
fisc.
Two, the U.S. could threaten other countries with
retaliation, but this could have harmful impacts on cross-
border trade.
Three, the U.S. could encourage the OECD to modify some of
the worst of its arbitrary rules. I think the guidance released
earlier this week suggests that this is a viable path.
And four, the OECD rules are based on financial accounting,
but it is Congress, through the SEC, that retains the ultimate
authority for the accounting guidelines, followed by publicly-
traded companies.
Over the longer term, the two-pillar agreement highlights a
failure in Treasury's interaction with Congress when pursuing
international tax negotiations. Congress could and should be
providing Treasury with clearer guidance here. A model could be
the Trade Promotion Authority, which guides the executive
branch when it is pursuing and negotiating trade agreements.
Thank you again for inviting me to testify. I would be
happy to answer any questions you may have.
[The statement of Ms. Herzfeld follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. HERN [presiding]. Thank you, Ms. Herzfeld.
Mr. Michel, you can start if you are ready.
STATEMENT OF ADAM MICHEL, DIRECTOR OF TAX POLICY STUDIES, CATO
INSTITUTE
Mr. MICHEL. Chairman Kelly, Mr. Hern, Ranking Member
Thompson, members of the subcommittee, thank you for inviting
me to testify today. I will begin by describing how the OECD
has abandoned its founding principles, then highlight the costs
of the Biden Administration's work with the OECD to overturn
domestic tax laws, and conclude with how Congress should
respond.
Founded more than a century ago, the Organization for
Economic Cooperation and Development was established to
preserve individual liberty and increase well-being. It did
this by expanding trade and international investment. An
important part of this work was the OECD's role in coordinating
international tax systems to reduce the double taxation of
international income.
In recent decades, the OECD has transformed into an
unaccountable, taxpayer-funded special interest group for our
government-centric economic policy model. This is a perversion
of the principles on which it was founded. Through its project
on Base Erosion and Profit Shifting, bureaucrats in Paris have
abandoned the pretense of objectivity. They have done this as
part of a multi-decade crusade against any country that dares
use its tax code to compete for international business.
Its most recent work has culminated in a two-pillar
proposal that aims to take domestic sovereignty over tax law
away from elected governments around the world, increase
economically costly corporate tax rates, raise new revenue from
primarily U.S. firms, and redistribute taxing rights away from
productive economies to consumer economies.
Pillar One is intended to replace extraterritorial Digital
Services Taxes targeted at the United States' most profitable
and iconic digital brands. These taxes have been widely
criticized on a bipartisan basis.
Pillar One's new digital tax isn't any better. It is
designed to redistribute the profits of the largest American
businesses to revenue-hungry governments across the world.
Pillar Two's 5-part 15 percent minimum tax is even worse.
It includes a new extraterritorial levy that will allow other
countries to reach into our borders and claim taxing rights
over the U.S. domestic income of U.S.-based companies.
Estimates indicate that Pillar Two will reduce U.S. revenues by
more than $120 billion, shrink domestic investment, and end
hundreds of thousands of American jobs.
Both Pillar One and Pillar Two are bad deals for the United
States. Every member on this dais, regardless of where you
think our--ultimately our tax laws should end up, should be
absolutely outraged at how the Administration has used the OECD
to circumvent your constitutional role in policy-making. By
side-lining Congress, Treasury's negotiators have colluded with
foreign powers to tax American businesses. They have done this
after Congress, on a bipartisan basis, rejected the
Administration's preferred tax policies.
So, what can Congress do?
First, Congress should instruct the President to
immediately withdraw from the OECD convention and stop funding
the close to 20 percent of the organization's budget we
support. The OECD is not only bad on tax policy, its projects
on inequality, labor markets, and climate pursue whole-of-
government approaches which seek one-size-fits-all solutions,
regularly calling for higher taxes, more redistribution, and
greater government subsidies. It is a disgrace that American
tax dollars are subsidizing an organization that is actively
undermining American competitiveness abroad.
Second, and even more importantly, after rejecting the
OECD's tax increases, America needs to be the most attractive
place to do business in the world. Building on the reforms in
2017, Congress should lower the corporate tax rate to the OECD
and Biden Administration agreed-upon rate of 15 percent or
lower; finish the transition to a full territorial
international tax system; and make full expensing for all new
U.S. business investments permanent. This would be the most
powerful message Congress could send to the OECD. We should be
playing the tax competition game they are trying to stop.
Your leadership is ultimately necessary to protect American
workers from a future dictated by policy-makers in Europe, a
future that would include higher taxes, slower growth, and
fewer jobs.
Thank you, and I look forward to your questions.
[The statement of Mr. Michel follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. HERN. I appreciate it. Thank you, Mr. Michel.
Ms. Gordon, you may proceed.
STATEMENT OF ANNE GORDON, VICE PRESIDENT, INTERNATIONAL TAX
POLICY, NATIONAL FOREIGN TRADE COUNCIL
Ms. GORDON. Good afternoon, Mr. Chairman, Ranking Member,
and members of the Tax Subcommittee. Thank you for inviting me
today to testify about this critical issue. I am the vice
president for international tax policy at the National Foreign
Trade Council.
NFTC is an association of U.S. business enterprises engaged
in all aspects of international trade and investment. Our goal
is to foster an environment in which U.S. companies can compete
globally.
On balance, the work of the inclusive framework fails in
several respects and, in too many instances, specifically harms
the competitiveness of American businesses. The continued
engagement of Congress is essential to creating stability and
protecting American interests.
First, let me briefly mention Pillar One. The business
community has repeatedly requested a final consultation on the
overall Pillar One concept, as there are several major
problematic issues still unresolved in both Amount A and Amount
B. There must be a cohesive, workable structure for tax
administrations and taxpayers on all of Pillar One, one that
has the backing of Congress. At this juncture, we feel it would
be premature for the U.S. to sign the Pillar One multilateral
convention being released later this year.
International tax is a complicated web of U.S. and foreign
laws and bilateral income treaties. And Pillar Two is adding to
that. With the Tax Cuts and Jobs Act enacted in 2017 by
Congress, there is a new international tax system that ensured
the foreign operations of U.S. companies were subject to
minimum tax under the first-of-its-kind GILTI framework. And
U.S. base erosion was prevented under the BEAD.
In short, the United States is not now, nor has ever been a
tax haven. Moreover, the notion that additional foreign minimum
taxes are needed to prevent the abusive use of the U.S. tax
code is unfounded.
The breadth of issues still remaining with the nearly
complete Pillar Two agreement is unsettling. The initial rules
were created without sufficient or--and at times disregard of
input from the business community. The final rules currently
contain multiple flaws that will hurt investment in the United
States.
More than anything else, what we need is time, time to
create a cohesive set of rules that accommodate U.S. tax
policies and ensure that U.S. businesses, U.S. workers, and the
U.S. economy are not disproportionately harmed. The recently-
announced delay in the application of the Undertaxed Profits
Rule, UTPR, is a step in the right direction, and is unlikely
to have occurred without the attention of Congress on this
project.
For many NFTC members, compliance with Pillar Two is a
looming reality, whether or not the United States makes any
domestic law changes. The more compliant the existing U.S. tax
system is deemed to be with Pillar Two rules, the better the
result for U.S. companies and workers. One such fix is the
earlier global consensus that current law GILTI is a compliant
Income Inclusion Rule, or IIR. In designing the Pillar Two
minimum tax, non-refundable credits are disfavored, while
refundable credits more commonly used in other countries, and
direct cash grants are favored.
In short, the use of many bipartisan credits, such as the
R&D credit, could reduce a corporation's tax rate below 15
percent and allow other countries to impose additional tax--
effectively, a clawback of U.S. tax credits.
It is extremely troublesome that U.S. negotiators have not
succeeded in broadly protecting U.S. credits, while other
countries were given specific carve-outs for their incentives
and industries. Even the acceptance of refundable credits
merely adds them to the denominator of the ratio, which is tax
paid over taxable income. This is helpful in many fact
patterns, but it can still result in additional tax for those
with significant investments, such as the energy credits. The
new preferential treatment of transferable credits, similar to
that of refundable credits, is not without numerous
complexities which may result in limited practical utility.
Above and beyond the policy concerns, the Pillar Two tax
return is unworkable and an unadministrable compliance burden.
It puts U.S. companies' sensitive financial information and
competitive advantage at risk for disclosure or leaking to non-
U.S. competitors. NFTC members have estimated the Pillar Two
returns, as envisioned, would provide anywhere from 50,000 to
200,000 data points, which is far greater than the 1,000 data
points estimated for the EU's country-by-country reporting. One
goal of the Pillar Two work was to provide tax certainty and
reduce the number of tax disputes, but the opposite is more
likely to occur.
I do want to briefly mention the developing countries have
expressed concern and dismay with the OECD inclusive framework,
preferring the UN. Employing two competing processes or
layering a UN regime over the OECD pillars would be disastrous.
