U.S. GOVERNMENT PUBLISHING OFFICE

32–785—PDF WASHINGTON : 2018

S. HRG. 115–384 

INTERNATIONAL TAX REFORM 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

OCTOBER 3, 2017 

( 

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 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BILL CASSIDY, Louisiana 

RON WYDEN, Oregon 

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 

CLAIRE MCCASKILL, Missouri 

A. JAY KHOSLA, Staff Director 

JOSHUA SHEINKMAN, Democratic Staff Director 

(II) 

(III) 

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 .................................................... 5 

WITNESSES 

Wells, Bret, professor of law and George R. Butler research professor of 

law, Law Center, University of Houston, Houston, TX .................................... 8 

Clausing, Kimberly A., Ph.D., Thormund A. Miller and Walter Mintz professor of economics, Reed College, Portland, OR ............................................... 9 

Shay, Stephen E., senior lecturer on law, Harvard Law School, Harvard 

University, Cambridge, MA ................................................................................. 11 

Grinberg, Itai, professor of law, Georgetown University Law Center, Washington, DC ............................................................................................................. 13 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Clausing, Kimberly A., Ph.D.: 

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

Prepared statement .......................................................................................... 47 

Grinberg, Itai: 

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

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

Hatch, Hon. Orrin G.: 

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

Prepared statement .......................................................................................... 66 

Shay, Stephen E.: 

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

Prepared statement .......................................................................................... 69 

Wells, Bret: 

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

Prepared statement .......................................................................................... 78 

Wyden, Hon. Ron: 

Opening statement ........................................................................................... 5 

Prepared statement .......................................................................................... 83 

COMMUNICATIONS

American Council of Life Insurers (ACLI) ............................................................. 85 

A. Philip Randolph Institute et al. ......................................................................... 90 

Association of Americans Resident Overseas (AARO) .......................................... 92 

Center for Fiscal Equity .......................................................................................... 93 

Democrats Abroad ................................................................................................... 95 

FACT Coalition ........................................................................................................ 96 

Hunt, Gina M. .......................................................................................................... 98 

Investment Company Institute (ICI) ...................................................................... 99 

Kadet, Jeffery M. ..................................................................................................... 101 

Reinsurance Association of America (RAA) ........................................................... 106 

Tax Innovation Equality (TIE) Coalition ............................................................... 108 

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INTERNATIONAL TAX REFORM 

TUESDAY, OCTOBER 3, 2017 

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC. 

The hearing was convened, pursuant to notice, at 10:05 a.m., in 

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

(chairman of the committee) presiding. 

Present: Senators Roberts, Thune, Isakson, Portman, Toomey, 

Cassidy, Wyden, Stabenow, Cantwell, Nelson, Carper, Cardin, Bennet, Casey, Warner, and McCaskill. 

Also present: Republican Staff: Jay Khosla, Staff Director; Jennifer Acuna, Senior Tax Counsel and Policy Advisor; Tony 

Coughlan, Senior Tax Counsel; Jennifer Kuskowski, Health Policy 

Director; Alex Monie, Professional Staff Member; Eric Oman, Senior Policy Advisor for Tax and Accounting; and Jeff Wrase, Chief 

Economist. Democratic Staff: Joshua Sheinkman, Staff Director; 

Ryan Abraham, Senior Tax Counsel; and Tiffany Smith, Chief Tax 

Counsel. 

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

SENATOR FROM UTAH, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. I want to thank everyone for attending this 

morning. Before we begin, I just want to say something about the 

awfulness of this past weekend. I think I speak for the entire committee when I say that our thoughts and prayers go out to those 

who were impacted by the horrific shootings in Las Vegas and to 

everyone in that community and across the country. It has been 

shocking to everybody. 

Nevada and Utah share a border, and a number of people from 

both States frequently travel back and forth. I have gotten to know 

a number of great people from Nevada over the years, not the least 

of whom is our colleague on this committee, Senator Heller. I am 

sure he is hurting today, as are so many people in that community. 

Our hearts go out to all of them, and I am praying that everyone 

who has been impacted by this terrible tragedy will be able to find 

peace, comfort, and, hopefully, a speedy recovery. 

With that, I would like to turn to the business at hand. Today’s 

hearing will focus on another piece in the complex tax reform puzzle. But before I get to the details of international tax reform, let 

me briefly address the elephant in the room. 

Last week, I joined with the Secretary of the Treasury, the National Economic Council Director, the Senate Majority Leader, the 

House Speaker, and the chairman of the Ways and Means ComVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 R:\DOCS\32785.000 TIM
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mittee to put forward a broad, unified framework for tax reform. 

As the document makes clear, this is just one step in the larger tax 

reform effort. But let us not mince words: it is a big step. 

