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76–317 2012

WAYS AND MEANS INTERNATIONAL TAX 

REFORM DISCUSSION DRAFT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON SELECT REVENUE MEASURES 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

NOVEMBER 17, 2011

Serial No. 112–SRM5 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON SELECT REVENUE MEASURES 

PATRICK J. TIBERI, Ohio, Chairman 

PETER J. ROSKAM, Illinois 

ERIK PAULSEN, Minnesota 

RICK BERG, North Dakota 

CHARLES W. BOUSTANY, JR., Louisiana 

KENNY MARCHANT, Texas 

JIM GERLACH, Pennsylvania 

RICHARD E. NEAL, Massachusetts 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

SHELLEY BERKLEY, Nevada 

JON TRAUB, Staff Director 

JANICE MAYS, Minority Staff Director 


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C O N T E N T S 

Page 

Advisory of November 17, 2012 announcing the hearing ..................................... 2 

WITNESSES 

Mr. John L. Harrington, Partner, SNR Denton .................................................... 5 

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

Mr. Tim Tuerff, Partner, Deloitte Tax LLP ........................................................... 18 

Testimony .......................................................................................................... 20 

Mr. David G. Noren, Partner, McDermott, Will & Emery ................................... 34 

Testimony .......................................................................................................... 36 

Mr. Paul W. Oosterhuis, Partner, Skadden, Arps, Slate, Meagher & Flom 

LLP & Affiliates ................................................................................................... 44 

Testimony .......................................................................................................... 46 

Dr. Martin A. Sullivan, Contributing Editor, Tax Analysts, Alexandria, VA. ... 66 

Testimony .......................................................................................................... 68 

MEMBER QUESTIONS FOR THE RECORD 

Mr. John L. Harrington ........................................................................................... 97 

Mr. David G. Noren ................................................................................................. 99 

Mr. Paul W. Oosterhuis .......................................................................................... 100 

PUBLIC SUBMISSIONS FOR THE RECORD 

Business Roundtable ............................................................................................... 103 

Carrix Inc ................................................................................................................. 114

Center for Fiscal Equity .......................................................................................... 118 

Jeffery M Kadet ....................................................................................................... 123 

RATE Coalition ........................................................................................................ 155 

U.S. Chamber Of Commerce ................................................................................... 158 


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WAYS AND MEANS INTERNATIONAL TAX 

REFORM DISCUSSION DRAFT 

THURSDAY, NOVEMBER 17, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 10:00 a.m., in 

Room 1100, Longworth House Office Building, the Honorable Patrick Tiberi [chairman of the subcommittee] presiding. 

[The advisory of the hearing follows:] 


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HEARING ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

Chairman Tiberi Announces Hearing on Ways and 

Means International Tax Reform Discussion Draft 

November 26, 2011 

Congressman Pat Tiberi (R–OH), Chairman of the Subcommittee on Select Revenue Measures, today announced that the Subcommittee will hold a hearing on the 

international tax reform discussion draft released on October 26, 2011 by the Committee on Ways and Means. The Committee released the discussion draft to solicit 

feedback on the details of the corporate rate cut and participation exemption (i.e., 

territorial) system that the Committee hopes to include as part of comprehensive 

tax reform. The hearing will take place on Thursday, November 17, 2011, in 

Room 1100 of the Longworth House Office Building 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. A 

list of invited witnesses will follow. 

BACKGROUND: 

As part of its pursuit of comprehensive tax reform, the House Ways and Means 

Committee (‘‘the Committee’’) released on October 26, 2011, a discussion draft of one 

discrete component of broader tax reform legislation: a participation exemption for 

certain foreign-source income (sometimes referred to as a ‘‘territorial’’ system). The 

Committee released this draft because it views the participation exemption as a fundamental change in the way the United States taxes cross-border activity, and in 

the interests of transparency seeks feedback from a broad range of stakeholders, 

taxpayers, practitioners, economists, and members of the general public on how to 

improve this proposed set of rules. 

The discussion draft is intended to be revenue neutral in and of itself when considered as part of comprehensive tax reform legislation that reduces the corporate 

tax rate to 25 percent. In addition to the exemption and other simplifications, the 

draft includes a number of options intended to prevent U.S. base erosion from activities such as overleveraging and income-shifting. Ways and Means Committee Chairman Dave Camp (R–MI) asked Chairman Tiberi to schedule a hearing on this discussion draft to begin to gather analysis from outside experts on the details of the 

draft. 

In announcing the hearing, Chairman Tiberi said, ‘‘The Members of the Ways 

and Means Committee worked hard to produce a draft proposal that encourages investment and job creation here in the U.S. while addressing 

concerns about potential erosion of the U.S. tax base through creative tax 

planning. Having said that, we want to ensure the plan carefully considers 

the potential impact on American businesses and workers, and we welcome 

feedback from the public on how to refine and improve the draft proposal.’’ 

FOCUS OF THE HEARING: 

The hearing will focus on the Ways and Means discussion draft released on October 26, 2011. For purposes of this hearing, the Subcommittee is particularly interested in comments and analysis of the basic architecture of the draft exemption system, including the scope of the 95 percent exemption for certain dividends and capital gains, the treatment of different forms of entities and ownership structures, and 

the transition rule applied to pre-effective date earnings. The hearing also will reVerDate Mar 15 2010 04:04 Oct 23, 2012 Jkt 076317 PO 00000 Frm 00006 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\76317.XXX GPO1 PsN: 76317

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view the various options for protecting the U.S. tax base, both with respect to thin 

capitalization rules and income-shifting through the location of intangible property 

and similar means. 

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 submit, and click on the link entitled, ‘‘Click here 

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

of business on Thursday, December 1, 2011. Finally, please note that due to the 

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

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

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing 

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

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

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

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

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

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

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

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

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

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

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

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

by the Committee. 

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

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

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

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

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

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

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

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

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

f 

/. 

Chairman TIBERI. The hearing will come to order. Good morning, and thank you for joining us for another in a series of hearings 

on comprehensive tax reform. 

At the Ways and Means Committee’s first hearing this year, 

Chairman Dave Camp said that comprehensive tax reform would 

be a ‘‘long discussion.’’ Last month, Chairman Camp initiated a 

new phase of this long discussion when he released his international tax reform discussion draft. I applaud Chairman Camp 

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sion draft, and they should be also commended for the transparency in the process of doing it. 

The purpose of the discussion draft is to gather feedback on how 

the Ways and Means Committee can best transition from a worldwide system to a territorial system of taxation. I look forward to 

gathering some of that feedback today with our witnesses. We are 

lucky to have before us a panel of some of the most well-respected 

international tax practitioners in our country. 

In addition, I very much encourage practitioners, businesses, academics, and other interested parties, to share their feedback with 

us, as well. They can do so by visiting the comprehensive tax reform section of the Ways and Means Committee website. 

And finally, I want to emphasize that comprehensive tax reform 

remains our goal. By the time we are finished, we will have reformed the Tax Code for all employers and all individuals. 

I look forward to hearing from our witnesses today, and I now 

yield to my friend, Ranking Member Neal, for his opening statement. 

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

for calling this hearing today to examine Chairman Camp’s international tax reform discussion draft. 

If there is one thing I think that we can all agree on, it is that 

our corporate and international tax rules need to be reformed. The 

United States has one of the highest statutory corporate tax rates 

in the world, which many economists say acts as a barrier to domestic investment. 

We have also heard a lot about the so-called lock-out effect of 

high corporate tax rate, where U.S. multinational companies don’t 

bring their earnings home to the United States because of the repatriations tax. At the same time, our current system includes loopholes which allow companies to shift income from the United 

States to low-tax or no-tax jurisdictions. 

Therefore, I certainly commend Chairman Camp for releasing his 

international tax reform proposal. The Chinese philosopher noted 

that the journey of 1,000 steps begins with the first step. And I 

think Chairman Camp’s proposal is a good first step, as I did with 

Mr. Rangel’s proposal some years ago, as well. When that proposal 

was offered, I was always amazed at the hysteria that once again 

prevented us from having a conversation about what an international tax system ought to look like for the United States. 

I think Chairman Camp should also be applauded for providing 

us what he envisions our new international tax regime to look like. 

I am also pleased that the proposal included approaches for preventing erosion of U.S. corporate tax base, the U.S. tax base, which 

is a critical concern as we move toward perhaps international tax 

reform. 

That being said, I have an awful lot of questions about the chairman’s proposal. For example, what impact would the proposal have 

on purely domestic companies and small businesses? Would the 

proposal encourage investment and job creation here, in the United 

States? Although I think lowering our corporate tax rate on a revenue-neutral basis is a worthy goal, can we lower the corporate 

rate to 25 percent without eliminating important tax incentives 


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that benefit job creation and investment in the United States like 

the R&D tax credit? 

When it comes to lowering the top corporate rate to 25 percent 

on a revenue-neutral basis, Chairman Camp has given us a map 

without any street signs. So I am glad we are having this hearing 

today to examine the chairman’s proposal, and I thank you and 

thank the witnesses for bringing the hearing forward. Thanks, Mr. 

Chairman. 

Chairman TIBERI. Thank you, Mr. Neal. Before I introduce the 

witnesses, I ask unanimous consent that all Members’ written 

statements be included in the record. 

[No response.] 

Chairman TIBERI. Without objection, we now turn to our witnesses and our panel, and welcome all of you today. I will introduce 

you all, and then we will start from left to right. 

Mr. John Harrington is a partner with SNR Denton. Mr. Tim 

Tuerff is a partner with Deloitte Tax LLP. Mr. David Noren is a 

partner with McDermott, Will & Emery. Mr. Paul Oosterhuis is a 

partner with Skadden, Arps, Slate, Meagher & Flom LLP, and Dr. 

Martin Sullivan is a contributing editor with Tax Analysts. 

Thank you, gentlemen. Mr. Harrington, you are recognized for 

five minutes. 

STATEMENT OF JOHN L. HARRINGTON, PARTNER, SNR 

DENTON, WASHINGTON, D.C. 

Mr. HARRINGTON. Thank you, Chairman Tiberi. My name is 

John Harrington, and I am a partner at the law firm of SNR Denton. I appreciate the opportunity to appear before the Subcommittee on Select Revenue Measures to discuss the Ways and 

Means discussion draft released on October 26, 2011. The views expressed in this testimony are solely my own. 