At this juncture, it appears U.S. companies and the U.S. fisc
may lose, whether or not the U.S. adopts a conforming Pillar
Two regime. However, the OECD has shown flexibility in
interpreting and clarifying its rules, including the provision
of numerous temporary safe harbors, with the one under the UTPR
just this week.
Congress's attention to this process has been helpful in
obtaining this temporary relief. We urge Congress to continue
working with the OECD, Treasury negotiators, and foreign
counterparts to create a regime that works with the U.S. tax
code, protects U.S. companies and workers from an unlevel
playing field, and encourages investment and economic growth in
the U.S. Thank you.
[The statement of Ms. Gordon follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. HERN. Thank you, Ms. Gordon.
Mr. Schizer, you are recognized for five minutes.
STATEMENT OF DAVID SCHIZER, DEAN EMERITUS AND HARVEY R. MILLER
PROFESSOR OF LAW AND ECONOMICS, COLUMBIA LAW SCHOOL
Mr. SCHIZER. Representative Hern, Ranking Member Thompson,
and distinguished members of the subcommittee, thank you for
inviting me to this hearing.
Our international tax system is famously complicated, but
some things are simple, or at least they should be. And I am
here to make two simple points: first, in the United States,
taxes must be imposed by Congress, not the President; second,
the tax policy of the United States should be set by the United
States, not by other countries.
Unfortunately, in joining the Pillar Two agreement, which
imposes a Global Minimum Tax on large corporations, the Biden
Administration has strayed from both of these principles.
Proceeding without congressional approval, they have given
other countries significant influence over our tax system.
So Congress is now under pressure to enact a Global Minimum
Tax that satisfies Pillar Two. Technically, the agreement
doesn't compel it to do so, but there is a steep price for
saying no: other countries will be able to collect and keep
this tax. So, if a U.S. company like Apple uses a tax credit to
cut tax on its U.S. income, U.S. income below 15 percent,
France and Germany will be able to take away this tax savings,
even though Congress meant to provide it. This puts Congress in
a difficult position.
The message, essentially, is adopt a Pillar Two minimum tax
or other jurisdictions will do it for you. This denies Congress
the ability to make an independent choice. By analogy, think
about a non-profit that asks for a donation, which is supposed
to be voluntary, but then adds, ``if you don't give us the
money, those big guys over there will take it from you.''
This pressure is all the more inappropriate because the
U.S. already has three minimum taxes in place. In fact, we led
the way in enacting them. But our minimum taxes don't satisfy
the OECD. The Biden Administration should have said that we
would join Pillar Two if and only if our minimum taxes were
sufficient. Instead, the Administration got out ahead of
Congress, undercutting Congress's ability to make an
independent choice about Pillar Two.
This is not the way taxes are supposed to be imposed in
this country. Under the Constitution, only Congress has the
power to lay and collect taxes. This is an expression of a
fundamental idea: No taxation without representation. The
President can't just rewrite the tax law on his own. For
example, the U.S. had one of the highest corporate tax rates in
the world until Congress cut it from 35 percent to 21 percent 5
years ago. But if Congress had voted down this measure, could
the Trump Administration have done this on their own,
announcing that they would collect only a 21 percent tax?
Obviously not. The same is true for the Biden Administration.
The right way to change our minimum tax regimes is to
appeal to Congress or, if they say no, to voters, not to an
international organization. This brings me to my second point:
Should we really give the OECD so much power?
Unfortunately, the U.S. now has one set of minimum taxes,
the OECD has another, and they aren't in sync. This pressures
us to revise our rules to spare U.S. businesses from double
taxation. According to the Joint Committee, as has already been
discussed, we also are going to lose a great deal of revenue.
Some might call it unfair to blame the Biden Administration
for what other countries do. For example, if a U.S. multi-
national like Apple wants to do business in France, Apple
chooses to be subject to whatever taxes France imposes on
profits there. But let me emphasize ``on profits there.''
Pillar Two does more than that. With the UTPR [sic], France can
collect tax from Apple's French subsidiary based not on the
French subsidiary's income in France, but on the U.S. parent's
income in the U.S.
To see how aggressive this is, imagine that you live in
Virginia and your daughter lives in California. Obviously,
Virginia can tax you, since that is where you live and earn
money. But should California also be able to tax you, and to do
it through your daughter? Is it okay for California to tax your
daughter based not on what she earns in California, but on what
you earn in Virginia? This is what a UTPR does.
When faced with this sort of overreach, the Administration
should push back and threaten retaliation, as the House has
done. But in committing to Pillar Two, the Administration
essentially pledged not to object to this overreach. Arguably,
they encouraged it.
To sum up, the Administration has empowered other countries
to reshape our tax law, while curtailing Congress's role. This
is not the way our system is supposed to work.
Thank you, and I look forward to your questions.
[The statement of Mr. Schizer follows:]
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Chairman KELLY. Thank you, Mr. Schizer.
Mr. Barnes, five minutes.
STATEMENT OF PETER BARNES, INTERNATIONAL TAX ADVISOR AND OF
COUNSEL, CAPLIN AND DRYSDALE
Mr. BARNES. Representative Hern, Ranking Member Thompson,
and distinguished members of this committee, I appreciate this
opportunity to speak on Pillar Two. This is a critically
important proposal, and how the U.S. responds will have a major
impact on our companies, their global competitiveness, and the
U.S. fisc.
Yes, Pillar Two represents a significant change in
international tax law, but it comes as the next step in decades
of efforts to align international tax rules so that
corporations can and will run their businesses based on market
fundamentals, not taxes. The U.S. competes very successfully in
that environment.
The U.S. is the model for much of Pillar Two. Congress
deserves credit for enacting GILTI, which demonstrated the
soundness of ensuring corporate income earned outside the
parent company's home jurisdiction is subject to a minimum tax.
The reason the United States should join this initiative is
quite simple. More than 100 countries will adopt Pillar Two in
their domestic laws. The proposal is not going to be abandoned.
So, the United States faces a choice: join this exercise or
stand outside the process. The merits of joining are clear.
First, the U.S. Fisc is better served by joining Pillar
Two. The revenue impact on the United States is uncertain, as
detailed in the Joint Committee's analysis. But one conclusion
from the JCT is clear: the U.S. will earn more tax revenue if
it adopts the Pillar Two agreement than if the U.S. stands
aside while other countries proceed.
Second, U.S. multi-national companies will benefit,
compliance burdens will be reduced, and competitiveness will be
improved. Today, U.S. companies are subject to our GILTI tax,
but no other country has a similar regime. Competitor companies
often pay little or no tax on low-taxed earnings of foreign
subsidiaries. The Global Minimum Tax will benefit U.S.
companies by subjecting their competitors to a minimum 15
percent tax.
The legislative changes required for conformity with Pillar
Two are modest. The Build Back Better legislation approved by
this committee in the House of Representatives in 2022 included
the changes to U.S. law required to align the U.S. with Pillar
Two. The path forward is well marked.
Much of the criticism of Pillar Two has centered on the
Undertaxed Profits Rule. Critics argue that the UTPR violates
tax sovereignty. This argument, in my view, misunderstands the
concept of sovereignty. If a country adopts tax rules into its
law, that is the quintessential exercise of tax sovereignty.
Indeed, that is the argument the U.S. has made for three
decades when countries object to the use of arbitration for
dispute resolution under treaties. Countries complained that
allowing arbitrators to decide a tax dispute was a denial of
sovereignty. No, the U.S. responded repeatedly. When a
sovereign adopts a rule such as tax arbitration, there is no
loss of sovereignty because it is the decision of the sovereign
to establish that procedure. The argument that Pillar Two
undermines U.S. tax sovereignty is not persuasive.
More importantly, the UTPR is an important but diminishing
feature of Pillar Two. If a country adopts the key elements of
Pillar Two, there will be no undertaxed foreign income earned
by that corporation--country's corporation subject to the UTPR.
The UTPR safe harbor regarding home country income announced on
Monday by the OECD eliminates, at least temporarily, the risk
that other countries will tax income earned by U.S. companies
from U.S. activities.
Pillar Two is the result of many compromises. Any informed
critic can find elements of the proposal that need further
work. Fortunately, discussions about the technical issues are
still under debate. So far, the United States has had a full
voice in those discussions, but there is a limit to what weight
the U.S. interests will be given if the U.S. chooses to stand
outside Pillar Two. The U.S. must join the initiative so that
the U.S. voice will continue to be strong and effective in
negotiating these rules.
Some critics of Pillar Two act as if the proposal can still
be derailed. At last count, 138 countries indicated their
intention to join. The choice facing the U.S. is binary: adopt
the proposal or step away from the table with the attendant
consequences.
I urge this committee to align the U.S. tax rules with
Pillar Two. That will continue our leadership in developing
sound international tax practices that benefit our companies
and their ability to drive economic growth. Thank you.
[The statement of Mr. Barnes follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. HERN. Thank you, Mr. Barnes. I would like to thank each
of the witnesses for your expert testimony, and we are going to
now move into the question-and-answer session, and so I will
recognize myself.
