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22–334 2017

THE OECD BASE EROSION AND 

PROFIT SHIFTING (BEPS) PROJECT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON TAX POLICY 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

DECEMBER 1, 2015 

Serial No. 114–TP04 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

KEVIN BRADY, Texas, Chairman 

SAM JOHNSON, Texas 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

PETER J. ROSKAM, Illinois 

TOM PRICE, Georgia 

VERN BUCHANAN, Florida 

ADRIAN SMITH, Nebraska 

LYNN JENKINS, Kansas 

ERIK PAULSEN, Minnesota 

KENNY MARCHANT, Texas 

DIANE BLACK, Tennessee 

TOM REED, New York 

TODD YOUNG, Indiana 

MIKE KELLY, Pennsylvania 

JIM RENACCI, Ohio 

PAT MEEHAN, Pennsylvania 

KRISTI NOEM, South Dakota 

GEORGE HOLDING, North Carolina 

JASON SMITH, Missouri 

ROBERT J. DOLD, Illinois 

TOM RICE, South Carolina 

SANDER M. LEVIN, Michigan 

CHARLES B. RANGEL, New York 

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 

JOSEPH CROWLEY, New York 

DANNY DAVIS, Illinois 

LINDA SA ́ NCHEZ, California 

DAVID STEWART, Staff Director 

JANICE MAYS, Minority Chief Counsel and Staff Director 

SUBCOMMITTEE ON TAX POLICY 

CHARLES W. BOUSTANY, JR., Louisiana, Chairman 

DAVID G. REICHERT, Washington 

PATRICK J. TIBERI, Ohio 

TOM REED, New York 

TODD YOUNG, Indiana 

MIKE KELLY, Pennsylvania 

JIM RENACCI, Ohio 

KRISTI NOEM, South Dakota 

GEORGE HOLDING, North Carolina 

RICHARD E. NEAL, Massachusetts 

JOHN B. LARSON, Connecticut 

LINDA SA ́ NCHEZ, California 

MIKE THOMPSON, California 

LLOYD DOGGETT, Texas 


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C O N T E N T S 

Page 

Advisory of December 1, 2015 announcing the hearing ....................................... 2 

WITNESSES 

Panel One 

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

U.S. Department of the Treasury ....................................................................... 6 

Panel Two 

Barbara M. Angus, Principal, Ernst & Young ...................................................... 34 

Catherine Schultz, Vice President for Tax Policy, National Foreign Trade 

Council .................................................................................................................. 56 

Gary D. Sprague, Counsel, The Software Coalition .............................................. 47 

Martin A. Sullivan, Ph.D., Chief Economist, Tax Analysts ................................. 64 

SUBMISSIONS FOR THE RECORD 

Andrew F. Quinlan .................................................................................................. 85 

Business and Industry Advisory Committee (BIAC) to the OECD ..................... 92 

Motion Picture Association of America (MPAA) ................................................... 100 

National Association of Manufacturers (NAM) ..................................................... 105 

Tax Innovation Equality (TIE) Coalition ............................................................... 111 


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(1) 

THE OECD BASE EROSION AND 

PROFIT SHIFTING (BEPS) PROJECT 

TUESDAY, DECEMBER 1, 2015 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON TAX POLICY, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:04 a.m., in 

Room 1100, Longworth House Office Building, Hon. Charles W. 

Boustany, Jr. [Chairman of the Subcommittee] presiding. 

[The advisory announcing the hearing follows:] 


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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON TAX POLICY 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–3625 

Tuesday, November 24, 2015 

No. TP–04 

Chairman Boustany Announces Hearing on 

The OECD Base Erosion and 

Profit Shifting (BEPS) Project 

Congressman Charles Boustany (R–LA), Chairman of the Committee on Ways and 

Means Subcommittee on Tax Policy, today announced that the Subcommittee will 

hold a hearing on the OECD BEPS project final recommendations and its effect on 

worldwide American companies. The hearing will take place on Tuesday, December 1, 2015, in Room 1100 of the Longworth House Office Building, beginning at 10:00 a.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. 

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 hearing for which you would like to make a submission, 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, December 15, 2015. 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 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 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 submitted in a single 

document via email, provided in Word format and must not exceed a total of 10 

pages. Witnesses and submitters are advised that the Committee relies on electronic 

submissions for printing the official hearing record. 

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

on whose behalf the witness appears. The name, company, address, telephone, and 

fax numbers of each witness must be included in the body of the email. Please exclude any personal identifiable information in the attached submission. 


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3. Failure to follow the formatting requirements may result in the exclusion of 

a submission. All submissions for the record are final. 

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 TDD/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 online at 

http://www.waysandmeans.house.gov

f 

/. 

Chairman BOUSTANY. Good morning. And I want to call this 

hearing to order. 

You might remember this Subcommittee was formerly called the 

Select Revenue Measures Subcommittee. But, to reflect the central 

role of tax in the Ways and Means Committee agenda, Chairman 

Brady and the rest of the Members decided to change its name to 

the Subcommittee on Tax Policy to give it its rightful position 

among subcommittees. 

I also want to acknowledge the fine work done by the two Chairmen before me, Mr. Reichert and Mr. Tiberi, in moving forward the 

agenda on tax reform. Thank you, gentlemen, for the fine work of 

leading the Subcommittee. 

Today the Subcommittee on Tax Policy will examine the final 

recommendations recently issued by the OECD on their Base Erosion and Profit Shifting project. 

The alarming increase in foreign acquisitions of U.S. companies 

over the past decade, and especially in the last year, have exposed 

the critical and urgent need for tax reform in America. At 39 percent, the United States now faces the highest Federal and State 

combined corporate rate in the developed world, which is rapidly 

draining America of its homegrown innovation and business, and 

forcing companies to relocate to countries with more businessfriendly tax regimes. 

Globalization of the business marketplace has created historic 

opportunities for growth that were previously impossible. U.S. tax 

policy must account for these changes in this rapidly complex 

changing environment. Just last week, Pfizer, an American company founded in 1849 in New York City, announced the largest foreign acquisition of an American company in history. That is not the 

first, nor will it be the last. 

Foreign acquisition has been pushed over the line by our broken 

Tax Code—and the last time comprehensive tax reform took place 

in the United States was 1986. And since then, our international 

counterparts have capitalized on our lack of action, outpacing us to 

a debilitating degree in adopting tax reforms needed to attract capital investment. 

As international tax regimes have evolved, multinational companies have also evolved to become increasingly savvy in minimizing 

their overall tax liability. International competition for business 

and a fiduciary duty to shareholders obligates companies to be 

proactive. The political and policy hurdles that have prevented tax 

reform efforts from moving forward seem to pale in comparison to 


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the problem America faces with the mass exodus of American companies through foreign acquisitions. 

Since 2001, global economic instability, alongside the increasing 

mobility of capital and high-value profitable business activities, 

have served as natural and powerful motivators for international 

tax reform. The substantial migration of multinational companies 

to more favorable tax jurisdictions has placed front and center an 

acute international awareness that there are limits to the tax burdens countries can place on their resident companies before they 

must seek a more favorable tax environment elsewhere. 

All the while, the United States has failed to keep with the pace. 

It is being left behind. Indeed, the need for tax revenue resulted 

in the push by OECD to launch the BEPS project. 

The OECD BEPS project was intended to target limited, overly 

aggressive tax planning, and resulted in inappropriate tax avoidance. In fact, one key theme of the BEPS project was to eliminate 

cash boxes. In effect, shell companies with few employees or economic activities, and which are subject to no or low taxes. However, 

the project quickly expanded into a fundamental rewrite of global 

tax practices, including those of the United States, in a relatively 

opaque process outside the reach of U.S. political process. 

The OECD’s BEPS project recommendations are deeply troubling 

on a number of levels, not the least of which is the aggressive attempt to impose substantial tax policy changes on the international 

community under the guise of eliminating so-called harmful tax 

practices to ensure multinational companies pay their ‘‘fair share’’ 

of taxes owed in the jurisdictions in which they operate. This is a 

highly subjective standard set by the OECD that seems to unnecessarily target American companies, while also disregarding the detrimental impact these recommendations will have on U.S. companies that currently operate under the worldwide system of taxation 

observed in the United States. 

The BEPS project may have been motivated by an underlying belief that creating a business-friendly tax regime to attract business 

investment to one’s country is itself an illegitimate and harmful 

practice that must be eliminated. But the BEPS project ended up 

making recommendations that will achieve the opposite result, by 

encouraging countries to create patent boxes, which will effectively 

force worldwide companies to shift their business operations out of 

the United States in the absence of change. 

Moreover, the exposure of American companies’ highly sensitive 

information through the country-by-country reporting requirements 

within BEPS’ recommendations are not constrained by any rationale 

for the breadth of information required, and are also lacking appropriate protections for highly-sensitive information in this regard. 

The BEPS project final recommendations issued this year, coupled with the present European Commission investigation into alleged receipt of illegal state aid by mostly American companies, exposed what appears to be an extremely disturbing and multifaceted 

attack specifically targeted at American companies. 

Ladies and gentlemen, we are out of time. We have nearly three 

decades of inertia with regard to tax reform. This must be the Congress of action that takes the tough but necessary steps to reform 

our Tax Code for the sake of American families, American compaVerDate Sep 11 2014 15:21 Apr 26, 2017 Jkt 022334 PO 00000 Frm 00008 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\22334\22334.XXX 22334

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nies, and America’s stature as the world’s leader in fostering innovation and business growth. 

And, with that, I will yield to my Ranking Member, Mr. Neal, for 

an opening statement. 

Mr. NEAL. Thank you very much, Mr. Chairman. And congratulations on your new post. A reminder that I have now either been 

the Chairman or the Ranking Member with the three people sitting 

to my right. So I provide some institutional anchor to the conversation that we are about to have. 

Our Tax Subcommittee has a long and rich bipartisan history of 

coming together to address some of the Nation’s biggest problems. 

We have worked together in the past, and I hope to continue to 

work together on tackling very important issues of this day. Thank 

you for calling this important hearing on OECD’s Base Erosion and 

Profit Shifting project. The timing could not be more fitting. 

A new wave of inversions has gripped the corporate world, as yet 

another U.S. multinational has renounced their U.S. corporate citizenship. In a record-setting $160 billion deal, Pfizer and Allergan— 

and a reminder, Allergan was also formerly an American company—have agreed to merge and create the world’s largest pharmaceutical company. With this merger, the U.S. tax base continues 

to erode. Perhaps this latest inversion will prompt Congress to 

come together on reforms so this does not continue to happen. 

These inversions happen because of a broken Tax Code which allows these deals to take place. Congress must take action immediately, as we did in 2004, with legislation that I sponsored, to stop 

the flow of inversions until we can meaningfully fix our broken Tax 

Code. 

Our rudimentary Tax Code remains ill-equipped to handle our 

increasingly globalized and digital economy. As a result, we have 

seen an explosion of multinational companies shift profits, activities, and property from high tax countries to low tax countries. By 

OECD’s best guess, countries are losing as much as $240 billion a 

year in lost revenue. 

I want to commend the Obama Administration and Secretary 

Lew for their efforts in working with the international community 

and finding commonsense solutions to address these taxation challenges. I look forward to the hearing, the testimony from our distinguished panelists on the best ways to address the challenges 

ahead of us, and to ensure that the OECD process is not one where 

our jurisdictions try to grab revenue that rightly belongs to the 

United States. 

But ultimately, the task of fixing our Tax Code falls on us, specifically on this Subcommittee. Mr. Chairman, it is my hope that 

we can use this hearing as a springboard toward meaningful reform, one that broadens the base and lowers the rate in a revenueneutral way, as the Obama Administration has proposed. 

Thank you, Mr. Chairman. 

Chairman BOUSTANY. I thank the gentleman. Today we will 

hear from two panels comprised of experts on international taxation. I am very excited to have these panelists, who are all wellknown experts in this area. 

Our first panel will be Robert Stack, Deputy Assistant Secretary 

for International Tax Affairs, U.S. Department of the Treasury. 


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Mr. Stack, thank you for being here today. We appreciate the 

fine work you have done over the years, and we look forward to 

hearing your testimony. Rest assured the Committee has received 

your written statement. It will be made part of the formal hearing 

record. We ask you to keep to 5 minutes on your oral remarks, and 

you may begin when you are ready. 

STATEMENT OF ROBERT B. STACK, DEPUTY ASSISTANT 

SECRETARY FOR INTERNATIONAL TAX AFFAIRS, U.S. DEPARTMENT OF THE TREASURY 

Mr. STACK. Chairman Boustany, Ranking Member Neal, and 

distinguished Members of the Subcommittee, I appreciate the opportunity to appear today to discuss some key international tax 

issues, including the recently-completed G20 OECD Base Erosion 

and Profit Shifting—or BEPS—project. We appreciate the Committee’s interest in these important issues. 

In June 2012, the G20 Summit in Los Cabos, Mexico, the leaders 

of the world’s largest economies identified the ability of multinational companies to reduce their tax bills by shifting income into 

low and no-tax jurisdictions as a significant global concern. They 

instructed their governments to develop an action plan to address 

these issues, which was endorsed by the G20 leaders in St. Petersburg in September 2013. The project came to fruition with the submission of the final reports to the G20 this fall. 

The BEPS reports cover 15 separate topics. Some reports, such 

as those on the digital economy and controlled foreign corporation 

rules, are more or less descriptive of the underlying issues, and discuss approaches or options that different countries might take, 

without demonstrating any particular agreement among participants on a particular path. Other reports, such as those on interest 

deductibility and hybrid securities, describe the elements of a common approach that countries might take with respect to those 

issues. With respect to transfer pricing, the arm’s length standard 

was further amplified in connection with issues around funding, 

risk, hard-to-value intangibles. 

And finally, in the areas of preventing treaty shopping, requiring 

country-by-country reporting, fighting harmful tax practices, including through the exchange of cross-border rulings, and improving dispute resolution, countries did agree to a minimum standard. 

I believe that the transparency provided by country-by-country 

reporting, the tightened transfer pricing rules, and the agreement 

to exchange cross-border tax rulings will go a long way to curtail 

the phenomenon of stateless income. Companies will very likely be 

reluctant to show on their country-by-country reports substantial 

amounts of income or lower—in low or no-tax jurisdictions. And the 

transfer pricing work will better align profits with the functions, 

assets, and risks that create that profit. 

The exchange of rulings will drive out bad practices and shine 

sunlight on the practices that remain. The improvement of dispute 

resolution and the inclusion, where possible, of arbitration, will 

streamline dispute resolution and should thereby reduce instances 

of double taxation. 

Throughout this work, the U.S. Treasury Department worked 

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nity, which stands to be most directly affected by this work. And 

this was particularly the case in fashioning the rules on countryby-country reporting. Across the board, the BEPS deliverables are 

better than they would have been if the U.S. Treasury Department 

had not been heavily involved in their negotiation. We are proud 

of the role we played in the BEPS process, but our work is not 

done. 

Where do we go from here? Well, certain technical work remains 

for the OECD in 2016 and beyond. And the participants in the G20 

OECD project will be turning its attention to implementation of the 

BEPS deliverables, as well as monitoring what countries actually 

do with respect to those deliverables. 

But we must do more than that. The G20 OECD project has produced well over 1,000 pages of material, some of it quite technical 

in detail. It is imperative that we turn our attention to ensuring 

that countries are able to implement these rules in a fair and impartial manner, based on the rule of law. What good is having carefully crafted new transfer pricing rules, if the agent in another 

country auditing a U.S. multinational is compensated based on the 

size of the assessment he or she can make against the multinational, regardless of its technical merit? 

Can these rules really be fairly implemented if there is not access to a meaningful appeals process? Ensuring the fair and effective administration of the BEPS deliverables must be part of our 

ongoing work. Indeed, the best way to foster the G20 goal of supporting global growth is to actively promote the connection between 

foreign direct investment growth and efficient and effective tax administrations. 

Foreign leaders often come to the United States seeking greater 

foreign direct investment in their countries from our investors, 

seemingly unaware of the impediment to such investment resulting 

from their very own tax administrations. We need to do a better 

job of making the connection between fair and efficient administration, foreign direct investment, and global growth. We are working 

hard to ensure that issues around effective and fair tax administration are made part of the post-BEPS agenda. 

I would like to close by noting that it is no secret that the BEPS 

project was inspired to no small degree by the fact that large U.S. 

multinationals have been able to keep large amounts of money offshore in low-tax jurisdictions untaxed until those amounts are repatriated to the United States. This phenomenon, and the sometimes very resulting low effective rates of tax, in turn have led to 

the perception abroad that U.S. multinationals are not paying their 

so-called fair share. 

Thus, the BEPS phenomenon also lends support to the need for 

business tax reform. The President’s proposal to lower corporate 

rates and broaden the base enjoys bipartisan support. We look forward to continuing to work with Congress to bring business tax reform to fruition. 

Let me repeat my appreciation for the Committee’s interest in 

these important issues. And I would be happy to answer any questions you may have. Thank you. 

[The prepared statement of Mr. Stack follows:] 


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EMBARGOED UNTIL DELIVERY - December l, 20 15 

Testimony of Robert B. Stack, Deputy Assistant Secr etary (International Tax Affail·s) 

U.S. Department of the Treasury 

Before the Ways and Means Subcommittee on Tax Policy 

December 1, 2015 

Chairman Boustany, Ranking Member Neal, and distinguished members of the Subcommittee, I 

appreciate the opportunity to appear today to discuss some key international tax issues, including 

the recently completed G20/0rganization for Economic Cooperation and Development (OECD) 

Base Erosion and Profit Shifting (BEPS) proj ect. We appreciate the Subcommittee's interest in 

these important issues. 

I would like to begin by describing the outcome of the G20/0ECD BEPS project, and then 

describe the expected BEPS follow-on work. l will then link that discussion to a consideration of 

the need for general corporate and intemational tax refonn, as well as ihe related need to address 

U.S.-base stripping and inversion transactions. 

G20/0ECD Base Erosion and Pt·ofit Shifting (BEPS) Project 

ln June 2012, at the G-20 Summit in Los Cabos, Mexico, the leaders of the world's largest 

economies identified the ability of multinational companies to reduce their tax bills by shifting 

income into low- and no-tax jurisdictions as a significant global concern. They instructed their 

governments to develop an action plan to address these issues, which was endorsed by G-20 

leaders in September 2013 in St. Petersburg. The OECD has hosted this process, but all G-20 

governments, some of which are not members of the OECD, had a role. The G20/0ECD BEPS 

Action Plan outlined 15 specific areas for further examination. The results were delivered to 

Finance Ministers this October in Lima, Peru, and to President Obama and other world leaders at 

last month's G20 summit in Antalya, Turkey. 

The United States has a great deal at stake in the BEPS project and a strong interest in its 

success. Om active participation is crucial to protecting our own tax base from erosion by 

multinational companies, much of which occurs as a result of exploiting tax regime differences. 

A key goal of BEPS is to identify those differences and write rules that close loopholes. In 

addition, as the home of some of the world's most successful and vibrant multinational ftrms, we 

have a stake in ensuring that companies and countries face tax rules that are clear and 

administrable and that companies can avoid unrelieved double taxation, as well as expensive tax 

disputes. Both the United States and our companies have a strong interest in access to robust 

dispute resolution mechanisms around the world. In contrast, failure in the BEPS project could 

well result in countries taking unilateral, inconsistent actions, thereby increasing double taxation, 

the cost to the U.S. Treasury of granting foreign tax credits, and the number and scale of tax 

disputes. lnde.ed, notwithstanding the BEPS project, some countries have taken unilateral action, 

and it is our hope that they will reconsider those actions in the post-BEPS environment. 

The principal target of the BEPS project was so-called "stateless income," basically very low- or 

non-taxed income within a multinational group. The existence of large amounts of stateless 
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income in a time of global austerity bas called into question the efficacy of longstanding 

international tax rules. This issue is prominent in a global economic environment in which 

superior returns can accrue to intangibles that are easily located anywhere in the world and that 

often result from intensive research and development activities that a single multinational may 

conduct in many countries, or that result from marketing intangibles that can be exploited in one 

country but owned and financed from another country. Some countries with large markets 

believe that some of these premium profits should be taxed in the market country, whereas 

current international norms attribute those profits to the places where the functions, assets, and 

risks of the multinational firm are locate-d - which are often not the market countries. Finally, I 

would be remiss to not note that the ability of U.S. multinationals to defer tax on large amounts 

of income in low- and no-tax jurisdictions has fed the perception of tax avoidance by these 

multinationals. This perception exists even though the U.S. would tax that income upon 

repatriation to the U.S. parent firm - whether voluntarily by the taxpayer, or through a deemed 

repatriation that might occur as a part of tax refonn. 

The G20/0ECD project produced a broad array of reports outlining measures addressing 

stateless income ranging from revision of existing standards to new minimum standards, as well 

as describing common approaches, all of which are expected to facilitate the convergence of 

national practices. All OECD and G20 countries have committed to minimum standards in the 

areas of preventing treaty shopping, requiring country-by-country reporting, fighting harmful tax 

practices, and improving dispute resolution. In transfer pricing, existing standards have been 

updated. With respect to recommendations on hybrid mismatch arrangements and best practices 

on interest de-ductibility, countries have agreed on a general tax policy direction. In these areas, 

we expect that practices will converge over time through the implementation of the agreed 

common approaches. In the United States, most of the rules restricting the use of hybrid entities 

and hybrid securities and the rules limiting excessive interest deductibility would require 

Congressional action, and the Administration proposed new policies along these lines in the 

FY20 16 Budget. Guidance based on best practices will also support countries in the areas of 

disclosure initiatives and controlled foreign company (CFC) legislation. Finally, participants 

agreed to draft a multilateral instrument that countries may use to implement the BEPS work on 

tax treaty issues. 

1 would like to highlight some of the more important outputs from the BEPS project. Interest 

expense deductions are a major contributor to the BEPS problem. The ability to achieve 

excessive interest deductions, includitlg those that finance the production of exempt or deferred 

income, is best addressed in a coordinated matmer. The BEPS project has agreed on a best 

practice approach, which recommends that countries provide two alternative caps on interest 

deductions from which companies can choose. The first cap is a fixed ratio, which is similar to 

the rules under current U.S. law and looks at the ratio of interest expense to earnings before 

interest, taxes, depreciation and amortization, also known as EBITDA. The BEPS 2015 Final 

Report recommends that countries adopt a fixed ratio for allowable interest deductions within a 

range of 10 percent to 30 percent ofEBITDA (current U.S.Iaw allows up to 50 percent). The 

report also recommends that countries adopt as an alternative cap a group ratio based on 

earnings. Under this cap, each entity in a multinational group could deduct interest up to its 

allocable portion of the group's third party interest expense, which would be detem1ined based 

on the entity's proportionate share of the group's worldwide earnings. This nale is based on the 

2 
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premise that multinational groups should be able to deduct interest up to their group-wide third 

party interest expense. The combination of this rule with a low fixed ratio also would ensure that 

groups would not be able to use related party loans to deduct interest expenses well in excess of 

the group's third party interest expense. As discussed below, the President's FY2015 and 

FY20 16 Budget have included a proposal that is in line with tlus recommendation. 

The OECD bas agreed on hybrid entity and hybrid security best practices that target a 

"deduction/no inclusion" situation (i.e., a tax deduction in one country without an income 

inclusion in the other country) and a double deduction situation (i.e., tax deductions taken in 

more than one jurisdiction for the same item). In the case of the "deduction/no inclusion" 

scenarios, these recommendations would require Congressional action, and are broadly 

consistent with rules proposed in the President's FY2015 and FY2016 Budget The 

recommendations addressing double deductions are modeled after existing U.S. rules. 

Importantly, the OECD approach to this action item is to neutralize the mismatch in tax 

outcomes, but not otherwise interfere with the use of such arrangements so as to not adversely 

affect cross-border trade and investment. 

An agreement on a minimum standard to secure progress on dispute resolution was reached to 

help ensure that cross-border tax disputes between countries over the application of tax treaties 

are resolved in a more effective and timely manner. The Forum on Tax Administration (FT A), 

including all OECD and G20 countries along with other interested countries and j urisdictions, 

will continue its efforts to improve mutual agreement procedures (MAP) through its recently 

established MAP Forum. This will require an assessment methodology to ensure the new 

standard for timely resolution of disputes is met. In parallel, a large group of countries is 

committed to move quickly towards mandatory binding arbitration. It is expected that rapid 

implementation of this commitment will be achieved through the inclusion of arbitration as an 

optional provision in the multilateral instrument that would implement the BEPS treaty-related 

measures. 

Standardized country-by-country reporting and other documentation requirements will give tax 

administrations a global picture of where profits, tax, and economic activities of multinational 

enterprises are reported, and the ability to use this infonnation to assess various tax compliance 

risks, so they can focus audit resources where they will be most effective. Multinational 

Enterprises (MNEs) will report their revenues, pre-tax profits, income tax paid and accnted, 

number of employees, stated capital, retained earnings, and tangible assets in each jurisdiction 

where they operate. The implementation package provides guidance to ensure that information 

is provided to the tax administration in a timely manner, that confidentiality is preserved, and 

that the information is used appropriately. The filing requirement will be on multinationals with 

aruma! consolidated group revenue equal to or exceeding EUR 750 million, meaning this regin1e 

applies only to the largest and most sophisticated entities. 

The existing standards in the area of transfer pricing have been clarified and strengthened as part 

of the BEPS project. Because the transfer pricing work is based on the arm's length principle, it 

is consistent with U.S. transfer pricing regulations under section 482. A key element of the work 

relates to the am1's length return to so-called "cash boxes," which would be entitled to no more 

than a risk-free rentm if they arc mere fi.mders of activities performed by other group 

members. 1l1e work on cash boxes is one aspect of new approaches to risk, which generally 

provide that contractual allocations of risk are respected only when the party contracntally 

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allocated risk bas the capacity to control the risk and the financial capacity to bear it. The 

transfer pricing work also addresses specific issues relating to controlled transactions involving 

intangibles, including providing a special rule for hard-to-value intangibles akin to the U.S. 

"commensurate with income" standard. 

\!.'here do we go from here? Certain technical work remains for the OECD in 2016 and beyond. 

More importantly, however, we believe the best way to foster the G20 goal of supporting global 

growth is to actively promote the connection between foreign direct investment, growth, and 

efficient and effective tax administrations. Too often countries fail to recognize that strong civil 

institutions promote growth and investment. The OECD is expected to present to the G20 a 

framework for moving forward at the Finance Minister's meeting to be held in China in February 

2016. We are working bard to ensure that issues around effective and fair tax administration are 

made part of the post-BEPS agenda. 

Intem ational Tax Reform 

The G20/0ECD BEPS project shined a spotlight on so-called stateless income, a phenomenon 

that is a byproduct of outdated tax rules. I would like to outline the steps the United States could 

take today to refonn our own tax system to improve competitiveness, secure our tax base, and 

reduce incentives for profit shifting by U.S. firms. 

As the President bas proposed, we should refonn our business tax system by reducing the 

corporate income tax rate and broadening the base. It is frequently noted that the United States 

has a high statutory corporate rate, but much lower effe-ctive tax rates. High statutory rates 

encourage multinational tim1s to find ways to shift profits, especially on intangible income, to 

other jurisdictions. So lowering our statutory rate while broadening the base could help reduce 

erosion of the U.S. base. 

But it would only be a start, because even with lower rates U.S. multinationals would continue to 

aggressively seek ways to lower their tax bills by shifting income out of the United States since 

there will always be jurisdictions with lower tax rates. We can, however, take other steps. 

First, the President's framework for business tax refonn proposes a minimum tax on foreign 

earnings that represent excess returns, which typically arise from intangible assets. Til is would 

reduce the benefit of income shifting and impose a brake on the international "race to the 

bottom" in corporate tax rates. Other recent tax retorn1 plans have included similar proposals, 

which would improve on the current c-omplex international tax rnles by requiring that companies 

pay a minimum rate of tax (either to the United States or to a foreign jurisdiction) on all foreign 

excess returns. 

Sec.ond, as part of tax refonn, we should also take a close look at interest deductibility, noting 

that our thin capitalization rnles are inadequate and that our system acntally gives an advantage 

to foreign-owned multinationals. These foreign-owned multinationals can lend funds to their 

U.S. subsidiary to benefit from interest deductions against a 35 percent tax rate, while the related 

interest income is subject to significantly lower tax rates, or no tax at all, in tile lending 

jurisdiction. It is especially disconcerting to observe that among the foreign multinationals that 

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most aggressively take advantage of this strategy are so-called " inverted" companies - that is, 

foreign-parented companies that were previously U.S.-parented. The Administration's FY2016 

Budget proposes to level the playing field by limiting the ability of U.S. subsidiaries of a foreign 

multinational to claim interest deductions in the United States that greatly exceed their 

proportionate share of the group's global interest expense. Specifically, this proposal would 

limit a U.S. subsidiary's interest expense deductions to the greater of 10 percent of the 

subsidiary's EBITDA or the subsidiary's proportionate share of worldwide third-party interest 

expense, determined based on the subsidiaries' share of the multinational's worldwide earnings. 

A related Administration FY20 16 Budget proposal would limit a U.S. multinational's ability to 

claim a U.S. deduction for interest expense that is related to foreign subsidiary income. U.S. 

multinationals typically borrow in the United States to benefit from interest deductions against a 

35 percent tax rate, but they then use the borrowed cash throughout the multinational group, 

financing operations that may not be subject to current U.S. tax. indeed, we have recently seen 

examples of U.S. multinationals borrowing in the United States - rather than bringing back cash 

from offshore operations- to pay dividends to their shareholders. The proposal would align the 

treatment of interest expense deductions with the treatment of the inc-ome supported by the 

proceeds of the borrowing. 

In addressing stripping of the U.S. base, it is also important to consider so-called "hybrid 

arrangements," which allow U.S. subsidiaries of foreign multinationals to claim U.S. deductions 

with respect to payments to related foreign entities that do not result in a corresponding income 

item in the foreign jurisdiction. These arrangements produce stateless income and should be 

remedied. To neutralize these arrangements, the Administration's FY2016 Budget proposes to 

deny deductions for interest and royalty payments made to related parties under certain 

circumstances involving hybrid arrangements. For example, the proposal would deny a U.S. 

deduction where a taxpayer makes an interest or royalty payment to a related person and there is 

no corresponding inclusion in the payee's jurisdiction. 

Additionally, shifting intangibles outside the United States is a key avenue through which U.S. 

base erosion occurs. The principal means of shifting intangible income is to undervalue 

intangible prope1ty transferred offshore or to take advantage of the uncertainty in the scope of 

our defutition of intangibles. Once this intellectual property is located offshore, the income that 

it produces can accrue in low- or no-tax jurisdictions. The Administration's FY2016 Budget 

contains a number of proposals that would discourage the corporate tax base erosion that occurs 

via intangibles transfers. In addition to our proposal to impose a minimum tax on excess returns, 

the FY20 16 Budget would explicitly provide that the detlnition of intangible property includes 

items such as goodwill and going concern value and would also clarify the valuation rules to 

address taxpayer arguments that certain value may be transferred offshore without any U.S. tax 

charge. Another proposal would update subpart F to currently tax certain highly mobile income 

from digital goods and services. 

Conclusion: 

Chairman Boustany, Ranking Member Neal, and distinguished Members of the Subcommittee, 

let me conc lude by thanking you for tbe opportunity to appear before the Subcommittee to 

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discuss the Administration's work on various international tax matters. We appreciate the 

Subcommittee's continuing interest in the BEPS Project, international tax reform, and other 

matters. On behalf of the Administration, that concludes my testimony, and I would be happy to 

answer any questions. 

6 
14 

Chairman BOUSTANY. Thank you, Mr. Stack. I—clearly, this 

Committee now certainly has a sense of urgency about what is happening on the international front. And, as developments have occurred in a rapid pace, whether it is the creation of innovation 

boxes or patent boxes by European countries, or the completion of 

the OECD BEPS recommendations, we are falling behind. We need 

to pick up our pace. And that means we need to move forward with 

tax reform. We need a firm commitment that the Administration 

will work with us getting beyond where we are today, and really 

roll up the sleeves to try to move forward on this. 

But one of the concerns that a number of us have had, as we 

have watched through the fall with the completion of these recommendations on the BEPS project, is that Treasury might be perceived as speaking or committing to legislative policy recommendations on behalf of Congress without full consultation with Congress. 

BEPS implementation will focus on getting countries to make 

legislative changes, which will require congressional action in this 

country. And I just want you to outline for us, in signing off on 

BEPS, to what extent did Treasury and others in the Administration consult with Congress, or consider whether Congress would 

agree with any of the specific tax policy recommendations? 

Mr. STACK. Thank you, Mr. Chairman. I can report very directly 

that the—if you go through the BEPS’ 15 action items, there are 

2 in particular that absolutely would need congressional legislative 

action. One is the work on interest stripping, which is in the BEPS 

project. And there is a second piece on what we call hybrid securities. That is a situation in which you get a deduction, let’s say, in 

the United States because it is treated like interest, but when it 

is received in the other jurisdiction, they view it as a dividend and 

don’t tax it, so that creates stateless income. 

We were very careful, Mr. Chairman, not to include those in the 

minimum standard agreed at the OECD, precisely because we, as 

the Administration, could not and would not commit the U.S. Congress. I think, if you work through the other items, if you think, 

for example, of treaty matters, where we might agree, as a matter 

of Treasury, to put something in our model, a treaty, of course, requires the advice and consent of the Senate. Fully mindful of that, 

all our obligations in the BEPS process take into account the legislative processes in the United States. 

I mean I would just add for the record that there is nothing in 

the BEPS project that is a legally binding commitment on the part 

of the U.S. Government. And so, I think we tried very hard to respect the legislative role and the difference between the legislative 

and the executive in every aspect of our work. 

Chairman BOUSTANY. Well, I appreciate that. And I think 

what we need to do now, going forward, is accelerate our level of 

communication on how we are going to move forward. Because 

other countries are taking steps, very aggressive steps, with some 

of the implementation of these recommendations. And if we fail to 

reform our Code appropriately, we will not lead this process, it will 

be led by others, and I don’t think the outcome is going to be as 

amenable to American companies as we would all hope. 

I want to shift gears for a minute with one last question for you. 

I want to examine this EU state aid situation. EU state aid cases 


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seem to be another example of foreign governments targeting U.S. 

firms to expand their tax bases. And we have seen the press reports. I have actually had a conversation with folks at Apple who 

are very concerned about this. I believe you share my concern that 

these EU state aid cases will lead to retroactive foreign tax increases on U.S. companies that could result in American taxpayers 

footing the bill through foreign tax credits, further eroding our 

base. 

I am very concerned that the effects will go far beyond the EU’s 

initial cases—I mean we are in the early stages of this—and that 

these cases could have substantial and direct impact on our U.S. 

companies—and ultimately our U.S. taxpayers. 

In light of the EU’s state aid cases, what is Treasury doing to 

protect the interests of the United States? 

