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THE U.S. TAX CODE: 

LOVE IT, LEAVE IT, OR REFORM IT 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

JULY 22, 2014 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

RON WYDEN, Oregon, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

SHERROD BROWN, Ohio 

MICHAEL F. BENNET, Colorado 

ROBERT P. CASEY, Jr., Pennsylvania 

MARK R. WARNER, Virginia 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

JOHNNY ISAKSON, Georgia 

ROB PORTMAN, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

JOSHUA SHEINKMAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(II) 

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee on 

Finance .................................................................................................................. 1 

Hatch, Hon. Orrin G., a U.S. Senator from Utah ................................................. 3 

WITNESSES 

Stack, Robert B., Deputy Assistant Secretary for International Tax Affairs, 

Department of the Treasury, Washington, DC .................................................. 5 

Saint-Amans, Pascal, director, Centre for Tax Policy and Administration, 

Organisation for Economic Co-operation and Development, Paris, France .... 7 

Desai, Mihir A., Ph.D., Mizuho Financial Group professor of finance, and 

professor of law, Harvard University, Cambridge, MA .................................... 9 

Merrill, Peter R., Ph.D., director, National Economics and Statistics Group, 

PricewaterhouseCoopers, Washington, DC ........................................................ 11 

Robinson, Leslie, Ph.D., associate professor of business administration, Tuck 

School of Business, Dartmouth College, Hanover, NH ..................................... 13 

Sloan, Allan, senior editor at large, Fortune magazine, New York, NY ............. 14 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Desai, Mihir A., Ph.D.: 

Testimony .......................................................................................................... 9 

Prepared statement .......................................................................................... 37 

Hatch, Hon. Orrin G.: 

Opening statement ........................................................................................... 3 

Prepared statement .......................................................................................... 40 

Levin, Hon. Carl: 

Prepared statement .......................................................................................... 43 

Merrill, Peter R., Ph.D.: 

Testimony .......................................................................................................... 11 

Prepared statement .......................................................................................... 46 

Robinson, Leslie, Ph.D.: 

Testimony .......................................................................................................... 13 

Prepared statement .......................................................................................... 63 

Saint-Amans, Pascal: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 74 

Sloan, Allan: 

Testimony .......................................................................................................... 14 

Prepared statement with attachment ............................................................. 81 

Stack, Robert B.: 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 96 

Thune, Hon. John: 

Prepared statement .......................................................................................... 101 

Wyden, Hon. Ron: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 102 

COMMUNICATIONS

American Citizens Abroad (ACA) ........................................................................... 105 

The Babcock and Wilcox Company (B&W) ............................................................ 109 

Page

IV 

National Association of Manufacturers .................................................................. 111 

National Retail Federation (NRF) .......................................................................... 114 

Public Citizen ........................................................................................................... 115 

Reforming America’s Taxes Equitably (RATE) Coalition ..................................... 121 

Silicon Valley Tax Directors Group ........................................................................ 125 

Steelcase Inc. ............................................................................................................ 131 

(1) 

THE U.S. TAX CODE: 

LOVE IT, LEAVE IT, OR REFORM IT 

TUESDAY, JULY 22, 2014 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 9:50 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Ron Wyden 

(chairman of the committee) presiding. 

Present: Senators Schumer, Stabenow, Menendez, Cardin, 

Brown, Hatch, Grassley, Enzi, Thune, Burr, Portman, and Toomey. 

Also present: Democratic Staff: Michael Evans, General Counsel; 

Todd Metcalf, Chief Tax Counsel; Jocelyn Moore, Deputy Staff Director; and Joshua Sheinkman, Staff Director. Republican Staff: 

Chris Campbell, Staff Director; Tony Coughlan, Tax Counsel; Chris 

Hanna, Senior Advisor for Tax Reform; Jim Lyons, Tax Counsel; 

Shawn Novak, Senior Accountant and Tax Advisor; Mark Prater, 

Deputy Staff Director and Chief Tax Counsel; and Jeff Wrase, 

Chief Economist. 

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

FROM OREGON, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The Finance Committee will come to order. 

The U.S. tax code is infected with the chronic diseases of loopholes and inefficiency. These infections are hobbling America’s 

drive to create more good-wage, red, white, and blue jobs here at 

home. They are a significant drag on our economy and are harming 

U.S. competitiveness. The latest outbreak of this contagion is the 

growing wave of corporate inversions, where American companies 

move their headquarters out of the United States in pursuit of 

lower tax rates. 

The inversion virus now seems to be multiplying every few days. 

Medtronic, Mylan, Mallinckrodt, and many more deals have either 

occurred recently or are currently in the works. Medtronic’s proposed $42-billion merger with Covidien was record-breaking when 

it was announced in June. But the ink in the record book had barely dried when AbbVie announced its intention on Friday to acquire 

Shire for almost $55 billion. 

According to the July 15th edition of Marketplace, and I am 

going to quote here, ‘‘What’s going on now is a feeding frenzy. . . . 

Every investment banker now has a slide deck that they’re taking 

to any possible company and saying, ‘You have to do a corporate 

inversion now because, if you don’t, your competitors will.’ ’’ 

2 

* For more information, see also, ‘‘Present Law and Background Related to Proposals to Reform the Taxation of Income of Multinational Enterprises,’’ Joint Committee on Taxation staff 

report, July 21, 2014 (JCX–90–14), https://www.jct.gov/publications.html?func=startdown& 

id=4656K. 

The Congress has been aware of the inversion virus for a long 

time. In fact, it passed legislation purporting to solve the problem 

a decade ago. But the underlying sickness continues to gnaw away 

at our economy with increasing intensity. 

The American tax code is an anticompetitive mess. Accountants, 

lawyers, and fast-buck artists looking for tax shelters feed off it. 

This mess is driving American investment dollars overseas, and, 

according to the Joint Committee on Taxation,* it is costing American taxpayers billions. 

On a bipartisan basis, the Finance Committee must respond 

now. First, let us work together, colleagues, to immediately cool 

down the inversion fever. The inversion loophole needs to be 

plugged now. Second, let us use the space created by these immediate steps to apply the indisputable, ultimate cure: comprehensive 

tax reform. 

Now, I have 9 long years of sweat equity in the cause of tax reform. With former Senator Gregg and current Senators Begich and 

Coats, we have produced what still is the Senate’s only bipartisan 

Federal income tax overhaul in almost 30 years. Now, I would be 

the first to say that Senators here have differing views about how 

to go about enacting tax reform. Let us, however, recognize that 

what really counts is that the Finance Committee is not back here 

once again discussing inversions a decade from now. 

Comprehensive tax reform has to happen soon. The outbreak of 

inversions shows that, without curing the disease once and for all, 

the illness is going to keep plaguing the American economy. It is 

going to get tougher to create those good-wage, red, white, and blue 

American jobs. Our tax base is going to keep eroding. Cash piles 

trapped overseas will grow. Investment will be driven elsewhere. 

Now, the Finance Committee invited a number of CEOs from the 

inverting companies to join our discussion today. None accepted our 

invitation. I hope that these executives will soon change their 

minds and be willing to answer questions that Finance Committee 

members have about this issue. 

The fact is, without immediate comprehensive tax reform, an 

antidote to the inversion virus is needed now to protect the American economy. This wave of inversions may be good for shareholders and investment bankers and private equity firms, yet the 

barrage is bad for America. America’s free enterprise system is at 

its best when there is a level playing field, and inversions bestow 

tax favors on some parties that further distort the free market. 

Absent tax reform being enacted immediately, colleagues, what 

happens if the inversion virus leads to 20 more inversions over this 

summer? Many inversions to this point have happened in the medical field, but the Wall Street Journal just reported that there is 

evidence of inversions spreading to manufacturing and retail. 

How many more infections can America’s economic body endure? 

Global markets are expanding. Stockpiles of cash sitting overseas 

grow at record levels. Foreign competitors get more aggressive in 

chomping at the bit to get a deal on the backs of the American taxVerDate Mar 15 2010 20:39 Mar 25, 2015 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 R:\DOCS\93597.000 TIMD
3 

payer. The time for action is now. Our committee needs to move 

on a bipartisan basis to close the loopholes that are fueling the 

growth of the inversion virus. Then the Finance Committee needs 

to cure the disease once and for all with comprehensive tax reform. 

I just want all colleagues to know that I am going to be working 

with each of you on a bipartisan basis to accomplish both of these 

tasks. 

[The prepared statement of Chairman Wyden appears in the appendix.] 

The CHAIRMAN. Let me recognize my colleague and friend, Senator Hatch. 

OPENING STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH 

Senator HATCH. Thank you, Mr. Chairman. 

I appreciate you holding today’s hearing. I think we can all agree 

that addressing the shortcomings of our international tax system 

is a critical step on the road toward comprehensive tax reform. 

And, as we consider reforms to our tax code, our primary goals 

should be to make the U.S. a better place to do business and to 

allow American companies to more effectively compete with their 

foreign counterparts in the world marketplace. 

Sadly, when it comes to our international tax system, much of 

the attention gets placed elsewhere. For example, in 2013 the 

OECD launched its Base Erosion and Profit-Shifting, or BEPS, 

project. While we appreciate the OECD’s efforts at bringing tax authorities together to discuss and work through issues, many of us 

have expressed concern that the BEPS project could be used by 

other countries as a way to increase taxes on American taxpayers. 

The issues under negotiation with the BEPS project are complex 

and can have far-reaching and negative consequences. And, while 

I think we should be willing to work through these issues until an 

international consensus is reached, we should not be rushed into 

accepting a bad deal just for the sake of reaching an agreement. 

I think we are right to expect that the Treasury Department will 

aggressively represent American employers and their workers in 

the BEPS negotiations, while responsibly consulting with Congress 

as the discussions proceed. Hopefully, in the end, the focus of these 

discussions will return to base erosion principals instead of ways 

foreign countries can raid the American Treasury or American 

businesses. 

Of course, while the BEPS negotiations are important, the most 

high-profile international tax issue today happens to be corporate 

inversions. It seems that almost every day we are hearing about a 

U.S. multinational opting to invert to a foreign jurisdiction. As I 

have said publicly on multiple occasions, I am greatly concerned 

about these corporate inversions. Ultimately, the best way to solve 

this problem will be to reform our corporate and international tax 

system in a manner that will make our multinationals competitive 

against their foreign counterparts. That will mean, among other 

things, a significant reduction in the corporate tax rate and major 

changes to make our international tax system more competitive. 

Over the past few months, we have seen a handful of legislative 

proposals to address the issue of inversions. Most of them are puniVerDate Mar 15 2010 20:39 Mar 25, 2015 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 R:\DOCS\93597.000 TIMD
4 

tive and retroactive. Rather than incentivizing American companies 

to remain in the U.S., these bills would build walls around U.S. 

corporations in order to keep them from inverting. I think that is 

not only stupid, I think it is going to result in consequences that 

nobody wants. 

This approach, in my view, completely misses the mark. While 

it may put a stop to traditional inversions, it could actually lead 

to more reverse acquisition inversions, as our U.S. multinationals 

would under this approach become more attractive acquisition targets for foreign corporations. Whether it is traditional corporate acquisition inversion or a reverse acquisition inversion, the result is 

the same: continued stripping of the U.S. tax base. 

In fact, the approach in the proposed anti-inversion legislation is 

so misguided it reminds me of an old joke. A drunk is looking for 

something under a street light. A police officer walks up to him and 

asks what is he looking for. The drunk says, ‘‘My keys.’’ The police 

officer helps the drunk look for a few minutes without success and 

finally asks, ‘‘Did you lose your keys here?’’ The drunk says, ‘‘No, 

I lost them across the street.’’ The officer responds, ‘‘Then why are 

you looking for them on this side of the street?’’ The drunk replies, 

‘‘Because the light is better over here.’’ 

Once again, the ultimate answer to this problem—and the only 

way to completely address the issue of inversions—is to reform our 

tax code. However, as I have also said publicly, there may be steps 

that Congress can take to at least partially address this issue in 

the interim. And, while I do not support the anti-inversion bills we 

have seen thus far, I personally am open to considering alternative 

approaches, although I do have a few stipulations as to what proposals I will consider. 