Before diving into the specifics of the discussion draft, I want to 

commend Chairman Camp and you all regarding the discussion 

draft. The materials released with the discussion draft included 

both statutory language and explanations of what is and is not in 

the discussion draft, facilitating understanding and scrutiny of the 

proposed participation exemption system. 

This is not the standard way tax legislation is unveiled, but I believe that this is the right way to approach fundamental tax reform. We are often quick to complain about the legislative process, 

and so we should let you know when you get it right. 

My written testimony goes into detail regarding various aspects 

of the discussion draft. In my oral testimony, I will highlight some 

of the major items. 

Corporate rate reduction. The discussion draft would reduce the 

top corporate tax rate to 25 percent. I believe that a reduction in 

the corporate tax rate is a good idea for multiple reasons. I note, 

however, that reducing the corporate rate to 25 percent in a revenue-neutral manner would require a significant increase in the 

corporate tax base. Whether the prize is worth the cost can only 

be determined as the base-broadening proposals are identified and 

debated. 

Regarding the basics of the participation exemption system, I believe that the discussion draft’s participation exemption system is 


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a fundamentally sound starting point. I think there are significant 

advantages to using as a base the participation exemption system 

adopted by many other countries, rather than creating a new territorial system out of whole cloth. By using a frequently adopted system as a framework, it allows you to avoid the practical problems 

that would arise with an idealized but untested system. 

The discussion draft includes certain rough justice rules. Although I may have suggestions to modify specific ones, I believe 

that, generally, rough justice rules are necessary. And much of the 

simplification advantages of the discussion draft are derived from 

such rough justice rules. For example, I believe that the discussion 

draft’s choice to allow a partial 95 percent exemption and narrow 

expense allocation and disallowance rules is a better approach than 

a full exemption and more expansive expense allocation rules. 

Treatment of branches of CFCs. Under the participation exemption system, foreign branches of U.S. corporations would be treated 

as controlled foreign corporations, or CFCs. I believe that this 

deemed CFC rule raises several practical concerns. In particular, I 

believe that the proposed threshold for deemed CFC status, the 

U.S. effectively connected income, or ECI, rule is both too transitory and too vague to serve as the necessary threshold. Not only 

would the deemed CFC rules require a domestic corporation to determine whether the ECI threshold has been crossed, it would require a domestic corporation to determine exactly when the threshold has been crossed. 

Under the discussion draft, crossing the ECI threshold would result in the formation of a CFC, and the cessation of foreign activities would result in the demise of the CFC. In light of the technical 

problems of the deemed CFC rules, I strongly encourage you to consider allowing branches to be exempt without treating them as 

CFCs. 

Treatment of 10/50 companies. The discussion draft provides an 

all-or-nothing election to treat 10/50 companies as CFCs. Domestic 

corporations will have to make the election if they want to keep the 

indirect foreign tax credit. Because electing 10/50 companies would 

become subject to subpart F, however, this election can raise serious questions about the shareholder’s ability to get the information 

needed to comply with the myriad U.S. reporting rules. If you retain this rule, you will either have to simplify the information 

needed for subpart F, or have to deal with significant unintentional 

non-compliance. 

Deemed repatriation. Any switch to a participation exemption 

system necessarily requires some rule to address old untaxed earnings of CFCs. The breadth and mandatory nature of the deemed repatriation rule raises several fairness issues, particularly with respect to individuals who would be subject to the deemed repatriation, even though they are not eligible for the participation exemption. If there are concerns about individuals, I suggest a more 

targeted rule. 

Subpart F. A participation exemption system, where the question is whether to tax now or never, is fundamentally different 

than our foreign tax credit and deferral system, where the question 

is whether to tax now or later. Rules that were designed with deferral in mind have to be modified to reflect a different paradigm. 


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This is true not only for subpart F, but cross-border reorganization 

rules, transfer pricing, and other such rules. 

In closing, I urge you, when you take up individual tax reform, 

to simplify and reform the international tax rules for individuals, 

as well. Many of the rules were designed with large businesses in 

mind, and they can be quite onerous on individuals and small businesses. 

Thank you for the opportunity to present these views on the discussion draft. I would be happy to answer any questions that you 

may have. 

[The prepared statement of Mr. Harrington follows:] 


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Chairman TIBERI. Thank you, Mr. Harrington. You got a lot of 

information in that 5 minutes with about 10 seconds to spare. 

Thank you so much. 

Your work is cut out for you, Mr. Tuerff. You are recognized for 

five minutes. 


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STATEMENT OF TIM TUERFF, PARTNER, DELOITTE TAX LLP, 

WASHINGTON, D.C. 

Mr. TUERFF. Mr. Chairman, Ranking Member Neal, and Members of the Subcommittee, thank you for the opportunity to share 

my views on the discussion draft for establishing a territorial system for taxing foreign income. I am a tax partner with Deloitte Tax 

LLP, with over 27 years of experience as a tax attorney and CPA. 

I appear today on my own behalf, not on behalf of Deloitte Tax or 

a client of Deloitte. I am honored to be present and to participate 

in this hearing. 

U.S. corporations are taxed on their worldwide income, and are 

allowed a credit for foreign income taxes. This system is different 

from the territorial tax system used by almost all other OECD 

countries, which exempt foreign income from domestic corporate 

tax. 

Most recently, Japan and the United Kingdom adopted territorial 

systems of taxation. The use of territoriality by our competitors, 

along with the higher U.S. corporate tax rate has given serious concern about U.S. competitiveness. In my oral testimony today, I 

would like to discuss a proposed deemed dividend deduction, and 

the expansion of subpart F. 

An exemption system is a more competitive alternative to the 

current U.S. tax regime. The high U.S. corporate tax rate results 

in an increased tax charge on repatriation of earnings from foreign 

subsidiaries. This additional charge causes what is often referred 

to as a lockout of foreign earnings, preventing them from being returned to the United States. The proposed 95 percent dividends received deduction would reduce the U.S. tax charge on remitted 

earnings to 1.25 percent, thereby allowing for the movement of capital back to the United States for reinvestment in domestic operations. 

Furthermore, an exemption system would simplify U.S. tax law 

by significantly reducing the importance of the foreign tax credit. 

Under the discussion draft, the foreign tax credit would be primarily relevant to subpart F income and withholding taxes on interest and royalties. Only one foreign tax credit limitation would be 

needed, and only directly allocable expenses would reduce that limitation. 

The proposal raises the question of whether deductions should be 

allowed for expenses attributable to exempt foreign income. The 

discussion draft follows the position adopted in a number of countries which reduce the amount of the exemption, typically to 95 

percent, as a reasonable proxy for disallowing expenses incurred in 

the domestic country attributable to exempt foreign income. 

The deductibility of expenses is a factor in retaining and expanding corporate headquarters functions in the United States. By comparison, United Kingdom adopted a 100 percent exemption for active foreign income, and did not place any restrictions on deductions. This change was adopted to encourage performance of corporate activities in the United Kingdom. 

Moving on to subpart F income, the discussion draft includes 

three options for significantly expanding the existing subpart F 

rules. The proposed options A and C require CFCs to bifurcate 

their sales and services income between intangible related returns 


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and non-intangible related returns. I know of no other country that 

does this. The bifurcation of intangible income requires taxpayers 

to unscramble the economic egg by identifying the amount of revenue and expenses attributable to intangible property, compared 

with other functions of the CFC. 

Requiring segregation of return from intellectual property will 

result in significant controversy during the examination process, as 

taxpayers and the IRS attempt to subdivide returns on transactions. Such a theoretical subdivision of a single transaction is 

considerably more complex than adjusting a transfer price for an 

actual transaction. 

Historically, our subpart F rules have focused on whether income 

was derived from an active conduct of a trade or business. If any 

of these options were enacted, it would represent the first time that 

subpart F rules would look to foreign tax rates for purposes of defining when a CFC’s earnings should be currently taxed in the 

United States. 

Option A, in addition, has the novel feature of focusing on the 

CFC’s rate of return on expenses. By triggering current taxation 

when the return exceeds 150 percent, option A encourages taxpayers to push deductible development and marketing costs into 

the CFC, which is inconsistent with the policy objective of the subpart F provisions. 

Under current law, the CFC must pay for the right to use its 

U.S. parent’s intellectual property outside the United States. These 

proposals would treat income from active business operations as 

subpart F income, solely on the basis of intangible property that 

was acquired in arms-length transactions. This treatment is inconsistent with the arms-length standard, the cornerstone of international taxation for members of the OECD. 

In conclusion, I hope my comments on these proposals are constructive, and I look forward to addressing your questions. Thank 

you. 

[The prepared statement of Mr. Tuerff follows:] 


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Chairman TIBERI. Thank you, sir. 

Mr. Noren, you are recognized for five minutes. 


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STATEMENT OF DAVID G. NOREN, PARTNER, MCDERMOTT, 

WILL & EMERY, WASHINGTON, D.C. 

Mr. NOREN. Chairman Tiberi, Ranking Member Neal, and distinguished Members of the Subcommittee, thank you for the opportunity to testify today regarding the Ways and Means Committee 

discussion draft on international tax reform. My name is David 

Noren, and I am a partner at McDermott, Will & Emery LLP, 

where I focus on international tax planning. The views I am expressing here today are my own, and do not necessarily represent 

the views of McDermott or any of its clients. 

I would like to start by commending the committee leadership 

and staff for producing such a detailed and thoughtful proposal in 

an important area of the tax law. My testimony today focuses on 

the discussion draft’s three alternative subpart F proposals addressing concerns about the potential erosion of the U.S. tax base 

through the shifting of income to low-tax jurisdictions. 

My view is that adopting a territorial system is unlikely to place 

significant additional pressure on the transfer pricing and subpart 

F regimes, and that questions relating to the proper scope of the 

transfer pricing and subpart F rules are largely independent of 

whether a deferral or a dividend exemption approach is pursued. 

Thus, the adoption of territoriality, in and of itself, does not create 

any new imperative to tighten these rules. 

The discussion draft’s proposed reduction of the top corporate income tax rate to 25 percent actually may have more bearing on the 

proper approach to transfer pricing and subpart F than does dividend exemption itself. A case could be made for taking a more restrictive approach to transfer pricing and subpart F as the corporate rate is reduced to a level more in line with the rates applicable in other OECD countries, although the strength of such a case 

would, of course, depend on the nature and scope of the restrictions 

in question. 

The discussion draft’s three alternative subpart F proposals reflect three quite different ways of further limiting the ability of taxpayers to shift income to low-tax jurisdictions and, ultimately, 

three different theories of what behavior is thought to be objectionable. 