Mr. STACK. Thank you, Mr. Chairman. I would like to begin this 

discussion with a note of humility. I am a trained U.S. tax lawyer. 

I am not a European lawyer. I am not a competition lawyer in Europe, nor have we seen the final legal documents of all the various 

investigations that are ongoing. 

In light of that, we were faced with a judgement, which is do we, 

as the Treasury Department, simply sit and let these cases kind of 

move forward and unfold with the possibility that I can talk— 

which I will talk more about—of the effect on U.S. bilateral relationships and/or the possibility of an ultimate foreign tax credit if, 

indeed, these taxes are determined to be creditable, which is an 

open question I need to put on the record. 

Or we could speak now about the U.S. interest in these cases, 

even though the work is not finally done. So what Treasury has 

done is we have made it clear to the EU Commission directly that 

the United States has a stake in these cases. 

The first—our first stake is as follows. The United States has income tax treaties with the member states in the EU. We do not 

have an income tax treaty with the EU. And that is because income tax in the EU is left to the members to do their own income 

tax. Well, there is a great deal of uncertainty in the current proceedings whether or not the commission is substituting its own tax 

determination for that of the member states. And if it were to do 

that, I think it calls into question our bilateral relationships with 

members of the EU. And it is worth mentioning that the United 

States has an interest in understanding, with clarity, the precise 

nature of income tax enforcement administration in the EU. That 

is number one. 

Number two, some of the numbers that have been reported in 

the press here are what I would call eye-popping. And while it is 

true—and I will repeat for the record that we have not analyzed 

whether or not taxes required to be paid in these jurisdictions will, 

in fact, be creditable. The fact that they may be could mean that, 

at the end of the day, U.S. taxpayers wind up footing the bill for 

these charges by the EU State Aid Commission. 

But let me make two other points that I think are very important here. 

One is that I believe we also have a concern that these taxes are 

being imposed retroactively under circumstances in which—I do 

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pected a state aid analysis of the type that is emerging from this 

work. In our view, when a novel approach to law is taken, that is 

precisely the situation in which a prospective remedy would be appropriate, to ensure that the behavior ceases without imposing very 

large tax impositions on a retroactive basis. So we have been very 

careful to note that we think the basic fairness calls for these to 

be retroactive. 

Beyond being public about our concerns, and demonstrating the 

U.S. interest, and demonstrating our concern that fairness calls for 

a prospective approach, to be honest, it is not 100 percent clear 

what other tools are at our disposal, except to make our concerns 

known. And we have done that, and hopefully will continue to do 

that. 

Chairman BOUSTANY. We look forward to exploring options 

with you on that. You put your finger exactly on the real concern 

that I and other Members of the Committee have, about the retroactive nature of this, and how it is really, in effect, going after advance pricing agreements that are in existence. And this is deeply 

problematic. 

I do believe we are going to need policy ideas that can be discussed between the Administration and this Committee on outlining our way forward on that. I thank you. 

I now yield to Mr. Neal for questioning. 

Mr. NEAL. Thank you, Mr. Chairman. I think on that question 

and the answer that was given by Mr. Stack there would be broad 

agreement on this Subcommittee and the full Committee. I don’t 

know that there was anything that the witness said that we could 

disagree with on that. I thought it was right on target. So thank 

you for establishing that. 

Mr. Stack, it appears clear that the Pfizer Allergan merger is 

moving forward, and the resulting inversion of one of the largest 

U.S. pharmaceutical companies is imminent. You and the witnesses on the next panel have testified on the need for tax reform, 

and specifically international tax reform, as an important and even 

vital step to ensuring that multinational companies remain competitive globally, and continue to create jobs and income in the 

United States. I think you would agree so far that such tax reform 

has been elusive, despite years of conversation on the Committee. 

Are there some things that Congress could do right now, as we 

continue our efforts, to reform the Tax Code that could stem the 

tide of inversions? 

Mr. STACK. Thank you, Congressman. Yes, I actually believe 

there are. And tomorrow I believe that if Congress were to lower 

the threshold for an inversion that forces the inverted company to 

retain its U.S. tax domicile from, let’s say, 80 percent of the current 

statute to 50 percent, I believe that this would act very strongly 

to stem the tide of inversions because companies are quite reluctant to, let’s say, give up control entirely, even in the public context, through a merger with another entity. 

Second, I think that plugging our interest-stripping rules, so that 

once a company is inverted it is not able to take excess amounts 

of income out of the United States in the form of interest, is an imperative that we could do today, both to stem the tide of inversions, 

and also to level the playing field between foreign and domestic 


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U.S. companies. I don’t see those as necessarily having to wait for 

the full package of tax reform. And this is something I believe Congress could do. 

As Secretary Lew has said, we have tried to do with our regulatory authority what we can. But these are some actions Congress 

could take that would help greatly, I believe, stem the flow of inversions. 

Mr. NEAL. Mr. Stack, I have also heard from a number of multinational companies talk about the bad things that BEPS might do. 

I think everyone in the room would agree that it is certainly not 

in the United States’ best interest to do something like pulling 

back from BEPS in the project, or stand on the sidelines as the rest 

of the world implements BEPS rules that could greatly impact our 

multinational corporations. For the Members of this Committee, 

that could be tantamount, I think, to malpractice. 

But to look at this from another angle, I think there are a number of very important things that the United States could specifically do, and that Members of Congress could join in in a helpful 

role. 

There is an opportunity here, I think, for some very basic—many 

things that could be done on insight that other countries are now 

choosing to do. Their authority under the new rules is to ensure 

that the United States, after a period of time, would push the participating countries to ensure that their efforts are being monitored 

by their peers. Would you offer your insights on that, as well? 

Mr. STACK. Certainly, Congressman. I think the—frankly, the 

next phase that we will be working very intensely on in BEPS goes 

to both the implementation—how will countries implement it. And 

here I mentioned I would like to push for the rule of law. And then, 

what kind of monitoring will we do? Will we watch other countries 

to see how they are implementing these rules? 

From the U.S. perspective, there are a lot of areas where we are 

going to care a lot about the monitoring. We care a great deal 

about how country-by-country reporting is going to be done, whether 

it is confidential and whether it is used for the appropriate purposes. We are going to care a lot about whether new permanent establishment rules are applied in a fair and efficient manner. 

So, some of the ongoing work in BEPS is going to be creating 

these monitoring tools, so that, over time, we are watching to see 

that countries are not simply using these new rules to grab revenue, but are applying them in a principled way. So that will absolutely be part of our ongoing work in BEPS. 

And the country-by-country, I should add, in 2020 we actually all 

come back together to assess how the rules are working, how countries are doing them, are they producing necessary information for 

countries. And adjustments will be made, as necessary, at that 

time to the proposed rules, as well. 

Mr. NEAL. Thank you, Mr. Stack. Thank you, Mr. Chairman. 

Chairman BOUSTANY. Mr. Reichert. 

Mr. REICHERT. Thank you, Mr. Chairman. And I want to take 

a moment, too, to thank you and Pat and the rest of our team over 

here, and then, of course, recognize Mr. Neal for his expertise and 

for being a good partner over the last year I was Chairman, and 

I thank the team on the Democrat side. 


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I am an old cop, a retired cop. So I am all about teamwork. And 

I understand that in this world sometimes politics get in the way 

of teamwork. But I think that you are hearing a lot of agreement 

so far with the testimony that you provided. And we will see how 

that goes as we continue to question you, but I appreciate all the 

work that you have done. And, as Chairman Boustany said, we 

really look forward to working with you to help make America 

stronger, and have that fair playing field that we all are searching 

for. 

I want to focus on dispute resolution. You mentioned that in your 

testimony. Prior to the release of the BEPS final report, the number of tax disputes initiated between countries far outpaced the 

number of disputes actually resolved. And, as countries begin to 

implement the various changes to their own international tax 

rules, as recommended by the BEPS final report, the number of unresolved disputes is almost certain to increase. I think you would 

agree with that. 

However, the final report did not call for mandatory binding arbitration. And as you mentioned in your testimony, the United 

States, along with 20 other countries, remain committed to pursuing mandatory binding arbitration procedures. 

So, my question, Mr. Stack, is why was mandatory binding arbitration, which is, again, of great importance to American companies and the United States, in general, not included in the final report? 

Mr. STACK. Thank you, Congressman. The short answer is the 

OECD BEPS project was a consensus kind of approach that sometimes played to the U.S. advantage, as we were trying to push 

items that we cared about. And in other circumstances, countries 

made clear that they were not yet ready to move forward on mandatory binding arbitration. 

The reasons for that, by the way, are not always nefarious. I 

mean some countries don’t have experience with it. Some countries 

worry about whether or not they can keep up with wealthier countries that might be able to put a lot of resources into it. And many 

countries have a concern that it raises issues of sovereignty to give 

away the right to make their tax determinations. And, of course, 

I suspect some are concerned that they would come out on the losing end of many arbitrations if, in fact, their tax administration 

was put to the test. 

The good news, however, Congressman, is the fact that—you referred to the fact that there are 20 countries ready to move forward 

in mandatory binding arbitration. This is something, when we were 

not successful in getting it in BEPS, we pushed it through the G7, 

and we have created quite a deal of momentum around it. 

And I can also report that the 20 countries that are interested 

represent 90 percent of the dispute cases around the world. So, by 

bringing together a lot of the developed countries that actually 

have the cases today, we are able to put the real critical mass of 

countries into the pot of moving forward on mandatory binding arbitration, and we are deeply engaged in that work at the OECD 

and the multilateral. 

The thinking I have is if we can get this critical mass of countries having experience with binding arbitration, that over time it 


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will grow out and attract the countries that for now are not willing 

to do that, most notably a country like India. And so we would try 

to demonstrate its success, make it part of the international tax 

fabric and, over time, I believe we will have success in making 

mandatory binding arbitration a standard tool in our international 

toolbox. 

Mr. REICHERT. And I recognized at the end of your testimony 

you asked yourself the question where do we go from here, and you 

mentioned tech work, implementation, and large document—1,000 

pages. Mr. Neal also asked about reporting and monitoring, which 

you mentioned, again, at the end of your comments. And you are 

looking for fair, efficient, and effective, all of those things you mentioned. 

Where do we go from here when it comes to binding arbitration? 

Is it your testimony, then, that demonstrating success is a likely 

way to get countries to come on board with dispute resolution language? 

Mr. STACK. Thank you, Congressman. I should have added that, 

as a very concrete next step, we are working in Paris on something 

called a multilateral instrument, which will try to put in one instrument the various treaty-related matters that have been agreed 

in the BEPS process. Mandatory binding arbitration will, we expect, be part of this multilateral instrument, at which point countries can sign up to the instrument and, in effect, put it into effect 

with those 20 countries, automatically if you will, subject, of course, 

to ratification by the Senate. 

And so, that gives us a very concrete, near-term vehicle to move 

forward with mandatory binding arbitration. And then I think we 

would watch the results and try to build out from there. 

Mr. REICHERT. Thank you. I yield back. 

Chairman BOUSTANY. Mr. Larson. 

Mr. LARSON. Thank you, Mr. Chairman, and congratulations to 

you. And kudos always to Mr. Neal and your other predecessors 

who served as Chairmen here, as well. And we want to get all these 

accolades out, and also condolences to Mr. Kelly on Notre Dame’s 

loss this past weekend. I was with you, I wanted you to know. 

Thank you again for your testimony, Mr. Stack, and for your 

service to the Nation. And if I could, just a couple of followup questions, one on what Mr. Neal had to say, and the other one is—it 

relates to the BEPS process. 

There is great concern about wholesale rewriting of the rules on 

the digital economy, with countries wanting the rights to tax companies with a so-called digital presence in their country. Did that 

occur? And can you discuss some of the Administration’s proposals 

regarding the digital economy and subpart F income? 

Mr. STACK. Thank you, Congressman. Yes. I mean I think that, 

as I said in my opening statement, I think the U.S. presence in the 

BEPS project was critical to moving international rules to a better 

place for the United States. 

As the—our digital companies are doing business all over the 

world. They are household names. They have penetrated markets 

and the consciousness of people and politicians all over the world. 

And one of the issues we were facing in BEPS was whether or 

not there should be new rules to tax people who sell into an econVerDate Sep 11 2014 15:21 Apr 26, 2017 Jkt 022334 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\22334\22334.XXX 22334

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omy through the digital economy. And there is a great deal of fervor and political pressure to write such new rules. And I am proud 

to report that the digital report in the OECD was an excellent discussion of the technical tax elements of digital. But, at the end of 

the day, none of the more aggressive proposals for taxation based 

on a digital presence were adopted. 

In the report there are options. And I believe also that European 

countries will turn, over time, more to that collection, which is totally appropriate. And I believe we were able to play a very constructive role in the digital space. 

With respect to the U.S. issues on digital in our subpart F reforms, I would say that, quite different from the work in the 

OECD, whether we needed a brand new paradigm to tax the digital 

age, what we were really doing in the President’s budget proposals 

was really trying to conform our subpart F rules to the fact that 

we now have different modes of achieving, in the digital space, 

things that brick-and-mortar countries used to do. 

So let me give you a very simple example of our rules. Our subpart F rules are based on a premise that, if you sell out of the 

United States, let’s say, to Bermuda, and then Bermuda on-sells, 

let’s say, into Europe, that the presence of this intermediate company provides an opportunity to do a little game-playing with how 

much income stays in the United States. And so, we have a rule 

called a foreign-based company rule, that says, well, if you’re going 

to buy from a related person and on-sell, we’re going to treat that 

Bermuda profit as really subpart F, and bring it back into the 

United States. 

Well, in the digital space, if you think about it, you don’t need 

to buy and sell a widget. You might license some IP and then 

stamp a disk in Bermuda and sell it. And really, I think the easy 

way to understand our proposal is we simply brought our subpart 

F rules up to what we had been doing in the brick and mortar 

world, so that similar games could not be played by tech companies 

in the digital space. And we have a couple of examples like that 

in our budget. 

Mr. LARSON. So let me quickly ask you, as well, you mentioned 

that there were—in addressing Mr. Neal’s concerns, there were two 

things that Congress could do immediately. We all hope, and certainly would like to see the bipartisan effort continue for tax reform. But you mentioned there were two immediate things, one 

was lowering the threshold and the other was dealing with interest 

stripping. 

You said going from 80 to 50 percent. Why 80 to 50? And, with 

interest stripping, could you give us a quick explanation of how 

that occurs? 

Mr. STACK. Sure. Thank you. Well, in the interest stripping, you 

know, I often say when I speak, you know, you read a lot in the 

press about these highly-engineered structures to do base stripping 

around the world. And what I have said publicly sometimes, if 

you’re a foreign multinational you don’t really have to do something very fancy to strip out of the U.S. base, you just have to— 

maybe you even dividend up a note. You just hand something to 

your owner and say, ‘‘Now I owe you $1 million.’’ And those interVerDate Sep 11 2014 15:21 Apr 26, 2017 Jkt 022334 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\22334\22334.XXX 22334

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est deductions start clicking in the United States, and we are losing revenue at every moment. 

Our proposal—and one that we pushed at the OECD—said, 

‘‘Wait a second. First of all, a multinational shouldn’t get, in our 

jurisdiction, any more than its pro rata share of its third-party borrowing.’’ And without getting too much into the weeds, what we did 

was we came up with a way to say you can get your share of global 

borrowing based on your EBITDA in the United States. And that 

seems fair. Or you can take a fixed percentage of your EBITDA so 

you don’t have to prove anything. 

And in the Administration’s proposal we put it at 10 percent. The 

OECD work suggested a corridor of 10 to 30. But I would just point 

out for the Committee both of those are far removed from the 50 

percent in our current 163J, which seem to permit far more interest stripping than we can probably afford, or that is based on 

sound tax policy. 

Mr. LARSON. Thank you. 

Chairman BOUSTANY. I thank the gentleman. Mr. Tiberi. 

Mr. TIBERI. Thank you, Mr. Stack. I have a headache. This is 

just unbelievable. 

[Laughter.] 

So, in responding to Dr. Boustany’s question about the EU state 

aid cases, you said you are not sure what else Treasury can do besides express concerns. 

Mr. Neal correctly identified the problem, and that is Congress 

not acting. But I would also argue, Mr. Neal, that there has been 

a lack of leadership at the White House on this very issue, as well. 

To me, it is not very complicated. Number one, it is outrageous, what the EU is doing in retroactively targeting U.S. multinationals. I just think it is outrageous. But number two, to me, in 

my Fred Flintstone mind, it is not really complicated, what the 

problem is. We have a very uncompetitive Tax Code. 

So, you can point to States. I was in Connecticut recently and I 

saw my friend, and the chatter there was about a large U.S. multinational company that has been headquartered there for a long, 

long time that was considering moving because of a new tax that 

was put in place in that State. 

In my State of Ohio, we lost longtime multinational—and not 

even multinational—domestic companies not to just India, but to 

Indiana, to Georgia, to Texas. And the companies, many of them 

public, cited the Tax Code in Ohio. And this has happened internationally, as well. And yet we talk about trying to prevent ways 

by writing regulations and rules. 

Mr. Stack, I don’t understand why we can’t look at this picture— 

I am cynically asking, I am not really asking you, because it is 

above your pay grade. 

[Laughter.] 

Why the Administration and Congress can’t come together and 

do what happens in communities in Ohio. One community loses a 

major employer to another community because the tax rate is lower 

in that community than the community they left. We see this all 

over. It is the marketplace. 

And, at the end of the day, you write rules to try to stop this, 

and maybe we can—you know, we can hit that peg for a little 


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while, but it is going to come up somewhere else. And the reality 

is we have an uncompetitive tax system. And if we can lower the 

rate and go to a system, some exemption-type system, that puts 

our large employers who do business all over the world on the 

same playing field, quite frankly, that the rest of the world’s rules 

are on, then we could actually maybe see some of this loss of jobs 

and ultimate loss of revenue stop. 

And for the life of me, I can’t understand, so I ask you this personally, not as a Member of the Administration, someone who leans 

to the left, rather than to the right. What is the problem with lowering rates and going to an exemption-type system that puts us— 

puts our employers on a level playing field? Why not just do that? 

Mr. STACK. Thank you, Congressman. First of all, I think you 

have just described the President’s plan. 

Mr. TIBERI. Wow. 

Mr. STACK. Because the President’s plan would lower the corporate rates, would broaden the base, and, in many of the jurisdictions around the world, where you pay more than a minimum tax, 

you are exactly on equal footing with your competitors in those jurisdictions. 

Mr. TIBERI. Boy, oh boy. I remember watching the Democratic 

Convention and Joe Biden making fun of the exemption system, 

saying that would ship jobs overseas. So maybe the Vice President 

needs to get on board with the President, because I clearly don’t 

think that what I am describing is the President’s plan, because we 

would have passed that back in 2011. Or maybe you should have 

passed it back in 2009. 

I mean, clearly, the market is doing something differently than 

what we would like it to do. And so, we have a—not a loss of jobs. 

We have a loss of really good companies. The only thing worse than 

an inversion is the company actually moving their headquarters 

overseas. 

And I don’t know about the community you are from. The community that I am from, the jobs that—the employers that make up 

the heart and soul of the communities, whether they are small 

businesses, medium-sized businesses, or large businesses, are the 

ones that are headquartered there, because they are involved in 

the United Way, they are involved in the educational system. They 

provide so many dollars to the community. And we are losing 

those. 

And, rather than trying to come up with these BEPS rules and 

anti-inversion rules, I just don’t understand and don’t see the leadership from the White House to say, ‘‘Look, let’s look at what other 

countries have done. Let’s look at what Ireland has done. Let’s look 

at what the UK has done. Let’s look at what other major employers, countries in the world have done, and follow their lead.’’ If we 

would have done that 3 years ago, we wouldn’t be having this hearing today. And maybe what we would actually be having is a great 

debate in Connecticut and in Massachusetts and Ohio and Louisiana about jobs coming here from Europe, rather than losing jobs 

to Europe. 

I yield back. 

Chairman BOUSTANY. I think the gentleman really outlined the 

problem beautifully. I thank him for that analysis. 


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Ms. Sanchez. 

Ms. SANCHEZ. Thank you, Mr. Chairman. And I am prepared 

to yield more time to Mr. Tiberi, if he wants to unveil the TiberiObama plan. 

[Laughter.] 

Mr. TIBERI. If you will support it, Ms. Sanchez. 

Mr. THOMPSON. I ask unanimous consent that we do a letter 

asking the Vice President to support the Obama-Tiberi plan. 

[Laughter.] 

Ms. SANCHEZ. That is right, that is right. Reclaiming my time, 

Mr. Stack, thank you for being here today. 

You mentioned that the United States had a presence in the 

BEPS discussion, and that was a favorable outcome, to have that 

input. You talked about making it known that we have a vested 

interest in what comes out of that project, and that you favor a prospective approach, and that there is this issue of retroactivity. 

I am curious to know what other ways did your—did Treasury’s 

participation in the BEPS project improve the outcome, the overall 

outcome, of the project? 

Mr. STACK. Thank you, Congresswoman. In preparing for today 

I had occasion to go back through these BEPS action items and just 

think of the ways the United States demonstrated a very strong intellectual leadership in—actually, across the board of the actions. 

And let me just give you a couple of examples. 

You know, transfer pricing is the prices that companies pay between affiliates across borders. Today, a lot of the action is around 

royalties and intellectual property, which is offshore. That constituted three action items: 8, 9, and 10. And there was an enormous push around the world to really water down the rules that 

respect contracts and respect the separateness of legal entities so 

that tax auditors and administrators could almost have carte 

blanche to look at a multinational setup and say, ‘‘Well, we think 

so much more profit should have been here than there.’’ 

We were extraordinarily aggressive in the transfer pricing space, 

and I think we have produced a report—and I don’t think it is— 

I don’t think I need to be the test of it, but I think within the U.S. 

tax community people have seen that move back to something that 

is far more a recognition of the arm’s length standard and how to 

apply it. 

On country-by-country reporting, I understand fully that it has 

been the subject of some complaint, because I can understand that 

any time you add burdens, et cetera, then there are concerns. But 

I have to say, on that one, the very first—first of all, the world 

started off wanting the multinationals to publicly produce their 

country-by-country data all over the world, number one. And number two, the first draft of that report didn’t just want 6 or 7 items 

per country. I believe the first draft wanted something in the 

neighborhood of 19 or 20 items. And there was going to be a—far 

more complexity. 

And we worked with the business community, and we came back 

to OECD and said, ‘‘Look, this is what can be done in the least burdensome way. This is really all companies need.’’ And we were able 

to push the country-by-country stuff over the line. 


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In the hybrid work—and this is weedy, I will confess, and I won’t 

get into the details—but there were times when the administrators around the world wanted U.S. multinationals to identify every 

single item on their books and records that might actually cause 

a mismatch. And we said, ‘‘Wait a second. This should be done 

among related parties,’’ because that is really where the problems 

are. 

So, I think we went item after item, led very strongly, and have 

improved the quality of the work by our tenaciousness, our adherence to principle, and our technical skills. 

Ms. SANCHEZ. I appreciate your answer. And I would just add 

one further thing before I yield back my time, that if Mr. Tiberi 

is interested in us, the United States, conforming our laws to that 

of most nations around the world, I would just point out that in 

the performance rights arena we lag far behind where the rest of 

the world is, and we give up revenue that sits overseas because we 

don’t pay performance rights here in this country, as other countries do to our performers. 

And, with that, I will yield back the balance of my time. 

Chairman BOUSTANY. I thank the gentlelady. We will go next 

to Mr. Kelly. 

Mr. KELLY. I thank the Chairman. Mr. Larson, thank you for 

your condolences, although I would just say to you that we both 

know Jerry Hogan. Jerry Hogan is the father of Kevin Hogan, the 

quarterback at Stanford. Jerry is a good friend of all of ours. His 

brother, Tom, and I went to school together at Notre Dame. And 

Jerry was also Notre Dame, too. But Kevin—I was happy—as 

much as I hate to see the Irish lose, I love seeing the Hogans win. 

So it is something about this Irish deal that keeps us together. 

Mr. Stack, thanks so much for being here today. I am going to 

ask you a question, though. And I think Mr. Tiberi hit on it very 

clearly. Now, I come from the private sector. And in the private 

sector you are always looking for market opportunities. And in our 

case we are looking at a global market. And we are looking at competitors who look at us and say, ‘‘This is a country whose pocket 

we can pick,’’ because of tax policy and regulations that make it 

very hard for us to be competitive on a world stage. 

Now, Senator Levin had proposed a bill in early 2014 that would 

place strict limits on mergers in which they move their tax address 

outside of the United States. Under the Senator’s plan U.S. companies trying to buy a foreign company and relocate their headquarters to a lower tax country would have to ensure that shareholders of non-U.S. companies owned at least 50 percent of the 

combined company, up from 20 percent now. The bill would consider inverted companies to be domestic for U.S. tax purposes if executive control remained in the United States and if 25 percent of 

sales, employees, or assets remained in the United States. The 

measure would have been retroactive to May 2014, and would be 

in place 2 years while Congress considers broader tax changes. 

Mr. Levin was responding to 14 companies that had conducted 

mergers since 2011 in which they moved their headquarters outside of the United States and into a lower tax jurisdiction. At the 

time of his announcement, Pfizer was contemplating such an inverVerDate Sep 11 2014 15:21 Apr 26, 2017 Jkt 022334 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\22334\22334.XXX 22334

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sion. Fast forward to today. Pfizer has announced that is just what 

they are doing. 

So, if you just did the Levin bill, that is a bill that actually became law, would that by itself forestall this migration of the U.S. 

tax base, considering the question within the context, relative of 

the tax advantage that foreign acquirers would gain from tighter 

inversion rules on U.S. companies? 

Mr. STACK. Congressman, yes. I—we have a budget proposal 

that differs from the Levin proposal in some minor ways that I 

can’t recall as I speak at this moment. But the general concept of 

telling a company that if you are—if you retain more than 50 percent ownership by the U.S. shareholders of the formerly inverted 

company, you have it inverted and you are still United States, we 

think would help greatly stem the flow of inversions. 

Mr. KELLY. Okay. But I think, when I heard Mr. Tiberi talk— 

and I think we all agree—in the private sector there is something 

about a carrot and a stick, and how you incentivize people to behave properly, or the way you would like to see them behave. 

So, I don’t believe that a bigger stick that makes it harder for 

people to be profitable—and, by the way, we all want to see companies be profitable because they hire more people, they make more 

capital investments—I would rather see a carrot that makes sense 

in relation to what the rest of the world perceives as a global market, and as an advantage that they have, or in restructuring their 

Tax Code to say, ‘‘Come over here and shop with us, you can be 

here,’’ knowing that—I think this is the part that is really hard for 

people to sometimes grasp—the total cost of operation includes everything, not just your raw materials and your labor, but also tax 

policy. 

When we artificially increase the cost of any product or service 

by a Tax Code or by regulation that makes it impossible to be on 

the same shelf globally as other countries, then it is time for us to 

take a look at what it is that we are doing wrong. Not what they 

are doing wrong. They are responding to an opportunity. It is not 

that they are not patriotic; they are just not stupid. Why the hell 

would you stay here, and continue to pay those kind of taxes and 

follow those kind of regulations, and then be held up as the worst 

people in the world because you are not paying your fair share? 

There is something that just doesn’t make sense about this whole 

piece. 

And this is not a Democrat or Republican issue. This is an American issue. We continue to lose red-white-and-blue jobs. We continue to decimate our local economies. We continue to downgrade 

our ability to compete globally and then blame it on some kind of 

a corporate strategy. That is not the problem here. The problem is 

we have no strategy, going forward, to gain market share. And I 

am talking about global market share. If you really want to lift this 

economy, then do it the right way. 

So I don’t expect you to respond to that, but, I mean, I don’t 

think the Levin bill does it. I would argue against any time that 

somehow a bigger stick, swung harder, is going to encourage people 

to stay. You know what they are going to do? They are going to 

say, ‘‘You know what? I am going to stay. I am not going to leave. 

But in the future, I am making investments someplace else, and 


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I will let this die on the vine. It can wither and go away. I will 

still succeed, but it won’t be here.’’ 

And I think that is the real crux of the matter. We seem to think 

that somehow, by beating people, that we are going to make them 

perform better. That is not the key. The incentive is much, much 

brighter for America when we actually encourage people to make 

investments here, not tax them out of business or regulate them 

out of business and make them totally uncompetitive on a global 

stage. 

Thank you, I yield back. 

Chairman BOUSTANY. The Chair recognizes Mr. Thompson. 

Mr. THOMPSON. Well, thank you, Mr. Chairman. And I also 

congratulate you on your rise to prominence in this fantastic Subcommittee. 

Mr. Stack, thank you very much for being here. And it is interesting. We all seem to be coming from the same place on the dais, 

irrespective of the side. We may have a different way of articulating it, Mr. Kelly, but I think we all want to make sure that the 

United States is a competitive place where we attract businesses, 

businesses who will stay here, businesses who will come here, businesses that will create jobs, businesses that will pay a tax level 

that gives us the revenues that we need in order to fund the priorities that we have, as a Congress, as Americans. 

And so, I guess my—what I am interested in is maybe some help 

from you, some guidance from you, as to how we get there. Your 

focus has been on business and international tax reform. The other 

side of the equation is the comprehensive tax reform that has had 

us all wrapped around our axles for the last many years. And is 

it your perception that we need to do one before the other? 

You talked a little bit about some specific tax policy that could 

be done, irrespective of comprehensive, that would help things 

around, help things move along. But is it better to break it off and 

do the business international, or would doing comprehensive help 

you get to where you believe we need to be, in regard to the business and international? 

Mr. STACK. Thank you, Congressman. I would mention, just 

as an opener, there has been, in terms of carrots and sticks and 

competitiveness—as a Tax Policy Committee, I think you folks 

know better than I do that, at the end of the day, the most competitive rate might be zero, but then we don’t raise any revenue. 

So, as tax policy folks, we always are all thinking about what is 

the revenue we need to fund the government we have. And finding 

a happy median with that and these competitiveness concerns is 

kind of an obvious point. And so we are not free, I take it, to just 

join a race to the bottom to, let’s say, zero corporate tax rates without an alternative revenue source. 

As to the second question, I would simply point out that the business tax reform in the last 2 years—there seems to have been some 

bipartisan consensus that a revenue-neutral business tax reform 

could be broken apart and done independently. And I think there 

has been a lot of good work done in lowering the rates and broadening the base and trying to get to the revenue-neutral business 

tax reform. Whether or not it is better to put it on with the comprehensive and the individual, I am simply going to report, as the 


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international guy on the team, I am afraid that falls a little above 

my paygrade. 

I don’t—I think there is a lot of complicated issues that folks— 

that you all appreciate perhaps better than I do about the complexity of going to the full comprehensive, you know, in the current 

environment. And I think there was a judgement made at some 

point to try to do the business-only on a revenue-neutral basis, and 

that seemed to be, for a while, the most promising thing we could 

do. 

Mr. THOMPSON. Thank you. Before I yield back, I just want to 

elaborate a little bit on the last point you made, and that is the 

importance of being revenue-neutral. It has to be able to pay for 

itself. And, if it doesn’t, all we are doing is digging the deficit hole 

deeper, and passing on greater debt to future generations. I think 

that is real important to keep in our focus, as we do any tax policy 

in this House. 

Thank you, and I yield back. 

Chairman BOUSTANY. I thank the gentleman. Mr. Renacci. 

Mr. RENACCI. Thank you, Mr. Chairman. And I want to thank 

you for holding this hearing on this very important issue. 

It is clear that our international tax system is outdated and anticompetitive, and makes U.S. companies vulnerable to foreign takeovers. In northeast Ohio we already have one large, multinational 

that has inverted. We have another company that is considering inversion. We have another one that looks like they are going to be 

taken over. So these are issues that are very concerning to me. 

And, Mr. Stack, you and I have talked about this in the past. So 

I do think we have to continue to look at this and do what is necessary to make sure that we are competitive here. 

Mr. Stack, I am going to get into the weeds a little bit, though, 

on one of the items finalized on round one. As you know, action 13 

requires companies to maintain and report significant transfer pricing documentation. Some have said that action 13 may be the most 

important action item arising out of the BEPS project. I want to 

focus on the difference between two of the types of documentations 

that companies will be required to report, country-by-country, CBC, 

reporting; and master file information. 

Can you explain what types of documentation businesses must 

provide under these two types of reporting? 

Mr. STACK. Thank you, Congressman. The country-by-country 

report is really a template in which a country would list the various jurisdictions around the world in which it does business, and 

then it would list out six or seven economic indicators: Its revenue, 

its taxes paid, its taxes accrued, its assets, its retained earnings, 

its number of employees. And then it would have a little code of, 

like, what kind of a business does that company do. It is a distributor or a manufacturer. 

So it is really a form, if you will, that sets forth that kind of information. The form will be filed with the U.S. tax return. And 

then the U.S. Government will, with appropriate treaty or tax information exchange partners, exchange that form with jurisdictions 

around the world that have promised to keep it confidential, and 

use it for kind of a risk assessment. 


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The master file is really a different document. And, by the way, 

the work in this space about harmonizing transfer pricing documentation around the world precedent BEPS, because multinationals were basically stuck with a situation in which every 

country in which they did business was asking for a different kind 

of transfer pricing documentation to substantiate what it did. 

So the OECD went to work and said, ‘‘Gee, we could have a winwin here. We can simplify this documentation to reduce the burdens on business and, at the same time, get the countries what 

they need.’’ And that aspect of it consists of two parts, really. There 

is something called the master file, which I will talk about, and 

then there is something called a local file. 

And the local file is, oh, tell me about your foreign affiliates that 

have direct transactions with my country, so we can go in and 

check your transfer pricing. The master file is this overview document. Tell us about—in fact, I highlighted just a couple of sections 

of it—give us a high level—it is intended to provide a high-level 

overview in order to place the multinational group’s transfer pricing practices in their global economic, legal, financial, and tax context. 

It is not intended to require exhaustive listings of minutiae, a 

listing of every patent, as this would be unnecessarily burdensome. 

Instead, it is an overview of the business, the nature of the operations, its transfer pricing policies, et cetera. And in producing that 

master file, which is written by the company, it should include lists 

of important agreements. But the company should use prudent 

business judgement in determining the appropriate level of detail. 

So this is your big, overarching picture. It goes to the company. 

When they come in to audit you they know something about you 

and how you function. And that is the master file. 

Mr. RENACCI. Mr. Stack, I am running out of time, but are you 

concerned that the master file information will be used by foreign 

governments to launch frivolous foreign audits or, even worse, 

leaked to foreign competitors? 

Mr. STACK. I am—one can never say never, Congressman, 

right? However, we have to look at this context of the countries had 

the opportunity to ask for this on their own beforehand. We will 

be vigilant in watching how American companies are treated 

around the world, and we will try to take actions appropriately. 

Mr. RENACCI. And I am going to move back to state aid, which 

I know the Chairman talked about. 

