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72–510 2011

HOW OTHER COUNTRIES HAVE USED TAX 

REFORM TO HELP THEIR COMPANIES COMPETE 

IN THE GLOBAL MARKET AND CREATE JOBS 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

MAY 24, 2011

Serial No. 112–12 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

DAVE CAMP, Michigan, Chairman 

1WALLY HERGER, California 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

GEOFF DAVIS, Kentucky 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

PETER J. ROSKAM, Illinois 

JIM GERLACH, Pennsylvania 

TOM PRICE, Georgia 

VERN BUCHANAN, Florida 

ADRIAN SMITH, Nebraska 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

ERIK PAULSEN, Minnesota 

KENNY MARCHANT, Texas 

RICK BERG, North Dakota 

DIANE BLACK, Tennessee 

SANDER M. LEVIN, Michigan 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

JON TRAUB, Staff Director 

JANICE MAYS, Minority Staff Director 


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C O N T E N T S 

Page 

Advisory of May 24, 2011, announcing the hearing ............................................. 2 

WITNESSES 

Gary M. Thomas, Partner, White & Case, Testimony .......................................... 7 

Frank Schoon, Partner, Dutch Desk, International Tax Services, Ernst & 

Young, Testimony ................................................................................................. 13 

Steve Edge, Partner, Slaughter and May, Testimony .......................................... 23 

Jo ̈rg Menger, Partner, German Desk, International Tax Services, Ernst & 

Young, Testimony ................................................................................................. 37 

Reuven S. Avi-Yonah, Irwin I. Cohn Professor of Law, University of Michigan 

Law School, Testimony ........................................................................................ 43 

SUBMISSIONS FOR THE RECORD 

Asian American Hotel Owners Association, Statement ....................................... 103 

The Center for Fiscal Equity, Statement ............................................................... 104 

The Chamber of Commerce, Statement ................................................................. 111 

The Securities Industry and Financial Markets Association, Statement ........... 118 

The Working Group on Intangibles, Statement .................................................... 127 

QUESTIONS FOR THE RECORD 

Gary M. Thomas—1 ................................................................................................. 83 

Gary M. Thomas—2 ................................................................................................. 86 

Frank Schoon ........................................................................................................... 91 

Steve Edge—1 .......................................................................................................... 95 

Steve Edge—2 .......................................................................................................... 96 

Jo ̈rg Menger ............................................................................................................. 99 


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(1) 

HOW OTHER COUNTRIES HAVE USED 

TAX REFORM TO HELP THEIR 

COMPANIES COMPETE IN THE GLOBAL 

MARKET AND CREATE JOBS 

TUESDAY, MAY 24, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

Washington, DC. 

The committee met, pursuant to call, at 2:00 p.m., in Room 1100, 

Longworth House Office Building, the Honorable Dave Camp 

[chairman of the committee] presiding. 

[The advisory of the hearing follows:] 


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HEARING ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

Camp Announces Hearing on How Other 

Countries Have Used Tax Reform to 

Help Their Companies Compete in the 

Global Market and Create Jobs 

Tuesday, May 17, 2011 

Congressman Dave Camp (R–MI), Chairman of the Committee on Ways and 

Means, today announced that the Committee will hold a hearing on how other countries have reformed their international tax rules to enable companies headquartered 

in those nations to compete more effectively in the global marketplace. As part of 

the Committee’s ongoing consideration of how best to reform the Tax Code in order 

to help grow the U.S. economy and create good jobs for hard-working Americans, 

this hearing will examine the experiences of other countries in order to identify best 

practices in designing stable, pro-growth tax policies that would help American companies compete against their foreign counterparts. The hearing will take place 

on Tuesday, May 24, 2011, in Room 1100 of the Longworth House Office 

Building, beginning at 2:00 P.M. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. However, any individual or organization 

not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. A 

list of invited witnesses will follow. 

BACKGROUND: 

At the Committee’s May 12, 2011 hearing on international tax reform, the four 

Chief Financial Officers (CFOs) who testified recommended that in reforming our 

current international tax rules, Congress should benchmark against the rules that 

have been put in place by our major trading partners. The CFOs cited several nations as having international tax systems that make those countries’ companies and 

workers more competitive in the global economy. Many countries have had their 

rules in place for decades, while others have recently enacted major reforms with 

global competitiveness in mind. Surveying the tax laws in some of those countries 

will provide the Committee with useful information as it continues to explore options for tax reform. 

In announcing this hearing, Chairman Camp said, ‘‘Many of our major trading 

partners have already reformed their tax laws in ways they believe help their companies expand their global operations and in turn support good-paying jobs within 

their own borders. To make American employers and workers more competitive in 

the global market, we would be wise to examine those reforms and consider if such 

rules would be appropriate for the United States. 

FOCUS OF THE HEARING: 

The hearing will examine international tax rules in various countries with an eye 

toward identifying best practices that might be applied to international tax reform 

in the United States. The hearing will explore policy choices that maximize competitiveness and job creation while also appropriately protecting the U.S. tax base. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit written comments for the hearing record must follow the appropriate link on the hearing page 

of the Committee website and complete the informational forms. From the Committee homepage, http://waysandmeans.house.gov, select ‘‘Hearings.’’ Select the hearVerDate Mar 15 2010 10:22 Jan 31, 2012 Jkt 072510 PO 00000 Frm 00006 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\72510.XXX GPO1 PsN: 72510

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ing for which you would like to submit, and click on the link entitled, ‘‘Click here 

to provide a submission for the record.’’ Once you have followed the online instructions, submit all requested information. ATTACH your submission as a Word document, in compliance with the formatting requirements listed below, by the close 

of business on Tuesday, June 7, 2011. Finally, please note that due to the 

change in House mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House Office Buildings. For questions, or if you encounter technical 

problems, please call (202) 225–3625 or (202) 225–2610. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing 

record. As always, submissions will be included in the record according to the discretion of the Committee. The Committee will not alter the content of your submission, 

but we reserve the right to format it according to our guidelines. Any submission 

provided to the Committee by a witness, any supplementary materials submitted for 

the printed record, and any written comments in response to a request for written 

comments must conform to the guidelines listed below. Any submission or supplementary item not in compliance with these guidelines will not be printed, but will 

be maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word format and MUST 

NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised 

that the Committee relies on electronic submissions for printing the official hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone, and fax numbers of each witness. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://www.waysandmeans.house.gov

f 

/. 

Chairman CAMP. Good afternoon. The hearing on ‘‘How Other 

Countries Have Used Tax Reform to Help Their Companies Compete in the Global Market’’ will come to order. Good afternoon. I 

want to thank everyone for joining us today for the next in our series of hearings on comprehensive tax reform. 

Today’s hearing will examine international tax rules in various 

countries and identify best practices that might be applied here in 

the United States. The hearing will explore policy choices that 

must be considered to create a structure that maximizes competitiveness and job creation while also appropriately protecting the 

U.S. tax base. 

This is the second hearing the committee has convened on international tax. During the first hearing, we looked at how America’s 

high statutory corporate tax rate, the ever-increasing complexity of 

the Tax Code, and our worldwide system of taxation impairs our 

competitiveness in the global economy. And during that hearing, a 

number of witnesses encouraged the committee to benchmark our 

efforts on international tax reform against what other countries, esVerDate Mar 15 2010 10:22 Jan 31, 2012 Jkt 072510 PO 00000 Frm 00007 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\72510.XXX GPO1 PsN: 72510

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pecially our major trading partners, have done recently in this 

area. 

Many of our major trading partners across the globe have already reformed their tax laws in ways they believe help their companies expand their own global operations and support good-paying 

jobs within their own borders. Some of these countries have improved upon the rules they have had in place for decades, while 

others have recently enacted major reforms with global competitiveness in mind. 

Through the testimony of the panel assembled here today, we 

will discuss the approaches developed and implemented by our 

global competitors. We hope to learn what influences led other 

countries to move toward a territorial system and other related corporate tax reforms, such as a lower corporate rate. We also expect 

to hear some details about the process these countries undertook 

in developing their reforms, as well as lessons learned and other 

outstanding issues these countries are encountering with their 

international tax systems. Finally, in hopes of crafting a system 

that is uniquely American, we will begin to focus on what a more 

territorial U.S. tax system would look like, including key design options to consider for the United States. 

There is no doubt that the global marketplace is changing. Today 

it doesn’t even slightly resemble the marketplace that America 

once dominated. As the world economy changes, America must also 

change and adapt. That begins with transforming our Tax Code so 

that America can be a more vibrant competitor abroad and a more 

attractive place to invest and create the jobs we need here at home. 

As this committee re-examines the Tax Code and pursues comprehensive tax reform, we are grateful for the insight provided by 

our witnesses. Thank you all for being here. 

I will now yield to Ranking Member Levin for his opening statement. 

Mr. LEVIN. Thank you, Mr. Chairman. 

And welcome to all of you. 

In this committee’s last hearing on tax reform 2 weeks ago, we 

heard testimony from U.S.-based multinational corporations regarding what they believe corporate tax reform should look like. 

Their testimony illustrated the importance, the complexity, and the 

controversial nature of these issues. 

The corporations indicated that they would prefer sharply lower 

rates and a territorial system. At the same time, they rejected a 

notion of a one-time repatriation holiday, acknowledged the need 

for reform to be at least revenue-neutral, and suggested that the 

U.S. consider a value-added tax to make up the revenue that would 

be lost by cutting corporate taxes. 

The testimony from the last hearing bears on today’s hearing because U.S. multinational corporations, by and large, often describe 

their desire for a European-style territorial system or a tax system 

that is similar to that of our major trading partners. Today, I hope 

we will continue to explore exactly what such statements mean. 

If we are going to compare our tax system to our trading partners, it is appropriate to consider the broader context of their corporate tax systems. To say simply that we want to adopt certain 

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tries’ tax systems is somewhat like going out to shop for a car and 

saying, I would like to have a Corvette engine without worrying 

about anything else. That engine comes with a number of tradeoffs. 

When you get that engine, you know not to expect wonderful gas 

mileage, four doors, room for children, or low-cost insurance. You 

know that having that powerful V8 will mean compromising on 

some other things. These compromises and tradeoffs may not be 

appropriate for everyone. 

As we consider the corporate tax systems of other countries, it 

is important that we pay close attention to the compromises and 

the tradeoffs that they might entail. What kinds of anti-abuse rules 

did countries with territorial systems have to adopt to stem erosion 

of their corporate tax base? What do choices about a corporate tax 

system mean for other countries’ individual tax systems and the 

necessity of finding other revenue sources, such as value-added 

tax? What is the broader economic context in which these choices 

were made? How much do these other countries invest in economic 

fundamentals, such as education and infrastructure? How does 

their revenue collection relate to these important investments? 

Last, but perhaps most importantly, we should consider the basic 

differences between our economy and the economies of our trading 

partners. Our European trading partners, for instance, operate 

under EU rules that constrain their options for corporate taxation. 

It is also the case that the U.S. remains the largest economy in the 

world and we remain the world leader in innovation. How much do 

we need to follow in the international tax arena? How much do we 

need to lead? 

With these questions in mind, my Democratic colleagues and I 

look forward to hearing the witnesses’ testimony today. 

Thank you. 

Chairman CAMP. Thank you very much, Mr. Levin. 

We are pleased to welcome our panel of experts, all of whom either have extensive experience as law or accounting practitioners 

in countries that have moved to more territorial-based tax systems 

or have spent time studying such systems in the halls of academia. 

First, I would like to welcome and introduce Gary M. Thomas, 

a partner at White & Case in Tokyo, Japan. Mr. Thomas has 

worked in Japan for over 25 years and is a licensed Japanese tax 

attorney fully qualified to practice before the Japanese National 

Tax Agency and the National Tax Tribunal. It is my understanding 

that he is the only U.S. attorney with such qualifications. 

We know that it has been an extraordinarily challenging time for 

Japan and all its residents over these past several months, so we 

are especially grateful for your willingness to appear before us 

today. 

Second, we will hear from Frank Schoon, a partner at Ernst & 

Young and originally from the Netherlands. Mr. Schoon heads 

Ernst & Young’s Dutch Desk as part of the firm’s international tax 

services practice in Chicago and has spent more than 22 years of 

experience in serving multinational clients. 

And, third, we welcome Steve Edge, a partner at Slaughter and 

May in London. A large part of Mr. Edge’s practice involves advising multinational corporations on cross-border transactions, and we 


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look forward to him sharing his expertise about the U.K. tax system. 

And, fourth, we will hear from Jo ̈rg Menger, a partner at Ernst 

& Young and the head of the German Tax Desk of the firm’s international tax services practice in New York. Before joining the international tax services practice, Mr. Menger worked in the national 

Ernst & Young office in Germany. 

And, finally, we will hear from Reuven Avi-Yonah, the Irwin I. 

Cohn Professor of Law at the University of Michigan Law School 

in Ann Arbor. Professor Avi-Yonah is a familiar face here at the 

Ways and Means Committee, having testified before us several 

times, and we welcome you back this afternoon. 

Thank you all again for your time today. 

The committee has received each of your written statements, and 

they will be made part of the formal hearing record. Each of you 

will be recognized for 5 minutes for your oral remarks. 

And, Mr. Thomas, we will begin with you. Votes have been called 

on the floor. There will be two votes. I was hopeful we could get 

through two of your 5-minute oral testimonies before we broke for 

the vote. So, Mr. Thomas, you have 5 minutes. 


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STATEMENT OF GARY M. THOMAS, PARTNER, WHITE & CASE 

Mr. THOMAS. Thank you, Chairman Camp, Ranking Member 

Levin, and Members of the Committee. My name is Gary Thomas. 

As indicated, I am with White & Case in Tokyo. I appear before 

you today on my own behalf and not on behalf of my firm or any 

firm client. 

It is a privilege to have been invited here today to testify on how 

Japan has used international tax reform to assist its companies to 

compete in the global market, to revitalize Japan’s economy by encouraging the repatriation of foreign profits to Japan, and to enhance employment opportunities in Japan. 

Prior to 2009, Japan’s international tax system bore a remarkable resemblance to that of the United States. Japan imposed its 

corporate taxes on a global basis, including taxing dividends from 

foreign subsidiaries, while avoiding double tax by means of a foreign tax credit. Japan’s deferred taxation of profits of foreign subsidiaries until repatriation but restricted deferral for profits of 

CFCs operating in low-tax countries unless an active business exception applied. 