Is it the earning of profits from IP by a foreign subsidiary? If so, 

does it matter whether the IP was developed entirely within the 

U.S., entirely outside the U.S., or partly within and partly outside 

the U.S.? 

Are low foreign tax rates a concern in and of themselves, or only 

when paired with other factors, such as IP return, or a lack of certain kinds of business activities in the relevant jurisdictions? 

To what extent does it matter whether a foreign subsidiary is 

earning income from selling into its home country market, foreign 

markets in general, or the U.S. market? 

How are concerns about potential income-shifting to be balanced 

against other economic policy concerns such as U.S. employment 

and innovation leadership? 

Each of the three alternative proposals provides different answers to these questions. Option A, which is substantially similar 

to the Obama Administration’s excess returns proposal, reflects a 

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sidiary. Option A would tax currently a foreign subsidiary’s excess 

income that is subject to a low foreign tax rate if the income has 

any connection at all to IP transferred from a related U.S. person. 

A narrow exception is provided for cases in which the CFC sells 

into its home country market. 

The most fundamental concern about the excess returns proposal 

is that, by gearing taxation to where IP originates, it might encourage the migration of R&D activity from the U.S. This option thus 

entails significant tension between the goal of restricting income 

shifting and other economic policy goals. 

Option B provides that a foreign subsidiary’s income that is subject to a low foreign effective tax rate is subpart F income, subject 

to a narrow home country exception. Under option B, unless a foreign subsidiary is essentially selling into its own home country 

market, an effective tax rate of 10 percent or less will lead to the 

treatment of the subsidiary’s income as subpart F income, regardless of the other facts and circumstances surrounding the subsidiary’s earning of the income. 

Thus, even if the subsidiary makes very significant contributions 

to the earning of the income, and no U.S. affiliate provides IP or 

makes any other contribution, subpart F would apply. 

Both option A and option B might be improved, in my view, by 

providing a somewhat broader home country exception that would 

accommodate structures with a significant business presence in the 

country of organization, even if the foreign subsidiary is selling into 

other markets. Low foreign tax rates alone, or low foreign tax rates 

in the presence of some relevant IP originating in the United 

States, should not suffice to trigger subpart F. 

Option C is a very inventive proposal that essentially boils down 

to current basis taxation of income attributable to IP, with a preferential rate being applied for IP income relating to serving foreign 

markets, and a normal rate being applied for IP income relating to 

serving the U.S. market. A key issue under option C will be how 

to attribute income to IP, which could create a need for valuation 

and transfer pricing type analyses of a kind not required under 

present law. 

In sum, I think all three options have some merit, and might 

usefully be developed further, but all three raise significant issues. 

Under any approach to tightening the subpart F rules, I would 

urge that efforts be made to accommodate structures with substantial functionality in the relevant locations in order to avoid interfering with common business models. 

I thank you again for the opportunity to present my views on 

this important subject, and I again commend committee leadership 

and staff for advancing the debate in this area. I would be pleased 

to answer any questions you may have at this time or in the future. 

[The statement of Mr. Noren follows:] 


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Chairman TIBERI. Thank you. 

Mr. Oosterhuis, you are recognized for five minutes. 


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STATEMENT OF PAUL W. OOSTERHUIS, PARTNER, SKADDEN, 

ARPS, SLATE, MEAGHER & FLOM LLP & AFFILIATES, WASHINGTON, D.C. 

Mr. OOSTERHUIS. I too appreciate the opportunity to speak to 

you today here on this important bill. I think when international 

tax reform is finally enacted—and hopefully that is sooner, rather 

than later—we will see the introduction of this bill as one of the 

key milestones to move in that direction. It is a very important 

event. 

By eliminating our current system of taxing foreign income but 

with deferral, and replacing it with a mixture of exempting a large 

portion of foreign business income, and beginning the discussion of 

how much of that income should be currently taxed, it seems to me 

the bill provides a framework for resolving the important issues in 

international tax reform that members of both parties can engage 

in, and that, indeed, those of us who have thought about a territorial system for a long time can embrace. 

Ending the lock-out effect, as Mr. Neal mentioned in his remarks, and limiting the role of the foreign tax credit, which is a 

terribly complicated and flawed mechanism as it has evolved in our 

law over the last 30 years, as some of the witnesses have mentioned, achieves very important goals in international tax reform. 

Mr. Noren spoke at some length in his five minutes on the various subpart F options that are expanding the potential business 

income that is subject to current taxation. I would like to focus in 

my five minutes on the expense disallowance issues that are raised 

by the bill, and comment on their treatment in the bill. 

Today, as other witnesses have mentioned, because we have a 

system that, when it taxes foreign earnings, it taxes them worldwide with a foreign tax credit, there is a lot of pressure on the 

issue of what is foreign income against which you can take the 

credit, and what expenses are allocated to that income. We have 

a very broad definition of foreign-source income that is eligible for 

the credit and of expenses allocable to that income. 

When you move to a territorial system, as this bill does, the definition of income that is eligible for exemption is much more narrow, as it should be. Income like royalties that U.S. companies are 

earning from abroad, interest that U.S. companies are earning 

from abroad, are not eligible for the exemption. That is appropriate, because they are deducted in a foreign jurisdiction, so if 

they were eligible for an exemption they wouldn’t be taxed anywhere in the world. 

But they are foreign-source income under today’s rules. So, once 

you dramatically change, as this bill does, the amount of income 

that is treated as foreign and therefore eligible for the exemption, 

from what we have today, you do need to rethink what expenses 

are treated as being attributable to that income, and therefore, 

under today’s rules, they are allocated to foreign-source income in 

determining how much credits you get. 

In an exemption system any allocated expenses would be disallowed. And disallowing major expenses for U.S. multinationals is 

obviously a very important issue, because it can affect them competitively, compared to foreign companies, as well as can result in 


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tax policy that just doesn’t make sense, in terms of the matching 

of income and expense. 

There are three expenses that are normally put in this category, 

and are allocated under present law: R&D expenses, G&A expenses, and interest expense. Those are the three kinds of indirect 

expenses that are at issue. 

The bill rightly does not disallow any deduction for R&D expenses. And that is because, as I said before, we are now taxing 

royalty income, and not allowing a foreign tax credit, by and large, 

against it. And in that system, it is entirely appropriate to allow 

a full deduction for R&D expense, because it is the royalties that 

are the income offset for the expense, and that is being fully taxed. 

So, just as a tax accounting matter, that makes sense. 

The second area of expense, which is G&A, the bill does not disallow a deduction for that expense, either. And I think that is entirely appropriate because, to the extent U.S. multinationals can 

charge out that expense to their foreign affiliates, it should be deductible. And to the extent it can’t be charged out to foreign countries, then it is appropriately, in my mind, attributed to the U.S. 

income that is taxed, and not attributed to foreign income. Otherwise, the expense would not be deductible anywhere in the world. 

Finally, with respect to interest expense, the bill does propose a 

thin capitalization mechanism that, in some circumstances, could 

disallow interest expense. In my own view, that is an appropriate 

approach because it says if a U.S. company has a very large 

amount of interest expense it should think about whether some of 

that expense shouldn’t be pushed down to its foreign affiliates, and 

not just deducted in the United States. 

I think the bill needs some refinement in that respect, but it is 

an important movement in the right direction, and I applaud the 

chairman for introducing it. 

[The prepared statement of Mr. Oosterhuis follows:] 


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Chairman TIBERI. Thank you. 

Mr. Sullivan is recognized for five minutes. 


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STATEMENT OF MARTIN A. SULLIVAN, CONTRIBUTING 

EDITOR, TAX ANALYSTS, ALEXANDRIA, VIRGINIA 

Mr. SULLIVAN. Thank you, Mr. Chairman, Ranking Member 

Neal, and Members of the Committee. Mr. Chairman, there is no 

doubt about it. U.S. multinationals play an invaluable role in the 

American economy. They are export-intensive, they provide millions of high-paying jobs, they do most of the nation’s research and 

development. It is certainly not in America’s interest to let its multinationals be at a competitive disadvantage. 

But we must not forget that multinational corporations are only 

part of the American economy. And multinational competitiveness 

is not an end, in and of itself. A far more important objective is to 

promote the overall competitiveness of the economy. Too often in 

Washington, the term ‘‘competitiveness’’ is equated with competitiveness of multinationals, and this is a serious mistake. 

Our goal is job creation through tax reform. We cannot neglect 

small businesses, we cannot neglect large and mid-sized businesses 

that do not have foreign operations, but nevertheless do compete 

internationally with their exports on foreign markets and with imports into the United States. And finally, we also want to encourage job-creating foreign companies to locate in the U.S. 

Tax policies that only promote the interests of multinationals are 

a double whammy to the rest of the economy for two reasons. First, 

they create a tax-induced tilt to the playing field that shifts resources away from domestic business. This reduces the productivity 

of the overall economy. And second, now that we have extremely 

tight budgets that require tax reform to be revenue-neutral, or perhaps even revenue raising, any tax cuts for domestic operations of 

a multinational—any tax cuts for foreign operations of multinationals are likely to result in tax increases for domestic business. 

U.S. tax rules give multinationals a large incentive to shift production offshore. This incentive is growing, and it is much larger 

than most folks realize. That is because we are not just talking 

about the difference between 35 percent in the U.S. and 12.5 percent in Ireland. The ease with which a multinational can shift profits turbo-charges the incentive of that rate differential. A toehold 

of real investment allows a truckload of profit to follow. The net effect is that the marginal effective rate on foreign investment is 

driven below zero. This is corporate welfare, plain and simple. It 

is no different than the Department of Commerce sending subsidy 

checks to companies. And the worst part of it is that the checks 

only go to companies that invest abroad. 

For obvious reasons, it has been customary throughout our history to limit business tax incentives like the investment credit and 

the research credit to domestic business activities. From this perspective, it is mind-boggling that one part of our Tax Code does the 

exact opposite. Our international tax rules provide a tax incentive 

exclusively for foreign investment and exclusively for foreign job 

creation. 

If we do want to promote the competitiveness of our multinationals, there are better ways than expanding foreign tax breaks. 

Our multinationals have a domestic side and a foreign side. We 

should focus tax benefits on the domestic side. In addition, we must 


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not forget that providing tax benefits to domestic suppliers also improves the competitiveness of our multinationals. 