It is disturbing to me that American companies are being targeted in proceedings and aren’t given an opportunity to defend 

themselves. My understanding is that only the countries can defend the state aid proceeding at the commission level. Companies 

that are subject to increased retroactive taxes—which we talked 

about, almost 10 years—are precluded from participating in the 

commission’s proceedings. 

Mr. Stack, do you share the concern of fairness of these proceedings, if the company is not allowed to participate in these hearings? 

Mr. STACK. Congressman, I am not an expert in the procedures 

in the state aid proceedings, so I am a little loathe to kind of judge 

them, you know, from afar. Obviously, opportunities like ability to 


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present your case are part and parcel of fairness, in our view. But 

I don’t know their procedures well enough to comment. 

What I have chosen is the retroactivity aspect, because I think 

that stares us all in the face to say, ‘‘Hey, these are new rules, they 

should be applied prospectively, not retroactively,’’ and that is the 

piece that I have chosen to focus in on. And I apologize, I am not 

a procedural expert to know enough for the basis of your question. 

But, obviously, I am concerned about the fair treatment of our companies. 

Mr. RENACCI. Thank you, Mr. Stack. I yield back. 

Chairman BOUSTANY. I thank the gentleman. 

Mrs. Noem. 

Mrs. NOEM. Mr. Stack, thank you for being here today. I will 

keep mine short. 

I am concerned that there isn’t mandatory binding arbitration 

procedures in the final report. When the United States, obviously, 

made it a priority, and several other companies—or countries, as 

well, asked for that, we look at the number of tax disputes every 

year—they far exceed those that are resolved. And as many countries start to implement some of the changes that were recommended in the final BEPS report, we are bound to see more tax 

disputes. 

Why was there no binding arbitration procedures put in the final 

report? 

Mr. STACK. Thank you, Congresswoman. I—we were also disappointed that we were not able to have mandatory binding arbitration as part of the final deliverables. 

The nature of the BEPS process, however, was a consensus process. And so, countries were able, in effect, to veto the idea that we 

would have binding mandatory—— 

Mrs. NOEM. I understand that it was a major concern for many 

countries, up to 20 of the major countries that are part of the negotiations. 

Mr. STACK. Yes, yes, it is. And the nature of the OECD process 

is it takes one country, basically, to block moving something forward. 

Now, on the flip side of that is, when it came to the transfer pricing work, the United States was able to be very aggressive in saying, you know, ‘‘We have certain demands before that work comes 

out.’’ I—— 

Mrs. NOEM. So what is our next process? What do we do about 

getting some procedures put in place? 

Mr. STACK. We have 20 countries that have said, ‘‘We want to 

do mandatory binding,’’ and they represent 90 percent of the world’s 

disputes right now. And we are moving to put that in this multilateral instrument that, hopefully, that—part of which the United 

States can join, and hopefully get it signed and ratified by our Senate. And we will have made enormous progress, even though there 

will be some outlier countries, for the time being, that will not have 

mandatory binding arbitration with us. 

So, it is not a whole loaf, but it is a pretty good loaf. 

Mrs. NOEM. And the time frame on having those recommendations ready for the Senate’s consideration would be? 


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Mr. STACK. So the multilateral is hoping to finish a draft in 

2016. I think that is very ambitious. So I think we are looking over 

the next couple of years when this would play out. 

And, of course, we need to have those provisions look like provisions that we think our Senate would ratify. So there is a fair 

amount of work on that. 

Mrs. NOEM. Okay, thank you. With that, I yield back. 

Chairman BOUSTANY. I thank the gentlelady. 

Mr. Holding. 

Mr. HOLDING. Thank you, Mr. Chairman. I want to follow up 

on a couple of lines of inquiry from my colleagues. 

First, from Mr. Tiberi—just to expand on his comments. You 

know, it is not only about rates. And if we could just simply lower 

the rates, broaden the base, you know, we would be much more 

competitive. It is also compliance cost. I had a series of interesting 

meetings with large multinationals, and just talked about how they 

comply with the U.S. Tax Code, and how they comply with other 

countries. 

You take one particular company, tens of billions of dollars in 

revenue. Their U.S.-based operations, they have 40 IRS employees 

in their accounting division to continually prepare their returns, 

and so forth. In their UK-based operations with similar amounts 

of revenue, they are able to comply with the Tax Code there with 

no revenue agents in their accounting offices. It is a huge burden 

to comply with our Tax Code. So it is not only a matter of lowering 

the rates, Mr. Chairman, you know, it is a matter of simplifying 

the system so that companies can easily comply. 

I want to follow up a little bit on Mr. Renacci’s comments about 

the master files. You know, it is—in the master files—I mean the 

information there is not general. There are a lot of specifics there 

regarding supply chains, service agreements, extremely sensitive 

information. Imagine the sensitivity of a defense contractor’s information who is doing work all around the world, in different countries, dozens upon dozens of different countries on every continent. 

You can imagine the angst they would have in supplying, you 

know, the information required by the master file. 

So, I mean, I understand that Treasury will be compiling those, 

collecting and compiling those master files. Is that correct? 

Mr. STACK. Congressman, we will—the IRS will collect the 

country-by-country file. The master file goes directly from companies to the countries in which they operate. 

Mr. HOLDING. Okay. Will the Treasury also have the master 

files? 

Mr. STACK. We—if—let’s say there is a U.S. company that operates in foreign jurisdictions. We would not necessarily get a master 

file from, let’s say, a U.S. resident multinational, because they are 

our taxpayer, they are here, and we have all the information we 

need about them. 

Mr. HOLDING. So, I mean, if the master file is misused in some 

way, what recourse does a company have? 

Mr. STACK. I think that one of the reasons I would like to move 

our focus—let me back up. 

Companies already today deal with tax administrations that 

don’t always behave in the best ways, and they struggle with that. 


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And it is one of the reasons we want to move the BEPS work more 

into focusing on tax administration. 

The second thing to keep in mind is companies—countries were 

always free to ask for a master file. What we really did at the 

OECD was homogenize the work so that there is, like, one file 

asked for around the world. We didn’t really have a special power 

to tell countries what they could ask of multinational—— 

Mr. HOLDING. So in the BEPS process, was there consideration 

of some form of recourse that a company might have or, you know, 

special safe harbor provisions, where a company could shield sensitive information? 

Mr. STACK. I—— 

Mr. HOLDING. Is there any arbiter of that—— 

Mr. STACK. On that last point, Congressman, we—the companies have the pen on that report, and we do not expect them to, 

willy nilly, give away sensitive information. Because we think the 

master file rules can be read in such a way that companies can use 

judgement to be sure the country gets the high-level view that I described without necessarily pouring out, you know, super-sensitive 

information. That was the judgement—— 

Mr. HOLDING. So, you know, during the BEPS process it was 

clear that the various countries involved were working hard to protect their own multinational countries, protect their own interests. 

So Treasury, at the table at the BEPS process, what were you 

doing to protect U.S. multinational countries during this process? 

Mr. STACK. I think—— 

Mr. HOLDING. Give me your top three hits. 

Mr. STACK. I think the top three hits are the work we did to 

make the transfer pricing respect the legal entities and contracts 

of our companies, I think the work we did to get the country-bycountry reporting to be manageable for our multinationals, and I 

think the work we did to protect our digital companies from overreaching by foreign jurisdictions. Those are the three that I would 

say pop to mind—— 

Mr. HOLDING. Give me a couple where you think you failed. 

Mr. STACK. I—we were disappointed that things like permanent 

establishment rules are looser than we would like, although there 

we said, ‘‘Well, we are not necessarily going to adopt those, but the 

rest of the world wants to.’’ And there we are going to come back 

on more work to make sure we can ring fence the work done on 

permanent establishment rules. 

And the fact that countries around the world have opted for a 

kind of a very loose principal purpose test for treaty abuse was 

disappointing to us. Now, again, the United States is not going 

to adopt that approach, but other countries seemed to want to do 

that. 

We wanted, in both those cases, more clear and administrable 

rules for other countries to follow, but other countries had different 

ideas. 

Mr. HOLDING. Thank you. Thank you, Mr. Chairman. 

Chairman BOUSTANY. I thank the gentleman. And I think Mr. 

Holding hit on some very important questions, given that we have 

6103 protections for U.S. taxpayers and yet, under the master file, 


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32 

we have serious concerns about those kinds of protections, going 

forward. 

Mr. Stack, thank you for being here today. We appreciate your 

testimony. It has been extraordinarily—oh, I am sorry. 

Mr. Reed. 

Mr. REED. I know I am from New York, so we are often forgotten here. But if we could have the last word, Mr. Chairman, I 

would appreciate it. 

Chairman BOUSTANY. You got it. 

Mr. REED. Thank you, Mr. Stack. I do want to zero in a little 

bit on this master file issue, because it is of a concern to me. 

So what I am hearing from your testimony is, essentially—and 

from your written testimony—is the Treasury is going to require 

country-by-country reporting mechanisms for certain companies—I 

think it is $800 million or more, or above. But with the master file, 

Treasury is not requiring that information. 

And essentially, what I heard from your testimony—and is this 

accurate—that you are essentially saying companies are in the best 

position to protect their information, therefore we are going to let 

them make the determination as to what information they release 

in that master file? Is that the testimony you are offering? 

Mr. STACK. Yes, Congressman. 

Mr. REED. Okay. So what is Treasury going to do if someone 

challenges that determination by the businesses, that maybe they 

erred in their judgement, and a taxing administration says, ‘‘We 

need more information’’? What is Treasury’s position or response to 

those multinational companies that are in that situation? 

Mr. STACK. So those questions—that question could go in two 

directions. The first direction could be that a U.S.—a foreign country is always asking our multinationals for more information. It is 

a constant part of being a multinational tax director. And then you 

have the laws of the local country, and you—that local subsidiary 

may or may not have that information. And that is kind of a common, everyday dispute in the multinational space. So, in this case, 

that would be no different. 

A trickier question could be, well, let’s say they don’t like the 

level of detail in the master file. And so they—— 

Mr. REED. That is my question. 

Mr. STACK. Yes, and they impose a penalty, or they do something—— 

Mr. REED. Correct. 

Mr. STACK. Then I do think—but I don’t think this is different 

in kind from a whole slew of administrative things we have to be 

paying more attention to, to protect our multinationals that I 

would like to get on the next wave of the agenda, which is: How 

do tax administrations act; do they act in good faith, in accordance 

with what the general consensus—— 

Mr. REED. You are going away from my question here, Mr. 

Stack. 

Mr. STACK. Yes? 

Mr. REED. Because, if I am understanding correctly, country-bycountry reporting is going to be given to you, the Treasury—— 

Mr. STACK. Yes, right. 


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Mr. REED. And then that is going to be protected by tax information—— 

Mr. STACK. Yes. 

Mr. REED [continuing]. Treaty agreements, and you will have 

the ability to defend what information is released, et cetera, and 

stand by those companies that are targeted maybe in an inappropriate manner. 

But with the master file data, I don’t see the same type of protection that Treasury is offering to companies that, you know, make 

that error in judgement or say, you know, ‘‘We gave you enough information,’’ and the tax administration says, ‘‘No, we are going to 

hit you with a penalty.’’ 

Treasury is essentially telling our guys, ‘‘You are on your own,’’ 

is what I am hearing from your testimony. 

Mr. STACK. Well, the report does call for countries to treat it 

confidentially. But what I want to emphasize here is—and this is 

difficult—— 

Mr. REED. How are they going to treat it confidentially? 

Mr. STACK. Because, in many of these jurisdictions, it is expected to be treated as tax return information in those jurisdictions. So it would just be—— 

Mr. REED. So your understanding is that the foreign countries 

are going to protect that information. And what is the penalty if 

the foreign country violates that—— 

Mr. STACK. We don’t have a specific penalty, Congressman. I 

mean, and that is fair. I think—— 

Mr. REED. That is the problem. 

Mr. STACK. It is—— 

Mr. REED. That is the problem. 

Mr. STACK. It is, Congressman, except if we never had a BEPS 

project, those countries could ask for the same information. We 

didn’t do anything special in the BEPS project that the country 

couldn’t have done on its own. What we did do was try to get a homogenized look at these—— 

Mr. REED. All right, so—— 

Mr. STACK [continuing]. Across the countries. 

Mr. REED. Going into the negotiation, you recognized that the 

countries had the ability to potentially—— 

Mr. STACK. Yes. 

Mr. REED [continuing]. Abuse or inappropriately use that information, but we elected—you elected not to take that issue up. You 

elected to negotiate other points is what I am hearing. 

Mr. STACK. No. Actually, Congressman, I think my big, heavy 

lift in the next part of BEPS is I want to get all the tax administration issues like this on the table, and get the world to agree to peer 

reviews and standards for what a fair and just tax administration 

should look like. And when we do that, that country could not assert a penalty on a master file, just because it is missing some jot 

or tittle, because that is not the spirit of that work. 

That is a reason to stay engaged multinationally, but it is more 

work to be done for—to be sure, and it is a heavy lift. I wouldn’t 

doubt that. But it is important. 

Mr. REED. So that is for future consideration and future—— 

Mr. STACK. Yes. 


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Mr. REED [continuing]. Negotiation. Because—— 

Mr. STACK. And it is important. 

Mr. REED. Because that is another question I have. One of the 

things I am seeing here, potentially, on the international scene, especially with the EU, is the EU seems to be targeting, for lack of 

a better term, this revenue. And as they face austerity budgets in 

the EU, I just see, in my opinion, an aggressive attack by the EU 

to go after this revenue. 

And you just said there is a future BEPS environment that you 

envision. What is post-BEPS? Where are you going? What is after? 

What can we expect in those negotiations, going forward, especially 

when the EU seems to be taking a very aggressive approach here? 

Mr. STACK. Yes. I think I just want to—because they are doing 

it through their competition committee, they don’t necessarily participate in the overall tax work that we do at the OECD, and that 

is part of the problem, I think, that you are pointing to. 

Mr. REED. Yes. 

Mr. STACK. In the—coming back to the tax world that I live in, 

I think the next phase in BEPS is how do we implement this, how 

do we monitor each other, how are we implementing it. And something the United States is aggressively trying to put on the table 

is how do we make everybody else behave with all this information. 

And that is something that I want to get companies and countries 

to focus on, both through the G20 and also at the OECD. 

Mr. REED. I appreciate it. I notice my time has expired. With 

that, I yield back. I appreciate the information. 

Chairman BOUSTANY. I thank the gentleman. 

Well, thank you, Mr. Stack, for appearing before this Subcommittee. You helped walk us through some very difficult and 

complicated issues. Obviously, a lot more is going to be done in this 

area. I want to assure you that both sides of the aisle of this Subcommittee have a deep interest in how this is going to be implemented, and there are a number of outstanding questions. So, 

again, thank you, and we look forward to staying in touch. 

We will now call the second panel up. 

[Pause.] 

We will now hear from our second panel of witnesses. We have 

a very distinguished panel, starting with Barbara Angus, Principal 

with Ernst & Young, followed by Gary Sprague, Counsel, The Software Coalition. Then Catherine Schultz, Vice President for Tax 

Policy, National Foreign Trade Council and Martin Sullivan, Chief 

Economist, Tax Analysts. 

The Committee, as I stated earlier, has received your written 

statements. They will be made part of the formal record. We look 

forward to hearing your oral remarks, and I would ask each of you 

to limit those oral remarks to 5 minutes. 

Ms. Angus, you may begin when you are ready. 

STATEMENT OF BARBARA M. ANGUS, 

PRINCIPAL, ERNST & YOUNG 

Ms. ANGUS. Chairman Boustany, Ranking Member Neal, and 

distinguished Members of the Subcommittee, it is an honor to appear before you. My name is Barbara Angus, and I am leader of 

strategic international tax policy services for Ernst & Young. EarVerDate Sep 11 2014 15:21 Apr 26, 2017 Jkt 022334 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\22334\22334.XXX 22334

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lier I had the privilege of serving as international tax counsel for 

the Treasury Department, and as business tax counsel for the Joint 

Committee on Taxation. I am appearing today on my own behalf, 

and not on behalf of EY or any client. 

I am pleased to be here to discuss the practical implications of 

the final reports issued by the OECD as part of its BEPS project. 

Other countries are already implementing aspects of the recommendations, so this hearing is very timely. As the Ways and 

Means Committee continues its work toward U.S. tax reform, it is 

important to consider the BEPS recommendations, the actions that 

other countries are taking in response, and how those actions will 

affect global companies that are headquartered or invested in the 

United States. 

At the core of the reports issued by the OECD last month are 

recommendations for significant changes affecting fundamental elements of the international tax framework. Countries must now consider whether, how, and when to act with respect to the BEPS recommendations. They will act in their own interests and under their 

own timetables. 

The OECD project arose out of a growing political and public 

focus in many countries on the taxation of foreign companies. 

Therefore, I have no doubt that significant action with respect to 

BEPS will take place across countries around the world. Indeed, 

countries had already begun taking unilateral action to address 

BEPS, even before the OECD issued its reports. 

The international tax changes that are embodied in the BEPS 

recommendations have significant implications for all global businesses. While the OECD did not deliberately target U.S. companies, the recommendations could have a disproportionate impact on 

U.S. businesses because of their geographic spread and the particular pressures of the U.S. worldwide tax system. Moreover, some 

countries have singled out U.S. companies, and the recommendations could well be used by countries in such targeting. 

Global companies face uncertainty in light of the BEPS recommendations, significant uncertainty. The BEPS recommendations 

generally reflect a move away from relatively clear rules and wellunderstood standards to less-specific rules, more subjective tests, 

and vaguer concepts. Global companies face significant new compliance burdens highlighted by the new country-by-country reporting 

requirement. 

Global companies face significant risk of misuse of their business 

information. The new reporting would put global information about 

a company into the hands of all countries where it operates. For 

U.S. companies, which tend to have the broadest global footprint, 

the risk of breaches of confidentiality is particularly acute. 

In this regard, many U.S. companies believe it is in their interests for the United States to implement the recommended countryby-country reporting so that they can provide their information to 

the IRS to be shared under U.S. information exchange relationships, subject to the U.S. rules on confidentiality of taxpayer information. This approach would mean greater protection and lower 

administrative burdens than the alternative, of U.S. companies directly providing their information to multiple foreign countries. 


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Global companies face significant risk of controversy. The new 

rules are subject to varied interpretation. Controversy imposes substantial resource burdens on both taxpayers and tax authorities. 

For taxpayers, controversy in a foreign country is even more complex. 

Global companies face significant risk of double taxation. Where 

countries do not apply the new transfer pricing guidelines included 

in the BEPS recommendations in the same way, for example, multiple countries may assert taxing jurisdiction over the same dollar 

of income. One of the BEPS focus areas was improving the dispute 

resolution mechanisms used to prevent this kind of double taxation. But the BEPS project made little progress in this area, 

which is a major disappointment for the U.S. business community. 

Importantly, there is continuing work in the OECD on BEPS 

that provides opportunity to ameliorate these issues. Business 

input is much needed, and the U.S. business community, which has 

much at stake, should continue its participation in the OECD process. In order to ensure that U.S. interests are protected, it is essential that Treasury, in consultation with the tax rating committees, 

continues to play an active role in all aspects of the OECD/BEPS 

work. 

Countries’ actions with respect to the BEPS recommendations 

will dramatically change the global tax landscape. The aspects of 

the current U.S. tax system that detract from the attractiveness of 

the United States as a location to headquarter and invest will become more acute as other countries implement the BEPS recommendations. The BEPS project, and the response by foreign 

countries, should be viewed as yet another reason why tax reform 

must be an urgent priority. 

Thank you for the opportunity to present these views. 

I would be happy to answer any questions. 

[The prepared statement of Ms. Angus follows:] 


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Statement of Barbara M . Angus 

to the 

House Committee on Ways and Means Subcommittee on Tax Policy 

Hearing on the OECD Base Erosion and Profit Shifting Project 

December 1, 201S 

Chairman Boustany, Ranking Member Neal, and distinguished members of the Subcommittee, 

it is an honor to appear before you today as the Subcommittee considers the implications of 

the OECD Base Erosion and Profit Shifting (BEPS) project. I am leader of Strategic International 

Tax Policy Services for Ernst & Young UP. Earlier in my career, I had the privilege of serving as 

International Tax Counsel for the U.S. Treasury Department and as Business Tax Counsel for the 

Joint Committee on Taxation. In my role at Treasury, I was the lead U.S. representative to the 

OECO Committee on Fiscal Affairs, which is the OECO group responsible for work related to 

taxation. I am appearing today on my own behalf and not on behalf of EY or any client. The 

views reflected in my testimony are my own. 

With the OECO's recent issuance of final reports in connection with its BEPS Action Plan, the 

BEPS project is entering a new phase where the focal point will be implementation of the 

recommendations reflected in those reports. At this stage attention must turn to the practical 

implications for global businesses of the changes in international tax laws and treaties that are 

embodied in the BEPS recommendations and that are being considered and adopted by 

countries around the world. Moreover, as the Ways and Means Committee continues its work 

toward reforming the U.S. tax system, it will be important to consider the principles and 

recommendations reflected in the final BEPS reports, the actions that other countries are taking 

in response to the BEPS recommendations, and how those actions w ill affect global companies 

t hat are headquartered or invested in the United States. 

OECO BEPS Project, Final Reports, and Next Steps 

On October s•h, the OECD issued final reports with respect to all fifteen focus areas in its BEPS 

Action Plan. The reports were endorsed by the G20 Finance Ministers at their meeting on 

October g<h and the G20 Leaders at their summit on November lS'h·lG'h. At the core of the 

reports are recommendations for significant changes in countries' tax laws and treaty 

provisions that affect fundamental elements of the international tax framework. 

The OECD's focus on BEPS began in 2012, and at the direction of the G20 BEPS became a formal 

project with the issuance of a preliminary report in February 2013 and the fifteen-point BEPS 
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Action Plan in July 2013. This occurred against the backdrop of increasingly intense criticism in 

Europe and elsewhere of the taxation of foreign companies with inbound investment, highly· 

charged rhetoric about "fair share" of taxes, and allegations of tax evasion fueling headlines in 

the press. The creation of an OECD project was viewed by policymakers in some G20 countries 

as a constructive way to approach the underlying concerns about the international tax system, 

through the OECD's historic role as a forum that brings countries together to consider tax 

matters of common interest from a combination of technical, policy and economic 

perspectives. However, the ambitious scope and timetable established for the project 

necessarily challenged the deliberative process for which the OECD is known. Rather than 

narrowly targeting the potential for artificial shifting of income and other erosion of countries' 

tax bases, the BEPS Action Plan involves virtually every aspect of the international tax 

infrastructure. The short deadlines included in the Action Plan meant that there was little time 

to engage fully with stakeholders or to reach solid agreement among countries grounded in 

mutual understanding of the final outcomes. 

The OECD's issuance of final BEPS reports was the culmination of an expedited process of 

discussion drafts, comment periods and consultation sessions with respect to each of the 

fifteen focus areas. The global business community, including many U.S.-based businesses that 

actively participated in the process, submitted thousands of pages of comments on the various 

discussion drafts, addressing policy, economic, technical and practical aspects of the proposals 

for change. Business representatives participated in consultations with OECD and G20 member 

country officials to present their perspectives and concerns and to respond to questions and 

requests for further input. Other interested parties, including representatives of nongovernmental organizations, also provided input during the consultation process. At the same 

time, the dialogue among country officials regarding the development of the recommendations 

continued, as the discussion drafts that were released generally were preliminary in nature and 

did not yet reflect agreement among the participating countries. 

The final reports that were issued represent an evolution, to a greater or lesser degree, from 

the original drafts. Several of the final reports reflect moderation, in some cases significant, of 

the initial proposals for change. U.S. Treasury was an important voice in the discussions that 

led to these refinements. However, the process revealed how much divergence of views there 

is among countries in many areas. Because the OECD operates by consensus, unanimous 

acceptance was required for the issuance of the reports. Given the wide range of views, 

reaching agreement required the inclusion of options and alternative approaches in some of 

the reports. In other cases, the use of fairly general concepts and broad language to leave 

room for varied interpretations likely facilitated acceptance of the final reports. 

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As the OECD acknowledges, countries are sovereign and the OECD is not a rule-making body. 

As part of the BEPS project, OECD and G20 member countries have agreed on the 

recommendations reflected in the final reports. However, given the options, alternatives and 

broad language reflected in the reports and the complexity inherent in meshing any of these 

concepts with countries' existing domestic tax systems, there may be significant distance 

between agreement in the OECD process and ultimate adoption of new domestic tax rules. 

Moreover, most of the recommendations likely would require legislative changes or treaty 

revisions, thus necessitating the legislative or treaty ratification processes which in many 

countries are separate from the process for participation in the OECD. In addition, some 

countries may already have measures in place that they believe are consistent with one or 

more of the BEPS recommendations such that they would take the view that no further action 

would be needed in those areas. 

At the same time it issued the final reports, the OECD also issued an explanatory statement that 

describes additional work to be done in connection with the BEPS project. There will be fol lowon work in several areas, including essential work to address industry-specific issues that were 

not resolved in the final reports and some broader work related to transfer pricing. This work is 

expected to be completed in 2016 and 2017. Negotiations have just begun on the so-called 

multilateral instrument that is envisioned by the OECD as a mechanism for amending existing 

bilateral tax treaties to incorporate the BEPS recommendations that are treaty-based without a 

separate bilateral negotiation for each such treaty. These negotiations are expected to be 

completed by the end of 2016, with the instrument then open for signature by interested 

countries subject to each country's applicable ratification procedure. The OECD plans to 

develop a peer review process with respect to countries' practices in resolving disputes under 

t reaty-based mutual agreement procedures. It is expected that this will be based on a similar 

process in place for peer review of countries' exchange of information practices. At the 

direction of the G20, the OECD also intends to develop a framework for monitoring countries' 

implementation of the BEPS recommendations. While the form and nature of this monitoring is 

not yet defined, the G20 intends that additional countries should be involved in this aspect of 

the BEPS work going forward. Finally, the OECD statement indicates that the OECD and G20 

will continue to work together on BEPS until 2020. 

Country Activity with respect to BEPS 

With the OECD's issuance of the final reports, countries must now consider whether, how and 

when to act with respect to the various BEPS recommendations. Countries will act in their own 

interests and according to their own timetables. Coordination and consistency of action are 

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likely to be limited as each country interprets the BEPS recommendations through its own lens 

and in the context of its own tax policies and practices. 

Notwithstanding the likely absence of a coordinated approach, significant action with respect to 

BEPS nevertheless is expected across countries around the world. The OECD project arose out 

of a growing political and public focus in many countries on the taxation of foreign companies. 

More t han 60 countries actively participated in the BEPS project, including all members of the 

OECD and G20 and a substantial number of developing countries. More than 90 countries are 

participating in the negotiation of the multilateral instrument to be used to amend existing 

bilateral treaties to incorporate the treaty-based BEPS recommendations. Thus, there is 

substantial interest by countries in the BEPS recommendations. 

In the case of the BEPS recommendations with respect to transfer pricing, which represent 

some of the most significant changes coming out of the BEPS project, the new rules will have 

effect in some countries without further action by the country. The recommendations are 

reflected in revisions to the OECD transfer pricing guidelines, which in many countries, other 

than the United States, have been made a part of the countries' rules on transfer pricing 

through legislation or guidance. Thus, in these countries, the transfer pricing changes will 

become applicable as soon as the revised guidelines are finalized by the OECO. 

Countries had already begun taking unilateral action to address BEPS even while the OECD 

process was continuing and before final recommendations had been agreed. In some cases the 

action taken anticipated the final BEPS recommendation and is generally consistent with it. In 

other cases, unilateral action that is inconsistent with the BEPS recommendations has been 

taken. In addition, in many countries, tax authorities have been citing BEPS concerns as 

justification for new administrative practices even without any change in the applicable law. In 

addition to individual country action, the European Union already has agreed on measures to 

address BEPS that all EU member countries are required to implement and several additional 

BEPS-related measures are under ongoing discussion in the European Union. 

EY has been tracking BEPS-related developments in countries' tax law and administrative 

practices since the beginning of 2014. In the past two years, BEPS-related developments in 

more than 60 countries have been identified. Illustrations of the kinds of measures that already 

have been enacted, implemented or proposed include the following: 

• The United Kingdom has enacted the diverted profits tax which would impose a penalty 

rate of tax in situations where it is considered that a permanent establishment has been 

avoided or profits otherwise have been artificially shifted out of the United Kingdom. 

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Mexico, Poland and Spain have adopted country-by-country reporting requirements; 

legislation that includes country-by-country reporting is advancing through the process 

in Australia, China, Denmark, France, Ireland, the Netherlands, and the United Kingdom. 

• The European Union has amended a directive to address certain hybrid arrangements 

which is to be implemented by all member states by the 2015. Brazil and Norway have 

proposals to address hybrids. France and Mexico have enacted anti-hybrid rules that go 

beyond the BEPS recommendation in this area. 

• Australia, Austria, Brazil, Poland, the Slovak Republic, South Africa, and Spain have made 

changes to rules related to the deductibility of interest. Costa Rica, Indonesia, Japan, 

Korea, lesotho, and Norway are considering changes in such rules. 

• Argentina, Australia, Chile, and Germany have amended tax treaties to restrict access to 

benefits. Vietnam has issued administrative guidance limiting treaty benefits. 

• The European Parliament is discussing requiring public reporting of information similar 

to the information required in the country-by-country report. 

Implications for Global Businesses 

Global businesses will need to monitor developments in all the countries where they operate or 

invest. Even in the absence of any immediate U.S. legislative action, U.S.-headquartered 

companies will be adversely affected by actions that are taken in the foreign countries that are 

part of their global footprint. The potential effects are an immediate concern because, as 

noted above, BEPS-related change has occurred in countries already and additional action is 

expected with countries' year-end tax legislation. 

The OECD BEPS project and the international tax changes that are embodied in the BEPS 

recommendations have significant implications for all global businesses. In today's global 

economy, a business need not be large to have international operations. While the OECD 

project did not deliberately target U.S.-based companies, the recommendations could have a 

disproportionate impact on such businesses as they tend to be the biggest companies with the 

broadest global footprint. In addition, the implications of the current U.S. worldwide tax 

system may have the effect of exacerbating the adverse impact of the BEPS recommendations 

for U.S.-based companies. Moreover, some countries certainly seem to have singled out U.S.-

based companies in their criticism of foreign investors and the BEPS recommendations could 

well be used by countries in such targeting. 

Global companies face significant uncertainty in light of the BEPS recommendations, 

uncertainty that can be a substantial barrier to cross-border operation and investment. Change 

of the magnitude contemplated in the BEPS recommendations necessarily creates uncertainty. 

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The options and alternatives reflected in the BEPS recommendations add to the uncertainty, as 

does the fact that each country will make its own choices with respect to the 

recommendations. But the most fundamental uncertainty comes from the form of the 

recommendations, which generally reflect a move away from relatively clear rules and wellunderstood standards to less-specific rules, more subjective tests and vaguer concepts. Many 

of the new rules will be more difficult both for taxpayers to apply and for tax authorities to 

administer. Interpretations of the new rules are likely to differ- across countries, between 

taxpayers and tax authorities, and even over time. 

One illustration of the uncertainty inherent in the new rules is the recommendations with 

respect to the permanent establishment standard, which is the concept used in tax treaties to 

establish a threshold for taxable presence in a country. The BEPS recommendation on 

permanent establishment replaces what are relatively bright-line standards with vaguer and 

more subjective tests that clearly lower the threshold but are much less clear as to exactly 

where the new threshold lies. A global company would have to operate without clarity as to 

when its activities in a foreign country would be considered to give rise to a permanent 

establishment such that its operations in the country would be treated like a local taxable entity 

subject to all of the country's domestic tax obligations. At the same time, the company's home 

country may see the new rules differently and may not be prepared to cede taxing jurisdiction 

over those operations. 

Global companies face significant new compliance burdens. This includes most directly the 

transparency-focused BEPS recommendations: the new requirement for country-by-country 

reporting, the two-tier approach to transfer pricing documentation, and the mandatory 

disclosure regime. However, the compliance obligations do not end with the filing 

requirements but also will include the follow up that will be required in many countries to 

explain the new reporting and to put the information in proper context. 

As an illustration, the new country-by-country report requires global companies to provide 

country-based information on various measures of income, taxes, and economic activity for all 

countries where they have entities or branches; this information is to be delivered to the 

company's home country tax authority to be shared with other countries under tax information 

exchange relationships or alternatively must be delivered to each country directly. The 

required information typically is not maintained by companies in t his form for any other 

purpose so companies will need to create new systems and processes in order to collect the 

information. The report requires financial accounting information, not tax information, so it will 

not tie with local tax returns. The report requires information that is aggregated by country, 

without the elimination of intercompany transactions as is done in a financial consolidation, so 

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it will not tie to the consolidated financial statements. Global companies will have to be 

prepared to respond to inquiries and provide additional information (or deal with adjustments 

that are proposed on t he basis of the report alone) in all the countries that receive the countryby-country report. In the case of U.S.-based companies, this could be as many as a hundred or 

more countries, including countries where the company has relatively litt le local presence. 

New compliance burdens also are embedded in the substantive changes reflected in the BEPS 

recommendations. As noted above, a global company that is considered to have a permanent 

establishment in a country is subject to the country's domestic tax obligations with respect to 

its local operations. With the BEPS recommendation lowering the permanent establishment 

threshold, global companies likely would have new permanent establishments, perhaps in 

multiple countries. This would require the establishment of new systems to create and 

maintain separate books and records for each set of activities that is found to be a permanent 

establishment. It would require the filing of income tax returns for the permanent 

establishment. Moreover, in many countries, the finding of a permanent establishment has 

consequences beyond income tax. A permanent establishment often will be required to 

register for and collect value added tax. Other business registration and license requirements 

also may be triggered. 

Global companies face significant risk of misuse of core business information. The new 

transparency requirements would put information about a company's entire global footprint 

into the hands of all the countries where the company has entities or branches. For U.S.-based 

companies, which tend to have the broadest global footprint, the risk is particularly acute. The 

information required to be provided would include commercial data that is competitively 

sensitive. For example, the country-by-country report includes revenue and profit information 

from which operating margins could be estimated. The information also could be used to cause 

reputational damage. The information in the country-by-country report is an annual snapshot, 

so it might show, for example, that a company pays litt le or no tax in a country despite having 

significant income in that country without showing that this result is because of substantial net 

operating losses carried over from prior years. A company with that profile could be falsely 

branded a tax evader based on information that is improperly released to the public (in such a 

case the tax authority also could be falsely criticized as having failed to enforce a tax 

obligation). Because all countries that receive a company's country-by-country report will have 

its global information, a breach of confidentiality in any one country could have global effects. 

