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S. HRG. 114–230 

BUILDING A COMPETITIVE 

U.S. INTERNATIONAL TAX SYSTEM 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

MARCH 17, 2015 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

ORRIN G. HATCH, Utah, Chairman 

CHUCK GRASSLEY, Iowa 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

JOHNNY ISAKSON, Georgia 

ROB PORTMAN, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

DANIEL COATS, Indiana 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

SHERROD BROWN, Ohio 

MICHAEL F. BENNET, Colorado 

ROBERT P. CASEY, Jr., Pennsylvania 

MARK R. WARNER, Virginia 

CHRIS CAMPBELL, Staff Director 

JOSHUA SHEINKMAN, Democratic Staff Director 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman, Committee on 

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

Wyden, Hon. Ron, a U.S. Senator from Oregon .................................................... 3 

WITNESSES 

Olson, Hon. Pamela F., U.S. Deputy Tax Leader and Washington National 

Tax Services Leader, PricewaterhouseCoopers LLP, Washington, DC ........... 5 

Smith, Anthony, vice president of tax and treasurer, Thermo Fisher Scientific, 

Inc., Waltham, MA ............................................................................................... 7 

Altshuler, Rosanne, Ph.D., professor of economics and dean of social and 

behavioral sciences, Rutgers University, New Brunswick, NJ ........................ 8 

Shay, Stephen E., professor of practice, Harvard Law School, Harvard University, Cambridge, MA ............................................................................................ 10 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Altshuler, Rosanne, Ph.D.: 

Testimony .......................................................................................................... 8 

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

Hatch, Hon. Orrin G.: 

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

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

Olson, Hon. Pamela F.: 

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

Prepared statement .......................................................................................... 44 

Portman, Hon. Rob: 

‘‘Tax Inversion Curb Turns Tables on US,’’ by David Crow, James 

Fontanella-Khan, and Megan Murphy, Financial Times, March 15, 

2015 ................................................................................................................ 56 

Shay, Stephen E.: 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 57 

Smith, Anthony: 

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

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

Wyden, Hon. Ron: 

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

Prepared statement .......................................................................................... 67 

COMMUNICATION

The LIFO Coalition ................................................................................................. 69 

(III) 

(1) 

BUILDING A COMPETITIVE 

U.S. INTERNATIONAL TAX SYSTEM 

TUESDAY, MARCH 17, 2015 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 10:11 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Orrin G. Hatch 

(chairman of the committee) presiding. 

Present: Senators Crapo, Roberts, Thune, Portman, Coats, Heller, Scott, Wyden, Schumer, Stabenow, Cantwell, Menendez, Carper, Cardin, Brown, Bennet, and Warner. 

Also present: Republican Staff: Mark Prater, Deputy Staff Director and Chief Tax Counsel; Eric Oman, Senior Policy Advisor for 

Tax and Accounting; Tony Coughlan, Tax Counsel; and Jim Lyons, 

Tax Counsel. Democratic Staff: Joshua Sheinkman, Staff Director; 

Tiffany Smith, Senior Tax Counsel; and Todd Metcalf, Chief Tax 

Counsel. 

OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. 

SENATOR FROM UTAH, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The committee will now come to order. 

I want to welcome everyone to today’s hearing on Building a 

Competitive U.S. International Tax System. I also want to thank 

our witnesses for appearing before the committee today. 

Reforming our international tax system is a critical step on the 

road toward comprehensive tax reform. Not surprisingly, the failures of our current system get a lot of attention. That is why Senator Wyden and I designated one of our five tax reform working 

groups to specifically look into this issue. I know that my colleagues serving on that working group, and all of our working 

groups, are looking very closely at all the relevant details, and I 

look forward to their recommendations. 

As we look at our international tax system, our primary goals 

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

allow American job creators to more effectively compete with their 

foreign counterparts in the world marketplace. Our corporate tax 

rate has been the highest in the developed world, and effective tax 

rates facing U.S. corporations are higher than average. In my opinion, our high corporate tax rate has to come down significantly. 

I think most of my colleagues on both sides of the aisle would 

agree with that. In addition, our current system creates disincentives that lock out earnings made by U.S. multinationals abroad 

2 

* For more information, see also, ‘‘Present Law and Selected Policy Issues in the U.S. Taxation 

of Cross-Border Income,’’ Joint Committee on Taxation staff report, March 16, 2015 (JCX–51– 

15), https://www.jct.gov/publications.html?func=startdown&id=4742. 

and keep those earnings from being reinvested domestically. This 

also needs to be addressed in tax reform. 

Additionally, I will note that the tax base is much more mobile 

than it used to be. For example, thanks to advances in technology 

and markets, capital and labor have become increasingly more mobile. 

The most mobile assets of all, intangible assets, have taken up 

the greater share of wealth around the world. The problem we have 

seen is that intangible assets and property can easily be moved 

from the United States to another country, particularly if that 

country has a lower tax burden. 

This is a disturbing trend, one that I think all of us would like 

to see reversed. Some, like President Obama in his most recent 

budget, have responded to this trend by calling for higher U.S. taxation of foreign-source income, claiming that by extending the 

reach of U.S. taxes, we can eliminate incentives for businesses to 

move income-producing assets to other countries. 

The problem, of course, is that assets are not the only things that 

can be moved from one country to another. Companies themselves 

can also migrate away from our overly burdensome tax environment. We have seen that, with the recent wave of inversions, that 

has really been the case. 

Indeed, many companies have already decided that our current 

regime of worldwide taxation with absurdly high tax rates is simply too onerous and have opted to locate their tax domiciles in 

countries with lower rates and territorial tax systems. In other 

words, if we are serious about keeping assets and companies in the 

United States, we should not be looking to increase the burdens 

imposed by our international tax system. Instead, we should be 

looking to make our system more competitive. 

Not only must our corporate tax rate come down across the 

board, we should also shift significantly in the direction of a territorial tax system. Most witnesses have testified that way. If we 

want companies to remain in the U.S. or to incorporate here to 

begin with, we should not build figurative or legal walls around 

America. We should fix our broken tax code.* 

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

The CHAIRMAN. We have a lot to discuss here today. I know that 

there are some differing opinions among members of the committee 

on these issues, particularly as we talk about the merits of a worldwide versus a territorial tax system. But I think we have assembled a very good panel that will help us get to some answers on 

this front and hopefully aid us in our efforts to reach consensus as 

we tackle this vital element of tax reform. 

Let me just turn to our ranking member, Senator Wyden. 

3 

OPENING STATEMENT OF HON. RON WYDEN, 

A U.S. SENATOR FROM OREGON 

Senator WYDEN. Thank you very much, Chairman Hatch. I think 

this is a particularly important hearing, and I look forward to 

working with you and the working groups on this and the other 

topics in a bipartisan way. 

Colleagues, 9 months ago the Finance Committee gathered in 

this room for a hearing on how the broken U.S. tax code hurts 

America’s competitiveness around the world, how that tax code is 

hindering the drive to create what I call red, white, and blue jobs 

that pay strong middle-class wages. 

That discussion was dominated by the wave of tax inversions 

that was cresting at the time, pounding our shores and eroding our 

tax base. Headline after headline last summer announced that 

American companies were putting themselves on the auction block 

for foreign competitors. They would find a buyer, headquarter overseas, and then shrink their tax bills to the lowest possible level. 

In the absence of comprehensive tax reform from the Congress, 

the Treasury Department undertook extraordinary measures aimed 

at slowing that erosion. Nine months later, the Finance Committee 

is back for yet another hearing on international taxation, and the 

headlines are back once more. 

Once again, there is a wave cresting, and this wave is even bigger. Now it is foreign firms circling in the water and looking to 

feast on American competitors, often in hostile takeovers. Just like 

before, American taxpayers could be on the hook, subsidizing these 

deals. So there is an obvious lesson here. I see my friend from Indiana, Senator Coats, here. We have talked about this often. 

Our tax code is deeply broken. The next flaw that exposes itself, 

the next wave that appears on the horizon, may not be about inversions or hostile takeovers. But whenever one wave breaks, you can 

bet that there will be another one rolling in, ready to pound the 

American economy and erode the American tax base even more. 

The deal makers are always going to get around piecemeal policy 

changes. Nothing short of bipartisan, comprehensive tax reform, in 

my view, is going to end that cycle. 

Now, there has been an awful lot of ink spilled on the business 

pages and in magazines about the many ways our tax code is outdated and anti-competitive. The corporate tax rate puts America at 

a disadvantage. The system of tax deferral blocks investment in the 

United States like a self-imposed embargo. How fitting it is on St. 

Patrick’s Day to shine a spotlight on mind-numbing strategies like 

the ‘‘Double Irish with a Dutch Sandwich’’ that is used to winnow 

down tax bills. 

A modern tax code should fight gamesmanship and bring down 

the corporate rate to make our businesses more competitive in the 

tough global markets. That’s what our bipartisan proposal would 

do. In fact, it has the lowest rate of any proposal on offer. 

Colleagues, it is legislative malpractice to sit by and let this situation fester. The Congress cannot expect the Treasury Department 

to keep playing whack-a-mole with every issue that pops up. The 

latest wave of cross-border gamesmanship shows that cannot work. 

So the Finance Committee is going to need to lead the way on 

tax reform. In my view, our end goals are bipartisan: a tax code 

4 

that supercharges American competitiveness in tough global markets; draws investment to the United States; and creates high-skill, 

high-wage jobs in Oregon and across the country. 

It is going to take a lot of work and a lot of bipartisan will to 

get there, but, in the meantime, the waves are going to keep crashing, and our tax base is going to keep eroding. So it ought to be 

clear to all what our challenge is. I thank our witnesses today. I 

think this is going to be a fruitful discussion. 

Mr. Chairman, I thank you again. I think we have seen how important it will be to have a bipartisan approach here, and I look 

forward to working with you. 

The CHAIRMAN. Well, thank you, Senator. 

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

The CHAIRMAN. We have an excellent group of witnesses today. 

Let me introduce them. Our first witness is Pam Olson. She is the 

Deputy U.S. Tax Leader for PricewaterhouseCoopers, as well as 

PWC’s leader for the Washington National Tax Services. Ms. Olson 

received her bachelor’s degree, her Juris Doctor, and MBA from the 

University of Minnesota. 

Prior to joining PWC, Ms. Olson was a partner with the law firm 

of Skadden, Arps, Slate, Meagher, and Flom. She also served as 

Assistant Secretary of the U.S. Treasury for Tax Policy from 2002 

to 2004. We welcome you back. We have always enjoyed having you 

come and visit with us in this committee. 

Our next witness is Tony Smith. I am just going to introduce all 

of you at once. Mr. Smith is the vice president of tax and treasurer 

at Thermo Fisher Scientific. He has more than 20 years of experience in global tax treasury operations and, of course, pension investments. Before joining Thermo Fisher Scientific, Mr. Smith was 

a partner at PricewaterhouseCoopers, as well as a partner at Pannell, Kerr, and Forster. 

Mr. Smith holds a bachelor’s degree in Economics from Loughborough in the U.K. and is a U.K.-chartered accountant. That is 

pretty impressive to me. We are glad to have you here. 

Our next witness is Roseanne Altshuler. Dr. Altshuler is the 

dean of social and behavioral sciences at Rutgers University. Her 

research focuses on Federal tax policy, and her work has appeared 

in numerous journals and books. Dr. Altshuler holds a bachelor’s 

degree from Tufts University and a Ph.D. in economics from the 

University of Pennsylvania. 

Dr. Altshuler was formerly an assistant professor at Columbia 

University and a visiting professor at Princeton University and 

New York University. These are great credentials. She was formerly the editor of the National Tax Journal and a member of the 

board of directors at the National Tax Association. 

Our final witness is Stephen Shay. Mr. Shay is a professor of 

practice at Harvard Law School. He has extensive experience in the 

international tax area and has been recognized as a leading practitioner by various organizations. Mr. Shay graduated with his master’s from Wesleyan University, and he earned his J.D., Juris Doctor, and MBA from Columbia University. 

Prior to joining Harvard Law School, Mr. Shay was a tax partner 

at Ropes and Gray, LLP for over 20 years and served as Deputy 

5 

Assistant Secretary for International Tax Affairs at the U.S. Treasury. So we feel very honored to have all four of you here with us 

today, and we look forward to your testimony. 

So we turn to you, Ms. Olson, as the first witness. 

STATEMENT OF HON. PAMELA F. OLSON, U.S. DEPUTY TAX 

LEADER AND WASHINGTON NATIONAL TAX SERVICES LEADER, PRICEWATERHOUSECOOPERS LLP, WASHINGTON, DC 

Ms. OLSON. Thank you, Chairman Hatch, Ranking Member 

Wyden, distinguished members of the committee. I appreciate the 

opportunity to appear as the committee considers the important 

topic of the competitiveness of our international tax laws. 

I should say that I am here today on my own behalf and not on 

behalf of PWC or any client, and the views I express are my own. 

I have submitted a longer statement for the record, which I assume 

will be included, Mr. Chairman? 

The CHAIRMAN. It will be included in the record. 

[The prepared statement of Ms. Olson appears in the appendix.] 

Ms. OLSON. Thank you. 

I agree with both your and Senator Wyden’s opening comments. 

It seems particularly appropriate that the committee chose to hold 

this hearing on St. Patrick’s Day, given Ireland’s competitive tax 

system. As one of my colleagues has been known to joke, the U.S. 

has had a patent box for years: we call it Ireland. 

Reform of our international tax rules is essential to growth of the 

U.S. economy and to the success in today’s global marketplace of 

American businesses, their workers, and the many businesses on 

which they depend for goods and services. Unfortunately, our current system is a barrier to their success and is driving business 

away. 

This morning I would like to highlight some of the changes in the 

global economy and in other countries’ tax systems that I think 

make U.S. reform important. First, the U.S. has had a worldwide 

tax system since the inception of the income tax in 1913. The last 

significant change to our international framework was the enactment of the anti-base erosion provisions of subpart F in 1962. 

Our international rules remain locked in a time of rotary phones 

and telephone operators, while we carry smartphones with 1,000 

times the computing power of the Apollo guidance computer that 

put man on the moon. Meanwhile, global business operations and 

the global economy have changed significantly in the last 50 years. 

Advances in communication, information technology, and transportation have accelerated the growth of a worldwide marketplace for 

goods and services. The U.S. tax system simply does not position 

U.S.-based companies to serve it well. 

The U.S. role in the global economy has also changed. In 1962, 

the U.S. was the dominant economy, accounting for over half of all 

multinational investment in the world. By contrast, PWC projects 

that by 2050 the combined GDP of the seven largest emerging 

economies will be twice the size of the combined GDP of the G–7. 

As President Obama noted in his State of the Union address, 95 

percent of the world’s customers live outside the United States. 

U.S. busineses cannot serve those rapidly growing markets by staying home. 

6 

Just as the global economy has changed, tax systems around the 

world have evolved in response to the growing importance of IP, 

the reorganization of economic activity across national borders, and 

the mobility of capital. Other countries have reduced their statutory corporate income tax rates, added incentives for research and 

development, and adopted territorial systems that limit the income 

tax to activities within their borders, all in order to attract the capital and IP that yield high-paying jobs. 

Other countries rely more heavily on consumption-based taxes, 

such as a value-added tax or goods and services tax, to fund government needs, giving them a base that is more reliable, more easily measured, less mobile, and more conducive to economic growth. 

By contrast, the U.S. has the highest statutory income tax rate 

among major global economies and a high effective tax rate relative 

to our competitors. At the same time, other countries have adopted 

generous incentives for patents and innovation to attract research 

and development activities. 

Our currently expired U.S. research credit is ranked 27th out of 

41 countries in terms of the tax incentives provided for research 

and development activities, and that ranking does not include the 

benefit of a patent or innovation box that is employed by an increasing number of other countries. 

On the international side, the U.S. is the only G–7 country with 

a worldwide tax system. Twenty-eight of 34 OECD member countries have territorial systems that limit tax to income from activity 

within their borders. 

Countries with territorial systems have adopted a variety of antiabuse rules to discourage income shifting. Their anti-abuse rules 

are aimed at preventing the erosion of the domestic tax base, not 

at preserving a world-wide base. There is no country that imposes 

a minimum tax on active business income like that proposed by the 

Obama administration. 

A tax system should create a level playing field that does not 

favor one owner over another, but our worldwide tax system places 

a premium on the value of U.S. companies’ assets in the hands of 

a foreign bidder. Eliminating the disadvantage U.S. companies face 

by aligning our rules with the rest of the world would be a far more 

effective response than building higher walls around an uncompetitive tax system. 

The globalized world in which we live increases both the competition American businesses and workers face and the opportunities 

available to them. If we want to build a sustainably revenueneutral tax system, then, as Jon Moeller, the CFO of Procter and 

Gamble, observed last month, we must have a competitive system. 

Our international tax rules have fallen behind other countries’ 

efforts to promote economic growth by attracting investment and 

jobs. It is time for Congress to do the same. 

Thank you. I would be pleased to answer any questions. 

The CHAIRMAN. Well, thank you very much. We appreciate your 

comments. 

We will go to you, Mr. Smith. 

7 

STATEMENT OF ANTHONY SMITH, VICE PRESIDENT OF TAX 

AND TREASURER, THERMO FISHER SCIENTIFIC, INC., WALTHAM, MA 

Mr. SMITH. Chairman Hatch, Ranking Member Wyden, and distinguished members of the committee, good morning. It is an honor 

to appear before you. My name is Tony Smith. I am vice president 

of tax and treasurer of Thermo Fisher Scientific. I am here today 

to appeal for tax reform, specifically international tax reform. I applaud the committee’s interest in building a more competitive U.S. 

international tax system. 

Thermo Fisher manufactures, sells, and services analytical instruments, specialty health diagnostics, and lab products. We supply products wherever scientific research is carried out. The company is headquartered in Massachusetts, with sites in 30 States 

and employees serving customers in every State. We have 50,000 

employees worldwide, with about half the workforce in the U.S. 

Our global revenue also is split roughly 50/50 between the U.S. 

and overseas. Our markets are global, and we sell a lot of our products overseas through U.S. exports and local manufacturing. Thermo Fisher manufactures a substantial volume of products in the 

United States. We benefit from the reduced tax rate on domestic 

manufacturing under section 199. The company conducts substantial R&D in the U.S. and benefits from the R&D tax credit when 

it is available. 

We have significant outstanding debt. The proceeds of this debt, 

along with funds generated from operations, are used to make strategic acquisitions. While approximately half of the company’s annual cash flow is generated overseas, we currently have very little 

cash overseas because the vast majority of the funds are reinvested 

in the business. 

The combined effect of the high U.S. corporate tax rate and the 

U.S. worldwide tax system limits the flexibility of Thermo Fisher 

and other U.S. companies to deploy foreign earnings in productive 

uses in their U.S. businesses. Most U.S. companies, including Thermo Fisher, allow their foreign earnings to remain overseas rather 

than face a large tax cost to repatriate the funds. If funds are needed in the U.S., we and other companies borrow, rather than access 

the earnings trapped overseas. Having a tax regime that creates a 

disincentive for U.S. companies to pay down debt and actually creates the incentive to incur new debt is not good policy. 

A tax policy that results in cash being trapped offshore creates 

an incentive for acquisitions of foreign companies, sometimes leading U.S. companies to over-pay for such acquisitions. The current 

U.S. tax system also puts U.S. companies at a disadvantage when 

bidding against a foreign company for both U.S. and foreign companies. As a result, Thermo Fisher has been out-bidden several times 

in the competition for strategic acquisitions. I firmly believe that 

a reduced corporate tax rate and more flexibility to repatriate foreign earnings would encourage investment and generate jobs in the 

U.S. 

A corporate tax rate between 25 percent and 30 percent would 

put the U.S. closer to other developed economies. There will always 

be significant advantages to being headquartered in the U.S., so it 

is not necessary for the U.S. to match the world’s lowest tax rates. 

8 

In addition, we should retain the section 199 manufacturing incentive. 

Repatriation of foreign earnings should be allowed at a lower, 

but not necessarily zero, tax cost. A tax on repatriated earnings in 

the U.S., at a rate of 5 percent or slightly higher, would not be a 

significant barrier to bringing funds home because most U.S. companies will value the flexibility to redeploy earnings in the U.S. 

Tax reform should include provisions that incentivize research in 

the U.S. Making the R&D tax credit permanent would encourage 

the development of intellectual property in the U.S. A targeted reduction of the tax rate on IP earnings would encourage ownership 

and use of valuable IP in the U.S. 

Simplifying the subpart F and foreign tax credit rules would reduce administrative burdens and uncertainties and better target 

the rules to their intended purposes. However, I also recognize that 

there must be trade-offs. Consideration could be given to a limit on 

deductions for interest expense. An appropriately structured limitation would encourage repatriation to pay down debt where the 

other reforms make such a repatriation feasible. 

One-off tax incentives and holidays should be avoided. I view 

eliminating LIFO inventory accounting and accelerated depreciation as an acceptable trade-off for other reforms that provide permanent benefits. 

These priorities would create a more stable and more competitive 

environment for U.S. companies operating in today’s global economy. In my opinion, the goal of international tax reform is not to 

reduce U.S. tax paid, but rather to reduce the ways in which the 

U.S. tax system impedes the flexibility and productivity of U.S. 

companies with global operations. 

This committee has already done significant work on tax reform. 

I urge you to continue the effort to get the international tax reform 

over the finish line soon. 

Thank you for the opportunity to present these perspectives. I 

am happy to answer any questions. 

The CHAIRMAN. Thank you so much. 

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

The CHAIRMAN. Dr. Altshuler? 

STATEMENT OF ROSANNE ALTSHULER, Ph.D., PROFESSOR OF 

ECONOMICS AND DEAN OF SOCIAL AND BEHAVIORAL SCIENCES, RUTGERS UNIVERSITY, NEW BRUNSWICK, NJ 

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

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

before you today to discuss the very important topic of international tax reform. I believe there is broad agreement among policymakers and companies that our current system for taxing the income earned abroad by U.S. corporations is very complex and induces inefficient behavioral responses. 

The system provides incentives to invest in some locations instead of others, to engage in costly strategies to avoid U.S. taxes 

on foreign dividends, and to shift income from high- to low-tax locations by using inappropriate transfer prices or paying inadequate 

royalties. Where the tax burden under U.S. rules exceeds what 

could be achieved through a non-U.S. parent structure, pressure 

9 

exists to change the parent corporation’s domicile to a foreign jurisdiction. Many are calling for reform and support moving to a territorial tax system. 

I recently worked with Steve Shay of Harvard Law School and 

Eric Toder of the Urban-Brookings Tax Policy Center on a report 

that explores other countries’ experiences with territorial tax systems. We examined the approaches and experiences of four countries: Germany and Australia, both of which have longstanding territorial systems, and the U.K. and Japan, both of which, within the 

last 6 years, enacted territorial systems by exempting from home 

country taxation either all or 95 percent of the dividends their resident multinationals receive from their foreign affiliates, what is 

commonly called a dividend exemption system. 

We examined the factors that drove their policy choices and put 

forward lessons we believe the United States can take away from 

their experiences. I would like to highlight six conclusions from this 

work that I believe are important for policymakers as they contemplate reform. I will end by briefly discussing the benefits of a 

reform that would remove the U.S. tax upon repatriation of foreign 

profits and impose a minimum tax on foreign income. 

The six lessons are as follows. First, the classification of tax systems as worldwide or territorial oversimplifies and does not do justice to the variety of hybrid approaches taken in different countries. All tax systems, including ours, are hybrids that tax some 

foreign business income at reduced effective rates. As in so much 

else in taxation, the devil is in the details. 

Second, the circumstances that have caused other countries to 

maintain or introduce territorial systems do not necessarily apply 

to the United States; therefore, other experiences do not necessarily dictate that the United States should follow the same path. 

Third, the tax policies of countries with dividend exemption systems have been greatly influenced by their separate individual circumstances. 

Fourth, the burden of the tax due upon repatriation of foreign 

earnings may be a lot higher in the United States than it was in 

the United Kingdom and Japan before they adopted dividend exemption systems. 

Fifth, the fact that the United States raises relatively little corporate tax revenue as a share of GDP than other countries, while 

having the highest statutory corporate rate in the OECD, has multiple explanations and does not necessarily suggest that U.S.-based 

companies in any given industry are more aggressive at income 

shifting than foreign-based companies. 

Sixth and finally, the ability of the U.S. to retain higher corporate tax rates and tougher rules on foreign income is declining. 

In the last 2 decades, differences between the U.S. and other countries’ tax systems have widened. The global tax environment has 

changed and will continue to do so. 

The U.S. need not follow others’ tax policies, but our reform process should not be done in a vacuum. It is fundamental to understand the forces that have shaped reforms of our competitors and 

recognize that, while our economies are different, we do indeed face 

some of the same pressures. 

10 

What should we do? Harry Grubert of the U.S. Treasury and I 

recently evaluated a variety of reforms and proposed one that 

makes improvements along a number of behavioral margins that 

are distorted under the current system. We would start by eliminating the lock-out effect by exempting all foreign earnings sent 

home via dividends from U.S. tax. This reduces wasteful tax planning and simplifies the system. 

Then we would impose a minimum tax of, say, 15 percent on foreign income. As a result, companies would lose some of the tax benefits they enjoy from placing valuable and tangible intellectual 

property like patents in tax havens and from other methods of income shifting. The minimum tax could be on a per-country basis, 

but it could also be on an overall basis, which would be much simpler. 

As an alternative to an active business test, the tax could effectively exempt the normal profits companies earn on their investments abroad by allowing them to deduct their capital costs. That 

way the tax would apply only to foreign profits above the normal 

cost of capital, and companies would not be discouraged from taking advantage of profitable opportunities abroad. Only super-profits 

or excess profits above the normal return typically generated from 

intellectual property, which are most easily shifted and would be 

made in the absence of the tax, would be subject to the minimum 

tax. 

There are other options, but my analysis with Harry Grubert 

suggests that combining a minimum tax with dividend exemption 

can make improvements across many dimensions, including the 

lock-out effect, income shifting, the choice of location, and complexity. 

Thank you. I would be happy to answer questions. 

The CHAIRMAN. Thank you. 

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

The CHAIRMAN. Mr. Shay? 