For example, whatever approach we take, it should not be retroactive or punitive, and it should be revenue-neutral. Our approach 

should move us toward or at last not away from a territorial tax 

system and should not enhance the bias to foreign acquisitions. 

Most importantly, it should not impede our overall progress toward 

comprehensive tax reform. Toward that end, it should not be inconsistent with our House colleagues’ approach. 

I think there is a growing chorus out there among some of my 

friends on the other side of the aisle to use corporate inversions as 

a political wedge issue in this election year. In fact, I was recently 

the recipient of a very politically toned letter from Treasury Secretary Lew on this issue. I hope that is not the direction we take. 

If we actually want to accomplish something on this issue, we are 

going to have to work together. 

As you can see, Mr. Chairman, we have a lot to discuss today. 

I want to thank you for holding this important hearing, and I 

look forward to hearing from this very distinguished panel. 

The CHAIRMAN. Thank you very much, Senator Hatch. 

[The prepared statement of Senator Hatch appears in the appendix.] 

The CHAIRMAN. Let me just reiterate that I am very much interested in working with you and our colleagues on both sides of the 

aisle to address both of these issues: the immediate challenge we 

are facing with this growing inversion virus and then, of course, 

5 

the ultimate cure, which is comprehensive tax reform. So I look forward to working with you and our colleagues. 

We now have six witnesses. Our first witness is Mr. Robert 

Stack, who is the Deputy Assistant Secretary for International Tax 

Affairs at the Treasury Department. 

Our next witness will be Mr. Pascal Saint-Amans, director of the 

Centre for Tax Policy and Administration at the Organisation for 

Economic Co-operation and Development. 

Our third witness will be Dr. Mihir A. Desai, who is professor of 

finance at Harvard Business School and a professor of law at Harvard. 

Our fourth witness will be Dr. Peter Merrill, who is the director 

of the National Economics and Statistics Group at PricewaterhouseCoopers. 

Our fifth witness will be Dr. Leslie Robinson, who is an associate 

professor of business administration at the Tuck School of Business 

at Dartmouth. 

Our final witness will be Mr. Allan Sloan, who is the senior editor at large for Fortune magazine. 

Our thanks to all of you for coming. It is our custom that your 

prepared statements will be made a part of the hearing record in 

their entirety, and, if you could use your 5 minutes to summarize, 

that would be very helpful. 

I know Senators have many questions. We are going to have 

some votes at 10:45. So this is going to be a bit of a juggling act, 

and we will try to handle this as well as the chaotic Senate schedule allows. 

So, Mr. Stack, welcome. 

STATEMENT OF ROBERT B. STACK, DEPUTY ASSISTANT SECRETARY FOR INTERNATIONAL TAX AFFAIRS, DEPARTMENT 

OF THE TREASURY, WASHINGTON, DC 

Mr. STACK. Thank you, Chairman Wyden, Ranking Member 

Hatch, and distinguished members of the committee. I appreciate 

the opportunity to appear today to discuss these important international tax issues to which your committee has already devoted 

substantial effort. 

I would like to begin by describing the work we are doing in the 

G–20/OECD Base Erosion and Profit-Shifting, or BEPS, project and 

then link that discussion to a consideration of the need for international tax reform, as well as measures outlined in the administration’s fiscal year 2015 budget proposals to address U.S. base 

stripping, including through so-called inversion transactions. 

In June 2012, at the G–20 Summit in Las Cabos, Mexico, the 

leaders of the world’s largest economies identified as a significant 

concern the ability of multinational companies to reduce their tax 

bills in high-tax countries by shifting income into low- and no-tax 

jurisdictions. The result was the G–20/OECD BEPS project and the 

BEPS action plan endorsed by G–20 leaders last September in 

Saint Petersburg. 

The BEPS action plan outlines 15 specific areas where governments need to work to change the tax rules that encourage companies to shift their income at the expense of the global tax base and 

our own tax base. The BEPS project is expected to release its first 

6 

set of recommendations this fall and is set to conclude its work 

with final recommendations at the end of 2015. 

The United States has a great deal at stake in the BEPS project 

and a strong interest in its success. Our active participation is crucial to protecting our own tax base from stripping by multinational 

companies. Because the United States provides a foreign tax credit 

to U.S. companies for taxes they pay overseas, the United States 

also has a strong interest in rules that enjoy a broad international 

consensus. In addition, as home of some of the world’s most successful and vibrant multinationals, we have a stake in ensuring 

that companies and countries play by tax rules that are clear and 

administrable and that companies can avoid unrelieved double taxation, as well as time-consuming, expensive tax disputes. Failure 

in the BEPS project could well result in countries taking unilateral, 

inconsistent actions, thereby increasing double taxation, the cost to 

the Treasury, and the number and expense of tax disputes. 

I am happy to report that the OECD BEPS project has had a 

promising beginning, and there are areas where commendable 

work is being done to resolve gaps in existing international rules. 

I have outlined those areas in my written submission. As the work 

moves into 2015, there is more that can be achieved and, also, several areas where we must guard against bad outcomes. And echoing Senator Hatch, those bad outcomes would include international 

norms that increase tax disputes because they are vague and easily 

manipulated by tax authorities, or international norms that could 

erode the U.S. tax base or increase double taxation. 

The United States needs to remain deeply engaged in moving the 

BEPS project to a successful conclusion between now and the end 

of 2015. While the international discussions over BEPS are ongoing, it is worth acknowledging steps the United States could take 

today to reform our own tax system to improve competitiveness, secure our tax base, and reduce incentives for profit-shifting by U.S. 

firms. 

As the President has proposed, we should reform our business 

tax system by reducing the rate, broadening the base, and imposing a minimum tax on foreign earnings. But such reform would 

only be a start, because, even with lower U.S. rates, U.S. multinationals would continue to aggressively seek ways to lower their 

tax bills by shifting income out of the United States. 

So what tools do we have at our disposal? The administration’s 

fiscal year 2015 budget contains a series of common-sense proposals to protect our U.S. tax base which can be enacted as part 

of reform or in the context of our current system. They are outlined 

in some detail in our budget and in my written testimony, but let 

me highlight just two here. 

One proposal would strengthen our interest-stripping rules and 

level the playing field by limiting the ability of U.S. subsidiaries of 

a foreign multinational to deduct a disproportionate amount of the 

group’s global interest expense to the United States. It is especially 

disconcerting to observe that among the foreign multinationals that 

can most aggressively take advantage of the deficiencies in our 

interest-stripping rules are so-called inverted companies—that is, 

foreign-parented companies that were previously U.S.-parented. 

7 

A second proposal in our budget would deal with inversions. As 

underscored by Secretary Lew’s July 15th letter to Congress, I 

want to emphasize the serious need for the United States to directly address the potential loss of Federal tax revenue from corporate inversion transactions and the need to enact our budget proposal or a similar one aimed at curbing them. 

Once companies invert, there is a permanent loss to the U.S. income tax base, since it is safe to assume these companies are not 

coming back to the United States. These inversion transactions are 

on the increase and, indeed, we are aware of many more inversions 

in the works right now. Letting our corporate tax base erode 

through inversions will worsen our fiscal challenges over the coming years and will reward countries that practice race-to-the-bottom 

tax competition in an effort to lure away our large U.S. multinationals. 

As the Secretary indicated in his June 15 letter, Congress should 

pass anti-inversion legislation immediately with an effective date of 

May 2014. 

Thank you for the opportunity to speak to you today. I look forward to answering your questions. 

The CHAIRMAN. Thank you very much, Mr. Stack. That is very 

helpful. 

[The prepared statement of Mr. Stack appears in the appendix.] 

The CHAIRMAN. Our next witness will be Mr. Pascal SaintAmans. We welcome you. 

STATEMENT OF PASCAL SAINT-AMANS, DIRECTOR, CENTRE 

FOR TAX POLICY AND ADMINISTRATION, ORGANISATION 

FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, PARIS, 

FRANCE 

Mr. SAINT-AMANS. Thank you, Mr. Chairman. Chairman Wyden, 

Ranking Member Hatch, distinguished members of the committee, 

thank you for the opportunity to testify today here. 

The OECD was founded in the aftermath of World War II under 

the leadership of the United States. It is a country-driven organization with 34 countries, the U.S. being the largest member and playing a key role, and it works by consensus. It does a lot of work on 

tax, and in the tax area we do consult extensively. 

On the project related to Base Erosion and Profit-Shifting, we 

have consulted civil society, businesses, all stakeholders. In this 

project, we have issued a number of discussion drafts. More than 

3,500 pages of comments have been received and have been taken 

into account. We have conducted five public consultations, as well 

as webcasts which have been looked at by more than 10,000 viewers. 

In the area of tax, the OECD facilitates cooperation in tax administration between its member countries to eliminate double taxation. As you know, taxation is at the core of countries’ sovereignty, 

and each country is free to set up its corporate tax system the way 

it chooses, but, as a result, there are risks of double taxation which 

are not conducive to cross-border investment. 

Since the 1920s, a common set of standards has been agreed to, 

and the OECD has abated this work since the 1950s. In particular, 

we have come up with a model tax convention and transfer-pricing 

8 

guidelines. These rules have worked well, but they have also not 

kept pace with the economic changes and globalization. As a result, 

they have been good at eliminating double taxation, but they have 

also facilitated unintended double non-taxation. This is an issue for 

most governments across the world for many reasons. 

Low taxation in itself is not a problem. On the contrary, the 

OECD favors low corporate tax, low rates, and broad bases. But 

this is an issue because, as long as countries decide to have a corporate income tax, the corporate income tax needs to be paid by all 

taxpayers. And there is a need now to, one, make sure that the 

rules make sense. The current rules are no longer adapted to 

globalization, and there is the gain through artificial settings. 

There is a divorce now between the location of the activity and 

the location of the profits, which can be booked in a jurisdiction 

where absolutely nothing is happening. As a result, the sovereign 

right of countries is undermined. This is a global issue; this is not 

an issue targeted to U.S. companies. U.S. companies only account 

for less than a quarter of the Fortune Global 500 companies. So it 

is a global issue concerning U.S. and non-U.S. companies. 

Second, there is a need to level the playing field. An uneven playing field between companies is not conducive to the right location 

of capital. Companies operating at the domestic level are at a competitive disadvantage because they cannot use the loopholes in the 

international tax framework. 

Three, there is a need to reduce uncertainty. Uncertainty is bad 

for companies, it is bad for the investment climate, and there is increased uncertainty because these rules do not make a lot of sense. 

A number of tax administrations are trying to dispute the position of companies that are legal. The tax administrations are frustrated, and a number of countries are walking away from the consensus, from the common interpretation of the rules, and that results in uncoordinated unilateral measures to protect their tax 

base, but that increases uncertainty. Therefore, we need to address 

these serious risks for businesses. 

The response from governments has taken place in the context 

of the G–20, which has been called on to address the issue of Base 

Erosion and Profit-Shifting. We have brought all the G–20 and the 

OECD countries onto an equal footing to find ways to address this 

issue of the tax framework by consensus in 2 years’ time so that 

principles can be agreed upon quickly to reduce the risk of uncertainty. We need a principled approach and a cost-effective approach 

to limit the compliance burden for companies and to reduce controversy. 

This is not a revenue-grabbing exercise and should not be a 

revenue-grabbing exercise, but a useful consensual exercise for the 

common principles to be more accepted by ensuring consistency in 

the cross-border environment, increasing substance requirements, 

and promoting transparency. The objectives are to secure the consensus and, therefore, reduce uncertainty and improve the way we 

can solve disputes. 

We have come up with an action plan of 15 measures which are 

described in my written testimony. Some of them are about neutralizing hybrid mismatches, reducing the abuse of tax treaties, or 

improving transfer-pricing rules. 

9 

As a conclusion, I would say that the issue of Base Erosion and 

Profit-Shifting is widely shared across countries, and, here in the 

U.S. in particular, we are aware that you are planning to address 

the U.S. tax system, and we hope that the work we are doing at 

the international level, with your support and the engagement of 

the U.S. Treasury, can be useful to promote growth and jobs here 

in the U.S. by fixing some of the issues of the U.S. tax system. The 

work of the OECD in that context, we hope, is particularly timely, 

and we hope that it will inform your debate. 