Global companies face significant risk of controversy. The fundamental changes and new rules 

subject to varied interpretation that create uncertainty for global companies also create 

controversy with tax authorities. The BEPS recommendations largely are high-level policy 

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statements. Proper implementation will require detailed and specific guidance. In many cases, 

appropriate transition into the new rules will be needed. In all cases, training of the tax 

authority personnel responsible for administering the new rules will be essential. Controversy 

will arise when there are gaps in any of these areas. With change happening all around the 

world, global companies likely will be dealing with controversy in multiple foreign countries at 

the same time. Whi le some countries have advance resolution mechanisms that are intended 

to head off controversy, like the compliance assurance program or CAP in the United States, the 

demand for these mechanisms may well exceed their capacity. Many countries have no 

procedures for addressing issues in advance. Moreover, in some countries taxpayers have no 

real access to a judicial system to resolve disputes. Controversy imposes a substantial resource 

burden on both taxpayers and tax authorities. For taxpayers, controversy in a foreign country is 

more complex and requires more resources. And controversy that cannot be properly resolved 

results in inappropriate taxation. 

Consider the BEPS recommendation on limiting access to tax treaty benefits, which includes a 

proposed rule under which a taxpayer would be denied treaty benefits if one of the principal 

purposes of the transaction was to obtain t reaty benefits, unless the taxpayer can establish that 

the granting of such benefits would be in accordance with the object and purpose of the treaty. 

A global company that loans funds to a foreign affiliate will receive interest payments from the 

affiliate. Countries typically impose a gross-basis withholding tax on cross-border interest 

payments (for example, the U.S. withholding tax rate is 30%), but provide an exemption from 

such tax under their tax treaties. If the company is challenged under the test described above, 

it is not clear what proof would be required by the foreign country to establish the company's 

entitlement to the benefits of the treaty. In the absence of treaty benefits, the tax imposed on 

the gross amount of the interest payment could exceed the company's net income from the 

lending activity once its cost of funds is taken into account . 

Global companies face significant risk of double taxation. As noted above, the recommended 

rules are subj ect to varied interpretations. Some countries may choose to go beyond the final 

recommendations, including resurrecting approaches that were proposed by the OECD in initial 

discussion drafts but were replaced with more moderate approaches in the final reports. Other 

countries may adopt unilateral measures. Where two or more countries do not interpret or 

apply the new transfer pricing rules in the same way, for example, they may assert taxing 

jurisdiction over the same dollar of income. One of the BEPS focus areas was the dispute 

resolution mechanisms in tax treaties that are intended to prevent this kind of double taxation. 

However, while the OECD's aim was to develop approaches for improving the effectiveness of 

these dispute resolution mechanisms, relatively little was accomplished in this regard. It is the 

view of many business stakeholders and policymakers in many countries that mandatory 

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binding arbitration is an essential mechanism for ensuring the resolution of treaty disputes. 

Arbitration provisions have been included in U.S. tax treaties and are viewed as having a 

positive effect in terms of preventing disputes. However, some countries participating in the 

BEPS project have rejected such a mechanism. Where a treaty dispute cannot be properly 

resolved, the result for the company is unrelieved double taxation. 

Even though the OECD has issued its final BEPS reports, the continuing work in the OECD on 

BEPS provides some opportunity to ameliorate these issues. The additional technical work that 

is planned should provide much needed guidance on industry-specific issues and could include 

further guidance on the interpretation and practical application of the BEPS recommendations 

more generally. The planned peer review process with respect to dispute resolution practices 

will allow continued attention to be focused on the need for improvements to all aspects of 

such practices and continued effort to expand the group of countries that are committed to 

mandatory binding arbitration. The framework to be developed for monitoring implementation 

of the BEPS recommendations should go beyond merely identifying which countries have taken 

which actions and should focus on encouraging and facilitating best practices for fair, effective, 

and transparent tax administration. The global business community should be given the 

opportunity to provide input to all of these workstreams and the U.S. business community, 

which has much at stake, should continue its participation. In order to ensure that U.S. interests 

are protected, it is essential that Treasury, in consultation with the tax-writing committees, 

continue to play an active role in all aspects of the ongoing work. 

While there are significant concerns about the BEPS recommendation on country-by-country 

reporting, many U.S.-based companies believe it is in their interest for the U.S. to implement 

this requirement so that they can provide their information to the Internal Revenue Service 

instead of having to deal with the local reporting requirements of the many foreign countries 

where they have entities or branches. The IRS would share the country-by-country reports of 

U.S. companies with other tax authorities under the formal agreements the United States has in 

place for tax information exchange and subject to the U.S. rules on confidentiality of taxpayer 

information. If there were a problem with misuse of information in a particular country, the IRS 

could suspend information exchange. This approach would mean greater protection and lower 

administrative burdens for U.S.-based companies than the alternative of direct fi ling of countryby-country reports in multiple foreign countries. 

Implications for U.S. Tax Reform 

The United States should have a tax system that makes America an attractive place for 

businesses to headquarter and invest. In designing the tax system that will best support growth 

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in U.S. jobs and the U.S. economy, it is important to consider the tax policy choices that have 

been made by other countries. The current U.S. corporate tax system is an outlier relative to 

the corporate tax systems of our major trading partners, both in terms of the corporate tax rate 

and the worldwide approach for taxing the foreign income of U.S.-based companies. These 

features adversely affect the competitiveness of companies that are headquartered in the 

United States and the competitiveness of U.S. investment opportunities for foreign companies. 

The OECD BEPS project and countries' actions with respect to the BEPS recommendations will 

dramatically change the global tax landscape. The aspects of the current U.S. tax system that 

detract from the attractiveness of the United States as a location to headquarter and invest will 

become more acute. U.S.-based companies will face new pressures in the foreign countries 

where they operate that will exacerbate the burden of the barrier to reinvestment in the 

United States that is created by the current worldwide tax system. Foreign companies also will 

face new pressures in foreign countries that could reduce their appetite for investment in the 

United States. Moreover, the foreign tax credit regime that is part of the current U.S. 

worldwide tax system means that the cost of increased foreign taxes on U.S.-based companies 

will be borne in part by the U.S. fisc through reduced residual U.S. tax when foreign earnings 

are repatriated. 

This Subcommittee and the Ways and Means Committee have long recognized the need for 

international tax reform in particular and comprehensive tax reform more generally. The BEPS 

project and the response by foreign countries should be viewed as yet another reason why tax 

reform must be an urgent priority. 

***** 

Thank you for the opportunity to present these perspectives. I would be happy to answer any 

questions the Subcommittee may have. 

10 
47 

Chairman BOUSTANY. Thank you, Ms. Angus. 

Mr. Sprague. 

STATEMENT OF GARY D. SPRAGUE, 

COUNSEL, THE SOFTWARE COALITION 

Mr. SPRAGUE. Chairman Boustany, Ranking Member Neal, and 

Members of the Subcommittee, thank you for inviting me to appear 

today on behalf of The Software Coalition to provide testimony on 

the impact of the OECD G20 BEPS project on U.S. software companies. In particular, how the BEPS project will reduce the U.S. tax 

base and create disincentives for U.S. multinationals to create R&D 

jobs in the United States. The members of our coalition are listed 

in our written submission. 

Our comments today will focus on those BEPS developments of 

greatest significance to the U.S. software industry, namely corporate income tax nexus in countries into which our companies 

export goods and services, transfer pricing, R&D employment incentives, and the unraveling of consensus among countries on 

international tax norms. While my comments are delivered on behalf of the U.S. software industry, U.S. multinationals and other 

high-tech industries are similarly impacted. 

First, the changes to tax treaty rules that establish when an exporter is subject to income tax in the country into which it exports 

goods or services. A key focus of the BEPS work was a push by 

market countries to obtain greater taxing rights over non-resident 

exporters which make sales into their countries. The BEPS work 

significantly reduces the threshold for income tax nexus, so that a 

member company of an MNC group may have to file tax returns 

and pay taxes in a market country, even if it has no physical presence in that country. 

Second, with respect to the OECD transfer pricing guidelines, 

these guidelines determine how much of a group’s income is subject 

to tax in a particular country where that group operates. The principal effect of these transfer pricing changes will be to decrease the 

returns allocated to intangible property and other assets in favor 

of returns to people functions. This also will increase tax collections 

by market countries, since U.S. software companies do not hold 

their intangible assets in such countries. 

Third, I will comment on the BEPS work regarding incentive tax 

regimes for R&D employment. The BEPS work recognizes that 

countries may set their national tax rate at any level. Most OECD 

member states have significantly reduced their rates of corporate 

income tax in recent years. At the same time, the BEPS work has 

created guidelines for targeted R&D employment regimes. Several 

countries that compete with the United States for technology investments have enacted so-called IP Box regimes that provide an 

even lower incentive tax rate for income derived from IP developed 

in their country. These rules create a strong incentive for U.S. multinationals to locate R&D functions in those countries. 

Finally, I would like to comment on a particularly unfortunate 

side effect of the current political and administrative environment 

relating to international tax. In our view, the BEPS process has encouraged, or at least tacitly permitted, some countries to circumvent the normal consensus-building process at the OECD and 


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to act unilaterally. This stands in stark contrast to much good work 

the OECD has done historically to develop an international tax 

consensus. 

On the related point, we note the EU state aid cases represent 

another example of foreign governments endeavoring to tax income 

which ultimately is part of the U.S. tax base. What, then, are the 

implications for U.S. tax policy? We believe that Congress should 

enact comprehensive international tax reform, which would include 

reducing the corporate tax rate to an internationally competitive 

rate—for example, to 25 or even 20, as some have suggested. 

As part of such comprehensive reform, we favor a territorial system, such as a 95 or 100 percent dividend exemption system, consistent with other major OECD countries, and a transition rule 

that allows tax-favored repatriation of earnings. 

Further, the United States should enact a best-in-class IP Box 

regime that provides an effective incentive to protect and create 

R&D jobs in the United States. Please see our letter of September 

14 to Chairman Boustany and Ranking Member Neal, which details our recommendations on the proposal. 

This proposal would provide the following benefits to the United 

States: Preserves the competitiveness of U.S. multinationals; it encourages the repatriation of IP by those U.S. multinationals which 

now hold their IP offshore, and discourages newly emerging companies from migrating their IP outside the United States in the first 

place; third, it would reduce the incentive for inversions through 

foreign acquisitions by diminishing the incentive for tax-motivated 

foreign takeovers; finally, it would encourage U.S. job growth and 

innovated industries by countering the incentives which now exist 

for U.S. multinationals to locate R&D jobs offshore. 

The work on BEPS is not finished. Therefore, we would encourage U.S. Treasury to continue taking an active role in ongoing technical discussions to be held in 2016 and beyond. In particular, the 

new tax nexus rules will present U.S. multinationals with considerable unnecessary expense and increased compliance burdens. 

Accordingly, Treasury should encourage our treaty partners to 

adopt alternative means of compliance and reasonable transition 

periods. 

I very much appreciate the opportunity to provide testimony on 

behalf of the software industry, and would be pleased to answer 

any questions. 

[The prepared statement of Mr. Sprague follows:] 


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I. Opening 

Rouse Committee on Ways and Means 

December I, 2015, Hearing on BEPS 

Testimony of Gary D. Sprague 

On Behalf of the Software Coalition 

Chaim1an Boustany, Ranking Member Neal and members of the Committee, thank you for inviting me to 

appear here today on behalf of the Software Coalition, and to provide testimony on the impact of the 

OECD/G20 BEPS project on U.S. software companies, and in particular how the changes to the 

international tax rules as developed under BEPS will significantly reduce the U.S. tax base and create 

disincentives for U.S. multinational corporations (MNCs) to create R&D jobs in the United States. 

The Software Coalition is the leading software industry group dealing with U.S. domestic and 

international tax policy maners.' Software Coalition members account for more than $400 billion per 

year in total gross revenue and $50 billion per year in total R&D spend. Member companies employ over 

1. 1 million individuals around the globe. The Coa lition member companies are listed in our written 

submission.1 

2. Impact ofBEPS on the U.S. Software Industry 

Our comments today will focus on those BEPS developmentS of greatest significance to the U.S. software 

industry. including corporate income tax nexus in countries into which our companies sell goods and 

services (which I will refer to as "market states"), transfer pricing, R&D employment incentives, and the 

unraveling of consensus among countries on intemational tax nom1s. While my comments are being 

1 The Software Coaliliou was fonne<l in t 990 and uow cooopaises 23 U.S. cooopanies wllicb opertue in ohe software and ecouuuerc.e sectors. The Software Coalition bas been actively involved in l.he work of the OECD/G20 BEPS project including 

panicipatiug as a busiuess represcnuuive in fl. number of BEPS consultations. and subruining wrineu couuneu1s ou a number of 

the BEPS discussion drafts. 1 T11e Softwa.re Coalition's current membership comprises the following companies: Adobe Systems t.nc.: Amazon.com. Jnc.: 

Anachulaoe CotpO ~•ion : Amodesk. Inc.: BMC Software. uac.: CA. u1c.: Cisco SysoeOIS. Inc.: Ciuix Sysoems. Iuc.: Eleeoronic 

AJ1s. Inc.: EMC Corporation: Facebook. Inc.: lBM Corpora1ion: Mentor Graphics Corporation: Microsoft Corporation: Nuance 

Communications. Inc.: Oracle Corporation: PTC Inc.: Pivotal Software. Inc.: Salesforce.com Inc.: SAP America. lnc.: Syma.ntec 

Corporation: Synopsys, Inc.: and VMWare. Inc. 

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delivered on behalf of the U.S. softwa.re industry, U.S. MNCs in other high-tech industries are similarly 

impacted. 

The net effect of most. if not all. of the BEPS measures will be to increase the amount of foreign tax that 

U.S.-based software companies with foreign operations must pay, and to increase considerably their 

foreign compliance burdens. The income that foreign countries are seeking to tax is ultimately pan of the 

U.S. tax base, and increased foreign taxes will inmost cases be borne by the U.S. fisc through the foreign 

tax credit, thereby reducing U.S. tax receipts. 

Several elements of the BEPS rules create incentives for U.S. multinationals to increase high-value 

employment outside of the United States. These new rules place an increased emphasis on people 

functions over tangible and intangible assets in determining where income should be taxed. This 

disadvantages U.S. high-tech MNCs since those MNCs earn their income in large pan from their 

intangible assets. The BEPS project also sets minimum standards for R&D employment incentive 

regimes. which create powerful incentives for MNCs to locate R&D employment outside the U.S. in 

order to take advamage of those regimes. 

a. BEPS Action 7 - Permanent Establishments 

We will comment first on the proposed changes to the technical tax treaty rules that establish when a 

company is subject to income tax in the country into which it sells its goods or services. wltich is referred 

to in our tax treaties as the "permanent establishment" standard. A key focus of the BEPS work was a 

push by market countries to obta in greater taxing rights over non-resident companies which make sa les 

into their countries. To that end. BEPS Action 7 significantly reduces the threshold for income tax nexus. 

so that a member company of an MNC group may have to file tax rerums and pay taxes in a market 

country. even if that separate entity docs not have operations in the country. This significantly affects the 

U.S. software industry because U.S. software companies by and large have created cost-efficient 

centralized sales structures that do not rely on large sales and marketing operations in every market 

country. which was more common in the past. It can reasonably be expected that this lowering of the 

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income tax nexus threshold will result in greater income taxation in market countries on sales into such 

countries, above and beyond the taxable income already being reported for the sales functions actually 

performed in those countries. Foreign politicians have argued that U.S.-based multinationals must pay 

their "fair share" of tax based on "where value is created". They argue that value is created in the market 

country by the act of consumption. We believe that value is created by innovation and production, not by 

consumption. Higher foreign income taxes imposed on U.S.-based multinationals ultimately will be 

subsidized by the U.S. fisc through foreign tax credits, resulting in lower U.S. income tax receipts, even if 

the U.S. itself never adopts the lower nexus threshold in our own tax treaties. 

b. BEPS Actions 8- 10 - Transfer Pricing 

Second we will comment on changes under Actions 8 - I 0 to the OECD Transfer Pricing Guidelines. 

These Guidelines set out the rules which allocate the income of a group between its constituent legal 

entities. and thus determine how much of a group's income is subject to tax in a particular country where 

tbat group operates. ln many countries. these Guideli.ncs become operative automatically upon their 

approval by the OECD. The principal effect of these transfer pricing changes will be to decrease the 

returns allocated to intangible property and other assets, in favor of returns to people functions. This 

potentially will disadvantage U.S. software companies. as it will increase tax collections by countries 

where U.S. software companies do not bold those assetS. It also will create strong incentives for U.S. 

MNCs to locate high-value, innovative jobs relating to the creation and etlbancement of their intellectual 

property, like software development, in countries with lower tax rates. 

c. BEPS Action 5 - R&D Employment Incentives 

Third we will comment on the BEPS work under Action 5 regarding incentive tax regimes for R&D 

employment. The BEPS work recognizes that countries may set their national tax rate at any level. Most 

OECD member states have significantly reduced their rates of corporate income tax in recent years? 

1 CoosequeUlly. 1be U.S. oow bas tlte highest corpora!e tax ra~e of <lily majoreounuy. TIJe U.S. 3S% federal income tax rate 

when combined with tl&e average U.S. state rax rate results in a combined coi])Orate iuoome tax rate for the U.S. over 390A. l11e 

average statutory tax rate (including sub-national taxes) of the OECD countries other than the United States is 24.8%. 

Accordingly, 1he U.S. tax rate is over 57% higher than the OECD average tax rate. 

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While the BEPS project is expected to increase the amount of foreign taxes paid by U.S. software 

companies, and also increase their administrative burdens, it is also clear that foreign corporate tax rates 

will remain considerably lower than the U.S. rate. The high U.S. corporate tax rate is a significant 

disincentive for U.S. investment in imangible propeny and jobs. 

At the same time, the BEPS work also resulted in guidelines for targeted R&D employment regimes. 

Several European and other countries that compete with the United States for technology investments 

have enacted so-called "IP Box" regimes that provide an even lower incentive tax rate for income derived 

from intellectual property developed in their country. The BEPS project links the amount of the 

allowable incentive to the percentage of locally performed R&D, and countries arc adapting their regimes 

to that standard. This creates a strong incentive for U.S. multinationals to locate R&D functions in those 

countries. 

d. Lack of Consensus and Resulting Unilateral Action 

Finally we would like to comment on a particularly unfonunate side effect of the current political and 

administrative environment relating to international tax. ln my view, the BEPS process bas encouraged, 

or at least tacitly pem1itted. some countries to circumvent the nonnal consensus building process at the 

OECD and to act unilaterally. This stands in swk contrast to much good work !hat the OECD has done 

over the years to develop an international tax consensus. The BEPS Action I fmal repon on the digital 

economy, which as a practical matter principally addressed U.S. multinational business models since our 

companies are the global leaders in the digital economy, refrained from recommending specific changes 

to increase tax on companies operating in the digital economy, but specified that some countries could 

unilaterally introduce those changes in their domestic law, provided they respect treaty obligations. These 

developments have emboldened. and will continue tO embolden. other tax administrations to bend 

established international tax principles, with a resulting increase in double taxation, international tax 

disputes, and greater uncertainty for U.S. multinationals. 

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3. Implications for U.S. International Tax Policy 

The U.S. corporate tax system needs to be more competitive with current international standards. The 

U.S. now has the highest corporate tax rate of any major country. We believe the Congress should enact 

comprehensive international tax reform, which would include reducing the corporate tax rate to an 

internationally competitive rate - for example, to 25% or even 20%. as bas been suggested recently. As 

part of such comprehensive reforn1, we favor a territorial system. such as a 95% or I 00% dividend 

exemption system, consistent with other major OECD countries, and a transition rule that allows a taxfavored repatriation of earnings. Furthermore. the U.S. should enact a "best-in-class" IP Box reginle that 

provides an effective incentive to protect and create R&D jobs in the U.S. Please see our letter of 

September 14th to Chairn1an Boustany and Ranking Member Neal which details our recommendations on 

featmes of the IP Box.'' 

Any changes to the U.S. anti-deferral rules under subpart F should not discriminate against intangible 

property. The existing foreign base company services income and foreign personal holding company 

income rules enacted more than 50 years ago are severely outdated. There is a long-standing bias in the 

Internal Revenue Code that royalties are passive income, while in the software industry they represent 

active business income. Any revisions to subpart F therefore should not impose different tax burdens on 

software companies due to the fact that their income arises from the exploitation of intellectual property. 

A lower U.S. statutory corporate tax rate, coupled with an rP box regime, would provide many benefits to 

the United States. First, it would preserve the competitiveness of U.S. multinationals by imposing a 

competitive rate of lax on lP income. Second, it would encourage the repatriation of IP by those U.S. 

4

See our letter from the Software Coa lition to Representatives Boustany and Neal dated September 14, 

2015. That letter describes the following features of a "best-in-call IP Box: (I) provide a 

competitive rate for qualifying intangible income: (2) cover all fonns of innovation lP, including 

both software and tbc underlying software copyrightS; (3) cover the exploitation of!P through the 

provision of both products and services. including software as a service; (4) provide a nexus 

standard that is appropriate and administrable; for example, use a transfer pricing based approach 

to identify the income derived from qualified imangible property: and (5) provide an effective 

mechanism to allow the tax-free domestication of IP that is currently held offshore. 

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MNCs which now hold their !P offshore. and discourage newly emerging companies from migrating their 

lP outside the United States in the first place. This would broaden the U.S. tax base since income from 

intangible property which is now earned offshore would become currently subject to U.S. tax. Third, it 

would reduce the incentives for inversions through foreign acquisitions by enabling competitive bidding 

by U.S. acquirers. and diminishing the incentive for tax-motivated foreign take-overs. Finally. it would 

encourage U.S. job growth in innovative industries by decreasing the incentives which now exist for U.S. 

MNCs to locate R&D jobs offshore in countries with lP box regimes. 

4. Further Work to be Done 

The work on BEPS is not finished. Therefore, we would encourage U.S. Treasury to continue taking an 

active role in ongoing technical discussions to be held in 2016 and beyond. Ln particular, Treasury should 

continue to actively participate in the further revisions of the OECD Transfer Pricing Guidelines relating 

to the use of the profit split method to divide taxable income among companies in a MNC group, to 

ensure that the rules are not changed in a way that allows unprincipled applications of those nales to tax 

larger shares of the income of U.S. MNCs. Now that the definition of taxable nexus in tax treaties has 

been revised, 2016 will see the further work necessary to define how much taxable income actually will 

be subject to these new nexus nales. Treasury will need to play an active role in those discussions to 

ensure that the result of that work is consistent with existing international nonns on what income should 

be taxed by a market country. 

The new nexus nales will present two choices for many U.S. MNCs: they either must report a taxable 

presence in market countries based on sales into those countries: or restructure their foreign sales 

operations to avoid creating a new tax liability of the supplier entity. ln both cases. U.S. MNCs will 

suffer considerable unnecessary expense and increased compliance burdens. Accordingly, Treasury 

should encourage countries to adopt alternative means of compliance and reasonable transition periods. 

Finally, Treasury should participate fully in the discussions about the multilateral instnunent. and should 

continue to advocate for mandatory binding arbitration. 

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5. Closing 

I very much appreciate the opportunity to provide testimony on behalf of the Software Coalition 

regarding the effects ofBEPS on the U.S. tax base and U.S.jobs. and the long-term positive benefits to 

U.S. competitiveness of adopting intematiooal tax refornl and an effective IP Box regime. I would be 

pleased to answer any questions. 

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Chairman BOUSTANY. We thank you, Mr. Sprague. 

Ms. Schultz. 

STATEMENT OF CATHERINE SCHULTZ, VICE PRESIDENT FOR 

TAX POLICY, NATIONAL FOREIGN TRADE COUNCIL 

Ms. SCHULTZ. Chairman Boustany, Ranking Member Neal, and 

Members of the Subcommittee, thank you for inviting me to speak 

today about the G20 and OECD report on Base Erosion and Profit 

Shifting. I request that my complete statement be made part of the 

record. 

The National Foreign Trade Council, organized in 1914, is an association of some 250 U.S. business enterprises engaged in all aspects of international trade and investment. The NFTC believes 

the current U.S. tax law is outdated and must be modernized by 

enacting tax reform that reduces the U.S. corporate income tax to 

be more in line with our trading partners, and adopts a competitive 

territorial tax system that does not disadvantage U.S. businesses 

competing in foreign markets. Competitive U.S. tax reform would 

address many of the concerns raised in the BEPS project. 

The Treasury Department staff should be commended for their 

efforts to attempt to ensure the rules that were drafted were as 

grounded as they could be in reasonable and objective tax law. Unfortunately, this was a difficult task, since the BEPS project was 

politically driven and, we believe, appeared to be aimed more at 

raising revenue from U.S.-based multinational corporations, rather 

than other global companies. 

We have several concerns with the CBC report. The country-bycountry report is intended to provide information that is to be used 

only as a high-level risk assessment tool. Completing a CBC report 

will be cumbersome and expensive for taxpayers, particularly for 

taxpayers who have operations in many countries. There are many 

NFTC members who operate in over 100 countries. If tax authorities release taxpayer information to the public, as some recommend, there is concern about determining the correct amount due 

on a tax return, based on media reports, rather than tax law. Companies understand they must share tax information on a confidential basis to the relevant tax authorities, where it can be explained 

in context. However, they are unwilling to be subject to audit by 

media spin. 

It is important to note that if the United States does not require 

country-by-country reporting subject to confidential information exchange via the U.S. treaty network, U.S. companies will still have 

to comply with the reporting requirements, because each country 

will demand that the local subsidiaries of companies produce a 

global CBC report under its local variation of the rules, which will 

be expensive, and may expose confidential information to improper 

disclosure. 

The NFTC hopes the United States will continue to make the 

case to maintain the confidentiality of CBC reporting, as the countries who participated in the BEPS project will review the implementation of the CBC reporting in 2020. 

Countries are already adopting these reporting guidelines, and 

many are not following the BEPS report guidelines. Indeed, China 

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ported in all local analysis. Companies are concerned with how the 

information they are required to file under the master file will be 

used by local authorities. We believe it is important for Treasury 

and the IRS to provide further guidance, so companies can report 

their information to the IRS with section 6103-protected information exchanged via the U.S. treaty network. Otherwise, as I have 

noted, countries will be entitled to request it for—without section 

6103 protections. 

There are several other concerns that the NFTC member companies have with the final BEPS report, and I will try to get through 

them pretty quickly. 

The action 7 on permanent establishment changes several of the 

longstanding definitions of what constitutes a permanent establishment, which subjects a business to income in a local country. Action 7 changed the definition of a deemed income tax permanent 

establishment to achieve in-country tax results under applicable 

transfer pricing rules. This will result in more companies being 

subject to tax in a local jurisdiction, and could result in potentially 

double or triple taxation for companies. 

I am not going to spend a lot of time going over the transfer pricing rules, but we do have a lot of concern about the new rules on 

value creation. It is often hard to determine where value is created. 

In a value creation that is supposedly tied to function, it will be 

difficult to determine the final values, because value and function 

are not always linked. So we have a lot of new transfer pricing 

rules with new value creations. It could actually be very difficult. 

Some countries are adding additional value creation requirements. 

China is considering a value contribution method that departs from 

the BEPS guidelines. Location-specific advantages will be used— 

analysis. 

The NFTC is concerned about the general aggressive global tax 

enforcement environment. The BEPS report action 11 analyzed 

base erosion and estimated how much is lost to—worldwide to aggressive tax planning. Interestingly, this analysis was not done 

prior to the start of the BEPS project, but only at the very end. 

As countries continue their aggressive stance to collect enough 

taxes to counter base erosion, who will determine what enough is? 

If BEPS is hard to determine beyond a I-know-it-as-I-see-it standard, how will it be determined when it no longer exists? As other 

governments increase taxes on U.S. multinational companies, the 

United States is likely to provide foreign tax credits to those companies to offset double taxation on the same income. As the number of foreign tax credits increase, we will see more base erosion. 

But this time it will be the U.S. base that is eroded. 

What can Congress do to protect the U.S. base from being eroded 

further? The NFTC is strongly in favor of tax reform that lowers 

corporate income taxes in line with our trading partners, and 

moves to a competitive territorial-style tax system. 

Thank you for the opportunity to present the views of the National Foreign Trade Council, and I would be happy to answer any 

questions. 

[The prepared statement of Ms. Schultz follows:] 


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lnh·oduction 

Statement of Catherine Schultz 

Vice President for Tax Policy, National Foreign Trade Council 

Before the House Ways a nd Means Tax Policy Subcommittee 

On Decem be•· 1, 2015 

Chainnan Boustany, Ranking Member Neal and members of the Conm1ittee, thank you for 

inviting me to speak today about the G-20 and OECD report on the Base-Erosion and Profit 

Shifting (BEPS) project. 

The National Foreign Trade Council (NFTC), organized in 1914, is an association of some 250 

U.S. business enterprises engaged in all aspects of international trade and investment. Its 

membership covers the full spectrum of industrial, commercial, fmancial, and service activities. 

The NFTC therefore seeks to foster an environment in which U.S. companies, like their foreign 

counterparts, can be dynamic and effective competitors in the international business arena which 

will increase U.S. jobs and economic growth. To achieve this goal, businesses must be able to 

participate fu.lly in business activities throughout the world, through the export of goods, 

services, technology, and entertairunent, and through direct investment in facilities abroad. As 

global competition grows ever more intense, it is vital that global enterprises are not subject to 

excessive foreign taxes, double taxation, or other impediments to the flow of capital that can 

serve as barriers to full participation in the international marketplace. Foreign trade is 

fundamental to U.S. job creation and economic growth. 

The NFTC believes the current U.S. tax law is outdated and must be modernized by enacting tax 

reform that reduces the U.S. corporate income tax to be more in line with our trading partners 

and adopts a competitive territorial tax system that does not disadvantage U.S. businesses 

competing in foreign markets. Competitive U.S. tax reforn1 would address many of the 

concerns raised in the BEPS project. 

We appreciate that the business community was invited to provide input into the BEPS project 

through the ability to review and submit comments on the Discussion Drafts released by the 

Working Parties. The BEPS project was conducted during an accelerated 2 year time frame in 

collaboration with the OECD, the G-20 countries who are not OECD members, and 10 

developing countries. Expanding the discussion beyond OECD members in this rushed 

envirorunent made the discussions and consensus building much more difficult. The Treasury 

Department staff should be commended for their effort to attempt to ensure the rules that were 

drafted were as grounded as they could be in reasonable and objective tax law. Unfortunately, 

this was a difficult task since the BEPS project was politically driven and we believe, appeared 

to be aimed more at raising revenue from U.S.-based multinational corporations (MNEs) rather 

than other global companies. 

National Foreign Trade Council 

1625 K Street NW Suite 200 • Washington, DC 20006 •202·887·0278 

Serving America's Global Businesses Since 1914. 

www.nftCA[R 
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While the final BEPS report has been issued and endorsed by the G-20, the work is not complete. 

TI1ere are many issues that must still be dealt with in 2016 and the years ahead. Open items 

include work on implementing the tax treaty reconm1endations to date through the multilateral 

instrument, work on achieving consensus on the attribution of profits to Permanent 

Establishments (PEs), work on achieving a consensus on bow to apply profit splits where 

appropriate, the implementation of rules on hard-to-va lue-intangibles, and the implementation of 

rules on the treatment of headquarter activities and other low-value adding services. There arc 

also more difficult implementation questions raised by the final BEPS report for U.S. MNEs. 

Counh· b Country Reporting Maste1· File and Local ..:ue 

One of the driving forces of the BEPS project was the perception that many country's tax 

auditors did not have accurate information as to the extent of a corporate taxpayer's activities 

within its borders. There was a belief, that companies were not transparent enough about their 

operations in the countries where they had facilities. To remedy this perceived problem, new 

transfer pricing reporting requirements were agreed to. The fina l BEPS guidelines call for 

multinational companies to comply with three new reporting requirements. The new three-tier 

approach for transfer pricing documentation includes a framework for the "master file" and 

" local file" plus a template for Com1try-by-Country (CbC) reporting. The Country-by-Country 

report is required to be fi led for and contain infonnation with respect to a company's first fiscal 

year beginning on or after January I, 2016. For MNEs with a fiscal year that ends on December 

31, the CbC report would be required to be filed by December 31, 20 1 7, groups with other fiscal 

years would be required to file by 2018. Under the Country-by-Country reporting template, 

companies must report the amount of revenue, profits, income tax paid and taxes accrued, 

employees, stated capital and retained earnings and tangible assets annually for each tax 

jurisdiction in which they do business. MNEs are required to identify each entity within the 

group doing business in a particular tax jurisdiction and to provide an indication of the business 

activities that each entity conducts. The CbC Reports are required to be exchanged on a 

confidential basis by governments through the exchange of infonnation provisions included in 

tax treaties and Tax Information Exchange Agreements (TIEAs). The NFTC supports the CbC 

Reports being exchanged by Treasury as a way to protect taxpayer confidentiality. However, we 

have several concerns with the CbC report. 

The Country-by-Country report is intended to provide information that is to be used only as a 

high-level risk assessment tool. Completing the CbC report will be cumbersome and expensive 

for taxpayers, particularly for taxpayers who have operations in many countries. There are 

many NFTC members that operate in over 100 countries. Company concerns include: Will 

proprietary information remain confidential? How should MNEs deal with difterent GAAP ntles 

that apply for different entities in the global group? Some countries require local accountants, 

so there are questions regarding how and when are c.ompanies required to engage a local 

accountant? Business restrucrurings are common-- how can this be articulated in the template? 

Business units within a company do not a lways share inforn1ation and in some cases they are 

competitors--how is this siruation reconciled on the CbC reporting template? If tax authorities 

release taxpayer information to the public as some recommend, there is a concern about 

determining the correct amotUJt due on a tax return based upon media reports rather than the tax 

National Foreign Trade Council 

1625 K Street NW Suite 200 • Washington, DC 20006 •202-887-0278 

Serving America's Global Businesses Since 1914. 

www.nltfY!!9 
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law. Companies understand they must share tax infonnation on a confidential basis to the 

relevant tax authorities, where it can be explained in context. However, they are unwilling to be 

subjected to audit by media spin. It is important to note that if the US does not require countryby-country reporting subject to confidential infonnation exchange via the U.S. treaty network, 

U.S. MNEs will still have to comply with the reporting requirements because each country will 

demand that the local subsidiaries of companies produce a Global CbC report under its local 

variation of the mles which will be expensive and may expose confidential infonnation to 

improper disclosure. These are just some of the issues companies are facing as they begin to 

prepare for CbC reporting. The NFTC hopes the U.S. will continue to make the case to maintain 

the confidentiality of CbC reporting as the countries who participated in the BEPS project will 

review the implementation of the CbC Reporting in 2020. 

The BEPS project also requires the filing of a Master File which provides tax administrations 

with high level infom1ation regarding an MNEs global business operations and transfer pricing 

policies, including supply chain information. This information is highly proprietary and should 

remain confidential. Unfortunately, unlike the Country-by-Country report, the Master File must 

be filed directly with other governments without the protection of the exchange of information 

mles. It will be difficult for companies to assure that this infom1at-ion will remain confidential. 

Indeed, C·Ompanies will have to plan how to appropriately comply with the ftling requirements in 

a manner that does not disclose their proprietary infonnation to competitors. 