The U.S. has a worldwide system. Most other countries have territorial systems. To those who are unschooled in the realities of 

international tax, these circumstances imply that U.S. multinationals are at a huge disadvantage compared to other multinationals. But this just is not the case. 

One recent study compared the top 100 U.S. multinationals to 

the top 100 multinationals in the EU. Well, who had the higher tax 

rate? The EU multinationals had 31 percent; the U.S. had 24 percent. No competitive disadvantage there. This result is not surprising for those of us who work with the data. We can readily observe that multinationals pay low tax—low rates of foreign tax, and 

we can also readily see that multinationals with foreign operations 

have low overall effective tax rates. 

We also know that territorial systems employed in other countries are not pure territorial systems that exempt all foreign profits. Many countries do not allow exemptions if profits are from lowtax jurisdictions, which brings us to the chairman’s proposal. 

The chairman has been emphatic that the proposal should be 

revenue-neutral. Territorial systems that do not bleed revenue 

losses cannot simply exempt foreign profits from the U.S. tax base. 

In order to protect the domestic tax base, they need backstops and 

anti-abuse rules, which the rest of the panel has discussed. 

The chairman has wisely included several features in the draft 

to prevent base erosion and maintain revenue neutrality. These 

provisions would prevent an exacerbation of the economic problems 

that we now experience under current law. In particular, the socalled base erosion features of the plan are essential. The draft offers three options. 

I urge the committee to pursue the simplest option, option B. It 

would not spark endless disputes about the definitions of intangible 

income, and it would, for once—once and for all, eliminate the spectacle of mailbox holding companies and tax havens booking billions 

of profits. 

The chairman has stressed—in conclusion, the chairman has 

stressed that the rate reduction is an integral part of his plan. As 

someone who has crunched a lot of numbers in and out of government, it is hard to be optimistic about getting to 25 percent. In the 

1980s, Congress started the tax reform process with President Reagan’s blessing to repeal the investment tax credit. Translated into 

today’s terms, that gave tax reformers about $100 billion of annual 

revenue for rate reduction. 

We don’t have anything like that now. On the contrary, repeal 

of the current top three corporate tax expenditures—accelerated depreciation, Section 199, and the research credit—would only get us 

to about 30 percent. Furthermore, because the primary beneficiaries of these expenditures are manufacturers, this type of revenue-neutral reform would be a tax increase on America’s manufacturers. 

So, where is the money going to come from to pay for the 25 percent rate? Value-added tax? Limiting deductions on corporate debt? 

Increasing the tax rate on capital gains? Well, of course, I understand these are non-starters in today’s political environment. But 


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if we are talking about a 25 percent rate, that is where the numbers lead you. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Sullivan follows:] 


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Chairman TIBERI. Thank you, Mr. Sullivan, and thanks for reminding us that not everybody is for corporate tax reform. But I 

do want to point out my opening statement, just so you remember, 

that the chairman is for comprehensive tax reform for all employers and individuals, including pass-through entities and small businesses and medium-sized businesses and domestic-only businesses 

as well. So this is a phase in a long discussion. 


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With that, let me begin by asking you, Mr. Harrington, a question. In your written testimony that you provided today, you say, 

‘‘Proposed corporate tax rate reduction would be good, from international tax policy standpoint.’’ Can you elaborate more on that, 

and how that would be good for the U.S., U.S. economy? 

Mr. HARRINGTON. Sure, Chairman Tiberi. I think part of it 

goes back to David’s comment about the lower rate—by having a 

lower rate, you have less of a distortion, less of an impact of potential incentives. So, to the extent that someone is concerned about, 

for example, activities being moved to another place, I think having 

a tax rate that is more in keeping with the international norm will 

necessarily result in less income-shifting, just from a purely tax 

standpoint. 

And to the extent that the tax rules are trying to reflect the economic activity, I think that result makes sense. There are consequences to being an outlier, in terms of tax rates. 

Chairman TIBERI. Thank you. And if you could, all answer this 

question, starting with Mr. Tuerff. And we will just go down the 

line, ending with Mr. Harrington. 

Most of the countries in the OECD have converted to a territorial 

system with either 100 percent or 95 percent exemption and no expense allocation. So, do you believe that the discussion draft that 

Chairman Camp has presented moves the U.S. international tax 

system within international norms? And, if so, how again is that— 

how is that going to benefit the U.S. economy? Mr. Tuerff. 

Mr. TUERFF. Chairman Tiberi, I believe certain component 

pieces of the discussion draft are within international norms. Most 

of the other countries have a—somewhere in the range of 95 percent to 100 percent exemption system for foreign earnings. The 95 

percent represents a haircut attributable to expenses that might be 

in the home country related to the foreign earnings. So, I think in 

that regard, the fundamental aspect of the dividends received deduction that has been proposed is consistent. 

The subpart F rules, however, are an extension beyond the normal international norms, because they target more active income 

conducted outside a home country that typically is within the exemption, the territoriality exemption that is allowed. So in that respect, I would say it is beyond the typical norms of what we see 

in other countries. 

Chairman TIBERI. Mr. Noren. 

Mr. NOREN. I would agree with Mr. Tuerff. I think the proposal 

would bring our system into greater conformity with international 

norms. I think it would do a real service by substantially eliminating the lock-out effect. It would produce maybe some simplification benefits, subject to how these income shifting or anti-base erosion approaches are worked out. And I would agree that the one 

thing that could push us outside of international norms in an 

unhelpful way would be if we got too aggressive in pursuing base 

erosion, and started interfering with common business models, 

where you actually do have some significant business presence and 

functionality in the jurisdiction that we are talking about. 

Chairman TIBERI. Thank you. 

Mr. OOSTERHUIS. Yes. I agree with the other witnesses. I 

think, in terms of how it helps the economy, just looking at it from 


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my own little viewpoint of the world here as an international tax 

practitioner with a firm that does a lot of transactional work, first 

of all, the lock-out effect has the impact of incentivizing companies 

to use that money that is outside of the United States to spend 

that money outside the United States, whether it is buying other 

companies or building plants. 

And that hurts the U.S. economy. It doesn’t necessarily hurt a 

huge amount today, because companies can borrow cheaply in the 

United States today, and most of these companies are not highly 

levered. But over time it will increasingly be, as some have called 

it, an investment credit for foreign investments. And that has to 

hurt the U.S. economy. 

The second thing that I see is the very inefficient system that we 

have today leads to very high compliance costs, both in terms of 

planning with a deferral system, and particularly planning with a 

foreign tax credit. The ratio of the amounts that multinationals 

spend on people like those of us to my right at the table, at least, 

and others compared to the amount of revenue we raise is very 

high. That is good for a few of us, but it is not good for the economy. 

Chairman TIBERI. Thank you. Mr. Sullivan. 

Mr. SULLIVAN. I think you have to look at the totality of—when 

you are making these international comparisons. It is true that the 

95 percent is within the international norms. But what other countries are doing to pay for these territorial systems is increasing 

taxes elsewhere. They are increasing their capital gains rates, they 

are increasing their value-added tax rates. These are things we are 

not even willing to consider. 

So, as long as we are within the framework of revenue neutrality, I just don’t understand how we can just focus on the benefits and not look at the costs. 

Chairman TIBERI. Mr. Harrington. 

Mr. HARRINGTON. Thank you. Not surprisingly, I agree with 

the other three obvious suspects. As a general matter, I believe the 

participation exemption system approach in the discussion draft is 

within international norms. I think the 95 to 100 percent is pretty 

standard. 

And again, I think for most OECD countries, certainly countries 

with economies like ours, they tend to follow a participation exemption, rather than the broader territorial approach that you might 

see in Latin America and some other countries. 

I also agree that the subpart F rules are more stringent than you 

would typically see. Again, I think part goes back to the perspective issue. I think most countries think of these rules as CFC rules. 

You know, these are anti-deferral rules, from our perspective. 

The one thing I would like to point out about base erosion is that 

I think you are right to be worried about base erosion in the sense 

that you don’t want to lose what you have. But at the same time, 

you also have to be mindful of base erosion in the sense that you 

want to have a broader base because of growth and attraction of 

it bringing business. You can’t be so focused on losing what you 

have that you also lose sight of creating a system that potentially 

makes the U.S. a better place to do business. Because then you are 


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not just protecting your base, you are growing your base. So you 

want to protect it and grow it at the same time. 

Chairman TIBERI. Thank you all. I will now recognize the pride 

of Massachusetts, Mr. Neal. 

Mr. NEAL. Thank you, Chairman Tiberi. Chairman Camp’s proposal would lower the top corporate rate to 25 percent in a revenue-neutral manner. However, the proposal doesn’t include details 

on how we would achieve the goal. As I noted in my opening statement, Chairman Camp has given us a road map without any street 

signs. 

Dr. Sullivan, how can we achieve this 25 percent top rate goal 

in a revenue-neutral manner? Or, more importantly, can we lower 

the rate to 25 percent in a revenue-neutral manner without eliminating many of the tax incentives that benefit job creation and investment here in the United States, like the R&D tax credit? What 

tax expenditures would we have to consider eliminating? 

And I would be happy to hear from the other witnesses after Mr. 

Sullivan on this question, as well. 

Mr. SULLIVAN. Thank you, Mr. Neal. I take my information 

from the 2007 Treasury study, the Bush Administration study, 

which clearly shows and—that in order to get the corporate rate 

down to in the neighborhood of 30 percent, we would have to eliminate accelerated depreciation and expensing, eliminate the research credit, and eliminate the Section 199 deduction. 

Given that those tax expenditures have strong political constituencies and do serve an important purpose, it just seems out of the 

question that a revenue-neutral reform could ever get anywhere 

near the neighborhood of 25 percent, unless—and then we have to 

look at international experience—we look to revenue sources outside of the corporate sector, we start thinking outside of the box. 

And again, I just would mention that what we see going on in 

other countries is increases in value-added taxes to pay for reduced 

corporate taxes. We see increases in personal taxes, particularly at 

the high end on capital gains to pay for reductions in corporate 

taxes. 

Mr. NEAL. Thank you. The other panelists—— 

Mr. OOSTERHUIS. I will add one thing. I think it is a real dilemma. And as Marty says, thinking about a new revenue source 

may be the best way. 

You have this imperative that our tax rate is higher than other 

countries, and lowering it becomes important, competitively, for 

corporations. On the other hand, in this country we don’t want the 

corporate tax rate to get way out of line with the highest individual 

tax rate, because we do not want to go back to what I remember 

in my father’s day, when individual rates were 30 percent higher 

than corporate rates, and everybody did business through their 

own corporations to get the lower rate. 