The similarity with the U.S. international tax regime was not 

surprising because, for the past 50 years, the U.S. tax system has 

been Japan’s model. However, on April 1, 2009, Japan moved to a 

territorial tax regime by adopting a foreign dividend exemption system, pursuant to which 95 percent of the dividends from qualified 

foreign subsidiaries are exempted from Japanese national and local 

corporate income taxes. At the same time, Japan abolished its indirect foreign tax credit system. 

Why did this substantial change occur? There were a number of 

key reasons. 

First, the Japanese Government concluded that it was vital to 

encourage the repatriation of profits of foreign subsidiaries in order 

to assist in revitalizing Japan’s economy. There had been a significant increase in profits retained overseas by foreign subsidiaries, 

but Japan’s tax regime resulted in the imposition of additional corporate taxes in Japan upon repatriation of those profits, thereby 

creating a clear disincentive to repatriate. It was felt that a failure 

to repatriate these profits to Japan raised the risk that R&D activities and jobs would be shifted overseas. 

Second, the policymakers recognized that maintaining the competitiveness of Japan’s multinational enterprises in the global marketplace would ultimately lead to additional investments in job creation within Japan and to the promotion of Japan’s economy and 

that eliminating bias in capital flows within corporate groups was 

critical for this purpose. 

Third, the government was deeply concerned about the increasing compliance burdens imposed by the indirect foreign tax credit 

system and the overall international tax regime. It is noteworthy 

that in adopting the foreign dividend exemption system, Japan explicitly rejected capital export neutrality as a key guiding principle 

in the new global business environment. Although this principle 

had been imported from the U.S. 50 years ago, the position of the 

foreign tax credit approach based upon capital export neutrality 

was characterized as having declined while the era of the United 

States as the dominant capital exporter in the world was ending. 


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In considering this new tax regime, Japan did not ignore potential downsides. In particular, the government was worried about 

the possible hollowing out of Japan’s economy and shifting of jobs 

overseas. However, the government concluded that the adoption of 

the foreign dividend exemption system itself would not unduly influence corporate decisions as to whether to establish or move operations overseas. 

Nevertheless, the Japanese Government implemented and continues to study a number of design features in order to cope with 

the risk of shifting of profits, assets, and jobs overseas. These include, for example, denying deferral for passive income of CFCs. 

There has also been a proposed reduction of corporate tax rates in 

Japan. 

In addition, the government continues to evaluate potential 

measures to reduce the risk of outbound transfers of intangible 

property while encouraging R&D and related job growth in Japan. 

For example, it is reported that potential relief for at least some 

types of royalty income is being closely reviewed. 

In closing, as a tax practitioner working in Asia, I have seen 

firsthand how nimbly America’s competitors can operate within 

their territorial tax systems at the same time that U.S. corporations struggle to deal with the very complicated and burdensome 

U.S. worldwide tax regime. Your review of the U.S. tax rules, 

therefore, is extremely important. 

Thank you. 

[The statement of Mr. Thomas follows:] 


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Chairman CAMP. Thank you very much, Mr. Thomas. 

We have less than 5 minutes for this vote, so we are going to recess now, and we will return and hear from the rest of our witnesses after the series of two votes on the floor. Thank you. 


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[Recess.] 

Chairman CAMP. All right, the hearing will resume. 

Mr. Schoon, you have 5 minutes, and your full statement will be 

made part of the record. Welcome. 

STATEMENT OF FRANK M. SCHOON, PARTNER, DUTCH DESK, 

INTERNATIONAL TAX SERVICES, ERNST & YOUNG 

Mr. SCHOON. Mr. Chairman, Mr. Ranking Member, and other 

members of this distinguished committee, it is an honor to participate in these hearings on international tax reform. 

I would like to thank you for the invitation to appear before you 

today to provide information on key international elements of the 

Netherlands corporate income tax system. 

I am Frank Schoon, a Netherlands tax partner with Ernst & 

Young based in Chicago. I appear before you today on my own behalf and not on behalf of my firm or any client. 

Corporate income tax is imposed in the Netherlands on the 

worldwide profits of resident entities and on the income derived 

from certain sources within the Netherlands of nonresident entities, with provisions to prevent double taxation. The provision used 

in the Netherlands to prevent double taxation is a dividend or a 

participation exemption, as well as a foreign branch exemption. 

This is generally referred to as a form of a territorial tax system. 

As of January 1, 2011, the Dutch corporate income tax rate is 25 

percent. Over the last three decades, the corporate income tax rates 

have decreased from 45 to 48 percent in the early 1980s to the current rate. From parliamentary history, it can be seen that the motivation for this decrease generally was to lower the tax burden on 

companies, to stimulate investment, and to create jobs, as well as 

to align with developments in other jurisdictions. 

One of the pillars of the Dutch corporate income tax system is 

the participation exemption regime, which aims to prevent double 

taxation of business profits at different corporate levels in both a 

foreign and a domestic context. The origins of the participation exemption regime go back to 1893. A hundred years later, in 1992, 

the Dutch state secretary for finance stated during parliamentary 

proceedings that the exemption method, as provided under the 

Dutch corporate income tax system, is still the most suitable system for the Netherlands, considering its many international relations and its open economy. 

The participation exemption regime fully exempts income, such 

as dividends and other profit distributions, currency gains or 

losses, and capital gains or capital losses realized with respect to 

a qualifying interest in a subsidiary. To qualify for the participation exemption, an ownership test and a motive test must generally 

be satisfied. 

Under the ownership test, the taxpayer is required to hold at 

least 5 percent of the subsidiary. Under the motive test, the interest in the subsidiary cannot be held as a portfolio investment. The 

motive test is generally satisfied if the shares in the subsidiary are 

not held merely for a return that may be expected from normal 

asset management. If the motive test is not met, the participation 

exemption could still apply if either an asset test or the subject-totax test is met. 


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Under the current Dutch rules, expenses related to interest that 

qualify for the participation exemption are deductible. Several antiabuse measures apply to limit deductions in specified circumstances. If a Dutch tax resident has a foreign permanent establishment, the income, both positive and negative, of the foreign 

branch will directly be included in the worldwide income of the 

Dutch tax resident. As a result, foreign branch losses are deductible, albeit subject to recapture. Foreign branch income is generally 

exempt. 

The Dutch Government is currently considering moving to a full 

territorial tax system for foreign branch income. This would mean 

that foreign branch losses are not deductible and income would 

continue to be exempt. 

Other foreign-source income, like interest and royalties, is, in 

principle, subject to the current statutory rate of 25 percent. However, net earnings from qualifying intellectual property, such as 

royalties for example, may effectively be taxed at a rate of 5 percent under the so-called innovation box regime. This regime was 

first introduced in 2007 to cover patents and has been expended to 

cover other forms of intangible property. It was intended to stimulate development of technology, innovation, and employment in the 

Netherlands. 

There are no special provisions in Dutch law for controlled foreign companies. In the Dutch tax system I have described, the relevant question, therefore, is whether or not the participation exemption or the branch exemption applies, which, along with the 

anti-abuse rules, address the issue of mobile and passive foreign income. 

Thank you very much. I would be happy to answer any questions. 

[The statement of Mr. Schoon follows:] 


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Chairman CAMP. Thank you very much. 

Mr. Edge, you have 5 minutes, and your full statement will be 

part of the record, as well. 

STATEMENT OF STEPHEN EDGE, PARTNER, 

SLAUGHTER AND MAY 

Mr. EDGE. Thank you. 

Chairman Camp, Ranking Member Levin, Members of the Committee, I, too, am pleased to be here today, and I hope that I can 

help you in your deliberations. 


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First of all, let me apologize for the length of my testimony. As 

you will see, we have been on a long journey in the U.K., and I 

thought it would be interesting for you to see some of the very open 

Revenue consultations that there have been which tell the full 

story of what the revenue in recent years have been calling ‘‘a direction of travel’’. 

As I acknowledge in my paper, tax is an important business consideration, but it is not the most important. Logically, one might 

say that the best tax rate for a corporate tax lawyer is zero, but 

we know that that is not practical politics. This is not, as some people have suggested, a race to the bottom. It is a question of finding 

the right balance between the tax rate that is fair for business and 

will enable it to compete and that is fair to the society that is imposing that tax. 

As the U.K. has gone along its direction of travel, Three pressures have emerged, and I deal with those in my testimony. 

The first is obviously government pressure. Government needs to 

raise funding to provide the infrastructure that business needs in 

which to operate and to provide all the facilities its people need. 

It also needs to be cognizant of the fact that tax can be a great disincentive to investment. 

Secondly, industry. A huge amount of industry pressure, as you 

will see from my paper, followed the 2007 consultative document 

in which the government sought to extend the scope of our CFC 

rules so that they resembled what I remember of your SubPart F 

rules in the early 1980s, Propensity to tax offshore passive income 

regardless, resulted in many U.K. companies saying, well, if that 

is the way the U.K. system is going to be, we will leave the U.K. 

The U.K. does not have and cannot have anti-inversion rules. And 

as I explained in my testimony, the effective tax rate is absolutely 

key if a multinational is going to compete and is going to continue 

to grow. 

Thirdly, we have the pressures that are connected with the EU 

freedoms which say that, if you are within the EU, your laws can’t 

distinguish between the investment that you might make elsewhere in the U.K., buying shares in a company in the north of England, and an investment that you might make in a Spanish/French/ 

German company. So if you have a 100 percent domestic exclusion 

on dividends, you must have it if a dividend is coming in from elsewhere in the EU. And, equally, if you don’t have CFC rules within 

your domestic regime, of course, then, you can’t have them internationally. 

But, as I say in my paper, although you could say that the EU 

rules forced us in the direction of conforming to an exemption system, that, I don’t think, was the main driver. The main driver, as 

the consultation showed, for where we have got to now, which is 

an exemption system with no interest allocation and severely 

pared-down CFC rules compared with what we have had in the 

past, is that there is perceived to be an identity of interest between 

government and industry in maintaining our national champions. 

Multinationals are perceived to be good things and to contribute 

things to the U.K. which we would prefer to have. 

The government has been brave and said that we should not 

have a tax system that distorts good business decisions. If people 


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want to invest somewhere else, they should be free to do so, and 

the U.K. tax system should not then take away an overseas tax advantage that is part of the total picture as to why someone invests 

overseas. And we shouldn’t create penalties when somebody repatriates cash which might be a barrier to investment in the U.K. 

Of course, industry, in its desire to achieve an effective tax rate 

that is low, has to be conscious of its obligations. There is more 

pressure now in the U.K. on social responsibility in tax. And base 

erosion has been a key part of this process. As I say in my testimony, the U.K. decided not to have interest allocation or restrictions. That decision, I think, could have gone either way and will 

be kept under review. The CFC rules, or course, are a key feature 

in the territorial system. We are trying to be sensible on those and 

only tax income within a CFC if there is clear evidence of avoidance or diversion. And in order to make the U.K. comparatively a 

more attractive place to invest, we have lowered the domestic tax 

rate, which is targeted to come down to a 23 percent rate by the 

end of this parliament. 

So we are on a long journey. I hope we are proceeding to a successful conclusion. Thank you. 

[The statement of Mr. Edge follows:] 


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Chairman CAMP. Thank you very much. Thank you for your testimony. 

Mr. Menger, you also have 5 minutes, and your written testimony will be part of the record, as well. 


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STATEMENT OF JO ̈ RG MENGER, PARTNER, GERMAN DESK, 

INTERNATIONAL TAX SERVICES, ERNST & YOUNG 

Mr. MENGER. Mr. Chairman, Mr. Ranking Member, other members of this distinguished committee, thank you for your honor to 

participate in this hearing on international tax reform. 

I am Jo ̈rg Menger, an international partner of the German firm 

of Ernst & Young currently on assignment in New York. I appear 

before you today on my own behalf, not on behalf of my firm or any 

client. The purpose of this statement is to provide a brief overview 

over the German corporate tax system, in particular the tax treatment of foreign-source income. 

German tax policymakers have long focused on the implementation of a system of foreign-source taxation which is governed by the 

principle of capital import neutrality, which is aimed to ensure that 

German companies are able to compete in foreign markets against 

local companies. 

The German corporate tax rate—the German corporate tax includes corporate income taxes and trade taxes. The current combined average tax rate is slightly below 30 percent. The current tax 

rate reflects a series of reforms which has reduced the corporate 

tax rate from as high as 65 percent. 

To avoid double taxation on corporate earnings distributed within a chain of corporations, the German corporate tax law employs 

an exemption systems on dividends distributed from one corporation to another corporation. Generally, 95 percent of any dividends 

received by a corporation are tax-exempt; thus, only 5 percent of 

the dividend income is included in the taxable income. 

The tax policy rationale for the 5 percent income inclusion is to 

act as a compensating offset for the deduction of business expenses 

which are directly related to the exempt dividend income. The implementation of the 5 percent inclusion rule ended a constant conflict between the German taxpayer and the German tax authorities 

with regard to the interest deduction. 

A brief overview of the history of the international German tax 

system should provide an insight into the current tax policy. Beginning in the 1950s, dividends distributed by foreign corporations to 

German corporations were exempt from taxation pursuant to the 

tax treaty provisions. This 100 percent exemption was combined 

with a rule that disallowed deductions on certain expenses which 

were directly related to the shares owned in the distributing company and were determined using the tracing approach. Since 2001, 

the treaty-based rule on dividend and capital gain exemption was 

replaced by a 95 percent exemption, and this applies both to foreign and domestic shares. 

Germany has foreign corporation rules which subject undistributed income of controlled foreign companies to a full German corporate and trade tax, but only if such income is both passive in nature and low-taxed. Moreover, the CFC rules do not apply to EU 

subsidiaries if the subsidiary carries on an own business activity. 

In summary, Germany has incorporated its territorial tax system 

in the tax treaty network and the Tax Code with special rules for 

low-tax passive income. This approach was guided by the principle 

of capital import neutrality and simplicity. 

Thank you, and I am happy to answer any questions. 


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[The statement of Mr. Menger follows:] 


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Chairman CAMP. Thank you. 

Mr. Avi-Yonah, you have 5 minutes, as well. And your full statement will be part of the record. 

STATEMENT OF REUVEN S. AVI–YONAH, IRWIN I. COHN 

PROFESSOR OF LAW, UNIVERSITY OF MICHIGAN LAW SCHOOL 

Mr. AVI-YONAH. Thank you, Chairman Camp and Ranking 

Member Levin, Members of the Committee, for inviting me to testify before you on this important topic. I will make five points. 