The overall goal of Pillar Two is to ensure that all
companies are paying a minimum rate of 15 percent everywhere
they operate. It makes no sense to me that non-refundable tax
credits are treated worse than refundable tax credits in the
OECD Pillar Two rules. The OECD's whack-a-mole approach to
eliminate tax competition is ill considered.
Ms. Herzfeld, as you know, the Pillar Two rules favor
refundable tax credits. JCT finds that the effectiveness of
Pillar Two might be significantly weakened by the introduction
of refundable tax credits by low-tax jurisdictions. ``The
country that introduces them thereby preserves its fiscal
competition feature without visibly having a low-tax rate.''
Ms. Herzfeld, do these rules, these rules that were just
stated, do these rules eliminate tax competition, or merely
just create a new competition for direct-pay tax-tradeable
subsidies?
Ms. HERZFELD. Thank you for the question. Yes, they do, the
latter part of your question. They shift tax competition to
other areas. One is in the form of the type of tax incentives
that countries could offer. And so countries can compete along
the lines of credits that are blessed by the model rules.
The other way they can compete are also noted by the Joint
Committee. They can compete for--in the substance-based income
exclusion, so that allows an exclusion from the top-up tax, and
so they can compete in that area, as well.
Mr. HERN. And with that would come negotiations that would
get you--as a company or in a country, you would--you would
negotiate that with a body like ours, supposedly, or something
similar, to be able to get those. And it would be a
competition, much like it is today. It would be influence
peddling and lobbying, and it would be all of those combined,
except in a different world. So, it is the old saying, ``Tell
me the rules and I can play the game,'' is that fair?
Ms. HERZFELD. Correct. And also note that they--in addition
to tax incentives, this encourages a shift to direct subsidies.
And so, there is [sic] lots of different ways that countries
can and probably will compete to encourage investment in their
jurisdictions.
Mr. HERN. So, it would be credits that would incentivize
certain companies to possibly stay there and do business and
pick and choose winners and losers for in-country competition,
favoring one competitor over another, possibly. All these
things come into play that would create a whole other--another
set of rules that we would have to put in place and look at. Is
that correct?
Ms. HERZFELD. Yes. I mean, the reality is countries compete
for investment. And, if one avenue is shut down, then they will
likely move to another.
Mr. HERN. Do you see this creating--I think you have
alluded to this--creating a sort of a whole new government
free-for-all with added complexities and burdens that go along
with that? Is that--I believe that is what you are saying.
Ms. HERZFELD. So, these rules squash certain types of
investments, and so they will encourage other types of
incentives to proliferate, which--yes, you have added
complexity in shutting down one area, and--but taxpayers are--
and businesses are always creative in trying to maximize their
return on their investments in jurisdictions, and countries are
creative in trying to encourage businesses to invest there.
Mr. HERN. Mr. Schizer, if I may, I really appreciate your
scenario of really bringing it down to what everybody can
understand. In your example of Virginia, my colleague here
said, yes, they would love for California to be able to tax
everybody in every state for all----
Mr. SCHIZER. No, I said your daughter. [Laughter.]
Mr. HERN. Oh, oh, my daughter in your state, even though
she has never been there.
Mr. Schizer, can you go into detail how the OECD's favoring
of certain credits over others can be problematic in the future
as it relates to the sovereignty of this nation, and how the
powers of this committee laid out in the Constitution could be
usurped?
Mr. SCHIZER. My apologies. Thank you for the question.
Look, the Constitution is clear about this, that this is
the prerogative of Congress, and this is a very old idea. We
fought a revolution years ago because of concerns about a king
and a distant parliament who weren't listening to American
voices. And the Declaration of Independence emphasizes that
taxes can't be imposed without representation. So it makes
sense that revenue bills begin with you. They begin in the
House because you are closest to the people.
Now, it is true the President does also partner with
Congress in negotiating with foreign countries. But it is a
partnership. When there are treaties, the President negotiates,
proposes, but it is the Senate that needs to ratify. So we
really don't want the President acting unilaterally, and I want
to emphasize this is not--and should not--be a partisan point.
Sometimes the president is a Democrat, sometimes the president
is a Republican, and it should not be the case that a president
can partner with an international organization to circumvent
the will of Congress.
And I will just give an example that maybe points in the
other direction. There has been talk about the energy credits
that were passed last summer. If the next President doesn't
like them and says, ``Please repeal them,'' it will be up to
Congress to decide whether to do that. It should not be
possible for the President to go to the OECD and say, hey,
trigger a top-up tax to eliminate those, because I don't like
them.
Now it is--thank you.
Mr. HERN. Thank you. I am going to--one last question, and
we will move on to the ranking member.
Ms. Herzfeld, a few of my colleagues on the other side of
the aisle have made a push to modify the U.S. rules for taxing
the foreign income of U.S. multi-nationals so that it is
calculated on a jurisdictional basis, also known as country-by-
country. As you know, this is the primary change to GILTI to
come into conformity with Pillar Two.
Would this modification change JCT's outlook for the U.S.
fisc? Meaning, if the U.S. modified the GILTI rules to be
compliant with the OECD-brokered deal as JCT estimated, the
U.S. will still lose billions of dollars in revenue?
Ms. HERZFELD. So I don't have the details behind the Joint
Committee's analysis, but it seems to me that the two primary
factors that are driving the numbers that showed a loss of U.S.
revenues were, one, the fact that if other countries enact new
domestic minimum taxes to increase their tax rate to 15
percent, the U.S. has to provide a foreign tax credit for that.
So that is an automatic revenue. So other countries increase
their taxes, ours goes down. Country-by-country GILTI doesn't
change that. And the other is the UTPR that imposes a tax on
U.S. domestic source income. And country-by-country GILTI
doesn't change that, either.
Mr. HERN. Thank you for your response. I would like to
recognize the ranking member, Mr. Thompson.
Mr. THOMPSON. Thank you, Mr. Chairman. Thanks to all the
witnesses for being here today.
Mr. Barnes, we have heard quite a bit from our Republican
colleagues on the topic of sovereignty, and why they believe
that the Pillar Two agreement threatens the United States
sovereignty to enact tax laws. But isn't it true that each of
the countries in the inclusive framework, including the United
States of America, has the right to enact or not to enact
domestic legislation that aligns with Pillar Two?
Mr. BARNES. Thank you for the question. Yes, every country
retains its authority, and it is an important point to note
that there is not a one-size-fits-all. The OECD's agreement is
trying to align the rules. It is not prescriptive to say you
must do A, B, C, D, E. There is flexibility within the
framework for how countries choose to adapt. And that is why
modifying the U.S. GILTI rules may be sufficient for the U.S.,
even though another jurisdiction takes a different approach to
aligning with the proposals under Pillar Two.
Mr. THOMPSON. Thank you. And doesn't the fact that we are
having this hearing today and the fact that the elected Biden
Administration has been negotiating with the OECD mean that we
are not ceding our sovereignty?
Mr. BARNES. Well, that certainly would be my view, thank
you.
And again, I come back to what I said in the oral
statement, which is in arbitration for tax disputes other
governments have said, ``That is a loss of my sovereignty'' and
the U.S. has said, ``No, you as the sovereign can choose to
have certain disputes settled by arbitration, and that does not
impede your sovereignty one bit.''
Mr. THOMPSON. Thank you very much. Mr. Barnes, again, many
of my colleagues across the aisle seem to think the U.S. should
abandon these OECD negotiations. As a matter of fact, one of
the witnesses mentioned that, too. I mentioned to the chairman
that, you know, that old saying that if you are not at the
table, you are on the menu, and I think that might hold true
here, as well.
In your view, which would be better for American businesses
and American workers, remaining at the table to ensure a fair
outcome or walking away from the table entirely?
Mr. BARNES. Well, I am a huge believer that we need to be
at the table and our voices heard.
One thing that is important--and I spent four-and-a-half
years at the Treasury Department--one thing that is important
to remember is that our voice is widely respected within the
world. We have been a leader in developing international tax
principles for a century, and our voice is heard. But if we
walk away from Pillar Two, then our concerns will not be taken
into account with nearly the same weight as if we are a player
in the exercise.
Mr. THOMPSON. Thank you, and thank you for pointing out the
time you spent at Treasury. I think we have a very unique
witness in you, Mr. Barnes, the fact that you have been at
Treasury, you have been a player in negotiations such as these,
you have been in the private sector, and you have been a tax
consultant to many major corporations and entities. I think you
bring a lot of expertise to the witness dais today.
Thank you very much, Mr. Chairman. I yield back.
Mr. HERN. I thank the gentleman. Now I would like to
recognize the gentleman from Georgia, Mr. Ferguson.
Mr. FERGUSON. Thank you, Mr. Chairman, and thank you to the
witnesses for being here today.
Ms. Herzfeld, I am going to start with you. You may have
been here, and you may have heard Mr. Plowgian telling us that
our treaties allow us to tax income earned outside its borders.