STATEMENT OF STEPHEN E. SHAY, PROFESSOR OF PRACTICE, 

HARVARD LAW SCHOOL, HARVARD UNIVERSITY, CAMBRIDGE, MA 

Mr. SHAY. Thank you, Mr. Chairman. Chairman Hatch, Ranking 

Member Wyden, members of the committee, it is an honor to appear before you today. I am testifying at the invitation of the committee, and the views I express are my own and not those of any 

institution or entity with which I am associated, and in some respects also not my co-author. As you will see, we have some differences in terms of prescriptions. 

I recommend that our income tax system have a very broad base 

and a progressive rate structure that retains public support 

through apportioning tax burdens according to ability to pay. Rates 

should be set to provide revenue needed for public goods that support high-wage jobs, innovation, productive investment, income security for those in need, and personal security from domestic and 

international threats. These public goods include education; basic 

research; legal, physical, and spectrum infrastructure; income security transfers; and defense. These are what support a high standVerDate Mar 15 2010 20:53 Apr 13, 2016 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 R:\DOCS\99718.000 TIMD
11 

ard of living for all Americans. One thrust of these observations is 

that we should design our tax system to raise the revenue that we 

spend and stop using a tax system as a back-door tool to regulate 

the size of government and to make non-transparent, de facto public expenditures for specific industries or interest groups. 

The taxation of U.S. multinationals’ foreign business income is 

just one part of our overall tax system and should not be viewed 

as separate and distinct. If we are going to provide a tax advantage 

for this income, then the revenue saved by those taxpayers will be 

paid by somebody else. 

The evidence is that most U.S. multinationals are not paying 

high effective rates of tax on foreign earnings. Based on 2006 tax 

return data, 46 percent of earnings of foreign subsidiaries that reported positive income and some foreign tax, were taxed at foreign 

effective tax rates of 10 percent or less. These foreign effective 

rates are not fully explained just by lower foreign corporate tax 

rates in major U.S. trading partner countries, but reflect ongoing 

corporate multinational structuring to minimize tax by source and 

residence countries. 

Today, most international tax structures employ intermediary 

legal entities that do not bear a meaningful corporate tax because 

they are located in countries that facilitate very low effective tax 

rates on the income. Aggregate and firm-level financial data evidence substantial U.S. tax base erosion under current law. 

My reading of the evidence and my experience is that the U.S. 

taxes U.S. multinationals’ foreign business income too little in too 

many cases, and not too much. I do not think the evidence supports 

claims that U.S. multinationals are non-competitive as a result of 

U.S. international tax rules. This leads me to recommend that the 

committee consider three areas for reform. 

First, improve taxation of foreign business income. My first 

choice would be to follow the Wyden-Coats approach of taxing foreign earnings on a current basis. If that is not feasible, then I recommend a minimum tax on foreign business income, that is, an advanced payment against full U.S. tax when earnings are distributed from the business. I would not give up the residual U.S. tax 

on foreign earnings. 

Second, I would strengthen the U.S. corporate tax residence rules 

and the earnings stripping rules in order to reduce the incentives 

of U.S. companies to move their corporate residence abroad. 

Third, I would recommend reducing the U.S. tax advantages for 

portfolio investment in foreign portfolio stock over U.S. portfolio 

stock. 

So let me just move for a moment to the advanced minimum tax 

that I have described in my testimony. Under this tax, a U.S. 

shareholder and controlled foreign corporation would be required to 

include in income the portion of the CFC’s earnings that would 

bring its residual U.S. tax up to achieve a minimum tax on the foreign earnings. The target minimum effective tax rate would be 

based on a percentage of the U.S. corporate tax rate so we adapt 

as U.S. corporate rates change. Deductions by U.S. affiliates allocable to the CFC’s earnings only would be allowed to the extent the 

CFC’s earnings were actually or deemed distributed. This is a proposal that fits well within current law. 

12 

I am going to skip to my last proposal on portfolio dividends and 

portfolio holdings, because I think it has been least addressed. 

Under current U.S. law, a U.S. portfolio stock investor can earn a 

higher after-tax return on foreign business and earned income 

earned through a foreign corporation than through a domestic corporation carrying on exactly the same business. 

One alternative would be to determine the foreign portfolio 

shareholder-level U.S. tax in two parts, one part to top up the corporate level tax that is not being paid abroad and then to tax the 

remaining earnings as under current law. 

I would be happy to answer any questions that the committee 

might have, and I appreciate the opportunity to testify. 

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

The CHAIRMAN. Well, thank you. We appreciate all of you being 

here, and we appreciate your various, respective points of view. 

Let me just ask you this, Professor Shay. You wrote in an article 

that was published in Tax Notes just yesterday, if I recall it correctly, that a reduced rate of U.S. tax on $2 trillion or more of 

untaxed U.S. multinational earnings to pay for highways and infrastructure is, to truly put it politely, not advisable. 

Would you please just briefly elaborate? And is it the reduced tax 

rate that you find objectionable, or that it would not be very longterm in nature, or something else? 

Mr. SHAY. A combination of all of the above. The tax on offshore 

earnings, if we are going to make changes in that, which I have 

questions about, that should be part of the broader reform. I think 

everybody has agreed with that. 

But the notion that it somehow is acceptable to do that because 

it is being used for infrastructure on a one-off basis does seem to 

me to be very bad policy. I think what we should be doing with respect to those needs is, first, we should be looking at tax instruments that might be more effective, including taxes on energy, and 

then second, that should be ongoing and able to sustain the ongoing needs of the infrastructure investment. 

So I do not think that we should have such a low rate on offshore 

earnings, particularly earnings that are invested in productive investment, even though they are invested outside of the United 

States. So, I think there are problems with that proposal across a 

variety of margins. 

The CHAIRMAN. Dr. Altshuler, let me turn to you. In your written 

testimony, you talk a fair amount about the current international 

rules creating a lock-out effect, whereby U.S. corporations do not 

want to bring back earnings to the U.S. You think this creates a 

fair amount of inefficiency, is that correct? 

Dr. ALTSHULER. Yes, that is correct. 

The CHAIRMAN. All right. Let me just—you can go on and talk 

if you would like. 

Dr. ALTSHULER. No, go right ahead. 

The CHAIRMAN. All right. Let me just ask you a follow-up. You 

propose a 15-percent immediate minimum tax on the earnings of 

foreign subsidiaries of U.S. parent corporations, together with a 

dividend exemption. Now, I have worried that a minimum tax as 

high as 15 percent would increase the pressure to invert from what 

corporations are experiencing today. Now, do you think that there 

13 

would be considerable pressure to invert if there were an immediate minimum tax of 15 percent? 

Dr. ALTSHULER. What I talk about in the testimony is a proposal 

in which only the excess returns or super-normal returns that corporations earn abroad would be subject to that 15-percent tax. So, 

for corporations that are just earning the normal rate of return, 

there would not be an increase in the incentive to expatriate. There 

would not be an increase in inversions, for instance, or foreign acquisitions if the tax is just on the excess returns, which are usually 

the returns from intellectual property. 

Now it is the case, and I agree with you, that there would be 

pressure to invert and/or expatriate if we had that minimum tax 

of 15 percent for the firms that have the intellectual property. But 

the question that you have to ask is whether or not the system 

itself is less distortionary than the current system, and whether or 

not a dividend-exemption system with a minimum tax is less distortionary than a dividend-exemption system without a minimum 

tax. So you have to put the whole package together. 

The CHAIRMAN. Mr. Smith, as I know you are aware, there are 

many different measurements for tax rates. For example, there are 

book tax rates, cash tax rates, average effective tax rates, and marginal effective tax rates. Now, given these different types of tax 

rates, what is the tax rate that is most important to you or to your 

company, and, if you would, tell us why that is the case. If you 

could also, elaborate on how operating in the global marketplace 

particularly impacts the tax rate calculation. 

Mr. SMITH. Certainly. Thank you for the question. So the most 

important measure of tax rate to myself, and to a lot of the investment community out there, is what I call the long-term global cash 

tax rate. So that is different from the accounting tax rate that we 

see in our reported accounts. That is actually an accrual tax rate, 

and there is an adjustment to that when you have your reported 

accounts, because of acquisitions and disposals. 

So we think in terms of the cash taxes that we pay globally, and 

we look on a long-term basis at what the average will be over time. 

So, think about the cash taxes we paid in 2014. That was about 

$600 million in cash taxes we paid in 2014. Something between 

$300 and $400 million of that was in the U.S. 

The way the calculation is done in the case of Thermo Fisher— 

think of about half our income as being in the U.S. and half as 

being overseas. That is simply because half our revenue is there, 

half our workforce is there. So the half of the income that is in the 

U.S. is subject to U.S. taxation. We have the R&D credit, we have 

the 199 incentive, we have other things. 

So the average tax rate from a cash point of view on U.S. earnings is around 30 percent. The other half of income is subject to 

tax overseas. We have lower tax rates overseas, we have higher 

R&D incentives, other rulings, U.K. patent box, lower tax rates 

generally. 

So because of all that, the overseas tax rate on the other half of 

the earnings from a cash point of view is much lower. The average 

rate of tax for Thermo Fisher, when you add those up from a cash 

point of view, is somewhere between 15 and 20 percent. That is the 

average cash rate. So that is how I think, because that is the 

14 

amount of cash taxes that we pay. That is an important measure 

for us. It is also an important measure for investors. 

The CHAIRMAN. Well, thank you. My time is up. 

Senator Wyden? 

Senator WYDEN. Thank you, Mr. Chairman. 

Let me start with you, Ms. Olson. 

The CHAIRMAN. Could I mention that I have to go to—pardon me, 

Senator Wyden. I have to go to the Judiciary Committee, and Senator Wyden has kindly offered to make sure this speeds along with 

the various questions. 

Senator WYDEN. Thank you very much, Chairman Hatch. We are 

going to work in a bipartisan way on this. 

Let me start with you, Ms. Olson, because I have always admired 

that you have been interested in moving on these issues in a bipartisan way and have given good counsel to people on both sides of 

the aisle. I thought it would be smart, at least for my questions, 

to start with this issue of base erosion and profit shifting. 

I define this as, in effect, tax planning strategies that exploit 

gaps and mismatches in tax rules to artificially shift profits to lowor no-tax locations where there is not much, if any, economic activity, so people do not end up paying many taxes. 

What is so troubling and challenging about this is that, with the 

piecemeal changes, it just seems that clever lawyers and accountants always find their way around it. Now, you have been working 

on this since your days in the Bush administration, and you were 

focused on approaches that I thought had some real promise and 

unfortunately were not picked up on: earnings stripping and others. But take a minute and give the committee some of your counsel on what you think would most effectively stop base erosion and 

profit shifting at this point. 

Ms. OLSON. The thing I would say that could be most effective 

in stopping base erosion would be reducing the U.S. rate. Clearly 

a high rate is a disincentive to locate your most profitable activities 

here in the U.S. It is also an attraction for deductions, for leverage, 

such as the kinds of earnings stripping that the Bush administration proposal went after back in 2002 to 2004 when I was at the 

Treasury Department. 

So probably the best thing that we could do would be to dramatically lower the U.S. rate. If there is a country that is willing to 

offer a lower rate than the U.S., particularly on activity that is mobile, like intellectual property and tangible assets, that activity is 

going to migrate there if it can. European countries in particular 

that are willing to offer patent and innovation boxes with rates in 

the 5- to 10-percent range are going to continue to attract that kind 

of activity. 

So, if we are serious about preventing shifting of profits, base 

erosion out of the U.S., we should bring down the rate. We ought 

to have an anti-base erosion feature that does look at our own base 

and that protects our own base, but I think it would make sense 

for us to define our own base the way that other countries have defined their own base. They are looking at activities within their 

own borders and trying to make sure that the income generated by 

those activities within their own borders is not eroded. 

So those would be the things I would do. 

15 

Senator WYDEN. I very much share your view that a competitive 

rate is essential as part of this. I just think there are going to need 

to be some other steps—and you alluded to them at the end—that 

we need to take in this country to prevent base erosion. 

Just in the interest of time, I am going to move on to you, Dr. 

Altshuler, if I might, with respect to simplifying the tax system. 

We know that the international tax system is inherently complicated. My question to you is, would not rolling back deferral go 

a significant way towards corporate tax simplification by eliminating this incredibly byzantine, complicated system that exists to, 

in effect, track unused foreign tax credits and the related earnings 

and profits? 

I mean, in effect, if you roll it back—and I am using those words 

deliberately—it would seem that income would either be subject to 

immediate taxation or be exempt, and the current foreign tax credits would be utilized against current taxable income. So rolling it 

back, in my view at least, offers an opportunity towards some 

measure of simplification. What is your take on that? 

Dr. ALTSHULER. My take on that is that you are correct, that 

there would be some measure of simplification if we were to roll 

back deferral. One thing that we cannot forget when we think 

about a full inclusion system is that there would still be a situation 

in which firms have excess credits. I do not think that we will be 

able to get rid of that. As soon as firms have excess foreign tax 

credits that they cannot use, you are back in a situation like the 

current system in which you will be able to use credits to shelter 

royalties, and you are going to get into all of that tax planning. 

So the rate that you end up at is really important, and just taking into account that you do not solve all problems by going that 

way, that you still have these excess foreign credits to deal with. 

Once you have those, you have the same incentives that you have 

under the current system. 

Senator WYDEN. A fair point. 

Senator Roberts? 

Senator ROBERTS. Yes. Thank you, Mr. Chairman. I know the 

chairman has made a very good statement with which I agree, and 

I agree with your statement with regards to crashing waves. I 

might point out that if you have crashing waves, you are going to 

have base erosion. 

I would like to state that Mr. Smith has come to Washington 

with a very good comprehensive review. Thank you for your extensive investment and employment in Lenexa, KS. We are very proud 

to have you there. Thank you for your testimony. 

I am pleased you are here representing a company with significant operations in Kansas, where we take pride in the growth and 

development of our life-science and our bio-tech sectors. You are a 

world leader in innovation in those sectors, and your perspective is 

important, especially in regards to the general need for predictability, certainly in the tax environment, the lock-out effect of current policy, and the impact of these policies on your ability to grow 

your company. 

There has been a lot of discussion about that lock-out. I am worried about that simply leading to increased taxes. We are not 

16 

under-taxed in this country, and that is a concern of mine when we 

talk about general tax reform. 

You call for a reduction in the business tax rate—note I did not 

say corporate—something which I think is very important to 

achieve. Given your sensitivity to rates, would you support moving 

reform of the international tax system on a separate track from the 

overall business tax reform? 

Mr. SMITH. I certainly would, and the reason I say that is because I think that international tax reform can be done on a compartmentalized basis. I think if we bring business tax reform into 

the mix as well—I think trying to bring in a broader reform makes 

everything much more complicated. 

So I do think we need to try to achieve a focus on international 

tax reform to achieve a result. I really think we can get that done 

in a reasonable time frame. If you broaden the scope of reforms, it 

just takes longer to do. 

Senator ROBERTS. I appreciate that. Summing up: let us do what 

we can do first and get it done. 

I know from your testimony that Thermo Fisher is a heavy R&D 

company. You recommend additional stable incentives for R&D in 

the utilization of intellectual property in the U.S. Would you support the implementation of a patent box regime in the United 

States? 

Mr. SMITH. I certainly would encourage that. I spent a lot of 

time, as you can imagine, in the U.K., looking at the U.K. patent 

box regime. It does work. It does incentivize companies to spend 

more money and patent more things in the U.K., and so I think we 

should mirror something like that in the U.S. I do think that would 

incentivize more research in the U.S. and the generation of more 

income, and therefore more jobs, in the U.S. So, I think we should 

do that. 

Senator ROBERTS. Mr. Chairman, I want to thank all members 

of the panel for their testimony. I know we have a whole bunch of 

votes coming up, so I yield back. 

Senator WYDEN. Thank you, Senator Roberts. 

Senator Schumer is next. 

Senator SCHUMER. Well, thank you. I thank the chairman and 

Ranking Member Wyden for organizing the hearing. 

As you know, Senator Hatch and you, Senator Wyden, have 

asked Senator Portman and I, along with several other members 

of the committee—Warner, Carper, Brown, Enzi, Roberts, 

Cornyn—to find a consensus in the area of international tax reform, and I have to say we are making good progress. I am pretty 

heartened by how it is going. 

So I have a number of questions. I am going to get right to them. 

First, a little discussion about what is happening around the world, 

specifically with regard to the OECD—we call it BEPS, for Base 

Erosion and Profit Shifting. Yes, I know. I hate that word: BEPS 

project. 

I have been talking about international tax reform with a number of U.S. CEOs over the past several weeks. One point that has 

really stood out to me, one that I do not think we are paying 

enough attention to on the Hill up here, is the fact that the rest 

of the world is already acting. We sit around talking in theory 

17 

about tax reform; other G–20 governments are proactively enacting 

new tax policies that are, to put it bluntly, stealing our tax base 

and forcing our U.S. multinationals to send jobs and assets overseas. It is a game of Hungry, Hungry Hippos. We are sitting on our 

hands, and other countries are trying to gobble up the field. 

As we all know, many European countries already have in place 

patent box regimes intended to provide a discounted corporate rate 

on certain intellectual property. Belgium, France, Hungary, Italy, 

Luxembourg, Netherlands, Portugal, Spain, and the U.K. all have 

them, and Ireland proposed one. 

In the context of BEPS, the idea of ‘‘a nexus requirement for patent boxes’’ is being discussed. I know this sounds technical, but 

stay with me. What this means is that, in order to receive the benefit of the discounted rate on IP in these countries, the business 

will have to prove that R&D activity associated with the IP was 

performed in that country, and that is a good thing in terms of 

combating the ability of multinationals to stash their IP in low- or 

no-tax jurisdictions. 

It is a wake-up call for all of us who want to keep R&D and associated manufacturing jobs in the U.S. It is actually a very good 

thing for us if we can move forward. It would really help us. In addition, as Ms. Olson points out in her testimony, a lack of resolution on BEPS is resulting in many countries contemplating unilateral action. So that is the worst thing that we can do as policymakers: sit on the sidelines and watch this happen. That is my 

view. 

So here is the question to all the witnesses: how concerned are 

you about the impact of either BEPS activity or unilateral tax policy changes in other countries on our domestic corporate tax base? 

CEOs have told me they think the impact will be felt in months, 

not years. Would you agree? I want our jobs to be this red, white, 

and blue, not the E.U. 

So, go ahead. 

Ms. OLSON. As you mentioned, Senator Schumer, my testimony 

does address what is happening at the OECD with respect to 

BEPS. It is something that I think the U.S. Congress should be 

paying more attention to than it is. The OECD project was intended to address what was viewed as an unraveling global consensus about the allocation of taxing rights, but, as a practical matter, there has been a lot of heated political rhetoric surrounding it, 

and that has caused a lot of other governments to decide to move 

forward with unilateral actions that indeed could take part of our 

tax base. 

Even our close ally and strong proponent of the BEPS project, 

the U.K. government, has announced a diverted profits tax that is 

even nicknamed after a U.S. company, and that is slated to take 

effect on April 1st. So other governments clearly are moving, and 

it really is important for the U.S. to pay attention to this, to follow 

what is going on at the OECD, and take unilateral actions. 

Senator SCHUMER. Mr. Smith? 

Mr. SMITH. Certainly I view BEPS as being an attempt by overseas jurisdictions to put forth legislation which drives income and 

jobs back into their jurisdictions and then encourages those jobs to 

stay there through other means, be it R&D or patent boxes, or 

18 

something like that. So it is driven to reduce base erosion, but it 

is also driven to incentivize growth of jobs in overseas jurisdictions. 

We need to compete with that, so we need to keep up with those 

changes. 

Senator SCHUMER. Does anyone else have anything to add? Dr. 

Altshuler, Mr. Shay? 

Dr. ALTSHULER. I think what is going on just shows again, and 

forcefully, that we need to be looking at our international tax system, and we need to be looking at our corporate tax rate. 

Senator SCHUMER. Mr. Shay? 

Mr. SHAY. I will be the dissenter here, I think. I come from Cambridge, MA. Within 4 miles of my house are the greatest research 

institutions in the world. Patent boxes did not create those institutions. Solid education did, and funding for people who end up in 

those institutions. 

I am worried that we are being distracted by noise and we are 

not paying attention to the fundamentals. The fundamentals are, 

we should design a broad-based tax. The notion that we can use 

the tax system and target this and target that—I spent decades as 

a tax planner. Every time you create an exception or a rule, if I 

can use it, I will use it. 

I have written an extensive article on an earlier version of the 

Camp report. In that article I demonstrated different ways we 

would end-run those rules. I encourage you to step back, keep the 

big picture in mind: broad base, lower rates. Certainly a lower corporate rate would help, but it is very difficult to pay for. If we are 

being realistic, we are not going to drive it down to the levels that 

people are talking about. 

Senator SCHUMER. Correct. 

Mr. SHAY. So we are going to need anti-base erosion proposals 

ourselves. They are in my testimony. We need to strengthen our 

definition of corporate residence. We need to strengthen our earnings stripping rules. There is no magic pill, and a patent box is absolutely not a magic pill. 

Senator SCHUMER. So just to clarify—and I will be quick; my 

time is up—if we could not get the rate down low enough to make 

a real difference, you still would not enact a patent box? 

Mr. SHAY. I think a patent box is terrible policy. 

Senator SCHUMER. All right. Thank you. 

Mr. SHAY. But everything is in the details. 

Senator SCHUMER. Thank you. 

Senator WYDEN. Thank you, Senator Schumer. It sounds very encouraging that Senator Schumer and Senator Portman are making 

some real headway. 

Colleagues, we have a vote already on. I think we can get Senator Stabenow in before the vote. The question is whether we will 

have one or two votes, but we are going to just try to keep moving. 

So, Senator Stabenow? 

Senator STABENOW. Thank you very much, Mr. Chairman, for 

this hearing, for you and Senator Hatch providing this hearing. 

Let me ask, Mr. Shay, as a follow-up, talking about policy options as they relate to tax policy on jobs going overseas. I have had 

legislation for some time that is pretty simple, the Bring Jobs 

Home Act, that just would stop companies from being able to deVerDate Mar 15 2010 20:53 Apr 13, 2016 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 R:\DOCS\99718.000 TIMD
19 

duct their moving costs, their costs incurred when they physically 

move overseas. 

I do not think the taxpayers or workers whom they leave behind 

should be subsidizing that. We have talked a lot about inversions 

and earnings stripping and so on, but we should also look at the 

fact that companies are able to gain other tax benefits from offshoring American jobs using a foreign subsidiary, making something, bringing it back to the United States and so on, selling it 

here while they are competing with companies that are staying 

here in America. 

I wonder if you might speak more about this particular problem, 

and policy options as we go forward, making sure that we are in 

fact supporting American businesses that are choosing to be here 

in America and invest in America. 

Mr. SHAY. Well, one general observation that I have made in my 

testimony is, if we provide more favorable taxation for foreign earnings, then it ends up affecting the rest of the system. So, if we 

want to encourage operating in the United States, one way—from 

a policy point of view I think a preferred way—is to try to make 

the taxation of income as equal as possible. 

We cannot control what other countries do, but, as I have suggested in my testimony, either we take the approach that is described in the Wyden-Coats proposal of trying to broaden the base 

and bring down rates but then tax foreign earnings currently, or, 

if we are not going to get that far and it is a daunting task, I have 

proposed an advanced minimum tax that would take away basically the benefits of putting operations or trying to shift income 

into tax havens in low-tax countries. 

I think those are approaches, combined with anti-abuse rules, 

that are practical and that we are going to end up needing under 

any plausible scenario where we come out in this process. 

Senator STABENOW. Thank you. 

Mr. Smith, your company does a lot of manufacturing, including 

in Kalamazoo, MI. We are happy to have you. If there is time, I 

would certainly welcome anyone else on the panel to respond as 

well. But as you know, or at least as I would say, we do not have 

a middle class unless somebody makes something. 

A quarter of working people worked in manufacturing in the 

1970s; now it is about one out of 10. So, lots of challenges on the 

one hand: productivity is up. I mean, there are lots of reasons for 

that, but it is still very important that we manufacture in this 

country. 

So what are some of the key components of tax reform that in 

your mind would support and promote American manufacturing 

and new investments in the United States as opposed to those investments going overseas? 

Mr. SMITH. That is a great question. Thank you for that. So, if 

you look at Thermo Fisher, in Thermo Fisher’s case, about half of 

our earnings are overseas. That is just the way we do business. 

So if we had an incentive, or at least not a disincentive, to bring 

our earnings from overseas back to the U.S. and then reinvest 

them in the U.S., then we could reinvest them in the U.S. because 

we have a lower tax rate and maybe a patent box or some lower 

20 

tax rate from generating income from those jobs in manufacturing 

higher-tech, higher-IP products. 

That would certainly grow jobs in the U.S. So the lock-out effect 

to me, whereby offshore earnings are basically stuck offshore, if we 

end that and we bring the earnings back to the U.S., we will reinvest them in the U.S., and then we will grow jobs. I think if you 

combine that with a lower tax rate, the job growth would be pretty 

substantial. 

Senator STABENOW. When we look at things like the R&D tax 

credit—and about 70 percent of that is auto companies, manufacturing using the R&D tax credit—or we look at accelerated depreciation on equipment purchased here and so on, in your mind are 

those things important for us to maintain as part of encouraging 

investments here and R&D here? 

Mr. SMITH. So the R&D credit is an important credit. I do think 

a lower tax rate on income generated from intellectual property, 

whatever that might be, is very important. I think that tax incentives, which I consider to be one-off cash-based incentives like accelerated depreciation, I think because they are one-off in nature, 

I am not in favor of those. Those are things that I certainly think 

we should consider giving up if we can get the other things I talked 

about. 

Senator STABENOW. Interesting. There are varying views on that. 

I certainly hear the other side of that. 

Well, I think my time is up. Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Scott? 

Senator SCOTT. Thank you, Mr. Chairman. I think there is an opportunity for both myself and Senator Portman to be heard before 

we have to leave for our vote, so I am going to just ask one quick 

question of Mr. Smith. Of course, you have come to Washington, as 

Mr. Roberts has suggested, so you obviously have all the information that I will need on my question on how the fact of the complexity and the higher rates and the worldwide reach of our current tax code is really causing our tax inversions. 