And so, there is a huge tension there that, to my mind, means 

we need to think about an alternative revenue source, and not 

allow the inefficiencies in the income tax system to continue because of our unwillingness to do that. But that is just my personal 

view. 

Mr. NEAL. Let me follow up on that, because you raised an interesting point, Mr. Oosterhuis. The committee has heard from a 


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number of multinational companies during the course of this year 

in the hearings that we have undertaken to complain that the current U.S. worldwide tax system and high corporate rate effectively 

prevents them from reinvesting foreign earnings in order to create 

jobs, domestically. 

Given your commentary on interest rates, do you think that today’s low current rates on borrowing offer a credible argument? 

Mr. OOSTERHUIS. It depends on the company. But I do think 

the problem is not as big in a low-interest rate environment as it 

is in other environments. 

For example, take the period of time in the fall of 2008 and the 

spring of 2009, when companies couldn’t borrow because short-term 

debt markets dried up. Had that continued for a substantial period 

of time, it could have been a real problem. And I think if interest 

rates go back up to more historical levels, it will be a problem. 

I think as we move through time, foreign earnings build up; I 

mean they have built up from maybe 500 billion 7 years ago to 1.2 

or 1.3 trillion now. As they build up, it gets to be worse of a problem over time. 

Mr. NEAL. One of my priorities here at the committee for a long, 

long period of time has been to tackle the issue of low tax or no 

tax jurisdictions that compete with us. And it is particularly pronounced in the reinsurance industry. So I am pleased that the 

chairman’s discussion draft included approaches for preventing erosion of the U.S. corporate tax base, which is often times critical, as 

we move in the direction of international tax reform. 

But it is unfair, patently, for American corporations, particularly 

those, as you might note, are located in my constituency, or in the 

state of Massachusetts, to have to compete with similar companies 

who claim a residential address in an offshore tax haven. Now we 

can have an argument here about what constitutes a corporate tax 

system, and we can even argue about countries that compete with 

us that have low corporate rates. But at least they have corporate 

rates. It is very different than the structure that some have set up, 

which is for the purpose of avoiding American corporate taxes. 

And I know my time has run out, but if you would—if anybody 

would like to give a quick answer—Mr. Chairman. 

Chairman TIBERI. Anyone want to give a quick answer? 

Mr. OOSTERHUIS. In a world economy, it is very difficult to design a system that doesn’t have some optionality for foreign companies on whether they have income in the United States or outside 

the United States, whether it is through reinsurance or through interest or royalties, or whatever it is. It is just very hard to have 

a system that doesn’t allow foreign companies to have some 

optionality. And that just means we need to keep our rates reasonably low. 

Mr. NEAL. But the argument there is not over the idea of the 

corporation being a foreign corporation. The idea is that it really 

is an American company with a foreign address. 

Mr. OOSTERHUIS. Fair enough. And that may lead to consideration of some of the rules determining residency. 

Chairman TIBERI. All right—— 

Mr. NEAL. Thank you. 


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Chairman TIBERI [continuing]. The gentleman’s time has expired. Thank you, Mr. Neal. Mr. Paulsen is recognized for five minutes. 

Mr. PAULSEN. Thank you, Mr. Chairman. I don’t think many 

of you touched on the component of the treatment of deferred foreign income upon the transition of the participation in this exemption system of taxation, so let me ask this. 

The discussion draft talks about deeming all deferred income 

that is earned prior to the effective date to be repatriated, but with 

an 85 percent exemption. And that is payable over eight years. Do 

you think that this treatment is appropriate? And what issues do 

you see, as a part of that deeming? I mean, is this the right approach? 

And you can just start off, Mr. Harrington, if you want to comment, and all the panelists. 

Mr. HARRINGTON. Sure. Thank you, Mr. Paulsen. I do touch on 

this a little bit in my testimony on page eight. But I think the answer on this is really one of process of elimination. There really is 

no right answer here. 

You could effectively say the participation exemption is going to 

apply going forward, so all the old earnings can come back exempt. 

I mean that has revenue issues, that has sort of, you know, effects 

in terms of how people would respond. 

You could just simply say well, we are going to make you keep 

separate accounts. And I think Paul touches on this to a certain extent, the details on this, as well. 

But you could just say let’s have a two-track system for a long 

period of time. That is not really a good answer, either. 

Then again, sort of by process of elimination, I think you wind 

up where the discussion draft is, and that is you have to have some 

sort of forced repatriation—it is either voluntary or it is forced. Obviously, I think people would prefer a voluntary repatriation, because there will be sympathetic instances in which someone doesn’t 

have the cash to bring things back. And I do worry about that, particularly with respect to individuals. I think individuals are another sort of issue. 

But, I mean, there are fairness issues about telling people to, you 

know—that you have to bring this back, particularly people that 

don’t have the cash to do that. So I worry about it in that sort of 

sense. But again, I think at the end of the day it is choosing your 

options. 

In terms of the time period, what percentage comes back, I think 

none of those are tax policy issues. Those are all somewhat arbitrary. Those are dealing with kind of what do you think is the fairness or unfairness of the issue. I think if it is more voluntary, you 

might make it less favorable. If it is compulsory, you have to make 

it more favorable. I think that is the tension. 

Mr. PAULSEN. Mr. Tuerff. 

Mr. TUERFF. I would agree with Mr. Harrington’s comments in 

that if you have a system where you have old earnings and to try 

and run a two-track system with respect to the old earnings and 

retain the old system and have a new exemption system on a goforward basis is far too complex, and I would not recommend that. 


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The difficulty then determines as to whether or not you wish to 

exempt old earnings. In the territorial systems adopted by Japan 

and the UK they exempted old earnings. Or, do you wish to go to 

a system whereby either elective or mandatory recognition of income of those earnings—but it needs to be done in a way that will 

promote and remove the lock-out with respect to those earnings, 

because we want the cash to be able to come back to the United 

States at a low cost, where it can be reinvested in the U.S. economy. 

Mr. PAULSEN. Mr. Noren. 

Mr. NOREN. Yes, I would agree with what my fellow witnesses 

have said. And in particular, I think Mr. Harrington put it just 

right, that it is sort of a process of elimination. You don’t want the 

complexity of maintaining separate pre-effective date earnings accounts. While at the same time some would say it might be a windfall to just start applying exemption to pre-effective date earnings, 

wholesale. And so, I think what the discussion draft has done on 

the transition side is just a really great compromise of the various 

revenue and complexity considerations. 

I would add one point. On the eight-year period, I think that is 

a particularly important feature, because I think what gets lost 

often in tax policy discussions is the distinction between earnings 

and cash. So we are talking about repatriation of earnings, and yet 

to pay tax you are going to need cash. 

And so, some companies might say, ‘‘How do I repatriate a building?’’ To the extent that my foreign earnings were reinvested in a 

building, that is a little tricky to repatriate. And so I think eight 

years gives you some time to kind of earn out of that and deal with 

the liquidity issues that might be raised by this big deemed repatriation. 

Mr. PAULSEN. Mr. Oosterhuis, I know time is running down, 

but—— 

Mr. OOSTERHUIS. Yes. I think we do need to deal with revenues in all of this, and from a revenue perspective, you need to do 

something significant. Taxing the prior earnings, or at least a portion of the prior earnings, is a good way to go. 

As others have talked about, you might come up with a somewhat narrower definition of prior earnings, including earnings that 

are reflected in relatively liquid assets, because that is, in a sense, 

more fair among companies, depending on what their earnings 

have been used to fund. 

Mr. PAULSEN. Just real quick, I know time is out. 

Mr. SULLIVAN. Briefly, it is the 85 percent in the 8 years. They 

are arbitrary numbers, they are just about revenue. 

I just would mention that if this is being used to preserve revenue neutrality in the 10-year window, it will not preserve revenue 

neutrality in the later years. 

Chairman TIBERI. Thank you, Mr. Paulsen. Mr. Larson is recognized for five minutes. 

Mr. LARSON. I thank Chairman Tiberi and Ranking Member 

Neal for holding today’s hearing on Chairman Camp’s international 

tax reform proposal, and I would like to thank all of our witnesses 

for their testimony. Tax reform provides us with a number of 

exiting opportunities, not the least of which is the potential to creVerDate Mar 15 2010 04:04 Oct 23, 2012 Jkt 076317 PO 00000 Frm 00087 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\76317.XXX GPO1 PsN: 76317

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ate jobs and strengthen America’s international competitiveness. 

That is why I think we all share the happiness to see Chairman 

Camp come forward with a thoughtful proposal that serves as a 

starting point on tax reform. 

Now, not all of us will agree on every part of anyone’s proposal 

when it comes to comprehensive reform. I still believe that we will 

need to examine innovative methods of taxation to ensure our Tax 

Code is fair and efficient for all. 

I do have a couple of questions that I would like to ask, and I 

would like to start with Mr. Sullivan. And they are broad in their 

context. But Mr. Sullivan, I would be interested in getting your 

thoughts on how the corporate rate reduction assumed by Chairman Camps [sic] might impact research and development efforts in 

the United States. I have long supported simplifying and permanently extending R&D credit, and I am concerned that if we are 

forced to eliminate R&D credit to get to the 25 percent rate, we 

may reduce the amount of research and development that occurs 

in the U.S. Your thoughts on that? 

Mr. SULLIVAN. Thank you. If we did eliminate the research and 

development credit, that would certainly be to the detriment of research in the United States. It would raise—that accounts for 

about one percentage point of the rate reduction. So, if we don’t repeal the research credit, that allows—that means we have to have 

a corporate statutory rate, which is one percentage point higher 

than it otherwise would be. So, it certainly would be detrimental 

to U.S. research. 

Mr. LARSON. The other panelists agree? 

Mr. TUERFF. I think it will have a—some effect. But I would 

say it is only incremental effect, because research and development 

activities, in many cases, are centered throughout the world. The 

issue is what is the impact on incremental research. 

I think the proposal would authorize the ability to remit funds 

back to further develop and increase research activities in the 

United States, where today a significant amount of research is currently conducted. By reducing the cost of remitting funds back to 

the United States, it encourages the expansion of those existing activities of research and development. 

Obviously, that needs to be balanced against the fact that if a research credit is lost, that there would—may be a net impact. But 

I think the proposal promotes the return of funds to the United 

States for additional research here. 