And he cited the example of CFCs. Do you think that this is
accurate?
Ms. HERZFELD. So, our CFC regime, which is known as subpart
F, has been in place since 1962, and it is widely accepted that
treaties allow for taxation of foreign earned income by CFCs.
Subpart F--and that is what GILTI does also.
There is a big difference between subpart F and GILTI and
the taxing provisions of the UTPR, which allow for
extraterritorial taxation in a way that violates existing
treaty principles. And so there is--although the U.S. laws that
are in place are consistent with treaties, the UTPR is much
more questionable.
Mr. FERGUSON. So it is--in your opinion, that would lead to
less stability in international tax administration, and
probably lead to disputes with our trading and taxing partners?
Ms. HERZFELD. I think there are big, open questions about
whether the UTPR is consistent with existing tax treaties.
Several European academics have recently written a long article
explaining why they think it is not consistent with treaties,
and so I don't know what happens when you have a lot of
countries enacting a law that conflicts with their existing tax
treaties.
Mr. FERGUSON. And we should certainly be having
communication with the Treasury Secretary and the
Administration, sharing work product. And we should--this
committee should be at the forefront of determining that.
Moving on, Mr. Schizer, if I heard you right--we are
talking about refundable credits--if a company here in the U.S.
has $300 million of taxable income, 400 million, a billion,
whatever the number is, and then they decide that they are
going to take advantage of the Green Energy Tax Credits, and
they take advantage of 300 million of those, and they
effectively drive their tax rate here in the U.S. down to 0--
yes?
Mr. SCHIZER. Yes.
Mr. FERGUSON. Okay. Now, if that happens, then a European
country could say, well, you have an effective tax rate of
zero. Therefore, we are going to tax an additional 15 percent
to bring you up. Right?
Mr. SCHIZER. That is the risk I was identifying, yes.
Mr. FERGUSON. So, we are going to--let's just think about
this for one second. So the corporations that my colleagues on
the other side of the aisle and this Administration have railed
against about paying their fair share in this example would go
from $300 million of taxable income to 0, and then we are going
to take 15 percent of their--of that, and we are going to give
it to somebody in France or Italy or Germany or wherever.
Mr. SCHIZER. So the OECD has given a bit of guidance giving
comfort on this. But I can tell you, as someone who has
practiced tax law for 30 years, we have never heard the last
word on anything. If they wanted to change the guidance
tomorrow, there is a risk that those credits become ineffective
because all of a sudden France is nullifying them with a tax.
Mr. FERGUSON. Okay. So we are not collecting tax revenue
here, and we are giving tax revenue to a foreign country.
Mr. SCHIZER. Yes, sir.
Mr. FERGUSON. Okay. Mr. Michel, I have heard a witness say
here that we are faced with a--what I believe is a false
choice, which is either join in the discussions or be left on
the sidelines. We are America. We are the world's number-one
economy, the number-one place to innovate. We have the most
productive workforce. We are in a unique spot.
Instead of being--instead of our voices being heard,
shouldn't our policies dictate, and should not we--or shouldn't
we be putting America in a place of leading the world and not
simply following behind it?
Mr. MICHEL. Thank you for the question. I do believe that
America should be setting the tax policy that is right for us
and is growing our economy and helping American workers here in
the United States. And the way we do that is keeping our taxes
low, setting policies that encourage innovation and investment.
And the--we have been at the table as part of this, the
ongoing process. And you can see where it has gotten us. The
U.S. fisc is about to lose hundreds of billions of dollars,
investment in the United States is projected to go down, and
members up and down the dais here were just pleading with a
representative from Treasury to make sure that companies can
still access tax credits that you all put into place.
Mr. FERGUSON. One more quick question for Ms. Gordon.
Ms. Gordon, at the end of the day, American business
counts. It counts because it provides jobs for American
workers. Do you see this creating more jobs or taking away jobs
from America?
Ms. GORDON. As currently envisioned, it seems to reduce the
number of jobs in the United States.
Mr. FERGUSON. Thank you. I yield back.
Mr. HERN. I thank the gentleman. The gentleman from Texas,
Mr. Doggett.
Mr. DOGGETT. Thank you very much.
Mr. Michel, though you and I have very significant
disagreements about most everything you testified to, one thing
that I do want to say is that you are to be commended for your
candor in your testimony and particularly that portion of your
written testimony that you indicate that eliminating corporate
taxes is a worthy goal, because I think that is exactly what
these folks have been trying to do. They reduced the corporate
tax rate by 60 percent in 2017 and, of course, for those multi-
nationals that have stashed so much money down in the Cayman
Islands, $60 billion in 1 year, and are only paying 0.6 tenths
of 1 percent in taxes, they have gotten very close to your goal
of just eliminating corporate taxation on those monies. And
defending this kind of system assures that we will have more of
the same kind of tax scam.
Mr. Barnes, I want to ask you about some of the arguments
that I have heard from my colleagues. One of them has been,
well, why didn't the Treasury Department just go over there to
Europe and get exempt every tax credit that we have? Don't you
suppose, Mr. Barnes, that if we ask for that, that every other
country would ask to have every credit and preference and
loophole in their tax code exempted, as well, so that the idea
of a minimum tax and stopping the race to the bottom would be
totally meaningless?
Mr. BARNES. Well, I suspect--thank you. I suspect everyone
in this room has been involved in negotiations, in tax
negotiations, whether it is tax treaties or a negotiation like
this, Pillar One/Pillar Two exercise. Every country comes with
its sovereign interests. And the idea that the U.S. can
completely bully its way through is, I think, a false optimism.
Yes, we have a lot of authority. But if our take-it-or-
leave-it is--all of our stuff is good, other countries are
going to insist on the same approach.
Mr. DOGGETT. We can't just be a go-it-alone if we want to
be a true leader in the world.
And the other argument that they make is, well, we have got
this GILTI tax, why didn't they just go over and get it
accepted and approved? And I know that some negotiations are
still continuing, but the GILTI tax has a few loopholes in it.
One of them is that they blend the country-by-country, instead
of defining the results country-by-country, and that allows for
a great deal of subversion for the whole idea of a minimum tax.
What is your feeling about the failure to just totally
exempt GILTI as it exists today? The same GILTI, by the way,
which, as I pointed out from the joint tax analysis, those are
the 88 multi-nationals that are now paying under 8 percent as
their tax rate.
Mr. BARNES. Well, it is important to recognize that the
GILTI tax paid by U.S. corporate taxpayers is counted in the
calculation toward the Global Minimum Tax. So it is not like
the GILTI tax is on top of the Global Minimum Tax. It simply
has not yet been deemed sufficient to eliminate any need to
compete and comply with the minimum tax.
Mr. DOGGETT. In your opinion, would the adoption of a
Global Minimum Tax the Treasury has been advocating, what is
called Pillar Two, would it diminish the competitiveness of
U.S. businesses?
Mr. BARNES. I think the answer is no. And I realize I may
be an outlier here, but let me give a concrete example.
A U.S. company invests in a low-tax jurisdiction,
Switzerland, Singapore, a real business, $500 million, 1,000
very skilled workers. Because of Singapore's tax incentives,
there [sic] zero tax. A Singapore-owned Singapore company pays
zero. A Dutch-owned Singapore company pays zero. A U.S.-owned
Singapore company pays 10.5 percent under GILTI. That is our
rules today. The U.S. company is handicapped by 10.5 percentage
points. A Global Minimum Tax may cause the U.S. company in
Singapore to pay a little more tax, but it will bring up the
tax for the Singaporean-owned Singapore company and the Dutch-
owned Singapore company to 15 percent. In that environment, I
am quite confident the U.S. company's subsidiary in Singapore
will be very successful.
Mr. DOGGETT. Well, thank you for your example. Just
overall, if we set a reasonable minimum on taxation, we would
be competing with other countries not on whether we could have
a race to the bottom with the lowest possible taxes, but on
things like education, our justice system, our workforce, our
ability to do research and development here. And I think the
United States would lead that competition.
Thank you very much.
Mr. HERN. I thank the gentleman. The gentleman from Kansas,
Mr. Estes.
Mr. ESTES. Well, thank you, acting chairman, or chairman,
and thank you to the panelists for being here today. It is
important that we talk through this issue.
Just as we saw with the previous panel, the Treasury
Department is willfully ignoring the reality by working around
Congress, working around the committee, and trying to pave the
way for new taxes through these deals with the OECD that are
fundamentally un-American, and would give away our tax base to
foreign countries.
Throughout the process of the OECD Base Erosion and Profit
Shifting, the BEPS 2.0 negotiation, the Administration has
repeatedly made commitments that are out of its prerogative to
both make and fulfill. Treasury has cut Congress out of the
process, even though constitutionally only Congress can write
tax laws and commit the United States to the end deal
negotiated at OECD.
And why is the Administration repeatedly ignoring the
requests of the committee and doubling down on the efforts to
give away American tax base? It is all to ram down this bad,
anti-American policy. At virtually every step of the
negotiation process, the Administration has chosen America
last. The deal is so terrible I have to ask which country's
interests the Biden Administration negotiated for, because it
doesn't seem to be the interests of America that the Treasury
is negotiating for.