No matter how many corporations invert, there are a couple of 

things that I believe are inherent within the American psyche and 

our competitive position—our education and workforce—and particularly in South Glen where we have seen foreign investment create more than 116,000 jobs. And over 65,000 of those jobs are in 

manufacturing. 

I think it speaks to the strength of our education system, our 

strong workforce, our desire to be competitive globally. Companies 

like Michelin have 8,900 jobs in the State; Daimler just announced 

a $500-million expansion, adding 1,200 additional employees in 

South Carolina. 

The challenge is that inversions are a natural result of an unnatural tax code, bottom line. So, as we look at many options to 

eliminate tax inversions without dealing with the fact that we need 

a lower tax rate, I am worried that our proposals might have the 

effect of discouraging foreign direct investment, which has brought 

millions of jobs to our shores, obviously over 100,000 in South 

Carolina. 

Mr. Smith, do you have any thoughts on this based on your experience in a multinational corporation? 

21 

Mr. SMITH. So, when I look at inversions, some of the jobs that 

may move when companies invert are really in terms of the headoffice function. So, when you have a U.S. company that becomes 

headquartered overseas, then head-office functions do go overseas. 

I do not actually see a lot of change in the manufacturing jobs 

in the U.S. I think it is those higher-level head-office jobs which 

do move. They are still jobs. They are highly paid jobs. We certainly should not be incentivizing moving those overseas. But I 

think manufacturing jobs—I do not think they change very much 

because of inversions or lack of inversions. I think that is a fairly 

stable situation. 

Senator SCOTT. Thank you. 

I will yield the rest of my time, with the chairman’s permission, 

to Senator Portman. 

The CHAIRMAN. Senator Portman? 

Senator PORTMAN. Thank you, Mr. Chairman, and thanks to my 

colleague from South Carolina for yielding. 

First of all, I really appreciate you all being here, and I wish we 

had all day to talk about this. So many questions! Senator Schumer mentioned that we are heading up this international working 

group together, and we have had some good success in identifying 

the problem, and now we are moving toward solutions. I think 

there is a good deal of consensus here. We have heard a lot of consensus from the table here, including a lower rate. 

I guess what I would like to focus on is three things, quickly. 

One is, although inversions are reduced thanks to the regulations 

and threat of more, what we are seeing is more foreign takeovers. 

I would ask unanimous consent to enter into the record the Financial Times story from yesterday which says, ‘‘Crackdown on tax inversions allowed U.S. companies to slash their tax bills and had 

the perverse effect of prompting a sharp increase in foreign takeovers.’’ 

[The article appears in the appendix on p. 56.] 

Senator PORTMAN. This is also consistent with what we are seeing generally. The Wall Street Journal ran a story, and recently the 

Ernst and Young report, which some of you have seen, talks about 

what is happening, and what has happened over the last—not just 

recently, not just because of these regulations. 

The Salix acquisition is probably the best case in point recently 

where they did not invert because of the rules and then they were 

bought by a foreign company that had inverted. Of 12 suitors, I am 

told 11 were foreign companies. The twelfth is in the process of inverting. So this notion that we are not losing companies and headquarters and so on—it is happening. 

The second one, though, goes to your ability to expand as a U.S. 

company. Everybody here has great expertise in this, but, Mr. 

Smith, since you are representing the company here today—and 

thanks for what you do in Ohio. I loved visiting your plant last 

year. Talk about that for a second. 

I think it is one thing we are missing in this debate. I think we 

understand what is going on. We have more foreign transactions, 

more U.S. companies being taken over, and that will continue to 

happen. I am a beer drinker. Try to find a U.S. beer. The biggest 

one is Sam Adams, with a 1.4-percent market share. 

22 

But in terms of this notion of being able to grow as a U.S. company, when you are competing overseas, particularly for an acquisition—and by the way, there are all sorts of new data on what that 

means for U.S. jobs. To acquire a U.S. company, an overseas entity 

adds jobs right here. But what are you competing with? 

Mr. SMITH. So we are competing in two different situations. The 

U.S. multinational population, a lot of those companies do have 

earnings and cash overseas. So, when a foreign target is actionable 

and when a foreign company could be purchasable, there are lots 

of bidders for that, and so the price goes up. 

So we do see situations where people who have a substantial 

amount of cash overseas will bid the price up for a foreign target 

simply because there is no other productive use for it. That is just 

not good policy. We should not be doing that. That is incentivizing 

increasing purchase prices. 

The other situation is, we cannot get, in the U.S., to all our global earnings because half are locked out, in the case of Thermo Fisher. So when we compete for purchasing other U.S. companies or 

other foreign companies, whatever it might be, only half our earnings are available to us because the other half are locked out. That 

puts us at a substantial disadvantage. 

If we were able to make those acquisitions, I do think jobs would 

grow in the U.S. because of it. But because of the way that our 

cash builds up overseas because of our structure, because of those 

offshore earnings that we have through operations, we cannot do 

it. We cannot compete. 

Senator PORTMAN. I have a story. Recently an Ohio company 

wanted to expand and purchase a subsidiary in Korea where they 

do business, the Republic of Korea. After they were done with the 

negotiations, a European company stepped forward and said they 

would pay 18 percent more of whatever was negotiated because 

their after-tax profit is greater because of their tax system. Their 

point to me was, we cannot expand. We are handicapped. You are 

nodding your head. 

So the final question that I have has to do with BEPS again and 

this notion of the patent box and what we ought to do. The administration, I think, has a lot of common ground with this committee 

in terms of addressing this issue, but one issue that troubles me 

a little in terms of what the Europeans are doing is to put a minimum tax in place. 

If you had a 19-percent minimum tax, as the administration has 

proposed, it does not provide the incentive to locate IP here. It may 

create some disincentives for companies to go overseas with the IP 

because there is a 19-percent minimum rate, but, particularly with 

the direction the E.U. is going with its nexus requirement, it seems 

to me IP located overseas is going to necessarily bring more R&D 

with it. So maybe, Ms. Olson, since you have done a lot of work 

in this area, you could comment on that. 

But given where the world is, not where we might wish it to be, 

but given how it has changed since the 1960s when we last reformed our international tax system in any substantial way, and 

given the specific issue of what is going on with patent boxes, what 

would the impact be of this minimum tax rate in terms of where 

R&D would occur? 

23 

Ms. OLSON. Well, I do not think it would bring R&D back to the 

U.S. I think it would be a disincentive to relocate, as you have indicated. But as good as our researchers are, including the ones in 

Cambridge, I do not think any of us have learned how to make 

water flow uphill. 

So if other countries are offering a 5-percent rate or a 10-percent 

rate and our companies cannot access that, but other companies 

can, then the result is going to be that other companies are going 

to get those opportunities and our companies are not. So it is definitely going to disadvantage us. 

I think it is important for us to recognize, as Mr. Smith has indicated, that U.S. companies are serving a global marketplace. This 

is not just about what happens here in the U.S., it is about what 

happens around the world and the fact that, as you indicated, we 

benefit. We create more jobs here in the U.S. when we do a better 

job of serving those markets outside the U.S. 

Senator PORTMAN. Thank you all. I am literally going to run to 

the vote. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Ms. Olson, let me ask you a question. You were 

clear in your testimony that the corporate tax rate needs to be reduced significantly. I would like you to elaborate on your point that 

a reduction in the corporate tax rate would, by itself, reduce the 

amount of intellectual property migration. 

Also, you stated the recent economic study suggests that a significant portion of the corporate income tax is ultimately paid for 

by labor, not just by the shareholders of the corporations. Could 

you elaborate on that as well? 

Finally and specifically, does this suggest that a cut in the corporate income tax rate is actually, at least in part, a cut in tax for 

the American worker? 

Ms. OLSON. Starting with the last part of the question relating 

to the corporate tax and who bears the burden, there has been 

some very good work done by the Congressional Budget Office, the 

Joint Committee on Taxation, and the U.S. Treasury Department, 

along with a lot of private researchers, who have concluded that 

some substantial part of the corporate tax burden—while the 

checks are written by the corporations—is actually borne by U.S. 

workers because of the mobility of capital and so forth in the global 

economy. 

The estimates are 20 to 70 percent. There are some who suggest 

an even higher rate. But it is clear that, in the global economy 

today, a substantial part of the burden of the corporate tax is in 

fact borne by workers in the form of lower wages. 

So, if we were to reduce the corporate tax, then part of the benefit of that would be distributed, I think, according to the revenue 

estimators of the Joint Committee, to the individuals who are employed. So it would show up as a reduction in the tax burden borne 

by the employees and not just the shareholders of the company. 

Reducing our corporate rate, I think, is a very important thing 

to do. Our country is a wonderful country, a wonderful market, 

with wonderful research institutions, wonderful governance structures. It is a wonderful place to be, but there is only so much of 

an additional burden that U.S. companies can carry against the 

24 

rest of the world. We are so far out of line right now with the rest 

of the world on corporate tax rates that I think we have to bring 

our rates down. 

In thinking about rates, we need to look at the Federal burden, 

but we also need to look at the burden imposed by State and local 

governments, which is why, when we look at the all-in burden, we 

are looking at 39.1 percent on corporate income. That, of course, 

does not count the additional tax that is paid by shareholders on 

dividends and corporate capital gains. 

When you put that all together, we have something north of a 

50-percent tax burden on corporate income here in the United 

States, and that is way out of line with where other countries are. 

The CHAIRMAN. You write in your testimony that many other 

OECD countries are developing various patent box regimes or intellectual property box regimes. You discuss extensively how capital 

is increasingly mobile. This, I would say, suggests a need to change 

the tax laws. 

So my question is this: is the main reason for a patent box to 

encourage research and development, and, if so, could not the R&D 

tax credit simply be increased to be a more generous provision? Or 

is the main reason for a patent box a recognition that any attempt 

to tax intellectual property at anything more than a very low rate 

will only result in chasing intellectual property away? 

Ms. OLSON. My view is that our R&D credit has served more the 

purpose of getting companies to locate their R&D activities here in 

the U.S. than it has actually incented R&D activity to occur that 

would not otherwise have occurred. 

I think the most important point at this time is location. Other 

countries have R&D incentives at the front end, when you are actually undertaking the research and development activity, and then 

on the back end as well with a lower rate on the returns to the 

results of those efforts. 

So other countries are going after it on both sides. We could provide a far more generous R&D credit than we currently have to 

incentivize performing the activities here, but there is probably 

some benefit in looking at the patent box end as well where we 

would have a reduced rate on the returns from the endeavors. 

The CHAIRMAN. All right. 

Mr. Smith, you provide several suggestions for international tax 

reform in your remarks. One of those suggestions is to ‘‘incentivize 

the utilization of intellectual property in the United States and 

generation of income here by reduction in the rate of tax on earnings from that activity.’’ 

Now, this is generally referred to as a patent box or innovation 

box regime. Do you have any recommendations for us on how a system might be designed, and, more specifically, how might we address the concerns that some have raised regarding the complexity 

and game-playing that would occur in the determination of the income attributable to intellectual property? 

Mr. SMITH. My greatest experience on R&D credits and patent 

boxes working well is in the U.K., so I think what we need to do 

is incentivize expenditure on R&D in the U.S., because that generates very high-level jobs. Mr. Shay mentions the best scientists— 

a lot of the best scientists—are here in the U.S. 

25 

So, we need that credit. We then need a patent box, because then 

we need to utilize the intellectual property we just developed from 

the research. What we would need to do is find a way to define 

what the intellectual property might be, and that could be, do you 

patent it, is it registered, whatever it might be. There are ways to 

define what the intellectual property might be. 

Then there will be ways to identify what the earnings might be 

from that. So, if you go to the Netherlands, what is the royalty 

stream coming from that trademark? That is not a good system, in 

my view. What you need to encourage is manufacturing the product that is subject to the IP. That creates jobs. That is the income 

stream that should be subject to a lower rate of tax. I do think it 

should be fairly easy to identify the intellectual property and what 

U.S. companies made in terms of earnings from that property. 

The CHAIRMAN. All right. 

Senator Wyden? 

Senator WYDEN. Thank you. Thank you, Mr. Chairman. 

I want to ask one question with respect to the territorial issue, 

because this is going to be an important part of the debate. First, 

so we are clear on the definition—because I think there has been 

a lot of debate about what territorial is all about—my understanding is, under a territorial system, a company would pay tax 

on the earnings in their home country and pay no tax on earnings 

outside of the home country. Is that correct? Does anybody disagree 

with that? 

Dr. ALTSHULER. I disagree. Go ahead, Stephen. 

Mr. SHAY. Go ahead. 

Dr. ALTSHULER. It is not all foreign. Territorial taxation does not 

relieve the U.S. tax burden on all foreign-source income abroad. 

Senator WYDEN. Right. I understand. 

Dr. ALTSHULER. All right. 

Senator WYDEN. All right. 

Dr. ALTSHULER. It is on active income abroad. 

Senator WYDEN. Correct. Fair enough. Good. 

Mr. SHAY. And there is a second point, which is, the proposals 

differ as to whether or not they provide exemption to foreign 

branches as opposed to subsidiaries. Some are only for income from 

subsidiaries, others, such as the administration proposal, cover 

both. That is a very significant design difference. So, that is to respond to your question. 

Senator WYDEN. That point really relates to the question I wanted to get at, because what has concerned me most about the debate 

about territorial, and I know in this kind of decade-long odyssey 

that I have been part of with Senator Gregg, Senator Coats, Senator Begich, what always struck me is that going to a pure territorial system does not eliminate the use of game-playing and tax 

havens and the like, which I think is where Dr. Altshuler was 

going with her reaction to my first comment. And your writings addressed that too, Mr. Shay. Is that right? We can get the whole 

panel involved in it. 

But it just seems to me that the debate about territorial will be 

a fierce one, and it has been ever thus. But the idea that it will 

eliminate tax havens strikes me as an important issue as well, and 

I do not see how it eliminates tax havens. So, for any of you—Mr. 

26 

Shay, you have written on this. We can get all four of you involved 

in this. 

Mr. SHAY. Well, if I may start, I do not think there is a proposal 

out there today in the U.S. that would provide exemption without 

also having some form of minimum tax to prevent use of tax havens. It is that exact same phenomenon. 

All of the proposals—Camp, Baucus, administration—would be 

stronger than many of our peer countries. Yet without them, we 

are going to lose a lot of revenue, which is why, coming back to an 

earlier question, it is not enough just to focus on that one piece. 

We are going to still need anti-inversion, anti-base erosion provisions. 

But even if you have a minimum tax, there is a real difficulty 

in designing it so it cannot be gamed. You are correct. I published 

an article which went through ways to game at least that version 

of the Camp proposal. You give me any proposal where there is a 

significant rate difference, and I will find a way to push more income into it than is expected, which does also bring up the patent 

box. 

The U.K. patent box, as I understand it—and Tony can correct 

me—is drafting a way that you deem a return to certain assets, 

and the excess above that return is treated as intangible income. 

That is a very broad, low rate. It is not well-targeted, and it is very 

hard to target. It is very hard to design that. 

Senator WYDEN. Let us, for purposes of discussion—Ms. Olson, is 

there anything Mr. Shay just said on that point that you would 

take exception with? 

Ms. OLSON. Well, I might. I do not think that we can move to 

a pure territorial system. I do not think anybody wants to move to 

a pure territorial system. We have to protect our tax base so that 

smart advisors do not take advantage of the opportunity to erode 

the base. 

I think the real question is whether we focus on our own base 

and making sure that we capture all of the income that is attributable to our own base, or whether we decide we want to try to 

trace the income around the rest of the world. 

Professor Altshuler’s recommendation of a minimum tax is much 

simpler administratively. If it does not put us too far out of line 

with what companies in other countries are allowed to do, then it 

would also have the benefit of keeping activities here. If it is too 

broad, then it will not matter how much more administrable it is 

because we are going to have fewer companies to apply it to. So 

those are the things that we need to look at, and that is what I 

think we need to focus on: how do we design a system that encourages activity here in the U.S. and that safeguards our own base? 

Senator WYDEN. Thank you. 

Let me just apologize to all of you. We have votes, and Chairman 

Hatch has been very gracious. I think we have to race off to get 

another vote. But I look forward to working closely with all four 

of you. You have been very, very constructive and very good. 

Thank you, Mr. Chairman. 

The CHAIRMAN. I understand Senator Menendez has some questions, so we will keep this open for him. But let me just ask a quesVerDate Mar 15 2010 20:53 Apr 13, 2016 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 R:\DOCS\99718.000 TIMD
27 

tion until he gets here. This is for you, Mr. Shay, but I also invite 

Mr. Smith to answer this question after Mr. Shay. 

Mr. Shay, in your Tax Notes article published just yesterday, you 

wrote, ‘‘A material portion of U.S. global business untaxed earnings 

are invested in active foreign business assets. Presumably, managements do not seek to repatriate earnings invested in active business assets until the assets are sold or disposed of. It is difficult 

to argue that lock-out is a problem in relation to these earnings 

while they are so invested.’’ 

But could it be the case that at least some of those earnings are 

invested in active foreign business assets because of the lock-out effect? That is, but for the lock-out effect, the earnings would instead 

be invested in active U.S. business assets. Is that possible? 

Mr. SHAY. It certainly is possible. There almost certainly is some 

linkage there. Tony alluded to that in his testimony, but I was relieved to read that Thermo Fisher does not make bad investments. 

But some other companies might. 

It is actually buried in a footnote in my article. As I point out 

in the article, the real question is, is the extent of sub-optimal investment in real assets in the foreign subsidiaries greater than the 

extent of sub-optimal investment domestically? The reason I ask 

that is, I have been involved in, or had as clients, companies that 

have made absolutely terrible acquisitions in the United States. 

What happens when you get into a deal is, deal fever can take 

over, and you can pay a bad price. It happens over and over again. 

The question is, how much does lock-out contribute to that in 

connection with foreign assets, and how great is the differential 

from just what happens normally? I am not persuaded—and particularly given the very high levels of cash holdings, there is not 

a lot of evidence to me that the amount of bad deals is disproportionate, which it would have to be in order to ascribe to lock-out, 

the effect that we are talking about. 

I worry much more about unused cash sitting offshore. Frankly, 

as I argue in the article, I think a lot of that is invested in the U.S. 

economy, so I do not think it is as big a problem. But if I am an 

investor in a company, I start to worry about it. 

The CHAIRMAN. Mr. Smith, do you care to comment? 

Mr. SMITH. So, from a treasury perspective, the treasury within 

Thermo Fisher, I would love to be in a situation where all of our 

global cash is available to us in the U.S., and right now it is not, 

because we generate, as I said, about half of our cash overseas 

through earnings, and it stays there, so it is locked out. 

If I am able to get to all that cash in the U.S. with a minimum 

tax cost, then I have a broad array of choices where I can invest. 

So I can still invest in overseas assets if I want to, or I can invest 

in U.S. assets too. So the choice, to me, is much, much broader. 

That means the competition for foreign assets goes down and we 

can compete better for U.S. assets because we just have a bigger 

cash pool, if you would like, back in the U.S. 

So I think the lock-out effect really does limit our ability to deploy our funds globally, and that is what I really want to do. 

The CHAIRMAN. Thank you. 

Let me direct one other question to you, Dr. Altshuler. You discussed the idea of there being an implicit cost in deferring foreign 

28 

income. You say that the implicit cost of the repatriation tax in our 

current worldwide-with-deferral regime is 5 to 7 percentage points 

today. 

Would you elaborate on this a little bit more, please, so that we 

can understand it maybe a little bit better here in the committee? 

What do you mean by ‘‘implicit cost’’? Is this mostly just a deadweight loss in the economy? Who is bearing the brunt of such a 

deadweight loss, if that is what it is? 

Dr. ALTSHULER. Well, it is a deadweight loss. One way to think 

about it is how much companies would be willing to pay to avoid 

the tax. So that is a good way to think about it, a way that I would 

use to explain it to my classes. How much would you be willing to 

pay to not be subject to this tax in the future? The implicit cost 

is an estimate that Harry Grubert of the U.S. Treasury and I came 

up with using data from tax returns of U.S. companies. 

The implicit cost is generated by having to undertake inefficient 

behavior to access the funds that you want to use abroad, so borrowing against the assets that you hold abroad. The more you hold 

abroad, the more you borrow against assets held abroad, the costlier it is for you to raise funds to invest in the United States. So 

it really is a cost. It is the cost that the tax system imposes on a 

company by not allowing them to bring the money back. It is imposed and it is borne by the company itself. 

The CHAIRMAN. All right. Thank you. 

Senator Menendez, you are the last one. I am going to have to 

go vote. Let me see. I cannot tell who was first. 

Senator MENENDEZ. Mr. Chairman, I am not going to ask for 

unanimous consent for anything in your absence. [Laughter.] 

The CHAIRMAN. I am glad to hear that. Senator Thune would be 

first, and then you would be second. 

Senator MENENDEZ. All right. 

The CHAIRMAN. But I am going to have to leave. I have to go to 

Judiciary. So, if you will shut it down, I would appreciate it. 

Senator THUNE [presiding]. Well, thank you, Mr. Chairman. 

Thanks to our panel today for your excellent testimony. With everybody bouncing around between different things going on today, 

I am glad I got a chance to get back and ask a couple of questions. 

Anybody can answer this, but over the past few years we have 

seen a number of proposals to overhaul—and I am sure you have 

covered a lot of this—international tax rules, from Wyden-Coats, to 

Senator Enzi’s proposal, to the proposal by former Chairman 

Camp. Given that each of you is an expert in this area, I would 

be curious to know which of the recent proposals you believe would 

be the best reform of our international tax system, and why. Feel 

free. 

Ms. OLSON. Of the proposals, I think the one that comes closest 

would be Chairman Camp’s proposal. But I would make some 

modifications on the international side with respect to the minimum tax, because I think it is too broadly applied. So I think the 

base on which the tax is imposed should be narrowed, more focused 

on protecting the U.S. base as opposed to circling the globe. 

Senator THUNE. All right. What do you think about the rate? 

Ms. OLSON. The rate is on the high side. 

Senator THUNE. All right. 

29 

Ms. OLSON. I think a lot of these things end up being the result 

of what the revenue estimators tell the drafters they have to go 

with, so something that was lower, 10 percent, something on that 

order, would be more effective. 

Senator THUNE. All right. 

Mr. Smith? 

Mr. SMITH. So I think, again, Chairman Camp’s proposals are 

mostly in line with what I am recommending, although I would 

make some changes. I do think repatriation should be taxed in the 

U.S. when the cash actually comes back to the U.S., so I do not 

think there should be any tax imposed whilst the earnings are offshore. 

That also goes to, I guess, the minimum tax or the overseas income tax. My preference would be to only have the income taxed 

in the U.S. when the cash actually comes back, but otherwise I 

think we are fairly close on it. 

Senator THUNE. All right. 

Dr. ALTSHULER. So, I like the idea of a dividend-exemption system, getting rid of that repatriation tax and combining it with a 

minimum tax. I think the administration rates are too high, the 14 

percent on the earnings held abroad and the 19-percent minimum 

tax. I would go with a minimum tax of 15 percent. This all has to 

be combined, of course, with the lower corporate tax. 

Senator THUNE. Right. All right. 

Mr. Shay? 

Mr. SHAY. As I say in my testimony, my first choice would be the 

Wyden-Coats approach with respect to the international provisions, 

but it does presume a fairly low rate. If that is not going to be 

achieved—and realistically then you would not get agreement to 

tax foreign income currently—then I prefer some form of minimum 

tax. Of the ones that are out there, I do think the administration’s 

is the best. I think it has some problems, like I have suggested, 

and that is why I have suggested an alternative in my testimony. 

Senator THUNE. All right. 

It is a reality that we have fewer and fewer of these Fortune 500 

companies that are based in the U.S., and they continue to be acquired by a lot of their foreign competitors. How much of that do 

you think is due to America being one of the few developed countries in the world with a worldwide system of taxation and the 

highest statutory tax rate? Put another way, are foreign acquisitions driven primarily by business considerations, or do tax considerations play a major role in that? To anyone on the panel. 

Ms. OLSON. My view is that there is a lot of activity that occurs 

because the U.S. is a very attractive market, so foreign companies 

want to invest here. Foreign companies are happy to acquire U.S. 

companies. 

I do think that if you have, for example, a merger of two similarly sized companies, one being foreign and one being U.S., that 

when it comes time to decide where the company should be domiciled or headquartered for tax purposes, the answer today is not 

likely to be the U.S. because of our very high corporate rate. So I 

think that lowering our corporate rate would go a long way towards 

having the decision made to have the U.S. be the headquarters in 

those kinds of situations. 

30 

Senator THUNE. All right. 

Mr. SMITH. So, in my view, the acquisition by foreign corporations of U.S. corporations, a lot of that is driven by business, because we have great corporations in the U.S. But I think it is inevitable that there is a tax element to that decision, so tax savings 

definitely would weigh into that, in my opinion. 

Senator THUNE. All right. 

Dr. ALTSHULER. I agree with what has been said before. I think 

we cannot ignore that taxes are playing a role here, a major role— 

that is an open question—but a role that we need to focus in on. 

Mr. SHAY. As I think Tony’s testimony indicated, you are facing 

a series of trade-offs. I would not be distracted too much by looking 

at acquisitions that are within one quarter or two quarters, I would 

look over a longer period. I think, while tax is without doubt a factor and was a very big factor in inversions, that part of it, I think, 

has been, at least for the interim, addressed. 

I agree with the sentiment, I think, of the other panelists. I 

would guess by far the predominant portion of acquisitions is driven by business and not tax, on the scale we are talking about. 

There is just too much risk to be doing something primarily for a 

tax reason. The inversions were the exception, and that is why it 

was appropriate to take actions to stop them. 

Senator THUNE. All right. Very quickly, because my time has expired, is earnings stripping contributing to corporate inversions? 

Mr. SHAY. Yes. Absolutely. 

Senator THUNE. All right. Agreed? 

Dr. ALTSHULER. Yes. 

Senator THUNE. All right. Thank you all very much. I will yield 

to the Senator from New Jersey. 

Senator MENENDEZ. Thank you, Mr. Chairman. Welcome all. 