I would be hard-pressed to remember the last time the White 

House and the House and Senate leadership were in agreement on 

an issue as complicated as tax reform. 

We began discussions earlier this year, and at that time there 

were a number of high-profile differences among us. I am very 

pleased that we have been able to bridge so many divides, and I 

am optimistic about our chances going forward. 

I particularly want to thank our ranking member for his open 

mind and his ability to look at these matters and do so in a constructive way. He has worked very hard on tax reform for years, 

and, frankly, I hope we can do something together. 

I want to express my gratitude to the others who worked on the 

framework and to the members of the committee who have helped 

us move the tax reform effort forward. I particularly want to acknowledge the work of Senator Grassley who, as a former chairman and ranking member of this committee, laid much of the 

groundwork for the ideas we are discussing and for the progress we 

have made. It was under Senator Grassley’s chairmanship that the 

Finance Committee in 2003–2004 initiated the last package of 

international tax reforms. 

Now, as some have already pointed out, the framework released 

last week is not, by design, a complete plan. Of course, that has 

not stopped think tanks and analysts from speculating about its 

fiscal and distributional impact. We have already seen groups attempting to reverse-engineer a completed tax plan from the framework, generally filling in blanks with their own ideas and assumptions and reaching conclusions about a plan they have essentially 

written themselves. Generally speaking, it seems that the blankfilling exercise is designed to cast the framework in the worst possible light. 

The framework does not include any specific information about 

things like the break points for the individual tax brackets, the 

value and indexing of the enhanced Child Tax Credit, or the precise rate for the top bracket. Without those and other key pieces 

of information, there is simply no way for any outside party to 

produce a credible analysis of the framework, let alone a detailed 

estimate of revenue and the distribution of tax burden. 

But that did not stop a certain think tank from issuing a ‘‘preliminary analysis’’ of the framework at the end of last week, nor 

did it stop any of the framework’s critics from citing that analysis 

as authoritative. It is odd, however, that the analysis came with a 

disclaimer that it was expressing only the views of the authors, not 

the think tank itself. Even more unusual, no specific authors were 

listed on the analysis, probably because no respectable academic or 

researcher was willing to have their name associated with something so haphazardly cobbled together. 

But I digress. 

As the framework makes clear, this committee will be responsible for writing the Senate tax reform bill, and I am going to work 

with members of the committee to make sure we are successful. 

3 

For now, everyone should take every estimate or analysis about the 

plan from outside groups with an exceptionally large grain of salt. 

Moving on, I also want to say that my preference has always 

been for this to be a bipartisan effort. And I think there are several 

elements in the framework where Democrats and Republicans can 

work together, and I hope we will be able to do so. 

The subject of today’s hearing is a great example of an area 

where both parties are largely in agreement. Under our current 

system, U.S. multinationals that accrue overseas earnings can 

defer U.S. tax on those earnings until they are brought back to the 

United States. 

In 1962, due to concerns that businesses were moving passive 

and highly mobile income-producing assets offshore, Congress enacted subpart F of the Internal Revenue Code. Under subpart F, 

income from these sources is immediately subject to U.S. tax, while 

taxes on active and less-mobile offshore income remain deferred 

until the earnings are repatriated. 

This is a bit confusing in the abstract, so let me provide a hypothetical. Imagine that an American company headquartered in the 

United States and subject to our corporate tax rates opens a factory 

in Germany, incorporating a subsidiary there. The income generated by the subsidiary, legally a German company, will be subject 

to German taxes paid to German authorities. So long as the American company does not bring that income back to the United 

States, its income from the German subsidiary will not be subject 

to U.S. taxes. And in fact, we are finding that many American companies have been keeping this type of income offshore in order to 

avoid our punitive corporate taxes. 

Now, imagine if the American company parked its money in 

stocks, bonds, or other passive investments and moved the income 

generated from those assets to an offshore low-tax jurisdiction. 

Under subpart F, that type of passive and highly mobile income is 

immediately subject to U.S. tax without any deferral. Now, I know 

this is a bit arcane. And frankly, I would be nodding off if I did 

not know how this story ended. 

As a result of subpart F, American companies have engaged in 

a number of sophisticated and complex tax-planning schemes to 

keep earnings offshore to avoid the U.S. corporate tax. According 

to the Joint Committee on Taxation, American companies are currently holding more than $2.6 trillion in earnings offshore, thanks 

in large part to our worldwide tax system, something often referred 

to as the, quote, ‘‘lock-out’’ effect. 

That is $2.6 trillion held by foreign subsidiaries of U.S. corporations that the parent companies are unable to invest here at home. 