Mr. LARSON. In striving for revenue neutrality, as Mr. Camp’s 

proposal seeks to do—and we commend him for that—it does seem 

to create gaps. And a number of you have alluded in your testimony about what is happening globally. 

With respect to global transactions, what do you make of Europe’s move towards a transaction tax? Would a transaction tax be 

conceivable in this country? Should a nation that consumes more 

than anyone else in the world look at this as striving towards getting to revenue neutrality and filling up some of the gaps that 

would otherwise be created? 

Mr. OOSTERHUIS. Were you referring to a financial transaction 

tax, or a broader, value-added tax? 

Mr. LARSON. A broad tax, in general, but we could start—— 


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Mr. OOSTERHUIS. Right. 

Mr. LARSON [continuing]. If you want, with a—just in a financial tax area—— 

Mr. OOSTERHUIS. Yes. 

Mr. LARSON [continuing]. On taxes on over-the-counter drugs. 

There are transaction taxes that are placed already on both the 

commodities and on the SEC. 

Mr. OOSTERHUIS. Right. 

Mr. LARSON. But not on the over-the-counter, or the ‘‘dark market,’’ as it is referred to. 

Mr. OOSTERHUIS. Yes. I really don’t have any expertise on the 

questions raised by a direct tax like that on a specific transactions, 

what does it do to the market, how mobile are the transactions to 

go to other markets, and how does it build inefficiencies in these 

markets. Marty may be better able to comment on that than I 

would be. 

Mr. SULLIVAN. There is a lot of interest in financial transactions tax. At first blush it looks very attractive, because it is a 

very low rate and a very broad base. But I think it is really—operationally, would be impossible to prevent administrative problems 

and competitiveness problems. There are a lot of better ways of 

taxing financial institutions and the markets and regulating the 

markets than imposing that type of tax. 

On a broader commodity—broad value-added tax, we economists 

all think it is a great idea, and we should look at it. I don’t think 

you will find 1 economist out of 100 that would disagree with that. 

Mr. LARSON. How would you define the difference between 

transaction taxes in general—not just financial transactions—and 

a value-added tax? 

Chairman TIBERI. The gentleman’s time has expired, but you 

can answer the question. 

Mr. SULLIVAN. They have different administrative mechanisms. 

But economically, their effects are the same. 

Chairman TIBERI. Thank you. Dr. Boustany is recognized for 

five minutes. 

Dr. BOUSTANY. Thank you, Chairman Tiberi, for holding this 

really important hearing. And I want to publicly thank Chairman 

Camp for putting out this discussion draft in a very public way to 

start a real earnest discussion on what we need to do with our Tax 

Code to promote American competitiveness. 

And gentlemen, I want to thank you. Your testimony has been 

very helpful. I read through most of it real carefully. And I want 

to focus some questions on the base erosion options that we have, 

and specifically option C, or the third option, which is the reduced 

rate of taxation for foreign intangible income. And granted, we— 

and this came up in some of the previous discussion and your oral 

comments—we have some key questions about how to attribute income to intangibles, and we have to work through that. 

But if we can do that successfully, would this third option be effective in preventing our base erosion? If we can answer those key 

questions on the attribution of income—— 

Mr. NOREN. Yes, I think it would be effective. I do think that 

the attribution of income would be awfully tricky. And then the 


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question is, does it become too effective, such that it produces an 

excessive tax burden on U.S. companies? 

It is sort of a step in the direction of current basis taxation. And 

certainly at a sufficiently low rate that is workable. But the concern that has been historically expressed about ideas like this is 

that the rate could end up increasing at some later point in time, 

and yet you would be stuck with this current basis taxation model. 

And so what might start out as being a perfectly workable system 

could kind of slip into something more harmful to companies. And 

that would be the main concern. 

Dr. BOUSTANY. Other comments? 

Mr. OOSTERHUIS. The one thing about it that I think is definitely worth a lot of consideration is that it differentiates between 

intangible income that relates to foreign sales and intangible income that relates to sales back to the United States. 

And in terms of the base erosion concerns that many have articulated going forward, I think focusing on that distinction and focusing on ways to implement a differential regime is important. Because if there is base erosion, it has got to likely mostly be with 

respect to activities back in the United States, and not purely foreign transactions. 

Dr. BOUSTANY. And to follow up on that, Mr. Oosterhuis, so 

this approach would address current incentives for R&D to migrate 

offshore? 

Mr. OOSTERHUIS. Yes, it certainly would, particularly to the 

extent that the functions that are moved offshore are ultimately 

leading to transactions back in the United States, as opposed to 

just further exploiting foreign markets. 

Mr. NOREN. Yes, and I might add on that that one difference 

between option C and option A is that option C does not distinguish between the origins of the IP, whereas option A, the excess 

returns proposal, does. And so that might be an additional benefit 

that C would have over A, in that it would provide less of an incentive to do R&D, for example, in one location as opposed to another. 

Dr. BOUSTANY. Okay. And, Mr. Noren, in your testimony about 

option C, you state that a key issue will involve attributing income 

to IP, which would give rise to valuation and transfer pricing type 

analysis that is not required under present law. How would this be 

different? Elaborate further on that for me. 

Mr. NOREN. Sure. And so present law certainly requires plenty 

valuation and transfer pricing analysis. But I think Mr. Tuerff perhaps put it better than I did when he said that this option can 

cause you to have to tease apart or sort of unscramble—— 

Dr. BOUSTANY. The egg—— 

Mr. NOREN [continuing]. The economic omelette, yes, in a way 

that present law doesn’t require. And so that is what I had in 

mind. 

Dr. BOUSTANY. Okay. And Mr. Tuerff, that does add a layer of 

complexity. And from a compliance/enforcement standpoint, could 

you—— 

Mr. TUERFF. Yes, it raises—— 

Dr. BOUSTANY [continuing]. Elaborate? 

Mr. TUERFF. It raises a significant concern, because our current 

transfer pricing rules look to a given transaction, and compare that 


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transaction with third-party transactions, requiring documentation 

up front at the time of filing a return to justify the transfer price. 

This takes it to another level by saying you have a transaction, 

now we are going to start carving off the returns within that transaction to identify intangible versus non-intangible income. So it is 

much more complex. 

Dr. BOUSTANY. Thank you. My time has expired. Thank you, 

Mr. Chairman. 

Chairman TIBERI. Thank you, Dr. Boustany. The subcommittee 

is fortunate to have with us today the former chairman of the full 

committee, and the author of the mother of all tax reform proposals, Chairman Rangel, you are recognized. 

Mr. RANGEL. Thank you so much, Mr. Chairman, and thank 

you so much for calling this hearing. For purposes of my questions, 

I have been asked an hypothetical to advise a New Yorker as to 

where to place his firm. He is a big manufacturer of widgets. So 

I would want you to stop me if I am giving the wrong advice as 

to the positive things that—if he decided to go to this foreign country. 

One, they have a much lower corporate rate. Two, the country is 

prepared either to subsidize or give you the property if you want 

to reinvest there, because you don’t—you can’t send your money 

back home. Three, their market for widgets is actually growing, so 

you don’t have the big problem there. The workforce is more highly 

trained. I mean all this stuff about Americans and high productivity, I didn’t hear anyone argue against the training. I’m sorry I 

didn’t. Climate, language, all of those things, depending on what. 

Then I get a call from the President of the United States, and 

he says, ‘‘Whatever it is to take your client to build in the United 

States, that is going to be done,’’ so I immediately rush to you guys 

and say, ‘‘Please give me a list of things that I can tell my client 

that he has to stay in New York, we need the jobs, we—that has 

to be.’’ 

So immediately, I would say we got to find some way to lower 

the corporate rates, and that is going to be difficult in terms of winners and losers with the exemption. I can’t tell him to train the 

workers. But we can provide tax incentives. What can we do to 

turn around all of the positive things that I have already given to 

fulfill the mandate that we have got to have stamp, ‘‘Made in the 

USA’’? Mr. Sullivan? 

Mr. SULLIVAN. Thank you, Mr. Rangel. I think you are hitting 

the nail on the head here by asking this question. We all want jobs 

in the United States. How can we do that most effectively? 

Certainly lowering the corporate tax rate, that helps us in the 

United States. That helps foreign companies come in to New York, 

it helps New York companies stay in New York. 

We can have tax credits for research and development and for 

jobs. What I—— 

Mr. RANGEL. You mean—I’m sorry. 

Mr. SULLIVAN. Go ahead. 

Mr. RANGEL. You mean retain the credit was have for—— 

Mr. SULLIVAN. Retain the credit and strengthen it. 


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Mr. RANGEL. Well, I didn’t tell you how I was going to reach 

a lower tax. That would be a problem I have to face if you tell me, 

you tell the President—— 

Mr. SULLIVAN. Right. 

Mr. RANGEL [continuing]. If he wants a lower rate he has to 

give up R&D, I got another problem. But assuming everything is 

going to work the way the President wants, which is really hypothetical, but okay. Make certain that we do have an incentive for 

research and development, one way or the other. Okay—— 

Mr. SULLIVAN. And I would suggest strengthening it. But what 

I would not suggest is hoping for—expanding offshore tax incentives in the hope that somehow increasing employment offshore 

will reverberate back to increased employment back in the United 

States. 

Mr. RANGEL. I agree. 

Mr. SULLIVAN. I think it is much better to focus all of our efforts on the domestic side, which will help the foreign side, rather 

than the other way around. 

Mr. RANGEL. I couldn’t agree with you more. But how do you 

just always pass over education? I mean we have a part of our 

workforce locked up in jails, producing nothing at a tremendous 

cost to the taxpayer with the understanding that they will be 

trained to cause more expenditures. And it would seem to me, forgetting the morality of it, that business would say, ‘‘You have got 

to do a hell of a lot better if you got to compete against these people who start off educating their kids.’’ And I am not talking about 

me. I am 81. 

But it seems like the future of the country, if I have got a billion 

people, just educating a fraction of theirs, and I have a large segment of mine living longer, doing less, fighting technology, going to 

jail, being absolutely unemployable, why is business so quiet about 

that? Albeit that it is not a national responsibility, but to me, it 

is national security and economic security. How do you handle that, 

Mr. Sullivan? I am hiring you guys now. 

Chairman TIBERI. Well, the gentleman’s time has expired, but 

the witnesses may answer. 