Thank you for your testimony. I want to particularly welcome Dr. 

Altshuler, who is from a great New Jersey institution, being professor and dean at Rutgers University. 

A lot of the discussion today has been focused on how uncompetitive the corporate tax rate is, and critics correctly argue that our 

35-percent statutory rate is the highest of all OECD countries. But 

I think we neglect to mention that our effective tax rate is actually 

right in the middle of that curve. According to the Congressional 

Research Service, the effective U.S. corporate rate in 2011 was 27.1 

percent, slightly lower than the OECD average of 27.7 percent. 

Now, having said that, I do see myself supporting a tax reform 

package that seeks to reduce the corporate rate, but also, while I 

think that that is important, I do not know that it is the Holy Grail 

of tax reform. I am concerned about the gap between the United 

States and the rest of the world, about reducing the infrastructure 

and education gaps that we have. 

We were long the envy of the world in infrastructure, and we 

now rank just 12th globally, with billions of dollars of maintenance 

backlogs for roads, rails, and ports. American high school students 

ranked a dismal 26th out of 34 OECD countries in math. 

So, Professor Shay, let me start with you. It is estimated that for 

every point we reduce the corporate rate, we lose $100 billion in 

money to the Treasury. How do we look at this in the context of 

the desire to lower corporate rates, but the necessity, I think, of inVerDate Mar 15 2010 20:53 Apr 13, 2016 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 R:\DOCS\99718.000 TIMD
31 

frastructure investment, both in infrastructure broadly defined and 

in educational pursuits? 

Mr. SHAY. Well, a key question that is at the heart of this hearing is, how do you think about the taxation of cross-border income 

in that regard? My view is, it should not be left off the table if you 

are going to try to expand your base. 

Expanding the tax base by having tax at least up to some number, at least a minimum tax on income that is earned at very, very 

low foreign rates and very likely as a result of tax planning and 

incentives to achieve that, I think that would help contribute to the 

$100-billion point that you are referring to. In other words, I do not 

think we should be excluding international income from the base 

in achieving a lower rate. 

At that point, there are quite a few corporate tax expenditures, 

and they are just going to be very clear decisions. My preference 

is, as I say in the testimony, a much broader base. Take away as 

many expenditures as is feasible and either invest that in the rate 

or invest it in infrastructure or other things that would be valuable 

for the country. 

Senator MENENDEZ. Can we agree that a critical infrastructure 

and educational excellence in a globally challenged economy are incredible elements as well to future prosperity? 

Mr. SHAY. You certainly have my agreement on that. 

Senator MENENDEZ. All right. 

Let me ask this, Ms. Olson. We have been working on something 

that has broad bipartisan support in Congress, which is reforming 

the Foreign Investment in Real Estate Property Act, or FIRPTA, 

which is basically a punitive tax that acts as a roadblock to investments in the U.S. at a time when it seems to me we should be 

doing the opposite and incentivizing investment. 

Does it make any sense to create obstacles like FIRPTA for foreign investments in the U.S., particularly considering our needs, 

for example, in infrastructure and a still-looming commercial debt 

that is out there that has to be refinanced? 

Ms. OLSON. Can I give a one-word answer? 

Senator MENENDEZ. Sure. 

Ms. OLSON. No. It does not. 

Senator MENENDEZ. All right. 

Ms. OLSON. Clearly, FIRPTA does distort investment decisions 

about which sector of the economy to invest in, as well as whether 

to invest here in the U.S. or to invest in another country that does 

not have that kind of a tax. 

Senator MENENDEZ. I hope we can take your ‘‘no’’ and convert it 

into a powerful ‘‘yes’’ here to reform it. The other day, we started 

some of that. 

Finally, let me ask about inversions. I find this particular activity absolutely reprehensible and un-American, companies that benefit from our intellectual property laws, the protection of our military power and diplomatic expertise, the benefits afforded American businesses in operating abroad, the benefits of our universities 

and graduate schools, our highways, our infrastructure, the right 

to claim First Amendment rights in elections, then walk away from 

the table when the bill comes due. It is almost parasitic, in my 

mind. 

32 

So, Professor Shay, do you believe that a lower tax rate and a 

territorial tax system alone can end the problem of inversions in 

the U.S., or will we continue to have a need to address inversions 

directly? 

Mr. SHAY. I do not think that would end inversions alone, because a territorial system, as we have said, would almost certainly 

be accompanied by other provisions that would need to protect the 

U.S. tax base. There is still going to be pressure to try to move to 

some country that just taxes less, so there is going to need to be 

a whole series of provisions. 

But most importantly, we need to re-think our concept of corporate residence. In my testimony, I suggest that we should be taking account of shareholder composition. When the companies are 

trading on U.S. exchanges, if they have substantial U.S. shareholdings, we should—and it will take a fair amount of designing 

and thinking to make this a clear proposal—move towards making 

those companies U.S. tax residents. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Senator THUNE. Thank you, Senator Menendez. 

Does the Senator from Delaware desire to ask questions? 

Senator CARPER. He does. Thanks. 

Hi, everyone. Nice to see you. Thanks for joining us and for sharing your wisdom with us. 

In the last Congress, I chaired a committee and helped lead a 

committee with a Republican from Oklahoma named Tom Coburn, 

and we focused a fair amount on cyber-security legislation. A couple of Congresses ago, we tried to pass comprehensive cybersecurity legislation. It involved a bunch of committees in the Senate, the administration, and we found, at the end of the day, that 

we could not get it done. 

So Dr. Coburn and I started in the last Congress in 2013 and 

said, ‘‘Rather than trying to find a silver bullet on cyber-security, 

why don’t we see if there might be a number of silver BBs that, 

put together, would actually add up to something significant?’’ That 

is what we actually did and passed three or four bills out of committee, and the President signed them into law and significantly 

strengthened the ability of the Department of Homeland Security 

to help defend us on the cyber-side. 

I like to go big. With respect to comprehensive tax reform, I 

would like to go big in this instance as well. But at the end of the 

day, we may not be successful in doing that. We may not be able 

to find that silver bullet all the way through, but there might be 

a number of silver BBs. Sometimes we talk around here about getting a half-loaf, a quarter-loaf, or three-quarters of a loaf. 

So let us think in terms of either silver BBs or half-loaves. If we 

cannot get the full loaf or the silver bullet, starting with you, Ms. 

Olson, what should we at the very least try to get done—not on a 

temporary basis, not on an extender kind of basis, but on a permanent basis, please? 

Ms. OLSON. The constraint is always revenue neutrality. If we 

could walk away from revenue neutrality or if we could take a perhaps more realistic look at what is sustainably revenue-neutral, 

that might be a good place to start. 

33 

But clearly we need to do something to bring our corporate rate 

down so it is more closely aligned with that of other governments. 

So, if you can only do one thing, I would say try to move in the 

direction of reducing the corporate rate. 

Senator CARPER. Thank you. One of the pay-fors we never think 

much about or talk much about is actually investing in the IRS in 

terms of people and technology. It is a huge pay-off. I think it is 

like $10 for every $1 we invest. When are we going to wake up and 

say, well, maybe we should do that to help pay for some of this 

stuff? 

Mr. Smith? 

Mr. SMITH. So I think international reform should focus on making U.S. companies more competitive in the global marketplace, 

and it should also incentivize job growth in the U.S. So I think very 

targeted international tax reform, which would focus on repatriation at a reasonable cost, further R&D credits on a consistent 

basis, some level of patent boxes I would call it, which is a lower 

tax rate on earnings in the U.S. from utilization of intellectual 

property, and also a lower general corporate tax rate, would generate jobs growth. 

Senator CARPER. Thank you. 

Dr. Altshuler? 

Dr. ALTSHULER. I agree with Ms. Olson about getting the corporate rate down. I guess if there was another BB, this one might 

be bigger: thinking about a dividend exemption system with a minimum tax on it. 

Senator CARPER. All right. Thanks. 

Mr. Shay? 

Mr. SHAY. I put three BBs in my testimony. They would be an 

advance Alternative Minimum Tax, strengthening the corporate 

residence rules, and addressing some problems that we have today 

that advantage investment in foreign portfolio stocks rather than 

U.S. portfolio stocks, which is interactive with U.S. corporate taxation. 

Senator CARPER. Thank you. 

Ms. Olson, in your testimony you provided, I believe, a chart that 

sought to compare research tax incentives that are offered in some 

of the major OECD countries. In it, I think we found that the 

United States—we are not in the top 20. I do not think we are in 

the top 25. I think we are at a rate as low as 27. Many of our major 

trading partners, including China, the U.K., Canada, Japan, all 

offer, as we know, strong incentives. 

To help address this issue, last month one of my colleagues on 

this committee, Senator Toomey from the neighboring State of 

Pennsylvania—which was once part of Delaware—and I introduced 

legislation. We called it The Compete Act. That would address 

many of the problems by permanently extending, increasing, or 

simplifying the R&D credit. I view this legislation as the beginning 

of a dialogue, not the end, on how to reform and improve the Federal tax policy with respect to research. 

I would be interested in hearing from the members of this panel 

about this idea of strengthening our tax incentives to innovate, either from an improved R&D tax credit or supplementing that credit with a so-called patent box. How can we design such a patent 

34 

box, and can we do so effectively while also avoiding the base erosion associated with highly mobile income from intangible assets 

such as patents? I am going to ask you, Ms. Olson, if you would 

lead off. I would love to hear from Mr. Smith and Dr. Altshuler as 

well. 

Ms. OLSON. Thank you. I think that one of the features of a patent box is that it would serve as an anti-base erosion feature because it would attract income to the U.S. So a well-designed patent 

box or innovation box that was focused on those kinds of activities 

and the income from those activities could attract that kind of activity, as well as the income associated with it. So it would be an 

anti-base erosion feature in itself. 

Senator CARPER. All right. Thank you. 

Mr. Smith? 

Mr. SMITH. So to continue that, I think the combination of continued R&D credits where we generate new ideas and new intellectual property, and then to encourage companies in the U.S. to generate income in the U.S., is the correct combination. I think that 

is the best combination we could get to and that would certainly— 

as I said before, I do think that would create jobs. 

Senator CARPER. All right. Thanks. 

Dr. Altshuler? 

Dr. ALTSHULER. I think it is important to note that, under the 

current system, you can use excess credits to absorb taxes that 

would be paid on royalties, so the royalties are really not taxed to 

a large extent under the current system. So I would not even consider a patent box unless we were to go into a dividend exemptiontype, territorial-type system. 

Senator CARPER. All right. Thank you. 

Senator Thune, Mr. Chairman, I know that the witnesses are 

hungry for another question from me, but I am over my time, so 

why don’t I yield back? 

Senator THUNE. Thank you. I thank the Senator from Delaware. 

We are ready to wrap up here in just a minute. I want to ask one 

last question. 

Mr. Smith, in your testimony, you advocated for moving toward 

a territorial system by providing for a reduced tax rate on repatriated earnings in the range of 5 percent or slightly higher, and you 

also said that the tax should not be assessed until the earnings are 

repatriated to the United States, not when they are earned. Now, 

in contrast, the President’s latest proposal and the proposal from 

Dr. Altshuler include an immediate tax on foreign earnings, 19 percent under the President, 15 percent under Dr. Altshuler’s proposal. 

Tell me why you believe that your proposal is a better path forward. 

Mr. SMITH. I look at what we are trying to achieve, and I compare it to other international tax reforms from other jurisdictions 

and other international tax systems in other countries. I cannot see 

a minimum tax existing in any other foreign tax legislation that I 

can think of. 

So the only complete system of taxing everyone’s income, even at 

different rates, that I can think of is in Brazil, to be honest with 

you. So I think we should look hard at what other countries have 

35 

in terms of tax systems and try to mirror that, because, at the end 

of the day, I do view this as a competition. 

Senator THUNE. What would be the practical implications to your 

company and your ability to compete with companies based in 

countries with a territorial tax system if a 19-percent or 15-percent 

minimum tax were imposed on your foreign earnings? 

Mr. SMITH. So we have a lot of foreign earnings generated off- shore, about half our earnings. That equates to about $1.5 billion 

of earnings generated offshore every year. Some of those, we would 

like to invest in further acquisitions overseas, and so, if there is a 

minimum tax which basically taxes all our earnings overseas at an 

additional tax rate, then we have lost some of that money. 

So our capacity to go spend that money on other things overseas 

has gone down, so I think that would not allow us to compete better, that would allow us to compete worse. That is not my ideal for 

tax reform in the U.S. 

Senator THUNE. All right. Well, we appreciate very much, again, 

your testimony. Thank you for your willingness to come and respond to our questions. This is a complicated subject, but we are 

long overdue to reform the tax code and to get us to a place where 

we are more competitive in the global marketplace. Your thoughts 

and suggestions were very helpful in that regard. So, thanks so 

much. 

With that, this hearing is adjourned. 

[Whereupon, at 12:09 p.m., the hearing was concluded.] 

(37) 

1 Rosanne Altshuler, Stephen E. Shay, and Eric J. Toder, ‘‘Lessons the United States Can 

Learn from Other Countries’ Territorial Systems for Taxing Income of Multinational CorporaContinued 

A P P E N D I X 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

PREPARED STATEMENT OF DR. ROSANNE ALTSHULER, PROFESSOR OF ECONOMICS AND

DEAN OF SOCIAL AND BEHAVIORAL SCIENCES, SCHOOL OF ARTS AND SCIENCES, 

RUTGERS UNIVERSITY

Chairman Hatch, Ranking Member Wyden, and Members of the Committee, it is 

an honor to appear before you today to discuss the very important topic of international tax reform. 

I am a Professor in the Economics Department and Dean of Social and Behavioral 

Sciences at the School of Arts and Sciences of Rutgers University. During various 

leaves from Rutgers University, I have served as Special Advisor to the Joint Committee on Taxation, Chief Economist for the President’s Advisory Panel on Federal 

Tax Reform in 2005, and Director of the Urban-Brookings Tax Policy Center. In 

each of these positions, I have advocated the compelling case for tax reform, evaluated the economic consequences of different tax reforms, and studied the implementation issues and transition costs associated with various reforms. My primary area 

of expertise is international tax policy. 

Under our current system, all income of U.S. corporations is subject to U.S. corporate income tax whether it is earned at home or abroad. This ‘‘worldwide’’ or ‘‘residence’’ approach is used by only a handful of advanced countries. All other G–7 

countries and all but six other OECD countries (Chile, Ireland, Israel, Mexico, Poland, South Korea) have adopted systems that exempt some (or all) active foreign 

earnings of resident multinational corporations (MNCs) from home country taxation. 

These countries are commonly referred to as having ‘‘territorial’’ tax systems. It is 

more accurate, however, to call this approach a ‘‘dividend exemption’’ system since 

the removal of home country tax liabilities on active foreign income is typically accomplished by exempting dividend remittances from foreign affiliates to home country parent corporations from tax. In contrast, the United States defers taxation of 

foreign affiliates’ active income until it is distributed as a dividend, but then taxes 

the income at its full corporate rate and allows a credit for foreign taxes paid on 

the earnings. 

I believe there is broad agreement among policy makers and companies that our 

current system for taxing the income earned abroad by U.S. corporations is very 

complex and induces inefficient behavioral responses. The system provides incentives to invest in tangible and intangible capital in some locations instead of others, 

to engage in costly strategies to avoid U.S. taxes on foreign dividends, and to shift 

reported income from high- to low-tax locations by using inappropriate transfer 

prices or paying inadequate royalties. Where the tax burden under U.S. rules exceeds what could be achieved through a non-U.S. parent structure, pressure exists 

to change the parent corporation’s domicile to a foreign jurisdiction. 

Many in the United States are calling for reform of our system for taxing international income and support moving to a territorial tax system. I recently worked 

with Stephen Shay of Harvard Law School and Eric Toder of the Urban-Brookings 

Tax Policy Center on a report that explores other countries’ experiences with territorial tax systems.1 We examined the approaches and experience of four countries— 

38 

tions,’’ Urban-Brookings Tax Policy Center Research Paper, January 21, 2015, http://www.tax 

policycenter.org/UploadedPDF/2000077-lessons-the-us-can-learn-from-other-countries.pdf. 2 Because of deferral, the foreign tax credit, and the electivity of operating through a foreign 

branch, the United States does not collect much corporate tax in any form on foreign income 

earned from operating directly in another country. In recent work using U.S. Treasury tax data, 

Harry Grubert and I estimate that the United States collected $32 billion of revenue on all categories of corporate foreign source income in 2006. This amount was approximately nine percent 

of 2006 corporate tax revenues but less than four percent of all foreign-source income of U.S. 

MNCs (including profits deferred abroad, but before allocated parent expense). U.S. taxes paid 

on repatriated dividends accounted for a very small portion of this revenue. The remainder came 

from taxes on royalties, portfolio income, export income and income from foreign branches. See, 

Harry Grubert and Rosanne Altshuler, ‘‘Fixing the System: An Analysis of Alternative Proposals 

for the Reform of International Tax,’’ National Tax Journal, September 2013, 66(3), 671–712. 

Germany and Australia—both of which have long-standing territorial systems—and 

the UK and Japan—both of which within the last six years enacted territorial systems by exempting from home country taxation either all or 95 percent of the dividends their resident MNCs receive from their foreign affiliates. We examined the 

factors that drove the policy choices of these four countries and put forward some 

lessons we believe the United States can take away from their experiences. In my 

testimony today, I highlight six conclusions from this work that I believe are important for policy makers in the United States as they contemplate reform of our international tax system. I also briefly discuss the benefits of adopting a reform that 

would remove the U.S. tax due upon repatriation of foreign profits and impose a 

minimum tax on foreign income. 

1. The classification of tax systems as ‘‘worldwide’’ or ‘‘territorial’’ oversimplifies and does not do justice to the variety of hybrid approaches taken 

in different countries. 

In practice, when exceptions and anti-abuse rules are taken into account, the difference in corporate tax policy between the United States and other advanced economies is nowhere near as stark as the labels ‘‘worldwide’’ and ‘‘territorial’’ suggest. 

The details of a system are more important than which broad definitional category 

is applied to a particular system. 

All tax systems are hybrid systems that tax at reduced effective rates some foreign business income. Under the current U.S. ‘‘worldwide’’ system, MNCs are allowed to defer tax on most income earned in their foreign subsidiaries until that 

income is repatriated as a dividend to the U.S. parent company and are provided 

a liberal credit for foreign income taxes paid. As a result of deferral and the foreign 

tax credit, the United States collects little tax on the dividends its MNCs receive 

from their foreign affiliates.2 Under the prior ‘‘worldwide’’ UK and Japanese systems, in which they also deferred tax on foreign affiliate earnings, their MNCs could 

bring back foreign earnings through related party loans without it being treated as 

a taxable repatriation. Most ‘‘territorial’’ countries impose tax on some foreignsource income as accrued in order to protect their domestic corporate tax base. In 

any assessment of international tax policy, as in so much else in taxation, the devil 

is in the details. 

2. The circumstances that have caused other countries to maintain or introduce territorial systems do not necessarily apply to the United States. 

Therefore, others’ experiences do not necessarily dictate that the United 

States should follow the same path. 

The countries we studied (Australia, Germany, Japan and the UK) differed greatly in the extent to which they weighed conflicting policy concerns, such as effects 

on domestic investment, residence decisions of MNCs, tax avoidance through profit 

shifting, the burden of the tax due upon repatriation of foreign profits, and taxation 

of inbound investments. Countries also differed as to their levels of concern about 

potential budgetary effects of corporate tax policy changes. We were somewhat surprised to discover that the policy decisions of the countries we studied do not appear 

to have been based on analysis of how foreign source income was effectively being 

taxed. In other words, the changes do not seem to have been driven by analysis of 

administrative data and seem, instead, to have been driven by anecdotal evidence 

to the extent decisions were ‘‘evidence based.’’ 

3. The tax policies of countries with dividend exemption systems have been 

greatly influenced by their separate individual circumstances. 

As a net capital importing country, Australia’s main goal for its corporate tax has 

been to collect taxes from foreign corporate investors. There is less concern with 

39 

3Germany is concerned about avoidance of German tax on inbound investment, which their 

rules to limit tax avoidance by German-resident companies cannot combat. There is a concern 

that this gives foreign companies a competitive advantage over domestic-based firms in the German market. 

treatment of outbound investment by Australian companies. Australia has an imputation system, which allows domestic, but not foreign shareholders, to claim credits 

for domestic but not foreign corporate taxes paid by Australian companies. This in 

part may reduce tax avoidance by Australian companies through shifting profits 

overseas, because Australian shareholders are not allowed credits if domestic corporate taxes have not been paid. 

Germany adopted their dividend exemption system many years ago in order to 

foster foreign investment by German companies. Other European Union (EU) countries also had exemption systems, which influenced German practice. German antiavoidance rules appear to be more effective than most in limiting profit shifting by 

German-based companies, except to the extent that these rules are limited to conform to EU rules.3

Japan adopted an exemption system in 2009 to make its companies more competitive and encourage them to bring back accrued overseas profits to Japan. The Japanese also believed that exemption would be simpler to administer than the system 

they had in place. A notable feature of the Japanese tax environment is a compliant 

international tax planning culture. Advisers report that Japanese MNCs are not aggressive tax planners. Accordingly, the Japanese government was not concerned 

that eliminating taxes on repatriated dividends would encourage income shifting 

and base erosion behavior by their MNCs. Japan did not enact any new antiavoidance rules to accompany the switch to a territorial system and did not adopt 

a transition tax on repatriations from pre-effective date profits. 

The United Kingdom went to a territorial tax system in 2010 and lowered their 

top corporate tax rate to 21 percent. It also enacted ‘‘patent box’’ legislation that reduced the tax rate on intangible income to 10 percent. Like Japan, the United Kingdom applied their new dividend exemption system to distributions of foreign earnings prior to the effective date. But the UK moves had much different motivations 

than the Japanese reforms. The United Kingdom was mainly concerned with losing 

corporate headquarters. This was facilitated by a number of factors including the 

proximity of the United Kingdom to other countries (Ireland, Luxembourg) with 

lower corporate tax rates and territorial systems, and the absence of any antiinversion rules in the United Kingdom (and EU restrictions against adopting such 

rules). The United Kingdom was less concerned about tax avoidance and had close 

to the equivalence of an exemption system before the change because of rules that 

allowed their MNCs to return borrowed funds to their shareholders without paying 

the repatriation tax. In addition to tax competition from European countries for corporate headquarters, the decision of the United Kingdom to adopt dividend exemption seems to have been driven by requirements to satisfy European Court of Justice 

case law interpreting EU treaties and the recession brought on by the 2008 financial 

global crisis. 

4. The burden of the tax due upon repatriation of foreign earnings may be 

a lot higher in the United States than it was in the United Kingdom and 

Japan before they adopted dividend exemption systems. 

Deferral of U.S. tax allows foreign business income of U.S. MNCs to be taxed at 

a lower effective rate than it would be if it were earned in the United States. When 

combined with financial accounting rules that effectively treat deferred earnings as 

permanently exempt, deferral creates a ‘‘lockout’’ effect with associated efficiency 

costs. Corporations will engage in inefficient behavior—they will take actions that 

they would not find attractive were it not for the tax—to avoid the tax due upon 

repatriation and the associated reduction in after-tax book income. For example, a 

parent corporation that wants to invest in a project in the United States, distribute 

dividends to shareholders or buy back its shares may borrow at home instead of remitting foreign profits in order to extend the deferral of U.S. tax on foreign earnings. This maneuver allows the U.S. parent to defer the U.S. corporate tax, but 

raises the cost of capital for domestic uses. 

The burden of the tax on foreign subsidiary dividends is a key issue for understanding both the benefits and detriments of moving to a dividend exemption sysVerDate Mar 15 2010 20:53 Apr 13, 2016 Jkt 000000 PO 00000 Frm 00043 Fmt 6601 Sfmt 6621 R:\DOCS\99718.000 TIMD
40 

4Pressure from U.S. MNCs arguing that the burden was costly to their business operations 

and a desire by Congress to induce U.S. MNCs to reinvest accrued foreign profits in the United 

States resulted in a ‘‘repatriation tax holiday’’ in 2005. Not surprisingly, pressure for a similar 

tax holiday surfaced not long after the holiday expired and has continued. 5See Harry Grubert and Rosanne Altshuler, ‘‘Fixing the System: An Analysis of Alternative 

Proposals for the Reform of International Tax,’’ National Tax Journal, September 2013, 66(3), 

671–712. 6 A recent analysis reported in Bloomberg News estimates the stock of profits held abroad by U.S. companies at $2.1 trillion. See http://www.bloomberg.com/news/articles/2015-03-04/u-scompanies-are-stashing-2-1-trillion-overseas-to-avoid-taxes. 7Section 956 of the Internal Revenue Code prevents companies from avoiding home country 

taxation while implicitly receiving the benefits of the foreign earnings of their controlled foreign 

affiliates through loans or investments in U.S. property by treating these transactions as constructive dividends. I am not aware of these types of rules being in place in any other OECD 

country. 8OECD, Revenue Statistics 2014, 2014, OECD Publishing, Paris, http://www.oecdilibrary.org/taxation/revenue-statistics-2014_rev_stats-2014-en-fr. 

tem and how the current system differs from dividend exemption.4 The burden of 

the tax includes both the actual tax paid upon repatriation and the implicit costs 

of deferring income which likely increase as retentions abroad grow. These implicit 

costs include, for example, the cost of using parent debt to finance domestic projects 

as a substitute for foreign profits (which will increase as debt on the parent’s balance sheet expands), payments to tax planners, foregone domestic investment opportunities and foreign acquisitions that may not have been undertaken in the absence 

of the tax. 

In a recent paper, Harry Grubert of the U.S. Treasury Department and I used 

data from the U.S. Treasury tax files to derive an estimate of the cost of deferring 

foreign income that takes into account the growing stock of profits retained 

abroad.5, 6 This implicit cost can be thought of as the amount a company would be 

willing to pay to have the repatriation tax on an extra dollar of foreign earnings 

removed. Our work suggests that the implicit cost of the tax on foreign profits for 

a highly profitable company is about five to seven percentage points today. This burden is higher than previous estimates and increases as deferrals accumulate abroad. 