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The first one is that, despite what you may have heard, the issue 

before us is not really about territoriality versus worldwide taxation, because, as the witnesses before me have clarified, in fact all 

of us have a mixed system in which we tax some income of our 

resident corporations overseas currently under the CFC rules or 

other anti-abuse provisions and other income is not. This is really 

not about what addresses territorial at all; this is about whether 

we will tax dividends that are sent back from CFCs from income 

that is not subject to SubPart F when it arrives to our shores. And 

that is the various participation exemptions that have been described. 

Now, that particular narrow issue, in my opinion, has nothing to 

do with competitiveness. Competitiveness, as Mr. Edge, for example, has mentioned, is determined, to the extent that it is determined by taxes at all—and there are other more important topics— 

but to the extent it is determined by taxes, it is determined by the 

overall effective tax rate that is borne by a multinational from a 

particular country or, you could say, maybe sometimes by the effective tax rate on foreign-source income on a particular project. It is 

not determined by the question of whether you tax dividends when 

they are sent back, because that tax basically is never paid. The 

dividends are not repatriated if there is an additional tax that is 

paid on them, so how can that affect competitiveness? The issue of 

competitiveness has to do with the overall tax rate, not with the 

tax on dividends. 

The second point is the recent issue with sending dividends back, 

and that is the issue of the trapped earning phenomenon. American 

multinationals don’t repatriate unless there is a foreign tax credit, 

and a lot of their earnings overseas are subject to a low tax rate, 

so then they don’t repatriate. But that particular issue, which is a 

real issue, has another much simpler solution which I think alleviates the need to deal with a lot of the other problems that I will 

talk about, and that solution is that we should tax those income 

currently as they are earned. 

Now, I think that that is only feasible if we significantly reduce 

our rate to prevent us from being anticompetitive. But, nevertheless, I think that that would, for example, enable us not to have 

to worry about transfer pricing, it will enable us not to have to 

worry about the endless characterization of SubPart F, et cetera. 

So if trapped income is the real problem, then I think that is another solution. 

Now, adopting an exemption for dividends without doing anything about the potential for profit shifting is really problematic. 

Currently, the main disincentive for American multinationals to 

put their profits overseas is because they know that they will not 

be able to bring them back without paying tax. That is the trapped 

income phenomenon. If we abolish that—that is, if we stop taxing 

dividends—then there will be no disincentive to further shift profits 

overseas. 

And here, I think, if you listen carefully, you could see that, in 

fact, the anti-abuse and CFC rules of our trading partners, not just 

those that are represented at the table but other ones as well, are 

significantly different from our SubPart F, because they all take 

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tion—that is, where income is earned. And if the income is passive 

and is subject to low taxation at source, then that triggers SubPart 

F. That is the CFC rules. 

Of course, our SubPart F doesn’t work that way, as you all know. 

It has nothing to do with the effective tax rate in the source jurisdiction in almost all cases. And it enables freely to shift income 

from one CFC to another without triggering SubPart F so that if 

income, for example, is shifted to one of those four countries which 

has a real corporate income tax rate, our SubPart F then enables 

you to shift the income again to a third country which has no income tax whatsoever and leave it there as, quote, ‘‘active income’’ 

without—or as nonexistent income if you are going to disregard 

transfers from one CFC to another—without triggering SubPart F 

inclusions. And that, I think, is what makes our system particularly porous and subject to income shift abuse, and that is why we 

should be really careful about this. 

Now, the fourth point is that this is a revenue loser. It is a revenue loser under some circumstances, specifically if we don’t adopt 

any limitation on expense deductibility. But that seems to be the 

direction in which we are going, in which case it is a revenue loser 

and we can’t afford it. 

And then, finally, I think the comparison that is being done 

today ignores, as Ranking Member Levin mentioned in his opening 

remarks, other differences between our system and the overall 

economy of the countries that we are being compared to that I 

think are also relevant, and I will be happy to answer questions 

about them. 

Thank you very much. 

[The statement of Mr. Avi-Yonah follows:] 


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Chairman CAMP. Well, thank you. Thank you very much. 

I would just like to point out, a territorial system or international tax system does not need to lose revenue. I mean, it could 

be designed in such a way that it is revenue-neutral. And that 

would be another sort of discussion. 

But I did have a question, particularly for Mr. Thomas and I 

think anyone who wanted to weigh in, all four of you who are really talking about particular countries. 

What were some of the underlying reasons we have seen some 

dramatic changes in international tax law and tax reform? Was it 

about competing abroad? Was it making their workers more competitive? What were some of the underlying reasons? 

And if you want to start, Mr. Thomas, we can just go down the 

row. 

Mr. THOMAS. Thank you. 


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I like to use a sports analogy, an American football team on the 

field playing against a U.K. soccer team. The American football 

team goes on the field. There are all sorts of complex rules and 

penalties. They have to huddle, they have to determine how they 

could move the ball forward within all those complex rules. At the 

same time, the soccer team is out running around the entire field 

reacting on a second-by-second basis to what is happening everywhere and simply can be much more flexible. 

My sense is that Japan looked around, They did do 

benchmarking. They looked at other countries, and they came to 

the conclusion that the rest of the world is playing soccer and that 

Japan should play soccer, as well, in order to compete effectively 

in each of the jurisdictions in which they are competing with companies from France, Germany, and the U.K., and particularly 

throughout Asia where there are many emerging countries growing 

rapidly, with many of those countries offering various tax incentives for business that the Japanese companies want to take advantage of. 

Chairman CAMP. All right. 

Mr. SCHOON. In the Netherlands, it is not a recent development 

but it has been reviewed over time. And I quoted the statement by 

the state secretary of the ministry for finance in the 1990s. The 

idea is, indeed, capital import neutrality, to be able to compete locally, and also to recognize the sovereignty of third countries. 

Chairman CAMP. Thank you. 

Mr. Edge. 

Mr. EDGE. For me, in the U.K., competitiveness is at the heart 

of it. When I talk to my U.K.-based multinational clients, they can 

achieve low effective tax rates but only, as someone said to me, by 

running working very hard. And if they look at their peer groups 

around the rest of Europe and in the U.S., they will find that effective tax rates at a global level are lower. And that does make it 

very difficult for you to compete, particularly if you are looking to 

acquire other companies and grow. 

And as a symptom of that, in 2007, when the last Labour government was looking to extend the CFC rules, that was seen as having 

a direct effect on effective tax rates. And it resulted not in a mass 

exodus, only a number of small companies left, but the bigger companies in the U.K.—and a number of them said this publicly—said, 

we like the U.K. for everything else it has to offer; if the tax system 

is going to make it uncompetitive, we have to work with government and change it. So it is competitiveness that has driven the 

change. 

Chairman CAMP. All right. 

Mr. Menger. 

Mr. MENGER. Yes, Germany didn’t change the system. They 

have an exemption system since after World War II. And the German system is driven by the capital import neutrality in order to 

compete in the foreign markets. 

Chairman CAMP. All right. Thank you. 

And, Mr. Thomas, to what extent, as you talked about these 

rules, football versus soccer, to what extent did corporate tax rates 

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ble taxation of foreign-source profits? What were the factors that 

really sort of drove that, or the rules, as you called them? 

Mr. THOMAS. Well, I think there were quite a number of factors. The Japan authorities were concerned about the complexity of 

the tax system, and the resources that Japanese companies were 

having to devote toward complying with the tax laws. In fact, I 

hold here in one hand the entire Japanese national and local corporate tax laws, income tax laws, and all the other tax laws and 

regulations. They prefer simplicity. They prefer not having to maintain armies of tax lawyers to figure out what the laws mean and 

to comply with them. 

I think that they definitely wanted to be able to take advantage 

of the various types of tax incentives that are granted in other 

countries, particularly in Asia. And they felt they could do this effectively really only by adopting a territorial system. 

Chairman CAMP. Mr. Schoon, the Netherlands has had—I know 

you call it a worldwide system, but it is, in effect, a territorial system, or at least how we look at it. So I just wanted to make sure 

we are using the same terminology. And you have had it for a hundred years. 

What are some of the structural issues that continues to maintain that sort of tax policy that you look at? What are some of the 

reasons that that has worked for the Netherlands, I guess is a better way to put it. 

Mr. SCHOON. You know, the reasons that it has worked, I 

think, as I referred to earlier, it did allow Dutch companies to 

grow, Dutch multinationals to grow in a way that, you know, was 

acceptable and preferred by the Dutch Government. So I think that 

that is the most important aspect, actually, the stimulation that 

that created. 

Chairman CAMP. All right. 

And, Mr. Edge, I think you mentioned that corporate rates did 

play a significant role in the U.K. Were there other factors, as 

well? 

Mr. EDGE. EU pressures, which, of course, affect the other two 

European countries here, have come into it. But, interestingly, I 

think the Revenue haven’t yet admitted that they have been losing 

the litigation on that, so they have been trying to work around it. 

At the heart of the changes has been the fact that the U.K., with 

a maritime tradition and a mercantile tradition, has wanted to 

have a competitive system to attract people to the U.K. I make the 

point in my testimony, I don’t know whether Members of the Committee will remember that, that when we put our tax rate up to 

52 percent in 1972, we had to take immediate action so that U.S. 

companies who were investing in the U.K. did not suffer that 52 

percent rate but could, through the double tax treaty that was negotiated, get a tax refund in the U.K. to bring that tax down. I 

think the U.S. rate then was 40 percent. 

Early in my career, when U.K. tax rates were a somewhat eyewatering 83 and 98 percent for individuals and, as I say, 52 percent for corporations, I spent quite a bit of time working on Northern Ireland investments, where they looked rather jealously across 

the border at then the Irish incentives, Northern Ireland then got 

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Interestingly, the government, in the last budget, has announced 

that it is proposing something rather radical, which is a lower tax 

rate for Northern Ireland as part of the U.K., simply so that, with 

its identical geographic position and economic advantages to Southern Ireland, it could compete evenly across the border. So even the 

low U.K. rate is thought to be uncompetitive on the island of Ireland. 

Chairman CAMP. Thank you. 

Mr. Levin may inquire. 

Mr. LEVIN. Thank you very much. 

And I think it is very useful to have this hearing and to really 

scratch beneath the surface and try to go beyond labels, because I 

think, as we read the testimony, all of these systems are mixed to 

some degree, and you don’t have either/or. 

We pulled out, for example, provisions that show the mixed nature, just to review a few of them quickly. For Japan, there are 

major transfer pricing guidelines. Also, there are certain provisions 

relating to denial/deferral on certain types of passive income, and 

also there are certain provisions relating to royalty income. And 

also, I am not sure it was mentioned, the present system subjects 

5 percent of dividends to taxation. That is a system used in other 

countries. 

In terms of the Netherlands, as we extracted the provisions there 

that I think show the mixed nature, some of them are fairly complicated. Under, for example, the ownership test, that interest in 

a subsidiary cannot be held as a portfolio investment. And then you 

have a lot of other anti-abuse provisions and provisions relating to 

foreign branches. And it is interesting, on royalties, that they have 

a higher tax except where there is an innovation box provision, 

which I think again shows the mixed nature of this. 

With Germany, which I guess has an older system, with 95 percent, also you have exemptions relating to dividends, also to 

branches that are in a non-treaty jurisdiction. So there is a differential between investments or operations by a corporation one 

place or another, depending where there is a tax treaty. Also, differentials as to whether income is passive or not. And, also, some 

major transfer pricing provisions that reflect the OECD guidelines. 

And so, as you go through this, looking at the Netherlands and 

the U.K., you see that what we need to do is pierce through the 

surface and try to go beyond either/or propositions, look at what 

the realities are here and overseas, and to see, that the primary 

standard has to relate to our competitiveness. 

My plea is that we all take the time, and I think your testimony 

is indeed useful, to look at the complexities in each of these systems, because they are just not simple. You held up the code, and 

I didn’t ask you how many pages they are, but it is more than a 

few and not as many as we have here. 

And I think, also, we should take seriously the testimony that 

was given by Mr. Avi-Yonah in terms of what is the reality within 

each of these territorial systems and how they relate to what we 

have today. And I think we will see the complexity. 

Professor, you suggest the elimination of deferral. That, in itself, 

is very complex and controversial. And as I said a few weeks ago, 

when Amo Houghton and I, many years ago, sat down for a couple 


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days on a bipartisan basis to look at our international tax system, 

we came up with some ideas, some of which were incorporated in 

legislation. But when we got to deferral, we came to a stop, because 

it was difficult to find a strong basis on which to proceed. 

So thank you very, very much for your testimony. 

Chairman CAMP. Mr. Herger is recognized. 

Mr. HERGER. Thank you, Mr. Chairman. 

Critics of a territorial tax system often argue that it will result 

in companies shipping jobs overseas. Based on your experiences 

and observations, does adopting a territorial tax system result in 

jobs being shipped overseas? 

And I would like to ask each of our witnesses that represent 

other countries, beginning with you, Mr. Thomas. 

Mr. THOMAS. Thank you. That is certainly a very important 

question. As I indicated in my testimony, the Japanese Government was concerned. They consulted very closely with business. 

They tried to learn from business what factors are involved in deciding to set up operations overseas or move operations overseas, 

and they concluded that there were a variety of very legitimate 

business reasons for doing so. 

Japan recognizes that due to population growth, or relative lack 

of population growth in Japan, frankly there is going to be more 

economic growth outside of Japan. The principal policy objective in 

Japan is what they call a ‘‘virtuous growth cycle.’’ A virtuous 

growth cycle would involve assisting and encouraging Japanese 

companies to grow outside Japan and to bring the profits back into 

Japan for enhanced domestic investment. They view the situation 

as a win-win, not as a zero-sum game. And, consequently, at the 

end of the day, they concluded that the risk of jobs being shifted 

overseas was far less than the benefit of encouraging Japanese 

companies to expand and bring the profits back into Japan to help 

the Japanese economy. 

Mr. HERGER. Thank you. Mr. Schoon. 

Mr. SCHOON. In the Netherlands it is the same; the experience 

of a hundred years that I think strengthened the Dutch Government in its position that this is, for the Netherlands, the appropriate system and on a net basis does not lead to a shift in jobs 

overseas. 

Mr. HERGER. Mr. Edge. 