The BEPS project also requires the filing of a Local Files with local tax administrations to 

provide infom1ation regarding material related party transactions, the amounts involved, and the 

company's analysis of the transfer pricing detenninations they have made with regard to those 

transactions. Some local files will have to be filed in the local language, although many 

governments are willing to accept the first version in English with some leeway on the tin1e to 

file in the local language. Like the Master File, the Local File is filed directly with the local tax 

administration and does not have an exchange of information confidentiality protections. 

Cow1tries are already adopting these reporting requirements, and they are not all following the 

BEPS report g11idelines. Indeed, China has already said that it will require entire value chains to 

be reported in all local analysis. Companies are concemed with how the infom1ation they are 

required to fi le will be used by local tax authorities. Countries are already becoming more 

aggressive i11 seeking infom1ation from taxpayers even before they have officially adopted by 

BEPS reporting standards. We understand that Australia intended to release all tax information 

for all MNEs until some if its domestic companies realized that their tax information would also 

be made public. The Australian Senate has pulled back on the proposed legislation and it is 

currently under further review. 

We believe it is important for Treasury and the IRS to provide further guidance so companies 

can report their information to the IRS with Section 6103 protected infonnation exchanged via 

the U.S. tax treaty network. Otherwise, as I have noted, other countries will be entitled to request 

for it without Section 6103 protections. 

There are several other issues that concern our member companies with respect to the fmal BEPS 

National Foreign Trade Council 

1625 K Street NW Suite 200 • Washington, DC 20006 •202-887-0278 

Serving America's Global Businesses Since 1914. 

www nff~ 
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report 

BEPS Action 7 Permanent Establishment 

BEPS Action 7 recommended several changes to the longstanding definition of what constitutes 

a permanent establishment which subjects a business to income tax in a local country. Action 7 

changes the definition of a "deemed" income tax permanent establishment (PE) to achieve incountry income tax results under applicable transfer pricing rules. This will result in more 

companies being subject to tax in a local jurisdiction, yet we are still waiting for the OECD work 

to begin to defme how to measure the profits, if any attributable to these deemed PEs. Without 

full agreement between countries on income attribution, taxpayers have no idea how much 

income is subject to a "deemed PE". We are very concerned that there will not be agreement and 

taxpayers will be facing real risks of double or triple taxation. As these taxes imposed on deemed 

PEs are potentially eligible for a foreign tax credit on U.S. tax returns, this has an impact on the 

US fisc. 

Further, we are not aware of any discussion, or even recognition, of the many potential collateral 

consequences of changing the PE definitions. For example, it is not clear whether the "deemed" 

PE will be treated as a PE for VAT purposes or customs purposes or legal business registration 

purposes. In the face of these uncertainties, diligent taxpayers simply trying to comply may have 

to create accowJting systems, invoicing systems, customs processing systems, procurement and 

ordering systems and many other systems which are expensive and will take years to implement. 

We believe that the critical goal for tax administrations and taxpayers should be ensuring that the 

appropriate amount of tax due is reported and paid to the tax authorities without creating undue 

burdens or areas of unnecessary dispute. The U.S. must work with the other countries to agree 

that a deemed income tax PE does not create a deemed VAT PE or a deemed change in who is 

obligated for customs duties and impottation compliance and that there be a sufficient transition 

period so taxpayers can actually comply. 

For most cownries, more revenue is raised from their VAT systems than through the income tax 

systems. The U.S. is the only OECD country without a VAT, and all U.S. MNEs must comply 

with the VAT guidelines and collect and remit VATs to the countries where they are selling or 

operating. By lowering the threshold for what constitutes a PE for VAT purposes, some 

govemments are being aggressive and are insisting that companies that have agents for VAT 

collection and remission, also have a PE for income tax purposes. The BEPS Guidelines 

specifically state that an agency for VAT collection should not create aPE for direct tax 

purposes, but tlus is just one area where countries are already going outside the guidelines set out 

in the BEPS report to implement their own more aggressive mles to the detriment ofU.S. MNEs 

and against the interests of the United States. 

Transfer Pricin 

Actions 8- 10 of the BEPS report will lead to changes in the OECD Transfer Pricing Guidelines. 

National Foreign Trade Council 

1625 K Street NW Suite 200 • Washington, DC 20006 •202·887-0278 

Serving America's Global Businesses Since 1914. 

www.nftCA[R 
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There were considerable changes to the transfer pricing rules that raise concem for taxpayers. 

The Treasury Department did an admirable job of insisting that the ann's length standard be 

retained for transfer pricing purposes as some countries c-ontinued to push for moving to a more 

formulary apportio1m1ent standard. The BEPS project guidance on applying the ann's length 

principle provides guidance on identifying the actual transaction undertaken, on what is meant by 

control of a risk, and on the c ircumstances in which the acmal transaction undertaken may be 

disregarded for transfer pricing purposes. For the taxation of intangibles, tbe final BEPS report 

provides guidance on which entity or entities are entitled to share in the economic remm from 

exploiting intangibles. The fmal report provides that mere legal ownership of an intangible does 

not confer any right to the remm from its exploitation. Instead, the economic retum from 

intangibles will accrue to the entities that perlorm the important value-creating functions of 

developing, enhancing, maintaining, protecting and exploiting the intangible, and that assume 

and manage the risk associated with those functions. It is often hard to detennine where value is 

created. Although the final report confttms that database comparables are seldom appropriate for 

pricing intangible transactions, and provides guidance on the use of other valuation techniques 

that may be more applicable, there is no obj ective measure on how to detennine value creation. 

If value creation is supposedly tied to function, it would be difficult to determine tbe fmal value 

because value and function are not always linked, and because there is no intematioual 

consensus on how to allocate profits where value-creating functions occur in more than one 

location. Some countries are adding additional value creation requirements. China is insisting on 

a "value contribution method" that departs from the BEPS guidelines. Location specific 

advantage will be used in comparability analysis. The taxation of intangibles is one of the most 

controversial aspects of the BEPS report and is likely to result in more tax being paid by US 

MNCs to foreign jurisdictions. Countries will try to look at leading U.S. companies and try to 

raise more revenue through more aggressive audits of the transfer pricing of intangibles. 

The implementation of the guidelines for hard-to-value-intangibles will not be completed until 

2016. At the beginning of the BEPS project, there was a great deal of discussion of"special 

measures" where the normal transfer pricing arm's length standard would not apply. Under the 

hard-to-value-intangibles draft when intangibles are transferred or licensed in development or 

where there value is uncertain, the tax administration is entitled to use the ex posr evidence about 

the financial outcomes to determine the ann's length pricing arrangements, including any 

contingent pricing arrangements, that would have been made between independent enterprises at 

the time of the transaction. These rules do not take into consideration the significant risks 

associated with the commercialization of any intangible. It is impossible for a company to 

accurately predict the outcome of research and development. W11at if your main competitor goes 

bankrupt? What if the product developed is similar to another product brought on the market 

with similar characteristics? We are concerned that the BEPS report includes subjective 

tenninology relating to "satisfactory evidence" and "siguiftcant" differences between 

expectations and outcomes. Companies are concemed that tax authorities will use ex posr 

iufom1ation in any situation where reliable comparables are not available to support the pricing 

of any significant intangible. Tlus will result in more tax disputes. 

The implementation of the guidelines on headquarters activities and other low value-adding 

services will not be implemented until2018. The purpose of these rules is to mitigate double 

National Foreign Trade Council 

1625 K Street NW Suite 200 • Washington, DC 20006 •202-887-0278 

Serving America's Global Businesses Since 1914. 

www.nttc.org 
63 

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taxation by ensuring that expenses for headquarters and other support activities are deductible 

once in the appropriate jurisdiction. This work is of disproportionate importance to the United 

States and U.S. MNEs given the fact that a disproportionate amount of headquarters and other 

corporate support activities occur in the United States. Accordingly, companies are concemed 

that this aspect of the BEPS work will continue to be deferred or will not be in1plemented with as 

much vigor as other aspects of the project. 

Dis~!!!!! Resolution - Mandator:r. Binding A1·bitration 

The NFTC strongly supports the inclusion of a mandat01y binding arbitration clause in the 

multilateral instrument currently being drafted by the BEPS project member countries. Over 20 

countries have already agreed to include mandatory binding arbitration in their treaties. We are 

also pleased that the new U.S. Model Tax Treaty will include a mandatory binding arbitration 

provision. As countries be.come more aggressive in their application of rules under the guise of 

the BEPS report, we are greatly concerned that the number of disputes will significantly increase. 

Without the mandatory binding arbitration provision, countries would have no incentive to 

resolve tax cases in a timely mmmer. At a time when the IRS budget is constrained and the 

Competent Authority has more limited resources, there must be a way to resolve tax disputes 

between countries in an efficient manner. 

Conclusion 

The NFTC is concerned about the general aggressive global tax enforcement environment. The 

BEPS report Action II analyze-d base erosion and estimated how much is lost worldwide to 

aggressive tax planning. Interestingly, this analysis was not done prior to the strut of the BEPS 

project, but only at the very end. If it was au objective concern, and not a political project, the 

amount of base erosion would have been exanlined at the outset of the project, not at the very 

end of it. As com1tries continue their aggressive stance to collect "enough" taxes to counter base 

erosion, who will determine what "enough" is? lfBEPS is hard to determine beyond an " I know 

it when I see it "standard, how will it be detennined when it no longer exists? As other 

govemments increase taxes on U.S. multinational companies, the U.S. will provide Foreign Tax 

Credits to those companies to offset double taxation on the same income. As the number of 

Foreign Tax Credits increases, we will see more base erosion--but this time, it will be the U.S. 

base that is being eroded. 

What can Congress do to protect the U.S. fisc from being eroded fiutber? The NFTC is strongly 

in favor of tax reform that lowers corporate income tax rates in line with our trading partners and 

moves to a competitive territorial-style tax system. Revenue that effectively is part of the U.S. 

tax base, is being claimed by other countries. It is not their revenue, it is ours, and modemizing 

the U.S. tax system will ensure that companies will have the ability to increase their investments 

and jobs in the U.S. 

Thank you for the opportunity to present the views of the National Foreign Trade Council on this 

important subject. I would be happy to answer any questions. 

National Foreign Trade Council 

1625 K Street NW Suite 200 • Washington, DC 20006 •202-887·0278 

Serving America's Global Businesses Since 1914. 

www.nftc.org 
64 

Chairman BOUSTANY. We thank you, Ms. Schultz. 

Mr. Sullivan. 

STATEMENT OF MARTIN A. SULLIVAN, PH.D., 

CHIEF ECONOMIST, TAX ANALYSTS 

Mr. SULLIVAN. Good morning, Chairman Boustany, Ranking 

Member Neal, Members of the Committee. Thank you for inviting 

me to discuss the BEPS project and its effect on the U.S. economy. 

In 2013, the OECD initiated the BEPS project to address the 

flaws in the international tax system that allowed multinationals 

to shift profits but not corresponding business operations from 

high- to low-tax countries. At the core of the OECD’s response is 

a focus on aligning taxable profits with value creation with economic activity, with economic substance. This is likely to have significant consequences for the competitiveness of multinationals, on 

how multinationals allocate investment across borders, and on how 

countries engage in tax competition. 

Check-the-box regulations issued in 1996 made it easier for U.S. 

multinationals to shift profits into tax havens. The BEPS alignment of taxable profits with business operations would take much 

of the juice out of these—out of this check-the-box tax planning. In 

1998, when Treasury wanted to withdraw check-the-box regulations, many questioned why the United States should have rules 

that help foreign governments collect taxes. Now it is the BEPS 

project that will help foreign governments collect taxes. 

Before, multinationals could lower their taxes with tax planning 

that had minimal impact on real activities. Now, to lower taxes, 

they will be required to shift jobs and capital investment to lowtax countries. If BEPS succeeds, we will be entering a new era 

when cross-border profit shifting is replaced with cross-border 

shifting of jobs and of capital. 

Countries with low tax rates and real economies, countries like 

Ireland, Singapore, Switzerland, and the United Kingdom, are the 

likely winners. Their gains will come at the expense of high-tax 

countries that will lose jobs and will lose investment. With a combined Federal-State rate of 39 percent, the United States is particularly vulnerable. 

The likely response by foreign parliamentary governments that 

can more easily change their tax laws will be to set their corporate 

rates even lower than they are now. The UK has already announced that it will reduce its corporate rate to 18 percent in 2020. 

Competition for real activity will increase. The already problematic 

effects of the high U.S. corporate rate will be compounded by these 

rate cuts. 

Reducing the corporate tax rate has always been a top priority. 

The BEPS project will raise the stakes. The critical question is how 

do we pay for it. The economics of corporate tax reform are trickier 

than most people realize. It is entirely possible that any revenueneutral corporate tax reform that rolls back investment incentives 

will impede and not promote economic growth. 

At the top of the list of usual suspects to pay for a rate cut is 

a reduction in depreciation allowances. Unfortunately, the positive 

growth effects of a rate cut are more than offset by the negative 

effects of slower capital recovery. If you add to that capitalization 


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65 

of R&D, as proposed by Chairman Camp, you have a tax reform 

that penalizes capital formation, with the heaviest burden on domestic manufacturing. 

Clearly, to boost America’s competitiveness, we need a new 

approach. Revenue neutrality within the corporate sector is not a 

useful guiding principle for 21st century tax reform. We need to 

downsize our most economically damaging tax and replace those 

revenues with revenues from other sources. 

One option is for the United States to follow the example of other 

nations and adopt a value-added tax. This would greatly enhance 

U.S. competitiveness because revenue from the capital-repelling 

corporate tax would be replaced with a highly-efficient consumption 

tax. 

Another approach would be to shift away from taxing business 

entities and toward taxing investors. The main advantage of this 

approach stems from differences in cross-border mobility. Investors 

are less mobile than investment. Most OECD countries have raised 

shareholder taxes, while cutting their corporate taxes. And because 

the burden of corporate taxation is increasingly falling on labor, a 

shift from corporations to shareholders will increase progressivity. 

On the international side, the Camp approach to territorial taxation, including all of its strong anti-base erosion provisions, still 

seems correct. We need to banish lock-out from our international 

tax rules. To the extent we impose any tax on foreign profits, we 

should levy that tax as profits are earned, not when they are distributed. 

We need strong and tough earnings stripping rules. It is common 

practice for foreign-headquartered multinationals operating in the 

United States to cut their U.S. tax by paying interest to foreign affiliates. Earnings stripping is a major motivation for inversions. 

Finally, as proposed by Chairman Camp, we need to adopt a onetime tax on unrepatriated foreign profits. From an economic perspective, this tax is as good as it gets. As a tax on old capital, it 

does not affect incentives on new investment. Congress should 

consider a deemed repatriation proposal with rates substantially 

higher than those proposed in the Camp plan, and use those revenues for tax cuts that promote domestic jobs and domestic capital 

formation. 

Mr. Chairman, thank you very much. 

[The prepared statement of Mr. Sullivan follows:] 


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Testimony of Martin A. Sullivan, Ph.D. 

Chief Economist, 

Tax Analysts1 

Embargoed Until Delivery 

Befot·e the Subcommittee on Tax Policy of the 

Committee on Ways and Means, 

U.S. House of Representatives 

Decembet· 1, 2015 10:00 a.m. 

Heat·ing on the OECD Base Erosion and Profit Shifting (BEPS) Project 

Good morning, Chairman Boustany, Ranking Member Neal, and Members of the Committee. It 

is a pleasure to appear before you today to discuss the OECD's project on base erosion and profit 

shifting (BEPS) project and its effects on the U.S. economy. 

In 2013, at the request of the leaders of the G-20 nations, the OECD initiated the BEPS project to 

address the flaws in the international tax system that allowed multinational corporations to shift 

profits-but not corresponding business operations- from high-tax to low-tax countries. This 

idea of aligning profits with value creation was entirely consistent with tax reform efforts of the 

chairmen of the tax-writing committees who at the time who staled: "We'll make sure that 

companies can't avoid paying tax on income they earn in the U.S. by pretending that they earned 

it in an overseas tax haven" 2 

Now that most of the BEPS project is completed there is a great deal of c-ommentary about how 

foreign governments, acting on the OECD's recommendations, will begin taxing profits 

currently being booked in tax havens.3 To the extent BEPS principles are implemented, it is 

likely that the foreign tax burden on U.S. multinationals will rise-especially for those 

multinationals with lots of intellectual property. 

With the release of the check-the-box regulations by the Treasury Department in I 996 it became 

much easier for U.S. multinationals to reduce their fore ign taxes by shifting profits from 

1 The views here are my own and not those of Tax Analysts. Founded in 1970 as a nonprofit organization, 

Tax Analysts is a leading provider of tax news and analysis for the globa l commt111ity. By working for the 

transparency of tax rules, fostering increased dialogue between taxing authorities and taxpayers, and 

providing forums for education and debate, TaK Analysts encourages the creation of tax systems that are 

fairer. simpler, and more economica lly eflicient. tax code should minimize its role in the economy by 

rechanneling the revenues devoted to tax breaks into lower rates. 

'Dave Camp and Max Baucus. "Tax Reform Is Very Much Alive and Doable," Wall Streer Jaw·nal, 

April7, 2013. 3 Mindy Herzfeld, " U.K. Leads on BEPS Implementation While U.S. Dithers," Tax Nates Inrernatianal, 

Nov. 30. 201 5. 
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countries where they conduct most of their business into tax havens.4 The BEPS 

re.commendations that align taxable profits with value-creating business operations have the 

potential to take much of the benefit out of this type of check-the-box tax planning. In the 1990s 

when Treasury wanted to repeal check-the-box regulations5 many in Congress and the business 

community questioned why the United States should have rules that help foreign governments 

collect taxes on U.S. multinationals. Similarly, many are now asking why the United States 

should support the BEPS project that will help foreign governments collect taxes on U.S. 

multinationals. 

The Economics of Economic Substance 

Before discussing how the United Stales should respond to what some call a " revenue grab" by 

non-tax haven foreign govenunents, we should take a moment to discuss another aspect of the 

BEPS project that also has important economic implications for the United States.6 Here we are 

not so much talking about the effect ofBEPS principles on competitiveness of U.S. 

multinationals but about the eiTect ofBEPS principles on the location of multinationals' business 

operations. 

From the start of the BEPS project the focus has been on prevet1ting artificial profit shifting, that 

is, the shifting of profit achieved by related-party loans, related-party risk shifting contracts, the 

relocation of rights to intangible property, and adjustment of transfer prices. Through this 

elaborate "supply chain restructuring" multinationals have been able to shift taxes from high- to 

low-tax countries usually without a cotlllnensurate shift in employment and tangible assets. 

To the extent the BEPS project is successful in aligning taxable pro tits with real activities there 

will be less artificial profit shifting, more revenue for goverrunents where economic activities 

take place, and higher taxes on multinationals. But that is not the end of the story. Where before 

multinationals could lower their taxes with clever tax planning that had minimal impact on real 

activities, they will now be required to shift jobs and capital investment to low-tax countries to 

cut their tax bills. With the implementation of BEPS principles, the problem of large tax rate 

differentials will be much less about cross-border loss of revenue and much more about crossborder shifting of jobs and capital spending. 

In general, efforts by tax administrators to require more economic substance- for example, to 

prevent tax shelter transaction- is widely considered to be good tax policy. What is often 

forgotten is that adding friction to aggressive tax planning can have the unfortunate side effect of 

increasing the economic distortions oftaxation.7 In the context of international tax planning, 

requiring economic substance means shifting real business operations to low-tax countries in 

order to justifY booking profits in those countries. Therefore, requiring alignment of economic 

activities and taxable profits can either attract or drive away investment. 

4 Treasury Decision 8697. 

>Notice 98-11. 6 Wall Srreer Jaumal editorial, July 23, 2013. 7 Daniel N. Sbaviro, "Corporate Tax Shelters in a Global Economy: \Vhy They Are a Problem and What 

We Can Do About It," American Enterprise Institute monograph, 2004. 

2 
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Countries with low tax rates and with substantial economies that are platforms for real 

investment- countries like Ireland, Singapore, Switzerland, and the United Kingdom- arc likely 

to be winners.8 Gains to these countries will come at the expense of high-tax countries that will 

lose jobs and investment. With a combined federal-state tax rate of 39 percent the United States 

is particularly at risk. 

Heightened Tax Competition 

TI1e OECD's BEPS project is telling govenunents that profits must be aligned with substantial 

value creation. If these principles are adopted, we could be entering a new era where rate 

differentials take on heighted significance. The likely response by foreign parliamentary 

govemments that can more easily change their tax laws and are willing to pursue a lax 

competition agenda will be further reductions in their corporate tax rates. Thus, the already 

problematic economjc effects of a high U.S. corporate tax will be compounded by rate cuts of 

foreign govenunents responding to BEPS. Reducing the corporate tax rate has always been a top 

priority of economic policy. The BEPS project has raised the stakes.9 

The critical question is how do we pay for a lower corporate tax rate? 

The tepid response to former Ways and Means Committee Chaim1an Camp's prodigious tax 

reform efforts demonstrates the political obstacles to tax refonn. It has been five years since 

Simpson-Bowles Commission put tax refonn on the front bumer. But since then there has not 

been one tax refonn proposal that has come close to coming up for a vote in either the House or 

Senate tax-writing committees. 

That's the politics of tax reform. Then there are the economics of tax reform. It is entirely 

possible that any revenue-neutral corporate tax refonn that rolls back investment incentives to 

pay for a corporate lower rate will impede--not promote--economic growth. Unlike 1986, there 

are not many big-money tax breaks available to pay for a corporate rate cut, and a substantial 

portion of those tax expenditures that could be repealed to finance a rate reduction are not 

loopholes but incentives for domestic investment. 

At the top of list of"usual suspects" to pay for a corporate rate cut is a reduction in depreciation 

allowances. Unfortunately, the positive growth effects of a rate cut (which rewards old and new 

capital) would be more than offset by negative effect of slower of capital recovery (which is 

borne entirely by new investment). If on top of that you include capitalization of research 

expenditures and cuts to tbe research credit, as propose.d by Chainnan Camp, you have a tax 

reform that penalizes capital fonnation with the heaviest burden on domestic manufacturing. 

8 In July of2015 the British government announced its intention to reduce the United Kingdom's 

corporate tax rate to 19 percent in 2017 and to 20 percem in 2020. 9 In a very recem article Daniel A. Win makes the same point: ''Another unintended consequence of 

BEPS is that the competition for real economic activity (e.g., physical plants and production sites) will 

increase, and likely lead to continued downward pressure on corporate income tax rates." (Tax Nores 

Intemational, Nov. 30, 20 15, p. 759.) 
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Any cut in the corporate tax rate is a welcome development. So if the Congress can find a way to 

cut tbe U.S. rate from 35 to 30 percent or through base broadening reforms that do not reduce 

investment incentives it should not let tbe perfect be the enemy of the good. But this still leaves 

the United States with a clunky corporation tax that is poorly suited to the modem international 

economy. 

Clearly if we want a tax reform that will substantially improve America's competitiveness we 

must begin to think differently. We must look beyond cuts in corporate tax expenditnres as 

source of revenue to pay for corporate rate cuts. Revenue-neutrality is not a useful g~aiding 

principle for 21st centnry corporate tax refonn. For all its merits the Tax Refonn Act of 1986 is 

not a model for our next tax refom1. We must begin to think about replacing revenues from our 

most economically damaging tax with revenue from new sources. 

One option would be for the United States to follow the example of other nations that have cut 

their corporate tax rates and adopt a value added tax. A reduction in the corporate tax rate to 15 

percent could be paid for a 5 percent value added tax. This would greatly enhance the 

competitiveness of the U.S. economy because the revenue from the capital-repelling corporate 

tax would be replaced with a highly efficient consumption tax. Senate Finance Committee 

member Benjamin Cardin, D-Md., has proposed tbat the revenues from a federal value-added tax 

witb a I 0 percent rate be used to pay for large cuts in individual and reduction in the corporate 

tax rate to 17 percent. 

Ta x l nvestoa·s, Not Investmen t 

Another straightforward and economically intriguing concept is a tax reform that shifts tax away 

from business entities and onto investors. The main advantage of shifting taxes on capital to tbe 

personal level stems from differences in cross-border mobility. Investors are less mobile ilian 

investment. Most people are unwilling to uproot families, leave friends, and adopt a new culture 

just to save taxes. For a profit-maximizing corporation, however, an international relocation is 

just a matter of dollars and cents. And with improved communications the costs of spreading 

business operations across the globe are decreasing. 

The idea that we must shift taxes on corporations to taxes on investors is gaining increasing 

acceptance among policy experts on both side of the aisle. 

ln a 2010 paper economists Rosanne Altshuler, Benjamin Harris, and Eric Toder explored the 

possibility of returning the top dividend and capital gains rates to their pre- 1997 level of 28 

percent. They made several interesting findings: First, most OECD countries have moved in the 

opposite direction of the United States and have raised shareholder tax rates while lowering 

corporate rates. Second, because tbe cross-border mobility of individuals is Jess than that of 

corporations, such a change would reduce tax distortions in economic decision-making. Third, 

because the burden of corporate taxation is believed to increasingly fall on labor, a shift in tax 

from corporations to shareholders would increase the progressivity of the tax system1 0 

10 "Capital Income Taxation and Progressivity in a Global Economy," Virginia Tax Review, 2010, p. 355. 

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In 2011 testimony before the Senate Finance Committee, Professor Michael Graetz of Columbia 

Law School, a fonncr Treasury official, stated that the Treasury Department traditional view of 

favoring reductions in shareholder taxes over reductions in corporate taxes has not withstood the 

test of time because of the "internationalization of the economy." Graetz told the committee that 

"It is far easier and, I believe now better tax policy, to collect income taxes from individual 

citizens and resident shareholders than from multinational business enterprises." He then 

suggested that Congress consider a cut in the corporate rate to 15 percent and a tax increase on 

individuals in the fonn of a withholding tax on corporate shareholders and bondholders 

And just last week James Pethokoukis of the American Enterprise Institute wrote: "Perhaps it is 

time for a new approach, with one economically obvious refonn being a shift of corporate 

income taxation from the corporate level to that of the individual shareholders." Similarly, Alan 

Viard, also at the American Enterptise Institute, has stated: "We need to base our tax on wbere 

tbe stockholders live. We should give up this idea of taxing income at the corporate level, and 

instead say American shareholders should pay tax every year at full ordinary income rates on 

their dividends and their capital gains from any company no matter where the company is 

chartered or managed or where it earns its profits, and that tax should apply regardless of 

whether the stockholders sold the stock or not.'' 11 

BEPS and International Tax Refoi"DJ 

In the prior section I argued that BEPS provides extra motivation for Congress consider new and 

bold approaches to domestic corporate tax refom1 that differ considerably from the approach 

taken by Chairman Camp last year. The best way for the United States to respond to BEPS is to 

lower its corporate rate and to maintain or even expand well-designed investment incentives. On 

the international side-although many details that are yet to be settled--the basic thrust of the 

Camp approach to tenitorial taxation, including all of its strong anti-base erosion provisions, still 

seems correct. 

First and foremost, we need to banish lock-out from our international tax mles. I am skeptical of 

the magnitude of economic benefits that some claim will arise from removing the tax penalty 

from repatriation of foreign eamings. Nevertheless, there are negative consequences of lock 

out. 12 And the problem is easily solved by in1posing domestic tax (if any) on foreign profits 

when profits are eamed instead of when they are paid as dividends to the U.S. parent. 

We also need tough earning stripping ntles. It is common practice for foreign-headquartered 

multinationals to shift income out of the United States by paying interest on related-party loans 

from foreign affiliate.s. Because U.S. controlled foreign corporation mles prevent tllis, the ability 

to strip earning is a major a motivation for U.S. headquartered companies to invert. To encourage 

foreign headquartered multinationals to invest in the United States we should replace tax benefits 

for debt with tax incentives for capital expenditure. 

11 James Petbokoukis. "'What 10 Do About US Fimts Moving Overseas to Pay Lower Tax Rates?'' 

November 23, 2015. Includes quote from Alan Viard. 12 Martin A. Sullivan, "The Economic Case for Unlocking Foreign Profits. Tax Nores, July 2, 2012. p.7. 

5 
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Interestingly, if the United States fhlly embraced the BEPS principle of aligning profits with 

value creation, there would be less need for the tough anti-base erosion mles in Chairman 

Camp's proposed refonn or for a minimum tax as proposed by President Obama. This would be 

a welcome development because it is difficult to design such mles that are both administrable 

and effectiven 

Finally, the Camp proposal to apply a one-time tax on the stock of accumulated foreign eamings 

(so called "deemed repatriation") should not only be fully embraced, it should be expanded. 

Under the Chainnan Camp's plan unrepatriated foreign earnings currently held as cash would be 

taxed at 8.75 percent and other tmrepatriated eamings invested in active business would be taxed 

at 3.5 percent. The Joint Committee on Taxation estin1ated this proposed would raise $170 

billion over ten years. From an economic perspective, this is about the most et1icient tax 

possible-even better than a consumption tax- because as a tax on old capital it does not affect 

incentives to invest on a going forward basis. Therefore, in order to pay for rate cuts and tax 

incentives that would promote domestic capital fonnation and job growth, Congress should give 

high priority to the a deemed repatriation proposal with rates considerably higher than those 

proposed by Chairu1an Camp. 

Thank you for the opportunity to discuss tllese important issues. I am happy to answer any 

questions that the committee may have. 

13 Martin A. Sullivan, "Designing Anti-Base-Erosion Rules," Tax Noles, April22, 20 13, p. 347. 

6 
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Chairman BOUSTANY. Thank you, Mr. Sullivan. We will now 

proceed with questions. Let me start with Ms. Schultz and Ms. 

Angus. 

Under the BEPS action item 13, the master file information that 

is required is something of concern. We had some discussion on it 

earlier. Based on what we know today, what recourse does a company have if it discloses sensitive business information to a foreign 

jurisdiction and that information gets out to a foreign competitor? 

Ms. SCHULTZ. Yes. I think, as Mr. Stack said, companies have 

to work very hard to try to make sure that whatever information 

is provided is not proprietary. But a lot of countries are requiring 

that information. 

So, you may say, ‘‘I am going to put this much information on, 

and if they ask for additional information they can do it through 

the audit process and we will then, you know, have a separate conversation to review that information,’’ but the way it is set up right 

now, a lot of these governments are already making these changes, 

and are going to require that information. It is going to be very difficult, if information is required and it doesn’t go through an exchange of information provision, for companies to be able to control 

what happens with that information. 

There is also a big push by some of the civil society to make sure 

that as much information gets published as possible. They think 

that to have corporate transparency you need to have all the tax 

information out in the public. So a lot of the proprietary information that companies really hold very tightly, especially value chain 

information, is stuff that they are very concerned could get released 

or could get given to some other governments, or through civil society, and released in another way. 

Chairman BOUSTANY. Thank you. Ms. Angus, do you want to 

comment? 

Ms. ANGUS. I agree with—— 

Chairman BOUSTANY. Please turn your microphone on. 

Ms. ANGUS. I agree with the comments by Ms. Schultz, and also 

Mr. Stack, that the master file is an important document to focus 

on. Because it is a more extensive document than the country-bycountry report, it can provide more information. It is in narrative 

form. So precisely what information is provided and how it is described is in the hands of companies, and they will need to approach this very carefully to be compliant with the requirements 

but give themselves as much protection as they can. 

Once a master file is provided to a government, as with any 

other information that a company has to provide to the tax authority, it then falls under that country’s rules as to the protection of 

that information, and we certainly have seen experiences where 

U.S. companies have had unfortunate experiences in the past with 

countries not protecting information the way that it is protected in 

the United States. 

I think that is an important issue to be considered as the work 

in the OECD goes forward. The OECD has an opportunity to take 

a leadership role here and get countries really focused on the price 

of obtaining the information that they want about companies has 

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Chairman BOUSTANY. I thank you. And I see in the countryby-country reporting it is limited to large multinational groups 

with consolidated group revenue of at least 750 billion Euro. Does 

the master file disclosure requirement in action 13 have similar restrictions? 

Ms. ANGUS. It does not have those restrictions, as specified by 

the OECD. And the countries that have already begun to adopt the 

master file have not always put in any restrictions. So it could 

apply to any company of any size. 

Chairman BOUSTANY. I thank you. And finally, a question for 

Mr. Sprague. 

BEPS was supposedly meant to level the playing field and address tax evasion and tax avoidance in an even-handed fashion. 

Can you elaborate further on how BEPS is encouraging the creation of IP regimes in various countries? Are these patent boxes, 

or innovation boxes, likely to effectively force companies that use 

a lot of intangibles to move operations out of the United States? 

Mr. SPRAGUE. Thank you, Mr. Chairman. The short answer to 

the last question is yes. The BEPS process, very interestingly, resulted in, essentially, a setting of minimum standards for IP boxes. 

So even though general corporate tax rates outside of the United 

States are lower, considerably lower, than the U.S. rate, every 

country that has adopted an IP box will have an even lower rate 

for income in the IP box. It is remarkable, how many countries 

have either already adopted or are intending to adopt an IP box. 

The rate in the UK, for example, is 10. The rate in Ireland is likely 

to be 6.25. Those are very powerful incentives. 

The agreement that has come up through the BEPS process essentially is to establish a connection, a very direct connection, between the amount of income that can be taxed in the IP box and 

the amount of R&D development activity that is performed in the 

country. So, as a consequence, the very direct result of the IP incentive is to incentivize all companies—U.S. companies included— 

to move R&D functions into the countries that offer such IP boxes. 

Chairman BOUSTANY. I thank you. 

Mr. Neal. 

Mr. NEAL. Thank you much, Mr. Chairman. 

Mr. Sprague, you correctly noted that many of our competitors, 

particularly in the G20, have lowered their corporate rate. And you 

cited the British, for example, as Mr. Sullivan did. Simultaneously, 

while lowering that corporate rate, Prime Minister Cameron is now 

calling for more defense spending. Who is going to make up the difference in revenue? 

Mr. SPRAGUE. Well, that is a political question that I guess—— 

Mr. NEAL. I am going to give Mr. Sullivan a shot at it, as well. 

Mr. SPRAGUE. You guys get to—you get to decide. You know, 

my—from an international corporate tax competitiveness perspective, I am a private practitioner. You know? I work with companies. They ask me what the tax rate is outside the United States 

compared to the United States, and I tell them. And that provides 

a very powerful incentive for them to move operations outside the 

United States. 

And one very important result of the BEPS process—I think Ms. 

Schultz commented on this—the transfer pricing changes, in parVerDate Sep 11 2014 15:21 Apr 26, 2017 Jkt 022334 PO 00000 Frm 00077 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\22334\22334.XXX 22334

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ticular, are going to encourage companies, our clients, U.S. multinationals, U.S. software companies, to put high-value jobs outside 

the United States, because it is those high-value jobs that are going 

to solidify the foreign structures to make them stand up better to 

challenges of the market jurisdictions. 

Mr. NEAL. Mr. Sullivan. 