As mentioned above, the United Kingdom and Japan allowed corporations to move 

foreign profits from affiliates to parents without any home country tax via subsidiary loans to or investment in parent corporations.7 In those countries, it seems 

that it was relatively easy for parent corporations to access foreign profits without 

paying home country tax. The U.S. tax code, however, would treat such loans or investments as distributions with respect to stock and subject them to U.S. tax to the 

extent of un-repatriated earnings. 

I am not aware of any estimates of the burden of repatriation taxes in the United 

Kingdom or Japan, but my understanding of their systems suggests that the burden 

of the tax on foreign dividends in those countries was much smaller than it is in 

the United States. For this reason, their decisions to eliminate the tax on active foreign earnings offer relatively little direct guidance for resolving the disagreement 

in the United States over the optimal approach to reducing this key burden of the 

current system. 

5. The fact that the United States raises relatively little corporate tax revenue as a share of GDP than other countries while having the highest statutory corporate rate in the OECD has multiple explanations and does not 

necessarily suggest that U.S.-based companies in any given industry are 

more aggressive at income-shifting than foreign-based companies. 

According to the OECD Tax Database, only Germany had a lower ratio of corporate receipts to GDP than the United States in 2012 (the most recent year reported).8 This ratio was 1.8 percent for Germany, 2.5 percent for the United States, 

2.7 percent for the UK, 3.7 percent for Japan and 5.2 percent for Australia. The 

United States had the second highest corporate rate at 39.1 percent (including subnational taxes) among the five countries in 2012 with Japan at the top at 39.5 percent. Germany and Australia had rates of 30.2 and 30 percent, respectively, and the 

United Kingdom had a rate 24 percent. (Since 2012, the Japanese rate has fallen 

to 37 percent and the rate in the United Kingdom has been reduced to 21 percent.) 

One reason the United States raises little corporate revenue as a share of GDP 

with a relatively high corporate tax rate is that a relatively large share of business 

activity in the United States comes from firms that do not pay corporate income tax. 

We estimate that the United States among the five countries has the lowest share 

41 

9For further information and figures see Rosanne Altshuler, Stephen E. Shay, and Eric J. 

Toder, ‘‘Lessons the United States Can Learn from Other Countries’ Territorial Systems for Taxing Income of Multinational Corporations,’’ Urban-Brookings Tax Policy Center Research Paper, 

January 21, 2015, http://www.taxpolicycenter.org/UploadedPDF/2000077-lessons-the-us-canlearn-from-other-countries.pdf. 10 U.S. Office of Management and Budget, Analytical Perspectives: Budget of the United States 

Government, Fiscal Year 2015, 2014, Table 14.2: 210–215. 11See Kevin A. Hassett and Aparna Mathur, ‘‘Report Card on Effective Corporate Tax Rates: 

U.S. Gets an F,’’ American Enterprise Institute, February 9, 2011. 12For the most rigorous evidence of income shifting of U.S. multinational corporations, see 

Harry Grubert, ‘‘Foreign Taxes and the Growing Share of U.S. Multinational Company Income 

Abroad: Profits, Not Sales are Being Globalized,’’ National Tax Journal, June 2012. Grubert 

demonstrates using Treasury tax data that the differential between U.S. and foreign effective 

tax rates has a significant effect on the share of U.S. multinational income abroad and that this 

effect works primarily thorough changes in domestic and foreign profit margins and not through 

the location of sales. 13 No country, however, has a pure territorial system. Countries with territorial tax systems 

have adopted rules to prevent abuse and protect the corporate tax base and one must take these 

provisions into account when comparing the ‘‘competitiveness,’’ for example, of different systems. 

At least on the surface, however, it does appear that other countries anti-abuse rules are not 

more robust than U.S. rules (Brian J. Arnold, ‘‘A Comparative Perspective on the U.S. Controlled Foreign Corporation Rules,’’ Tax Law Review, Spring 2012). 14 Edward D. Kleinbard, ‘‘Competitiveness Has Nothing to Do with It,’’ Tax Notes, September 

1, 2014. 

of business profits that comes from companies that are subject to a corporate profits 

tax (34 percent). Germany appears also to have a relatively low share of business 

profits subject to the corporate tax (45 percent). In contrast, very large shares of 

business profits in Japan (87 percent), Australia (82 percent), and the United Kingdom (80 percent) are subject to their country’s corporate income tax.9

A second reason that the United States raises relatively little revenue as a share 

of GDP from corporate taxes in spite of its high statutory corporate rate is the extent of tax preferences it allows in relation to business income. Based on estimates 

and projections reported by the U.S. Office of Management and Budget, we calculate 

that corporate tax expenditures, excluding international provisions, will reduce U.S. 

corporate tax receipts by about 15 percent between fiscal years 2015 and 2019.10

Including international provisions would raise this figure to 23 percent, but the 

major international tax expenditure, deferral, is less generous than the exemption 

of foreign-source income in the tax laws of the four comparison countries. While the 

domestic tax preferences reduce the effective U.S. corporate rate below the statutory 

rate, the effective corporate rate is also lower than the statutory rate in most other 

OECD countries, although less so. The ratio of the effective rate to statutory rates 

is slightly lower in the United States than it is for the four comparison countries.11

To what extent does income shifting explain the comparatively low level of corporate receipts as a share of GDP relative to the high U.S. statutory rate? The 

United States does have relatively large high-tech and pharmaceutical sectors, 

which are the ones mostly likely to have a large share of their capital in the form 

intangible assets that are easy to shift to entities in low-tax jurisdictions. While 

there is evidence of income shifting by U.S. companies, there are insufficient comparable data on companies from other countries to conclude that U.S. companies are 

more or less aggressive than their peer competitors from other countries.12

6. The ability of the U.S. to retain higher corporate tax rates and tougher 

rules on foreign income is declining. 

The United States is subject to many of the same pressures facing other countries 

that have lowered corporate tax rates and have eliminated taxation of repatriated 

dividends. The United States faces growing competition as an investment location 

versus jurisdictions with lower corporate tax rates. U.S.-based MNCs face growing 

competition from MNCs based in countries with exemption systems.13

The advantages of foreign residence have increased incentives for some U.S.-based 

firms to ‘‘re-domicile’’ as foreign-based firms. The rising costs of repatriations as 

U.S. firms accumulate more cash overseas and foreign corporate income tax rates 

decline, combined with the ability of expatriated firms to circumvent taxes that 

would otherwise be payable on repatriations from accrued assets in U.S. controlled 

foreign subsidiaries puts increased pressure on firms to consider giving up U.S. residence.14 And foreign-residence makes it easier for corporations to strip income out 

42 

15Stephen E. Shay, 2014. ‘‘Mr. Secretary, Take the Tax Juice Out of Corporate Expatriations,’’ 

Tax Notes, July 28, 2014. 16 Harry Grubert and Rosanne Altshuler, ‘‘Fixing the System: An Analysis of Alternative Proposals for the Reform of International Tax,’’ National Tax Journal, September 2013, 66(3), 671– 

712. 

of the United States through earnings stripping techniques involving interest and 

royalties.15

The U.S. market is large and has enough unique productive resources that companies will invest here (albeit somewhat less) even if U.S. corporate rates are higher 

than elsewhere. The United States has some of the world’s leading MNCs with 

unique assets in certain areas (e.g., high-tech, finance, and retailing). But as the 

economic differences between the United States and other countries narrow and the 

United States share of world output declines, the ability of the United States to sustain ‘‘U.S. tax exceptionalism’’ will decline. 

CONCLUSION

In the last two decades differences between the United States and other countries’ 

tax systems have widened. The United States is now the only major country that 

imposes a home country tax on foreign business income when it is returned to home 

country parents. And there are other ways that the United States has become more 

different that are also important: the United States is the only country that does 

not employ a VAT to raise revenues; statutory and effective tax rates around the 

world have continued to decline relative to U.S. rates, sharpening the ‘‘competitiveness’’ issue; and the share of business income in the United States that is taxed at 

the corporate level has been declining since the 1980s and today is less than 40 percent, while in most other countries business income is typically subject to corporate 

income tax. At the same time, emerging economies have acquired importance in 

international tax policy discussions and generally have adopted the perspective of 

a host country seeking to attract inbound investment. Accumulating evidence that 

MNCs are shifting more of their reported income to very low-tax countries is driving 

discussion of reform around the world and the OECD has initiated a Base Erosion 

and Profit Shifting project (BEPS) to develop coordinated actions to prevent the erosion of the corporate tax base. 

There is no question that the global tax environment has changed greatly and will 

continue to do so. One of the lessons of my study with Stephen Shay and Eric Toder 

is that the United States need not follow others tax policies. But that does not mean 

that our reform process should be done in a vacuum. It is fundamental to understand the forces that have shaped the reforms of our competitors and recognize that 

while our economies are different we do, indeed, face many of the same pressures. 

In a recent paper, Harry Grubert and I evaluated a variety of reforms and proposed one that makes improvements along a number of behavioral margins that are 

distorted under the current tax system.16 We would start by eliminating the lockout 

effect by exempting all foreign earnings sent home via dividends from U.S. tax. This 

reduces wasteful tax planning and simplifies the system. Then we would impose a 

minimum tax of, say, 15 percent on foreign income. As a result, companies would 

lose some of the tax benefits they enjoy from placing valuable intellectual property 

like patents in tax havens and from other methods of income shifting. If companies 

continue to route income to havens, at least the U.S. would collect some revenue. 

Our reform would restore some sanity to the system. For example, investments 

in low-tax countries are now effectively subsidized due to the opportunities for income shifting they create. Under our minimum tax reform these investments would 

face positive U.S. effective tax rates. The minimum tax could be imposed on a per 

country basis but it could also be on an overall basis which would be much simpler. 

As an alternative to an active business test, the tax could effectively exempt the 

normal profits companies earn on their investments abroad by allowing them to deduct their capital costs. That way the tax would apply only to foreign profits above 

the normal cost of capital and companies would not be discouraged from taking advantage of profitable opportunities abroad. Only ‘‘super’’ profits above the normal return—typically generated from intellectual property—that are most easily shifted 

would be subject to the minimum tax. There are other options. But my analysis with 

Harry Grubert suggests that combining a minimum tax with dividend exemption 

can make improvements across many dimensions including the lockout effect, income shifting, the choice of location and complexity. 

43 

I applaud the Senate Committee on Finance for holding this hearing on building 

a competitive U.S. international tax system and urge the Committee to tackle the 

challenge of reforming our system. 

Thank you. I would be happy to answer any questions you may have. 

PREPARED STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM UTAH

WASHINGTON—Senate Finance Committee Chairman Orrin Hatch (R–Utah) today 

delivered the following opening statement at a committee hearing on the international tax system: 

The committee will come to order. 

I want to welcome everyone to today’s hearing on Building a Competitive U.S. 

International Tax System. I also want to thank our witnesses for appearing before 

the committee today. 

Reforming our international tax system is a critical step on the road toward comprehensive tax reform. Not surprisingly, the failures of our current system get a lot 

of attention. That’s why Senator Wyden and I designated one of our five tax reform 

working groups to specifically look into this issue. 

I know that my colleagues serving on that working group—and all of our working 

groups—are looking very closely at all the relevant details. I look forward to their 

recommendations. 

As we look at our international tax system, our primary goals should be to make 

the U.S. a better place to do business and to allow American job creators to more 

effectively compete with their foreign counterparts in the world marketplace. 

Our corporate tax rate has been the highest in the developed world and effective 

tax rates facing U.S. corporations are higher than average. In my opinion, our high 

corporate tax rate has to come down significantly. I think most of my colleagues— 

on both sides of the aisle—would agree with that. 

In addition, our current system creates incentives that lock out earnings made by 

U.S. multinationals abroad and keep those earnings from being reinvested domestically. This also needs to be addressed in tax reform. 

Additionally, I’ll note that the tax base is much more mobile than it used to be. 

For example, thanks to advances in technology and markets, capital and labor have 

become increasingly more mobile. And, the most mobile assets of all—intangible assets—have taken up a greater share of wealth around the world. The problem we’ve 

seen is that intangible assets and property can easily be moved from the United 

States to another country—particularly if that country has a lower tax burden. 

This is a disturbing trend, one that I think all of us would like to see reversed. 

Some, like President Obama in his most recent budget, have responded to this 

trend by calling for higher U.S. taxation of foreign-source income, claiming that, by 

extending the reach of U.S. taxes, we can eliminate incentives for businesses to 

move income-producing assets to other countries. 

The problem, of course, is that assets aren’t the only thing that can be moved 

from one country to another. Companies themselves can also migrate away from our 

overly burdensome tax environment. And, we’ve seen that with the recent wave of 

inversions. Indeed, many companies have already decided that our current regime 

of worldwide taxation with absurdly high tax rates is simply too onerous and have 

opted to locate their tax domiciles in countries with lower rates and territorial tax 

systems. 

In other words, if we’re serious about keeping assets and companies in the U.S., 

we should not be looking to increase the burdens imposed by our international tax 

system. Instead, we should be looking to make our system more competitive. 

Not only must our corporate tax rate come down across the board, we should also 

shift significantly in the direction of a territorial tax system. If we want companies 

to remain in the U.S. or to incorporate here to begin with, we should not build figurative or legal walls around America—we should fix our broken tax code. 

We have a lot to discuss here today. I know that there are some differing opinions 

among members of the committee on these issues—particularly as we talk about the 

44 

merits of a worldwide versus a territorial tax system. But, I think we’ve assembled 

a panel that will help us get to some answers on this front and, hopefully, aid us 

in our efforts to reach consensus as we tackle this vital element of tax reform. 

With that, I now turn it to Ranking Member Wyden for his opening statement. 

PREPARED STATEMENT OF HON. PAMELA F. OLSON, U.S. DEPUTY TAX LEADER AND

WASHINGTON NATIONAL TAX SERVICES LEADER, PRICEWATERHOUSECOOPERS LLP 

Chairman Hatch, Ranking Member Wyden, and distinguished members of the 

Committee, I appreciate the opportunity to appear this morning as the Committee 

considers the importance of ensuring that our Nation’s tax laws serve to make the 

United States competitive globally. I had the honor of serving as Assistant Treasury 

Secretary for tax policy from 2002 to 2004, and am currently U.S. Deputy Tax Leader of PricewaterhouseCoopers LLP and leader of PwC’s Washington National Tax 

Services practice. I am appearing on my own behalf and not on behalf of PwC or 

any client. The views I express are my own. 

INTRODUCTION

The subject of this hearing is the legislative actions necessary for a competitive 

U.S. international tax system, and I applaud the Committee for holding the hearing. 

It is my view that reform of our international tax rules is imperative to promoting 

the economic growth that will yield increased job opportunities and higher wages 

for the American people. Our tax system should serve to facilitate, not impede, the 

efficient, effective, and successful operation of American businesses in today’s global 

marketplace. Success for America’s globally engaged businesses is essential to the 

success of their workers as well as the many businesses on which they depend for 

goods and services. Unfortunately, it is increasingly the case that the divergence of 

our current tax system from the systems of the rest of the world makes it a barrier 

to their success and drives business away. 

My testimony is focused on tax policy issues specific to making the United States 

a more hospitable environment for headquartering global operations and for domestic investment, both of which will lead to more American jobs and a rising standard 

of living. My testimony describes changes in the global economy that make international tax reform vital, changes in other countries’ tax systems, the features of 

our tax system most in need of reform, and the implications and risks to the United 

States and U.S. businesses of the global effort to address base erosion and profit 

shifting (BEPS) led by the Organisation for Economic Cooperation and Development 

(OECD). 

A CHANGING GLOBAL ECONOMY

The changing global economic landscape must set the stage for considering the tax 

reforms necessary for American business to compete and succeed. But first some 

background is useful on the age of our international tax framework. Since the inception of the income tax in 1913, the United States has taken a worldwide approach 

to taxing the foreign income of U.S. companies and their subsidiaries. Shortly after 

enactment, Congress added a foreign tax credit to reduce the adverse economic impact of a second layer of tax on foreign income. Limitations on the foreign tax credit 

soon followed. The general rule is that foreign income is subject to U.S. tax only 

when it is repatriated to the United States, but there are many exceptions that dictate current U.S. tax on foreign income. Those exceptions are found in subpart F 

of the Internal Revenue Code and date to 1962. Although a number of changes have 

been made to the subpart F rules over the last 50 years, the rules remain locked 

in a time when global business operations differed significantly from today. Congress’ reform of the rules to reflect changes in the global economy, such as the exception for active financing income, has been limited and temporary. We have a tax 

system designed for rotary phones and telephone operators while we carry 

smartphones with 1,000 times the processing power of the Apollo Guidance Computer that put man on the moon. The 21st century is calling. The rest of the world 

has answered and enacted a tax system that fits it. It is time we did the same. 

The global economy has changed enormously since 1962. Globalization—the growing interdependence of countries’ economies—has resulted from increasing international mobility and cross-border flows of trade, finance, investment, information, 

and ideas. Technology has continued to accelerate the growth of the worldwide marketplace for goods and services. Advances in communication, information technology, 

45 

1Matthew J. Slaughter, ‘‘Mutual Benefits, Shared Growth: Small and Large Companies Working Together,’’ a report prepared for the Business Roundtable, 2010. 2Matthew J. Slaughter, ‘‘American Companies and Global Supply Networks,’’ prepared for the 

Business Roundtable, 2013. 3 U.S. Department of Commerce, Bureau of Economic Analysis, November 2014. 

and transportation have dramatically reduced the cost and time it takes to move 

goods, capital, information, and people around the world. In this global marketplace, 

firms differentiate themselves by being nimble around the globe and by innovating 

faster than their competitors. 

The U.S. role in the global economy has changed as well over the last 50 years. 

In 1962, the United States was the dominant economy, accounting for over half of 

all multinational investment in the world. U.S. dominance has diminished as the 

significance of the rest of the developed world in the global economy has grown. In 

recent years, there has been a massive shift in economic power to emerging markets. PwC projects that the combined GDP of G–7 countries including the United 

States will grow from $29 trillion in 2009 to $69.3 trillion by 2050, while the combined GDP of seven emerging economies (the E–7) that include China, India, and 

Brazil will grow from $20.9 trillion to $138.2 trillion over the same period. 

The changing U.S. role reflects less the waning of the U.S. economy than the 

rapid rise from poverty of the most populous parts of the globe. As President Obama 

noted in his State of the Union address, 95 percent of the world’s customers live 

outside the United States. That represents more than 80 percent of the world’s purchasing power. U.S. businesses can’t serve those rapidly growing markets by staying 

home. Facilitating U.S. businesses in serving those markets increases the value of 

the assets of American businesses and leads to increased American jobs. 

To thrive in the changing global marketplace, it is critical that we ensure our 

international tax system promotes the competiveness of U.S. business in the global 

marketplace. A tax system that allows U.S. companies to serve foreign markets 

more effectively will translate to increased success for American businesses, increased American jobs, and higher wages. 

Today, there are few U.S.-based businesses unaffected, directly or indirectly, by 

the operation of the U.S. international tax rules. Advances in communication, information technology, and transportation have opened the global marketplace to small 

and medium sized businesses along with large globally engaged business. Businesses operating domestically provide goods and services to other businesses operating internationally. According to a recent study, the typical U.S. multinational 

business in 2008 bought goods and services from 6,246 American small businesses; 

collectively U.S. multinationals purchased an estimated $1.52 trillion in intermediate inputs from American small businesses.1 Further, many small and medium 

sized businesses have their own direct foreign operations. Commerce Department 

data show that 26 percent of U.S. multinational businesses meet the U.S. government definition of a small or medium sized business.2 The result is that all businesses, whether large or small, benefit from a tax system that promotes the global 

competitiveness of American businesses, and their success is linked to a strong global economy. 

A globally competitive tax system is critical not only for U.S.-headquartered companies to succeed but also to attract continued investment by foreign-headquartered 

businesses in the United States. Today the U.S. operations of foreign companies employ 5.8 million American workers and account for 21.9 percent of all U.S. exports 

of goods.3 Tax policies that attract foreign capital to the United States will create 

American jobs and should be part of building a competitive U.S. tax system. 

A CHANGING GLOBAL VIEW OF CORPORATE TAXES

When the United States had a dominant role in the global economy, we were free 

to make decisions about our tax system with little regard to what the rest of the 

world did. As a practical matter, our trade partners generally followed our lead in 

tax policy. That is no longer the case. 

Just as the global economy has changed, tax systems around the world have 

evolved. Governments in the developed and developing world have adopted policies 

that reflect a changing view of corporate income taxes. This changing view may 

have been occasioned by economics or practicality, but as discussed below, the result 

is a growing gap between the United States and the rest of the world. 

46 

4Pol Antra`s, ‘‘Firms, Contracts, and Trade Structure,’’ Quarterly Journal of Economics (2003), 

p. 1375. 5 C. Lakatos and T. Fukui, ‘‘EU–U.S. Economic Linkages: The Role of Multinationals and 

Intra-firm Trade,’’ Trade, Chief Economist Note, Issue 2, European Commission (2013). 6 Castells, The Power of Identity, The Information Age: Economy, Society, and Culture, Vol. 

II (2nd ed., 2010), p. 306. 

In recent decades, the share of GDP attributable to intangible assets, such as patents, know-how, and copyrights, has increased substantially. Unlike property, plant, 

and equipment, intangible assets are highly mobile and more likely to be exploitable 

on a global basis, increasing their value. This shift has been accompanied by the 

reorganization of economic activity around global value chains and strategic networks that flow across national borders. It has been estimated that roughly onethird of world trade takes place within multinational companies.4 Trade between related parties accounted for 47% ($172 billion) of total EU–U.S. merchandise trade 

in 2002 and increased to 50% ($307 billion) by 2012.5

The rise in the value of intangibles and the interconnected nature of the global 

economy leads to two points. The first point is that it is more difficult today to 

measure income earned within a country’s borders and to tax it. Manuel Castells 

observed that: 

[A]s accounting of value added in an international production system becomes 

increasingly cumbersome, a new fiscal crisis of the state arises, as the expression of a contradiction between the internationalization of investment, production, and consumption, on the one hand, and the national basis of taxation systems on the other.6

As a practical matter, other countries have dealt with this issue by relying more 

heavily on consumption based taxes, such as value-added or goods and services 

taxes, that are applied to a tax base that is more easily measured and less mobile, 

to fund the government. 

The second point is tied to the rise in economic power of the rest of the world, 

which has broadened and deepened the markets in which capital can be raised and 

profitably invested. Capital is mobile. It is more easily deployed in a globally interconnected economy where much of the value comes from intangible assets that are 

also mobile. 

Many foreign governments have recognized the global mobility of capital and intangible assets and have come to view business income taxes as a competitive tool 

that can be used to attract investment. By reducing statutory corporate income tax 

rates, adding incentives for research and development, innovation, and knowledge 

creation, and adopting territorial systems that limit the income tax to activities 

within their borders, governments have sought to attract capital that will yield jobs, 

particularly high-skilled jobs for scientists, engineers, and corporate managers. 

They’ve recognized the benefits that flow from making their country hospitable to 

investment from globally engaged businesses. These benefits include the creation of 

sustainable jobs, both directly and through the goods and services the businesses 

and their employees purchase. 

There are other reasons for governments to move away from reliance on the corporate income tax as a significant source of revenue. They include the fact that capital mobility affects the reliability of the corporate income tax and makes proposals 

to increase taxes on corporate income less likely to succeed. They also include the 

fact that economists have concluded that consumption-based taxes are the most efficient way of raising revenue, and the corporate income tax the most destructive 

form. These conclusions appear to have been accepted by foreign governments. Their 

increased reliance on consumption-based taxes positions them to raise the revenue 

required to fund government needs on a basis more conducive to economic growth 

than is the case in the United States. 

The extent to which U.S. tax policy is out of sync with the competitive and progrowth tax policies of other nations can be seen in the chart below which shows the 

federal government’s primary reliance on income taxes in contrast to most of the 

world’s major economies, which rely to a significant degree on consumption taxes. 

47 

FEDERAL/STATE TAXES AS A SHARE OF TOTAL TAXATION, OECD, 2011

Reliance on consumption taxes is not limited to OECD countries. Their widespread usage can be seen in the map below. 

Although consumption taxes are often criticized as regressive, recent economic 

studies have concluded that the corporate income tax falls on labor to a significant 

extent. This has been recognized by economists at the Congressional Budget Office, 

the Joint Committee on Taxation, and the U.S. Treasury Department. Estimates of 

the share borne by labor range from 20 percent to 70 percent. 

Joseph Sneed observed nearly six decades ago: 


031715.001 031715.002
48 

7 Joseph Sneed, ‘‘Major Objectives and Guides for Income Tax Reform,’’ in Tax Revision Compendium, Committee Print, Committee on Ways and Means (GPO, November 16, 1959), p. 68. 

A tax on corporate income at the corporate level has a deep appeal to many people and assertions addressed to them to the effect that they, and not the corporations, pay the tax make little headway against the observable fact that corporate accountants prepare the returns and corporate treasurers write the 

checks in payment of the tax. To them a tax on corporate income is a tax on 

corporations which, more often than not in their opinion, are sufficiently evil 

to deserve their fate.7

Despite the economic studies, there continues to be a widespread and persistent 

perception that the corporate tax is somehow borne by the corporation without effect 

on its employees, customers, or shareholders, and without impact on its ability to 

succeed in an increasingly competitive global economy. When considering how to 

build a competitive international tax system that will create jobs in the United 

States, it will be important for the Committee to lay that myth aside. The reality 

is that our globally engaged businesses are the engine that delivers the products 

and services of America’s workers to the world and the benefits of globalization to 

America’s consumers. 

U.S. TAX POLICY IS OUT OF SYNC WITH GLOBAL TRENDS

An understanding of the full impact of U.S. international tax rules must begin 

by recognizing the fact that the United States has the highest statutory tax rate 

among major global economies. The top U.S. statutory corporate tax rate, including 

state corporate income tax, is 39.1 percent, more than 14 percentage points higher 

than the 2014 average (24.8 percent) for other OECD countries, and 10 percentage 

points higher than the average (29.0 percent) for the other G7 countries. 