Mr. SULLIVAN. Thank you. What I would just strongly emphasize is that competitiveness is about everybody, not just large U.S. 

corporations. Of course we want them to prosper and succeed in 

the world. But we need—as we in the joint committee wrote in the 

early 1990s, competitiveness is about education, training, deregulation. All of these factors contribute. And to just focus on multinationals and use the word ‘‘competitiveness’’ in that context I 

think is misplaced. 

Mr. RANGEL. Thank all of you. 

Chairman TIBERI. Anybody else have a comment before we go 

on to our next questioner? 

[No response.] 

Chairman TIBERI. Mr. Marchant from Texas is recognized for 

five minutes. 

Mr. MARCHANT. Thank you, Mr. Chairman. Before we go any 

further, I would kind of like to clear up an earlier discussion, and 

make it clear. I don’t see anywhere in this draft that it conVerDate Mar 15 2010 04:04 Oct 23, 2012 Jkt 076317 PO 00000 Frm 00092 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\76317.XXX GPO1 PsN: 76317

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templates a financial transactions tax. Do any of the panelists see 

any suggestion of that in this draft? 

Mr. HARRINGTON. No. 

Mr. MARCHANT. Because I can tell you back in my district this 

is a—I get lots of cards and letters on the financial transactions 

tax, and I want to make sure that it is clear that this draft does 

not involve that. 

My first question is many commentators and stakeholders urge 

the committee to adopt a territorial system with no expense disallowance. The discussion draft does not disallow expenses. Rather, 

it exempts 95 percent of foreign dividends using the 5 percent as 

a proxy for expenses incurred in the U.S. to create foreign source 

income. Do you agree that this is the best method to address the 

U.S. expenses in a territorial system? And we will just go down the 

line in the panel, please. 

Mr. HARRINGTON. Thank you, Mr. Marchant. the short answer 

is yes, I agree. I think that the amount of expenses that should 

be—well, I mean as a theoretical matter, you should disallow expenses that are related to exempt income. But I think from a practical standpoint, you are talking about a very small amount of expenses, if any, that would fall in that category. 

So, the approach taken by the discussion draft, I think, is appropriate in terms of its narrowness, in terms of expense disallowance. 

In terms of whether it is 95 or 96 or some other number, I think 

to a certain extent that is in part a revenue issue and in part is 

sort of a compromise between resolving disputes between people 

who think there should be more or less. 

What I do think, though, is that you should not have some very 

broad set of expense allocation rules like we have currently that 

you would apply to this type of income. I think, one, it is too broad 

and I think it is complicated. 

Mr. MARCHANT. Thank you. Mr. Tuerff. 

Mr. TUERFF. Yes, Mr. Marchant. I would agree with Mr. Harrington, that I think the approach of taking a small percentage of 

the income and making it taxable is a reasonable approach, as opposed to a very detailed method of allocating specific expenses. And 

it is consistent with international norms. Whether it is 95 percent 

is the right percentage can be debated, but I think that approach 

is much better than the specific allocation approach. 

Mr. MARCHANT. Thank you. 

Mr. NOREN. I would agree that the approach makes a lot of 

sense. It avoids a lot of the complexity that would go with expense 

allocation and disallowance. I would also note that, in addition to 

the five percent so-called haircut on the distribution, there also is 

a set of thin capitalization rules applied, and I would say both the 

haircut, taken together with the thin cap rules, really direct two 

different responses to the concerns that might lead people to say 

that you need to allocate expenses and disallow them. 

So I think the discussion draft really represents a serious effort 

at dealing with that issue. 

Mr. OOSTERHUIS. I take a little bit different approach, although I disagree with—I do agree with the bill. 

I don’t see the five percent haircut—as we have been calling it, 

the 95 percent deduction rather than 100—as being a substitute for 


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what otherwise would have been the proper disallowance of expenses, because I don’t think, with respect to R&D and G&A, as 

I mentioned in my oral statement, there should be any disallowance, no matter what the exemption is. And with respect to interest, the thin capitalization rule provides a framework for dealing 

with the disallowance of interest expense. And so, therefore, you 

don’t need the haircut with respect to that expense, either. 

So it is fine to have the 95 percent rather than 100, if from a 

revenue point of view that is what you need. But I wouldn’t say 

you need it because we otherwise would have expenses that we 

would be disallowing. 

Mr. SULLIVAN. I generally agree with the panel, but I think we 

need to be very careful. Remember, we are exempting foreign income. If we do not properly allocate expense, or have a proxy for 

that allocation, that means we are not only exempting foreign income entirely from tax, we are subsidizing foreign income. So we 

are driving the effective rate of tax below zero. So, we want to be 

careful about that. 

Having said that, it is extremely complicated to get these rules 

to work. And they need to be judged in conjunction with the thin 

capitalization rules. It is how—it is—the whole entire package has 

to be judged, and not just one—this one feature alone. 

Mr. LARSON. Will the gentleman from Texas yield? 

Chairman TIBERI. He has about two seconds. 

Mr. LARSON. It will be less than 10 seconds. Because you mentioned about the no transaction tax anywhere in the draft. Can you 

tell me where in the chairman’s proposal the table is showing his 

proposal to be revenue-neutral? 

I brought it up because I think we have to demonstrate how we 

can get to that 25 percent. 

Mr. MARCHANT. I yield my time back, Mr. Chairman. 

Chairman TIBERI. Thank you, Mr. Marchant. The gentleman 

from Pennsylvania, Mr. Gerlach, is recognized for five minutes. 

Mr. GERLACH. Thank you, Mr. Chairman. Mr. Sullivan, I am 

looking at your October 17th op ed or article to ‘‘Tax Notes.’’ And 

you make a very clear point. In fact, I will quote. ‘‘On rare occasions when Congress gets serious about reform, it gives priority to 

the individual income and corporate taxes. Taxation of small business and pass-through income is neither here nor there.’’ 

And you go on to then talk about some strategies and efforts we 

ought to undertake, as Congress, to deal with small business passthroughs relative to overall tax reform. 

Recognizing that the chairman’s draft focuses on the issue of territorial versus a worldwide system of taxation, I would like to have 

your thought on the issue of comprehensive tax reform, whether it 

should be done comprehensively at one time, so as to avoid or help 

minimize any adverse impacts that would occur within the economy domestically, or whether a phasing of that reform—i.e. doing 

a territorial piece of legislation first, then coming back, doing a— 

say a small business pass-through piece of legislation—and this is 

also for the other panelists—does it really matter, one way or the 

other, how we phase? Or, from a flip side, a more comprehensive 

approach to doing tax reform, relative to what the impacts would 

be, positive or negative, on our economy? 


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Mr. SULLIVAN. Thank you very much for the question, Mr. Gerlach. The—because I live such an exciting lifestyle, I think about 

these things a lot. And I have tried to compartmentalize just a simple topic of corporate tax reform by itself, which—of course it is a 

very complicated topic, but it can’t be compartmentalized. It has 

got to be closely—the revenues have to balance out, and then there 

are the interactions on the rates. 

And then, on the specific issues of small business, you know, it 

is just amazing to me that we have these incredibly complex rules 

for small businesses. They have to choose between sub-S partnerships, sole proprietorships, or even—some of them, many of them, 

millions of them, because sub-chapter C corporations. This is a 

crazy mish-mash. 

We could do a great deal for the competitiveness of small businesses without spending any revenue by just taking this ridiculously complex system and simplifying it. And the reason why I 

said it is not—it is just not getting any attention. Nobody is thinking about this. And I think, you know, part of it is that multinationals have more people and more resources and get more attention on Capitol Hill. 

But the problems that—the complexity issues that small businesses face are, per dollar of sales, are much greater and they deserve more attention. 

Mr. GERLACH. We are having a lot of those discussions within 

our committee. I know Chairman Camp is very much aware of that 

issue, as well. So it is not an issue that we are not thinking about 

and talking about. But I am just curious as to whether, when you 

step out with tax reform on the business side, either corporate or 

pass-through, does it matter if you do it all at one time, or whether 

you do it in a sequencing process, starting with a territorial approach first, and then moving on to other aspects—— 

Mr. SULLIVAN. I will briefly say I think it has to be done all 

together, absolutely. 

Mr. OOSTERHUIS. Yes, I would agree with that because how 

the territorial system is designed depends on what the corporate 

rate is. And then, what the corporate rate is, really, you have to 

start thinking about the impact of that reduction, if it is a reduction in the corporate rate, on incorporated businesses. And so, once 

you start broadening your framework to think about unincorporated businesses, you are really talking about the whole system. 

Mr. NOREN. I would agree that the whole tax reform package 

ought to be pursued at one time, because the different areas do 

interact with each other technically. And as well, the Congress 

should want to keep track of what it is doing to the overall tax mix 

of the country, and how much are we raising from different areas. 

That being said, I would say that it makes a whole lot of sense 

to have released this discussion draft on this particularly complex 

part of tax reform to get the community started looking at it now, 

even if it needs to be ultimately pursued together with a broader 

package. 

Mr. TUERFF. I would also agree if the objective is to reduce the 

cost of repatriation of earnings back to the United States for reinvestment in the U.S. Then the tax rate is going to be critical in 

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junction with addressing a corporate tax rate is an important element that needs to be considered together. 

Mr. GERLACH. Thank you. 

Mr. HARRINGTON. Just briefly, I agree that ideally you do 

want to try to do all the reforms together. I mean it is a lot like 

the pushing down on the tube of toothpaste, it is going to pop up 

somewhere else. 

But at the same time, I think one has to be mindful that each 

of these component parts are very difficult by themselves. And putting them together makes it also hard, as well. So, if it turns out 

that you are unable to do the broader reform, but you have pieces, 

then I think you might have to go that way, just because they 

shouldn’t be held hostage. 

But I think it is difficult to get consensus on particular items 

without knowing how they fit in the bigger picture. 

Mr. GERLACH. Thank you. Thank you, Chairman. 

Chairman TIBERI. Chairman Camp will be pleased with your response on that last question. With that, I will recognize the gentleman from Wisconsin, Mr. Kind. 

Mr. KIND. Thank you, Mr. Chairman. Mr. Chairman, I am 

pleased with that response, because I think it is the right approach 

to comprehensive tax reform. I don’t think we should just be limited to the C side, but also the pass-through, given the fact that 

the majority of businesses operating in this country are passthrough entities to begin with. So, if we are going to do this, I 

think we got to do it together, do it in a way that doesn’t discriminate or set up this disparity between C corporation versus S and 

limited and everyone else. 