Mr. EDGE. The concern in the U.K., I think, has not been as I 

have seen it here in the U.S., that this encourages people to create 

jobs overseas. To the extent we had concerns, they have actually 

been that U.K. companies coming under the control of foreign multinationals has led to loss of jobs in the U.K. That has been quite 

a controversial issues in a number of areas recently. 

The philosophy in the U.K., as I said earlier, is than if you try 

to use the tax system to force people to invest at home and make 

it less attractive to invest overseas, rather than letting everything 

be treated on a level playing field as part of a total package, then 

you will eventually make your own multinationals uncompetitive. 

And, if you do that, then you go back to the first position, which 

is your big companies come under the control of foreign companies 

and then you no longer have the national sway that you thought 

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You are actually maintaining the influence and trying to make 

sure that businesses don’t find tax a driving factor in where they 

put investments and do jobs. But tax is, as I say, just a part of the 

package. 

Mr. HERGER. Mr. Menger. 

Mr. MENGER. The legislative history in Germany shows that 

the policymakers believe that capital import neutrality would generate jobs in Germany by making German companies competitive 

abroad under competitive tax rates, and that is generating jobs in 

Germany to manufacture and design all the products which are 

sold abroad. 

Mr. HERGER. Mr. Avi-Yonah. 

Mr. AVI-YONAH. I don’t know of any evidence that indicates 

that this particular provision—that is, whether you tax or do not 

tax dividends paid by CFCs to the parent companies—has any effect on jobs by itself. But I think the broader question of the tax 

rate—the effective tax rate on foreign-source income certainly can 

have an effect on both income shifting and potentially job creation 

outside the country where the parent is in place. 

Mr. HERGER. Thank you. I yield back, Mr. Chairman. 

Chairman CAMP. Thank you. Mr. Johnson. 

Mr. JOHNSON. Thank you. Mr. Chairman. 

You know, it sounds like to me that you all agree since the U.S. 

last reduced its corporate tax rate through the 1986 tax reform, 

that our major trading partners have moved past the U.S. in terms 

of reducing the corporate tax burden by lowering rates and going 

to a territorial system. 

Is that what you all are saying? Am I reading you right? It also 

eliminates our need for an IRS army to go out and try to persecute 

these companies, I think. 

Would you all agree that our current corporate tax system hurts 

the U.S. economy, the competitiveness and jobs worldwide? Go 

ahead, Mr. Thomas. 

Mr. THOMAS. I believe that it does. I work for U.S. companies 

and French companies and German companies in Japan. Many 

times when we try to set up transactions or we try to reorganize 

operations, the French and German companies really don’t have a 

problem under their territorial tax systems. The U.S. companies 

look at the particular proposal and there always seems to be a foreign tax credit problem or a CFC problem or some other problem 

that prevents them from doing what would be best for their business in Japan. And, again, it is not an issue that the French or 

German companies seem to face. 

Mr. JOHNSON. Go ahead, if you have got a comment. 

Mr. SCHOON. It is hard for me to judge what the impact would 

be from the U.S. system for the U.S. multinationals. But I would 

believe that if the Netherlands would abandon the territorial system, they would put their companies at a competitive disadvantage. 

Mr. JOHNSON. Competitive worldwide, you mean? 

Mr. SCHOON. Yes. 

Mr. EDGE. During the 1980s when we were looking at a lot of 

possible U.S.-U.K. mergers, the U.S. and UK advisers used to compete which had the most horrible system, We used to wonder as to 


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whether we could find somewhere else that was more friendly. We 

looked then to our friends in the Netherlands. Of course at the end 

of the day, you came back to all the other parts of the package and 

you ended up being in the U.S. or the U.K. because of all the other 

bits and pieces there. But from my perception I would say that the 

U.K. has gone in the right direction of lower tax rates in a territorial system, and it seems to me that the U.S. would benefit from 

that. 

It would be interesting to see what the position would be here 

if your capital markets weren’t so strong and you didn’t have antiinversion rules. That certainly influenced the U.K. Government 

thinking a lot. 

Mr. MENGER. There are a lot of factors influencing the U.S. system and it is very difficult for me to judge what is best for the 

United States. But I can mention that in Germany there were discussions; German legislators were looking at the U.S. system once 

or twice, and then decided it is too complicated for Germany and 

therefore Germany 

Mr. JOHNSON. I think it is too complicated for us, too. That is 

a good statement. 

Mr. Avi-Yonah, do you have any comment? 

Mr. AVI-Yonah. I have to say I do not see our companies suffering so much. American companies recently have been doing extremely well worldwide and the basic reason, as far as tax is concerned—I think it basically is for other reasons, but as far as tax 

is concerned, is that we don’t tax our overseas profits more than 

any other of the countries that are represented here. 

Mr. JOHNSON. Yeah, but we are leaving money overseas because they are afraid to bring it back and get it taxed at a high 

rate. Under our current deferral system, but not under a territorial 

system, foreign earnings are subject to U.S. tax when they are repatriated to the United States. You know that. 

What I would like to know from you all is, what did the U.K. and 

Japan do about accumulated foreign earnings when they 

transitioned to a territorial system? I am about to run out of time, 

so be quick, please. 

Mr. THOMAS. Japan imposed no restrictions. Basically, any dividends that were paid from foreign subsidiaries during a taxable 

year beginning on or after April 1, 2009 are subject to the exemption. 

Mr. JOHNSON. Do you all agree with that? Mr. Edge. 

Mr. EDGE. In the U.K. we did not distinguish. That would have 

been seen to have been an unfair distortion. But most importantly, 

the point was made quite forcibly to the government that if they 

did try to distinguish, the profits would end up in Ireland and not 

in the U.K. because companies would leave. 

Mr. JOHNSON. Thank you very much. I appreciate your testimony. 

Chairman CAMP. Mr. McDermott is recognized. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. I want to thank 

you all for coming here. I have a feeling as though I have seen this 

movie before, because the Japanese have a health care system and 

the Dutch have a health care system and the English have a health 

care system and the Germans have a health care system and they 


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are all different. And never have we had a hearing in the Congress 

where we asked them to come in and talk about how they run a 

health care system that is half as expensive as our own. So it 

seems strange that we are asking you to come in here and talk 

about systems developed in your own countries. 

And Dr. Avi-Yonah, I would like to ask, you nailed it down to one 

issue as to why we are here. We are not going to do what the Germans do, we are not going to do what the English do, we will not 

do what the Dutch do, we will not do what the Japanese do, because we are Americans. And we have developed this system—complicated, yes. 

Why are we having this hearing? It sounded to me like you were 

saying it is money left overseas, and we have two ways to get rid 

of the problem. One is tax it while it is over there, just get rid of 

deferral. And then—explain to me why are we talking about competitiveness. Because in health care we never look at the Europeans to see what is the best way to do it. They don’t know anything. We only know. That is how our health care system was developed. The same with our tax structure. So tell me, what it is 

that we are really here discussing today? 

Mr. AVI-YONAH. What we are discussing is this very narrow 

question, it seems to me, which is what to do about dividends that 

are distributed upstream at CFCs not held as income. That is the 

issue on the table. And the other countries, some recently some before, have decided not to tax them. It has nothing to do with the 

competitiveness. American multinationals don’t have any problem 

shifting profits around even from their overseas operations, one to 

another, or raising money at home or borrowing at very low rates, 

or even when their stock price reflects overseas income, it does 

nothing in any of this issue of trapped earnings overseas that affects their competitiveness. They are perfectly fine and competitive 

with the current system. 

The issue is some people argue that leaving the money overseas 

means that they don’t invest it at home. You know, you can argue 

about what the economic effects of that would or would not be. We 

had a 1-year experiment in 2004–2005 and the economic effects are 

not so stellar. But they did make enough money—— 

Mr. MCDERMOTT. You mean the one—— 

Mr. AVI-YONAH. When we allowed the creation—— 

Mr. MCDERMOTT. And they handed it out in dividends rather 

than investing it in any kind of—— 

Mr. AVI-YONAH. Right. But I think you can argue that there is 

an impediment there. There is no question that they usually don’t, 

because they have to pay an extra tax, and they also engage in all 

kinds of complicated transactions to try to repatriate without paying the tax. So that puts a burden on the IRS to try to fight these 

transactions. 

So I would say that something should be done about that. But 

in my opinion, if we were to reduce the rate to something like the 

OECD average, we could abolish deferral and and then we could 

get rid of a lot of this complexity that is currently in the code and 

we would not have a competitive disadvantage because of that either. And then the money can simply flow freely within the multinationals without having any tax effect. 


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Mr. MCDERMOTT. Which way would you go? You have these 

two ways to go. Which way would you recommend to us to go? 

Mr. AVI-YONAH. I would not recommend going territorial, because I think that this strongly increases the incentive to shift 

profits overseas. We know that American multinationals already 

use a lot of transfer pricing and other transactions in order to increase their overseas profits. And we have recently heard about 

large American multinationals putting their money overseas and 

paying very, very low effective tax rates on that money. And we 

have also had a hearing just last summer in this committee discussing all the ways in which they shift profits. 

But I think the one disincentive that currently exists is this 

problem, if they put more money overseas they will not be able to 

bring it back without paying taxes. And I think that if we eliminate that—— 

Mr. MCDERMOTT. Tax it as it is made? 

Mr. AVI-YONAH. Yes. 

Mr. MCDERMOTT. Then they can move it anyplace they want. 

Mr. AVI-YONAH. Yes, we we abolish deferral; there is no problem with transfer pricing; they can move it anyplace they want. 

They can bring it back here and there will not be a tax disincentive 

to do that. 

Mr. MCDERMOTT. Why do you think they don’t want that? We 

could pass a bill here in 15 minutes to get rid of the ability to defer 

taxes and keep it outside the country. 

Mr. AVI-YONAH. I don’t think that all of them don’t want it. 

What I have read recently is that some have actually said if the 

corporate tax rate is reduced sufficiently, they would being willing 

to leave it inside the system. That came from GE, which was one 

of the companies that was highlighted recently in terms of how 

good their overseas tax strategy is. 

Chairman CAMP. Mr. Brady. 

Mr. BRADY. Thank you, Mr. Chairman, for holding this important hearing. As opposed to health care where our local doctors, for 

example, don’t compete globally to provide services to us, our businesses do compete globally for customers. And what we have 

learned through this hearing and others is that America has fallen 

behind. Where we used to hold a distinct advantage in competitive 

tax rates, in fact our global competitors have taken a page from our 

playbook and are beating us at it. It is costing us jobs. 

The goal today is to find out how we become competitive to make 

sure that we have the strongest economy of the 21st century, not 

the strongest economy until China catches us or the European 

Union becomes more competitive, but how do we create the strongest economy for the next 100 years. 

This hearing I think is very important for exploring it. I want to 

follow up with Mr. Johnson’s conversation and direct a question to 

Mr. Thomas and Mr. Edge, if I may. And by the way, all the panelists have been excellent today. 

You know, as Mr. Johnson said, many critics of the current U.S. 

worldwide tax system argue the current system has a lockout effect 

which forces U.S. companies to hoard cash overseas and not distribute those earning back to the U.S. where those earnings could 

be deployed for domestic investments. They are, by some estimates, 


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$1 trillion in stranded U.S. profits overseas eager to be brought 

back here. In fact, Mr. Thomas’ testimony stated the lockout effect 

was one of the primary reasons why Japan adopted the territorial 

tax system. 

Mr. Thomas and Mr. Edge, based on your experiences, you believe that the lockout effect is an impediment to domestic investment? 

Mr. THOMAS. Yes, I believe it is an impediment. Japan’s rules 

have been in effect only for a short period of time but initial indications are that repatriation of profits is increasing. And frankly, 

given the recent disaster in Japan, more and more Japanese companies will probably need to bring profits back into Japan to help 

with their rebuilding. So I definitely believe that the lockout effect 

is a problem, and the Japanese Government recognized that and 

that is why they changed their system. 

Mr. EDGE. The U.K. has not had as much trouble with where 

overseas cash gets used because, as I explained in my testimony, 

we did not have rules dealing with upstream loans. That meant the 

money could be brought back to the U.K. not only tax free- but in 

theory at the cost of a further detriment to the U.K. because of the 

additional interest deduction that that created. You then had 

money being lent back to the U.K. rather than being paid back to 

the U.K. by way of dividend. 

Once you have reached the conclusion that you deal with abuse 

through CFC rules, and through interest allocation, through tax 

pricing, then the essence of the territorial system as we have 

adopted is that you should take tax off the table in terms of deciding where corporations should invest their money. And therefore I 

think that leaving cash offshore because of tax reasons is an artificiality that is very good to get rid of. 

Mr. BRADY. The comment has been made that the way to address and solve the lockout problem is that you move to a territorial system or end deferral. Most of the countries that faced that 

decision have chosen to move to a territorial system. In your view, 

given a choice between ending deferral or moving to a territorial 

system, what is your recommendation to the panel? 

Mr. THOMAS. I would definitely recommend moving to a territorial system. Moving to ending deferral would be a step backwards. Again, the rest of the world is playing soccer. I think for 

U.S. companies to be competitive, we need to move to a territorial 

system. 

Mr. EDGE. I think you get much greater complexity if you get 

rid of deferral and you have to address the different ways in which 

taxable interest is calculated in different jurisdictions. And if you 

go for a territorial system life is much simpler; you let the total 

package that each country has to offer stand on its own. 

Mr. BRADY. Great. Thank you. I appreciate the panel and everyone has been very insightful today. 

Mr. Chairman, thank you. 

Chairman CAMP. Mr. Nunes. 

Mr. NUNES. Thank you, Mr. Chairman. At this time I would 

like to yield my 5 minutes to the chairman of the Select Revenue 

Subcommittee. 


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Mr. TIBERI. Thank you, Mr. Nunes. Thank you, Mr. Chairman, 

for holding this hearing today. 

Kind of following up on what Mr. Brady talked about, Mr. Thomas, with respect to the lock-out effect that he talked about. We had 

a week and a half ago a hearing with four CFOs, and in response 

to a question from me one of the CFOs with respect to the lockout effect said—this is a quote—‘‘the Tax Code certainly is structured in a way where there are significant disincentives to bringing 

those earnings and profits back here to the U.S.’’ So if we are looking to invest in the U.S., we have to find alternative sources of capital to make those investments. 

To piggyback on Mr. Brady’s question, from your experience in 

Japan—for what you just went through in Japan—what the Japanese just went through in Japan—can you give us some further insight as to the debate with respect to the territorial system and the 

lock-out effect and how that debate centered around creating more 

capital for the Japanese in Japan? 