TOP STATUTORY (FEDERAL AND STATE) CORPORATE TAX RATES, OECD 1981–2014

Other nations have continued to implement tax reforms that will result in the 

non-U.S. OECD average rate falling even lower in 2015. For example, the United 

Kingdom is scheduled to reduce its corporate rate from 21 to 20 percent and Japan 

is reducing its combined national and local corporate tax rate from 34.62 to 32.11 

percent in April. Portugal and Spain also are scheduled to reduce their corporate 

tax rates, while among OECD countries, only Chile is moving to increase its rate 

to 27 percent by 2018—still far below the U.S. statutory rate. 

U.S. effective tax rates also are high relative to other developed economies. For 

example, a recent report issued by the Tax Foundation found that the United States 


031715.003
49 

8 Jack M. Mintz and Duanjie Chen, ‘‘U.S. Corporate Taxation: Prime for Reform,’’ Tax Foundation Special Report, Feb. 2015, No. 228. 9Source: PwC report, Evolution of Territorial Tax Systems in the OECD, prepared for the 

Technology CEO Council, April 2, 2013. 

has the second highest marginal effective tax rate on corporate investment in the 

developed world at 35.3 percent—behind only France.8 The chart below references 

several recent studies that have consistently demonstrated the high effective tax 

rate of the United States relative to other peer groups. 

ALTERNATIVE CORPORATE EFFECTIVE TAX RATE MEASURES

U.S. international tax rules also are out of sync with the rest of the world. As 

noted above, the vast majority of foreign governments have shifted their income 

taxes from a worldwide basis to a territorial basis that limits the tax base to income 

from activity within their borders; they have enacted anti-base erosion measures, 

but those measures are aimed at protecting their domestic tax base from erosion, 

not at preservation of a worldwide base. Every other G–7 country and 28 of the 

other 33 OECD member countries have international tax rules that allow their resident companies to repatriate active foreign earnings to their home country without 

paying a significant additional domestic tax. This approach, sometimes referred to 

as a ‘‘participation exemption’’ or ‘‘dividend exemption’’ tax regime, differs markedly 

from the U.S. worldwide tax system in which the foreign earnings of U.S. companies 

are subject to U.S. corporate tax with a credit for taxes paid to the foreign jurisdiction. 

The United Kingdom and Japan, in 2009, became the most recent major economies to adopt territorial tax systems, leaving the United States as the only G–7 

country that has not adopted a modern territorial tax system. Of the 28 OECD 

countries with territorial tax systems, only two—New Zealand and Finland—have 

switched from territorial to worldwide tax systems, and both nations subsequently 

switched back to territorial tax systems. The growth in the number of OECD nations adopting territorial tax systems since 1986 when the United States last overhauled its tax laws is shown in the chart below.9


031715.000
50 

NUMBER OF OECD COUNTRIES WITH DIVIDEND EXEMPTION (TERRITORIAL) SYSTEMS, 

1986–2011

The high U.S. statutory corporate income tax rate in combination with the worldwide income tax system has negative consequences for American businesses and 

workers in an increasingly global economy. First, it discourages both U.S. and foreign companies from locating their more profitable assets and operations inside the 

United States. Second, it encourages both U.S. and foreign companies to locate their 

borrowing in the United States, as the value of interest deductions is greater 

against a higher corporate tax rate. Third, it discourages U.S. companies from remitting foreign profits to the United States. 

Evidence of the competitive disadvantage created by our international tax rules 

can be seen in the increase in foreign acquisitions of U.S. multinationals and in the 

number of cross-border merger and acquisitions in which the combined company has 

chosen to be headquartered outside the United States. The current system tilts the 

playing field against U.S. companies competing for acquisitions of foreign companies 

and U.S. companies with foreign operations. If the ultimate parent company were 

incorporated in the United States, distributions of foreign income to the ultimate 

parent company would be subject to the U.S. repatriation tax—a tax that would not 

apply (or could be mitigated) if the parent company were headquartered in a country with a territorial tax system. The tax system should create a level playing field 

that does not favor one owner over another. Our worldwide tax system essentially 

places a premium on the value of U.S. companies’ assets in the hands of a foreign 

bidder. 

If the United States were to adopt a territorial tax system similar to those adopted by most other OECD countries, U.S.-based companies would face the same effective tax rates in foreign markets as the foreign-based firms with which they compete. Eliminating the disadvantage U.S. companies face by aligning our rules with 

the rest of the world would be a far more effective response than ad hoc efforts to 

build higher walls around a U.S. worldwide tax system that places American companies and workers at a competitive disadvantage globally. 

OTHER ELEMENTS OF A COMPETITIVE TAX SYSTEM

The U.S. tax system also lags behind many developed countries in other aspects 

that affect our global competitiveness. As shown in the chart below, the (expired) 

United States research credit is ranked 27th out of 41 countries in terms of the tax 

incentives provided for research and development activities. 


031715.005
51 

10Dr. Laura D’Andrea Tyson, U.S. Senate Committee on Finance hearing on ‘‘Tax Reform, 

Growth, and Efficiency,’’ February 24, 2015. 

RESEARCH CREDIT AND PATENT BOX REGIMES

In addition, an increasing number of countries are acting to provide ‘‘patent 

boxes’’ and related incentives for innovation, which also can be seen in the chart 

above. 

Patent boxes have been considered as part of the harmful tax practices workstream in the OECD’s BEPS action plan. The result of the debate is an agreement 

to permit patent boxes so long as they satisfy a nexus requirement that will link 

tax benefits to the performance of R&D activities. The nexus requirement thus may 

result in the relocation of R&D jobs from the U.S. to foreign countries to obtain the 

enhanced benefits. 

As Dr. Laura Tyson noted in her recent testimony before this Committee, other 

countries ‘‘are using tax policy as a ‘carrot’ to attract the income and operations of 

U.S. companies with significant intangible assets and the positive externalities associated with them—including the spillover effects boosting innovation, productivity, 

and wages.’’ 10 Two industries with particularly significant intangible assets and associated positive externalities are the technology and pharmaceutical sectors of the 

economy. Both industries are highly mobile and sell their products in global markets. The positive spillover effect on the local market noted by Dr. Tyson and other 

economists has led many governments to enact significant incentives for researchdependent operations in order to attract investment by technology and pharmaceutical companies. In the European Union in particular, many governments have 

concluded it is better to tax at a low rate the profits of these industries than to attempt to apply a higher tax rate and see these highly mobile activities leave the 

country to be performed in another location, costing the country tax revenue and 

the valuable jobs and spillover benefits that go with them. 

The chart below details the patent box regimes available in the European Union. 

EU Patent Box Regimes, 2015 

Country 

Standard 

Corporate 

Rate in 

2015 

Patent Box 

Rate in 

2015 

Fully 

Phased-In 

Patent Box Rate 

Notes 

Belgium 33.99% 6.8% 6.8% 80% patent income deduction 

Cyprus 12.5% 2.5% 2.5% 80% exemption for income generated from owned IP or 

profit from sale of owned IP 

France 38.0% 15.0% 15.0% 15% tax rate on royalty income 


031715.006
52 

EU Patent Box Regimes, 2015—Continued 

Country 

Standard 

Corporate 

Rate in 

2015 

Patent Box 

Rate in 

2015 

Fully 

Phased-In 

Patent Box 

Rate 

Notes 

Hungary 19.0% 9.5% 9.5% 50% deduction for royalty income from qualified patents 

Ireland * 12.5% n.a. 5.0% to 

6.25% 

The 2015 Irish budget proposes a ‘‘Knowledge Development Box.’’ While the budget did not specify the 

reduced rate, it appears that a rate in the range of 

5% to 6.25% may be under consideration. 

Italy 27.5% 19.25% 13.75% 30% exemption for income derived from qualifying intangible assets. Exemption increases to 40% in 

2016 and 50% in 2017 and beyond. 

Luxembourg 29.22% 5.84% 5.84% 80% tax exemption of the net income deriving from 

the use and the right to use qualifying IP rights 

Malta 35.0% 0.0% 0.0% Full tax exemption for qualified IP income 

Netherlands 25.0% 5.0% 5.0% 5% tax rate with respect to profits, including royalties, 

derived from a self-developed intangible asset 

Portugal 29.5% 14.75% 14.75% 50% exemption for income derived from the sale or 

granting of the temporary use of industrial property 

rights (i.e. patents and industrial drawings and 

models) 

Spain 28.0% 11.2% 10.0% 60% exemption for income derived from the licensing 

of qualifying IP rights. Corporate tax rate will fall to 

25% in 2016. 

United Kingdom ** 20.0% 12.0% 10.0% 

* Proposed. 

** UK standard corporate tax rate will be reduced from 21% to 20% effective April 1, 2015. 

Dr. Tyson also noted the contrast between the carrot policies employed by other 

countries and the ‘‘stick’’ approach of the minimum tax proposal put forth in the 

Obama Administration’s FY 2016 budget. As Dr. Tyson observed, the minimum tax 

approach would deprive U.S. companies, but not companies based elsewhere, of the 

tax benefits of patent box regimes. 

THE CURRENT STATE OF U.S. INTERNATIONAL TAX RULES

To understand the disadvantage faced by U.S.-based companies in the global marketplace, it is useful to understand the operation of the current U.S. international 

tax rules. 

Under the worldwide system of taxation, income earned abroad may be subject 

to tax in two countries—first in the country where the income is earned, and then 

in the taxpayer’s country of residence. As noted above, the United States provides 

relief from this potential double taxation through the mechanism of a foreign tax 

credit under which the U.S. tax may be offset by tax imposed by the source country. 

The complexity of the foreign tax credit rules—income and expense allocations and 

other limitations—combined with the relatively high U.S. statutory rate limit their 

usefulness. As a result, even with foreign tax credits, U.S. companies often incur 

significant taxes when repatriating active foreign earnings. The added tax burden 

can make it more beneficial to reinvest foreign earnings abroad and accounts for the 

earnings of U.S. businesses designated as indefinitely reinvested abroad. For example, a U.S. company earning active income in the United Kingdom subject to the 

20 percent UK rate would pay an additional 15 percent U.S. tax on that income if 

it were returned to the United States. As previously noted, the U.S. tax system 

should create a level playing field, not one biased against reinvesting profits in the 

United States. 

53 

In addition to complex foreign tax credit rules, the United States has unusually 

broad and complex rules that impose current tax on the active income of foreign affiliates, subjecting them to high U.S. tax rate on their foreign income even though 

the income remains abroad. As noted above, under U.S. international tax rules, foreign income of a foreign subsidiary generally is subject to U.S. tax only when such 

income is distributed to the U.S. parent in the form of a dividend. The subpart F 

exceptions to this rule impose current U.S. tax on certain income of foreign subsidiaries, and extend well beyond passive income to encompass certain active foreign 

business operations. 

PROTECTING THE DOMESTIC TAX BASE

With the highest corporate tax rate among OECD countries, U.S.-based multinationals have a significant incentive to keep their foreign earnings abroad. The 

Obama Administration has cited reports that the amount of accumulated foreign 

earnings of U.S. companies exceeds $2 trillion. Although some of these earnings are 

in cash and liquid assets, a significant amount has been reinvested in expansion of 

the foreign operations of U.S. businesses to serve emerging markets. 

A territorial system similar to those in other advanced economies would allow 

U.S. companies to invest their foreign earnings in the United States on the same 

basis as they invest them abroad and on the same basis as foreign companies invest 

in the United States. Rather than moving to territorial taxation, under which active 

foreign business income is taxed once at the foreign rate, the Obama Administration’s recent budget proposal would impose immediate U.S. tax on foreign business 

income if the foreign effective tax rate is less than 22.4 percent. The difference between the stated minimum rate of 19 percent and the actual 22.4 percent rate is 

due to the fact that the minimum tax would apply to the extent 19 percent exceeds 

85 percent of the foreign effective tax rate. 

Imposition of a minimum tax of this scale and structure would put American companies at a competitive disadvantage in global markets, especially those that earn 

a large share of their income in global markets with effective rates below 22.4 percent. In Europe, for example, a significant share of the foreign income earned by 

subsidiaries of U.S. companies would be subject to the proposed minimum tax. Of 

28 EU countries, more than half had statutory tax rates below 22.4 percent in 2014, 

and effective tax rates generally were lower. 

Other developed countries with territorial systems have adopted a variety of antiabuse rules to discourage income shifting without imposing a minimum tax rate. 

Those anti-abuse rules are aimed at preventing the erosion of the domestic tax base, 

not at imposing a global minimum tax rate that would handicap their globally engaged companies with operations in lower tax jurisdictions. The experience of other 

nations shows that safeguarding the domestic tax base need not entail disadvantaging domestic businesses in the global marketplace. Examples of anti-abuse rules 

employed by other countries include ‘‘thin cap’’ rules that limit excessive interest expense deductions and rules aimed at taxing foreign passive income on a current 

basis. Some countries have chosen not to extend territorial tax treatment to foreign 

affiliates in specific tax haven jurisdictions. But no other country imposes a minimum tax on active business income such as proposed by the Obama Administration. 

The OECD BEPS action plan discussed below includes more stringent controlled 

foreign corporation (CFC) rules (like those of subpart F) and minimum taxes as one 

of the anti-base erosion items for study. In addition, the transfer pricing paper on 

action items 8, 9, and 10 includes a U.S. Treasury proposal regarding the minimum 

tax as a ‘‘special measure’’ to backstop transfer pricing rules. It is too soon to tell 

whether the OECD will embrace stronger CFC rules or the minimum tax, but public 

comments suggest that neither concept has been warmly received. If the United 

States were to enact a minimum tax while the rest of the world rejects the concept, 

it would push the United States even further from international norms to the disadvantage of U.S. companies and their employees. 

In addition to the minimum tax proposal, the Obama Administration’s recent 

budget includes proposed limitations on interest expense deductions that would significantly tighten the limitations of current law. Thin cap rules are also one of the 

items in the OECD BEPS action plan discussed below. As the Committee considers 

international reform, it will be important to consider the difference in rate between 

the United States and other countries. The value of deductions decreases as the tax 

rate is reduced. Thus a lower U.S. tax rate decreases the incentive to reduce U.S. 

taxable income, and in itself is a strong base protection measure. As a result, doVerDate Mar 15 2010 20:53 Apr 13, 2016 Jkt 000000 PO 00000 Frm 00057 Fmt 6601 Sfmt 6621 R:\DOCS\99718.000 TIMD
54 

11OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing. http:// 

dx.doi.org/10.1787/9789264202719-en. 

mestic reform aimed at lowering the statutory tax rate complements reforms to 

modernize our international tax system. Limitations on interest deductions that go 

beyond international norms will further tilt the playing field against investment in 

the United States to the detriment of the American worker, a result that should be 

avoided. 

IMPACT OF THE OECD’S BEPS PROJECT ON THE U.S. TREASURY AND TAX REFORM

The OECD’s BEPS project, launched in 2012 by G–20 governments, including the 

United States, presents a challenge for the U.S. Treasury negotiators and for U.S. 

businesses and a threat to the U.S. tax base. As the Committee is aware, the BEPS 

project is intended to forge a global consensus on how to address base erosion and 

profit shifting. In July 2013, the OECD issued a 15-point BEPS Action Plan 11 that 

is scheduled to be completed by December 2015. Several reports have already been 

issued, and the OECD is on track to issue the plan’s final reports this year. Although nominally a project aimed at a narrow problem—the erosion of governments’ 

tax bases and profit shifting—the reality is that the 15-point action plan opens the 

door to rewriting the rules of international taxation in nearly every respect, and 

doing so in a period of two years. Therein lay both the challenge and the threat as 

the United States considers a long-overdue reform of our nation’s tax laws. 

There is no doubt that the international tax regime is in need of an update, nor 

is there any doubt that international consensus is critical with respect to the allocation of taxing rights on cross border income. There is no better organization to facilitate the discussion necessary to achieve that consensus than the OECD. However, 

OECD history shows that building consensus takes time. True consensus around a 

single solution chosen from an array of technically complex options has proven difficult to achieve even with ample time for consideration and debate. The rapid pace 

of the BEPS project, with discussion drafts being released and finalized quickly 

(sometimes with less than 30 days allowed for public comments) is in sharp contrast 

to the traditional approach of OECD consensus building. Moreover, it is clear from 

public statements and unilateral actions of the governments participating in the 

BEPS project that their positions diverge significantly, making even more challenging the efforts to harmonize their views. 

The difference between source and residence countries provides one example of 

the divergent views and the challenge the negotiators face. At the inception of the 

project in February 2013, the OECD paper referred to the ‘‘balance between source 

and residence taxation’’ as an issue the project was intended to address, perhaps 

in deference to expectations of the developing countries that are part of the G–20 

(but not the OECD) that BEPS would permit a discussion of the reallocation of taxing authority between source and residence countries. At the insistence of the 

United States, however, redrawing the line between source and residence was explicitly rejected in the BEPS action plan released in July 2013. While the explicit 

rejection was critically important, the allocation of taxing rights remains at the 

heart of many of the BEPS papers. Pandora’s Box has been opened. The fact that 

redrawing the line is not part of the discussion has not diminished the participating 

governments’ interest in doing so. 

Given the reality of the fundamental rewrite of the international tax rules the 

BEPS project entails, failing to address divergent views head on means many issues 

hover beneath the surface unresolved. Even when there is basic agreement on 

issues, there can be disagreements over intent and meaning of words. In this case, 

the lack of resolution is likely to result in continuing intergovernmental disagreements once the ink has dried. Without agreement on clear rules, strains in resolving 

cross-border tax disputes—evident even before the BEPS Action Plan was initiated 

and reflected in the annual OECD report on mutual agreement procedure (MAP) 

statistics—are likely to increase. 

While the BEPS project was intended to shore up the global consensus on the 

rules of international taxation, which was perceived to be unraveling, many governments have not waited for the BEPS process to play out and consensus rules to 

emerge. Harsh political rhetoric accompanying the effort has prompted some taxing 

authorities to seek an immediate increase in the tax paid by U.S. companies 

through audit adjustment. Others are using the BEPS project to advance a domestic 

tax agenda and to claim their ‘‘fair share’’ of corporate tax revenues. The risk inherent in this trend is that as soon as one country moves ahead of the OECD consensus 

55 

12France Strategie, ‘‘Taxation and the digital economy: A survey of theoretical models,’’ Final 

Report, February 26, 2015, www.strategie.govr.fr. 

process, others are spurred to action, not wanting to be left behind. As a result, the 

danger of ‘‘global tax chaos marked by the massive re-emergence of double taxation,’’ 

of which the OECD Action Plan itself warned, may have markedly increased. 

Even our close ally and proponent of the BEPS project, the United Kingdom, 

moved ahead of the project, proposing a ‘‘diverted profits tax’’ that is scheduled to 

take effect on April 1. Under this proposal, a 25 percent tax—5 percentage points 

higher than the UK corporate rate—would be imposed on profits that are considered 

to be artificially diverted from the United Kingdom. The proposed tests to determine 

whether this tax would apply are complex and subjective and appear to be aimed 

at U.S. companies. While the UK government is expected to release additional details on these proposals before the end of March, the basic structure of the UK diverted profits tax is likely to remain intact. The greater risk is that the UK approach may encourage other countries to propose similar policies affecting companies operating in their jurisdictions. 

Issues regarding taxation of e-commerce were resolved in BEPS against a special 

set of rules for e-commerce. Just last month, however, a French government sponsored report 12 aimed at e-commerce recommended, among other things, the creation 

of a ‘‘sharing rule for corporate profits.’’ The rule would reflect ‘‘the number of users 

in the jurisdiction of the tax authority.’’ The report states that the existing taxation 

of multinationals ‘‘based on transfer pricing and territorial definitions’’ is obsolete. 

The report suggests the sharing rule should be developed as part of the existing 

OECD BEPS and EU initiatives, and cites a number of U.S.-headquartered multinational corporations as examples. 

Additional countries, including Germany, Poland, Russia, Spain, Australia, Japan, 

India, Mexico, and Chile, have initiated unilateral actions since 2014 in advance of 

any formal consensus agreements under the OECD BEPS initiative. The French report highlights the risk of BEPS to the U.S. tax base. Although BEPS is aimed at 

base erosion and profit shifting, it would appear that some governments believe 

BEPS should provide for profit sharing. When governments look for the corporate 

profits of which they would like a share, the targets are usually U.S. companies. 

This Committee has provided oversight to the BEPS project through a hearing in 

July of last year. Given that nothing is more fundamental to a nation’s sovereignty 

than the right to tax, a point acknowledged by the OECD, it is important for the 

Committee to continue its oversight to assure that the OECD’s historic goals of promoting economic growth and reducing regulatory burdens are given due consideration and not overrun by the unilateral actions of other countries in an effort to address concerns about base erosion and profit shifting. The extensive consultation 

with Congress involved in negotiating an international trade agreement should 

serve as a model in advance of any global effort to rewrite the international tax 

rules. As you noted during last year’s hearing, Mr. Chairman, ‘‘we should not be 

rushed into accepting a bad deal just for sake of reaching an agreement.’’ 

CONCLUSION

The United States is operating in a global economy that increases both the competition American businesses and workers face and the opportunities available to 

them. At the annual Tax Council Policy Institute last month, Jon Moeller, CFO of 

Procter & Gamble, made the point that we cannot ‘‘pretend that if we don’t have 

a competitive system it’s going to be sustainably revenue-neutral.’’ Since U.S. tax 

laws were last reformed, our international tax rules in particular have fallen behind 

other countries’ efforts to attract investment and promote economic growth. In the 

absence of action by Congress to enact a more competitive U.S. international tax 

system, there will be an increase in the pace of U.S. companies being acquired by 

foreign competitors, and our current worldwide tax system will continue to effectively subsidize the treasuries of other countries seeking to tax U.S. multinationals. 

It is time for Congress to promote economic growth and enhance opportunities for 

the American people by enacting tax reform that, without increasing the deficit, reduces the U.S. corporate tax rate, broadens the tax base, and establishes a competitive international tax system. 

56 

ARTICLE SUBMITTED BY HON. ROB PORTMAN

Financial Times, March 15, 2015 

Tax Inversion Curb Turns Tables on US 

By David Crow and James Fontanella-Khan in New York 

and Megan Murphy in Washington 

A crackdown by the Obama administration on ‘‘tax inversion’’ deals, which allowed US companies to slash their tax bills, has had the perverse effect of prompting a sharp increase in foreign takeovers of American groups. 

In September the US Treasury all but stamped out tax inversions, which enabled 

a US company to pay less tax by acquiring a rival from a jurisdiction with a lower 

corporate tax rate, such as Ireland or the UK, and moving the combined group’s 

domicile to that country. 

The move was designed to staunch an exodus of US companies and an erosion 

in tax revenues, but it has left many US groups vulnerable to foreign takeovers. 

Once a cross-border deal is complete, the combined company can generate big savings by adopting the overseas acquirer’s lower tax rate. 

Since the crackdown, there have been $156bn of inbound cross-border US deals 

announced, compared with $106bn in the same period last year and $81bn a year 

earlier, according to data from Thomson Reuters. 

By far the biggest acquirers have come from countries with lower tax rates such 

as Canada and Ireland, which have announced $26bn and $22bn of deals respectively, highlighting the competitive advantage that their companies have when it 

comes to mergers and acquisitions. Before the crackdown, groups from Germany and 

Japan were the biggest buyers of US companies. 

So far this year, foreign buyers have announced $61bn worth of US acquisitions, 

an increase of 31 per cent on last year and the strongest start to a year for inbound 

cross-border deals since 2007, according to the data. 

When the Obama administration changed the rules governing tax inversions, 

many bankers and politicians warned it would not stop the exodus of companies 

from the US unless it was accompanied by a reduction in the headline rate of US 

corporation tax, which stands at 35 per cent. However, gridlock in Washington has 

made it very difficult to achieve a comprehensive overhaul of the tax code. 

Senator Rob Portman, an Ohio Republican, said the jump in foreign takeovers 

since the crackdown ‘‘shows that one-off solutions instead of tax reform simply won’t 

work. . . . The need for reform is urgent, and it’s not a Republican or Democrat 

thing, it’s non-partisan.’’ 

Investment bankers have been advising US clients—especially those in the pharmaceuticals and energy sectors—to seek foreign buyers so they can offer quick rewards to their investors via lower tax bills. 

Furthermore, several American companies have built sizeable cash reserves outside the US in recent years, after they stopped the repatriation of overseas revenues 

to avoid being taxed at home. Being acquired by a foreign company would give them 

easy access to their cash piles. 

However, George Bilicic, a vice-chairman of Investment Banking at Lazard, said 

there were other reasons for the jump in foreign takeovers. ‘‘Cross border M&A is 

being driven by US companies’ desire to go global and non-US companies seeking 

to expand in America, which is enjoying a period of strong economic growth.’’ 

A Treasury spokesperson said: ‘‘The targeted anti-inversion action we took last 

year removed some of the economic benefits of inversions. But the only way to completely close the door on inversions is with anti-inversion legislation, and we have 

consistently called on Congress to act. 

‘‘As we’ve always said, we need to fix underlying problems in our tax code through 

business tax reform to address inversions and other creative tax avoidance techniques. We are committed to working with Congress to enact business tax reform 

that simplifies the tax code, closes unfair loopholes, broadens the base and levels 

the playing field.’’ 

57 

PREPARED STATEMENT OF STEPHEN E. SHAY, PROFESSOR OF PRACTICE, HARVARD LAW SCHOOL, HARVARD UNIVERSITY

Chairman Hatch, Ranking Member Wyden, and Members of the Committee, it is 

a pleasure to appear before you today to discuss the subject of how to build a competitive U.S. international tax system. I am a Professor of Practice at Harvard Law 

School. I practiced international tax law as a partner at Ropes & Gray for over 2 

decades and have served twice in the Treasury Department—the first time in the 

Reagan Administration throughout the process leading to the Tax Reform Act of 

1986 and the second time as Deputy Assistant Secretary for International Tax Affairs in the first term of the Obama Administration. 