As a result of Pillar Two, if we follow UTPR, the U.S.
Treasury would get less tax revenue, U.S. businesses will pay
more in taxes, U.S. businesses will have more administrative
costs and work effort to increase, U.S. taxpayers will not have
credit for the current tax code provisions that they have to
comply with, and it incentivizes businesses, whether located in
U.S. or businesses located in other tax countries, to look for
the lowest tax district because they will not have to pay the
global minimum in addition to what they are already paying.
We have already put the big effort in getting away from
inversions with the Tax Cuts and Jobs Act that we passed five
years ago.
The concessions during the Pillar Two negotiations will
result in U.S. companies paying more tax overall, but less to
the United States. As the Joint Committee on Taxation
identified, the U.S. will lose roughly $120 billion in tax
revenue if Pillar Two is adopted globally but we don't change
our tax code and will still lose 60 billion if we do adopt the
OECD Pillar Two.
And furthermore, our share of global gross domestic product
is 24 percent, while U.S. country's share is 40 percent of the
income exposed to the higher taxes, further evidence that the
deal disappropriately affects the United States.
Ms. Herzfeld, can you explain how such a scheme would
benefit the United States?
I mean, are [sic] there anything in the deal that benefits
us in exchange for what we are giving away?
Ms. HERZFELD. Thank you. I personally have trouble seeing
the benefit, and I am often asked the question from people from
other countries why the U.S. negotiated this deal.
Mr. ESTES. You know, this week OECD announced the delays in
implementation of one of the Pillar Two's most harmful
provisions, the one that I think is really the problem, the
Undertaxed Profits Rule. But this delay is not a fundamental
change in this bad policy and only extends this uncertainty
companies are facing.
Ms. Gordon, what are the main concerns you hear from
companies about complying with these new rules?
What is the response you are hearing about the delay in
implementation?
Ms. GORDON. Congressman, thank you for your question. So,
our members welcome the delay but, as you mentioned, it is not
a change in policy. And some of the concerns are even with the
UTPR safe harbor that only applies to the United States. So
most multi-nationals have entities in other countries, as well.
And if they are in Ireland, where there is a lot of U.S.
investment, the UTPR safe harbor will not count on that income
in Ireland, for instance.
Mr. ESTES. So it is problematic. And from my point of view,
if it is a bad policy, it is a bad policy next year, it is a
bad policy two years later, it is just a bad policy. And that
is not what we should implement.
I am really concerned about this policy. I am really
concerned about UTPR. I mean, as JCT confirmed, the United
States will lose less if we are forced to implement the OECD
Pillar Two provisions. It is not that we are going to gain
more. And the fact that UTPR and Pillar Two is not really a
volunteer tax sovereignty, I mean, if you want to consider
extortionary threats of you either change your tax code or you
pay this higher rate anyway. So, for that provision, I am
really concerned about this process.
Really, we need to fix the bad policy before it gets
implemented, ever. And with that, Mr. Chairman, I yield back.
Mr. HERN. I thank the gentleman. I would now like to
recognize the gentleman from Connecticut, Mr. Larson.
Mr. LARSON. Connecticut, yes. Thank you, Mr. Chairman, and
thank all the panelists. This has been a very interesting
session.
We don't often spend as much time on the Constitution as we
have today, and I am quite interested in the constitutionality
of all this. I actually thought we were in a committee hearing
in the United States Congress actually discussing, in the
committee of cognizance, tax policy, and discussing the
ramifications of that policy. So rather than working around, I
kind of feel like this is working directly.
And the way that our system works, four witnesses come with
very important and well-established, well-researched views on
their feelings, and one is a counterbalance to all of that. For
those that are listening in on this, that is how the system
works. That is how it is supposed to work.
So, Mr. Barnes, I had to ask you especially, you seem to
have a difference of opinion about Pillar Two.
Number one, do you think that the Constitution is being
violated here by the Biden Administration or here in Congress?
Mr. BARNES. Well, because any tax legislation to enact
Pillar Two will necessarily be started in the House Ways and
Means, will go to the Senate, will be signed by the President,
it will follow our ordinary course of constitutional progress
for tax legislation at the end of the day.
Mr. LARSON. And that was my impression, and that is--I used
to be a history teacher in school, so I thought that we were
following the Constitution. You can have constitutional
concerns, but we are following the Constitution.
Also, there is big disagreement over whether or not the
future for this great nation of ours, in these joint agreements
with more than 50 countries that are participating in this, it
seems as though we should be going it alone, as opposed to
working with other nations in a global economy, and in these
times where we are in a world where we need to be at the table,
seated there. And it seems as though we are saying no, what we
need to do is operate alone and by ourselves. That, to me,
sounds an awful lot like isolationism.
How are we advantaged by working together with these other
nations, Mr. Barnes?
Mr. BARNES. Let me take two examples from tax history that
are not directly Pillar Two.
First would be the treatment of corporate bribes. Some of
you are familiar with the history. In the 1970s the U.S. said
corporate bribes are bad. They should not be tax deductible.
Other countries where that is an ordinary course cost of doing
business, it took 20 years before some of our major trading
partners said bribes are not a good thing, we should make them
non-tax-deductible and illegal. U.S. leadership took decades,
but we got the right result.
Same thing with bank secrecy. A tax system can only be
enforced if there is adequate information. There were countries
that said bank secrecy is part of our blood, you shouldn't come
in and breach my bank secrecy. The U.S., with the help of
Germany and a few other countries, over a period of time led to
sufficient information exchange to enforce our laws.
I think U.S. leadership consistently has helped improve
global tax rules, and I am confident they did on Monday of this
week. And the continued participation by the U.S. will make the
ultimate Pillar Two rules much, much better.
Mr. LARSON. And how will that advantage the United States,
long run, in terms of our economy?
Mr. BARNES. I hope it will help us. I realize that there
are debates over whether Pillar Two ought to exist at all or
not, but there are some distinct advantages. I mentioned one,
with the Singapore example, to level the playing field.
It will put pressure on countries to reduce their corporate
tax rates. Those people who believe that high corporate tax
rates--that is, way above 15 percent--are a deterrent to
investment should cheer Pillar Two. With a country-by-country
analysis, a country like India, Japan, with high corporate
taxes will be starkly illustrated as having a rate where the
taxpayers bear an excess cost. Today, with the blended rules
under GILTI, that pressure doesn't fall entirely on the high-
tax jurisdictions because taxpayers can self-help to a lower
rate.
The other advantage for the U.S. is one Michael Plowgian
mentioned, which is it will reduce the incentives for U.S.
businesses to move offshore. That has an advantage for
investment in the U.S., U.S. workers, U.S. jobs.
Mr. LARSON. Thank you, sir. I yield back.
Mr. HERN. I thank the gentleman. I would now like to
recognize the gentleman from Tennessee, Mr. Kustoff.
Mr. KUSTOFF. Thank you, Mr. Chairman. Thank you for the
witnesses for appearing today.
Ms. Gordon, could I go back to you and follow up maybe a
little bit on what Mr. Estes asked you? In your written
testimony--and this is about compliance--you talked about how
businesses are establishing systems right now to try to comply
with Pillar Two's extensive reporting requirements. And, in
your testimony, you noted that one NFTC member has already
spent a lot of money--I think you said eight figures--and
15,000 hours preparing for those Pillar Two requirements.
Can you talk more about the compliance burdens that Pillar
Two will impose on U.S. businesses? What type of information
are they going to have to submit, and what are the--what are
some of the more unique challenges?
Ms. GORDON. Congressman, thank you for your question. So
our members have started to update their systems and comply--
prepare for compliance with Pillar Two. One member has noted
they hired another six to eight people. They have spent 15,000
hours preparing for this, and over $10 million. Other members
have noted that the $10 million is probably just the start-up
costs to implement these systems.
So this is very labor-intense, and that is really before we
even have all of the rules, and before we can see if all the
countries enact the exact same rules or if there are slight
differences. Every time there is a difference, that is more
compliance costs, that is more time, and additional numbers
that the country is going to need to--or the company is going
to need to report to a different country.
Mr. KUSTOFF. And you may have just talked about this. What
about the manpower? What about the labor that goes into that?
Ms. GORDON. Yes, there is a lot of labor. A lot of these
numbers that the Pillar Two tax return, the global information
return is requesting, are not numbers that my members currently
compute. So it is trying to get that information and compute
these new numbers because they are on the return, not because
they are used to assess the audit risk, or because they are
actually needed to compute either the IIR or the UTPR.
Mr. KUSTOFF. Thank you very much.
Ms. Herzfeld, if I can with you, you wrote a column in Tax
Notes a couple of months ago in May. You talked about the risks
associated with China participating in Pillar Two. Can you
expound on that a little bit more? And could China cheat, as it
relates to their requirements?