Mr. THOMAS. Absolutely. I think it is well known that the Japanese financial institutions are still in the process of recovering from 

the recent global financial crisis, and, consequently, their ability to 

lend to Japanese companies is far more restricted than it used to 

be. That was one of the issues the Japanese Government took into 

account. They wanted to enable Japanese companies to bring their 

profits back into Japan to avoid the lockout effect in order to help 

them continue to fund their operations and to do so in the most 

cost-effective manner. 

The Japanese business response was they felt it was much better 

for them to bring the profits back as opposed to trying to borrow 

within Japan under these circumstances. 

Mr. TIBERI. Thank you. To the four of you in the countries 

where you do tax work, if you could just comment on this question 

that I have. Some of my colleagues on the other side of the aisle 

seem to link going to a territorial system and adding a value-added 

tax. We have heard that not only today but in other hearings. 

Now I have family in Italy, and from what I hear from them, and 

they are not tax experts, the value-added tax is really to provide 

for a social safety network for more of a welfare state. I certainly 

don’t know what it is like in the countries that you do work in. 

But starting with you, Mr. Menger, in Germany, was there a link 

between going to a territorial system and adding a value-added 

tax? Can you give us some context to that? 

Mr. MENGER. Yes. There was no link. Germany, after World 

War II, had the participation exemption, the territorial system for 

corporate entities, and at the same time had a kind of VAT. It was 

slightly different. Later it was governed by the European Union. 

But there is no link between the two. And also from a policy perspective, there is legislative history that you wouldn’t be able—the 

policymaker wouldn’t be able to change or raise the VAT rate in 

order to pay for a changes in the corporate tax rate. Politically they 

are clearly disconnected and separate issues for financing different 

needs of the government. 

Mr. TIBERI. Mr. Edge. 

Mr. EDGE. That is true in the U.K. as well. I don’t think there 

is any link between the VAT increases that we have had over the 


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years, particularly the one in the last budget which was expressed 

to be to help deal with the deficit problem. The last government 

that I can remember in the U.K. making a major switch to taxes 

on spending was the Thatcher government, coming in in 1979, 

when that was very definitely the trend at that point, and that is 

when U.K. corporate tax rates starting going down. 

It is interesting, in one of the documents that I put in there, the 

2007 consulting document, the Revenue themselves admit that the 

yield from foreign dividends is very low. Yes, there was a lot of 

cash offshore, but there were no basis under the tax system short 

of just grabbing it—which would have resulted in lots of people 

leaving—under which you could have taxed it. 

So I personally don’t think, although you don’t know what is in 

the tax legislators’ mind, that there was any link between the VAT 

increase in the recent budget and the exemption. 

Mr. SCHOON. I am not aware of any link in the Netherlands. 

As I mentioned, the territorial system was developed over a very 

long time and the individual components of the Dutch tax system 

in general. 

Mr. THOMAS. There was no link in Japan between the adoption 

of a territorial system and Japan’s consumption tax. 

Chairman CAMP. Thank you. Mr. Neal is recognized. 

Mr. NEAL. Thank you, Mr. Chairman. 

I can understand the conversation as it relates to businesses that 

take advantages of preferences built into the Code and those who 

use legal mechanisms to seek low-tax jurisdictions. Part of the conversation as we discuss the territorial system versus the worldwide 

system, though, needs to focus on what our European friends have 

done to combat avoidance. You have heard me say here on the 

panel many times, I believe there is a difference between avoidance 

and deferral. But tax evasion in no-tax jurisdictions seems to me 

to be an opportunity to promote some credibility as we pursue tax 

reform. 

And Mr. Edge, how does the United Kingdom pursue tax evasion? The difference would be in this instance the Cayman Islands 

or Bermuda or Liechtenstein or some of those no-tax jurisdictions. 

Mr. EDGE. The answer to that question is ‘‘with handcuffs’’. Tax 

evasion is criminal. If it occurs, then the tax authority will do everything they can to catch it. There has been increasing cooperation between tax authorities in developed countries and the tax havens I think that is a good thing. 

There is a middle ground between aggressive tax avoidance and 

what you might call routine tax planning, As I say in my testimony, there was aggressive tax avoidance in the past because the 

rules were perceived to be too harsh. 

In the CFC area I would personally be surprised if that happened in the future because there is now a much better relationship between government and the Revenue and industry, and that 

much more open relationship plus the territorial system and what 

people perceive to be a tax system that is respected must help a 

lot. You can’t rule out human greed, but I hope we will get to a 

situation where business will be able to get on with business and 

not worry so much about, as I said early on, having to run very 

hard to get the effective tax rate down. 


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Mr. NEAL. Mr. Menger. 

Mr. MENGER. With regard to Germany, Germany looked at your 

U.S. SubPart F rules, and Germany has CFC legislation which applies if there is passive income and low tax. And in these cases 

there is full taxation in Germany. So it is a system that overlays 

and takes care of passive income with low taxation. 

Mr. NEAL. But, Mr. Chairman, I would hope that we would have 

an opportunity here in the committee to have a hearing on no-tax 

jurisdictions. I think that again lends some credibility to the task 

at hand. That is how to make American corporations more competitive, again distinguishing between no-tax jurisdictions and low-tax 

jurisdictions. At least those that have a low-tax jurisdictions have 

a corporate tax rate. That is a separate argument. 

Mr. Avi-Yonah, Mr. Edge stated that getting rid of deferral 

would increase complexity, but you are saying the opposite. Moving 

to a territorial system would put pressure on our transfer pricing 

rules and SubPart F rules, possibly leading to greater complexity 

in the tax system. Would the two of you care to elaborate? 

Mr. AVI-YONAH. Well, I think those two areas are clearly areas 

in which abolishing deferral would greatly simplify our tax system. 

SubPart F, as you know, is entirely devoted over hundreds and 

hundreds of pages of regulations to drawing very fine distinctions 

between the income that is currently taxed and income that is not 

currently taxed. All of that would disappear if we did not have deferral. Most of our transfer pricing enforcement and almost all of 

the big transfer pricing litigation that we have had in this country 

were outbound cases; that is, cases about American corporations 

shifting income overseas. There were very few inbound cases. All 

of that likewise disappears if you don’t have deferral. In fact SubPart F was enacted in part in order to bolster transfer pricing enforcements back in the 1960s. 

So other than the fact that we have a foreign tax credit—but 

even that is a complicated measure that we will have to retain if 

we abolish deferral—but I think even with territoriality, we are 

going to keep the foreign tax credit. Nobody suggested that we will 

abolish the foreign tax credit altogether, Because we still are going 

to tax some forms of foreign source. Nobody is suggesting abolishing SubPart F either. I think territoriality keeps all the most 

complicated elements of our Tax Code and greatly enhances the enforcement problem that we face. 

Mr. NEAL. Mr. Edge, do you want to quickly respond to that? 

Mr. EDGE. I don’t see the anti-avoidance aspects on a territorial 

system as greatly increasing the burden of the tax authorities. If 

you are trying to create jobs, I suspect that a good way to create 

jobs is to have armies of people working out what creditable taxes 

are. 

Chairman CAMP. Thank you. Mr. Tiberi is recognized. 

Mr. TIBERI. Thank you, Mr. Chairman. 

Mr. Avi-Yonah—I get my name mispronounced every day, I 

didn’t want to mispronounce yours—you made a statement and I 

will paraphrase the statement—and correct me if I am wrong—that 

the current tax structure for the United States doesn’t lead to 

American companies making a choice of moving jobs overseas, movVerDate Mar 15 2010 08:08 Jan 31, 2012 Jkt 072510 PO 00000 Frm 00067 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\72510.XXX GPO1 PsN: 72510

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ing corporate headquarters overseas. I don’t think you said it that 

way. Could you repeat that again as to our current tax structure? 

Mr. AVI-YONAH. I usually try not to talk about jobs specifically, 

because first of all, I am not an economist. And I think the economic literature that I am familiar with is ambivalent about what 

precisely the effect of U.S. multinationals expanding overseas on 

jobs here in the United States. There are studies with which you 

may be familiar, and there has been testimony before this committee before, that increasing U.S. multinational operations is a 

complement to U.S. job creation, and there are other studies that 

it is a substitute; namely, that you close factories here and move 

them overseas. I think it probably depends on—move from national 

and multinational—depends on the situation. 

What I can say, however, is that clearly our current system creates an incentive to shift income overseas and profits overseas in 

an artificial manner, and that I think there is plenty of evidence 

for and there have been a lot of reports both in the media and in 

the academic literature recently about that. 

Mr. TIBERI. I am trying to engage you in your thought process 

and maybe I can’t convince of you this. I have talked to CFOs far 

and wide of American multinational corporations—and we had a 

hearing a couple of weeks ago, as I said earlier—who are growing 

their American businesses overseas in emerging markets overseas 

in Asia and Europe. For instance, selling diapers. And when they 

sell diapers abroad, as an example, they are going to compete with 

somebody else who is selling diapers. If they don’t sell diapers overseas, somebody else is going to sell those diapers overseas. And 

when they sell those diapers overseas they are not going to make 

them in Ohio, they are going to make them close to where they are 

being sold overseas. Some would say that is shipping jobs overseas, 

but if they are not going to sell diapers overseas they are not going 

to make diapers overseas. 

And then you have the issue of returning profits. And as they 

continue to compete in a world marketplace where they are being 

taxed differently than their competitors who are headquartered in 

Germany, in the U.K., in the Netherlands, or in Japan, they are 

at a competitive disadvantage. 

And we had four CEOs last week. One of them said, ‘‘my biggest 

concern is that we are going to be taken over by a foreign competitor.’’ 

I used to walk to grade school in Columbus, Ohio, and I could 

smell the hops of the brewery down the street that I thought would 

be an American brewery forever, Anheuser Busch. It is no longer 

an American brewery, in part because of the business they do and 

the American Tax Code. Do you just not recognize that reality in 

the world? 

Mr. AVI-YONAH. It seems to me that the American multinational, including let’s say P&G, is competing very nicely overseas. And one reason that they are doing that is they don’t pay too 

much tax on their overseas profits. And I don’t think there is any 

evidence that the effective tax rate that the American multinationals pay on their overseas profit is higher than that of companies headquartered in any of these other—— 


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Mr. TIBERI. But the Tax Code that we have today makes them 

make a financial decision that if they bring those profits back here 

they are double-taxed, as opposed to a U.K. company they are competing against that does not have to have that double taxation. So 

it is a perverse incentive for them to keep their money overseas— 

unless there is a tax holiday—to keep that money overseas and invest it overseas. Does that not occur to you at all? 

Mr. AVI-YONAH. No. First of all they are not double-taxed. 

There is no double taxation because we do have a foreign tax credit. When the dividend comes back, we only tax it if it has not been 

taxed overseas. We give a foreign tax credit if it has been taxed. 

And I don’t think this particular distinction has any impact on the 

competitiveness of American businesses because they don’t bring 

the money back if it is going to be taxed. The money is overseas 

and they have plenty of money here in the United States. 

Mr. TIBERI. My wife says men are from Mars and women are 

from Venus. I am starting to think differently here. Mr. Edge, if 

you have a diaper company in the U.K. that is competing with an 

American company, did my example make sense to you? 

Mr. EDGE. Yes, I empathize with it considerably. You saw I was 

nodding my head as you were speaking. I think the correct 

term—— 

Chairman CAMP. The time has expired, so if you could answer 

very quickly. 

Mr. EDGE. Very quickly, the correct answer is there is double 

tax because two jurisdictions are having a bite at the cherry. You 

don’t level down. Allow each jurisdiction to stand on its own. 

Chairman CAMP. Mr. Davis is recognized for 5 minutes. 

Mr. DAVIS. Thank you, Mr. Chairman. 

I would like to follow a little bit on this line of discussion, maybe 

in a wider area. I am surprised about the commentary that American companies are doing just fine overseas. I have a question relating to this competition between tax systems, and I am intrigued 

that Britain and Japan have moved into this area. 

The first area that I would like to touch on is the area of mergers 

and acquisitions. My colleague just mentioned the American brewing industry. It used to be American at one time. But as I have 

looked particularly in the spirits industry that is prominent in 

Kentucky, companies like Brown-Forman among others that are 

major players in the industry here in the United States, I get the 

sense looking at comparative tax structures between the Europeans 

where the English and the French are dominating acquisitions 

right now, that you can have two companies that have essentially 

the same level of competitive edge, of the ability to create margin 

if you will—and I am saying that outside the sense of a tax construct for a moment. But as I began to look at the advantage that 

a European company could bring to the table, specifically a British 

company in an acquisition versus an American company with the 

same revenues and general gross margins, it appeared to me in acquisition after acquisition that I looked at over the last several 

weeks, that the American company was at a 10 to 15 percent or 

more disadvantage in the offer that could be laid on the table for 

an acquisition. That has somewhat turned the tables, where we are 


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seeing American industries, let’s say, being gobbled up in many aspects. Would you all like to comment on that? 

Mr. EDGE. From a strictly British point of view, let me say that 

your fear is right. It does go back to the same thing. We have 

moved from a situation where the British competitors you are no 

doubt thinking of have had to run very, very hard with our CFC 

rules, (the equivalent of your deferral problem), to try to make sure 

the income is not currently taxable, and then find ways in which 

to move it around to keep the low effective tax rate to an exemption system is easier to deal with. 

What I rejoice about now is that, with the work that was done 

by the last Labour government and the current Coalition, We have 

moved to a very sensible system. Life will tell us whether or not 

it is a good system for the U.K., but to me at present it seems like 

a good system and should make our multinationals more competitive, because deferral is not a feature and people can plan with 

much more certainty. 

Mr. DAVIS. So you would say, then, that your tax system gives 

you a competitive advantage over us on the same playing field? 

Mr. EDGE. Yes, I would. As I say, it is a part of the package and 

America has huge other strengths. But purely looking at it from a 

tax point of view, and knowing the little I know about the U.S. tax 

system, I would say where we have got to now is a very good place. 

Mr. DAVIS. We don’t like being in that place at the moment. I 

guess the question, and it is important in terms of international 

commerce, would it level the playing field in terms of the effectiveness of the global economy if we, too, had a territorial tax system 

here? Particularly from a standpoint of doing mergers and acquisitions? 