Mr. SULLIVAN. Thank you, Mr. Neal. You know, the question 

keeps coming up over and over again. Or it doesn’t—actually, it 

doesn’t come up enough. How are we going to pay for a lower rate? 

I am in favor of a low corporate rate. I would go to 10—I would 

go to 15 percent to 10 percent. But we have to find alternative 

sources of revenue. Obviously, a value-added tax is not very popular in the U.S. Congress right now, although it is what other 

countries have done to lower their corporate taxes. And perhaps 

the more realistic alternative that you also see in other countries 

is raising taxes on shareholders, raising taxes on investors. 

So you would move the point of imposing tax on capital away 

from the mobile corporations that can move outside of the United 

States and place that burden on shareholders. And you see more 

and more in the academic community experts are recognizing that 

this is a far better approach than trying to impose tax on corporations. 

Mr. NEAL. Thank you. And, Mr. Sprague, how much of the 

trapped cash that U.S. multinationals have held overseas is attributable to software companies, do you know? 

Mr. SPRAGUE. I don’t know, offhand. I mean there are many industries that have trapped cash overseas. I think there are articles 

that publish those statistics from time to time. 

Mr. NEAL. What is the software industry currently doing with 

that money? 

Mr. SPRAGUE. Generally, the money is used to reinvest outside 

the United States, reinvest in operations outside the United States, 

make acquisitions outside of the United States. Because of the lockout effect of U.S. tax law, the income or the cash can’t be dividended back to the United States without the punitive U.S. tax. 

And so it is much more efficient to deploy that cash to grow business operations outside the United States. 

Mr. NEAL. Mr. Sullivan, do you want to comment on that? 

Mr. SULLIVAN. Well, the—I think one—maybe one way of 

thinking about this is what will they do with the money if the 

money is brought—— 

Mr. NEAL. That is the point, yes. 

Mr. SULLIVAN [continuing]. If they are allowed to bring it back. 

And we saw, back in 2004, when we had a repatriation holiday— 

I don’t know about specifically the software industry, but, despite 

all of the discussion about how it was going to be used for investment and plant and equipment and job creation, most of it went 

into paying dividends and share buybacks. 

Mr. NEAL. And I think that is the point. And I—having experienced that moment, when it was suggested that the repatriated 

money could be used for job creation, that certainly—we—there is 

broad agreement today that certainly did not happen. 

Mr. SULLIVAN. And you know, we certainly want to get rid of 

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Mr. NEAL. Exactly. 

Mr. SULLIVAN. We don’t want to have that money trapped offshore. 

Mr. NEAL. Right. 

Mr. SULLIVAN. But I think some of the claims about how much 

benefit we will get for it as being a major stimulus that will transform the economy is a little bit overblown. 

Mr. NEAL. You know, there seems to be some consensus 

amongst the panelists that trying to get that money back at a reasonable rate would be very productive for America’s economic purpose. And I think that is where we ought to be focusing our attention, but not to miss the point that that argument was made here. 

I was on the Committee at the time and objected strongly to the 

notion that that money should be brought back at five and a quarter. And it was brought back at five and a quarter. And even the 

most aggressive proponents of bringing that money back later acknowledged not only did they not do any hiring, but that the 

money was given to the shareholders, and it was called good management. Now, that is up to them to make the determination. But 

not to miss the point, under the guise of job creation, that money 

was returned. 

Thank you, Mr. Chairman. 

Chairman BOUSTANY. Mr. Reichert. 

Mr. REICHERT. Thank you, Mr. Chairman. Thank you all for 

being here, and for providing your testimony, taking time out of 

your busy schedules to be with us today. Just a quick followup 

question on BEPS action 13 that the Chairman was pursuing. 

I would just like a little bit of a—more elaboration, Ms. Angus, 

on—and Ms. Schultz—on what other countries are doing. So you 

have referenced the more than 60 countries in the last 2 years that 

are now taking actions related to BEPS action 13. So what are 

those actions that other countries are taking, and how do they affect the United States? Either one of you would be—— 

Ms. ANGUS. With respect to country-by-country reporting—in 

particular, we have seen a flurry of activity starting before the 

OECD final reports, but speeding up since the issuance of the reports last month. And there are three countries that have already 

adopted country-by-country reporting: Mexico, Poland, and Spain. 

There are several others that have legislation in the process 

that is expected to be completed shortly that will have country-bycountry reporting in place, and many other countries are considering it. 

At the same time, there are countries that have also acted with 

respect to putting in place master file requirements. 

Mr. REICHERT. Ms. Schultz. 

Ms. SCHULTZ. I agree with Ms. Angus, that you start to see the 

countries that originally were called unilateral actors. Now they 

are called early adopters, before the BEPS report was finished. It 

just sort of changed the dialogue a little bit on who was doing 

what. 

But just by putting the BEPS action report—by starting the 

BEPS project, countries already started to make changes in their 

tax laws, and said that they were doing it because of BEPS. There 

were a lot of countries doing tax reform. There are countries that 


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have started to add the—as Barbara said, countries are already 

starting to do the things from the BEPS action report, but a lot of 

them started well before the BEPS project was finished. There was 

a lot of tax reform taking place. There were a lot of countries taking a look at their rules, both indirect and direct taxation on how 

they were taxing the income that they considered to be the BEPS 

income, the base erosion income. 

And one of the things that Mr. Sullivan said about the VAT, a 

lot of governments, because the United States is the only OECD 

country without a VAT system, a lot of these governments had already started to look at the VAT and said, ‘‘If you need a specific 

agent for VAT purposes, we will give you a PE for direct tax purposes.’’ So governments have started to try to figure out a way to 

get more income tax from U.S. multinationals in many other ways, 

not just looking at the CBC and the master file. 

So, by doing these early actions, there has been an awful lot of 

activity prior to the finish of the BEPS project, where companies 

have had to be more aware of where the changes were coming. 

Mr. REICHERT. And what are the impacts on American companies? 

Ms. SCHULTZ. It is much more expensive for American companies. We are seeing companies—just the complication of complying 

with all these different rules, and paying attention to who is changing their rules under which—at which time, it is becoming a little 

bit more difficult for companies to make sure that they are ready 

to comply with all these different rules. 

It has also increased the number of disputes already, significantly. The number of audits is up. And the number of disputes is 

going to go up substantially, as well. 

Mr. REICHERT. Ms. Sprague—or Angus, I am sorry. 

Ms. ANGUS. I would just add that it—certainly change is happening like this all around the world. At the same time it creates 

significant uncertainty. In many cases the changes are not fully described or detailed, so there is uncertainty about how the rules will 

be applied. 

And we are seeing an increase in tax authorities using the label 

of BEPS to justify challenges of companies under current law. So, 

potential for significant retroactive effect, where the law hasn’t 

been changed, but they are using this as an excuse to make a challenge against a company. 

Mr. REICHERT. Thank you, and I yield back, Mr. Chairman. 

Chairman BOUSTANY. Mr. Larson. 

Mr. LARSON. Thank you, Mr. Chairman, and I thank all of the 

panelists for your testimony. 

Mr. Sullivan, if I could, I would just like to ask a couple of questions. And one of them—and what I appreciate about these hearings—and I want to say, Mr. Chairman—is that this provides us 

an opportunity to demystify for the American public a lot of the 

terminology that we utilize. I can imagine someone tuning in—I 

don’t think our ratings are probably that high, but I can imagine 

someone tuning in and listening to the conversation here, and 

when I go home to Augie and Ray’s and I talk about the lockout 

effect, and I talk about base erosion and earnings stripping and 


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check-the-box, et cetera, they kind of look at me and say, ‘‘Well, 

yes, but what are you doing about jobs.’’ 

And while I do think that there is a direct correlation between 

these, Mr. Sullivan, if you could, briefly discuss how we can make 

changes to some of our international tax rules to help grow jobs in 

this country, while preventing the further base erosion, if possible. 

And then I would like you to expand upon what you had to say 

about what is going on in academic circles about a discussion—you 

and Ms. Schultz mentioned the VAT tax. Probably the unlikelihood 

of that happening, but the thinking as it relates to shareholders 

and investors. So answer those two questions, sir, if you would. 

Mr. SULLIVAN. Thank you, Mr. Larson. That is quite a challenge, for an economist to put something in plain English, but I 

will try. 

[Laughter.] 

It is about jobs. And we want domestic job creation. And when 

we look at our tax system, the major flaw of our tax system is the 

corporate tax. It has always been a flaw. But for the prior 50 years 

we have had so much economic growth that we haven’t really—we 

have been able to endure it. 

But now we really can’t afford to have a high corporate tax rate. 

And so, what we—all roads will lead you to the same conclusion. 

We need to get the corporate tax beaten down as much as possible, 

because it repels capital from the domestic economy, which raises 

productivity, which raises wages, which creates jobs. And so we 

need to be thinking about different types of proposals. 

And so, we want—so the conventional tax reform is about broadening the base and lowering the rates. We don’t really have that 

option any more. We need to broaden the base. We need to lower 

the rates without getting rid of domestic—incentives for domestic 

capital formation. And so we need to look at other sources of revenue. 

And I think, you know, it is an education process. At first we 

thought we could broaden the base and lower the rates, and now 

we see that it is not possible. We can’t get the rate below 30 percent. We need to get it to, you know, to 20, and we can’t even get 

it to 30 right now. And so, what I think more and more academics 

are looking at—on both sides of the aisle, this is not a partisan 

issue—is where else can we get revenue. How can we collect tax 

in a more efficient way? Nobody likes to raise taxes on anybody, 

but where are the best places to look? 

And if you look at what is going on around the world, where everybody is—all the other countries are lowering their corporate 

rate, they are raising their value-added taxes. And we don’t have 

that option. But also, what they are doing is they are—they have 

fairly high taxes on their—at the personal level. Ireland has very 

high personal tax rates. The UK has a 45 percent top individual 

rate. And all throughout the world you see this conscious decision 

to lower the corporate rate and replace it with a higher individual 

rate. 

Mr. LARSON. And so how would that—as you were saying in 

the—how would the proposal work, in terms of shifting responsibility to shareholders and investors? How would that—what kind 

of revenue would—could that get us toward revenue neutrality? 


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Could that help make up the base? What is the thinking along 

those—— 

Mr. SULLIVAN. Well, the—it is—there are limitations on how 

much you can raise the taxes at the shareholder level. You can certainly get the capital gains rate back up to 28 percent. You could 

certainly think about getting the dividend rate back to—at the regular level. And then we raise a significant amount of revenue that 

could be used for lowering the corporate rate. 

Mr. LARSON. Thank you. I yield back. 

Chairman BOUSTANY. Mr. Kelly. 

Mr. KELLY. Thanks, Mr. Chairman, and thank you all for being 

here. 

I continue, though, to—as I listen to all of you, coming from a 

little different world than the world I am existing in right now, 

other than really pro-growth tax reform and regulation reform, all 

the rest of these things are interesting topics to sit around some 

night, have a nice drink and discuss and debate. But the reality of 

it is, if you look—let’s just relate it to where we are right now, relate it to football. We need to look at what the other guys are doing 

in order to win, and adopt those practices. Look at why the other 

guys are losing, and then thank them for continuing on that same 

path, because it makes your win a lot easier. 

And what you each have said is exactly what we all agree on, 

and that is tax reform. But not just tax reform, but pro-growth tax 

reform, based on the market, the global market that we now compete in. Sometimes I think we are going back to the Dark Ages and 

we are having debates about how many angels we can fit on the 

head of the pin, instead of how many people we can get back to 

work. 

In my world, profitable companies pay taxes, working people pay 

taxes. That is the key to it. So it takes getting more people back 

to work. But you have to have a product on the shelf that competes 

with everybody else in the global marketplace. And you have all 

talked about it. And it is just kind of mystifying that we are sitting 

here, asking you questions like, ‘‘How could we possibly fix this?’’ 

What is the problem? The cost of operation. So every good or 

service that we do—and I don’t care what it is that you look at— 

if we are going to make it harder to go to market, more expensive 

to go to market with a product that can’t compete on a price range 

with everybody else in the world, we are going to continue to lose. 

And to think that somehow, by having you come in here, and baring your souls to us, or giving us ideas is going to get it done, it 

is not. 

Please tell me about the difference between what the Irish did— 

very charming. Love them, cute as the devil they are, but they 

have been picking our pockets for a long time. And they just lowered their rate again, because they looked at the world and said, 

‘‘Wait a minute. These guys are getting close to us. We have to cut 

our rates.’’ Tell me the difference between what the Irish are able 

to do overnight, what Cameron is able to do—quickly—and a pivot 

to making it more profitable, and giving you more market share. 

What is the difference between those models and our models? Just 

real—and I mean real quickly, because I think the answer is pretty 

obvious. 


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Any of you. Ms. Angus, what would you do right now, today? And 

what are they able to do that we are not able to do? 

Mr. SPRAGUE. You know, if I can respond to that—— 

Mr. KELLY. Sure, Mr. Sprague, please. 

Mr. SPRAGUE. You know, the Irish tax policy has been consistent for many years, to hold fast to a low corporate tax rate to 

make them, as they describe, the most competitive jurisdiction in 

Europe for inward investment. They have done exactly what Mr. 

Sullivan did—— 

Mr. KELLY. Exactly. But how did they do it? What process did 

they go through to pivot to that position? We have been deliberating for years here. I mean they don’t have to sit around and 

deliberate on it as much, it seems to me. Isn’t it a quick response? 

Isn’t it an early conviction made saying, ‘‘Listen, in order for us to 

compete we have to act now, and not continue to talk?’’ 

Mr. NEAL. Will the gentleman yield? 

Mr. KELLY. No. I will in a minute, I will in a minute. I know 

we are both Irishmen. I want to get to this. 

[Laughter.] 

Because I am telling you, I know what they are doing. 

Mr. SPRAGUE. You know, their parliament and their ministry 

of finance has always been consistent: ‘‘This is our international 

tax policy.’’ 

One thing that I think is worthwhile communicating to you is 

that Ireland came under huge pressure from the EU several years 

ago to raise their tax rate because Ireland was successful. Ireland 

achieved—— 

Mr. KELLY. Well, of course, yes. 

Mr. SPRAGUE [continuing]. Lots of inward investment—— 

Mr. KELLY. If you want to change the rules, that is the easy 

way to do away with your competition. 

Anybody, please tell me how quickly they were able to respond. 

Ms. ANGUS. They have a parliamentary system, and we do not. 

Mr. KELLY. Thank you. That is what I am trying to get to. We 

continue to play ring around the rosy with this, and we know what 

the answer is, but we keep saying this is something we have to get 

done, but we just can’t do it. 

Mr. SULLIVAN. You know, Mr. Cameron in the UK, and the 

same thing in Ireland, they made conscious decisions to raise their 

other taxes to pay—— 

Mr. KELLY. Right. Individuals pay almost 50 percent. 

Mr. SULLIVAN. Excuse me? 

Mr. KELLY. Individuals pay 50 percent. 

Mr. SULLIVAN. Yes. 

Mr. KELLY. But keep in mind they used to pay a lower percentage on no wages. They would gladly pay 50 percent on higher 

wages, because they end up with a net gain in their pocket. That 

is not hard to figure out. 

Mr. SULLIVAN. When Ireland was devastated by the financial 

crisis—— 

Mr. KELLY. Right. 

Mr. SULLIVAN [continuing]. They cut government worker salaries by 15 and 20 percent. They raised all of their other taxes, but 


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they kept the corporate rate at 12.5 percent. And there was no debate about it. 

Mr. KELLY. Yes. But my point, Marty, is they were able to act 

quickly. 

Mr. SULLIVAN. Yes. 

Mr. KELLY. That is the whole point. The purpose of debate is 

fine, if the consequences are that you actually get something done. 

And this is a Forrest Gump moment. There ain’t no fixing stupid. 

Thank you. I yield back. 

Mr. NEAL. Mr. Chairman. 

Chairman BOUSTANY. Yes. 

Mr. NEAL. Just to play up on what Mr. Kelly said, the other 

thing that they did, they took advantage early on of European 

Union subsidies for infrastructure. They were way ahead of the 

rest of Europe. The roadways were done. The Internet was prominent across the island. And there is another lesson for everybody: 

Everybody on that island is literate. That education is the gold 

standard of Europe. 

Chairman BOUSTANY. Mr. Renacci. 

Mr. RENACCI. Thank you, Mr. Chairman. I want to thank the 

panel. It has been enlightening to listen to you. And I spent a week 

over in Europe talking with Members that were looking at this 

BEPS project. And Mr. Neal asked a question which I thought was 

kind of interesting, because I asked a similar question when I was 

over there. They are lowering rates. And, as we heard, Mr. Cameron is increasing spending. And the question was how are they 

going to do that. 

Well, the answer that I was told was, ultimately, they are going 

to get American companies over there, they are going to increase 

their tax base and their jobs. That gets to Mr. Larson’s question 

about jobs. If they can get American companies over there, and 

they can increase the number of jobs over there, that is how they 

are going to raise their tax revenues to pay for their military 

spending. And that is one of the things that we have to start looking at, is how we can be more competitive. 

The corporate tax rate is a piece of our revenue structure. But, 

of course, we all know the individual tax rate is the majority of our 

revenue that we get in. And how we fix this system is that we look 

toward more jobs here. And today, if we continue to do nothing, 

and more companies go overseas, those companies are going to end 

up taking our jobs over there, increasing their payroll taxes, and 

taking the dollars that we should be getting by increasing jobs 

here. 

I was a businessman for 28 years. If I can save 20 percent, I am 

going to save 20 percent. If I have to pay 20 percent more, I am 

going to have less employees. It is a pretty simple fact when you 

work in the business world here in America, that if you can move 

overseas you are going to do that. So this is something we have to 

move on. And that is why I appreciate all of your comments. 

I want to go back to—I am actually glad that we hit on action 

13, because I really think that is important, and the cost to companies to have to provide that. Because that is also a job issue. If I 

have to spend more money here to comply with action 13, I am 

going to have less for jobs. So that is one issue. 


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Mr. Sprague, I noted that at least one company—well, at least 

one of your member companies is a target of these state aid investigations. But this is for the entire panel. Does it appear that U.S. 

companies are being targeted more than the EU companies when 

it comes to state aid? I don’t know who can answer that, but—— 

Mr. SPRAGUE. Well, there—of the various companies that have 

been targeted, only one is a non-American company. We, of course, 

don’t have information as to how the competition directorate made 

their decisions, but many commentators have noted the fact that 

all of the rest of the targets are, indeed, U.S. companies. 

Mr. RENACCI. Yes, it is interesting. Because, again, I go back 

to the fact as—how are European countries going to raise their revenues? It keeps going back to figuring out how—a way to get the 

American profits taxed overseas. So these are issues that we continue to go back and forth on. 

Ms. Angus, in your testimony you said that the BEPS recommendations generally reflect a move away from the relatively clear 

roles and well-understood standards to less-specific roles, more subjective tests, and vaguer concepts. Can you explain how the vague 

roles adversely impact American companies, in particular? 

Ms. ANGUS. Certainly I think vague rules are subject to different interpretation in different hands. That is an invitation for 

double taxation, for more than one country to seek to tax the same 

dollar of income. 

I think there are fundamental ways that the BEPS recommendations have increased vagueness. Maybe one I would single out is 

the proposed changes to the permanent establishment rules, the 

rules for setting a threshold for when a country is considered to 

have taxable—a company is considered to have a taxable presence 

in a country. 

The BEPS recommendation would move away from a relatively 

clear set of rules to much vaguer standards, so that a company entering into business in a country won’t know when it will cross the 

line and be considered to be like a domestic company, and subject 

to the full rules, the full compliance procedures in that country. 

That adds a huge burden, in terms of the need to fully comply with 

all aspects of the tax system, to file a tax return as if it was a domestic company. 

It also can have implications beyond the income tax. If a company is viewed as having a permanent establishment, it may be required to register for value-added tax. There may be other licensing 

requirements that get carried with it. And, at the same time, its 

home country may not believe that there is a permanent establishment there, may not be willing to cede taxing jurisdiction. And so 

you have double tax. 

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

Chairman BOUSTANY. I thank the gentleman. 

Mrs. Noem. 

Mrs. NOEM. Thank you, Mr. Chairman. 

Ms. Angus, we talked a lot today about U.S. multinationals. We 

tend to think of them when we are talking about the international 

tax system. But in all reality, in your testimony you shared that 

a company doesn’t necessarily have to be large to be impacted. And 

all global companies are going to face uncertainty with regard to 


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cross-border operation and investment, in light of the BEPS recommendations. 

But could you comment about the impact that the BEPS recommendations and related measures might have on smaller U.S.- 

based companies? In particular, looking at what they might do in 

regards to expansion into other countries, and what they might do 

to expand their presence in—overseas, to market their goods. 

Ms. ANGUS. I think the issue with respect to smaller companies 

is a really important one that we sometimes lose sight of. People 

think that an international company equates with being a large 

company. That is not true today. The smallest of companies can operate cross-border. Some might say that the smallest of companies 

must operate cross-border in today’s global economy. And for them, 

the uncertainty, the new compliance burdens, the potential for double taxation is particularly stark. 

A smaller company doesn’t have the resources to invest in order 

to put in the infrastructure to produce a country-by-country report, 

to be able to get the representation to understand the details of 

the tax rules in every country in which it might be doing some 

business to try to see will it be considered to have a permanent establishment in that country, and then need to come in to the full 

compliance net in that country. Those issues really can operate as 

barriers to that activity if the potential to serve that market could 

cause the company to suddenly become a full taxpayer in that 

country, and fully into the system. 

The answer might be it is better not to serve that market, and 

that is a really unfortunate answer, I think, for both the U.S. company and for the potential consumers in that country. 

Mrs. NOEM. I think that is why I wanted to highlight your 

testimony, because most of the discussion here today people would 

think revolved around very large entities and companies that have 

multiple opportunities to expand into many different countries. But 

in reality today, many small businesses, this is such a burdensome 

change in recommendations that are being made here, that it could 

completely eliminate their ability to be a part of a market, or 

even continue to stay in business if a lot of these things are implemented. 

So thank you for giving us some more insight into that, because, 

regardless of the size of the company, this could be very detrimental into the future. 

Thank you. I yield back, Mr. Chairman. 

Chairman BOUSTANY. I thank you. 

Mr. Reed. 

Mr. REED. Thank you, Mr. Chairman. I am interested in having 

a conversation about research and development, and what this 

BEPS project and tax policy is doing in regards to where R&D is 

located. 

So, Mr. Sprague, I read your testimony and found some of your 

comments insightful here. For your member corporations or companies, most of their R&D is done where? I think I know the answer 

to that, but I just want to make sure we are clear on that. 

And after the BEPS project, where do you see that impacting, 

and how does that negatively or positively impact that R&D component of your member companies? 


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Mr. SPRAGUE. Well, major U.S. multinationals will tend to do 

R&D in many places around the world. The life cycle of an R&Dintensive company coming from the United States is that R&D will 

start out being done in the United States. But as the company 

grows, they will tend to look for excellence elsewhere. Sometimes 

that is in India. You know, sometimes that is in other places. 

The effect of the BEPS process on the choice of location for R&D 

will be, I think, in two areas. One is for countries that do have an 

innovation box, they are putting on the table an incentive: Please 

move your R&D to our country. So every R&D-intensive company 

will look at that and make a decision as to whether it is worthwhile to move the R&D to the UK, for example, in order to take 

advantage of that innovation box. 

The other incentive is a little more subtle, and that goes to the 

transfer pricing points. U.S. software companies are, by and large, 

organized in fairly efficient structures. They generally will have a 

centralized sales entity somewhere, to try to minimize the footprint 

and the higher tax market jurisdictions. And a big theme, as I 

noted in my testimony, of the transfer pricing is the market jurisdictions will try to attract income into the market countries and 

tax it there, so that counter to that, under the BEPS project, is to 

move high-value functions—not just R&D, but high-value management functions—into places like Ireland, for example, in order to 

provide a counterweight to the Germanies and Frances of the market jurisdictions. 

So, when thinking about how the BEPS project will influence the 

decision of companies on where to locate high-value jobs, the R&D 

part is part of it. But the high-value job generally—not just R&D— 

is also a part of it. 

Mr. REED. So, what is your recommended course, as to try to 

avert that situation, going forward? 

Mr. SPRAGUE. Well, the—— 

Mr. REED. The Boustany-Neal bill. I heard it over here, but—— 

[Laughter.] 

Mr. SPRAGUE. Yes. No, as I said in the testimony, we think the 

single best thing is comprehensive international tax reform with a 

competitive U.S. innovation box to make it more attractive for U.S. 

companies to keep the R&D here. 

Mr. REED. And, obviously, we have had that conversation at 

length today about the possibility of that occurring. And, you know, 

we are not very optimistic that is going to happen any time soon. 

So there—is there any short-term—I always operated—when I 

was in private business, I always had a short-term, mid-term, and 

long-term plan. Obviously, if we could get to tax reform on a comprehensive basis, you know, that is something that I would love to 

see on a short term horizon. It is highly unlikely, in my opinion, 

we are going to get there in the next 6 months or thereafter. So 

is there anything we could be focusing on from the panel to try to 

stop this loss of high-value, high-functioning R&D activity that you 

would recommend to us? 

Ms. SCHULTZ. You could make the R&D tax credit permanent. 

That would help a lot. The fact that the credit is short-term, and 

is always expiring, is really detrimental to long-term planning by 


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companies. And having that assurance would really be great. If you 

want to do anything, make the R&D tax credit permanent. 

Mr. REED. I appreciate that very much. And I think—hopefully, 

we can get that taken care of sooner, rather than later. So I appreciate that input. 

Is there anything else, Ms. Angus or Mr. Sullivan, in regards to 

short-term—because I am really concerned about the loss. Once 

you lose that R&D, once you lose those high-value positions, it is 

tough to get that back. So do you have any short- or mid-term 

plans, other than permanency of the R&D tax credit, which I totally appreciate and totally support? Is there anything else anyone 

could offer for us? 

Ms. ANGUS. I think that the permanent R&D credit is certainly 

important. I think that comments that have been made earlier with 

respect to the BEPS project, the importance of continuing the work, 

and now pushing it in the direction of trying to ensure fair, effective, and a transparent tax administration around the world, to 

counter some of the potential for aggressive interpretations of some 

of the proposals that would—for example, overreach in the transfer 

pricing area is a really important thing to continue to work on. 

None of that, of course, is a substitute for all the work that you 

all are doing on tax reform. 

Mr. REED. I appreciate that, Ms. Angus. And that is the action 

13 issue that we talked about earlier with Mr. Stack from the 

Treasury Department. 

With that, I yield back. I notice my time is up. 

Chairman BOUSTANY. I thank the gentleman. I want to thank 

all of you for your expert testimony. This has been very helpful. We 

have gleaned a lot of valuable information. 

And I’d like to also advise you that Members may submit written 

questions to be answered in writing. Hopefully you can get back to 

us within a couple of weeks with that. 

With that, the Committee stands adjourned. 

[Whereupon, at 12:26 p.m., the Subcommittee was adjourned.] 

[Submissions for the Record follow:] 


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Statement of 

Andrew F. Quinlan 

President 

Center for Freedom and Prosperity 

House Committee on Ways & Means 

Subcommittee on Tax Policy 

Hearing on The OECD Base Erosion and Profit Shifting (BEPS) Project 

December 1, 2015 
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Otainmn Boustany,R.•nking Men-berNea~ and Members oftheSubcoomnllee on Tax Policy. thank you fon he 

opportunity to submit written testumny on theOECD's project on Base Erosion and Profit Shifting (BEPS). 

My uame is Andrew Quinlan. lam the president oft he Center for Freedom & Prosperity (CF&P). The primuy mission 

of the Center for Freedom & Prosperity is to defend tax convetition as an i11portant principle that helps ensure a 

prosperous global econonl)'. 

The BEPS project poses a direct tlueat to tax competilion and An-erican business. 

First and foreUJOst, it is necessary to understand that the OECD does not have An-ericau inteo-ests at heart, nor even the 

welfare of the global economy. Rather. il is an unaccountable bureaucracy that serves thenanow interests of fUlance 

n~nisters and tax collectors from its Jicb-nation n-embets. 

The OECD has a long documented history of advocating policies against the interests of American ta>payers and 

businesses, and of abusing its reputation to strong-anujurisdictions into adoptingself-<lestmctive tax policies. 

The United States mtst not buckle under pressure to do so in the caseofBEPS. 

The project on Base Erosion and Profit Sbifling bas been pushed under a dishonest prenise. Despite a relatively sonll 

and ten1Jomty dip ut recent years thanks to the recession, cotpomte tax revenues as a share of global Q)P have trended 

steadily and decisively upward over tlte last few decades. The contrary but popular idea of a corporate tax dodging 

problem is a myth designed to draw attention away from itresponsible budgets and profligate govemu.,ut s pending. 

In order to avoid scmtiny of the project, BEPS preceded rapidly from conception tocou1>letioo. The OECD is now 

hoping thattbeworld similal'ly in1Jlen.,nt its dictates without the carefitl consideration the subject dennnds. 

It is paraUJOunt that Congress prevent the U.S. Treasury from unilatemUy fitlfilliug the OECD~ wish to rewrite global 

tax niles without democratic oveJsight. lu panicular, mlcs designed to enable global foshing e>peditions on Anxorican 

businesses through dellllnds for inordinate aod unnecessary a1110unts of private and proprietaJy data should be rejected. 

Far from acquiescing to the OECD's scheme, the U.S. should take a leading role in defending the principles of free and 

open unrkets, and caU on other nations to situilariy reject their deunnds. 

For fiutbersubstautiation oftbe OECD's nX>tives and nX>re in-<lepth e>planation of the rrue costs of allowing BEl'S to 

proceed. please considerthe additionalunterials appended to this statement. 
87 


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Coalition for Tax Competition 

July 14, 2015 

Dear Senators and Representatives: 

Tite Organization for Economic Cooperation and De.velopu-ent (OECD) is rapidly working to rewrite global tax mles in 

the nanr of combating base erosion and profit shifting (BEPS). We the undersigned organizations are deeplyconcemed 

that this process lacks oversight and will result in onerous new reponing rcquirenrnts and higher ta>l!s on Aurrican 

businesses, and are urgiog Congress to speak up for U.S. interests by adding its voice to the process. 

The OECO has a history of suppotting lrigher tax burdens and larger government. and the BEPS project represents just 

the latest salvo in a long-mnning canl'aign by global bureaucrats to undennine tax conl'etition and its restraining force 

on political greed. 

Because the OECD is populated by tax collectors and finance ninisters, new mles being dt~fted through the BEPS 

initiative are necessarily going to be skewed in their favor. Businesses are given only a token voice, while other 

interests are not considered at all Consuurrs, eu1>loyees. and everyone that benefits from global economic growtlr are 

not able to rmke then· preferences known. 

TI1e inevitable prioritizing of tax coUecrion over every other political or economic interest ensures rbatlhe resub of the 

BEPS project will be econorric pain. And based on the OECD's own acknowledgenrnt that corporate tax revenues 

have not declined in recent years, that pain will provide little to no real gain to national treasuries. 

BEPS reconJl£ndations alre-ady released further show a troubling trend loward excessive and unnecessary dennndson 

taxpayers to supply data not typically relevant to the collection oftaxes. This inchtdes proprietary infonnation t.hat is 

not the business of auy govemn.:nt, and for which adequate privacy safeguards are not and likely canuot be provided. 

The Treasury Department should not be the only voice representing U.S. interests during this critical process. We urge 

nrnDers of Congress 10 get involved before it is too late. and 10 protect Anerican interests by ensuring thai the voices 

of tax collectors are not allowed to speak for everyone. 

Sincerely, 

Andrew F. Quinlan, President 

Center for Fre.edom & Prospetity 

QQver Norquist. President 

Americans for Tax Reform 

Pete Sepp, President 

National Ta'Payers Union 

Michael A. Needhan\ CEO 

Heritage Action for Anrrica 

Tom Schatz, President 

Council for Citizens Againsl Govemuk':ol \Vaste 

Seton Motley, President 

Less G>Venunent 

Wayne Brough, Chief Econorrist and Vtce President of Research 

FreedomWorks 

J. Bradley Jansen, Do'Cctor Center for Financial Privacy and Humm Rights 

Phil Ketpen, President 

Anr1ican Cot itn~nt 

David Williaul>, President 
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Ta>q>aycrs Protection A lliancc 

Bob Baunon. Olainnm 

Sovereign Society Freedom Alliance 

Karen Kcnigan. President 

Snnll Business & Entrepreneurship Council 

Sabrina Schaeffer. ~cutivc Oirccror 

lndcpcndcnt \Vom::n ·s Fonun 

Jan~ L Man ill. 01aimnn 

60 Plus Association 

Heather Higgins, President 

Independent Wo~ttn's Voice 

G:orge Landrith. President 

Frontiers of Freedom 

Lew Uhler, President 

National Tax Umitation Conll'ittcc 

Tcrrcncc Scanlon. Presidcnl 

Capital Research Center 

Tom Giovanetti. President 

~tstitutc for Policy Innovation 

Andrew Langer. President 

Institute for libcny 

Eli Lehrer. President 

R Street Institute 

010ck Muth. President 

Citizen Outreach 
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BEPS Ha s Tax Competition in the Ct·osshait·s 

Brian Garst, Center for Freedom and Prosperity 

Originally published October 2015 by 0./Jshore Investment 

The OECD's work on Base Erosion and Profit shifting is con1)1eting after what can only be descnbedas an e:wremely 

rushed process by global policy standards. In an elTon 10 undcr.>tand the broader in1)1icatious of the project and what it 

means for the future of inlemational taJOltion, I authored a study published June 2015 by the Center for Freedom and 

Prospe111y tilled. "Ma~ing SenseofBEPS: The Latest OECD Assauh on Tax COI11Jelilion." 1 The following is an 

abridged ver.;ion of the paper: 

loll·O<b ction 

Under direction of Ute G20, the Organization for Economic Cooperation and Development (OECD) began two year.; 

ago a n>ljor initiative ou "baseerosionaud profit shifting• (BEl'S). The project bas gamered lillie interest from U.S. 

policyn~ker.; to date, yet its ever expanding scope and profound uwlications for the global economy should den~nd 

their auentiou. 

In Febmary 2013 the OECD released a rep<>rl tilled, "Addressing Base Erosion and Profit Shifting" (BEPS Report), 

declaring that. "Base erosion constitutes a serious risk to tax revenues. tax sovereignty and tax fairness for OECD 

meni>er countries and non -meni>ers alike." TiteOECD followed up with a plan in July 2013, "Action Plan on Base 

Erosion and Profit Shifting'' (Action PL1n). that identified 15 specific areas lo address. 

Through the BEPS project. theOECD is continuing its war against tax con-petition. Its proposals would enable endless 

global fiShing expeditions and provide cover for governments 10 choke the economy "ith new ta""s. 

The l n r eat to tbe Economy 

The OECD and other supp011er.>ofthe BEPS initiative argue lhatlhere are economic benefits lo preventing legal tax 

avoidance teclwiques. Namely, they contend tltat activity unde1taken in response to tax policy represents a ma!Xet 

distortion. in the narrow sense this is accurate, but as a justification for the OECD's cun-emactivities it faUs sbon. 