We, of course, are fully available to respond to your questions 

and further assist you. 

The CHAIRMAN. Thank you, Mr. Saint-Amans. 

[The prepared statement of Mr. Saint-Amans appears in the appendix.] 

The CHAIRMAN. Let us now go to Dr. Desai. Welcome. 

STATEMENT OF MIHIR A. DESAI, Ph.D., MIZUHO FINANCIAL 

GROUP PROFESSOR OF FINANCE, AND PROFESSOR OF LAW, 

HARVARD UNIVERSITY, CAMBRIDGE, MA 

Dr. DESAI. Thank you. Chairman Wyden, Ranking Member 

Hatch, and members of the committee, it is a pleasure to appear 

before you today to discuss international tax reform. I am a professor of finance at Harvard Business School and a professor of law 

at Harvard Law School. 

Recent merger transactions highlight long-simmering problems 

in the U.S. corporate tax code, particularly with respect to its international provisions. My comments attempt to outline briefly the 

origins of these transactions, the range of alternative solutions, 

guidelines for evaluating alternative reforms, and some reforms 

that should be avoided. 

The last 12 months have witnessed a remarkable wave of merger 

transactions that facilitate the expatriation of U.S. corporations. 

Such transactions reflect the effects of policies and of the changing 

structure of multinational firms. From a policy perspective, the 

transactions highlight the increasing costs of employing a worldwide tax regime, when most other large capital-exporting countries 

no longer maintain such regimes, and a corporate tax rate that 

stands well above rates employed by other OECD countries. From 

a firm point of view, the transactions highlight the increased mobility of activity in today’s economy, the growing de-centering of firms 

whereby headquarter locations have been split up and reallocated 

around the world, and the growing importance of non-U.S. markets 

for U.S. firms. Rather than questioning the loyalties of executives, 

it is critical to understand these underlying structural and secular 

forces. 

While these transactions naturally attract growing attention, inversions are merely the most visible manifestation of these developments. In addition to inversions, these forces are giving rise to incorporation decisions by entrepreneurs that anticipate the burdens 

of being a U.S. corporation, merger patterns that reflect the penalties of being domiciled in the United States and the importance 

of offshore cash for U.S. corporations, investment patterns by U.S. 

and foreign companies and profit-shifting activities that are not 

10 

value-creating, and the consequent negative impact of all of these 

distortions on the U.S. labor force. 

While it is tempting to limit attention to the more sensational effects and characterize them as tax-avoiding paper-shuffling, this 

would effectively be missing the forest for the trees. Reforms 

should be focused exclusively on advancing U.S. welfare, with particular attention on reforms that will improve American wages. 

These goals are mistakenly thought to be achieved by limiting the 

foreign activities of U.S. firms, as foreign activities can be viewed 

as diverting economic activity away from the U.S. 

In fact, the evidence suggests the opposite. As firms expand globally, they also expand domestically. Indeed, American welfare can 

be advanced by ensuring that investments in the U.S. and abroad 

are owned by the most productive owner and that American firms 

flourish abroad, a goal advanced by the territorial regime that has 

now been adopted by most comparable countries. 

While the developments described above have crystallized the 

case for international tax reform, with an increasing attention on 

switching to a territorial regime, there is still tremendous variation 

in proposals for territorial regimes. Some proposals, including those 

with an alternative minimum tax on foreign profits, are tantamount to a back-door worldwide regime with even more complexity 

than today’s system. 

Revenue consideration should figure largely in tax reform today, 

but should be accorded secondary status in this setting given the 

very limited revenue provided by current international tax rules 

and the remarkable complexity and distortions required to secure 

any such revenue. Additionally, it is not clear that policies should 

prioritize revenue considerations in other countries. 

More broadly, the corporate tax is ripe for reform. In addition to 

international reforms and a rate reduction, reform should address 

the two other major developments in the corporate tax arena: the 

growing prominence of non-C corporate business income and the 

disjunction between profits reported to capital markets and to tax 

authorities. 

A useful blueprint for reform would include moving to a territorial regime, unencumbered by excessive complexity; considerably 

lower rates in the range of 18 percent to 20 percent; better alignment of book and tax reporting of corporate profits; and by some 

taxation of non-C corporation business income. This combination of 

reforms has the potential of addressing significant changes in the 

global economy in a revenue-neutral way that will advance U.S. 

welfare. More fundamental reforms, including those that replace 

the corporate tax with a consumption tax are preferred, if feasible. 

Legislation that is narrowly focused on preventing inversions or 

specific transactions runs the risk of being counterproductive. 

These transactions are nested in a broader set of corporate decisions leading to several unintended consequences. 

For example, rules that increase the required size of a foreign 

target to ensure the tax benefits of an inversion can deter these 

transactions, but can also lead to more substantive transactions. 

More substantive transactions are likely to involve the loss of U.S. 

activity as American firms will be paired with larger foreign 

acquirers that demand the relocation of more activity abroad, inVerDate Mar 15 2010 20:39 Mar 25, 2015 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 R:\DOCS\93597.000 TIMD
11 

cluding headquarters functions. Similarly, specific regulations targeted at inverting firms may also lead to foreign firms leading 

some transactions to avoid those regulations. 

While it is tempting to address specific transactions in advance 

or in lieu of broader reform, it is useful to recall that the last wave 

of anti-inversion legislation likely spurred these more significant 

recent transactions and reduced the prospect of reform in these intervening years. 

Members of the committee, I admire your foresight in addressing 

these issues. These highly visible manifestations of the structural 

problems in the corporate tax provide a significant opportunity for 

genuine reform. 

I would be delighted to answer any questions. 

The CHAIRMAN. Thank you very much, Professor. 

[The prepared statement of Dr. Desai appears in the appendix.] 

The CHAIRMAN. We now welcome Dr. Peter Merrill and look forward to your comments. 

STATEMENT OF PETER R. MERRILL, Ph.D., DIRECTOR, NATIONAL ECONOMICS AND STATISTICS GROUP, PRICEWATERHOUSECOOPERS, WASHINGTON, DC 

Dr. MERRILL. Chairman Wyden, Ranking Member Hatch, members of the committee, thank you for the opportunity to testify 

today. 

My name is Peter Merrill. I am a principal with PricewaterhouseCoopers. I hold a Ph.D. in economics. The focus of my practice 

is economic effects of tax policy. I am appearing today on my own 

behalf. The views I express are my own. 

I have been asked to compare how the U.S. rules for tax on international income compare with the rules of other countries. In my 

testimony, I will focus on two features of the U.S. corporate tax 

system that fall far outside international norms: the high corporate 

rate and the worldwide system of taxation. These features of the 

U.S. tax system make it more difficult for U.S. companies to compete in global markets. 

U.S. multinationals face ever-growing competition from abroad. 

Over the last 15 years, the number of U.S. companies in the Forbes 

Global Top 500 list has dropped by a third from 200 to 135. Loss 

of global market share by U.S. companies is due to a variety of factors. The out-of-step U.S. tax system is seen by many as a hindrance rather than a help. 

The top U.S. corporate statutory rate, including State tax, is 39.1 

percent. This is the highest rate among major economies, more 

than 14 points above the average for the other OECD countries, 

and almost 10 points higher than the average for the other G–7 

countries. 

After the Tax Reform Act of 1986, the U.S. had a relatively low 

corporate tax rate. However, since then, the other OECD countries 

have reduced their rates by a collective average of 19 points, while 

the U.S. Federal corporate tax rate was increased in 1993 to 35 

percent, where it has remained since. And, while it is widely recognized that our statutory corporate tax rate is high, studies show 

our effective tax rate also is high by international standards. 

12 

In addition, the U.S. has a worldwide system under which foreign income earned by foreign subsidiaries of U.S. companies is 

subject to U.S. tax when received by the U.S. parent. Unlike the 

United States, all other G–7 countries and 28 of the other 33 

OECD countries have adopted territorial tax systems. 

As a result of these trends, U.S. multinationals increasingly face 

foreign competitors that are taxed under territorial systems. Within the OECD, 93 percent of the foreign competitors on the Global 

Top 500 list were based in countries that use territorial tax structures. The significance of this is that foreign competitors of U.S. 

multinationals can invest their foreign profits at home without an 

added home country tax. 

Turning to recent reforms, in 2009, three OECD countries adopted territorial tax systems: the U.K., Japan, and New Zealand. The 

U.K. adoption of a territorial system was the first step in a multiyear reform package which also included lowering the corporate income tax rate from 28 percent to 21, with a further reduction to 

20 percent scheduled next year. 

The British government articulated the rationale for these reforms as follows, quote: ‘‘The government wants to send out the signal loud and clear that Britain is open for business. In recent 

years, too many businesses have left the U.K. amid concerns about 

tax competitiveness. It’s time to reverse this trend. That is why the 

government is prioritizing corporate tax reform.’’ 

Japan’s adoption of a 95-percent dividend exemption system had 

been advocated by the Ministry of Economy, Trade, and Industry 

to encourage a repatriation of foreign earnings. In addition, since 

2012, Japan’s combined corporate tax rate has been cut 5 points to 

35.6 percent, and Prime Minister Abe’s cabinet has recently approved a phased reduction to below 30 percent. 

Also in 2009, New Zealand switched back to a territorial tax system after a 21-year period in which it had operated under a worldwide system without deferral, thereby bringing New Zealand’s tax 

system back in alignment with international norms. 

In closing, the combination of our high corporate rate and worldwide system creates an incentive for U.S. multinationals to reinvest foreign earnings outside the United States. According to a recent study co-authored by Laura D’Andrea Tyson, former chair of 

President Clinton’s Council of Economic Advisers, switching to a 

territorial system, even without reducing the U.S. tax rate, would, 

on an ongoing basis, increase annual repatriations by over $100 billion a year and create 150,000 new jobs per year. 

Reforming the U.S. system to align with international norms 

would enhance the ability of U.S. companies to compete abroad and 

create jobs at home. 

Thank you, and I would be happy to answer questions. 

The CHAIRMAN. Dr. Merrill, thank you very much. 

[The prepared statement of Dr. Merrill appears in the appendix.] 

The CHAIRMAN. Dr. Robinson? 

13 

STATEMENT OF LESLIE ROBINSON, Ph.D., ASSOCIATE PROFESSOR OF BUSINESS ADMINISTRATION, TUCK SCHOOL OF 

BUSINESS, DARTMOUTH COLLEGE, HANOVER, NH 

Dr. ROBINSON. Chairman Wyden, Ranking Member Hatch, and 

distinguished members of the committee, it is an honor to appear 

today to testify on the important topic of international corporate 

taxation. 

I am an associate professor at the Tuck School of Business at 

Dartmouth College. I teach financial accounting and taxation, and 

my research centers on multinational corporations. 

It is clear that reform is needed. The international system is one 

of the most technically complex areas of the U.S. tax code, but 

raises little revenue. My testimony summarizes, in my view, what 

the academic literatures in economics, finance, and accounting collectively offer in terms of evaluating the range of alternative solutions. 

The top U.S. Federal corporate income tax rate is 35 percent. 

This is the highest rate of all OECD countries and far exceeds the 

23.5-percent average. 

Proponents of adopting a territorial system in the U.S. often cite 

competitiveness issues. A common assertion is that U.S. firms are 

at a competitive disadvantage because they face larger tax burdens 

operating under a worldwide system than their competitors operating under territorial systems. Generally speaking, this is because 

U.S. firms face a high home country tax on foreign profits, whereas 

their competitors face no home country tax on foreign profits. 

Yet, no country operates either a pure worldwide or a pure territorial system. When loopholes exist that facilitate the indefinite deferral of the home country tax on foreign profits under a worldwide 

system, the pendulum swings back to a pure territorial system. 

Likewise, as eligibility for the foreign dividend exemption under a 

territorial system is appropriately restricted, the pendulum swings 

back to a pure worldwide system. This means it is possible for a 

well-designed territorial system to be at least as, if not more, burdensome than the poorly designed U.S. worldwide system that we 

have today. 