Mr. EDGE. From my point of view, yes, it would. And of course 

as I have said a few times, it is part of the package. You have got 

things in your package that are pretty impressive. So whether the 

playing field would be level or tilted in your favor again, I am not 

sure. But on the tax side I think a level playing field would to my 

eyes be helpful. 

Mr. DAVIS. We would like to keep our spirits industries owned 

by Kentucky companies right now, at least for a few specific 

brands. 

Mr. Thomas, do you have a comment. 

Mr. THOMAS. Yes, I definitely agree with Mr. Edge’s comments. 

Businesses make, investment decisions on the basis of, after-tax return. And to the extent that American businesses are faced with 

a lower return as compared to foreign businesses, they are put at 

a disadvantage when they try to engage in these transactions. So 

I definitely agree. 

Mr. DAVIS. I appreciate that perspective very much. Thank you. 

And, Mr. Chairman, I yield back. 

Mr. TIBERI. [Presiding.] Mr. Doggett is recognized. 

Mr. DOGGETT. Thank you, Mr. Chairman. 

And thank you for your testimony. There are some here who believe that we ought to borrow from the Chinese and our other 

creditors or shift more of our tax burden onto small businesses and 

individuals so that a few large multinationals can pay even less 

than the relatively low effective rate that they pay today when they 


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pay taxes. General Electric and a few others don’t even bother to 

do much of that. 

In the cries for lower corporate tax rates, there is also the immediate demand for a rate of about 5 percent on previous earnings 

that have been accumulated abroad in what is called a repatriation 

tax holiday, but what is certainly not a holiday for most American 

taxpayers. At a cost of $80 billion, we cannot afford to lower the 

corporate tax rate to 5 percent on the cash that multinationals 

have stashed in foreign tax havens. 

At our last hearing, fortunately, all four corporate witnesses 

called by the Republicans agreed that such a stand-alone 5 percent 

repatriation tax break was a very bad idea, in the words of one of 

the witnesses, to which the other Republican witnesses agreed. 

Whether we are discussing this immediate or more permanent 

changes in our tax laws, I believe the focus has to be whether we 

are encouraging jobs and growth in America or we are incentivizing 

the export of jobs and capital. 

Mr. Avi-Yonah, you testified earlier about jobs. But let me ask 

you a more narrow question. Is adopting a territorial system an efficient way to create jobs in the United States? 

Mr. AVI-YONAH. No. 

Mr. DOGGETT. Will adopting a territorial system help us prevent multinationals from shifting billions of dollars out of the 

United States? 

Mr. AVI-YONAH. No. 

Mr. DOGGETT. And with reference to—you referred to 

transferral pricing rules. We know that we already have a system 

in place in which multinationals stash billions of dollars overseas 

and that not all of that money is on earnings overseas, but is in 

fact earnings from American consumers that have been categorized 

as foreign earnings. 

Steve Shay, who was sitting in your chair not that long ago as 

the Department Assistant Secretary for International Tax Affairs, 

just recently again objected to the very territorial system being considered today and declared, quote: ‘‘No other country with an exemption system has successfully protected its domestic tax base 

from abuse. They all are struggling with transfer pricing.’’ 

Let me ask you, if I understand the way this great territorial 

system is going to work, the idea is if you have any earnings overseas, you don’t owe any taxes at home on those. And if you have 

earnings at home, you pay whatever the statutory rate is, 25, 28, 

30 percent. Doesn’t that create a slight incentive, a more than 

slight incentive for a multinational to categorize earnings at home, 

particularly with intellectual property like a formula or trademark, 

as foreign earnings so they won’t have to pay any taxes on it? 

Mr. AVI-YONAH. Yes. 

Mr. DOGGETT. So you referred to the current rules and their inadequacies. The effect of that in incentivizing the export of what 

are truly American earnings to tax havens only increases, doesn’t 

it? 

Mr. AVI-YONAH. Yes. 

Mr. DOGGETT. Let me ask you also, we have heard the cries 

today right from this committee dais about American corporations 

having to pay 35 percent. And I am one who believes, as I think 


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every witness testified today, that we should be looking at the level 

of that statutory rate, even though few multinationals actually pay 

the statutory rate. But I want to be sure that I understand how 

that interfaces generally with our foreign tax credit rules. 

If I understand, if a company packs up in Ohio or Michigan or 

Texas and moves those jobs to China and opens a factory over 

there, and they pay the Chinese 25 percent, 25 cents, say, on every 

dollar that they earn from their factory in China, the objection is 

that if they bring any of those profits back to the United States 

they have to pay 10 cents on the dollar here. Is that the way the 

system works? 

Actually, I think that is a little too favorable to the corporations 

because there are all kinds of other gimmicks under the foreign tax 

credit rules, so you sometimes can get it even higher than the statutory rate in the country where the manufacturer is located. But 

is that generally how it works? 

Mr. AVI-YONAH. Yes. 

Mr. DOGGETT. Thank you. 

Mr. TIBERI. The gentleman’s time has expired. I recognize Mr. 

Reichert for 5 minutes. 

Mr. REICHERT. Thank you, Mr. Chairman. 

I want to thank the panel for being here today also. It is a great 

opportunity for all of us on the committee to hear from the different experiences that you had representing the countries and the 

organizations that you represent from around the world. I think it 

is a great opportunity for us to gain some wisdom from you, and 

I think that is always a good thing if we could have that sort of 

dialogue. 

We may not adopt everything that Japan does or the Netherlands or Germany or the U.K., but certainly we can adjust things 

to fit the United States as other countries look at us and use some 

of those ideas here in the United States. 

So that leads me to a question that is on a topic that is very near 

and dear to the hearts of those who live in the Northwest, and especially Northwest Washington where some of the most well-known 

tech companies are from, Microsoft and others. Congress, as you 

know, is considering a wide range of ideas looking at patent reforms to protect intellectual properties from counterfeiting and 

from theft. We are also looking at ways we might be able to encourage innovation in those areas. And, of course, as you know, innovation in America is one of our calling cards. We are proud of that 

and we want to encourage that. 

I do understand that the Netherlands, and I think the U.K., has 

a special tax treatment that I think was referred to in one of the 

statements, an ‘‘intellectual property patent box.’’ 

Mr. Schoon or Mr. Edge, can you explain the concept of the patent box and the idea behind it to encourage keeping IP within your 

countries’ borders, recognizing that it is a domestic tax proposal 

but there are some international implications? Can you address 

those two issues, please? Mr. Schoon, and Mr. Edge. 

Mr. EDGE. Okay, I will start. Yes, I did refer to the patent box, 

and the patent box has been the result of quite a long and broadspread inquiry in the U.K. into what we are doing about R&D. We 

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ceutical area where R&D is important. And Sir James Dyson of 

vacuum cleaner fame has set up a committee to look at it in the 

U.K. 

One of the conclusions on this was that this should be an area 

where we went beyond a level playing field on tax and went a little 

bit further to say, having had research and development credits 

over the years which have been enhanced deductions against tax, 

we should have a favorable tax regime for income from patents. It 

is quite limited. It is a 10 percent tax for income from patents that 

is received within the U.K., and a little bit (as I have referred in 

my testimony) like tonnage tax. So we have tax wrinkles, as you 

have in the U.S. as well. It is a rule that is designed to encourage 

activity in one particular area. And we are taking a gentle step in 

that direction. 

It does also have international implications as well because in 

our CFC changes we are saying that that income from patents is 

good income or income from intellectual property is good income 

unless that intellectual property started off in the U.K. and has 

been exported. 

So in those two ways we are trying to encourage innovation and 

not stifle our multinationals, but actually just give a little fillet to 

R&D in the U.K. 

Mr. REICHERT. And you are looking at a law that may go into 

effect sometime in 2012; is that right? 

Mr. EDGE. That is absolutely right. 

Mr. REICHERT. Are you looking at the Netherlands’ laws? I understand that the tax rate is 10 percent, I think, in the Netherlands also. You are looking at a 10 percent tax, too. 

Mr. SCHOON. In the Netherlands it is 5 percent. It was reduced 

to 10 percent in 2007 and was reduced in 2010 to 5 percent at the 

same time the scope was broadened. It was limited to patents initially, self-developed patents. But it has broadened to certain specified R&D activities, development activities, but does not include 

trademarks, et cetera. It is focused on technology, including software. 

Mr. REICHERT. Thank you, Mr. Chairman. 

Mr. TIBERI. Dr. Boustany is recognized for 5 minutes. 

Mr. BOUSTANY. Thank you, Mr. Chairman. 

I thank the witnesses for your testimony. Critics of territorial 

systems argue that the systems oftentimes put excessive pressure 

on transfer pricing. Mr. Thomas, do you agree with that? 

Mr. THOMAS. I think that it is fair to say that it puts some additional pressure because there is potentially a greater incentive to 

transfer profits overseas. However, the question is how much additional pressure, and how you take that pressure into account. 

There have been tremendous developments in the transfer pricing 

field in the past 10 years. Countries outside the U.S., countries all 

over the world, now are becoming very sophisticated. Companies 

have to deal with transfer pricing regulations not only in one country but in other countries as well. And the tax authorities are becoming more adept at evaluating transactions that may be abusive. 

So, yes, I think there is greater pressure. But my own view is 

that that such pressure is not a sufficient justification to not 

change to a territorial system. 


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Mr. BOUSTANY. If we have a higher corporate tax rate, lowering corporate tax rates would obviously reduce some of that pressure on transfer pricing. 

Mr. THOMAS. That is correct. And even though it was not directly related to the adoption of a territorial system, Japan has proposed a reduction in its corporate tax rates. It may be delayed now 

because of the disaster, but I believe that they will ultimately move 

ahead with that reduction. 

Mr. BOUSTANY. Mr. Edge, do you agree with those comments? 

Mr. EDGE. Yes, I very much agree on the comment on how tax 

authorities around the world have become much more sophisticated 

in dealing with transfer pricing. And with your comment—certainly 

from my experience in the U.K.—that, if you have a lower tax rate, 

there are still going to be some people who engage in tax avoidance 

because that is human nature. But the incentive to do so would be 

less. 

In the U.K. the CFC regime has generally been kind to active income, and so transfer pricing has been very much a part of the 

U.K.’s protection, against the export of active income I don’t see 

that changing. 

And the other thing that has been a big change in the U.K. in 

the last 4 or 5 years is much more real-time working between the 

Revenue and the industry, which has really helped. There is a 

much more open, trustful relationship, no-surprises culture. That 

helps enormously. 

Mr. BOUSTANY. I have heard mixed reviews about advanced 

pricing agreements, and I would like to hear each of your comments with regard to your experience. 

Mr. Thomas, why don’t you start? 

Mr. THOMAS. Japan actually invented the advance pricing 

agreement back in 1986 when they adopted their transfer pricing 

rules. They called it the preconfirmation system. After a few years 

of perhaps mixed results, from about the mid-1990s, it has become 

a very successful program. Indeed, in Tokyo right now, there are 

more examiners becoming involved in the APA review process than 

there are in transfer pricing examinations. We are finding that 

APA renewals are becoming more easy to do and quite efficient. We 

are finding that other governments increasingly are adopting procedures for advance pricing arrangements, so these are being done 

on a bilateral basis more effectively and more efficiently. So I think 

there is tremendous promise in that program and that can also go 

a long way to help with the entire whole transfer pricing issue, including issues that may arise in connection with the adoption of a 

territorial system. 

Mr. BOUSTANY. Mr. Schoon, what is your experience? 

Mr. SCHOON. In the Netherlands it is very common to conclude 

advanced pricing agreements on transfer pricing matters. And that 

settles a lot of disputes in advance. 

Mr. BOUSTANY. Thank you. Mr. Edge. 

Mr. EDGE. APA transfer pricing agreements are invaluable in 

the financial services area. It has enabled banks to have a great 

deal of flexibility in running their operation. 


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Very useful also on inbound investments. A lot of U.S. companies 

coming to the U.K. have found the ability to clear the charging arrangements useful for headquarters and cost-plus operations. 

Historically, since it came in about 5 years ago the APA regime 

has been more suspiciously treated in other areas but it is now becoming more common as the Revenue have got better at transfer 

pricing investigations. And any investigation is usually followed by 

an agreement for the future. 

Mr. BOUSTANY. Mr. Menger. 

Mr. MENGER. In Germany it is becoming more and more popular. APAs catching on slowly, but now it is very helpful for the 

taxpayer and the tax authorities because you have certainty about 

your international transactions. 

Mr. BOUSTANY. I thank you. I yield back. 

Mr. TIBERI. Thank you. Mr. Blumenauer is recognized for 5 

minutes. 

Mr. BLUMENAUER. I want to see if I can understand the context. Mr. Avi-Yonah mentioned the context of tax reform. Mr. 

Schoon, total taxes in the Netherlands approaches 40 percent of 

GDP; is that correct? 

Mr. SCHOON. I do not have those statistical data available with 

me at this time. 

Mr. BLUMENAUER. Well, I have here the OECD tax statistics 

database for 2008, before weird things happened, and it says in 

this that it was 39.1 percent total tax revenue as a percent of GDP. 

Is that reasonable? Is that in the ballpark? 

Mr. SCHOON. As I said, I can’t comment on that. 

Mr. BLUMENAUER. You don’t know? Okay. Let me turn, maybe 

Mr. Edge, if you have some sense of the total tax burden in the 

United Kingdom. The same chart suggests—not suggests, tells me 

that it is 35.7 percent total tax burden percentage of GDP. Is that 

reasonably accurate? 

Mr. EDGE. I don’t have it at my fingertips but that sounds about 

right. And it is clearly a figure that the government focuses on as 

times goes by, along with the balance between the different forms 

of tax that we have. 

Mr. BLUMENAUER. Right. 

Mr. Menger, in Germany it says 37 percent. Is that ballpark figure? 

Mr. MENGER. I am not an economist and don’t have the numbers at hand, but I believe it is an accurate number, yes. 

Mr. BLUMENAUER. You are a tax expert. 

Mr. Avi-Yonah, my chart here says that total tax percentage of 

GDP in the United States is 26.1 percent in 2008. Is that in the 

ballpark in your judgment? 

Mr. AVI-YONAH. Yes. 

Mr. BLUMENAUER. You in your final point, which you kind of 

rushed by in your testimony, you referenced the context of tax reform. Does the conversation that we are having this afternoon, does 

it make any difference that these other countries have much higher 

tax burdens on individuals and businesses, on managers and suppliers, when we are talking about both the impact of tax changes 

and the capacity to be able to make a tax change that, according 


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to Joint Tax, would cost $80 billion a year to the Treasury? Could 

you talk a little about the context? 