I. EXECUTIVE SUMMARY

The major points I would like to make follow: 

• A competitive tax system is one that is able to fund effectively public goods, 

such as education, basic research, infrastructure, income security transfers and 

defense, which support a high standard of living for all Americans. • The income tax is an important counterweight to increasing inequality in income and wealth in America. The Committee should focus on tax reform policies 

that preserve and increase the income tax base, including the corporate tax 

base, to be able to maintain a politically acceptable progressive rate structure. • There is no normative policy justification for advantaging international business 

income of multinational corporations (MNCs) beyond allowing a credit for foreign income taxes. Evidence suggests that the U.S. taxes U.S. MNCs’ foreign 

business income too little and not too much. The evidence does not support a 

claim that U.S. MNCs are non-competitive as a consequence of U.S. international tax rules. 

• I recommend the Committee consider the following reforms to improve taxation 

of international business income. These reforms could be adopted as part of or 

independently of a broader business tax reform: 

Æ Adopt a minimum tax on U.S. MNCs foreign business income that is an 

advance payment against full U.S. tax when earnings are distributed from 

the foreign business. 

Æ Strengthen U.S. corporate residence and earnings stripping rules. 

Æ Reduce the U.S. tax advantages for portfolio investment in foreign stock 

over domestic stock. 

II. BACKGROUND ASSUMPTIONS

The following are background assumptions that provide the context for the policies I recommend in this testimony. 

• Even after taking account of recent spending limitations and revenue increases, 

the U.S. will continue to run a deficit, which is projected to expand in budget 

out years. 

• Absent policy changes, the distribution of income and wealth in the U.S. will 

continue to shift toward the wealthy and the social and economic significance 

of income and wealth inequality will grow over time. 

• Although global economic integration will continue, the global economy will expand as a result of increased population, investment and trade among the current actors (i.e., the emergence in recent decades of China, India and Brazil as 

major new economic participants will not be replicated). There will be further 

expansion of the reach and efficiency of wireless and electronic communications 

and increased reliance on the Internet as a means of commerce. 

• The effects of globalization in eroding national tax systems (including income 

and consumption taxes) will continue, but how far and how fast, and whether 

international tax systems can respond in a mutually cooperative and beneficial 

way, is uncertain. 

• The U.S. will continue to rely on the personal income tax for the largest portion 

of its revenue. The U.S. income tax system will continue to rely on a partially 

integrated corporate tax to protect the U.S. personal income tax base and to collect revenue from U.S. tax-exempt and foreign shareholders. 

• Cross-border investment will continue to be dominated by MNCs and intercompany transfer pricing will be based on separate accounting. 

III. POLICY BENCHMARKS

A competitive income tax system. A well-functioning U.S. tax system should provide revenue for the public goods that support high-wage jobs, innovation, producVerDate Mar 15 2010 20:53 Apr 13, 2016 Jkt 000000 PO 00000 Frm 00061 Fmt 6601 Sfmt 6621 R:\DOCS\99718.000 TIMD
58 

1See Thomas Piketty, CAPITAL IN THE 21ST CENTURY, 498–502 (Harvard Belknap 2013) (emphasizing the role of economic shocks from the World Wars in adoption of high progressive 

rates). 2There is dispute among economists regarding the extent to which corporate tax is borne by 

shareholders or by labor. Nonetheless, the Staff of the Joint Committee on Taxation and the 

U.S. Treasury allocate over 75 percent (75%) of the burden of the U.S. corporate tax to shareholders. See Staff of Joint Comm. on Taxation, Modeling the Distribution of Taxes on Business 

Income, at 4–5, 30 (JCX 14–13; 2013). Based on Federal Reserve data, at the end of the third 

quarter of 2014, approximately 16 percent (16%) of the equity in U.S. corporations (not just U.S. 

MNCs) was reported as owned by foreign residents leaving 84% to be owned by U.S. residents. 

See Board of Governors of the Federal Reserve System, Financial Accounts Guide, Table L.213 

Corporate Equities, available at http://www.federalreserve.gov/releases/z1/current/z1r-4.pdf. 

Professor Sanchirico has questioned the ability to identify beneficial ownership of equities as 

a result of limitations in existing data sources and disclosures. See Chris William Sanchirico, 

As American as Apple Inc.: International Tax and Ownership Nationality, 68 Tax L. Rev. (forthcoming). The issues Professor Sanchirico raises are important and the exact percentage of U.S. 

beneficial ownership of U.S. equities in fact is unclear. Moreover, even in the Federal Reserve 

data U.S. ownership has been trending slowly down in recent years, though it remains to be 

seen whether this will continue. Based on what we know, it nonetheless is likely that a fairly 

high percentage of shares in U.S. corporations is owned by U.S. residents. 3 Harry Grubert and Rosanne Altshuler, Fixing the System: An Analysis of Alternative Proposals for the Reform of International Tax, 66 NAT. TAX J. 671, Table 3 at 699 (Sept. 2013). 

53.9 percent (53.9%) of these foreign subsidiaries’ income was taxed at a foreign effective rate 

of 15 percent (15%) or less and less than one quarter of these foreign subsidiaries’ income was 

taxed at an effective foreign rate of 30 percent (30%) or more. Id. 4See, e.g., Staff of Joint Comm. on Taxation, Present Law and Background Related to Possible 

Income Shifting and Transfer Pricing, at 122–127 (JCX 37–10; 2010) (in each of the six case 

studies, taxpayers use numerous intermediary legal entities to effect their tax avoidance stratetive investment, income security for those in need and personal security from domestic and international threats. A competitive income tax system would have a 

broad base and a progressive rate structure that retains public support through apportioning tax burdens according to ability to pay. A well-designed tax system 

should be capable of fulfilling revenue needs, including unforeseen needs of war or 

other emergency, through simple and transparent adjustments to tax rates. 

We should stop using the tax system as a back door tool to regulate the size of 

government and to make non-transparent de facto public expenditures for specific 

industries or interest groups. In all but a few cases, spending and appropriation are 

the appropriate mechanisms to address these issues openly and transparently. The 

collateral damage to the most efficient revenue raising system in the world from its 

use as a political football has been substantial. 

Role of the income tax. For over 100 years, the income tax has played a key role 

in developed countries in achieving a fairer distribution of the costs of public goods 

among national populations.1 The central feature of an income tax is to measure individuals’ worldwide income, from labor and capital, and to tax individuals based 

on their ability to pay measured by total income. The United States, which relies 

more heavily on the income tax to raise revenue than most other countries, taxes 

the worldwide income of U.S. resident individuals including imposing tax on worldwide income of domestic corporations. Taxing U.S. MNCs foreign business income 

is important to achieve the desired ability-to-pay objectives of the U.S. Federal income tax.2

Factual paradigms underlying international tax rules have changed. International 

tax rules were formulated in a time when it could be assumed that income from 

business carried on through a foreign subsidiary in another country where goods 

and services were sold (the source country) would be taxed at rates comparable to 

the rates in the country of residence of the MNC. It was customary to organize a 

foreign subsidiary in each country where business was conducted in a bilateral relationship between the MNC residence country and each source country where business was conducted. 

The premise that a foreign subsidiary pays a tax comparable to a U.S. tax today 

is not just wrong, but very wrong for most U.S. MNC foreign subsidiary earnings. 

Based on 2006 tax return data, 45.9 percent (45.9%) of earnings of foreign subsidiaries that reported positive income and some foreign tax were taxed at a foreign 

effective rate of less than 10 percent (10%).3 Such low foreign effective rates are not 

fully explained by lower foreign corporate tax rates in major U.S. trading partner 

countries, but also reflect ongoing MNC structuring to minimize tax by source and 

residence countries. Today, most international tax structures employ intermediary 

legal entities that do not bear a meaningful corporate tax because they are located 

in countries that facilitate very low effective tax rates on the income.4

59 

gies); Leslie Wayne, Kelly Carr, Marina Walker Guevara, Mar Cabra & Michael Hudson, Leaked 

Documents Expose Global Companies’ Secret Tax Deals in Luxembourg, INT’L CONSORTIUM OF

INVESTIGATIVE JOURNALISTS (Nov. 5, 2014, 4:00 PM), available at http://www.icij.org/project/ 

luxembourg-leaks/leaked-documents-expose-globalcompanies-secret-tax-deals-luxembourg (Luxembourg tax rulings for U.S. and non-U.S. MNE structures show multiple layers of companies). 5Daniel Shaviro, FIXING U.S. INTERNATIONAL TAX RULES 20–21 (Oxford 2014). Taxing worldwide income of U.S. citizens and residents has been upheld by the Supreme Court since the earliest days of the income tax. Cook v. Tait, 265 U.S. 47 (1924). 6See Harry Grubert, Foreign Taxes and the Growing Share of U.S. Multinational Company 

Income Abroad: Profits, Not Sales, Are Being Globalized, 65 NAT’L TAX J. 247 (2012). 7See U.S. Senate Permanent Subcommittee on Investigations of the Committee on Homeland 

Security and Governmental Affairs, HEARING ON OFFSHORE PROFIT SHIFTING AND THE U.S. TAX

CODE, Exhibit 1, Memorandum from Chairman Carl Levin and Senator Tom Coburn to Subcommittee Members, Offshore Profit Shifting and the Internal Revenue Code, 20–22 (Sept. 20, 

2012) (hereinafter cited as ‘‘Levin and Coburn, Memorandum on Microsoft and HP’’) at http:// 

www.hsgac.senate.gov/subcommittees/investigations/hearings/offshore-profit-shifting-and-theus-tax-code (last visited May 30, 2013). The Puerto Rican subsidiary had 177 employees whose 

compensation averaged $44,000. Intangible rights with respect to the software lay behind the 

Puerto Rican operation’s claim to 47% of the operating profit on the U.S. sales. 8See J. Clifton Fleming, Jr., Robert J. Peroni & Stephen E. Shay, Worse than Exemption, 59 

EMORY L.J. 79, 85 (2009) (combination of deferral, defective source rules, foreign tax credits, 

weak transfer pricing and current use of branch losses give U.S. MNEs a net tax advantage 

over exemption country competitors); Edward D. Kleinbard, ‘‘ ‘Competitiveness’ Has Nothing to 

Do With It,’’ 144 TAX NOTES 1055 (Sept. 1, 2014). The Administration’s minimum tax proposal is estimated by Treasury to raise $206 billion over FY 2016–2025, but it would lose $103 billion 

from extending the active finance exception to Subpart F and other taxpayer favorable changes, 

for a net revenue gain of roughly $103 billion (before taking account of $268 billion from a onetime tax on pre-effective date earnings). The Camp proposal for a 95 percent (95%) dividend exemption was estimated to lose $212 billion for the period 2014–2023, but its Subpart F reforms 

would raise $116 billion over the same period for a net revenue loss of $96 billion over the period. With $170 billion of revenue from a one-time tax on pre-effective date earnings, however, 

the Camp proposal would levy in the budget period roughly $70 billion in additional tax on U.S. 

MNCs (compared with the Administration’s roughly $371 billion). While there are questions 

about revenue effects beyond the budget period, these proposals arguably could be interpreted 

as representing an emerging consensus that U.S. MNCs should pay more tax on foreign income 

with the only remaining issues being how much more, how rules should be designed and what 

the revenue should be spent on. 9 Republican Staff, Committee on Finance, United States Senate, TAX REFORM FOR 2015 AND

BEYOND 254 (Dec. 2014). 

The importance of taxing foreign business income. Taxing income earned abroad 

is necessary to prevent the simplest form of avoidance of U.S. residence taxing jurisdiction.5 Aggregate and firm level financial data evidence substantial U.S. tax base 

erosion under current law.6 As one firm level example, the staff of the Senate Permanent Subcommittee on Investigations found that Microsoft transferred rights to 

software developed in the United States to a subsidiary operating in Puerto Rico so 

that digital and physical copies could be made for sale to customers in the United 

States. In fiscal year 2011, Microsoft’s Puerto Rican subsidiary booked over $4 billion of operating income for financial statement purposes and paid under 1 percent 

in tax (after paying $1.9 billion in cost sharing payments).7 This income shifting 

from the United States is in the face of current transfer pricing regulations and 

Subpart F rules. As the Microsoft example demonstrates, one reason to tax foreign 

business income is to protect the U.S. tax base from erosion with respect to sales 

to U.S. customers. 

There also is a need to protect the U.S. tax base in respect of sales to foreign customers. The pricing of U.S. intermediate goods and services with respect to sales 

to a foreign subsidiary, as well as the foreign subsidiary’s non-U.S. sales, are subject 

to the same risk of U.S. tax base erosion. Even in cases where the foreign subsidiary 

is selling to another foreign subsidiary, a low level of tax on the income attracts 

profit-shifting investment because of the higher after-tax return and our transfer 

pricing rules are not capable of defending large effective tax rate differences. The 

combination of low-tax intermediary entities in countries enabling tax avoidance, 

transfer pricing and a range of other tax planning techniques are largely responsible 

for very low effective rates of tax on foreign income. 

MNC competitiveness, lockout and dividend exemption. There is dispute whether 

U.S. MNCs are in fact tax disadvantaged under current law in relation to MNCs 

from other countries. The better case can be made that U.S. MNCs are advantaged, 

not disadvantaged.8 It also has been argued that the large retentions of offshore 

earnings by U.S. MNCs’ foreign subsidiaries are an important reason, if not the primary reason, to shift to a territorial tax system.9 I respectfully disagree that the 

60 

10See Stephen E. Shay, The Truthiness of ‘‘Lockout’’: A Review of What We Know, 146 TAX

NOTES 1493 (Mar. 16, 2015). 11See J. Clifton Fleming, Robert J. Peroni and Stephen E. Shay, Getting Serious About CrossBorder Earnings Stripping: Establishing an Analytical Framework, (forthcoming at 93 N.C. LAW

REV. 101 (2015) (hereinafter ‘‘Fleming, Peroni and Shay, Cross-Border Earnings Stripping’’). 12Stephen E. Shay, Mr. Secretary, Take the Tax Juice Out of Corporate Expatriations, 144 TAX

NOTES 473, 479 (2014); U.S. Treasury Dep’t, EARNINGS STRIPPING, TRANSFER PRICING AND U.S. 

INCOME TAX TREATIES 21–22 (2007); Willard B. Taylor, Letter to the Editor, A Comment on Eric 

Solomon’s Article on Corporate Inversions, 137 TAX NOTES 105, 105 (2012). 13The Administration and Chairman Camp have each proposed a form of minimum tax combined with a form of dividend exemption. An important difference between the proposals from 

a revenue perspective is the Administration’s limitation of interest deductions allocable to foreign subsidiary earnings eligible for a reduced rate of tax. The Administration and Camp proposals also vary in other important details but share the attribute of allowing foreign income 

to be exempt from U.S. tax so long as it is subject to an effective rate of tax that is less than 

the U.S. rate. The effects of the Administration minimum tax are not easy to discern without 

a specific proposal, including a specific corporate tax rate, particularly because the Administration proposal incorporates an allowance for corporate equity (ACE). Both the Camp and Administration proposals adopt design choices that, in quite different ways, directly or indirectly target 

MNCs that possess intangibles. My experience as a tax planner leads me to be skeptical of targeting income categories, such as intangibles, or adopting special relief provisions like the ACE, 

which experience in Belgium suggests can be difficult to design to achieve intended objectives. 

See Ernesto Zangari, Addressing the Debt Bias: A Comparison between the Belgian and the 

Italian ACE Systems (Working Paper No. 44, European Commission Taxation Papers), available 

at http://ec.europa.eu/taxation_customs/resources/documents/taxation/gen_info/economic_analysis/tax_papers/taxation_paper_44.pdf. The U.S. experience with the Section 199 deduction for manufacturing activity provides another cautionary example of a misguided effort 

to target an ill-defined category. I suggest instead adopting a design for taxing foreign business 

income that is broader and does not exempt, as the Administration’s ACE approach would, the 

primary layer of income from capital. With my co-authors Professors Fleming and Peroni, I have 

evidence we have supports that conclusion.10 Adverse effects of offshore retentions 

on U.S. economic activity are very unclear and do not lead to a conclusion we should 

relieve foreign business income from taxation. Offshore earnings retentions could as 

readily be addressed with full current taxation of foreign business income. The minimum tax proposal I outline below also would relieve some pressure on repatriating 

offshore earnings. 

Foreign parent MNC’s U.S. tax advantages. Foreign parent MNCs use debt and 

other earnings stripping techniques (that generally are not available to U.S. MNCs) 

to reduce U.S. tax on U.S. economic activity.11 Indeed, this tax avoidance opportunity has encouraged U.S. MNCs to shift their corporate residence outside the 

United States.12 A clear policy objective should be to neutralize a foreign parent 

MNC’s advantage from using earnings stripping (which need not wait for passage 

of new legislation). 

U.S. resident’s foreign portfolio stock tax advantages. In addition to corporate tax 

reforms, it is important to re-examine individual shareholder level portfolio income 

taxation. If an objective is to protect the U.S. individual income tax base, U.S. individuals’ portfolio investments in a foreign corporation should not be advantaged, as 

often is the case today, over a portfolio investment in a domestic corporation carrying on exactly the same global business. Today a U.S. individual portfolio shareholder in a foreign corporation bearing a low or no foreign corporate tax on foreign 

business income is more favorably taxed than the shareholder would be investing 

in the same business conducted through a domestic corporation. In a range of cases, 

this encourages individual and tax-exempt ownership of foreign rather than domestic equities and may indirectly contribute to shifting of corporate tax residence outside the United States. The taxation of dividends and gains from foreign portfolio 

equity investments should be reviewed and reformed under any of the international 

tax reform proposals. 

IV. POLICY PROPOSALS

The preceding discussion leads me to recommend that the Committee consider the 

following proposals or areas for reform. Each of these ideas would address a current 

problem and would be helpful whether or not part of a more fundamental tax reform, but each also would work well as part of a broader reform. 

Improve Taxation of Foreign Business Income 

If the corporate rate were reduced materially, the first best choice would be to 

follow the Wyden-Coats proposal and tax foreign subsidiary earnings currently, in 

which case deductions allocable to foreign subsidiary earnings should be allowed in 

full.13 I am skeptical that a lower corporate tax rate will be achieved in this ConVerDate Mar 15 2010 20:53 Apr 13, 2016 Jkt 000000 PO 00000 Frm 00064 Fmt 6601 Sfmt 6621 R:\DOCS\99718.000 TIMD
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extensively critiqued a prior version of the Camp proposal and many of those observations remain relevant to the final proposal as well as to elements of the Administration proposal. Stephen E. Shay, J. Clifton Fleming, Jr. and Robert J. Peroni, Territoriality in Search of Principles 

and Revenue: Camp and Enzi, 141 TAX NOTES 173 (Oct. 14, 2013) (hereinafter Shay, Fleming 

and Peroni, Territoriality in Search of Principles). 14The Obama Administration proposal for a final minimum tax would apply if a foreign effective rate is less than 22.35 percent (22.35%). If the Obama Administration is seeking to achieve 

a 28 percent (28%) corporate tax rate, a minimum effective tax rate of 22.35 percent (22.35%) 

would be approximately 80 percent (80%) of the domestic corporate tax rate. If the corporate 

tax rate remained 35 percent (35%), however, the minimum effective tax rate would be approximately 64 percent (64%) of the domestic tax rate. 15 I also would be very concerned if the Administration’s minimum tax proposal were ‘‘cherrypicked’’ and, for example, the deduction disallowance rule were not adopted or the minimum 

tax rate were reduced by even a few percent. Maintaining a full residual U.S. tax mitigates the 

substantial tax base risks of such changes in the course of the legislative process. 16See Fleming, Peroni and Shay, Cross-Border Earnings Stripping, supra note 11. 

gress, yet I think it is very important to address U.S. MNCs base erosion and profit 

shifting. Accordingly, I suggest as a second best approach an advance minimum tax 

on foreign business income that could be adopted today or as part of a broader reform. 

Under an advance minimum tax, a United States shareholder in a controlled foreign corporation (CFC) would be required to include in income (under the Code’s 

Subpart F rules) the portion of the CFC’s earnings that would result in a residual 

U.S. tax sufficient to achieve the target minimum effective tax rate on the CFC’s 

current year earnings. The target minimum effective tax rate would be based on a 

percentage of the of the U.S corporate rate, so that it would adapt to changes in 

the U.S. corporate tax rate.14 Deductions incurred by U.S. affiliates allocable to the 

CFC’s earnings only would be allowed to the extent the CFC’s earnings were actually or deemed distributed. For example, if the actual and deemed distributions 

caused 35% of the CFC’s earnings to be distributed, then 35% of the deductions allocable to the CFC’s income would be allowed and the remaining 65% would be suspended until the remaining earnings were distributed. 

The earnings deemed distributed would be treated as previously taxed as under 

current law and would be available for distribution without a further U.S. tax 

(which would reduce pressure on earnings held abroad). An advance minimum tax 

structured in this way could be readily adapted under the current infrastructure of 

U.S. international tax rules and could replace existing Subpart F income categories, 

including those for foreign base company sales and services income. This proposal 

could be implemented without waiting for a broader tax reform and without relying 

on a material reduction to the final corporate tax rate.15

Strengthen Corporate Residence and U.S. Source Taxation Rules 

If taxation of foreign income is reformed, there will be greater pressure on U.S. 

corporations to change corporate residence. It is important to reconsider existing 

corporate residence rules beyond cases involving expatriating entities. The United 

States should consider broadening its definition of a resident corporation to provide 

that a foreign corporation would be U.S. tax resident if it satisfied either a shareholder residency test or the presently controlling place of incorporation test. I acknowledge that there currently are limitations on identifying ultimate owners of 

stock in publicly-traded companies, but identity of shareholders’ or their tax residence already is used under the Code and it is feasible to increase the ability of 

corporations to learn shareholder identity information through reporting or other 

means. Importantly, linking corporate residence to greater than 50% control by U.S. 

tax residents would align corporate residence with the primary reason the U.S. 

seeks to impose a corporate tax which is to tax resident shareholders. There are important details to be worked out in designing a shareholder residence test, but I 

strongly encourage the Committee to pursue this avenue. 

The first and most direct way to strengthen U.S. source taxation generally is 

through improved earnings stripping rules.16 This has been the focus of the Treasury Department and I do not address details here except to emphasize that, unless 

addressed, U.S. MNCs will continue to attempt to shift corporate residence to take 

advantage of the U.S. tax reduction opportunities from earnings stripping. 

Reduce U.S. Tax Advantages for Portfolio Investment in Foreign Over Domestic 

Stock 

Under current U.S. tax law, a U.S. portfolio stock investor can earn a higher 

after-tax return on foreign business income earned through a foreign corporation 

62 

17See Shay, Fleming and Peroni, Territoriality in Search of Principles, supra note * [13], at 

163–165; see also A.B.A. Tax Sec. Task Force on International Tax Reform, Report of the Task 

Force on International Tax Reform, 59 TAX LAW. 649, 698–699 (2006) (calling for reconsideration 

of the scope of QDI treatment for a dividend from a foreign corporation); see also Michael J. 

Graetz and Rachael Doud, Technological Innovation, International Competition, and the Challenges of International Income Taxation, 113 COLUM. L. REV. 347, 361 (2013). 18 In addition, with respect to corporate managers of expatriated companies, if foreign taxes 

are imposed at lower rates than U.S. taxes, Section 457A-type restrictions on compensation deferrals could be extended to all cases where the deferred amounts are not subject to a corporate 

tax equivalent to the U.S. corporate tax. 19The surrogate for a corporate level tax would apply to a U.S. portfolio shareholder that is 

a U.S. tax-exempt organization, just as a U.S. corporate level tax would apply in relation to 

earnings of a domestic corporation. The taxing structure described is used in current law I.R.C. 

§ 962, which permits an individual U.S. shareholder in a CFC to elect to take a credit for a foreign corporate tax against the U.S. tax on a Subpart F inclusion, but conditions the election 

on (i) the shareholder being subject to a notional U.S. corporate level tax against which the foreign corporate tax is credited, and (ii) the shareholder being subject to normal U.S. tax when 

the earnings are actually distributed (though reduced by any additional tax paid under (i)). The 

Section 962 election is rarely used under current law. A U.S. portfolio shareholder owning less 

than 10 percent (10%) by voting power of the foreign corporation could be allowed to rely on 

the foreign corporation’s published financial statements to make reasonable estimates of retained earnings and foreign taxes. In the absence of such information, gain would be attributed 

to earnings. 20 A similar deemed corporate level tax is used as a limitation on the tax of an individual U.S. 

shareholder on dividend treatment of stock sale gain under Section 1248. See I.R.C. § 1248(b). 

than through a domestic corporation. In order not to favor a foreign corporation over 

a U.S. corporation in relation to foreign business income, at a minimum, foreign 

dividends should not qualify for a lower tax rate allowed for ‘‘qualified dividend income,’’ or QDI, to the extent that the foreign corporate level effective tax rate is materially lower than the U.S. corporate tax rate.17 In addition, the preferential capital 

gains rate (if retained) should be denied for stock gain attributable to the foreign 

corporation’s non-U.S. earnings.18

A more fundamental alternative would be to determine the portfolio shareholder 

level U.S. tax on foreign earnings distributed from a foreign corporation in two 

parts. The first part would be a tax equal to the tax that would be paid on the foreign earnings if they were subject to domestic corporate tax including allowing foreign corporate-level taxes as a credit. This equalizing tax would be imposed on taxexempt as well as taxable shareholders just as would occur in a domestic corporation. It is strange indeed to advantage investment by U.S. tax-exempts in foreign 

over U.S. corporations but that is the case today in relation to foreign corporations 

subject to low effective rates of tax. 

The distributed earnings (reduced by that amount of tax as though it were a corporate-level tax), then would be subject to the normal U.S. tax rules for that dividend income.19 The same mechanism could be applied to gains on the sale of foreign 

stock to the extent of untaxed deferred earnings.20 This would mitigate the advantage to a U.S. portfolio shareholder of earning foreign income through a foreign corporation not subject to U.S. corporate level tax. 

These modifications of shareholder taxation would bear on the corporate residence 

decision, particularly by domestic corporations that have a substantial U.S. shareholder base and may consider expatriation, not just in terms of the tax in connection 

with an expatriation, but in relation to ongoing shareholders. More generally, we 

need to scrutinize all of our international rules more closely to see where we may 

inadvertently be favoring non-U.S. over U.S. economic activity. 