Evidence suggests that U.S. firms are adept at indefinite deferral. One study finds that financially unconstrained U.S. firms shift 

as much income as firms operating under territorial systems. Also, 

there is no evidence that the global tax burden of a firm depends 

on how foreign profits are taxed in the home country of its parent. 

There is some evidence that certain location decisions differentially impact firms’ global tax burdens depending on the home 

country. For example, a firm resident in home country X realizes 

a larger reduction in its global tax burden by operating in source 

country A than a firm resident in home country Y, also operating 

in source country A, whereas the opposite may be true for these 

two firms when operating in source country B. This suggests that 

the burden of an international tax system depends significantly on 

anti-abuse provisions that selectively narrow or broaden the tax 

base with respect to certain types of income earned in specific locations rather than whether the tax system is worldwide versus territorial. 

14 

Similarly, other research shows that decisions about headquarter 

relocations, tax haven operations, and ownership structures depend 

on the existence and strength of anti-abuse legislation. Maintaining 

our current worldwide system with deferral, or introducing a territorial system, leaves the need for anti-abuse provisions that are difficult to administer and enforce. 

Another consideration is eliminating implicit costs. Avoiding repatriation, which triggers the home country tax on foreign profits 

under our current system, prompts firms to allocate economic resources in an inefficient manner. Examples include making valuedecreasing foreign acquisitions or the inability to respond to domestic investment opportunities. Maintaining a worldwide system but 

eliminating deferral would greatly reduce these costs. Adopting a 

territorial system may not. 

Firms operating under territorial systems face implicit costs 

when attempting to circumvent anti-abuse legislation, which serves 

as a backstop that otherwise imposes a home country tax on foreign profits that have not been subject to a robust tax system 

abroad. To my knowledge, there is no estimate of these costs, but 

my expectation is that they would be greater than under a worldwide system without deferral. 

My overall assessment is that our international tax system can 

be adequately reformed. We need not entirely abandon our current 

system in favor of a fundamentally different system. Limiting deferral and lowering the statutory rate would generally reduce incentives to shift income, eliminate the implicit costs of avoiding repatriation, and reduce complexity and uncertainty for firms. 

Thank you, and I would be happy to answer any questions. 

The CHAIRMAN. Dr. Robinson, thank you. 

[The prepared statement of Dr. Robinson appears in the appendix.] 

The CHAIRMAN. Our final witness is Mr. Allan Sloan. 

STATEMENT OF ALLAN SLOAN, SENIOR EDITOR AT LARGE, 

FORTUNE MAGAZINE, NEW YORK, NY 

Mr. SLOAN. Chairman Wyden, Ranking Member Hatch, members 

of the committee, I am flattered to be here, and I am honored and 

especially pleased to be hitting cleanup, which is my normal role 

in journalism. 

Before I proceed, I have to say that I am speaking for myself 

alone. I am not speaking for Fortune magazine, my employer. I am 

not speaking for Fortune’s owner, Time, Inc. I am not speaking for 

the Washington Post, which has run my material for more than 20 

years. 

I, like Senator Hatch, am appalled to see that inversions are becoming a partisan wedge issue. I do not like this. Now, at Fortune 

several weeks ago, we put an American flag on the cover. We called 

inversion positively un-American, but we were not being partisan. 

We were being Americans. 

Fortune is divided between Republicans and Democrats. We are 

acting collectively, not in the social sense, but in the societal sense. 

This is not a Republican problem. It is not a Democratic problem. 

It is a problem for everybody. It is for all of us. And, if you do not 

stop inversions now with some sort of band-aid, by the time you get 

15 

around to doing it, there will be tens of billions of dollars of taxes 

that will have been lost and will never be recovered. 

Now, I have been writing about inversions and researching them 

for months, and I have heard the argument that, well, inversions 

are a symptom; you cannot deal with them unless you deal with 

the whole problem, and, if you deal with the whole problem, you 

deal with inversions. 

Well, I happen to have a daughter who is an emergency room 

doctor, and, when someone shows up at the ER bleeding, the first 

thing they do is they put on a tourniquet, they stabilize the patient, and then they try to deal with the underlying problem. They 

do not say, ‘‘Well, gee, we have to deal with the underlying problem 

first.’’ 

You have an emergency here. It may not seem that way, but you 

have the beginning of, I think, a massive flood of inversions unless 

you stop this. Now, I know very little about tax, I know very little 

about law, but I do know something about Wall Street and manias. 

And I look at this, this inversion thing, and it reminds me of the 

dot-com bubble, where people did things that were just crazy, but 

everyone was doing them. And all these people with degrees and 

a lot of money and fancy suits were whispering in your ear, ‘‘Well, 

you have to do this,’’ so people did it, and it was just a disaster. 

I have written about Wall Street for large parts of my career, 

and they gave us the Internet bubble, they gave us toxic sub-prime 

securities, and now they are giving us inversions. It is a product. 

It is the latest thing that is good for Wall Street. 

There is this whole rationale that surrounds it, but I do not 

think it is good for society. It just does not work. And I do not pretend to understand anything about the international tax system, 

except that I do not understand it. I am a simple person; I am a 

recovering English major; I am not a legal person. I mean, if I were 

you—which will probably never happen, because you have to be 

nice to people, and I do not do that well—I would adopt one of the 

Levin bills. And Sandy Levin will probably be angry with me, but 

I would adopt the Carl Levin version, the one that has an expiration in it, because, if you can just stop these things for a while, you 

can buy time to fix the system. If you sit around and say, ‘‘Well, 

in a few years we will do this, it will all be fine,’’ by then, the patient will have lost so much blood, it is going to be very, very hard 

to do anything remotely revenue-neutral in a tax reform. 

The other complaint, again, I have heard endlessly is, oh, it is 

so unfair to make this May 8th, which is the date in the Levin 

transaction, which also, I believe, happens to be the date that Senator Wyden published his op-ed in the Wall Street Journal, which 

messed me up because he wrote what I was going to write. So I 

was furious, but I came here anyway. [Laughter.] 

So the May 8th deadline was known. If you look at the contracts 

of some of these deals, there are provisions in there in case the 

anti-inversion stuff changes. So it is not as if this is unprecedented 

or unfair. I mean, everybody knows this. You changed the rules 

retroactively in 2004, and, as best I could tell, there were no earthquakes or brimstone or fire from the sky. 

So, please, if you can act like Americans, which I know you can, 

instead of squabbling, and you get the Senate to go along and deal 

16 

with the House, we can put on the tourniquet, we can stop the patient from bleeding out, then we can fix the system, and that is 

what I hope you will do. 

Thank you for your time. I am happy to answer any questions. 

The CHAIRMAN. Mr. Sloan, thank you. 

[The prepared statement of Mr. Sloan appears in the appendix.] 

The CHAIRMAN. Colleagues, we will stick to 5 minute rounds, and 

we will get as many members in as we can. 

I am going to ask one question of all of you. I am going to start 

with you, Mr. Stack. 

I have been about as big a flag-waver for comprehensive tax reform as anybody around here, and I am going to continue to keep 

pushing for bipartisan tax reform as aggressively as possible. The 

reality is, nobody believes that you can get comprehensive tax reform passed this year. And, with the investment bankers in that 

inversion feeding frenzy, there may be 25 more inversions during 

that time. 

So I am just going to go down the row here this morning and ask 

each of you: will that be a bad thing for America? 

Mr. Stack? 

Mr. STACK. Yes, Senator. That is a bad thing for America. That 

money is not just a one-time hit. That is a hit we take the year 

a company inverts, and it is a cost we incur throughout the 10 

years of a budget window. 

In addition, I just want to add, companies not only reduce their 

U.S. tax bill on day 1 when they invert, but they also adopt techniques to keep stripping out of the U.S. for each of the next 10 

years as well. So we get hit with a double-whammy. It has a longterm effect. It is permanent. And so the cost of waiting, I think, 

is very high. 

The CHAIRMAN. Mr. Saint-Amans? 

Mr. SAINT-AMANS. I also think it is bad. It is a symptom of, indeed, a disease. Either you trap cash growth, which compels these 

companies to reinvest in the U.S.—and I think that is one of the 

challenges of the U.S. tax code today—or the result is inversions, 

meaning that you lose the control of these companies which invert 

in another country, and that is a loss for the U.S. 

So overall it is bad, and it is a symptom of an issue in the tax 

code. 

The CHAIRMAN. Dr. Desai? 

Dr. DESAI. I think in the short run, it will feel good to do something. I think in the long run, it is not clear whether it will help 

the country, and I think the reason for that is it will have all these 

unintended consequences. 

I think there are a lot of medical analogies that are being thrown 

around today, which I think are helpful. Rather than a tourniquet, 

we might have a bleeding patient, and these things might just 

anesthetize the patient. 

The CHAIRMAN. So I think I am going to take that as a ‘‘no.’’ 

Dr. Merrill? 

Dr. MERRILL. On this one, I very much agree with the comments 

of Pascal, which is that these transactions are a symptom of a very 

broken system. 

17 

Certainly I can understand the desire to put on the tourniquet, 

but, if you leave it on too long without resolving the underlying 

problem, you get gangrene. So I can understand the desire to do 

something in the short term, but there is the risk of unintended 

consequences. So fixing the system is ultimately the only real answer to stop the problem. 

The CHAIRMAN. So you are in the middle of all this. We will put 

you down in that way. 

My concern about that position, for both of you, is that tax reform is moving slowly, but inversions are moving rapidly. And that 

is a prescription for chaos, and that is why I want to see us address 

both of the issues in a bipartisan way. 

Dr. Robinson? 

Dr. ROBINSON. I do not have any data on this, but I do remember 

reading about inversions, companies leaving other countries, such 

as the U.K., and then, when the tax system is reformed, they have 

come back again. So I do not have any data on that, but my sense 

is that these companies may not be lost forever. 

I also think, as far as I understand inversion transactions, it only 

affects the tax on the future income. It does not impact the tax on 

the accumulated earnings. So, in that respect, I do not think we 

run the risk of waiting to solve the real problem and sort of letting 

the markets play out as they do. 

The CHAIRMAN. You think it would be a bad thing. 

Mr. Sloan? 

Mr. SLOAN. I think letting 25 companies invert and then fixing 

the tax code is a recipe for disaster. I know a little bit about how 

inversion works, and Mr. Stack is absolutely right that the problem 

is not so much what happens to foreign profits, but that it becomes 

much, much easier to move money, to earnings-strip out of the 

United States, and you have to stop this. 

And, at some point when we are not on the clock, I will bandy 

medical analogies with my colleagues, but this is not the time. So 

I will just let that go, and we will deal with that later. 

The CHAIRMAN. Let me see if I can get one other question in, and 

I will make this for you, Dr. Desai, given what you said. 

Let us take Walgreen’s. Walgreen’s is an American icon. It is located in the heart of our country, and they are talking about inverting right now. 

Should Americans be concerned about the prospect that, if 

Walgreen’s inverts, they will strip profits out of the United States 

and put them into tax havens? Is that something Americans ought 

to be concerned about? 

Dr. DESAI. Without question, absolutely. There is no question 

about that. The secondary question is, what we do about it, but absolutely we should be concerned about that. 

The CHAIRMAN. Very good. 

Senator Hatch? 

Senator HATCH. Thank you, Mr. Chairman. 

This question is for Dr. Robinson and Dr. Merrill. 

Dr. Robinson, in your written testimony, you write that, quote, 

‘‘There is no evidence to support the assertion that U.S. multinational corporations are at a competitive disadvantage because 

they face larger corporate tax burdens than their competitors under 

18 

a worldwide rather than territorial tax system.’’ You then cite three 

studies in support of your statement, including one study that finds 

that U.S. multinationals have effective tax rates that are 4 percent 

lower than multinationals based in the European Union. But are 

there not studies that show that U.S. multinationals are subject to 

higher effective tax rates than foreign-based multinationals? That 

seems to indicate that the U.S.—well, let me put it this way. 

Let me give you an example. Dr. Merrill cites numerous studies 

showing that in his written testimony. The Congressional Research 

Service released a report earlier this year studying effective tax 

rates. In one part of the report, CRS notes that the effective corporate tax rate in the United States is 27.1 percent as compared 

to the rest of the OECD countries that have an unweighted average 

of 23.3 percent. 