Mr. AVI-YONAH. I think that makes a tremendous difference. I 

mean the fact of the matter is that when American companies migrated, before we adopted the anti-inversion rules, they never inverted to Japan or to Germany or to the Netherlands or to the U.K. 

They wouldn’t dream of it because of these other taxes. I mean, 

the total tax burden on the headquarters of a multinational has to 

be measured to include the tax burden on the management and on 

the employees and the VAT that they all pay in all of these other 

countries. And you can’t, in my judgment, talk about competitiveness in general in the abstract without taking all of these other 

taxes into account. 

The other point, of course, is, despite, you know, the claim that 

the two things have nothing to do with each other, as a practical 

matter, if you are going to significantly reduce your revenues from 

the corporate tax to the tune of $80 billion or more, it is helpful 

to have another tax that can be raised relatively easily to compensate for that. And that is what every other country does, but 

we don’t. 

Mr. BLUMENAUER. Thank you very much. I appreciate that. 

Mr. Chairman, I think my friend, Mr. Doggett, pointed out that 

this would be the functional equivalent of a permanent repatriation—good, bad, indifferent. I mean, I just think our putting on 

the table what it means for the United States having a relatively 

lower tax burden than all these other countries—Japan more basically the same; it will be interesting to see how that retains over 

time, with exploding costs for an aging population in Japan—but 

the other three it seems pretty clear. And it seems to me important 

for us to try and understand the total context about what we would 

be getting into and what the likely consequence may be. And I 

think it is worth our exploring further. 

Thank you, and I yield back. 

Mr. TIBERI. Thank you. 

And Mr. Buchanan is recognized. 

Mr. BUCHANAN. Thank you, Mr. Chairman, for holding this important hearing today on taxes. 

And I want to thank each of our panelists for being here today, 

also. 

I believe we need to reform our Tax Code to get our economy 

going and get people back to work. But, Mr. Thomas, I noticed in 

your remarks you stated that the United States—its corporations 

struggle to deal with a very complicated and burdensome U.S. 

worldwide tax regime. 

Would you all agree that our Tax Code is outdated and a barrier 

to economic growth or prosperity? That was kind of your conclusion. I just wanted to follow up on that point. 

Mr. THOMAS. Yes, I would agree with that. I think, as we see 

what is happening around the world, all these countries that have 

for years had a territorial system or like the U.K. and Japan most 

recently, have gone through this thought process, have reached the 

conclusion to adopt a territorial system. And I think there is no 

reason why the United States shouldn’t reach the same conclusion. 


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Mr. BUCHANAN. And along that line, what would be your couple of recommendations to us, as a panel, to supercharge or get our 

economy going or help our corporations worldwide? 

Mr. THOMAS. Well, I think the adoption of a territorial system 

along the lines of what the U.K. or Japan has done, the dividend 

exemption, would encourage U.S. companies to bring their profits 

back into the United States and avoid the lockout effect. 

Mr. BUCHANAN. And the other thing, I just wanted to touch 

base a little bit on Japan. I remember in the 1980s we had offices 

in California. It just seemed like Japan was going to own everything. How is their Tax Code there—has that made a difference? 

Has that bogged them down? 

The reason I say that is because I remember, in the late 1970s, 

Hong Kong had a flat tax of 20 percent. And I was over there the 

other day, seeing they went to 16 percent. But with Japan keeping 

their rate, it seems, a little bit higher, has that made a negative 

impact? And then, do you agree that has affected us, as well, being 

competitive? 

Mr. THOMAS. I think that it has had a negative impact. And 

that is why there were very strong calls in Japan, beginning a couple of years ago, to reduce Japan’s corporate tax rates. Many of us 

were calling for a reduction closer to 10 percent, from the existing 

40 percent. Ultimately, they decided to reduce the national corporate rate to 25 percent. So, all in, it is about 35 percent. But they 

did recognize that the current high rates were hurting them. 

Mr. BUCHANAN. Yeah. 

Mr. Chairman, I yield back. 

Mr. TIBERI. Thank you. 

Ms. Jenkins is recognized. 

Ms. JENKINS. Thank you, Mr. Chair. 

And thank you all for being here. 

In his prepared testimony, I believe it was Mr. Edge, who spelled 

out the real danger of having an uncompetitive tax system in an 

open economy like that of the United States and U.K. The fear is 

that our international competitors with a lower tax rate can afford 

to pay a higher purchase price when making acquisitions. 

If U.S. companies become subsidiaries of foreign firms, their fairmarket value might rise because they escape worldwide taxation. 

Studies have shown that foreign-based companies take over U.S.- 

based companies three-fourths of the time when there is a crossborder merger. The alternative to tax reform could be continually 

making our companies takeover targets. 

Could you all elaborate on the role that tax reform could play in 

our increasingly competitive and global marketplace to put U.S. 

multinationals or future U.S. multinationals in a position where 

they are the acquirers, and not the targets, but also serves to protect our domestic tax base? 

Mr. THOMAS. Yes, certainly, lower tax rates would increase 

after-tax returns for a particular investment. And, consequently, in 

order to be competitive, U.S. companies should be placed on the 

same level playing field as other countries around the world. The 

adoption of a territorial system would, in effect, result in foreign 

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tion with those transactions and, again, would put U.S. companies 

in the same position as their competitors. 

Mr. SCHOON. Again, speculation on what the U.S. should or 

should not do is not for me to do. But, as a general statement, a 

lower effective rate obviously increases your payback or your rate 

of return, as was earlier addressed. 

Mr. EDGE. I think this is an ‘‘all-other-things-being-equal’’ question. But you are right, the drift of my testimony is exactly in that 

direction, because I have seen U.K. companies not able to make acquisition because other companies (rival bidders) have had better 

tax attributes. And I have also seen U.K. companies fall under foreign ownership, and then gradually you see businesses move out of 

the U.K. 

So those fears are very real. But, as I say, it is ‘‘all other things 

being equal’’. Because if you are bringing other things to the table 

in innovation, capital market strength etc, then it may well be that 

you can outbid the tax system. But all other things being equal, it 

must be a positive move to lower the effective tax rate and make 

yourself more competitive so you become the acquirer and not the 

target. 

Mr. MENGER. To acquire companies, you have to look at the return on investment and you have to look at the deductibility of interest. And both, of course, are affected significantly depending on 

what kind of tax system you have. And the better the return is, the 

easier it is to take over your competitors. 

Mr. AVI-YONAH. I don’t know of any evidence that cross-border 

M&A is driven primarily by tax considerations. It is driven primarily by business considerations. This is not the inversion saga, 

where this was purely a tax-motived transaction. 

Large cross-border M&A is driven by the ultimate needs of business to expand. And the United States is a very, very important 

market, the richest and biggest market in the world, so it is not 

surprising that foreign companies are interested in making acquisitions here in order to access our markets. I think that is a positive 

thing for the United States. 

Ms. JENKINS. Okay. Well, it would seem that the tax bills of 

these major corporations would be a business decision, as well. So 

I think it would factor in when you call it a business decision, 

would it not? 

Mr. AVI-YONAH. I don’t think that the tax bill that American 

multinationals pay is significantly higher than the tax bill that foreign multinationals pay. So I think that these tax considerations 

are not particularly relevant because there is no evidence that I 

know of that shows that American multinationals are taxed more 

heavily than multinationals from other countries. 

Ms. JENKINS. Okay. 

One final question. It looks like we are running out of time. I am 

just wondering about exports. The President has stated that a goal 

is to double exports, and many of the companies that we have 

talked about indicate that they have more exports than the United 

States. 

And maybe I will follow up in writing with you, because I hear 

the gavel. Thank you. 

I yield back. 


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Mr. TIBERI. Thank you. 

Mr. Kind is recognized. 

Mr. KIND. Thank you, Mr. Chairman. 

I want to thank the witnesses for your testimony and feedback 

I hear today. 

Professor Avi-Yonah, let me start with you. Here is one of the 

concerns, and I know it is a little bit off-topic here today, and we 

are talking about corporate tax reform here. But the majority of 

businesses in America are passthrough entities, so the individual 

rate is terribly important. And yet, if you take a look at the overall 

corporate tax rate, the goal of trying to reduce it to the mid- to 

upper-20s, you know, if we got rid of all the tax expenditures on 

the corporate side, except for accelerated depreciation, the best we 

can do is a 31 percent rate. Getting rid of accelerated depreciation, 

we can get down to 28 percent. 

Assuming we hit that mark, what would be the response with 

these passthrough entities, the majority of businesses in America, 

if we had a corporate rate at 28 percent with no expenditures at 

all on the corporate side? 

Mr. AVI-YONAH. Well, I mean, I think the concern would be 

that the bigger the disparity between the rate that you impose on 

passthroughs and the rate that you impose on corporations, the 

more shifting there would be from one form to the other based primarily on tax considerations. 

I mean, we used to have the system for many years where there 

was a huge—I mean, traditionally, the individual rate was much 

higher than the corporate rate. And the result was that a lot of 

earnings, even more than now, were parked maybe unnecessarily 

inside corporations and are not used in the best way that works for 

the economy. 

Mr. KIND. Well, let me ask you, as well, because, you know, one 

of the difficulties that we have in dealing with this, if there is 

agreement that we should do it in a deficit-neutral fashion, is finding a way to pay for it. Obviously, the corporate tax expenditure 

is in one area, but that is only 8 percent of the entire expenditures 

in the U.S. Tax Code; 92 percent is on the individual side. 

Should we be approaching this comprehensively, not just on the 

corporate but also on the individual side, given that, again, the majority of businesses are passthrough entities? 

Mr. AVI-YONAH. I think it makes sense to address tax reform 

comprehensively and to address tax expenditures not just on the 

corporate side but other tax expenditures, as well, as the various 

deficit reduction commissions have proposed. 

Mr. KIND. Well, I don’t think it would go over very well, as far 

as the passthrough entities, if we started going to their side of the 

ledger in order to help pay for lowering of rates in the mid-20 

range or something, which seems to be a goal that many of my colleagues are striving for. 

So if we don’t go to the individual side, we eliminate all of the 

corporate expenditures, again, that gets us, at best, to 28 percent. 

If you want to go lower than that, are there any other acceptable 

offsets to help pay for a lower rate? Should we be looking at cap 

gains, dividend, or both, dialing that in order to pay for a lowering 

of corporate tax rates? 


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Mr. AVI-YONAH. In my opinion, yes. I mean, I would increase 

the cap gain and the dividend rate in order to pay for corporate tax 

rate reduction. 

Mr. KIND. Do our other witnesses have an opinion on that, as 

far as the dividend rate right now, as it currently exists, or the cap 

gain rate, as far as looking at that with the goal in mind of trying 

to simplify and lower overall corporate tax rates? 

Mr. EDGE. I would be happy to make a comment based on the 

U.K. experience. I referred to Northern Ireland earlier on I did 

quite a lot of work there in the 1970s before the 1979 Conservative 

government came in with the objective of broadening the base and 

lowering the rates. And I found that Northern Ireland politicians 

were very much saying that if they had a high tax rate with grants 

or tax allowances for capital incentives, they ended up with investment coming in with significant risks attached—if you remember 

Mr. DeLorean, whose business wasn’t terribly successful—where as 

Southern Ireland, with a lower tax rate for profitable companies, 

got people who didn’t want somebody to risk-share on capital with 

them, but were very happy to know that they would make profits 

on which they would pay a lower rate. 

So, as you probably guessed, I am afraid I am a completely 

unreformed lower-tax-rate person. If that means broadening the 

base by getting rid of deductions, that removes another form of distortion, as well. 

Mr. KIND. Okay. 

Well, Mr. Edge, let me just stay with you for a second. You know, 

one of the goals that we have with this, again, is overall tax simplification to make our companies more competitive and the ability 

for that capital sitting offshore coming into the United States. 

Do you think just by going to a territorial system without recognizing the additional revenue forms that the developed nations 

have right now, the VAT being one of the primary ones, is a realistic approach for us to take here in the United States, I mean, 

with the budget deficits in mind that we are facing? 

Mr. EDGE. I don’t know, because I don’t know actually what 

your fiscal constraints are. As I said, in the U.K., We have been 

able to bring exemption in without a big immediate fiscal cost. And 

the decision has very much been based on the fact that if you tried 

to raise more revenue from our big multinational corporates, you 

would be going completely in the wrong direction. 

Mr. KIND. Well, I just hope we are not operating in a vacuum 

without recognizing the VAT and other forms of revenue that other 

nations are dependent on, as well. 

But thank you, Mr. Chairman. Appreciate the time. 

Mr. TIBERI. Thank you. 

Mr. Paulsen is recognized. 

Mr. PAULSEN. Thank you, Mr. Chairman. 

Also, thank you for all being part of this hearing and taking the 

time to testify. It has gone on for a while. 

And I was just curious, because we have heard the perspective 

from Japan, Netherlands, England, Germany, et cetera, is any 

country that you are familiar with, whether it is among those individual countries itself or other countries that you are familiar with, 


wwoods2 on DSKR6SHH1PROD with WAYS & MEANS
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that are talking about going back from a territorial system to a 

worldwide system like the United States has? 

Mr. THOMAS. I haven’t heard of any countries thinking along 

those lines. 

Mr. PAULSEN. Okay. 

Mr. Schoon. 

Mr. SCHOON. I am not aware of any. 

Mr. PAULSEN. Mr. Edge. 

Mr. EDGE. No, me neither. The French, as you probably know, 

have a ‘‘mondial’’ system, under which they treat everybody as 

being in France, (the best place to be of course!) but, as I understand it, they are not expanding that either. 

Mr. MENGER. I am not aware of anybody. 

Mr. PAULSEN. And thank you for that. It kind of underscores 

the point, the reason we are having this discussion is about competitiveness and what we can do to actually create jobs. 

I know Mr. Avi-Yonah had a chance to answer the question earlier when one of my colleagues asked it, but based on the country 

you are familiar with, whether, again, Germany, Japan, Netherlands, England, adopted a territorial system if we in the United 

States, would that be an efficient way to help create jobs in the 

United States? 

Mr. THOMAS. Well, I think if the United States takes into account the kind of considerations Japan took into account, that it 

would lead to the creation of jobs. 