Ms. HERZFELD. Yes. So--and thank you for that question. It
is interesting that China, in public, has been mostly silent on
its intentions.
So Pillar Two is not mandatory for any country to adopt. It
is voluntary, and for complex reasons. It is not clear,
although the UTPR is supposed to be this mechanism by which
other countries are kind of forced into the system or else it
will impose costs.
Many large Chinese companies are actually not Chinese-
headquartered, they are Cayman-headquartered. And so, it is not
clear, really, how effective the mechanisms that were designed
for Pillar Two would impact--would be in impacting Chinese
companies.
On Pillar One they have also been pretty silent.
But I don't know what mechanisms there are for ensuring
compliance in China. They haven't been so effective in other
areas. And so, I thought it was interesting that there was no
answer to the question about whether Secretary Yellen got a
commitment from China on implementation of this deal.
Mr. KUSTOFF. I am going to ask this very politely. Are
there challenges, or would there be challenges to monitoring
China's compliance?
Ms. HERZFELD. So we don't know anything right now about--it
is the OECD that would be designing a mechanism to ensure
countries' compliance with this deal. And we--there are simply
no--not even detailed, there is no information at all about how
that would be. And so whether that could be effective, I think,
is unknown at this point.
Mr. KUSTOFF. Is it fair to say that China could use
strategies to try to circumvent the Pillar Two rules?
Ms. HERZFELD. There is lots of mechanisms countries could
use, but----
Mr. KUSTOFF. Okay. Thank you very much, Mr. Chairman. I
yield back. Thank you.
Mr. HERN. I thank the gentleman. I would like to recognize
the gentlelady from California, Ms. Sanchez.
Ms. SANCHEZ. Thank you, Mr. Chairman.
Mr. Barnes, one thing that struck me about your testimony
was your statement that joining Pillar Two will strongly
benefit U.S.-headquartered companies. From hearing my
colleagues on the other side of the aisle discuss the Global
Minimum Tax, you would think that the sky was falling. In fact,
I think my Republican colleagues sometimes are simply panic
merchants, just trying to throw everybody into a panic,
claiming that calamity is going to strike if we try to enact
policies that make wealthy and well-connected multi-national
businesses pay their fair share in taxes.
And someone on the other side actually said, what is their
fair share? And I would just submit that when you have huge,
multi-national corporations that make billions of dollars in
profit and they are paying less than one percent in taxes, we
might want to start at least with what individuals pay. Because
in the United States individuals pay, minimally, 10 percent,
but up to 37 percent, with most Americans paying between 12 and
32 percent in taxes.
So that would just be kind of a starting point for
fairness, I would think, especially when you think about the
fact that these multi-national corporations often use our court
systems when they have business disputes, they rely on our
firefighters and police when emergencies arise, and on our
national security. And yet they move their profits overseas to
low-tax countries to avoid paying into these same systems that
they all use and all rely on. That doesn't seem to me to be a
very pro-American way to operate, to take and take and take
from the system, and to never pay their fair share into it.
So could you elaborate why signing onto the Global Minimum
Tax will strongly benefit our domestic businesses? I am
interested in hearing again why it makes sense for us to go
with this regime.
Mr. BARNES. Yes, let me make--thank you very much for the
question. Let me make two comments preliminarily.
First, no corporation likes to pay $1 more than it is
required to pay by the law. And that is why corporations have
tax professionals like me to try to make sure they are fully
compliant, but not paying more than that.
The second point is I think what is critical here is that
the U.S. companies are very capable of competing when the field
is fair. And the minimum tax, in my view, helps ensure a fair
field. We already have the GILTI rules; other jurisdictions
don't. There is a what is called a participation exemption is
the way many countries operate, and so they simply exempt the
foreign earnings of their domestic companies. And indeed, one
of our colleagues here on the panel has urged territoriality
for the U.S.
So why do I think it will help the U.S. to have this rule?
First, compliance. The U.S. compliance demands are
extraordinarily difficult. I appreciate the comment about the
challenges of the GloBE return. If the U.S. is inside the
tent--that is, if the U.S. is compliant with Pillar Two--then
various safe harbors and other issues can be discussed in a way
to reduce the compliance burden. U.S. companies will be subject
to Pillar Two regardless of what we do because 130 other
countries will adopt it. I think we will substantially reduce
the compliance burden.
The second is the competitiveness point. We pay GILTI,
other countries don't have a GILTI. And whether the rate is 5
percent, 10 percent, 15 percent, 40 percent, the point would be
to have a rate in which the U.S. companies are not
disadvantaged. And where there is a level playing field, I
think, U.S. companies win.
Ms. SANCHEZ. Okay. And given that that is the case, do you
have any theories about why these businesses aren't banging
down Congress's door demanding that we sign on to Pillar Two?
Mr. BARNES. I do have theories, but I am happy to also
yield to my colleagues. I think there are two reasons.
One is it is absolutely out of character for a corporation
to say, ``raise my taxes.'' That goes against everything the
corporation has stood for and lived for. And to stand up now
and say we think increasing taxes on corporations is favorable
is just completely antithetical to what corporations are all
about.
The second reason, I think, is a belief which I don't
share, a belief that the U.S. GILTI regime will be declared
fully compliant so the U.S. has nothing else it needs to do.
The U.S. GILTI rate will increase in two years, as many of you
know. We will still have the blending, but I think corporations
are optimistic, I believe incorrectly, but are optimistic that
the U.S. GILTI rule will be declared compliant.
Ms. SANCHEZ. Thank you so much for your testimony.
And I yield back.
Mr. HERN. I thank the gentlelady. I would like to recognize
the gentleman from Iowa, Mr. Feenstra.
Mr. FEENSTRA. Thank you, Mr. Chair, and I just want to say
thank you to each of our witnesses today.
In absence of the consultation by the Treasury, we relied
on your analysis by those like you to understand this agreement
that is being put before us and just a quick, simple one-on-one
economics tax lesson.
Individuals and families pay tax, but they don't make goods
and services, so they can't pass down the cost of tax, right?
They just have to pay it. In corporations--I am talking to my
colleagues on the other side of the aisle--on corporations,
when you increase their tax, what happens? They pass it down
through their goods and services. So goods and services
increase, causing inflation, causing the issues that we are
currently in. That is actually called economics 101. I just
want you to know these processes and agreements that are what
we are seeing is when you pursue a partisan domestic tax agenda
in an international tax forum, it really is.
Ms. Herzfeld, you pointed out in your article that the two
largest benefactors in terms of revenue were Canada and
Germany, and yet we saw that Canada declined to sign the recent
Pillar One agreement, and Germany is now taxing IP under
section 49 of its tax code in what appears to be purely a
revenue grab from U.S. firms. So despite being the largest
benefactor of Pillar Two, they are moving forward with
discriminatory taxes against American businesses. At the same
time, these new rules may violate U.S. tax treaties.
So my understanding was that these agreements were intended
to stabilize the international tax code. But in essence, am I
fair to say that they are--they could and seems to be--realize
that they are destabilizing our code? Could that actually
happen?
Ms. HERZFELD. Yes, thank you for the question. So I think
there is a question about whether the promises about stability
that this international agreement is supposed to bring will
actually come to fruition.
In addition to the examples you provided, there is also the
example of Australia that has proposed a tax that is outside
the scope of what was agreed to. And so all of those examples
show that--raise questions about the promises of stability that
the agreement was supposed to bring.
Mr. FEENSTRA. Thank you. Michael [sic], you noted that
also. Can you just note--just 20 seconds on that?
Mr. MICHEL. The beginning of this process started when
France and other European Unions started with Digital Services
Taxes. So I think the entire project starts with the assumption
that you can agitate at the international level by putting
these unilateral measures on other countries.
Mr. FEENSTRA. Yes.
Mr. MICHEL. And so that, in and of itself, tells you that
the system is unstable----
Mr. FEENSTRA. Thank you.
Mr. MICHEL [continuing]. And we are going to continue to
see these types of unilateral actions as people agitate----
Mr. FEENSTRA. Exactly. Thanks for that.
Mr. MICHEL [continuing]. Changes.
Mr. FEENSTRA. Thanks for stating that, because every
country is different. We are going to destabilize the
international tax system by going down this path.
Ms. Gordon, it is good to see you again. I am glad you are
here. The NFTC's members include U.S. businesses that have been
impacted by this agreement, many of whom provided comments
throughout this negotiating process. And some of these
comments, a large part of the comments, were a lot about
proprietary information that they will have to give up. You
know, it sounds like there could be over 200 data points that
they have got to do, compared to GILTI, where they have around
16--14 to 16, somewhere in there.
I mean, this seems very egregious, and makes it very
uncompetitive to us when we have to give up all our proprietary
information to the international code. Can you comment on that?
Ms. GORDON. Congressman, thank you for your question, and
great seeing you, as well. Yes, so the numbers of 50,000 to
200,000 come from multiplying the number 200 or--versus 16--by
all the entities.