Now, that seems to indicate that the U.S. corporate effective tax 

rate is almost 4 percentage points higher, not lower, than the other 

OECD countries, at least by one measure. Now, would you please 

comment on this? 

I would also like Dr. Merrill to comment on the effective tax 

rates faced by U.S. multinationals as compared to foreign-based 

multinationals. 

Dr. ROBINSON. Right. So the studies that I quote in my written 

testimony measure accounting effective tax rates from firms’ financial statements. So I am not sure what Dr. Merrill is going to follow up with in terms of his study. It may be a difference in how 

tax rates are measured. 

But in the accounting literature, there have been a number of 

studies, published and unpublished, that have searched extensively 

for differences in the accounting effective tax rates of firms resident 

in worldwide versus territorial countries that also looked at, as I 

mentioned, the effect on these effective tax rates of specific location 

decisions. And there is not, at least to my knowledge, in the accounting literature, as measured by an accounting effective tax 

rate, any evidence to suggest that U.S. firms have higher rates. 

Senator HATCH. Dr. Merrill? 

Dr. MERRILL. In my written statement, there is a comparison of 

six different studies that compare effective tax rates of U.S. and 

foreign companies. None of the studies is specifically focused on the 

foreign income of multinational companies, and perhaps this is 

what Dr. Robinson’s comment is referring to. 

The studies I refer to look at U.S. versus foreign companies, including accounting data. One of the studies was published by the 

Business Roundtable. It compares the financial statement accounting tax rate of companies in 58 different countries. The U.S. had 

a higher than average book effective tax rate than the other multinationals in that study. 

The World Bank does a study. We help them with that. It compares taxes in 183 countries, looking at purely domestic companies. 

And there are several other studies that I have cited that had a 

focus primarily on domestic investment. And so there are a range 

of studies. 

I must say that, looking at a broad range of studies, almost every 

study I have seen has shown that, when you do an international 

comparison of the U.S. effective tax rates versus foreign, whether 

19 

it is from financial statements, whether it is done through marginal or average effective tax rates, accounting studies, the U.S. 

consistently comes up above average. 

So I put that in my testimony, because it is commonly thought 

that effective tax rates of U.S. companies are low, but by international standards, according to all the studies I have seen, except 

for actually the ones in Leslie’s testimony, the U.S. comes up in the 

top quartile. 

Senator HATCH. Thank you. 

Do I have time to ask one more? 

The CHAIRMAN. Yes, of course. 

Senator HATCH. This question is for Dr. Desai. It seems that a 

discussion of international tax reform can at times result in a debate of capital export neutrality versus capital import neutrality. 

Such a discussion usually is not helpful, in my opinion, and typically ends up going nowhere. But you have developed an interesting new theory of international taxation—capital ownership neutrality—the idea being that a tax system should not distort the 

ownership of assets. And, in fact, capital ownership neutrality 

seems to fit in nicely with the acquisition inversions that we are 

seeing today in which a U.S. corporation acquires a smaller foreign 

corporation and inverts as part of the acquisition. 

Now, my question is this. If a U.S. corporation wants to acquire 

a foreign corporation, it seems that the U.S. corporation is at a disadvantage if it is competing against a foreign corporation based in 

a country with a territorial-type tax system. As we know, most developed countries have adopted territorial types of tax systems. In 

fact, 28 of the 34 OECD countries have territorial-type tax systems. 

Is it accurate that the U.S. corporation is at a disadvantage? 

The CHAIRMAN. Doctor, if you could, please give us a brief answer, because I want to recognize Senator Grassley. 

Dr. DESAI. Absolutely. So, yes. Along with Jim Hines, I developed 

capital ownership neutrality, and the central idea is what you said, 

which is, what matters is not where the dollars go, but who owns 

what. And, in the context that we are talking about, it is clear 

these inversions are manifestations of the fact that U.S. firms are 

not good owners because of tax provisions of assets around the 

world, and it is better to be domiciled somewhere else. 

So I think it is a clear manifestation of the patterns that give 

rise to why territoriality makes sense. 

The CHAIRMAN. Thank you very much. 

Senator Grassley? 

Senator GRASSLEY. Mr. Chairman, here is what I would like to 

do with my time, my 5 minutes. I would like to ask Mr. Stack a 

question to begin with, let him think about it for 41⁄2 minutes, and 

I want to read a statement and then stop so he can answer my 

question. [Laughter.] 

The CHAIRMAN. Colleagues, at this point, we have had a vote 

called, and I think it is the consensus of the members that we will 

have to break, since there are three. So we will get as far as we 

possibly can. 

Senator Grassley? 

Senator GRASSLEY. Mr. Stack, this is the question I would like 

to have you think about. Treasury recently informed me that it has 

20 

finally begun work on a report mandated by the American Job Creation Act to study the 2004 anti-inversion provisions. When does 

the Treasury Department expect to finish its study of the 2004 inversions legislation? And before enacting such important legislation, should not Treasury at least complete the report mandated to 

study the issue? 

Like most of my colleagues here today, I have deep concerns 

about the practice of companies moving overseas for the primary 

purpose of avoiding U.S. taxes. Average Americans and companies 

that remain in America are rightfully outraged when companies 

leave the United States, leaving the rest of us to foot the bill. That 

is why, in the early 2000s, I led an effort to prevent companies 

from simply setting up a filing cabinet and a mailbox overseas to 

escape millions of dollars of Federal taxes. 

In 2004, when I was chairman, I was successful in enacting for 

the first time reforms that established rules governing inversions. 

Under these reforms, an inverted company continues to be treated 

as a domestic company until there is a significant change in ownership or substantive business activities are located in the foreign 

country. A second feature of these reforms prevents an inverted 

company from skipping town without first paying taxes on untaxed 

earnings. 

Prior to these changes, all the company had to do was move its 

tax home out of the United States and file papers with a tax haven. 

There were no rules or standards for determining whether a transaction had substance or was purely a tax avoidance scheme. A 

number of companies took advantage of the lack of rules and standards to move to the Cayman Islands or Bermuda, as examples. 

These inversions were purely on paper, with no substantive change 

of current operation. 

The 2004 provisions have successfully curtailed abuses targeted 

by the legislation. As the nonpartisan Congressional Research Service has said, these reforms, quote, ‘‘effectively ended shifts to tax 

havens where no real business activity took place.’’ 

Now, this is not to say that inversions no longer take place. The 

2004 reforms were never intended to establish a Berlin Wall that 

forever trapped companies in the United States regardless of business needs. These reforms were targeted at and put an end to egregious abuses epitomized by Ugland House, which serves as mailbox 

headquarters for thousands of corporations. The inversions currently in the news mainly involve a large U.S. multinational merging with a significant, though smaller, foreign company, usually 

European. These are not the traditional tax haven countries with 

little or no corporate tax, but major U.S. trading partners with 

competitive tax systems and rates. 

There is little question that lowering one’s tax bill continues to 

be a factor in companies deciding to invert. However, unlike transactions in the early 2000s, these are substantive transactions that 

come with both risks and benefits for companies involved. As a result, factors other than taxes likely play a role in deciding to invert. 

I do not condone that behavior. One area that should be studied 

further is the role that tax rules that allow inverted companies to 

strip income out of the U.S. play in a company’s decision to invert. 

21 

I am going to stop and ask Mr. Stack to answer my question on 

the study that we asked for. 

Mr. STACK. Sure. Senator, as we mentioned in our letter to you 

of last week, now that we have gotten great guidance out in various areas of inversions, we are working on the study. 

I apologize. I cannot give a specific time frame for completing it, 

but I would say that, given the pace of inversions which has picked 

up recently, we would not think there would be a need to await the 

study to bring back our full attention to this issue which is happening before our eyes. 

Senator GRASSLEY. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Grassley. 

Senator Brown? 

Senator BROWN. Thank you, Mr. Chairman. 

I want to talk for a moment—and this is a question for you, Mr. 

Stack—about earnings stripping. 

Companies are using inter-company debt to lever up their U.S. 

subsidiary and deduct interest of up to 50 percent of free tax earnings, as you know, shifting profits to the lower-tax country. The 

second element of this tax arbitrage is shifting intellectual property 

and the attributed profits to tax havens. 

My question is, what do we do right now to create a kind of temporary tripwire that will allow legitimate mergers, but prevent 

those arbitrage-driven inversions? 

Mr. STACK. Thank you, Senator. One of the reasons we singled 

out these kind of anti-stripping proposals in our budget was because, even without reform, these things are going on now, and 

they are going on particularly in cases where we have inversions. 

So, whether it be interest stripping, making it harder to take intangibles out of the United States, or changing the treatment of instruments that you can take a deduction on here and have a noincome inclusion somewhere else, we think these are all urgent 

needs that would protect our base even before we do tax reform 

and will also protect our base while the inversion wave is happening, and they are very important. 

Senator BROWN. Mr. Chairman, I want to ask a question of Mr. 

Sloan. I also want to make one comment. 

The more we read about this—and I appreciate that the chairman has brought this out, I think, more effectively than anybody 

in the Senate. People in this country increasingly think the system 

is rigged. People in this country increasingly see large companies 

find ways of avoiding taxes. People struggle to pay their own taxes. 

People see these large companies having benefitted from a manufacturing tax credit, an R&D tax credit infrastructure in our country, using legal means—nobody is arguing, most of us are not arguing they are not using legal means—to find a way to avoid taxes. 

I think this committee needs to take this charge very seriously 

that the public increasingly is losing confidence in this tax system, 

causing others perhaps to cheat, and increasingly is losing confidence in this whole legislative body’s ability to do anything. And, 

if we cannot narrowly follow Mr. Stack’s advice and Senator Wyden’s ideas and do something narrowly now about inversions, we 

clearly have not lived up to our public charge. 

Let me ask a question of Mr. Sloan. 

22 

We are seeing increasingly more and more stories, partly from 

Senator Levin’s work on his subcommittee, that hedge funds and 

investment banks are big drivers of these deals, which indicates a 

potentially short-term focus on stock prices and fees. The rewards 

to Wall Street are plentiful, as Mr. Sloan said. Premiums are offered to shareholders of foreign companies so the inverting companies may avoid U.S. taxes. 

If you would, answer these couple of questions, if you would, Mr. 

Sloan. What role, in your mind, do equity funds, private equity 

funds, investment banks, hedge funds, play in encouraging companies to avoid taxes by completing an inversion? Is there any counterweight to this pressure that companies receive from short-termfocused investors? 

Mr. SLOAN. All of these players are in business to make money. 

They are in a competitive business. They want to show a higher 

rate of return than other people so they can continue to attract 

more money and get more fees. And, as long as something is not 

illegal, they will do it. 

If you talk with them socially, they are not bad people. They are 

human beings, even like Senators or journalists. They are regular 

people, but they have these forces that drive them. And I think 

there are perfectly fine corporate CEOs who, if you people will just 

protect them and get rid of the inversion temptation, will be very 

happy not to invert. 

But everyone now feels pressure, and everyone is scared, and it 

is becoming a mania such that, by the time it fades away, it will 

be too late. 

Senator BROWN. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Brown. 

Senator Schumer is next. And I am going to try, even after the 

first vote, to run over and vote, because we have colleagues who 

feel very strongly about this. 

Senator Schumer? 

Senator SCHUMER. Thank you, Mr. Chairman. I want to thank 

you and Ranking Member Hatch for holding this hearing today. 

It is absolutely critical we quickly develop and process a proposal 

to combat this growing trend by some U.S. corporations to leave 

our borders for tax-avoidance purposes. There has been a significant uptick in the number of inversions over the past 10 years. 

Forty-seven U.S. corporations have reincorporated overseas 

through these inversions during that period. Now there are more 

than a dozen prospective deals. 

Many of my colleagues, particularly on the other side of the aisle, 

argue we should not be looking at this issue in a vacuum right 

now. They say we should instead be focused on corporate tax reform. I would ask those arguing that we wait for tax reform, just 

how soon do you think that is going to be possible? Chairman 

Camp tried tax reform on the Republican side. Even Speaker 

Boehner did not give it much credence. 