Typically ignored in the BEPS discussion are the broader inl'lications of proposed refonus on the political economy. If 

all differences in tax policy were suceessf\!Uy nininized, to some el¢ent ~ would indeed reduce profit-shifting aimed at 

suppress iug tax burdens. So too would reducing ta""s 10 zero. but policyll>lker.> have a variety of objectives 10 weigh 

and ought not elevate endiugprofil-shiftiug above aU other national interests. 

BEPS would lead to an overall higher tax enviromrenl as politicians freed from the pressures of global tax con1)etition 

inevitably raise mtes to levels last seen intbc early 1980s. when refonns by Reagan and Thatchcrspa!Xed a global 

reduction in corporate tax rates that bas continued to this day. Through tax cotq>etition. the average co1porate tax rate 

ofOECD nations declined fiom ahrost 50% in 1981 10 25% in 2015. 

Taxes themselves dis1or11he market by shifting resources away from mnket driven activities and toward politic.aUy 

driven activities. and higher rates, all else being equal, increase tbe effect oftbe distorlion. Poorly designed taxsystelliS 

- the global nonn - inl1'0duce yet m:n-e dis1011ions tllrougb tile common practice of double ta>ing capita~ whicll is of 

panicular irq>orlauce when discussing BEl'S given that corporate ta"'s are often identified as the most desuuclive fonu 

of capital taJOltion, as even OECD affiliated economists have acknowledged. 

Govenuuen1s necessarily need Ul.xes to filnd esseucia1 functions. bu1 ideaUy should seek to nlninDze the econoulic 

footprint oflaJOltion as nJ.tcb as possible. Political incentives, however. often work in opposition ofthis goal. Politicians 

face pressure to deu>:~n st rate 10 constituents that they al'e perfonning and to please the interests that suppo1t Uteir 

cau,,aig:ns, and I hat in tum encourages ta~s to rise above and beyood the level ofoptil11nn gro\Y1h, or where new 

spending no longer provides net econonoc benefits. 

Tax con1Jetition tlms provides one of the u-nin sou roes of push ·back against the drive to spend and tax. 

Tax collector.; and finance ministers have inordinate sa yin the activities of the OECD, so it's expected tbatlhe BEPS 

initiative would represent their views above aU else. Tite Action Plan thus considers tlte benefits of tax cotq>etition to 

be the real problen\ explaining tbat''lhere is a reduction oflheovernll lax paid by all parlies involved as a whole." TI1e 

prospect of there being less money to be spent by politicians is perceived as a problem to be solved. rather than as a 

positive for the global economy. 
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The Threat to Prhacy 

Several BEl'S action items raise serious ptivacy coucems. Proposed recolllnendations for transfer-pricing 

documentation and country-by-counuy reporting. for instance, feature broad reporting requireuruts that go'" beyond 

what is required for purposes ofumrdiate tax assessment. 

Q1idance for Aclion 13 reconliTrnds A lhree·tiered approach to trnnsfer·priciug docunrnts consisling of a 111\ster file, a 

local file, and a couuuy-by-country (O:>C) repotts. Iufonuation contained in the local and master files are patticnlatiy 

vubterable, since it would take a breach in only a su1glejurisdiction for it to be eXPosed. TI1e OECD makes assurances 

for the confKicntiality ofthcsereports, btlltbey are en1)ty pronises. Such govemment assurances ofplivacy protection 

arc contradicted by eXPerience and the long history of leaks oftaXJ)ayer infonnatiQn. b1tbe United States alone tax data 

bas frequently been eX]losed thanks to inadequate safeguards. or even released by officials to attack political opponents. 

Eve-n without nnlicious intent. govemn~uts are iU equipped to protect sensitive infomntion from outside access. 

According to the U.S. Treasmy IuspectorGeneral for Tax Adnmistration. 1.6 ui.Jlion Anrrican laX]laye•s were 

victin:ized by identity theft u1 the fust half of2014, up from just271,000 u1 2010. Cllu1ese hackets were blanrd for a 

breach that eXPosed the data of four million curre01 and fonucr federal e1q>loyees, and the massive new coUection 

eflon and reponing systembeing established to enforce the Foreign Account Tax Couvliance Act has also been fan !Jed 

for its insufficient privacy safeguards. 

As poor as the United States bas proven at protecting privacy, there ate likely to be nations evenn~re vub1erablc. 

Tit rough the nllster file and other reponing nrcbauism;. B.EPS will denllud ofcorporatious propriety infonnation and 

other sensitive data thattheybaveevery right to keep ptivate and ont of the haudsofconvetitors. When it takes a 

breach of only a single national govcrunrnt to eXPose this infonnation, thete will no longer be such eXPectation of 

privacy. 

Is BEPS a Sctious PI'Oblem? 

11te OECD's website de-scribes BEPS as "tax pL~nning strategies that e~loit gaps and misnmtche-s in tax mle.s to 

artificially shift profits to low or no -tax locations where there is linle or no economic activity, resulting in little or no 

overall cotporate tax being paid." The BEl'S Report fun her claims that, "it nny be difficult for any single counuy, acting alone, to fu lly address the issue." Ot as the website n~re succinctly dcscnbes, BEl'S "is a global problem which 

requires global solutions." 

No signifiCant evidence for these assertions is provided, however. Tite OECIYs BEPS Report itself undercuts the 

argunrnl that there is a pressing need for a global response when it acknowledges that "revenues from co1porate 

income ta""s as a share of GOP have increased over lil.1:e." 

Acadenuc research on the invacl of BEPS is far less certain than the I11e1oric of the GlO and the OB:D. TI1e strongest 

analysis yet to date con-es from Obanmika Oharullpala, whose survey oft he literature reports t.hat recem studies tend 

to find lower levels of shifting than e.ar!ier works. It also challenged arguornts that "point to the fraction oft be income 

ofMNCs that is repotted in tax havens orto various suuilar measures as sclf-<!vidently demonstrating ipso facto the 

exi~tence and large magnitude of BEPS." Sinply identifying nxmey in other jurisdiclions, even I bose wirh low tax 

rates, is not evidence of a BEl'S problem It should be eXJ)ectcd to see o-ore money being earned where tax policy is 

less hostile. 

Pan of the reason there exists linle evidence of a signifiCant global BEPS problem is that dourstic policy solutions are 

already available to address legitunate areas of concem when they arise. More importantly, the best sohuion available 

for preventing base erosion is the adoption of a con1)etitive tax code. Pro-growth tax policy that eschews double and 

worldwide taxation uot only won't cause capital flight, but will anract investnrnt instead. 

Broader Alms or the OECD 

To fuUy understand the significance of the BEl'S e1Tot1, it's necessary to place the current agenda within the broader 

conteXI of the OECO's wolk in recent decades. Iu 1998 the OECD declared war on tax coU1)etition with a repo1t 

entitled, "Hannful Tax Con1)etition: An En:crging Goballssue."Its autbors worried tltat, au-oug otl1crtbings, tax 

conl)etition Hnny han:per the application of progressive rax rates and I be acbievenrnt of redisuibutive goals." 

The organization was eventually forced by political opposition to back away from eX]llicit condetmations of aU tax 

COI11)Ciiti<>u, but has not abandoned its views. Rather, it has adopted new tactics toward the sanr eud. To 1uakc this 

point clear, the Action Plan favorably references Hn171iful Tax Compeliliou as justification for its reconnrudations. II 

also repeats a popular but base Jess theory anxmg left·wing academics and po1it icians about tax conl)etit ion - tbat it 
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pron..:>tes a ~-ace to the botront' 

The 'race to the botlonf theory bas clain~d for decades that tax conpetition would force zero rates onnX>bile capital. It 

hasn't happened. One review of contJX>n such claims finds: "there can be little doubt that history bas proven wrong the 

pre.diction of 3 conlJiete erosion of capital tax revenue. Con\)arative data on co1porate and capital lax rates deox:mstrate 

that govenm~nts in aU econonies cominue to tax nX>bile sources of capita~ effective capital tax rates have not changed 

m•ch conpared with the orid-1980s, wben tax conpetition was triggered by the 1986 US tax act, and tax system; are as 

varied as coumries and political system; themselves, \\~th no visible sign of converging." 

NeveJtheless, the BEPS report notes:"ln 1998, the OECO issued a report on hrumftdtax pmctices in part based outhe 

recognition that a 'mce to the bottont would ultimately drive applicable tax mtes on certaiu om bile sourcesofincou~ to 

zero for aU COUll tries, whether or not this was the tax policy a country wished to pursue." Reality, essentially, is au 

unwarranted iutmsiou on the desire ofpolicyunkers to act \vitbout consequence. The BEPS report goes on: " It was feh 

that collectively agreeing on a set of comtX>n rules nny in fact help counuies to make their sovereign tax policy 

choices." Unless, that is, their sovereign choiee involves son~thiug other than raising taxes. 

Nations t!Jat opt for little to no taxes on capital are a problem forthis qui.wtic theooy of sovereignly- where the rest of 

the world 1ntst be bi'Oughtto heel in order to ensure that politicians ought not have to consider the economic 

consequences oftheir policies - hence why the ptimal)' indicator for detenuining whether a nation is to be identified as 

"potentially hannful" is thai it bas "no or low effective tax rates!' 

Other factors are said to be considered, but without clear indication of how they are to be weighted any calculation will 

be art>itrary and open to excessive enphasis on the"gateway criterion" that is a low tax rate. Wbena low-tax scourge is 

identified, theOECD benevolently provides tl1at, "the relevant oountrywUI be given the opportunity to abolish the 

reg~ or renX>ve the feattores that create the hrumful effect." To make perfectly clear that this is the soot of offer a 

nation cannot refhse. theywam: "Where this is not done, other countries may then decide to iuplen~nt defensive 

n~asures to counterthe effects of the banuful regime, while at the san~ tin~ continuing to encourage tl1e country 

applying the regiJJE to nX>dify orreoX>ve it.'' 

The OECD's previous aggressions against low-tax jurisdictions in puosuit of its quest to abolish tax competition make 

clear just what "defensive n~asures" it bas in niud, and how its membeo~ will go about trying to "encourage" 

COIJ1lliance. lu the years that followed release of Hamlfid Tax Competition, the OECO used threats of blacklists, peer 

pressure, and intinidation to cajole low-tax jurisdictions into adopting va1ious policies presented undertlte auspices of 

increasing tax transparency and conilating evasion.Io practice t.he changes were intended to undemiue the 

attractiveness oflow-tax jurisdictions and protect high-tax nations fiom baseei'Osiondue to capital flight. 

Of particular relevance for undeostanding the BB'S initiative is the pan em dermnstmtedby the OECO during the 

course of this canpaign. After each recoUil~ndation was widely adopted - typically under duress in the caseoflow-tax 

jurisdictions - the OECD imn~dia ely pushed a new requiren)!nt thar was nl)rt radical and invasive than the last. 

The fact that the OECO is always ready with a oew policy after one is itt..,lemeuted suggestseitherthatthe 

organization's goal is not n~rely what is stated. or that it is hoonbly ineffective. In either case it should seove as a blow 

to its credibility and a reason to question its work on BEPS. 

Conclusion 

Were the OECD nrrely 3 research in.sl ilntion, its work could be disuissed sin1Jiy as a bad idea thai no nation need 

adopt. Unfortunately, Europe's dominant welfare states use the OECO's wod< as a benchmad< when coercing other 

nations through use of political and econouic leverage. For the low-tax jurisdictions, and now nllltinational busittesses, 

caught in the OECD's crosshaits,tbe ride uuly never ends. The BB'S pi'Oject is a contimoation oftbe OECD's welldoctmEnted effort to elin-inate tax conpetition, and \\~II likely follow the same pan em of consistently tJX>viug 

goalposts. 

Tite BEPS project began at tl1e behest of a tiny few, \vithout open and public debate regarding the assnnptions 

UX>tivating the effo1t, its goals, or the nX>st appropriate n~tb ods to achieve them There is a lack of accountability, 

reflected in the activities ofthe BB'S iniliative, that can only be rectified throughl'eal public debate and llJDre direct 

political oversight. 

END NOTES: 

I. The fitll version is available at www.freedormndprosperity.orgl2015/publications/making-scnseof-beps. 
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Position Paper on the Organisation for Economic Co-Operation and Development's Project 

on Ba.se Erosion and Profit Shifting 

Submitted to 

In relation to 

Date 

Submitted by 

The United States House of Representatives Committee on Ways & 

M eans 

Tax Policy Subcommittee Hearing: Examining the OECD Base Erosion 

and Profit Shifting (BEPS) Project 

3 December 2015 

The Business and Industry Advisory Committee to t he OECD 

13·15 Chaussee De La M uette, 75016, Paris, France 

Tel: + 33 (O) 1 42 30 09 85 

Fa x: + 33 (0) 142 88 78 38 

BIAC has been supportive of the OECD's Base Erosion and Profit Shifting ("BEPS" ) project since Its inception 

and has provided constructive and detailed input from the international business community in response 

to all discussion drafts. Although we value the openness of the consultation processes and acknowledge 

the efforts of OECD and G20 member governments and the OECD Secretariat, we are anxious that some 

serious business concerns have not been sufficiently considered or addressed. 

At the March 2015 meeting of the BIAC Tax Committee, a substantial number of member organizations expressed 

concerns over the direction of certain aspects of the BEP$ project, and the potential significant negative economic 

consequences of several Action Items, and it was agreed to set those out in a short document. This document has 

been updated following the release of the OECO's final reports in October 2015. We would reiterate, despite the 

concerns noted below, that we want the BEPS project to succeed. We will continue to approach this project • 

both before and after the adoption of t he recommendat ions by the G20 • in a constructive .• flexible and 

incremental way as we believe this is the best way of achieving that success. We call on the OECD to continue to 

include us in the completion of outstanding work, and the development and implementation of the G20 proposed 

framework for implementation. 

General comments 

Many of the concerns identified in this Position Paper are common across the range of Action Items. We feel 

they are worth repeating up front as their importance continues to grow as the follow-up and 

implementation work commences. 

Economic impact: There is great concern that the economic consequences of the recommendations have not 

yet been full y considered. Countries should be undertaking realistic assessments oft he t ax revenues they 

may be due under the consensus reached, rather than assuming that implementation will bri ng addi t ional 

tax revenues. The possibility should be understood that overly strict regulation could force economic activity 

out of countries. Countries should not rush to implement proposals with such aims in mind when the actual 

impact on their t ax revenues has not been determined - this could undermine the BEPS process and bring 

about unintended economic implications. Although uncertainty, double-taxation, disputes and com pi ia nee 

burdens are a focus of business, we are also concerned about the broader economic impact , which may 

include, for example, the impact on the efficiency of markets, or the sustainability of certain legitimate nontax driven commercial transactions and structures (for example, cross-border infrastructure projects or 

regionalisation of certain functions to improve quality and efficiency). We believe that the justified target i ng 
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of BEPS activities must be integrated with larger economic concerns related to creating jobs and growth 

throughcross-bordertrade and investment. 

Complexity & Compliance: In a number of areas, the BEPS Action Plan proposes substantially new and 

complex rules to tackle avoidance. Given the pressures oft he ambitious timefrarne, there have been very 

few opportunities to explore how these complex proposals can be adopted and implemented on an 

international basis. Both tax authorities and businesses will need detailed implementing guidance toe nsure 

that the intention of each recommendation is clear. This w ill be critically important in ensuring that the 

recommendations are uniformly adopted, whilst avoiding overlaps. The challenges that will be brought about 

through the i nteraction of differenttimelines and domestic implementations should not be underestimated. 

They could lead to double taxation and a significant compliance burden on both businesses and tax 

authorities and create uncertainty that will delay necessary investments. We look forward to the OECD's 

development of an inclusive framework to support and monitor the implementation (as proposed by the G20 

Finance Ministers) to assist in maintaining international co-operationand as much consistency in timing and 

application as is possible. We would encourage the OECD to seek agreement from involved countries on 

effectivedatesafterwhich new rules and guidelines will apply; even with the OECD's work on Action 14, it 

will be very difficult to eliminate double taxation and would be inequitable if some tax aut h ori ties seek to 

revisit past years with newconceptsand methodologies. 

Scoping: As part of the implementation framework, we believe it would be helpful to target the scope of 

each recommendation more narrowly to increase the chance of developing the necessary intergovernmental co-operation. At present, many proposals appear to go beyond the scope required to 

effectively target BEPS related activities. We strongly believe that "success" in the BEPS project would be 

achieved with a set of detailed, well-defined proposals that can be (and are) implemented consistently. 

Countries should be encouraged to avoid overly-broad implementat ion that could lead to a less uniform 

international tax regime. 

Timing: As well as the timing concerns raised above in relation to the potential economic impact and the 

potentially disjointed internat ional adoption of the recommendations, we also have a more general t i ming 

concern that impatient countries and tax authorities may seek to commence full implementation of 

recommendat ions where it has been agreedthatfurtherwork is required. For example, critically important 

work remains in relation to profit attribution to permanent establishments and specific rules in rei at ion to 

financial services and insurance businesses. 

Reaching consensus 

BIAC has strongly supported the OECD as the best organisation to deliver a successful consensus outcome 

under the BEPS mandate and recognises the phenomenal work that the OECD has done in b rokering 

compromises and consensus wherever it has been possible. However, despite the OECD's claims, we are 

concerned that in many instances it has proved difficult (and occasionally impossible) for member 

governments to reach consensus. This has resulted in a lack of clarity and a degree of ambiguity. For 

example, whilst the OECD has not recommended solutions regarding the "digital economy", the door has 

been left open for countries to implement solutions unilaterally which, if implemented, could lead to double 

taxation. 

Understanding the economic impact 

It remains a matter of some regret that, owing to the political nature of t he timetable, the BEPS project could 

not begin w ith a detailed economic analysis oft he abuses identif ied in the Action Plan, incl uding the seale 

and importance of "double non-taxation" and "tax competition". We are concerned that the public 

announcements and discourse have been optimistic in terms of the amounts of additional tax that will be 

coli ected as a result of the BEPS recommendations, due in part to the conclusions reached inAction 11, and 

strengthened by the impression that the expectation of additional tax receipts was in some way a prerequisite of reaching a broad consensus. Whilst we understand the public and political pressure surrounding 

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the project elevated a need for consensus in agreeing that businesses should be taxed on all profits, most 

countries who have offered a public opinion on the matter seem to have assumed that the implementation 

of the proposals will increase their tax revenues substantially. 

In reality, depending on which of the proposals are introduced by themselves and/orothercountries, there 

could be many countries that do not receive additional tax revenues. There may be cases where overly strict 

regulation pushes economicactivityout of some countries. If not dealt with by rigorous impact assessments 

both at international and domestic levels, we are concerned that t his expectations gap could lead to 

countries budgeting for higher tax revenues than they will receive. The resulting pressure could end in 

countries opting not to implement all of the proposals uniformly, an outcome that would result in double 

taxation and more pressure on individual tax authorities to aggressively audit taxpayers in an attempt to 

collect more tax rather than the right amount of tax based on the consensus agreed. A failure of the BEPS 

project in such a manner is not in the interests of business, governments or the public and wi II sign ifica ntl y 

increase the costs of tax administration and tax compliance. 

Complexity and compliance burden 

The BEPS recommendations are likely to create significant implementation difficulties and greater 

compliance burdens, not only for Multinational Enterprises (MNEs), but also governments. this is in part due 

to the substantial number of recommendations, but also theircomplexityand the different timelines that 

will need to be followed to implement them (for example, the adoption of revised OECD Guidelines into 

domestic law, or different processes for implementing domestic recommendations). Public and considered 

consultation and strong commitment by countries to work together (supported by the OECD's 

implementation framework to be developed in 2016) are essential to avoid fragmentation. 

We would encourage the OECD to seek agreement from involved countries on effective dates after which 

new rules and guidelines wi II apply; even if the OECD' s work on Action 14 is successful in improving dispute 

resolution, it will be very difficult to eliminate double taxation and would be inequitable if some tax 

authorities seek to revisit past years with new concepts and methodologies. 

We support the OECD's statement thatVATregistrations should not create PEs, and we would encourage tax 

administrations to heed this and not assume that PEs exist where a company is registered for VAT (or vice 

versa). which would result in significant compliance burden. Other Action Items (for example, Actions 2, 3, 4, 

7 and 12) are also likely to require significant additional resource to ensure compliance wi th new, complex 

and sometimes contradictory rules. 

Discouragement of related party trade 

Many of the BEPS Action Items apply only in an intra-group context and could significantly increase the cost 

of performing various functions or undertaking certain transactions inside a group of related companies. For 

example, the recommendations to lower the PE threshold and the complex new transfer pricing analyses 

that only apply to transactions between affiliates could greatly incre ase the compliance cost and tax liabilities 

associated with various intra-group activities. In some cases, taxpayers may, effectively, be forced to conduct 

business with third parties to mitigate excessive tax cost or uncertainty. This would reducecomme rei a I and 

economic efficiencies and hamper international trade (as well as, quite possibly, lowering the wages and 

benefits inoutsourced functions - especially in developing countries). We believe that these effects should 

be considered in greater detail and encourage additional guidance to be developed to provide greater 

certainty. 

Appropriate resources for tax administrations 

Tax administrations already receive significant amounts of information that they often struggle to process. 

We are concerned that without additional resources, tax administrations will face difficulties in effectively 

using additional information and in dealing with the expected increase in requests for exchange of tax 

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information between countries. It may actually become more difficult to identify risks, or to target abuse, to 

the advantage only of the most aggressive taxpayers. 

We believe agreaterfocus on tax administration would be beneficial- for example, through fully integrating 

the work of the Forum on Tax Administration · and the use of targeted risk-based measures. This could 

include materiality thresholds and other risk-identification tools to target higher ri sk taxpayers/issues that 

represent the most substantial sums of lost tax revenues. Such approaches reduce the burden on the vast 

majority of compliant taxpayers, freeing up resources for more productive, value -creating activities. 

Cooperative compliance also has an important role to play in this area. 

Multilateral implementation 

The ultimate success of the BEPS project will be the multilateral implementation of specific, measurable, 

achievable and realistic recommendations on a timely basis. Whilst much work on implementation 

mechanisms is still to come throughout 2016; we encourage early discussions on approaches to enhance 

credibility and likely success of the project. We make the following recommendations in this regard: 

The G20 proposed engagement framework should be prepared and managed by the OECD 

Secretariat; 

As a first step, all countries should agree to key principles to be followed in any domesticlegislation 

used to enact BEPS proposals. Such principles could include that: 

o the pol icy objective should be dearly stated; 

o the policy objective should be consistentwiththe BEPSrecommendation, and in particu I ar, 

should be limited to addressing specific abuses; 

o draft legislation should be prospective in application and be published with a minimum 

period for detailed stakeholder consultation; and 

o an impact assessment should be prepared to evaluate any com pi lance burdens created. 

We encourage the OECD to coordinate the implementation so that national measures have a 

reasonable degree of consistency. 

BEPS Action Item-specific comments 

Address the tax challenges of the digital economy (Action 1) 

We greatly welcomed the original 2014 report (Addressing the Tox Chollenges of the Digitol Economy), but 

we consider that the final2015 report does not go far enough by recommending only that such countries are 

mindful oftheirtreatyobligations until further review in 2020. There is concern amongst BIAC members that 

some countries are considering withholding taxes on digital transactions, and whilst the final report 

recognises that this is not recommended, it neither discourages such action nor identifies the treaty 

obligations and implicat ions that such taxes could breach. Such unilateral action wi II certainly result in double 

or even multiple-taxation unless there is a very dear and strong consensus as to how the profits of digital 

business transactions should be taxed. BIAC looks forward to participating in ongoing monitoring and 

evaluation characteri stics of digital trade that may cause BEPS concerns. 

Neutralizing the effects of hybrid mismatch arrangements (Action 2) 

While we do not defend hybrid mismatches as a general policy matter, we do want to make three important 

points on the final report: 

It is not clear which countries intend to implement any or all of the recommendations, when they 

plan to do so, or how the interaction with the local legislative processes will result in differences 

between countries in terms of application or timing. Implementation through a combination of 

complex changes to domestic laws, bilateral treaty provisions and potentially a multilateral 

instrument increases the uncertainty on timing further. We welcome the development of an 

inclusive monitoring framework in early 2016 to assist international cooperation but retain concerns 

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in particular regarding the risk of double taxation, increased compliance burden and uncertainty that 

wi ll arise from countries implementing at different times. 

Even if implemented in a coordinated manner, the complexity of the proposed rules wi ll create 

substantial compliance difficulties, and will complicate the allocation of taxing rights between 

jurisdictions, increasing the risk of double taxation (e.g., the rules on "imported mismatches"). The 

accompanying expanded examples may provide clarity on some issues, but at the price of still further 

complexity. 

The financial services industry continues to be concerned that insufficient attention has been given 

to how the proposals will impact instruments deemed important by banking regulatory authorities 

for systemic liquidity. By relying on countries to opt not to tax such transactions at their discretion 

increases uncertainty and the risk of double taxation. 

Strengthen CFC rules (Action 3} 

The broad nature of the OECD's final CFC proposals illustrate the difficulty in reaching a consensus position 

on even the basic purpose of rules, w ith dear disagreements between governments overwhethersuch rules 

should tackle profit shifting from the parent entity or foreign-to-foreign abuse. Without clear agreement 

over the underlying principles, the chances of delivering clear, proportionate and practical solutions were 

almost impossible. This was an opportunity missed to refme a useful tool, based on wel l-understood 

concepts of "active" and "passive" income in ways that could reduce dependence on subjective, factintensive enquiries while atthe same time limiting the compliance burden and risk of do ubi e taxation. We 

urge the OECD to considerCFC rules further when addressing any future BEPS concerns that the moni tori ng 

and analysis highlight. 

Umiting base erosion via interest deductions & other financial payments 

(Action 4) 

The final report on Action ltem4 wi ll have serious implications for groups' economic activity and their ability 

to obtain tax deductions for funding costs. The proposals have been made without a clear articulation of how 

they specifically target BEPS activities. The OECD's proposals are likely to restrict interest deductions for a 

significant number of non-aggressive taxpayers, particularly those investing in infrastructure or long term 

projects where it remains unclear whether they would qualify for the proposed exemptions. Th e lack of 

support for the arm's length principle in Action Item 4 also undermines legitimate commercial reasons for 

having intercompany debt. A group's cash position and decisions on how to deploy cash should not be 

limited by rules that are not based on the arm's length principle. 

However, given the options previously put forward in discussion drafts, we do welcome the broadening of 

the corridor approach to a range between 10% and 30% of EBITDA and the relative simplicity it brings. 

However, this approach could have serious consequences if detailed work is not undertaken to determine 

appropriate ratios, taking into account the funding requirements of different industries. Where ratios are set 

too low, this could substantially raise the cost of capital for low-risk taxpayers undertaking commercial 

transactions. We are disappointed that the proposals do not recommend more strongly the elements of the 

proposals that would seek to limit double taxation, such as the ability to carry forward unutilised interest 

capacity (especiallyforstart-ups and companies in loss-making positions) or give credit for all with hoi ding 

taxes suffered. 

Additionally, we note that interest is the "raw material" for financial services businesses. Although a "net 

interest" approach is endorsed, it is important that the outstanding questions facing the financial services 

industry be resolved, particularly so that proposals do not contradict the regulatory agenda. 

Whilst we welcome the attention that the OECD plans to give to the group wide ratio rules, fi nancial services 

and insurance industries 2016, we have serious concerns that so much work remains outstanding in this area 

at a time when countries are otherwise being encouraged to start implementing the rules. 

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Prevent treaty abuse (Action 6} 

We are concerned that significant uncertainty remains as to whether treaty relief is available in ordinary 

commercial circumstances. This uncertainty risks undermining the usefulness of treaty networks in 

facilitating trade and promoting economic growth. Whilst we recognise that tax administrations require 

assurance that treaty benefits are only beir,ggranted in appropriate circumstances, anti -abuse rules should 

be applied in a proportionate and targeted manner. The existing provisions and Guidance could provide 

more clarity (e.g. low taxed branches with substance, calculation of head office tax rate). Broad 

disapplication of treaty benefits could create substantial withholding tax burdens and negatively impact 

cross-borde rtrade. 

The final proposed minimum treaty standards are at the very least expected to create a significant 

compliance burden for taxpayers (especially where both a simplified LOB and a PPT rule are adopted in 

certain treaties), and will potentially bring into scope legitimate structures that ought to be entitled to treaty 

benefits. We remain concerned that: 

Structures not involving treaty shopping may be unintentionally caught by broad rules. 

There w ill be increased cross-border investor uncertainty, especially for pension fund investors and 

sovereign wealth funds, where the potential for tax treaty abuse is low. 

Uncertainty for Collective Investment Vehicles (CIVs) wi ll be unavoidable, and the time taken to 

receive repayments of tax deducted at source will impact the Net Asset Values offunds. 

Source country tax authorities may experience additional demands to process an increased volume 

of reclaims, placing further pressure on already resource constrained administrations. 

Whilst we recognise that the OECD has further work to do regarding the commentary on LOB rules and the 

impact on non-CIVsand pension funds and welcome the OECD' s commitment to consult on such matters, 

we remain concerned that the in order forth is to be taken into account as a meaningful component of the 

multilateral instrument negotiations, this work must be completed swiftly. 

Preventing the artificial avoidance of PE status (Action 7) 

Whilst many of our members welcome the move away from the ambiguous language of the discussion draft 

that sought to establish a PE where persons "negotiated the material elements of contracts", we are 

concerned that the final de live rabies introduce new concepts that were not open to consultation and so 

retain ambiguity. Whilst we welcome the move to recommendations that a dependent agent PE is only 

established where a person "plays the principal role" in negotiating contracts, we urge the OECD to 

undertake additional consultation and provide tax authorities with additional guidance to clarify the meanir,g 

further. Similarly, the meanings of "complementary functions that are part of a cohesive business operation" 

in relation to fragmentation and "at the disposal of" regarding fixed places of business should be more tightly 

defined to ensure consistency in implementation. 

It is disappointing that recommendations regarding PEthresholds have been released before the guidance 

that wi ll follow on profit attribution. We are concerned that tax authorities will seek to establish the 

existence of PEs based on new concepts before providing business with any certainty regarding the 

attribution of profits to these newly defined PEs. For instance, the example of aPE being triggered by an 

agent who convinces customers to accept standard contracts without any authority to make deviations is 

verydifferenttothe previous definitions. Additionally, we would welcome the confirmation that PEs can be 

loss making. 

It is more disappointing still that the changes required to the OECD Model Treaty, OECD Guidance and 

domestic/multilateral implementation thereof w ill undoubtedly be disjointed, and we fear that some tax 

authorities may seek to apply the new concepts to open periods, which will cause considerable uncertainty 

and double taxation to arise. We urge the OECD to consider the impact of this as part of the implementation 

framework being developed and wait until there is a consistent understanding of the concepts before 

updating the ModeiTreatyand Guidance. 

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Transfer pricing (Actions 8-10) 

We have consistently acknowledged the need to update international tax rules on Transfer Pricing (TP), 

especially in relation to intangibles. However, aspects of BEPS project iII ustrate fundamental di fferences in 

opinions between countries over the Arm's Length Principle (ALP) in TP and its continued viability. We are 

hesitant in agreeing withtheOECDthatthe final report's recommendations have been finalised without a 

departure from the ALP. 

We welcome the confirmation that where clear contractual arrangements exist that are supported by 

economic reality, then recharacterisation is not generally required. However, we are concerned about the 

complexity of the process, the level of detail required, and the consequences it will entail in the practical 

application. For example, the modifications do not clearly address the relevance of or extent to which 

(control and) performance of DEMPE functions and risk should contribute to calculating price under the ALP. 

These are not generally factors that are taken into account by unrelated parties. Wewelcomethe reiteration 

that the most appropriate TP methodology should be used, and the OECD's commitment to developing 

guidance on profit split methodologies. However, we note that with this work expected to remai n 

incomplete until2017, a significant period of uncertainty remains, which will cause considerable uncertainty 

and double taxation to arise. We urge the OECD to consider the impact of this as part of the implementation 

fromcwork being developed ~nd prioritize thc:;c .Jrcos .Jccordingly. 

We welcome the confirmation that tax authorities should only be permitted to consider ex post outcomes as 

presumptive evidence about the appropriateness of the ex onte pricing arrangements where taxpayers 

cannot demonstrate that the uncertainty was appropriately measured in the pricing methodology adopted. 

However, the distinction between foreseen and unforeseen is subjective and very difficult to make. 

Additionally, there are many areas of the report that appear ambiguous which will allow countries to take 

divergent positions. We believe that there remains a significant risk of divergence in interpretation and 

extent of these approaches, and ultimately of tax authorities using hi ndsightto recharacte rise non -a bu si ve 

transactions. 

Whilst we would welcome the simplicity that the electiveregimeforCostContributionArrangements (CCAs) 

could provide, without a commitment from a significant number of countries to implement such a regime it 

remains the case that businesses will still face a signif icant compliance burden in satisfying the countries that 

do not implement it. If a significant number of countries could be encouraged to implement the elective 

regime at least in part (e.g. service CCAs) this would address these concerns in some cases. 

Financial services institutions face regulatory pressures that differentiate them from groups operating in 

other sectors. The OECD's 2010 report on the attribution of profits to PEs remains relevant for the taxation of 

this sector. BIAC cautions against special measures or general principles that move away from this wellestablished approach. 

BEPS Data (Action 11) 

Whilst the business community generally agrees that insufficient data is available and that such data wou I d 

be useful (and are thus supportive of the initiative), there has not been significant engagement with business 

in this area. We would welcome the opportunity to assist the OECD in its further work on identifying and 

analysing data on BEPS. 

Re-examine transfer pricing documentation (Action 13) 

BIAC fully supports the recognition under Action 13 of the importance of protecting the confidentiality of 

commercially sensitive information. Thi s protection should apply across all three pillars ofTP documentation. 

We consider it would be a useful addition (perhaps under the framework to be developed in 2016) if peer 

review mechanisms could be developed to monitor jurisdictions' adherence to appropriate confidentiality 

standards, and to ensure that the OECD's proposals are uniformly adopted. 

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The Action 13 recommendations will create substantial burdens for business, and effective com pi iance will 

require much preparation. For example, there remains ambiguity around areas such as the practicalities of 

reporting Master Files on a business line basis whilst maintaining a global overview, and many countries are 

already seeking to implement the country-by-country reporting elements recommendations before the 

guidance andXML schema are even released. Withoutfurtherguidance, much of the necessary preparation 

is impossible. Such implementing guidance should, where possible, leverage data reported under simi lar 

regimes (for example the EU's CRD IV for banking organisations) to streamline the compliance burden for as 

many taxpayers as possible. Only uniform TP documentation rules across countries will limit the resulting 

increase in compliance costs for companies, and we urge the OECDto encourage consistency in this area. 