Mr. PAULSEN. Mr. Schoon. 

Mr. SCHOON. You know, it is, again, a matter of U.S. tax law, 

which is very complex and there are a lot of factors, so I can refer 

to the Dutch experience, where we believe that is the case. 

Mr. PAULSEN. Mr. Edge. 

Mr. EDGE. By leveling the playing field for business investment 

and removing the threat on our multinationals, I believe it has a 

good tendency in that direction. 

Mr. PAULSEN. Okay. 

Mr. Menger. 

Mr. MENGER. It is a very complex question. There are a lot of 

factors going in. And as a German tax expert, it is difficult to give 

you an answer to your U.S. question. 

Mr. PAULSEN. Yeah. Well, there are a lot of complex factors as 

part of the U.S. Tax Code. It is a lot larger than the version you 

brought from Japan, certainly. 

Can you also answer the question, will it help protect—potentially help protect American jobs and American jobs from being 

shipped overseas if we looked at moving to a territorial system? 

Mr. Thomas. 

Mr. THOMAS. Again, when Japan considered that question, they 

concluded that this is not a zero-sum game. They concluded that 

it is a win-win situation. It will take a lot of effort, but it is unavoidable that markets overseas are growing and that Japanese 

companies need to address that growth, and U.S. companies need 

to address that growth. And if they can take advantage of that 

growth effectively and then bring the profits back to the United 

States, that will serve to enhance the U.S. economy. 

Mr. PAULSEN. Mr. Schoon. 


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Mr. SCHOON. The Netherlands, you know, has had these same 

considerations, and, as an open economy, has concluded that that 

would be the way to go. 

Mr. PAULSEN. Mr. Edge. 

Mr. EDGE. The U.K. benefits enormously from inward investment, particularly from the U.S. And I think anything that will foster that is a good thing and should be good for jobs. There is some 

paranoia about foreign ownership, and anything that actually preserves domestic control, some would say, is a good thing too. 

Mr. PAULSEN. Mr. Menger, anything to add? 

Mr. MENGER. I think it is helpful to generate jobs. 

Mr. PAULSEN. Okay. And I know that a big conversation we are 

having is how to increase economic growth. I mean, I do agree with 

my colleague from Wisconsin’s comments, too, about making sure 

that corporate tax reform is not the only provision that is on the 

table, because those small entities, partnerships, S corporations, et 

cetera, that pay under the individual rates, that has to be a part 

of the conversation for the foundations of overall tax reform, which 

I know our chairman is a part of, as well. 

So thank you for your feedback and for being here today. I appreciate it. 

I yield back, Mr. Chairman. 

Mr. TIBERI. Thank you. 

Mr. Rangel is recognized. 

Mr. RANGEL. Thank you, Mr. Chairman. 

I know the hour is late, and I want to thank all of you for your 

patience with the committee. 

I find it difficult to just talk about corporate tax rates. In the 

United States, when we do tax reform, individual tax rates, politically, has to be addressed. But from what you are saying, it is like 

it is two separate issues, that you can just do the corporate rates 

and not the individual tax rate? 

Mr. THOMAS. Well, Japan is undergoing a comprehensive review of its tax system. It has considered the corporate rates, it is 

considering individual rates and consumption taxes. 

Mr. RANGEL. Would anybody consider just the corporate rates 

and not figure what the individual tax rates would be? 

You would. 

Mr. EDGE. Yes, I would, The government has of course to balance the books, which is the most important thing, and create the 

right infrastructure. But I would personally say that the corporate 

rates have to be set at a level that attracts investment and encourages global competition. And individual rates are affected by different things. They are part of the social responsibility. 

So, personally, I think different factors come into play on individual rates and corporate rates. And, therefore, the two don’t go 

into tandem. But, at the end of the day, the government has to—— 

Mr. RANGEL. If you were considering a deficit like we were and 

you wanted to see where the revenue would come from, would you 

not want to consider what percentage came from the individual tax 

rates and the corporate rates? 

And, as some other Members have indicated, where we have a 

payroll tax for health care and Social Security, many European 

countries do not tax that directly and they just provide this service. 


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Mr. EDGE. I am sorry, is that for me? 

I think, if I can say, sir, that that is a political question, and the 

answer to it will then have to be given having taken into account 

the economic consequences. 

But, in answer to your first question, I believe that the corporate 

tax rate is something which you should look at economically first 

and then decide whether it is politically acceptable. 

Mr. RANGEL. Well, since our economy is so much larger, I gather that you don’t really think that the different sizes of our economy makes any difference as it relates to what the corporate structure looks like. But it would help me if, without going through it 

now and taking the committee’s time, if you could tell me the percentage that your country receives from individual tax rates and 

the percentage it receives from corporate tax rates and whether or 

not there is a VAT or some other type of tax. 

I assume you have a very high individual tax and low corporate 

tax, is that correct? 

Mr. THOMAS. In Japan, the individual income tax yields about 

13.5 trillion yen, the corporate tax about 7.8 trillion yen, and the 

consumption tax about 10 trillion yen in total. 

Mr. RANGEL. Thank you, Mr. Chairman. 

Mr. TIBERI. Thank you. 

Mr. Berg is recognized. 

Mr. BERG. Thank you, Mr. Chairman. 

Thank you for being here. 

You know, I am interested in really the public perception, the dynamics that went into the tax reform change. And so, what was the 

public perception of your tax system before you did the reform? 

Mr. Thomas. 

Mr. THOMAS. The Japanese public perception of the tax system? 

I think that they feel that the income tax rates are high. I think 

it is fair to say the consumption tax is not the most popular tax, 

but they have become quite accustomed to it. And it is now, in 

Japan, required that the consumption tax be used to pay for national pension and health care for the elderly and senior care. 

It is hard to say what the Japanese public thinks about the corporate tax. But Japan has had a very international-minded business community, and I think the Japanese public supports the Japanese companies’ need to be able to compete effectively worldwide. 

And so, my sense is that they have a favorable view of the recent 

changes that have been made. 

Mr. BERG. Thank you. 

Mr. Schoon. 

Mr. SCHOON. Well, the Netherlands, you know, as indicated 

earlier, the Netherlands did not go through tax reform to get to a 

territorial system because we have had that for a very long time. 

So it is engrained in the Dutch tax system, so that discussion did 

not take place in the last years. 

Mr. BERG. And maybe what I am asking you is just the public 

perception now, then, of your tax system. You know, the average 

person, where are they at on it? 

Mr. SCHOON. I think that, most times, the average person 

would think his own tax burden too high. Similar, yeah. But, overVerDate Mar 15 2010 08:08 Jan 31, 2012 Jkt 072510 PO 00000 Frm 00083 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\72510.XXX GPO1 PsN: 72510

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all, it is also a factor of the level of service that you get back for 

the taxes that you ultimately pay. 

Mr. EDGE. The sort of issues we have been talking about today 

don’t really translate terribly well into the popular press. How 

much tax banks should pay and how much tax bankers should pay 

is very much in the headlines, and the answer is a great deal. 

If you were asking what the man in the street thinks about it, 

then I would say they react more to the notion of a well-known 

British name coming under foreign control and the implications 

that that then has on jobs than they do about what sort of corporate tax system we should have for multinationals. 

But there is, nevertheless, a movement within the U.K., the U.K. 

Uncut system, which you have had, I think, some semblances of 

here, which looks at multinationals and it assumes if multinationals paid more tax, there would be less government cuts. But 

that is the only manifestation we have seen of a debate about the 

issues we have been talking about here in the popular sector. 

Mr. BERG. Thank you. 

Mr. MENGER. Yes, the German corporate system, corporate tax 

system, changed in the early turn of the century. The average man 

on the street doesn’t really look into what the corporate tax issues 

are, is looking more at its own tax. And referring to what Frank 

already said, the tax is too high and it is too complicated with regard to individual taxation. 

Mr. BERG. Thank you. 

I will yield back, Mr. Chairman. 

Mr. TIBERI. Thank you. 

Mr. Pascrell is recognized. 

Mr. PASCRELL. Thank you, Mr. Chairman. 

I want to thank the panel. 

I believe we come out of this, or at this, from two different perspectives, and that is very unfortunate. One picture is—and I will 

tell you, that is the approach I take to everything—income inequality; and your approach seems to be corporate disincentives. While 

one is not correct and the other incorrect, that is the way, you 

know, we approach this issue. 

I have to respond, Mr. Chairman, to our gentlelady friend from 

Kansas who made some comments about corporate taxes, taxes on 

corporate income. Absolutely incorrect. 

Mr. Avi-Yonah, correct me if I am wrong. It would seem, looking 

at the chart, of all of the countries that we trade with, major, major 

companies, 25 companies, that we have the lowest—that we have 

the lowest—taxes on a corporate income of any of those countries. 

Mr. AVI-YONAH. As a percentage of revenue, that is correct. 

Mr. PASCRELL. As a percentage of GDP. 

Mr. AVI-YONAH. Yes. 

Mr. PASCRELL. And that is because many of us are talking 

about, not the marginal rate, which we like to refer to but doesn’t 

take into consideration the different deductions in each of the countries, which is the effective tax rate. 

Mr. AVI-YONAH. Right. 

Mr. PASCRELL. So I want to correct the record, Mr. Chairman. 

And I will stand corrected if I am wrong. I think that this is a very 

important point, and I bring this up for everyone’s review. Looking 


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at all of our trade partners, we do not do very well. Or, rather— 

no, let’s make a correction—we do do very well when we talk about 

the effective rate. 

Now, I want to ask these questions. 

Mr. Avi-Yonah, when we are shifting money out of the United 

States of America, that means that the filers here in this country, 

those people who file income taxes, pay more money in their 

taxes—must pay more money in their taxes to make up for the loss 

of revenue. Is or is not that correct? 

Mr. AVI-YONAH. The government faces a certain amount of revenue that it has to raise every year. And to the extent that it 

under-collects from a certain sector, then it has to compensate. So 

I think that is correct. 

Mr. PASCRELL. Gentlemen, don’t you blame me for being concerned, or fault me for being concerned, that in New Jersey, the 

State that I am from, that State and the State of Delaware pay a 

lot more in taxes on individual filers because of this situation. In 

New Jersey, income tax filers pay $752 more in taxes because of 

a system which I don’t know whether we are advocating today or 

we are simply—the fault is not in the folks that represent companies that are in other countries. You are not the problem. We are 

the problem, we are the problem, in the direction and within the 

context that we are talking about. 

And how is this paid for? This is paid for by those folks who do 

pay taxes in this country. And it particularly hurts New Jersey, 

which is the second worst in the entire Nation. I think we need to 

take a look at this. We need to look at this very, very, very carefully. When you look at what taxes are paid in the Netherlands or 

in Germany or in Japan, then you start to put things into context. 

And I want to ask you this question, Mr. Schoon. How does your 

VAT work on an everyday commerce situation in the Netherlands? 

How does that work? Tell us. 

Mr. SCHOON. The VAT is a tax that is levied in every chain of 

a supply chain or a production chain to the ultimate customer, 

where, in every step of the chain, the input VAT can be deducted. 

So that, in essence, only the value added will be taxed, and, in essence, it will be paid ultimately by the consumer, by the end consumer. 

Mr. PASCRELL. Now, we don’t have a value-added tax in the 

United States, do we? 

Mr. SCHOON. No, you don’t. 

Mr. PASCRELL. We do not. You know our economic situation in 

terms of our trade, our imbalances. Would you recommend that we 

take a look at a VAT in this country? 

Mr. SCHOON. I would think there is nothing wrong at looking 

at any other tax, including VAT. 

Mr. PASCRELL. Thank you, Mr. Chairman. 

Mr. TIBERI. Thank you. 

To conclude today’s questioning, Mrs. Black is recognized. 

Mrs. BLACK. Thank you, Mr. Chairman. 

I thank all the panel members. I know it has been a long day 

for you. I sure appreciate your being here. 

Given that all of the G7 countries have adopted a territorial tax 

system, do you think that the United States companies will have 


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more difficulty competing in the global marketplace if we continue 

to use the current worldwide tax system? And this would be for all 

the panelists. 

Mr. THOMAS. Yes, I do. I believe that the world has changed, 

and unless the United States changes with it, U.S. companies will 

become less competitive. 

Mrs. BLACK. Mr. Schoon. 

Mr. SCHOON. Again, I cannot judge the U.S. side, as there are 

so many elements that play a role here. But, again, the Dutch experience was positive. 

Mrs. BLACK. Thank you. 

Mr. Edge. 

Mr. EDGE. Tax is not the only or driving factor. It is not the predominant reason why people do things. But it is a swing factor. 

And the fact that other jurisdictions have gone in that direction 

tells you something. Having said which, I believe U.S. companies 

compete pretty well at present in the arena that I am in. But having gone through the U.K. process, I am a big, big advocate of a 

territorial system. 

Mrs. BLACK. Thank you. 

Mr. MENGER. Germany didn’t change the system, but I believe, 

from comparing the two systems and being in Germany and in the 

United States, the territorial system is easier to deal with and 

should have less conflicts between taxpayer and the tax authorities. 

Mrs. BLACK. Mr. Avi-Yonah? 

Mr. AVI-YONAH. As I said before, I don’t think territoriality, as 

narrowly defined here, has anything to do with the competitiveness 

of U.S. multinationals. 

Mrs. BLACK. Thank you. 

I yield back. 

Mr. TIBERI. I first want to thank the panel not only for your insight today but your concise, clear answers. Frankly, a number of 

Members had two and three rounds of questions with each member 

of the panel; that is very rare. So commend you very much, both 

for the knowledge you imparted but also for the answers that you 

provided us. 

And, also, I would say, Mr. Thomas, looking at the relative compactness of the Japanese Tax Code, I don’t know whether to be inspired or depressed. Either way, we have some work to do. 

With that, this meeting is adjourned. 

[Whereupon, at 4:50 p.m., the committee was adjourned.] 

[Questions for the Record follow:] 


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Gary M. Thomas—1 


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Gary M. Thomas—2 


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Frank Schoon 


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Steve Edge—1 


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Steve Edge—2 


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Jo ̈ rg Menger 


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[Submissions for the Record follow:] 


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Asian American Hotel Owners Association, Statement 

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The Center for Fiscal Equity, Statement 


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The Chamber of Commerce, Statement 


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The Securities Industry and Financial Markets Association, Statement 


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The Working Group on Intangibles, Statement 


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Æ 


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