So, if we wait for tax reform, we are going to have lots more inversions, and it is going to take far too long, if we ever get to tax 

reform at all. Saying that we should wait for tax reform to deal 

with inversions is a green light to allow many more inversions to 

23 

occur. For some who make that argument, frankly, it is an excuse 

to keep this loophole in place for the foreseeable future. 

The tax reductions achieved through inversions, as you know, 

happen in a couple of different ways, Mr. Chairman. First, by moving their domicile offshore, these companies are no longer subject 

to U.S. taxes on any of their international operations, and this has 

been appealing to types of businesses that operate in a global supply chain, like pharmaceutical companies. 

But today we are seeing an uptick in more traditional brick-andmortar companies—Walgreen’s, for instance—doing the same thing. 

Why is that? Well, it is the second piece of the inverter’s taxavoidance equation. Not only can these companies avoid paying 

taxes on their international operations when they invert and reincorporate abroad, they can also avoid paying U.S. taxes on their 

businesses that remain in the United States. One way they do this 

is through a mechanism in the tax code called the interest expense 

deduction. 

It is a 5-step process. They set up a U.S. subsidiary to operate 

their U.S. business. When that subsidiary owes U.S. taxes, they 

transfer the corporate funds between the foreign parent and the 

subsidiary and call it a loan to the subsidiary. That loan triggers 

a U.S. tax deduction, the interest expense deduction for the subsidiary, which then largely offsets their U.S. tax liability. The loan 

is repaid through the profits of the U.S.-taxed subsidiary to the foreign parent, and U.S. taxes have been avoided. As a result, they 

pay little or no tax on their U.S. profits as well. 

Now, we have attempted to limit this type of behavior in the 

past. We put a cap on the debt-to-equity ratio of the U.S. subsidiary, but the current law still provides a very lucrative tax benefit for inter-company benefit. In fact, Mr. Sloan, your magazine or 

your website did an op-ed on this, talking about the risks and rewards of inversions, which mentions the interest expense deduction. 

So, as we work together to put forward a proposal to combat this 

growing challenge, we have to look at it from every angle. Now, I 

support the proposal that Senator Levin and the administration 

have been working on, which calls for an immediate 2-year moratorium and increasing the number of foreign shareholders to implement inversion from 20 to 50, making it more difficult for it to happen. I do have concerns with the management and control part of 

the Levin proposal, because we want to keep jobs here at home, 

and the management and control proposal may encourage jobs to 

grow abroad. 

But Levin’s proposal is not enough. We have to go further. We 

should also include a proposal that further limits or disallows the 

interest expense deduction to deal with the U.S. profits that they 

are also trying to avoid. Doing so will be a deterrent for those considering an inversion, as they will no longer see that opportunity 

to avoid U.S. taxation, and it will deal with the retroactive problem 

because you eliminate it prospectively, but any company that did 

an inversion 6 months ago, 1 year ago, 5 years ago, will still lose 

this deduction. 

So it is a prospective policy action to counter past and future inversion activity. It would ensure we do not leave those inverters 

24 

who are at the front of the line, the ones who started the trend, 

with a competitive advantage. 

So, Mr. Stack, my only question is—because my time is running 

out, and I know my dear colleague is waiting—does the administration agree that we should consider measures to further limit or disallow the current interest expense deduction for inverters in any 

legislative package we pursue to combat inversions this year? 

Mr. STACK. Yes, Senator. We fully agree, and we think you have 

shone a light on a very dangerous part of the inversion craze, 

which is the ability, the day after the inversion transaction, to continue to strip the U.S. tax base. We have a budget proposal to that 

effect, but we think you are pointing to a very critical aspect of the 

inversion problem. 

Senator SCHUMER. Thank you. I just want to say to companies 

doing inversions, if you want to operate here, you want access to 

this market, you want access to the workforce, access to the economy, understand this here today. To continue to have that access, 

you are going to have to pay your fair share of U.S. taxes. Things 

are changing. 

The CHAIRMAN. Thank you, Senator Schumer. 

The time for the vote has expired. We are going to go with Senator Stabenow. Senator Toomey is next. I am going to try to come 

back just as quickly as I can. Thanks. 

Senator Stabenow? 

Senator STABENOW [presiding]. Thank you. I wanted very much 

to be here, even though we are going to have to go running out. 

Thank you to each of you. 

First, I want to say to my colleagues, we have a place to start 

tomorrow, which is the Bring Jobs Home Act. I am very pleased to 

be working with Senator Walsh on that. It takes a simple first step 

on what needs to be a series of steps and will simply say, if you 

want to move your plant, if you want to move the company overseas, we are not paying for the move; we are not going to allow you 

to write off your costs of moving out of this country. And, if you 

want to come back, we will be happy to let you write that off and 

give you an additional 20-percent tax credit. But if you leave, you 

are on your own. 

Now, we know that is not enough, because we have a lot of folks 

who only leave on paper. And so they are not really picking up the 

plant and leaving. But I will say, Mr. Sloan, I could not agree with 

you more. This is not a partisan issue. This is an American issue. 

I think the American public is going to be watching very closely to 

see which companies that need consumers are doing this, and I 

think these companies underestimate the reaction of consumers 

and other businesses in going forward. 

I do think if we can move forward and overcome a filibuster, get 

on the Bring Jobs Home Act, we could add Carl Levin’s bill. And 

I am with you, even though I serve with both my dear colleagues, 

Sandy and Carl in Michigan, I think Carl’s approach of a 2-year 

effort to get us to tax reform is the right way to go, and we could 

add that certainly to the Bring Jobs Home Act, and I believe that 

we need to do that and we need to get started on this. 

I also think it is important—Dr. Merrill, you are right, I mean, 

certainly, all of you, saying we need tax reform, we need to do that, 

25 

we know we need to do that. We know we are in a global economy. 

We have to address this. But we also do know that I do not know 

of any sector paying 35 percent, our corporate rate. 

The reality is, we have a lot of incentives for companies to invert. 

We want incentives that relate to manufacturing or R&D or other 

things. But when I look at the list, from medical devices at 18.8 

percent or financial services at 16.5 percent or petroleum production at 11.3 percent or down to public-private equity which is paying a 0.8-percent rate, there is a large disparity and a number of 

issues that we need to address. 

Here is what I want a comment on, and we have two issues: corporate tax reform and the global economy. How do we address 

these and incentivize making things and growing things in America 

and innovating in America? 

And then we have folks who just plain do not want to pay their 

fair share yet benefit from America. So you have folks doing inversions who do not want to breathe Beijing’s air. They want to 

breathe American air. They do not want the water of third world 

countries. They want to be able to drink the water. They do not 

want the rule of law of a lot of countries. I know in Haiti, talking 

to our businesses, you pull up a cargo ship, you cannot get the 

product off the ship without paying a whole bunch of bribes. 

So they want our rule of law; they want our innovation, education, and infrastructure; they want to breathe the air and drink 

the water; they just do not want to contribute. That does not sound 

like the normal American values to me. What it does is create a 

race to the bottom where we are not going to have customers, and 

then we are really not going to have businesses as we go forward 

from here. 

So this is of deep concern to all of us. 

I guess, Mr. Stack, I would just simply ask you, when we look 

at competitiveness internationally, from your perspective, certainly 

the rate is important, but we know even going to 28 percent, that 

means eliminating R&D tax credit section 199 for small businesses, 

it means eliminating accelerated depreciation, which is so critical 

in a State like mine with manufacturing. 

There has to be more to it than just tax grade in terms of investing in America, and I would ask you, if we are going to stay competitive internationally, make things and grow things here, what 

are some of the other priorities of tax reform besides just lowering 

the rate? 

Mr. STACK. Thank you, Senator. First, on the rates, I would also 

add the point that a lot of the discussion about rates kind of ignores the fact that there will always be countries with lower rates 

than ours where people may want to seek to go and there is this 

tax competition going on. 

In terms of other things we could be doing, the first thing I 

would want to point out—and this also relates back to rates—is our 

effective rates, as you were pointing out, vary widely. So we do not 

really have a level playing field across our industries. Number two, 

we do not really have a level playing field with countries that can 

take IP and put it offshore or have a broad enough market offshore 

to take advantage of some of these international provisions. 

26 

So, in addition to lowering the rates, we think it is very important to broaden the base for these taxes so that we can create some 

equality, eliminate the winners and losers, so that everybody has 

the advantage of this lower effective rate as we go forward. And, 

as you also point out, maintaining incentives for research and development so that we remain the premier country in terms of this 

type of activity is also a critical concern. 

Senator STABENOW. Thank you. 

I believe, at this moment, I have to get over to vote or I am going 

to miss the vote. 

Thank you very much. Are we in recess? 

We are in recess subject to the call of the chair. Thank you very 

much. 

[Whereupon, at 11:11 a.m., the hearing was recessed, reconvening at 11:46 a.m.] 

The CHAIRMAN. I very much appreciate Senator Portman’s patience. He and I have talked often about tax reform, and I look forward to working closely with him on these issues. 

Senator Portman? 

Senator PORTMAN. Thank you, Mr. Chairman. I have had some 

long conversations with you, and I appreciate your championing 

tax reform, and I liked your first response to the inversion proposals. 

We have a little difference of opinion on tactics here, because I 

do think this is an opportunity for us to encourage solving the 

problem rather than dealing with the symptom, and we have heard 

a lot of testimony today about what will happen if we just go after 

this particular issue, and I know there is some difference of opinion 

among the panelists about that. 

I do not think there is any difference of opinion, I hope, among 

the panelists about the fundamental problem. Mr. Stack and I just 

spoke. I have spent a lot of time talking to administration officials 

about this issue too. 

The bottom line is that it is not advantageous to be an American 

company. It makes more sense to be a foreign entity, to be able to 

take advantage of a tax system where the great majority of our 

competitors—93 percent of our foreign competitors, as Peter Merrill 

told us today—have a territorial system, have a lower rate. And it 

is a deadly combination to have this high rate and to have a worldwide system. 

I just do not think what we are talking about in terms of a shortterm fix is going to help. In fact, there is some good testimony 

about how it could even hurt because, if you just deal with inversions, you have some unintended, perhaps, but negative consequences—demanding the location of even more jobs overseas is 

what Dr. Desai talked about. 

My big concern is foreign acquisitions. Recently we sat down 

with a lot of U.S. companies to talk about this issue. In fact, I have 

been doing this for the last few years, as some of you know, and 

have worked on this in the Super Committee, and we are just hearing over and over again the fact that already foreign acquisitions 

are on the rise, even without this rule. 

So, yes, we can put this rule in place, and then we could limit 

the deductibility of interest, as one of my colleagues said, and we 

27 

can make it even harder to be an American company. What will 

happen is, we will have more and more foreign companies owning 

U.S. assets. Some of those will be takeovers. 

Recently, a biopharmaceutical company came to see me, this was 

last week. They were from the Boston area. And I asked them 

about the acquisitions in the Boston area of bio-pharma companies. 

Twenty-eight companies have been acquired in the last several 

years, 17 of those 28 were acquired by foreign entities. So you sort 

of put the hole in the dam here, and then you are going to have 

a flood over here, and you are going to have an even worse result— 

even more pressure on jobs leaving this country. 

So we talk a lot about revenue and income stripping and earnings stripping, and I agree we need to have a tax code that captures income in the most efficient way, but this is about jobs. So 

my question, I guess, to Mr. Stack is, what is going to happen if 

we continue to make it harder to be an American company? Are we 

not going to see more, not just acquisitions, but acquisitions of 

American assets? 

These companies also tell me that, because foreign companies 

have higher after-tax profits, it is more profitable for them. They 

can pay a premium for our assets, in other words for subsidiaries 

being sold, and you will see more of that. You will see American 

companies shrinking and not being taken over by foreign entities. 

What is your answer to that? 

Mr. STACK. Senator, I think with the tax code, as we look out in 

terms of leveling this playing field, it is important for us to take, 

as an opening step, that we will never be able to offer, let us say, 

rates as low as countries that are trying very hard through tax 

competition to lure companies overseas. So there will often be some 

kind of a tax differential between the United States and other 

countries that might, on the margins, fuel some of that acquisition 

activity. 