And yes, so taking all of that data and giving it to
countries around the world who do not have the same protections
for taxpayer information like the United States is a threat to
American businesses. And many of these countries will either
share it with state-run enterprises or local competitors and
get tax advantages or details and knowledge of how these U.S.
companies operate around the world, which is not helpful.
Mr. FEENSTRA. Yes, thank you. I agree 100 percent.
Quickly, Mr. Schizer, I read your Journal piece. I loved
it, by the way. And you noted just what I said about economics
101, is when you increase corporate tax it affects the workers,
it affects jobs, opportunities, economic growth. So can you
explain why that is?
I mean, just a basic economics 101 that you wrote in your
journal piece.
Mr. SCHIZER. My apologies. Thank you for the question.
I do think there is a misunderstanding in the general
public about who pays the corporate tax. It could be that
investors pay some of it, but it is very clear that consumers
pay some and that workers pay a lot. And so when we talk about
who should pay it, we have to remember that.
Mr. FEENSTRA. Thank you. You just made my point.
I yield back.
Mr. HERN. I thank the gentleman. I would like to recognize
the gentlelady from Washington, Ms. DelBene.
Ms. DelBENE. Thank you, Mr. Chairman, and thanks to all of
our witnesses for joining us today. I appreciate it.
Mr. Barnes, former President Trump once said it is easy to
win a trade war. We all know that is not true. But it seems
like our colleagues on the other side of the aisle want to open
up a new front in this war by introducing a bill that would
certainly wage a tax war. Just this morning the Republicans
introduced yet another retaliation proposal intended to punish
our trading partners.
And so, Mr. Barnes, I was wondering. Are you aware of any
tax wars that have been waged in the past? And in your
judgment, is it easy to win a tax war?
Mr. BARNES. It is--thank you for the question. It certainly
is not easy to win a tax war. Let me mention a couple of
examples.
In the--it is more frequent that the war is waged through
administrative measures than through legislation, because it is
rare to have legislation that targets one country or two
countries. But administratively, it happens quite often.
In the 1990s Korea was administering their tax treaties and
their tax laws in a way that went way beyond the words of the
statutes and of their authority. When Korea wanted to join the
OECD in the 1990s, the OECD, the U.S., and other countries
said, ``no, you cannot join unless you go back and begin to
follow the rules, the written rules, as you agreed to them in
your tax treaties. And Korea agreed, and has done so, and
joined the OECD.
The most amusing one is probably the effort by India to
attack the companies that have invested in India in call
centers, 10,000-person, 20,000-person call centers. India has
been extraordinarily aggressive--this was particularly in the
early 2000s--in taxing--one would say over-taxing--the foreign
investors, including U.S. investors, in the call centers.
The Philippines government, in a tongue-in-cheek but very
heartfelt letter that was published on the front page of the
newspaper in India, said, ``Thank you, India, for attacking
these taxpayers. You are the best message for why investors
should come to us in the Philippines. And it was, in fact, part
of the reason that the Philippines grew as a center for call
centers.
So, I think when there have been inappropriate
administration of taxes--rarely by legislation, more often by
administration--it has generally backfired and reduced
investment.
Ms. DelBENE. Thank you. It is my understanding that, based
on the JCT-provided data, when you look at all of the U.S.
employees of firms that are based in countries that are
jurisdictions targeted by the chairman's bill, you get 8.9
million employees. So the Republican bill would place 8.9
million U.S. jobs at risk. That is not to suggest that UTPR is
necessarily good tax policy, or there aren't legitimate
concerns about it. However, it seems that starting a tax war
and putting at risk millions of U.S. jobs is not the right
answer.
I wondered, Mr. Barnes, in your professional opinion, what
is the best way for the United States to move forward so as to
make the UTPR less of a concern?
Mr. BARNES. I think the short-term fix on Monday sets a
path going forward.
There are countries that I think we can agree are--I will
call them full-tax, not necessarily high-tax countries, but
full-tax countries. And I think we could either push for--maybe
successfully, maybe not--push for a situation in which certain
countries are acknowledged as full-tax countries and the UTPR
need not apply.
The other would be a mechanical calculation: find ways in
which a taxpayer who, because of credits or other reasons, is
below 15 percent this year, but over a 3-year average or 5-year
average they pay reasonable taxes, they may be exempt from the
UTPR.
I think if the U.S. is at the table, then creative tax
negotiators can come up with approaches that would fully
protect U.S. tax on U.S. income. But we need to be at the table
for those negotiations to be successful.
Ms. DelBENE. Thank you so much.
I yield back, Mr. Chairman.
Mr. FEENSTRA [presiding]. Thank you. I now recognize Ms.
Moore from Wisconsin.
Ms. MOORE of Wisconsin. Thank you so much, Mr. Chairman,
and I just want to thank this entire second panel. This is just
like being in graduate school here.
I want to just say to my Republican colleagues that a lot
of things that you are raising about the treatment of our tax
credits, about how data will be used are really legitimate
things to raise. But you can't raise them if you ain't there at
the table. And as many of you have discussed and our witnesses
have discussed, just last week we won one of those arguments by
saying that tax credits that are transferable can be treated
that way. We got to stay in the fray in order to benefit from
it.
I agree with you, Mr. Barnes. I have never seen a
corporation that wants you to raise one penny extra in taxes. I
think that this entire panel and all of our colleagues on the
other side have forgotten that we just lowered the corporate
income tax rate from 35 percent to 21 percent. And we still
hear this, you know, plaintive cry about how we just are taxing
them to death.
I also want to say that because of the way that the Tax Cut
and Jobs Act was written up very quickly, that the 10.5 GILTI
tax is actually at about 13 percent, given the lack of
consideration about how that would interplay with other
deductions and so forth that were not allowable. Am I correct
so far, Mr. Barnes?
Mr. BARNES. You are fully correct. Thank you.
Ms. MOORE of Wisconsin. And I also want to say that, if we
had just kept that 35 percent corporate tax rate, that would
have been so much easier for United States to have complied
with the GloBE regimen. And we didn't do that. So I just want
some of the whining, some of it, to stop.
Mr. Barnes, we have heard testimony here today about just
how--and I have been hearing this for my entire professional
life--about how adding or changing any sort of tax regimen
creates all of this compliance and bureaucracy. And, you know,
all of our graduate schools from the Wharton School aren't
going to be able to figure this out. Even if they go to Duke,
they can't figure out how to do it.
Can you please give us a comparison of how not joining this
global regimen, what the compliance problems will be versus if
we join?
Mr. BARNES. Thank you very much. The core problem is that
the U.S. tax return, our GILTI regime, operate on what is known
as tax accounting principles, and that is because our tax law,
as developed by Ways and Means and everyone else, has special
provisions for how you go from your income received in the door
to a tax number. Under the GILTI regime, our companies will
continue to need to use tax accounting to compute the U.S.
GILTI liability.
Under Pillar Two, there will be calculations based
primarily on financial accounting. That is a different regime.
In the U.S. that is GAAP. Outside the U.S. it is IFRS. And
interestingly, there is no such thing as IFRS; every country
has their own IFRS. So U.S. companies, if the U.S. does not
join the Pillar Two exercise, will go through the full tax
accounting world for GILTI calculations, plus the full
financial accounting world calculations for----
Ms. MOORE of Wisconsin. So it will be harder. Is that what
you are saying?
Mr. BARNES. Absolutely.
Ms. MOORE of Wisconsin. It will be worse.
You know, I went to Canada recently and, you know, one of
my hosts said, ``I just don't--Fahrenheit and Celsius, it--you
guys are just stupid. You are the only people in the world who
do that.
I just wanted to ask a question about this example we were
given about the poor little daughter, you know, that doesn't
cash app her parent like most of them do, but it is getting
taxed. I just didn't think that was a--I was just trying to
process that. It is just not an example of what you are talking
about when we start talking about--can you give a better
example than that? Because I think that one doesn't work. There
is absolutely no tax liability on the daughter. She is more
likely asking for Cash App.
Mr. BARNES. This may be satisfying or may not. Let me try.
I would go back to a comment Michael Plowgian said, which is
that the U.S. today, under subpart F and GILTI, will tax a U.S.
company on earnings in Singapore.
So, to use my example before, the Singapore Government
says, ``U.S. company, invest in Singapore. We are going to give
you all these incentives. You will pay no tax.
The U.S. says, ``Great, fine, terrific. But we have a GILTI
tax, so we are going to collect 10.5 percent. The Singapore
Government may not like it because we have undercut the value
of their tax incentives, but that is absolutely consistent with
international tax law.
Ms. MOORE of Wisconsin. Thank you.
And thank you, Mr. Chairman, for your indulgence. I just
didn't want that California daughter to get too worried.
Mr. FEENSTRA. No problem.
Ms. MOORE of Wisconsin. Or the Virginia dad, rather.
Mr. FEENSTRA. I now recognize Mr. Schneider from Illinois.
Mr. SCHNEIDER. Thank you, Mr. Chairman, and I thank the
witnesses for being here today.