IV. CONCLUSION

International business income is but a part of the larger mosaic that comprises 

the U.S. economy. There is no normative reason to privilege foreign business income 

beyond allowing a credit for foreign income taxes. If any group of taxpayers does 

not bear its share of tax, others must make up the difference sooner or, if the deficit 

is debt-financed, later. The efforts of former Chairmen Camp and Baucus to lower 

tax rates in a revenue neutral tax reform illustrates the necessity of maintaining 

and expanding the tax base, including foreign business income of U.S. MNCs. Dynamic scoring will not alter this fundamental reality. 

In no area of business are tax planning skills more acute and heavily deployed 

to take advantage of exceptions, special deductions and lower effective rates than 

in relation to earning cross-border business income. My recommendation is to tax 

foreign business income broadly and allow a credit for foreign income taxes. It alVerDate Mar 15 2010 20:53 Apr 13, 2016 Jkt 000000 PO 00000 Frm 00066 Fmt 6601 Sfmt 6621 R:\DOCS\99718.000 TIMD
63 

ways is possible to relieve a tax rule; it is very difficult in our system to make a 

tax rule tougher. I encourage you not to gamble with dividend exemption or an ACE 

deduction when there are more established and less risky ways to address the actual problems. 

I would be pleased to answer any questions the Committee might have. 

PREPARED STATEMENT OF ANTHONY SMITH, VICE PRESIDENT OF TAX AND

TREASURER, THERMO FISHER SCIENTIFIC INC. 

Chairman Hatch, Ranking Member Wyden, and distinguished members of the 

committee, it is an honor to appear before you today to discuss how this committee 

and the Senate can build a more competitive U.S. international tax system. 

I am Tony Smith, Vice President of Tax and Treasury and Treasurer for Thermo 

Fisher Scientific Inc. Prior to joining the company over 10 years ago, I worked as 

a tax professional, beginning my career 25 years ago in the United Kingdom and 

focusing largely on U.K. tax matters. I then shifted my focus to U.S. tax matters 

in 1993 and moved here in 1998. My experience qualifies me to comment on U.S. 

and overseas tax regimes as well as company and shareholder reaction to tax rules 

and reforms. I have appreciated the opportunity to meet with many of your staffs 

over the past couple of years to discuss the pressing need for international tax reform. 

I recognize that the committee is faced with difficult decisions and complex tradeoffs as you consider corporate, small business and personal tax reform that will result in an optimal tax system for the United States in today’s global economy. My 

focus today is on corporate tax reform—with particular emphasis on international 

tax reform. I appreciate this opportunity to provide perspectives from the front lines 

on why international tax reform is so important to U.S.-based, globally engaged 

companies like Thermo Fisher. I’ll also speak to the kinds of changes that I believe 

will make a real difference to the competitiveness of U.S.-based companies and their 

contributions to economic growth and jobs in the United States. 

THERMO FISHER SCIENTIFIC’S BUSINESS

First, a little background on our company. Thermo Fisher Scientific is the world 

leader in serving science. Our mission is to enable our customers to make the world 

healthier, cleaner and safer, and we fulfill this mission by providing advanced technologies, products and services that help our customers address some of the most 

important challenges facing society today. For example, we have helped our customers screen for and contain the Ebola virus, discover better cancer treatments, 

monitor the environment to understand climate change and protect the safety of our 

citizens. 

Thermo Fisher is headquartered in Massachusetts, but is a globally engaged company with 50,000 employees worldwide. Approximately half of that workforce is in 

the United States. We are proud to have major facilities in many of the states represented on this committee—including facilities in Logan, Utah, and Eugene, Oregon. 

Our portfolio consists of some 1.3 million products, including analytical instruments used in research labs and production lines, specialty diagnostics that test for 

myriad health conditions, life sciences solutions to accelerate research, discovery 

and diagnosis, and a comprehensive offering of laboratory products and services. 

Thermo Fisher’s global revenue is approximately $17 billion. That revenue is split 

roughly 50/50 between the United States and overseas. We have a significant overseas customer base, and much of this revenue is derived from ‘‘Made in America’’ 

products that we sell to science customers around the world. These products come 

from not just Logan and Eugene, but also Lenexa, Austin, Asheville, Marietta, Allentown, Rochester, Kalamazoo, Fair Lawn, Rockville, Lafayette and Middletown, to 

name but a few. 

Thermo Fisher’s revenues have grown at an average rate of 10 percent per year 

since 2000. We continue to invest in technology innovation, commercial capabilities 

and emerging markets to grow our existing businesses. We have also acquired businesses to further strengthen our strategic position. In the last five years alone, we 

have spent more than $20 billion on acquisitions—both within and outside of the 

United States. 

64 

THERMO FISHER’S TAX PROFILE

Thermo Fisher manufactures a substantial volume of products in the United States. The company spends over $500 million per year in the United States on research and development to support new and existing products. The company benefits from the R&D tax credit when it is available. In 2014, the R&D tax credit was 

worth $25 million to Thermo Fisher. The company also benefits from the reduced 

effective corporate tax rate on domestic manufacturing under section 199, which was 

worth about $30 million to us last year. In addition, the company benefits from 

some timing items provided for in the current tax law, including use of the LIFO 

inventory valuation method. 

Given our active acquisition history, Thermo Fisher has approximately $14 billion of debt. The company’s interest expense is approximately $400 million per year. 

In addition to our large U.S. manufacturing presence, Thermo Fisher manufactures products overseas in multiple jurisdictions, including China, Finland, Germany, Lithuania, Singapore, Sweden, Switzerland and the United Kingdom. We sell 

products in nearly every jurisdiction through both distribution affiliates and unrelated distributors. In all cases, the corporate tax rate imposed on profits earned in 

those jurisdictions is lower than the U.S. corporate tax rate. 

Like many companies that have grown in part through acquisitions funded partly 

from U.S. sources and partly from overseas cash, Thermo Fisher has a complex 

overseas treasury and legal structure. Nearly all of the company’s external debt is 

owed by U.S. members of the Thermo Fisher group to U.S. lenders. This is because 

it is optimal for a corporate group to issue debt through one face to the capital markets and because the capital markets in the United States are the most efficient 

in the world. The proceeds of this debt, along with funds generated from operations, 

are then used by our U.S. or overseas businesses to make acquisitions. While approximately half of the company’s annual cash flow is generated overseas, Thermo 

Fisher currently has very little cash overseas. The vast majority of the cash from 

our overseas earnings is reinvested in the business or used for strategic acquisitions 

that increase our competitiveness and stimulate growth. 

Some of Thermo Fisher’s overseas income is subject to current tax in the United 

States under the Subpart F regime. This is because of the complex overseas treasury and legal structure just mentioned, which is a byproduct of the company’s significant international growth via acquisition. 

THE NEED FOR INTERNATIONAL TAX REFORM

The current U.S. international tax rules are unwieldy, subject to varying interpretation, and difficult to comply with. All of this gives rise to uncertainty for U.S.- 

based companies that are globally engaged. 

Investors and companies want predictability and certainty. And the entire marketplace remains cautious as a result of questions about when—or if—Congress will 

reform the U.S. tax code. Recent inversion activity is a sign of frustration with an 

uncompetitive U.S. system and lack of confidence that reforms to make the system 

more competitive are imminent. 

The combined effect of the high U.S. corporate tax rate and the U.S. worldwide 

tax system limits the flexibility of U.S.-based global companies to deploy the cash 

earned in their foreign businesses where it would be most productive. Given the 

high U.S. tax rate, U.S. multinationals will have overseas subsidiaries that make 

profits that are subject to taxes lower than in the United States. Most U.S. multinationals allow these earnings to remain overseas rather than face a large tax cost 

to repatriate the funds. If funds are needed in the United States, such companies 

borrow in the United States rather than access the earnings trapped overseas. Having a tax regime that creates a disincentive for U.S.-based companies to pay down 

debt—and indeed creates an incentive to incur new debt—is not sustainable in the 

longer term. 

The current U.S. tax system also impedes the ability of U.S.-based global companies to undertake acquisitions that make good business sense and that would contribute to our domestic economy. 

The existing tax rules can have the unintended effect of encouraging U.S.-based 

global companies to overpay for overseas acquisition targets because they have no 

other more productive use for the cash generated from their overseas operations. As 

a result, in pursuing non-U.S. acquisition targets, Thermo Fisher has been outbid 

several times by other U.S. multinationals that were willing to pay what we considVerDate Mar 15 2010 20:53 Apr 13, 2016 Jkt 000000 PO 00000 Frm 00068 Fmt 6601 Sfmt 6621 R:\DOCS\99718.000 TIMD
65 

ered to be an above-market price for the foreign target. The other bidders had available cash from overseas operations and limited options for deploying this cash without incurring the prohibitive costs of repatriating funds to the United States; because of this, they were willing to pay a premium for the foreign target. Ultimately, 

this distortion of the acquisition market extends to similar targets in the same industry, because the excessive price paid sets an artificial new benchmark. 

Conversely, the current tax system also places U.S.-based companies at a significant disadvantage when bidding against a foreign entity, regardless of where the 

target may be incorporated. Recent large acquisitions of U.S. targets by foreign 

acquirers have been valued more highly by the foreign buyers as compared to 

would-be U.S. buyers because their home country’s tax laws allow them to structure 

transactions more efficiently and access the targets’ global earnings without the 

home country tax that a U.S. buyer would face. 

To restate: When it comes to M&A activity, the combined effect of the high U.S. 

corporate tax rate and the U.S. worldwide tax system means that: 

• U.S. companies are more likely to be bought by foreign companies; and 

• U.S. companies are more likely to overpay for foreign acquisitions. 

Such a result—which is detrimental to the growth of U.S. companies—could not 

have been what the designers of the U.S. tax law intended. But this is the reality 

that currently exists. 

Corporate inversion transactions are a related phenomenon. Notwithstanding the 

chilling effect of the notice issued by the Treasury Department last summer, the 

current U.S. tax system encourages inversion-type structuring in large M&A transactions. Like my example earlier, this can lead U.S. purchasers to overpay for target 

foreign companies. The market has seen the price for foreign targets being bid up 

simply because they are large enough for a U.S. company of the right size profile 

to invert into without a tax penalty. The long-term tax savings from inverting out 

of the United States can support the higher cost of the deal. 

Finally, it is important to note that the U.S. tax system generally is more complex 

than foreign tax rules. Available R&D credits and other incentives are much lower 

in the United States than in many countries. And the U.S. R&D credit is rife with 

uncertainty due to its perpetually temporary and short-term nature. This encourages the development of high-value research centers, and the associated creation of 

high-value jobs, overseas where generous and stable incentives are available. 

KEY ELEMENTS OF TAX REFORM

I commend the committee for its focus on tax reform in general and international 

tax reform in particular. I urge you to continue the effort to get much needed international tax reforms across the finish line as soon as possible. Such reforms are critical to the competitiveness of U.S.-based companies and to the continued strengthening of the U.S. economy. 

Reforms should be designed to end the uncertainty that currently pervades the 

tax system for U.S. companies with global operations. Clearer and more stable rules 

would enable better investment decisions. I am convinced that many investment decisions are currently on hold while companies and investors wonder whether muchneeded tax reforms will advance. This is a drag on the economy in the United 

States. 

Tax reform should stimulate the U.S. economy, create jobs and strengthen the 

ability of U.S.-based global companies to succeed in an ever more competitive marketplace. And it should incentivize companies to make decisions—about mergers and 

acquisitions as well as general investment—based on total value rather than localized tax policies. 

We should all recognize that other countries are taking measures to stimulate 

their own economies, including lowering their corporate tax rates and providing tax 

incentives, while the continuation of the high U.S. tax rate puts our future competiveness at risk. 

Finally, I want to be clear: Thermo Fisher recognizes that Congress needs to 

achieve a delicate balance in terms of revenue and understands that corporations 

may need to be prepared to cede certain long-standing tax benefits in the interests 

of improving the overall corporate tax system. 

My suggestions for international tax reform are as follows: 

66 

1. Reduce the corporate tax rate: 

Æ A corporate tax rate between 25 percent and 30 percent would put the 

United States closer to other developed economies. There will continue to be 

lower rates in other countries, so this would not be any kind of a race to 

the bottom. 

Æ There will always be significant advantages to being headquartered in the 

United States. Therefore, it would not be necessary for the United States 

to match the world’s lowest tax regimes. But we ought to lower the U.S. corporate tax rate to prevent the job leakage and other unintended consequences that arise with our current corporate tax rate that is out of line 

with the rest of the developed world. 

2. Move closer to a territorial system by allowing repatriation of foreign earnings 

at a lower—but not zero—tax cost: 

Æ Repatriated overseas earnings should be taxed at a lower rate than the regular corporate rate. A U.S. tax on repatriated foreign earnings at a rate of 

5 percent or slightly higher would not be a significant barrier to repatriation 

because most U.S.-based companies will value the flexibility to redeploy 

earnings in the United States rather than having to retain such earnings 

overseas. 

Æ This tax should be imposed when the earnings are repatriated to the United 

States. 

3. Incentivize research in the United States: 

Æ Incentivize the development of intellectual property in the United States by 

making permanent the R&D credit. 

Æ Incentivize the utilization of intellectual property in the United States and 

generation of income here by a reduction in the rate of tax on earnings from 

that activity. 

4. Simplify the Subpart F and foreign tax credit rules: 

Æ The existing rules are an administrative burden, over-complicated and too 

prone to different interpretations. Simplifying the rules could reduce the administrative burdens and uncertainties and better target the rules to their 

intended purpose. 

5. Impose an appropriate limit on interest deductibility: 

Æ Consideration could be given to a limit on deductions for interest expense, 

based on an appropriate ratio of net interest expense to U.S. taxable income, 

with any surplus interest deductions being deferred. Today’s historically low 

interest rate environment makes clear that any such limit would have to be 

based on a ratio that adjusts by being tied to prevailing interest rates. An 

appropriately structured limitation would encourage repatriation to pay 

down debt where the other reforms make such repatriation feasible from a 

cost perspective. 

6. Avoid one-off tax incentives and holidays and reduce the number of cash-flowonly items: 

Æ In my opinion, LIFO inventory accounting and accelerated depreciation are 

timing items only and eliminating these benefits could be an acceptable 

trade-off for longer term permanent rate reduction and the other items mentioned here. 

7. Continue to incentivize manufacturing activity and the generation of earnings 

in the United States through the reduced rate of tax on manufactured earnings 

under section 199. 

8. Simplify reporting as much as possible. 

These priorities echo themes that are reflected in tax reform proposals that have 

been proposed in recent years in the Senate and the House of Representatives and 

by the President. I believe the work that this committee and your colleagues in the 

House have already done provides a strong foundation for the development of a detailed tax reform package. 

As I have emphasized throughout these comments, this committee’s goal ought to 

be providing a more stable and more competitive environment for U.S.-based companies operating in today’s global economy. This ultimate goal is more important than 

achieving the lowest possible corporate tax rate. But lowering the corporate tax rate 

67 

is an important element of competitive, pro-growth international tax reform. I stand 

ready to provide whatever assistance I can in this important initiative. 

Thank you for the opportunity to present Thermo Fisher Scientific’s perspective. 

I am happy to answer any questions that the committee may have. 

PREPARED STATEMENT OF HON. RON WYDEN, 

A U.S. SENATOR FROM OREGON

Nine months ago, the Finance Committee came together in this very room for a 

hearing on how the broken U.S. tax code hurts our competitiveness around the 

world—how it hinders the drive to create red, white, and blue jobs that pay strong 

middle-class wages. 

The discussion was dominated by the wave of tax inversions that was cresting at 

the time, pounding our shores and eroding our tax base. Headline after headline 

last summer announced that American companies were putting themselves on the 

auction block for foreign competitors. They’d find a buyer, headquarter overseas, 

and shrink their tax bills to the lowest possible levels. In the absence of comprehensive tax reforms from Congress, the Treasury undertook extraordinary measures 

aimed at slowing the erosion. 

Nine months later, the Finance Committee is back for another hearing on international taxation. And the headlines are back, too. Once again, there’s a wave cresting—and this one’s even bigger. 

These days, it’s foreign firms circling in the water and looking to feast on American competitors, often in hostile takeovers. And just like before, American taxpayers could be on the hook subsidizing these deals. 

There’s an obvious lesson here. Our tax code is deeply broken. The next flaw that 

exposes itself—the next wave that appears on the horizon—may not be about inversions or hostile takeovers. But whenever one wave breaks, you can bet there’s another one rolling in, ready to pound our economy and erode our tax base further. 

The dealmakers will always get around piecemeal policy changes. Nothing short of 

comprehensive tax reform will end the cycle. 

There’s been an awful lot of ink spilled on business pages and in magazines about 

the many ways our tax code is outdated and anticompetitive. The corporate tax rate 

puts the U.S. at a disadvantage. The system of tax deferral blocks investment in 

the U.S. like a self-imposed embargo. How fitting it is on St. Patrick’s Day to shine 

a spotlight on mind-numbing strategies like the ‘‘Double Irish with a Dutch Sandwich’’ used to winnow down tax bills. 

A modern tax code should fight gamesmanship and bring down the corporate rate 

to make American businesses more competitive. That’s what my own bipartisan proposal would do—in fact, it has the lowest rate of any proposal to date. 

It’s legislative malpractice to sit by and let this situation fester. Congress can’t 

expect the Treasury to keep playing whack-a-mole with every issue that pops up. 

The latest wave of cross-border gamesmanship shows that cannot work. So the Finance Committee will need to lead the way on tax reform. 

In my view, our end goals are bipartisan—a tax code that supercharges America’s 

competitiveness in tough global markets, draws investment to the U.S. and creates 

high-skill, high-wage jobs in Oregon and across the country. It’ll take a lot of work 

and political will to get there, but in the meantime, the waves will keep crashing 

and our tax base will keep eroding. So it should be clear to everybody what has to 

be done. 

Thank you to all our witnesses for being here today—I’m looking forward to a 

fruitful discussion. 

(69) 

COMMUNICATION

THE LIFO COALITION

1325 G Street N.W., Suite 1000, Washington, DC 20005 

TEL: 202–872–0885 

March 31, 2015 

Senate Committee on Finance 

Attn. Editorial and Document Section 

Rm. SD–219 

Dirksen Senate Office Bldg. 

Washington, DC 20510–6200 

To The Finance Committee: 

I am writing on behalf of the LIFO Coalition in response to testimony provided to 

the Committee at its March 17th hearing. 

The LIFO Coalition (the Coalition), organized in April 2006, has more than 125 

members including trade associations representing hundreds of thousands of American employers in the manufacturing, wholesale distribution, and retail sectors, as 

well as companies of every size and industry sector that use the LIFO method. A 

list of the LIFO Coalition members is enclosed. 

The last-in, first-out (LIFO) method of inventory is used by a diverse array of American companies, including hundreds of thousands of pass-through businesses, to 

most accurately record inventories and measure income. Despite the widespread use 

of LIFO, LIFO repeal has been considered several times in recent years as a way 

to raise revenues to offset various spending initiatives or to pay for certain tax reform objectives. 

An executive of a multi-national corporation testified before the Finance Committee 

on March 17th, at the Committee hearing on international tax. In his testimony, 

the executive made recommendations on tax reform, among them a suggestion that 

LIFO repeal ‘‘could be an acceptable trade-off for longer term permanent rate reduction. . . .’’ 

LIFO Coalition members were both surprised and disturbed to read that testimony 

because for the overwhelming majority of LIFO users, a reduction in income tax 

rates would not in any way offset the repeal of LIFO. The situation facing passthrough companies on LIFO is even worse inasmuch as, based on the current debate, they could lose the use of LIFO without a reduction in the individual tax rates 

that they pay. 

Because the testimony of this witness was so inconsistent with the position of the 

LIFO users who comprise the LIFO Coalition, the Coalition counsel reviewed the 

Form 10K filed by the executive’s corporation to better understand its LIFO usage. 

Our review determined that less than 15 percent of the company’s inventory is on 

LIFO, and that its LIFO reserve is very small. 

With so little of its inventory on LIFO and such a small LIFO reserve, repeal of 

LIFO may well not be burdensome for this company. However, these are both unrepresentative statistics in comparison to most companies on LIFO. 

To demonstrate that point, following the Finance Committee hearing, we quickly 

surveyed the members of the National Association of Wholesaler-Distributors (NAW) 

which are LIFO companies to determine the percentage of their inventories that are 

on LIFO. Of the 86 companies that responded to the survey, more than half (44 of 

70 

86) have 100 percent of their inventory on LIFO. And for more than 72 percent of 

the companies (62 of the 86), more than 70 percent of their inventory is on LIFO. 

Further, a tax firm which specializes in LIFO systems advised the Coalition that, 

‘‘of the hundreds of LIFO calculations we prepare annually for manufacturers, 

wholesalers and retailers . . . the vast majority, over 80%, use LIFO for all of their 

inventory.’’ 

This data and that of the NAW members is consistent with that of the diverse crosssection of industries that comprise the LIFO Coalition. The Coalition would be 

happy to substantiate that observation and provide additional data if the Committee 

requests that we do so. 

The LIFO Coalition would ask the members of the Finance Committee to bear in 

mind the very different circumstances of the witness who testified that repeal of 

LIFO would be acceptable as they consider his recommendation on LIFO repeal. 

For the overwhelming majority of the LIFO companies which have most or all of 

their inventory on LIFO and which have significant LIFO reserves, the repeal of 

LIFO is not only an unacceptable component of tax reform, it would both impose 

a punitive retroactive tax increase on them and force them to use an inventory accounting method prospectively that is totally inconsistent with their business models. For many of those companies, particularly thinly capitalized companies with 

small profit margins, repeal of LIFO would simply force them out of business. 

The LIFO Coalition urges the Finance Committee to oppose LIFO repeal, as a separate measure or as part of a comprehensive tax reform effort. 

Respectfully, 

Jade West, Executive Secretariat 

The LIFO Coalition 

Enclosure 

The Lifo Coalition 

1325 G Street N.W., Suite 1000, Washington, DC 20005 TEL: 202–872–0885 

Aeronautical Repair Station Association MDU Resources Group 

Alabama Grocers Association Metals Service Center Institute 

American Apparel & Footwear Association Mid-America Equipment Retailers Association 

American Chemistry Council Midwest Equipment Dealers Association 

American Foundry Society Minnesota Grocers Association 

American Fuel & Petrochemical Manufacturers Minnesota-South Dakota Equipment Dealers Association 

American Gas Association Missouri Grocers Association 

American International Automobile Dealers Association Missouri Retailers Association 

American Iron & Steel Institute Montana Equipment Dealers Association 

American Petroleum Institute Moss Adams LLP 

American Road & Transportation Builders Association NAMM-The International Music Products Association 

American Supply Association National Association of Chemical Distributors 

American Veterinary Distributors Association National Association of Convenience Stores 

American Watch Association National Association of Electrical Distributors 

American Wholesale Marketers Association National Association of Manufacturers 

Americans for Tax Reform National Association of Shell Marketers 

AMT—The Association for Manufacturing Technology National Association of Sign Supply Distributors 

Associated Equipment Distributors National Association of Sporting Goods Wholesalers 

Association for High Technology Distribution National Association of Wholesaler-Distributors 

Association for Hose & Accessories Distribution National Automobile Dealers Association 

Association of Equipment Manufacturers National Beer Wholesalers Association 

Auto Care Association National Electrical Manufacturers Association 

Automobile Dealers Association of Alabama National Federation of Independent Business 

Brown Forman Corporation National Grocers Association 

Business Roundtable National Lumber and Building Material Dealers Association 

Business Solutions Association National Marine Manufacturers Association 

71 

The Lifo Coalition—Continued 

1325 G Street N.W., Suite 1000, Washington, DC 20005 TEL: 202–872–0885 

California Independent Grocers Association National Paper Trade Alliance 

Cardinal Health National Roofing Contractors Association 

Caterpillar Inc. National RV Dealers Association 

Ceramic Tile Distributors Association National Stone Sand & Gravel Association 

Connecticut Food Association Nebraska Grocery Industry Association 

Copper & Brass Fabricators Council New Hampshire Grocers Association 

Copper & Brass Servicenter Association New Jersey Food Council 

Deep South Equipment Dealers Association North American Equipment Dealers Association 

Deere & Company North American Wholesale Lumber Association 

East Central Ohio Food Dealers Association Ohio Equipment Distributors Association 

Equipment Marketing & Distribution Association Ohio Grocers Association 

Far West Equipment Dealers Association Ohio-Michigan Equipment Dealers Association 

Farm Equipment Manufacturers Association Paperboard Packaging Council 

Financial Executives International Pet Industry Distributors Association 

Food Industry Alliance of New York State Petroleum Equipment Institute 

Food Marketing Institute Petroleum Marketers Association of America 

Forging Industry Association Power Transmission Distributors Association 

Gases and Welding Distributors Association Printing Industries of America 

Greater Boston Chamber of Commerce Professional Beauty Association 

Health Industry Distributors Association Retail Grocers Association of Greater Kansas City 

Healthcare Distribution Management Association Retail Industry Leaders Association 

Heating, Airconditioning & Refrigeration Distributors 

International 

SBE Council 

Illinois Food Retailers Association Security Hardware Distributors Association 

Independent Lubricant Manufacturers Association Service Station Dealers of America and Allied Trades 

Industrial Fasteners Institute Society of Independent Gasoline Marketers of America 

Industrial Supply Association SouthEastern Equipment Dealers Association 

International Foodservice Distributors Association Southern Equipment Dealers Association 

International Franchise Association SouthWestern Association 

International Sanitary Supply Association Souvenir Wholesale Distributors Association 

International Sealing Distribution Association SPI: The Plastics Industry Trade Association 

International Wood Products Association State Chamber of Oklahoma 

Iowa Grocers Industry Association Textile Care Allied Trades Association 

Iowa Nebraska Equipment Dealers Association Tire Industry Association 

Jewelers of America U.S. Chamber of Commerce 

Kansas Food Dealers Association Washington Food Industry Association 

Kentucky Association of Convenience Stores Wholesale Florist & Florist Supplier Association 

Kentucky Grocers Association Wine & Spirits Wholesalers of America 

Louisiana Retailers Association Wine Institute 

Marine Retailers Association of the Americas Wisconsin Grocers Association, Inc. 

Maryland Retailers Association Wood Machinery Manufacturers of America 

McKesson Corporation 

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