We have a lot of great things in this country, though, that keep 

companies here and keep them competitive and keep them doing 

very well. So I do agree then—and all the plans on tax reform seek 

to lower the rate, and there is universal consensus that our rate 

is too high and we should be bringing it down. And when we bring 

it down, we will come closer to leveling the playing field with those 

foreign acquirers. 

Senator PORTMAN. So I think this is not just an important problem, I think it is an urgent problem, and I think you all have 

sounded the alarm here. Again, we have differences on the witness 

panel and on our panel as to how to address it, but it seems to me, 

when you look at the history of our country, the only time you see 

major tax reform is when the administration takes the lead. Treasury has to be engaged and involved. I am a former OMB director. 

OMB has to be involved in the numbers. 

What is Treasury doing? Tell me what concrete steps are being 

taken to address this, as was said today, emergency situation? Is 

it just to plug the hole in the dam here, or are you actually looking 

at, as the President has talked about over the last couple of years, 

actually solving the underlying problem, making American companies more competitive? 

28 

Mr. STACK. Senator, the President’s framework in 2012 really 

was kind of a far-reaching move forward to think differently about 

our international tax rules, and that is to say that it was going to 

be able to bring down the rates, broaden the base to deal with 

some of the differential effective rates I mentioned earlier, but also, 

through the foreign minimum tax, try to cut out some of the gameplaying that goes on by stripping into very low tax jurisdictions. 

We think that that kind of set the tone for some of the work that 

was done both in the Finance Committee and by Chairman Camp, 

and we think that there is a very robust set of proposals on the 

table right now. 

In addition, for many of the things we are talking about today 

in terms of base stripping, we put several detailed proposals in our 

budget to get at this opportunity, once a company inverts, to strip 

out of the U.S. tax base, which, as everyone knows, provides a lot 

of juice for these transactions since they can do better at reducing 

U.S. taxes once they are offshore than they could before. 

So we think we have shown leadership in our framework. We 

think we have shown leadership in putting concrete proposals in 

our budget, and I know the President and Secretary stand ready 

to work with Congress on both sides of the aisle to push through 

international tax reform. 

Senator PORTMAN. I would love to see a proposal, and I would 

love to see that push. I do not know, maybe my colleagues see more 

of it than I do. Again, I have had some great conversations with 

individuals at the Treasury and in the administration, including at 

the White House, but I just do not see the push. 

I hope we will use this unfortunate situation where we have examples every week of another major inversion, another one this 

past week—and it happened to be a pharmaceutical company—to 

actually get us to the point where we are solving the underlying 

problem. 

If we make it worse by making it even less advantageous to be 

a U.S. company, I really worry we will look back 5 years from now 

and see a hollowed-out American corporate base and wonder what 

happened. What happened is, we abdicated our responsibility here 

in doing the thing that everybody on this panel, I think, agrees we 

have to do, which is reform our code to make it competitive. 

I know my time is up, Mr. Chairman. I appreciate the testimony 

today. I hope it results in some very specific action by the administration and by the Congress. 

The CHAIRMAN. Thank you, Senator Portman. I look forward to 

working with you on these matters in a bipartisan way. 

I would say to our guests, I have some additional questions. Senator Hatch is on a very tight timeline, and so I would like Senator 

Hatch to go first. 

Senator HATCH. That is very gracious of you, Mr. Chairman, and 

I appreciate it. It is a pleasure to work with you. 

This question is for Dr. Merrill. As you know, both Japan and 

the United Kingdom adopted territorial types of tax systems in 

2009, switching from a worldwide tax system with deferral. These 

are two countries with large economies. Japan is the third-largest 

economy in the world and the United Kingdom is the sixth-largest 

economy in the world. 

29 

Can you tell me why Japan and the United Kingdom switched 

from a worldwide with deferral system like the current United 

States tax system to a territorial system, and, after 5 years of experience with a territorial tax system, what have been the results for 

both Japan and the United Kingdom? 

Dr. MERRILL. Yes. Thank you for the question. The United Kingdom was experiencing a phenomenon not unlike what we are experiencing now. They saw a number of large multinational companies, some quite significant, that had actually moved their legal 

headquarters out of the U.K., primarily to Ireland. And that was 

of great concern to the government, so they decided that it would 

be appropriate to adopt a more competitive tax system along the 

lines of the quote in my oral statement so that their tax system 

would be more welcoming to multinational business. 

One of the factors for the U.K. is they have many companies 

there that earn only a small part of their total income, worldwide 

income, in the U.K., and yet the U.K. had a tax system like ours 

that was taxing the worldwide income of companies that only 

earned a small amount of income in the U.K. So, in order to become a more attractive location for multinational companies, they 

went to the territorial-type tax system, 100-percent exemption of 

foreign dividends, and they made a number of other changes, as I 

indicated, lowering their tax rate. They have also adopted a 10- 

percent refundable research credit. They also adopted a 10-percent, 

phased-in 10-percent tax rate on income from patents, and they 

also modified their C rule. 

So they have done a whole package of things mainly to make it 

more attractive for multinational companies to be headquartered in 

the U.K., and they have been successful. As Dr. Robinson mentioned, some of the companies that left the U.K. actually have 

moved their headquarters back to the U.K. in response. 

Japan is a different situation. Obviously, the Japanese economy 

has not been attracting the kind of growth that they have been 

looking for, and they saw Japanese multinationals, like the U.S., 

facing a very high corporate tax rate, a worldwide system, and 

money was not being repatriated to Japan. The Ministry of Economy, Trade, and Industry wanted to see that money come back for 

additional investment in Japan, and that is why they made the 

change. 

Senator HATCH. Thank you. 

Mr. Saint-Amans, glad to have you here. This is a question for 

you. I appreciated what you wrote in your testimony, that, quote, 

‘‘The work of the OECD is done by consensus. That is, measures 

cannot be adopted without the consensus of all member countries.’’ 

Now, presumably, consensus of all member countries means that 

all member countries will consent to the work the OECD is doing 

or else the OECD will not do that work or will not issue such a 

report. Am I right on that? 

Mr. SAINT-AMANS. Yes, Senator. A consensus means that a report 

or soft rule, which is what we develop, is agreed when no country 

around the table objects to it. 

Senator HATCH. And in making sure you have the consensus of 

the United States, please keep in mind our system of separation of 

powers. Lawmaking capabilities primarily are vested with the ConVerDate Mar 15 2010 20:39 Mar 25, 2015 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 R:\DOCS\93597.000 TIMD
30 

gress. In obtaining the consent of the United States, it is necessary 

to get the consent of the U.S. Congress. So we do appreciate you 

being here for this Senate hearing. 

Will you please assure me that you understand that to obtain the 

consent of the United States for the OECD’s work, including for the 

BEPS project, that Congress must be kept informed of the work, 

and, of course, that has to be working in conjunction with the U.S. 

Treasury as well? 

Mr. SAINT-AMANS. Senator, I do think that not only the Secretary, of course, but all the OECD member countries are fully 

aware of this. We are more than happy to engage with the staff on 

the Hill for the Senate, but without impeding on what Treasury is 

doing. 

And I would like to add that most of the measures which are 

completed in the project, fighting base erosion and profit-shifting, 

are soft rules. These are a common interpretation of standards, and 

so they do not require translation by parliament, but information 

from all stakeholders and, in particular, the Congress, is taken seriously by the OECD secretariat—and I will not speak on behalf of 

it, but I think also by Treasury. 

Senator HATCH. Mr. Stack, let me just ask you the same question. Please reassure me that the U.S. Treasury Department will 

keep Congress informed, but not get ahead of the Congress in the 

decision-making process and in negotiations with the OECD regarding BEPS. 

Mr. STACK. Yes, Senator. We fully intend to do that. I have already been up to the Hill twice to meet with bipartisan staffs, both 

houses, and I look forward to continuing that throughout the process. 

Senator HATCH. We appreciate your work in that regard. Thank 

you for doing that. 

I want to thank all of you for being here. I have to leave because 

of other commitments, but this has been extremely interesting, and 

I am going to read the transcript so I will know exactly what you 

all say. I am going to hold you to it too. 

Thank you, Mr. Chairman. 

The CHAIRMAN. He will, be on notice. 

We are moving toward the end of the hearing. Senator Portman 

may have additional questions. But let me give you my sense of 

where we are. 

I certainly am not interested in building any walls. I want to 

close a loophole, and then I want to drain the swamp. I want to 

fix this dysfunctional mess of a tax code so we have incentives for 

creating red, white, and blue jobs, creating jobs here in our country. 

I know we are going to be calling on you all often in the days 

ahead. I just have a couple of other questions about issues that are 

pending. 

Senator Thune, you are next. If I could just finish these two 

questions, then we will go right to you. 

The first deals with the implications of inversions on health care 

costs in America and the implications for the American consumer. 

I was struck by comments made in the Wall Street Journal recently by the CEO of Abbott, who said that he was concerned about 

31 

the higher prices that American consumers would have to pay if 

proposed inversions like his company’s did not go through. And I 

am still trying to figure out how these savings are going to be 

passed on to consumers and, of course, to taxpayers who put up so 

much of the money that funds the Medicare program. 

I will ask all three of our professors: Dr. Desai, Dr. Merrill, and 

Dr. Robinson. Explain to me how somehow these costs, particularly 

medical costs, because so many of the inversions thus far are medical, explain to me how or even if—because you have done some 

scholarship on this, Dr. Desai—this is going to benefit the American consumer and the Medicare program in particular. 

Let us start with you, Dr. Desai. 

Dr. DESAI. I think the broad way to think about this problem is 

to understand that this question relates to the broader question of 

the incidence of the corporate tax, who pays the corporate tax, and 

there are really three sets of folks who can pay. 

So the first is customers, which is what you are referring to via 

the health care system; the second is workers; and then, the third 

is capital or shareholders. So whenever there is a tax-saving move 

like an inversion, we can expect those benefits to accrue to one of 

those three sets of people. Either workers are going to get high 

wages, shareholders are going to get high returns, or customers 

will get lower prices. 

I think most of the consensus in the scholarship is that when 

taxes change, they do not typically get transmitted to product 

prices, because—— 

The CHAIRMAN. They do not typically get translated to product 

prices, which would be the prices that Americans pay for health 

care. 

Dr. DESAI. In this example, exactly right. 

The CHAIRMAN. Very good. Thank you. 

Dr. DESAI. They typically get transmitted more likely to wages 

and, to some degree, to shareholders. 

The CHAIRMAN. Very good. Let me then—because Senator Thune 

has just come back—bring you into this question, Dr. Merrill and 

Dr. Robinson, and that is the impact of reform on the deferral 

issue. Of course, one of the goals around which there is bipartisan 

support for corporate tax reform is to simplify the system. I think 

we all understand that the international tax is inherently complicated. 

My question is, wouldn’t repealing deferral go a long way toward 

corporate tax simplification by eliminating the complicated system 

that exists today of tracking unused foreign tax credits and the related earnings and profits? In effect, income would be subject either 

to immediate taxation or exempt, and the current foreign tax credits would be utilized against current taxable income. 

So answer the question, if you might. Would deferral eliminate 

a very complicated feature of the tax system, and would doing that 

as part of bipartisan comprehensive tax reform make the system 

more simple and understandable? 

Dr. Robinson? 

Dr. ROBINSON. I do think, as I put in my written testimony, that 

the implicit cost of the U.S. tax system is higher than the explicit 

cost, and what I mean by that is that the cost associated with actuVerDate Mar 15 2010 20:39 Mar 25, 2015 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 R:\DOCS\93597.000 TIMD
32 

ally avoiding repatriation or maintaining deferral for long periods 

of time is what I believe makes our tax system uncompetitive. 

I do think that eliminating deferral so long as the rate, of course, 

was lowered sufficiently would be what I would be in favor of, and 

the reason that I say that is because the alternative approach, of 

course, is to implement some sort of territorial system. But I think 

those types of systems, if you design them appropriately, would 

have to recognize instances where earnings were not subject to robust tax systems abroad, and then you have to introduce all sorts 

of exceptions and exclusions and base-broadening provisions. And, 

by the time you introduce those, you are sort of right back where 

you started. 