But let me—Mr. Sullivan, let me start with you. And I have been 

trying to figure out—and I have been the one kind of thinking 

aloud here on the committee for quite some time—that if the overall goal is to simplify lower rates, try to make us more competitive, 

and the goal is 25 percent, we would have to eliminate all of the 

expenditures on the corporation side in order to achieve that. And 

how you pay for that is going to make a big difference. 

But by eliminating 199, accelerated depreciation R&D, the impact on the manufacturers of this country would be impacted. Do 

you see it that way, too? If you are eliminating that while still lowering rates to a goal of 25 percent? 

Mr. SULLIVAN. That is just the way the numbers come out. 

Manufacturers are research intensive. Manufacturers are capital 

intensive. And obviously, manufacturers benefit from the manufacturing deduction. So we have put into place tax rules with good intentions—and they are good intentions—to help manufacturing. 

And if we lower the rate and get rid of those, we are going to hurt 

the manufacturing sector. 

Mr. KIND. Well, let me ask you this on that same line. There 

is a lot of feedback, 199, very complicated, the compliance and the 

justification thing, and all that. It is too cumbersome. 

So, what is wrong with the simple proposition that if your business operating in the United States, and if you are making something, you are inventing something, creating something, building 

something, growing something, you are going to get a major tax advantage for doing that right here in the United States of America, 


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and get rid of 199 and structure a different provision that rewards 

that type of activity here in this country, creating those type of jobs 

right here? 

Mr. SULLIVAN. I absolutely—Section 199 is needlessly ridiculously complex for the simple thing that it is trying to achieve. It 

would be much better to get rid of it and lower the rate. 

Mr. KIND. Yes. 

Mr. SULLIVAN. And—— 

Mr. KIND. Let me ask everyone on the panel here, and—because, obviously, we are going to be wrestling with the how do we 

pay for this in a deficit-neutral fashion. That is—unless we are 

willing to dip in to the individual side to get down to 25, which will 

not be popular at all, I think we are going to have to be a little 

more creative in thinking out of the box. 

And for the life of me, I don’t understand. With all the zeal to 

go to a territorial system, the fact that virtually every country that 

has it has other supplemental forms of revenue—and shall I dare 

say it, the VAT—and yet all the multinationals are already living 

in the world of VAT, so they are already complying with that, and 

it is not going to be a new burden or a new added complexity in 

their life. 

So if we want to try to lower rates, why aren’t we seriously considering, you know, moving towards a VAT system in order to supplement that lost revenue that we would otherwise see going to 25? 

Mr. SULLIVAN. May I? 

Mr. KIND. Yes, go ahead. 

Mr. SULLIVAN. I think any economist would say we are glad to 

get rid of the corporate tax and replace it with a value-added tax. 

I also think it is important to point out that in the 1980s there 

were lots of Republicans advocating replacing the corporate tax 

with a value-added tax. And for some reason that has gone off the 

radar now. And I think it is—may not be politically attractive, but 

economically it makes a heck of a lot of sense. 

Mr. OOSTERHUIS. You know, when you stand back and look at 

the difficult issues we are talking about, it really does take you in 

that direction. Because inherently in an income tax, an income tax 

taxes where you perform an activity. And given how mobile activities are in a global economy, that means countries have to compete 

for those activities, and tax rates is an element of that competition. 

A value-added tax doesn’t work that way. A value-added tax 

taxes where the person who buys the good is located. And that 

doesn’t move. People aren’t going to move from Wisconsin to Dublin 

to pay a lower value-added tax. And so whether you manufacture 

the good in Japan or in Singapore or in the United States, the tax 

is the same. 

And so, that tax, from an international location of activities perspective, is much more rational than an income tax. And that 

means you have to be careful how much pressure you are putting 

on the income tax, in terms of how much of the revenue that you 

have to raise—you are raising revenue through a tax where that 

inevitable mobility of activities is an important factor. 

Mr. KIND. Mr. Oosterhuis, let me stay with you just for a second. I mean you are familiar with the substance of what this committee works on. Anything that jumps out at you that gives you 


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pause or concern about the proposed draft that the chairman has 

released so far? Any—— 

Mr. OOSTERHUIS. No. I think, as a framework for the discussions of what is the right type of territorial system to have—and 

we really do need to move to a territorial system—— 

Mr. KIND. Well, I would love to follow up with you on sections 

904, 909 in particular—— 

Mr. OOSTERHUIS. Sure. 

Mr. KIND [continuing]. Some of the concerns being raised with 

that. 

Mr. OOSTERHUIS. Happy to do that. 

Chairman TIBERI. The gentleman’s time has expired. With that, 

the gentleman from North Dakota is recognized for five minutes. 

Mr. Berg. 

Mr. BERG. Thank you, Mr. Chairman. I want to thank the panel 

for being here. I apologize, we had some severe flooding issues in 

North Dakota, and I was in a meeting with FEMA, still trying to 

correct some of that. 

The number-one issue we are faced with here is how do we get 

our economy going, how do we create jobs. And so, clearly, one of 

the things that this committee has done has spent a lot of time on 

our international tax law, and is there a way that we can, again, 

create a more fair, simpler, more streamlined system that would 

encourage more capital being reinvested, preferably here in America, which, you know, brings us to territorial system. 

So, at the same time, I am learning that things don’t move very 

quickly here. And, you know, I understand the merits and rationale 

for an overall reform package. I mean, obviously, if we deal with 

corporate, that impacts all the small businesses that aren’t incorporated but operate as a partnership, those that are both in the 

country and out of the country. 

I guess my question for you—and I hope the chairman doesn’t 

hear this—but if we could only—if our focus was simply to try and 

streamline this one component quickly to try and bring more capital back into the United States, is that possible? Mr. Harrington, 

you kind of touched on that in your last answer. 

Or, I mean, would that be an option? How—any advice on—— 

Mr. HARRINGTON. Well, if the chairman isn’t going to hear 

your question, is he going to hear our answers? 

Mr. BERG. No, no. 

Mr. HARRINGTON. Okay. 

Mr. BERG. We will expunge all that. 

Mr. HARRINGTON. Okay. The short answer, I think, is yes. You 

could do this as a discreet piece. I mean I think you could do, you 

know, a participation exemption replacing these sets of rules. You 

could do that. I think you couldn’t do it as well as you could if you 

did it as part of a broader issue, because I think, again, some of 

these issues, how, from a practical standpoint, the rate is going to 

matter. 

Mr. BERG. Yes. 

Mr. HARRINGTON. Like I said, I would look at some of these 

differently, if it is a 25 percent rate—wanting to know how do you 

treat individuals, what is going on with pass-through entities, I 

think those would be significant enough. I think they would—I 


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can’t call them barriers, but they would be significant obstacles to 

doing this alone, but it is possible to do it on its own, I believe. 

Mr. BERG. Well, and certainly the challenge would be if we 

made this change, and then businesses made decisions based on 

the tax policy before we could get the rest of the components 

changed and in place. Therein might lie the bigger challenge. 

Mr. HARRINGTON. And effectively, you are doing part one, and 

then you would have to have a part two that followed up. So you 

would have to know there would be issues. 

Mr. BERG. And we don’t need to go through that, unless anyone 

had any specific things that you would like to address on that. 

I had another question I would like to talk in relation to the base 

erosion and, you know, just really, if we move the territorial system, how do we prevent that from happening. And in the draft 

there are a couple things that deal with the thin capitalization 

rule, as well as other options to prevent this base erosion. 

And I am just wondering. Are there other base erosion rules that 

you believe the committee should consider, in addition to those that 

are in place? I would like to address that to the whole panel. 

Mr. OOSTERHUIS. I will start out. I think there are. I think 

people are just beginning to think about it. We, as a tax community, haven’t done a lot of thinking about reforming subpart F more 

broadly, including dealing with base erosion, and we need to start 

thinking about it. And that is one of the important things that the 

bill does; it sets the table for everybody to give it concentrated 

thought. 

I do think one thing would be helpful for us. The revenue estimators in scoring a territorial system have perceived that there is 

going to be a substantial erosion that occurs under a territorial system that is not occurring today. We need to understand that better, 

because if we are going to talk about base erosion reforms to subpart F, that is the income that ought to be targeted first. 

And I don’t quite, on my own, understand where they see that 

much base erosion coming from, to be honest. But if it is there, 

then we need to understand what it is so we can think about redesigning subpart F to minimize the chances of that income, which 

today is being taxed in the United Stats, being eligible for exemption. 

Mr. NOREN. Yes. In terms of other options, I think, as I laid out 

in some of my written testimony, I think there are modifications 

that you could make to all of the different options, and particularly 

to accommodate structures where you have significant functionality 

in the CFC’s location. 

Another point I would make is that this could be an opportunity 

to really accomplish a comprehensive reform of subpart F. And so, 

rather than just focusing on adding further restrictions, and thus, 

further complexity, you know, if we decide that there is a better 

way to balance concerns over income shifting and other concerns 

about competitiveness and so forth, maybe we could eliminate some 

of the existing categories of subpart F income, and then replace 

them with the better new idea that we come up with. 

The final thought that I had is that you could also reduce the incentive for income shifting somewhat by administering the proposal’s five percent haircut on a current basis, rather than allowing 


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that piece to be deferred. And so that might be another small step 

to take to reduce some of the income-shifting incentives without 

creating a lot of additional complexity. 

Chairman TIBERI. Well, the gentleman’s time has expired, but 

anybody else want to answer the question? 

Mr. TUERFF. I would just agree with the comment that in looking at base erosion I think the focal point should be on the active 

business operations that are conducted offshore, and that those 

should be allowed to be conducted, consistent with other norms 

that are applied in other countries. 

Chairman TIBERI. Anyone else? Well, thank you. Thank you, 

Mr. Berg. 

That concludes today’s hearing. Please be advised that Members 

may submit written questions to the witnesses. The questions and 

the witnesses’ answers will be made part of the record for today’s 

hearing. 

I want to thank the five of you for your participation today. It 

was very, very helpful, very educational. I believe it helps us move 

forward on this debate of comprehensive tax reform, specifically 

with respect to the international tax piece, and will help us as we 

continue to try to move a bill on comprehensive tax reform. 

Thanks so much. The hearing is adjourned. 

[Whereupon, at 11:35 a.m., the subcommittee was adjourned.] 


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MEMBER QUESTIONS FOR THE RECORD 


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