And, Mr. Barnes, I want to pick up on your Singapore
example, since you brought it up. From a business standpoint,
the three businesses you mentioned--a Singapore Business, 0
tax; a Dutch business, 0 tax; but the U.S. business in
Singapore, 10.5 percent tax--what is the strategic business
impact of that disparity?
Mr. BARNES. Well, for--because of the U.S. rules, because
of GILTI and our foreign tax credit and our subpart F rules,
you are always going to be taxed in the U.S. So I think the
issue that comes up goes all the way back to the Base Erosion
and Profit Shifting. If the U.S. company has a choice between
high-taxed India, lower-taxed Singapore, they are inclined to
go to Singapore, all other things being equal.
Now, rarely is everything else equal, but let's assume
everything else is equal. Because the lower taxes in Singapore
will help you blend down the high taxes in India.
Mr. SCHNEIDER. Got it. Let me turn to Mr. Schizer for a
second, because I know we have all shared the concerns about
sovereignty.
What is the population of the Cayman Islands?
Mr. SCHIZER. I do not know.
Mr. SCHNEIDER. I will tell you. It is 69,000. How many
companies, corporations are registered in the Cayman Islands?
Mr. SCHIZER. Many companies.
Mr. SCHNEIDER. A hundred and sixteen thousand, more than
the people in the Cayman Islands. Why do you think that is?
Mr. SCHIZER. Low tax.
Mr. SCHNEIDER. No tax, right? Zero. Correct?
Mr. SCHIZER. There are some costs, but yes.
Mr. SCHNEIDER. The tax is zero. What is the implications
for U.S. sovereignty with Cayman Islands' zero tax?
Mr. SCHIZER. I think the answer to that question depends on
how the U.S. approaches income earned in the Cayman Islands.
Mr. SCHNEIDER. I think it is zero. It is up to us to make
our decisions, and we make choices on how we tax those
companies. Is that a fair statement?
Mr. SCHIZER. Yes.
Mr. SCHNEIDER. Okay. What is the impact on U.S. revenues
for those 100,000 companies registered in the Cayman Islands?
Mr. SCHIZER. Again, it depends.
Mr. SCHNEIDER. It does?
Mr. SCHIZER. Yes. If we wanted to tax it, we tax it. But if
your point is it is an effort to try to reduce the U.S. tax
base, that is true.
Mr. SCHNEIDER. It does. In fact, that is BEPS.
Mr. Barnes, isn't that the definition of BEPS?
Mr. BARNES. It is. I would always say, though, you have to
look at what the substance is in the Caymans. Is there
substance or is there no substance?
Mr. SCHNEIDER. That is a fair point. But isn't the goal of
what we are doing here talking about changing the tax regime,
trying to eliminate those tax havens, and get companies to
register in the countries where they are actually doing
business?
Mr. SCHIZER. I am sorry, are you asking me or Mr. Barnes?
Mr. SCHNEIDER. Mr. Barnes, Mr. Barnes.
Mr. SCHIZER. I am sorry.
Mr. BARNES. I think the key of what we are trying to do
here is to take tax out of the equation as much as possible. We
can't eliminate it completely, but let's get to business
fundamentals, where your customers, where your talented
workforce, where is your economic inputs.
Mr. SCHNEIDER. So if there is a level playing field, all
things being equal, whether you want to say it in Latin or
English, in your opinion, do you think it is to the advantage
of the United States because of our court systems, because of
our universities, because of our workforce, of all of those
things, in a level playing field would companies be inclined to
at least look at setting up shop here in the United States?
Mr. BARNES. They would. I think you have two things. You
have a reduced incentive to move out of the U.S., and you have
an improved incentive to move back to the U.S. or to expand in
the U.S. instead of expand elsewhere.
Mr. SCHNEIDER. And if we do nothing, and the rest of the
world moves forward, do we lose, to some degree, the incentive
for those companies that are moving profits from previously
tax-haven countries to other countries?
Are they likely to not come to the United States as much as
they would go to the other G7 countries?
Mr. BARNES. I think those companies would look at the
complexity of complying with the U.S. rules and the Pillar Two
rules around the world and be daunted.
Mr. SCHNEIDER. On the other hand, if the United States goes
to the table, works to influence--as others have said, we
should be at the table influencing, the United States--I think
it was Mr. Michel, you said this--we should be exercising the
power of our influence.
And Mr. Barnes, you said the rest of the world listens to
the United States. Aren't we better served by being at the
table and helping set the course of future tax structures in
the world?
Mr. BARNES. That is certainly my view, yes.
Mr. SCHNEIDER. Okay. With that I yield back.
Mr. FEENSTRA. I now recognize Mrs. Miller from West
Virginia.
Mrs. MILLER. Thank you, Mr. Chairman, and thank you all for
being here today.
It is of the utmost importance that we stop the OECD's
forced march to socialism. I appreciate the opportunity to talk
to our expert witnesses here today on how the Biden
Administration has failed the American people and attempted to
abdicate key congressional responsibilities to unelected global
bureaucrats who do not have our best interest in their heart in
the slightest. If the Administration fails to stand up for our
workers and taxpayers, then everyone else in the world will be
much more happy at eating our lunch while we are standing there
with nothing.
Ms. Herzfeld, have experts warned the UTPRs may violate the
terms of bilateral tax treaties?
Ms. HERZFELD. Yes, they have.
Mrs. MILLER. Could you describe just how foreign
governments could tax U.S.-based companies under UTPR?
Ms. HERZFELD. So the UTPR is a complicated rule, but what
it does is it looks at every company, every jurisdiction in
which a multi-national operates, and it says, to the extent
that anywhere in the world a company is not paying a 15 percent
rate, then other countries have the right to tax that income.
And it includes also the parent company's income.
So it means that if, because of credits or other
incentives, a U.S. company is not paying a 15 percent rate in
the U.S., other countries have the right to tax that income.
And so taxing another jurisdiction's income is a treaty
violation.
Mrs. MILLER. Can you elaborate on what actions countries
are taking that might be considered as undermining the global
tax deal?
In your opinion, will this deal ever go into effect in
countries like China, who are willing to always break the
rules?
Ms. HERZFELD. Yes, so I think one of your colleagues
brought up before some actions other countries are taking that
are not consistent with the global deal. I don't think any
country specifically has said we will--we want to undermine it,
but they are certainly taking actions that are not fully
consistent with it.
Mrs. MILLER. Thank you.
Mr. Michel, the OECD arrangement doesn't stop countries
from competing to attract business investment and jobs. It just
makes the current U.S. system less competitive. What makes this
agreement, as currently written, so lopsided against the U.S.
system, and what tools will countries use to compete if it is
implemented?
Mr. MICHEL. Well, as we have been discussing, the--I think
the agreement shifts competition from tax rates, which
ultimately reduce economic inefficiencies--and as we were
talking about before, less costs get passed onto workers and
consumers and investors--and instead shifts competition to a
war over subsidies.
There has already been reporting of countries saying they
are going to compensate their largest businesses by passing on
direct subsidies to compensate for the higher tax rates, and
this just opens up a whole world of cronyism, of this sort of
corruption that comes along with attaching specific payments to
specific companies, and the lobbying that goes on behind----
Mrs. MILLER. So wouldn't you consider that all these
subsidies and incentives is a type of global socialism?
Mr. MICHEL. It certainly incentivizes more government
involvement in business decisions than simply lowering tax
rates does.
Mrs. MILLER. So why would the United States negotiate our
right to be a capitalist country? It just doesn't make sense to
me.
Mr. MICHEL. It doesn't make sense to me either.
Mrs. MILLER. Okay, Ms. Gordon, there are likely numerous
technical issues with the OECD model rules and guidance that
have not received as much attention as the bigger concerns with
the deal, which my Republican colleagues and I have been
highlighting. Would you provide some examples that you are
hearing from companies and your insight?
And would you also tell me what your members' concerns are
about sharing information, their information, under Pillar Two?
Ms. GORDON. Congresswoman, thank you for your question. I
will start with the second one.
So, there are a lot of concerns with sharing information
and having sensitive tax information spread around the world as
might be possible if you file a return with the IAR, the UTPR,
the global information return.
As to the problems with Pillar Two, I mean, it is almost
6:00, and so I don't want to keep us here all night. That being
said, I think there are numbers of technical rules on, you
know, where you are filing your return, what information
exactly is required when you file it, who gets to claim the
UTPR.
I mean, there are so many issues----
Mrs. MILLER. Numerous.
Ms. GORDON [continuing]. And we have written hundreds of
pages of comment letters that people can read later. Thank you.
Mrs. MILLER. Thank you so much.
I yield back.
Mr. FEENSTRA. I want to thank all my colleagues. And to
each of our witnesses, thank you for having a terrific and
wonderful hearing this afternoon.
Please be advised that the members have two weeks to submit
their written questions to be answered later in writing. Those
questions and your answers will be made part of the formal
hearing of record.
With that, the committee stands adjourned.
[Whereupon, at 5:57 p.m., the subcommittee was adjourned.]
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