So I am largely in favor of ending deferral and lowering the rate 

if it means a simplification. 

The CHAIRMAN. Dr. Merrill, unless you want to add anything, I 

will recognize Senator Thune. Is there anything you wanted to 

add? 

Dr. MERRILL. Why don’t we take Senator Thune’s question? 

The CHAIRMAN. Very good. Senator Thune? 

Senator THUNE. Thank you, Mr. Chairman. I want to thank you 

and Senator Hatch for holding this important hearing, and thank 

you all for making time to share your expertise with us. 

I suspect there are significant differences of opinion about how 

to improve the U.S. tax code, differences of opinion among members here in the Finance Committee and probably in the Senate 

and the Congress, but I think that all of us agree that we want 

American companies to be competitive. We want for them to be 

able to compete and win in the global marketplace, and I think, unfortunately, we ask them to do it with one hand tied behind their 

back, because we actually make the rules that they play by. And, 

when you make bad rules, you get bad outcomes. And there are 

economic signals right now that are driving a lot of the decisionmaking that our businesses are following. 

So I think some of this inflammatory rhetoric and accusing them 

of not being economic patriots is really not helpful, and I would 

hope that we could focus on not just the symptoms, but actually the 

cause for these problems, and that is, we have an outdated, dysfunctional tax code, with the highest rate in the developed world. 

And we are also one of only a few countries in the world that continues to use a worldwide system, that has not moved to a territorial system. I should not say in the world, but certainly one of 

the few countries in the OECD. 

So I just think that we need to focus on the problem here, and 

the problem is the high rate. There was a time back in 1986 when 

the tax code was last reformed where our corporate tax rate was 

5 points lower than the average. Now, it is about 14 points higher 

than the OECD average. This is what you are going to get when 

you have these kinds of rules. So we need to change the rules. We 

need to reform the tax code. 

So I guess it seems, to me at least, that the system is basically 

the worst of all worlds, because we are asking our businesses to 

compete in the foreign marketplace, and not only do we have the 

highest corporate income tax rate among OECD nations, we are 

33 

also, as I said, one of the few nations that has a worldwide system 

of taxing income. 

So, Dr. Merrill, I guess I would ask you, could you elaborate a 

little bit on your testimony in terms of what this means for a U.S.- 

based company competing in foreign markets against companies 

that are based in nations with more modern and favorable tax systems? 

Dr. MERRILL. Yes. Thank you. What we are seeing is a world 

where a U.S. company that operates abroad is now generally competing with foreign competitors in the same market, but facing a 

very different home country tax system. They all face the same 

rules in the country where they are operating. 

The difference is, they face different home country taxation. So, 

if the U.S. company earns income abroad and wishes to invest it 

back home in the United States, bricks and mortar, it wants to use 

the money to give back to its shareholders, it wants to use the 

money to pay higher wages to its workers, it faces a U.S. tax on 

that repatriated earnings that would not be the case if it was a 

foreign-headquartered company under a territorial-type system. 

So we see this manifesting itself in U.S. companies stuck in a 

way, building up cash abroad that they would like, in many cases, 

to return to the U.S. to invest here, to use for a variety of purposes. 

But, if they do, they would face the highest tax rate in the world 

in bringing it back. 

So that is a very important driver of why a U.S. company is not 

a particularly attractive candidate when they go out to buy a foreign company. If you are a shareholder in a foreign company and 

a U.S. company says, ‘‘Gee, I would like to buy you,’’ you realize 

that that means that if you are acquired, any foreign profits that 

will be distributed to you have to go through the U.S. corporate income tax system. If you are purchased by a foreign acquirer, that 

is not the case. So it makes it harder for U.S. companies to make 

foreign acquisitions. It makes it harder for them to even invest 

back at home. 

Senator THUNE. And there seems to be a misperception about 

this—the way that some of this has been covered at least in the 

press articles. It is implied that U.S. companies are somehow 

changing the taxation of their U.S. income through these deals. 

Is it not the case that income earned in the United States remains subject to U.S. tax regardless of the corporate structure? 

Dr. MERRILL. A U.S. company that moves its legal headquarters 

abroad is still subject to U.S. income tax on its U.S. operations and 

is still subject to tax if it brings back the foreign earnings that it 

has previously earned in its foreign affiliates. 

Senator THUNE. This is a question—one more, Mr. Chairman? 

The CHAIRMAN. Of course. 

Senator THUNE. There is the suggestion in the administration’s 

proposal that we attempt to stop corporate inversions. But there is 

a concern that some of the steps that are being taken, that are designed to stop them, actually could cause more harm than the inversions themselves. 

In particular, there is a concern that this management control 

test that is being advanced by the White House and some here in 

34 

the Senate could have the effect of encouraging mergers, whereby 

management control would be outside of the United States. 

What is your view on that issue? 

Dr. MERRILL. Congress has a long history of trying to address inversion transactions, and each time it has produced unintended effects. Congress tried in 1984, the IRS tried about 10 years later in 

1994, and, of course, Congress in 2004 adopted legislation, each 

time trying to deal with the transaction of the day. What happened 

is companies found different ways to achieve what the economic incentives are driving them to do, which is to have the assets owned 

in a tax jurisdiction that is more favorable. 

So the concern would be that another stopgap measure could 

lead to the kinds of transactions that are not desirable from a U.S. 

standpoint, a true foreign acquisition of a U.S. company where the 

headquarters jobs are abroad and the U.S. headquarters shrinks. 

Senator THUNE. Mr. Chairman, I thank you. I appreciate the answers to these questions, and I would ask if I could get my statement, my entire statement, which I did not use all of, included in 

the record and, again, point out that we have a problem here. The 

problem is our tax code. 

The CHAIRMAN. Without objection, it is so ordered. 

[The prepared statement of Senator Thune appears in the appendix on p. 101.] 

The CHAIRMAN. Senator Thune, you may not have been here 

when I made this point. I am fully committed to working with you 

and colleagues on the other side of the aisle for the ultimate cure, 

which is fixing this dysfunctional mess of a tax system. 

The question is, what are we going to do about the damage that 

is being done right now? 

Senator Portman, do you have any other questions you would 

like to ask? 

Senator PORTMAN. Thank you, Mr. Chairman. Why don’t you go 

ahead, and then I will? 

The CHAIRMAN. I have no other questions. 

Senator PORTMAN. Can I just do a quick, quick round with the 

team here? 

The CHAIRMAN. Of course. 

Senator PORTMAN. First of all, I quote you all the time, because 

Chairman Wyden makes the point that the tax code is 100 years 

old and it looks like it. So I appreciate your attitude about wanting 

to pursue reform. I am concerned that by taking this detour, it is 

going to make it harder, not easier, and, again, there may be the 

unintended consequences we talked about, including accelerating 

this acquisition of U.S. companies by foreign entities. 

By the way, the Joint Committee on Taxation, which is our official nonpartisan scorekeeper, has said, with regard to the President’s proposals that were in his budget last year—Mr. Stack went 

through those in his testimony, and they are mostly international 

tax revenue raisers to deal with some of these issues—they said, 

and I quote, ‘‘Many of these proposals may make corporate structures with a domestic parent relatively less attractive than corporate structures with a foreign parent, and these proposals are 

likely to raise U.S. tax liabilities for the domestic parent structure 

more than the foreign parent structure.’’ 

35 

That seems pretty clear—and that is not Republicans or Democrats; these are our nonpartisan arbiters as to what we ought to 

be doing in terms of good tax policy. 

I guess one question that I would love to hear about from this 

distinguished panel is—Dr. Robinson talked a little about access to 

capital, and the most efficient flow of capital, obviously, is a big 

disadvantage to U.S. companies now. So forget the rate, even forget 

kind of the general notion of territorial versus worldwide. The fact 

is these U.S. companies are not as nimble. They cannot move assets around where they need them, and I think that has to be addressed. 

Here is my question. Sometimes when I debate my colleagues on 

this issue, they say, well, just because a company is foreign does 

not mean they do not have U.S. jobs, which is true. AnheuserBusch still has U.S. jobs. They sell a lot of beer in America. Their 

market share is in good shape. 

Maybe, Peter, if you could address this or Dr. Desai or Dr. Robinson, whoever has looked into this. But can you tell us a little about 

what happens when one of our—Peter talked about Fortune 500 

companies over the last 15 years, where you have seen a one-third 

reduction in U.S. companies. 

What happens? What is the impact on jobs when you see U.S. 

companies being acquired by a foreign company? 

Dr. MERRILL. I have not actually studied that issue. It could go 

either way. If the foreign company is a better-managed company, 

has better management and brings in new technology, it could increase jobs. On the other hand, it could go the other way, but I do 

not know what the actual experience has been. 

Senator PORTMAN. Dr. Desai? 

Dr. DESAI. I think you are right to put this in the context of the 

broader market for corporate control, which is I think really the 

issue with foreign acquisitions. And I think the issue of foreign acquisitions is, particularly with respect to high value-added headquarter jobs, those may well get relocated when it becomes foreignowned. 

That is something that we have seen at least anecdotally, and we 

also know that headquarter jobs are really important. They give 

rise to lots of economic spillovers more generally. So for that reason, I think you are right to be suspect of the potential harm of 

these foreign acquisitions, which is they can lead to high valueadded jobs going abroad and, in particular, headquarter jobs. 

Senator PORTMAN. Dr. Robinson, have you done any research on 

this? 

Dr. ROBINSON. I was going to say I do not have anything concrete 

to add. I have not done any research in this area. 

Senator PORTMAN. Let me just insert something that I find pretty obvious. When a company chooses to domicile somewhere else, 

and particularly when the headquarters moves, which often happens, as Dr. Desai says, there is an intangible impact. 

So the companies in our great cities in America are major benefactors. Companies in my home State of Ohio are involved in every 

single nonprofit in one way or another and often provide a lot of 

executives to help to lead these nonprofits and charities and, obviously, make huge contributions, and I would love to see some reVerDate Mar 15 2010 20:39 Mar 25, 2015 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 R:\DOCS\93597.000 TIMD
36 

search on that, because I do think this is sort of the intangible impact of companies pulling out of the U.S. that has not been given 

adequate focus and research. 

So, if any of you all have any thoughts on that, I would love to 

see if we could look into that. So certainly, on the jobs front, we 

would like more information, but also on this sort of intangible 

benefit. 

What happens? Why does it matter? I think it matters. I think 

my colleagues do. That is why Senator Wyden and others are working hard on this. But I think we need better information to be able 

to explain this more in terms of the impacts, the negative impacts, 

to our constituents. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Portman. 

At this point, I would ask unanimous consent that a statement 

by Senator Levin be included in the hearing record. 

Without objection, the statement will be included. 

[The prepared statement of Senator Levin appears in the appendix on p. 43.] 

The CHAIRMAN. Let me leave you all with one thought that we 

really have not, I think, gotten into much this morning. 

It seems to me that it would be one thing if there were just a 

few of these inversions. In other words, if there were a few of them, 

we would work, as we have talked about this morning, on comprehensive, bipartisan tax reform, we would fix it, and then we 

would not be back here again in another decade. 

Part of what has influenced my judgments is that that is not 

going to happen. And I spoke a couple of hours ago about reports 

from the financial press about this feeding frenzy. That is what is 

actually going on out there. It is not a few of these inversions that 

you could put to bed with comprehensive tax reform. But according 

to the financial press, it is a feeding frenzy, where you have the 

investment bankers going out to all the possible companies with 

their slide decks and saying, ‘‘You had better do this quickly.’’ And 

the reality is that tax reform is moving slowly and the inversions 

are moving very rapidly, and, as I indicated before, I think that is 

a prescription for real chaos. 

So, as you could hear from the Senators here today—there was 

not a lot of shouting and a lot of screaming and finger-pointing— 

there is a lot of good will here. And my hope is that, with your good 

counsel—it has been a very good hearing, with very thoughtful testimony—you can help us address both of these tasks: to close the 

inversion loophole and then move on to the great challenge in front 

of this committee, and that is the real cure, which is comprehensive, bipartisan tax reform. 

With that, the Finance Committee is adjourned. 

[Whereupon, at 12:21 p.m., the hearing was concluded.] 

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