Make dispute resolution mechanisms more effective (Action 14) 

We congratulate the OECD on the significant steps forward that have been taken in its work on Mutual 

Agreement Procedure (MAP). The recommended minimum standards on MAP and peer reviews is a 

welcomed development in the final report. We welcome the OECD FTA's MAP Forum as the best place for 

peer reviews to be undertaken, and encourage the OECDand governments to commit appropriate re source 

to ensure that the minimum standards can be upheld. The full picture of the success of the minimum 

standards on MAP (and the success of the BEPS Project as a whole) cannot be judged with reference only to 

tax authorities' data; we would welcome the opportunity to also be consulted as part of the OECD's 

monitoring framework. 

We also congratulate the OECD on securing the commitment of 20countries to binding arbitration and we 

urge the OECD to allocate necessary resource to ensuring this area is successful. We hope that this wil l 

demonstrate tonon-participatingcountriesthe benefits of such a process to its participants and hope that 

this will become an international standard that other countries are compelled to join. 

Multilateral Instrument (Action 15) 

We congratulate the OECDon securing the commitment of c.90 countries to participate in the development 

of this ambitious project in 2016. We recognise the benefits that could arise from a significant number of 

countries signing up to the instrument in order to swiftly and uniformly implement the OECD's proposals. 

Whilst the detailed timeline and consultation requirements have not been made public; we hope that the 

OECD wi ll seek to consult widely and take up BIAC's offer of support in its work on development of the 

Multilateral Instrument. 

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1l1e Homrable Charles Boustany 

Chainnan 

•tTitl 

~ 

~ PIC1 .. 1 UStcll&nlll tr Al li1Cl 

Dec~nber 15,2015 

The Homrable Richard Neal 

Ranking Member 

Subcommittee on Tax Policy 

House Ways and Means Committee 

Subcommittee on Tax Policy 

House Ways and Means Comnittee 

Dear Cbairtmn Boustany and Ranking Meuber Neal: 

The MPAA and its meuber companies are grateful to you ard your stallS for your 

eftorts to refom1 the U.S. tax system We very m.ICh appreciate the SubcOJmliltee's 

recent bearing regarding the OECD BEPS recommendations and the potrotial effects on 

U.S. co!T\)anies. We also are gratefill for your collective efforts to develop an "innovation 

box'' regin-x: that encoumges 6hu and other IP developn-x:nt in the United States. 

In that regard, we would like to submit the following comn:nts for the record 

focused pritnarily on BEPS Action 5 and the need for the U.S. to adopt an innovation box 

to respond to actions being taken overseas. 1l1is is essential to encow'llge domestic 

innovation and developrrent, to preserve and create well-paying U.S. jobs, and to 

groemte economic growth in an increasingly con1Jetitive global rnarketplace. 

Intl'oductio n 

The MPAA's six rrembers- Wah Disney Studios Motion Pictures, Pamnnunt 

Picnrres Corporation, Sony Picnu-es Entertainment, Inc., Twentieth Centtrry Fox Fibn 

Corpomtion, Universal City Sntdios LLC, and Warner Bros. Entertainment Inc.-

produce, distnbute and export theatrical motion pictures, televi<3ion progranming, and 

home video entertainment. The srtklios typically license their IP directly, or indirectly 

d1rough subsidiaries, to unrelated parties for distnbution in U.S. and foreign markets. In 

exchange, they receive royahies that historica lly have been subject to tax in the United 

States. 

The !IXltion picture and televi<;ion industry is an in1Jortant productive C001JOnent 

of the U.S. economy. The industry employed directly or irklirectly rK:arly 2 million 

people in the United States in 2013 and generated $113 billion in wages. Core 

production, marketing, rnanufucturing, and distnbution jobs paid an average of$84,000, 

which is nearly 70 percent higher than the national average. The industry is conlJrised of 

a nationwide network of tens of thousands sn"'ll businesses across all 50 states, with 85 

percrot ofd1ese businesses ~11J oying rewer than 10 people. The industry also supports 

good jobs and wages in thousatids of companies with which it does business, such as 

caterers, hotels, eq~n'l!nt rental facilities, luni>er arid hardware suppliers, transportation 
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vendors, and n:~ny others. Finally, Q1e industry creates one of our COlllltry's nJ:>st 

successful products, gamering a positive balance of trade with virtua Uy every country to 

which we expo1t and generating an overall $13.4 billion trade Stu-plus in 2013. 

Backgi'Ound - BEPS Action 5 

Several cotu1tries have introduced favorable tax regin-es for incon-e that is 

derived .from ownership of intellectual property. 'Il-ese "IP Box" regiires were enacted 

with the aim of attracting foreign invest1rent and ownership of IP in the applicable 

countty. Prior to BEPS and Action 5, such regiJres generally have not required work 

related to the IP be carried out within the cotuJtry in order to be eliglb le for IP box 

be1-efits. 1l1us, ti-e tax benefit is currently not dependent on economic activity and 

irmovation taking place in the jurisdictiort 

Several other OECD cotu1tries had raised concerns that these types ofregilres are 

'1wmful" and artificially shi.lt IP ownership and taxable profits away from the country or 

countries where the value oftl1e IP is created. To address these concerns, the OECD 

released its final report on Action 5 "Cowtering .Hannful Tax Practices More 

Eftectively, Taking into Account Transparency and Substance" in early October. Under 

the final report, to avoid being labeled as "hannful," a preferentia I regiJ11e ge11erally !DUSt 

require substantia I economic activity occur within the cowtry for a taxpayer to be 

etigible for IP box benefits. Specifically, Action S proposes that there must be a nexus 

between the inc01re receiving the benefits and the expenses contributing to that income. 

Put another way, IP incon-e \vill only qt~lifY tmder this '~1exus approach" for the 

prererential rates under an innovation box regiJ11e to the extent that the IP developu-ent 

expenses are incurred in the relevant cowtry. Consequently, conwanies \vishing to take 

adv-antage of the prererential regiJ1-es will need to shift at least a portion of their IP 

developtrent (and associated jobs) overseas. 

Inten111tional Tax Refom1 and the Need to Adopt an Innovation Box 

We believe one of the JOOSt in-.:>ortant elen1ents of tax refom1 \vill be to nl)demize 

our intemational tax systen1 in order to put Alrerican COIJllanies on a level playing field 

when con-peting in the global market place. The current U.S. worldwide system is an 

outtier among major developed cotu1tries \vith its high statutory rates and the in\)osition 

of a residual U.S. tax on foreign earnings. 1llis has a ntunber of adverse economic 

consequences, causing our COI1lJanies to be less COI1lJetitive overseas, enc.ouraging 

foreign ownership ofiP, and locking out cash that COt~d be used for don-estic investn-ent. 

Consequently, we agree with Cilllirman Brady's recent statell'tlnt that we need to quickly 

conchlde discussion on "international tax refo1m and an innovation box. It could be a 

significant down payn1ent on overall tax refunn, done right, allow[ing] U.S. CO!Jllanies to 

bring those stranded profits h01re to reinvest in the U.S. and ensur[ing] Alnerica 5n't 

isolated on the innovation side ofthe economy."' 

1 See Wall Street Joumal, "Q&A: House Ways and Means 01ainnan Kevin Brady 's Tax Plans," 

(November 6, 201 5). 

2 
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In addition to adopting lower statutoty mtes and a dividend exen-.:>tion system, the 

U.S. meds to take specific steps to respotXI to BEPS and other developmmts overseas 

that, if left unanswered, will result in significant U.S. job and revenue loss. As noted 

above, other countries are aggressively seeking to attract IP creation and 

c01mx:rcialization tiu·ougb ti1e introduction ofbroad IP regilres arid other incentives. In 

additioo, witl1 respect to fihns, many of our major trading partocrs (e.g., Australia, 

Canada, France and ilie United Kingdom) ofter significant wage credits and other abovetlx:-Iine incentives to attmct film productions and jobs abroad, in addition to their lower 

stannory rates. For example, recognizing tile bemfits of film production to its economy, 

the United Kingdom tilli year sweetened its film and television production incentives by 

increasing its refimdable tax credit from 20% to 25% for aD qualifying U.K. film 

expenditure. 

As descnbed above, ti1e tlexus requirell'X!nt utXIer BEPS Action S will likely 

require con11anies to shift IP developtrent atXIjobs overseas in order to take advantage of 

innovation box incentives. Because con-.:>anies like ours are fucing increased pressure 

from stakeholders to take advantage ofd1ese incentives, mmy will decide to locate IP 

ownership and a higher proportion of IP developtrent mtiorn overseas to establish tlx: 

requisite "nexus" to claim such beocfits or to justilY a higher allocation ofincon-e 

attnbutable to that IP. This wiD cause U.S. tax revenues to sluink as IJ1e U.S. tax base 

at!nbutab le to IP decreases wd credits for foreign taxes paid on IP developed and owned 

overseas increase. 

To prevent greater migration of IP ownership and quality jobs to other developed 

countries, atXIloss of the associated tax revenue, we believe tl1e U.S. needs to respotXI 

quickly by adopting an IP box trot encourages ilie de\elopll'X!nt, ownership atXI 

comrercialization of film and oilier IP in ilie United States. Consequently, we want to 

comretXI atXI tl1ank both of you and your staffS fur t!Je eJfons to develop an innovation 

box proposal to counteract BEPS and oilier actions overseas, atXI help ensure that IP 

developtrent and ilie associated weD-paying jobs remain in IJ1e United States. We are 

particularly grateful that ti-e discussion draft specifically inchtdes films in the types of 

"qualified property'' eligible for the innovation box deduction. TI:ris properly reflects tile 

fact tllat production of fihns, like other fomlS ofiP, is highly mobile and susceptible to 

Otller developed com1tries' incentives. 

To ensw·e tile purposes of adopting an lP box are fttlly n-et with respect to fihns, 

we believe that certain modifications should be made timt properly account for 

difterences between ilie developtrent of fibns arid other lbrms of IP. Most notably, ilie 

ratio in ilie discussion draft is based on incurring R&D expenses, rather tllan IP 

production expenditures generally. TI1e production of fib11S, in contrast to most olllef 

fonns ofiP, requires only limited R&D expenses. TI1e mnocrator arid denominator of the 

nexus ratio should be nndifted appropriately to reflect all lP developn-ent costs (inctured 

dotrestically conwared to worldwide), not just R&D expenses. Also, the inclusion in the 

nwrerator and denominator of costs of ar1 expwded affiliated group will often lead to 

anomalous resuhs. For exanwle, a corporation with significant business activities 

unrelated to developtrent of IP, such as cmise ships, will be disadvantaged tor no 

apparent reason relative to competitors witi10ut such activities. Conversely, a corporation 
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that has an a1filiate with significant unrelated IP development activities could be 

advantaged relative to its competitors. 

Also, similar to section 199, income derived from fihn-related copJ'Iights and 

tradennrks should be eligible fur the deduction tulCier the discussion draft, because such 

incorre is a significant portion of the film's revenue stream and is essential to the 

decision whether to produce a film or not. 

In addition, on-line viewing is a rapidly evolving portion of the fihn and 

television nnrket tJJat should be encouraged. Congress recognized this when it 

specifically provided that the n-.::thods and n-.::ans of distnbuting a fihn should not afiect 

eligibility under section 199. Failure to extend eligibility fur irmovation box benefits to 

incon-.:: derived from digita I broadcasts could n-.::an that, as the dennnd for digita I 

programming grows, the intended tax incentive for donx:stic fihn production could sluink 

substantially over tin-.::. 

Finally, we believe it is importani that the benefits of an innovation box be 

available to partnerships, as well as corporations. A substantial nuroer offihn projects 

every year are produced through partnerships, co-prodtK:tions and joint vennttes. Fihn 

production by partnerships is also susceptible to foreign incentives and the eftects of 

nexus requirements ulCier BEPS. Thus, to counteract those incentives and preserve the 

U.S. revenue base and jobs, partnerships should also be etig1ble for irmovation box 

benefits. 

An ahenJative approach to implenx:nting an innovation box in the U.S. would be 

to adopt an approach similar to the one taken by fonner Ways and Means Cornmittee 

Chairman Camp in his tax refunn bill (H.R. I) to address base erosion.2 By establishing a 

COJllletitive tax rate on IP incmne and a balance between the n-eatnx:nt of exported IP and 

IP owned overseas, the "carrot aoo stick" approach ofH.R. I will promote the creation, 

ow1rership and commercialization ofiP in tJre United States. 

Tile incentive eftect of tile "carrot" in H.R. I could be enhanced in several 

sensible ways. For example, the carrot will be heavily dependent on how intangible 

property development expenses are allocated for purposes of detemlining fOreign 

intangible inconx:. Specific mles are provided in the regulations tmder section 861 to 

allocate and apportion R&D expenses (T reas. Reg. sec. 1.861- I 7). These rules were 

adopted in part to encourage donx:stic research llllCi development. Applying similar 

allocation and apportionment rules to film industry content and other intangible property 

for purposes of detemlining net foreign intangible income would provide similar 

incentives and 1-.::lp to ensure ti1e catTOt properly encourages dou~tic production of 

intllllgible property. 

It would also enhance the "clllTot" to specifY that indirect expenses are not taken 

into accotmt in con1'uting net foreign intangible incon-.::. 11lis would exchlde expenses 

not directly allocable to IP developn-.::nt, including SG&A, stewardship and interest costs. 

2 See H.R I, "The Tax Refonn Actof2014," sec. 4211. 

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A similar approach is used in Chainmn Camp's discussion draft to define tbreign source 

taxable incmre for pUiposes of the fureign tax credit limitation 1his would provide a 

consistent approach for both pW]JOSes. 

Finally, similar to the computation of the "stick" (which is done on a CFC-by 

CFC basis), net losses from one transaction should not ofiSet net intangible inco~re from 

other transactions in detennining the carrot under the bill. 

Conclusion 

We are very appreciative of tllC ongoing work by the Committee and the 

Subcommittee to improve our tax system in order to protrote do~restic job growth and 

enhance the global competitiveness ofU.S. businesses. 

Our industry is highly sensitive to global COlllletition. Recent technological 

developments l~ve created an envirom11ent where jobs related to the production of 

underlying works, and the creation and cmmnercialization ofvaluable intellectual 

property, are trore highly 1oobile than ever befure. Other countries are becoming more 

aggressive in using lower statutory tax rates, targeted tax incentives, broad innovation 

box regimes, and other subsidies to attract IP production aod ownership overseas. 

Moreover, the OECD BEPS project has already caused a growing fbcus on the substance 

and extent of activities supporting the allocation of profits of a globally integrated 

enterprise. TI1ese actions by the OECD and other highly developed economies are 

creating a real and inurediate threat to U.S. jobs. 

We are grateful for your efforts to respond to these challenges so U.S. companies 

en~in highly competitive overseas, and IP development (and the resultant jobs and 

revenue base) mmin at ho~re. We believe that a significant reduction in the U.S. 

corporate tax rate and adoption of a dividend exen1Jtion system with an appropriate 

innovation box wiD successfully achieve these goals. 

Please contact Patrick Kilcur (202) 378-9175 if you have any questions or need 

anything else from us. We look forward to working with the Comnittee ~ren-bers and the 

staff on these in1Jortant issues. 

cc: 

Sincerely, 

Joanna Mcintosh 

Executive Vice President, Global Policy and 

External Affuirs 

House Ways and Means Committee Chainmn Kevin Brady 

Ranking Men-Der Sandy Levin 

Meni>ers of the Subcommittee on Tax Policy 

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NATIONAL ASSOCIATION OF 

Manufacturers 

Statement for the Record 

of Dorothy Coleman 

Vice President, Tax & Domestic Economic Policy 

National Association of Manufacturers 

For the Hearing of the House Ways and Means Tax Policy Subcommittee 

on "OECD BEPS Project final recon11nendations and its effect on worldwide 

American con-panies" 

December 1 • 2015 
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Statement for the Record by 

Dorothy Coleman 

For the 

Hearing of the House Ways and Means Tax Policy Subcommittee 

on "OECD BEPS Project final recommendations and its etfecl on worklwide An~rican 

co1npanies" 

December 1, 2015 

Chairman Boustany, Ranking Member Neal and members of the subcommittee, thank 

you for the opportunity to testify today about the Base Erosion and Profit Shifting (BEPS) project 

spearheaded by the G-20 and the Organisation for Economic Cooperation and Development 

(OECD). I appreciate the chance to highlight on behalf of the National Association of 

Manufacturers (NAM) our concerns about some of the recommendations in the BEPS project 

that would impose substantial and unnecessary compliance costs on companies and, in some 

cases, force disclosure of sensitive, confidential U.S. taxpayer information. These 

recommendations would create a new set of challenges for manufacturers and stand to harm 

our competitiveness in an already difficult global economic environment. 

The NAM is the nation's largest industrial association and voice for more than 12 million 

women and men who make things in America. Manufacturing in the United States supports 

more than 17 million jobs, and in 2014, U.S. manufacturing output reached a record of nearly 

$2.1 trillion. tt is the engine that drives the U.S. economy by creating jobs, opportunity and 

prosperity. The NAM is committed to achieving a policy agenda that helps manufacturers grow 

and create jobs. Manufacturing has the biggest multiplier effect of any industry and 

manufacturers in the United States perform more than three-quarters of all private-sector R&D 

in the nation - driving more innovation than any other sector. 

Manufacturers know full well how critically important it is for U.S. companies to be able 

to invest and compete effectively in the global marketplace. Indeed, 95 percent of the world's 

customers are outside the United States. Investment by U.S. global companies has paid off for 

the U.S. economy: U.S. global companies employ 35.2 million workers and are responsible for 

20 percent of total U.S. private industry employment'. l'vloreover, U.S. companies that invest 

abroad export more, spend more on U.S. research and development performed by U.S. workers 

and pay their workers more on average than other companies. 

Background 

In 2012, representatives from the G-20 asked the OECD to develop a comprehensive 

approach to address aggressive global tax planning that resulted in inappropriate corporate tax 

avoidance. The OECD released its final recommendations in October2015 and the 

recommendations were approved by the G-20 Finance Mnisters on October 9, 2015, and by the 

G-20 Leaders on November 16, 2015. 

1 Bureau of Economic Analysis,August2014. 
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In July 2013, the OECD released the G20/0ECD Base Erosion and Profit Shifting 

("BEPS") Action Plan, which provided for 15 actions designed to reach consensus among 

members for recommended changes in tax policy. The BEPS Action Plan included Action 13, 

"Re-examine Transfer Pricing Documentation," to develop rules to require multinational 

companies (MNEs) "to provide all relevant governments with needed information on their global 

allocation of the income, economic activity and taxes paid among countries according to a 

common template." 

On October 5, 2015, the OECD released its final report on Action 13 (along with reports 

on all 15 BEPS Actions). The OECD identified Action 13 as one of the areas where all countries 

agreed to consistent implementation. The Action 13 report was virtually identical to an earlier 

draft (released in September 2015) and previously released implementation guidance (released 

in February and June 2015). Action 13 adopts a three-tiered approach to achieve transfer 

pricing documentation: a master file containing information to provide a complete picture of the 

MNE's global operations, including an organizational chart, consolidated financial statements, 

and analyses of profit drivers, supply chains, intangibles, and financing; a local file providing 

more detailed information relating to specific intercompany transactions of the MNE group 

impacting the specific tax jurisdiction; and a country-by-country report {CbCR) containing 

aggregated financial and tax data by tax jurisdiction. According to the OECD, the two 

documents that provide group-wide information - master file and CbCR - are intended to 

provide governments with information necessary to conduct high-level transfer pricing risk 

assessment. 

The CbCR will only be required of multinational groups with annual consolidated group 

revenue of at least 750 million Euro in the immediately preceding year. The first CbCRs would 

be filed for tax years beginning in 2016 with the tax residence country of the parent of the MNE 

group (e.g., the United States for U.S.MNEs). Other countries could obtain CbCRs through 

exchange of information processes under bilateral treaties and tax information exchange 

agreements. 

In order to obtain CbCRs, countries must agree to certain conditions related to 

confidentiality, consistency and appropriate use of the information. In this document, appropriate 

use is defined as "assessing high level transfer pricing risk" and "other BEPS-related risks." If 

the tax residence country of the parent company does not collect CbCRs, or has not agreed to 

provide CbCRs via information exchange, then other countries would be authorized to collect 

CbCRs directly from subsidiaries in their jurisdictions. 

Action 13 includes model legislative language for adopting CbCR requirements and 

model competent authority agreements for use by governments to implement CbCR exchange. 

II also provides a detailed framework for confidentiality and data safeguards that need to be in 

place for countries to receive the CbCR through information exchange. 

Under Action 13, the master file and the local file would be collected directly by each 

local jurisdiction in which the MNE conducts business. Confidentiality, consistency, and 

appropriate use standards that apply to the CbCR do not explicitly apply to the master file or 

local file, although participating countries have agreed that the confidentiality and consistent use 

standards associated with transfer pricing documentation generally "should be taken into 

account." 

2 
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Potential Impact of the CbCR and Master File Requirements 

The CbCRs on a company's financial and tax data that companies file with their own 

country could impose a significant. additional administrative burden on companies. These 

reports however, would be submitted to foreign countries under bilateral treaties and information 

exchange agreements and thus have protections to ensure confidentiality, consistency and 

appropriate use of the information by foreign countries. 

Unfortunately, this would not be the case with the master file, which could be required 

directly by any country where a company does business. The master file asks for extremely 

sensitive information unrelated to actual taxpayer activities in the country requesting the 

information. In this way. the master file is similar to the CbCR. However, unlike the CbCR, the 

master file information does not have the confidentiality protections of the information exchange 

process and is not subject to any confidentiality, consistency, or appropriate use conditions 

beyond those that may apply locally. 

If a country fails to abide by these conditions with respect to the CbCR, Treasury has 

stated its intent to suspend CbCR information exchange. To the extent this threat is effective in 

ensuring that other countries maintain confidentiality of CbCRs of U.S. MNEs, it is irrelevant to 

the master file, which is arguably more intrusive. W ith respect to maintaining confidentiality of 

the master file, U.S. MNEs are at the mercy of foreign governments. 

Manufacturers are concerned that the master file requirement would force them to 

disclose an unprecedented amount of proprietary information about their global operations to 

foreign governments. The master file would include organizational charts. consolidated financial 

statements and analyses of profit drivers, supply chains, intangibles, and financing. In short, it 

would provide a comprehensive plan that includes every aspect of a company's worldwide 

business. 

While a small amount of the required information in the master file may be contained in 

public filings with the Securities and Exchange Commission (SEC), most of the required 

information is descriptive in nature and even publicly traded companies will need substantial 

input from across the business enterprise to recompose the data. Information about global 

supply chains, for example, can be considered sensitive commercial information that, if 

disclosed, would be of high value to the MNE's market competitors. For privately held 

companies, the requirements to include a global organizational chart and consolidated financial 

statements would constitute an unprecedented level of disclosure to foreign governments. 

Disclosure, misappropriation, or inappropriate use of this information could be extremely 

detrimental to the ability of U.S. manufacturers to create value in the United States and global 

marketplaces. 

The fact that taxpayers may have some level of control over what information is included 

in the master file does little to address confidentiality concerns since it is unclear how much 

flexibility taxpayers have to exclude sensitive information. 

In the Action 13 report, the OECD recommends taxpayers use a "prudent business 

judgment" standard to determine the "appropriate level of detail" to be included in the master 

file. Information that is "important," however, cannot be omitted. The OECD considers 

information to be important "if its omission would affect the reliability of the transfer pricing 

outcomes." 

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Manufacturers believe that this standard provides little comfort for taxpayers that want to 

omit sensitive information and avoid penalties for failing to comply with the filing requirements. 

There is, at best, a questionable nexus between the master file information and transfer pricing 

outcomes within a particular country under the arm's length standard, since that is the purpose 

of the local file. For example, a taxpayer could reasonably take the position that omitting a 

global organizational chart or consolidated financial statements would not "affect the reliability of 

the transfer pricing outcomes" within any particular jurisdiction, yet be concerned that such 

omissions would constitute non-compliance. 

Addressing Confidentiality Concerns 

Even though the BEPS recommendations were finalized this fall, the NAM strongly 

believes that taxpayer confidentiality concerns can and should be addressed during the BEPS 

implementation phase. Specifically, we believe that Treasury should link master file information 

to its agreements to provide the CbCR to other countries through information exchange. Thus, 

we urge Congress to ensure that Treasury enters into agreements with foreign countries 

specifying that: 

• Treasury agrees to provide CbCRs for U.S. t\N\!Es only if U.S. IVINEs or their subsidiaries 

are not required to provide master file information to the foreign country; 

• The foreign country agrees that it will not collect CbCRs from U.S. MNEs or their 

subsidiaries; and 

• Treasury agrees to provide to the foreign country only the master file information that a 

U.S. MNE chooses to file with its CbCR in order to provide context for its CbCR data. 

Conclusion 

NAM members recognize the crucial role tax policy plays in the ability of businesses 

around the world to compete and grow, and we support tax rules that are pro-growth, procompetitiveness, fair, clear. and predictable. In contrast, the proposed information sharing and 

disclosure rules included in the BEPS recommendations described above would impose new 

and unnecessary compliance costs on companies and, in some cases, force disclosure of 

proprietary business information, creating a new set of challenges for global companies. 

In particular, the master file requirement would provide foreign governments with a 

comprehensive roadmap detailing every aspect of a company's worldwide business. Many 

manufacturers in the United States with operations overseas would have to comply with this 

provision, which represents an unacceptable and unprecedented expansion of required 

proprietary data sharing and a very real competitive threat for some of America's most 

innovative firms. 

Manufacturers are particularly concerned about the lack of safeguards to protect the 

confidentiality of this very sensitive information in the master file. Unlike the CbCR, the master 

file is not provided through information exchange and is not subject to any confidentiality, 

consistency, or appropriate use conditions beyond those that may apply in a local jurisdiction. If 

a country fails to meet these conditions on CbCRs, Treasury can suspend the information 

exchange. Unfortunately, this option does not apply to the master file information, which is even 

more intrusive. 

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On a positive note, the United States has not announced plans to collect the master file. 

We urge Treasury officials to go one step further and only provide CbCRs to foreign countries 

that do not require a master file. A1 a company's option, Treasury can provide any master file 

information the company chooses to provide as context for its CbCR data that is provided 

through information exchange. 

When it comes to tax policy, manufacturers believe a fair and transparent tax climate in 

the United States-including competitive business tax rates and modern international tax 

rules-will boost standards of living and economic growth worldwide. A1 the same time, an 

appropriate balance needs to be struck between transparency and confidentiality of the 

proprietary information that enables companies to compete and prosper in a global economy. 

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COALITION W•shin!'!Oil, D.C. 2000$ 

mfo@riecoalition.com 

202.525.4872 e.'<l.. tto 

U.S. House of Representatives 

Comtlittee on Ways and Means - Subcommittee on Tax Policy 

Hearing on the OECD Base Erosion and Profit Shifting (BEPS) Project 

December l, 20 15 

Subtnission of the Tax Innovation Eq1~11ity (TIE) Coalition 

1l1e Tax Innovation Equality (TIE) Coalition is pleased to provide tllis statemem for tl-.e record 

of the hearing in the Ways and Means Subconunittee on Tax Policy on tlle OECD Base Erosion 

and Profit Sbifiing (BEPS) Project. 1 As the statements from witnesses, Ch..1innan Boustauy and 

munerous others made clear, many oftlle concerns ofbotll the U.S. goverrureut and U.S. 

businesses with the BEPS Reports woukl be alleviated by reforming the U.S. tax code. 

Therefore. as the Subconnninee considers what actions to take in view of the 0 ECD BEPS 

Reports, we urge you to move forward witll tax refonn that will n-.:>demize tl-.e U.S. tax system 

and help American businesses compete in a global market. 11-.e TIE Coalition believes trnt tl1e 

U.S. llJU5t (~ impleirent a conlJetitive territorial tax S}stem; (it) lower the U.S. corporate tax 

rate to a globally con'4Jetitive level: and (iii) not pick winners and losers in the tax code by 

discritninating against any particuhr industry or type of income - including income from 

itltangib lc property (IP). 

Recognizing lite ilrtportance of IP to tlle U.S. economy, many of the Members and witnesses at 

tlle hearitlg eXpressed concem about d-.e adoption of so-called "innovation boxes" by OECD 

cotuuries. raising questions about whether these treasures will resuh in the trovement of IP jobs 

from tire U.S. to oilier cotuttries and asking whetlrer the U.S. shoukl adopt similar measures. 

The TIE Coalition does not hiwe a position on a U.S. "iooovation box" but we are very 

concerned trnt in prior intematiooal tax refom1 proposals incoll!e from intangible property (IP) 

would be singled Oltt for harsher tax treaurent than incoll!e from ot11er assets. By 

discritnioating against IP income compared to income from otllcr types of assets, tllesc prior 

proposals would create an uofuir advantage for companies who don't derive their income from 

IP and sigoifx:antly disadvantage the most innovative U.S. companies. especially conlJarcd to 

their foreign competition 

For example, the "Tax Refom1 Act of2014" (H.R 1). as introduced by fom1er House Ways and 

Means Chainmn Camp, would seriously disadvantage itmovati ve An1erican companies. Under 

1 The TIE Coalition is comprised of leading American companies and trade associations that drive 

economic growth here at home and globally through innovative teclmology and biopbannaceutical 

products. For more infonnation, please visit hnpJiwww.tiecoalition.coml. 

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COALITION W•shin!'!Oil, D.C. 2000$ 

mfo@riecoalition.com 

202.525.4872 e.'<l.. 110 

that proposal Chainnan Canw chose to use what is now widely known as "Option C.''2 The 

probkm with "Option C," is if it became the law of the L1nd, its adverse tax treatment ofiP 

income would significantly hinder U.S. c<>mpaoies who conwete globaUy, and i1 would result in 

more inversions of U.S companies. TI1e TIE Coalition is opposed to "Option C" because it 

would have a devastating impact on both in110vative teclmology and biopbanmceutical 

convanies. 

In an effort to reaDy tmderstand the fiill scope of"Option C," the TIE Coalition earlier this year 

cotnnissioned a smdy by Manhew Slaughter, the JA>an of the Tuck School ofBusiness at 

Dartmouth Utliversity. The January 2015 snldy, entilled "Why Tax Refonn Should Support 

lutangtble Property in the U.S. Economy" can be found at http://www.tiecoalitiortcom/whytax-reform-should-support-intangible-propertv-in-the-u-s-economy and we ur~ the Ways and 

Means Committee to consider its Jindings when examining options for international tax refonn 

As Dean Slaughter emphasizes, ''PolicYJtRkers should understand the long-sta.nding and 

increasingly important contributions that IP makes to American jobs and American standards of 

tiving - and should tmderstand the value of a tax system that encourages the development of TP 

by American companies." TI1e sntdy finds that "Option C" in the Camp legislation would 

timdamenta lly change the measuren~nt and tax treatment of IP incotre earned by American 

COJlllanies abroad. The snldy finds that "Option C" of the proposal would disadvantage IP 

income earned abroad by U.S. corrpanies in three ways. First, it would tax TP income at a 

higher rate than tmder current law. Second, it would tax IP incon~ nXJrc than other types of 

business incon~. TI1ird, it would impose a higher tax burden on the TP incon-e of U.S. 

COJlllanies compared to their foreign competitors. TI.te tikely outcorre of using ''Option C" as 

proposed in the Cau-v legislation would be to increase corporate inversions and incenti\'eS for 

foreign acquisitions ofU.S. based TP intensive companies. 

The Slaughter snldy firlds that the "Uniled States. !JOt abroad, is where U.S. multinationals 

perfonn the L1rge majority of their operations. Indeed, this U.S. concentration is especiaUy 

pronounced for R&D, which rellects America's tmderlying strengths of skilled workers and 

legal protections such as IP rights that together are the foundation of An~rica s IP strengths, as 

discussed eartier." The Slaughter sntdy concll.ldes that the overseas operations of these 

COJlllanieS complerrent their U.S. activities and support, 110t reduce, the inventive efforts arid 

related jobs of their U.S. parents. So it is increasingly in1portant to Au~rica s TP success that 

these companies continue to operate profitably overseas and any tax refom1 proposals do 110t 

DJ'4lOSe discritninatory taxes on n1con-e from n1tangible assets located there. 

2 Please note that the TIE Coafition is opposed to both versious of"Option C" (version one of"Option 

C" iu the Camp Draft and versiou twoof''Option C" in H.R. I as introduced). 

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COALITION W•shin!'!Oil, D.C. 2000$ 

mfo@riecoalition.com 

202.525.4872 e.'<l.. 110 

lP jobs are very important to the U.S. economy and make up a large portion of lhe workforce. 

That i> why it i> in1Jortant to have a tax code that supports the IP economy here in the U.S. To 

that point, the U.S. Cl:~.1rrber s Gbbal Intellectual Property Center commissioned a smdy onlhe 

benefits ofTP jobs to economic growth in the U.S. l11e study fowxl tbat in 2008-09 that there 

were 16% or 19.1 million direct lP jobs atxl 30% or 36.6 million U.xlirect 1P jobs in the U.S. 1P 

or lP related jobs accow:n for 46% of the U.S. economy or 55.7 million jobs. With our 

modernizing economy it is likely that this murber has grown.3 

To be construcriw and help lhe Subcommittee find solutions that will allow Anxrican 

co111>anies to succeed in a very competitive gk>bal market, lhe TIE Coalition has devebped 

anti-base erosion solutions that do not target lP income. We w01~d like to work with the 

Sttbcommittee to develop ahemati\IC options that would apply to situations in which COI11>anX!s 

are sirrq)ly trying to shift income to low taX jurisdictions with no substance or real business 

presence, but wo1~ not discriminate against income from intangible assets. Such options 

would apply to income from aD goods atxl services, not just incon-e from intang.tble assets. 

In conclusion, the TIE Coalition supports tax reform that tmdemizes the U.S. tax system, 

albwing An-erican busirJeSses to compete in global markets ir1 a rmm~er that does not 

discriminate against any partict~r industry or type of inconr, including ioco= from intangible 

property. As the witnesses at thi> hearirJg itxlicated, many other comtries are lowering their 

corporate tax rates and adoptirtg tax n~s to attract IP con1Janies to their shores. So, it wo1~ 

be especially hannful to lhe U.S economy to adopt a tax poocy that will hurt. not help, 

A.nrrican companies who compete globally. Now is not the tirne to drive high paying 

Am:rican jobs owrseas.

4 

'See, http://image.nschamber.conlflhlfee913797d6303/m/1/JP+Creates+Jobs+-

+Executive+Swmnary+Web+-+2013.pdf 4 l11e U.S. Chamber study fowtd tl1at "IP-intensive companies added more !han $2.8 trillion direct 

output, accotulting for more than 23% of tota l output in the private sector in 2008-09" and that the 

"Output per worker in IP-intensive companies averages $136,556 per worker, uearly 72.5% higher tl1an 

tl1e $79,163 national average. ld. 

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