That is income that could be used to create more American jobs 

and grow wages for American workers. And that income has attracted the interests of foreign tax authorities, particularly in Europe, who wish to tap into what is, by all rights, part of the U.S. 

tax base. 

Now, I know some of my colleagues have proposed to solve this 

problem of earnings being locked out of the United States by 

transitioning to a pure worldwide system with no deferral. And 

while that would rid us of the lock-out problem, it would signifiVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 R:\DOCS\32785.000 TIM
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cantly increase pressures for American multinationals to invert or 

be acquired by foreign-based multinationals. 

Many of us have talked at length about inversions in recent 

years and the problems they pose for our economy and our tax 

base. Perhaps even worse than an inversion is when a larger foreign corporation simply acquires a smaller American corporation. 

Either way, the result is the same. A foreign corporation becomes 

the parent of the restructured multinational group. 

Companies takes these routes for a number of reasons. First, 

they want to escape the high corporate tax rate in the United 

States, which, as we have heard in our last hearing, is the highest 

in the industrialized world. Second, they want to minimize the 

damage caused by our worldwide tax system. If an American multinational can successfully move its tax situs out of the U.S., it will 

only owe taxes on the earnings accrued here. 

There is also the matter of earnings stripping, which is another 

complicated topic that I look forward to our witness panel discussing today. All of these problems are key for today’s hearing because they highlight the shortcomings of our outdated worldwide 

tax system. 

The solution to these and other problems, to put it very simply, 

is to transition to a territorial-based system like virtually all of our 

foreign competitors. Under such a system, an American company 

would owe taxes only on income earned in the United States. Income earned in foreign jurisdictions would only be taxed by those 

jurisdictions, not here. 

This type of reform would have to be accompanied by enforceable 

anti-base-erosion rules to make sure companies, both domestic and 

foreign, do not exploit loopholes in order to unduly avoid paying 

taxes here. That approach is endorsed in the united framework. It 

was also suggested in the last Congress by our committee’s bipartisan working group on international tax, which was co-chaired by 

Senator Portman and by current Senate Minority Leader Schumer. 

Other members of the committee have also made significant contributions in the area of international tax reform, including both 

my colleague Senator Wyden, whom I have great respect for—I 

have respect for everybody on this committee—and of course, Senator Enzi, who is always working to try to do good things here. 

Finally, as many of you know, I have been interested for some 

time in the idea of better integrating our individual and corporate 

tax systems. I continue to believe that corporate integration by 

means of a dividends paid deduction can significantly help with 

some of our existing problems. And I look forward to talking more 

about that today as well. 

Once again, international tax reform is an area that is rife for 

bipartisanship if we are willing to work together on goals that 

members from both parties share. I hope people will note that the 

international portion of the framework is particularly short on details. That is because these problems cannot be solved in a ninepage framework document. That will require the work and effort 

of this committee. 

Long story short: today’s hearing will surely be informative, important, and timely. 

5 

And with that, I turn to my good friend and ranking member, 

Senator Wyden, for his opening remarks. 

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

OPENING STATEMENT OF HON. RON WYDEN, 

A U.S. SENATOR FROM OREGON 

Senator WYDEN. Thank you, Mr. Chairman. 

I will turn to taxes in just a moment, but like you, I want to comment briefly on the horrifying shooting in Las Vegas. 

Mr. Chairman and colleagues, here is my takeaway from this. It 

is just unconscionable that this epidemic of violence goes on and on 

and on and on, and policymakers in Washington, DC sit on their 

hands and do nothing about it. 

Now, we are going to talk about a different subject today, but I 

think all of us are just heartsick about this. I continue to believe 

that there is an opportunity for common sense to prevail and reduce gun violence in America. 

Mr. Chairman, on taxes, let me first of all thank you for your 

very kind words. And I continue to believe that there is an opportunity for us in the Finance Committee to find common ground. 

Democrats have laid out principles that are important to us. And 

I would just say, colleagues, the principles Democrats have laid out 

in the letter very much resemble the bipartisan bill I wrote with 

Senator Dan Coats, now a member of the Trump Cabinet. And I 

see Senator Cassidy—that is where Dan Coats sat when we put together the bill. 

And Chairman Hatch has ideas that are important that we 

talked about. So I continue to believe that there is an opportunity 

for common ground here. And I think the principles that Democrats have talked about in our letter—where our caucus was thoroughly united around where we ought to be headed—and some of 

the ideas Chairman Hatch has talked about, are an opportunity to 

find common ground here. 

Now, the Trump team says their international tax framework is 

about creating jobs and firing up the country’s economic engine. 

The details, however, show it is really a con job on America’s middle class. 

Behind the scenes, the administration recently scrubbed from the 

Treasury website a 2012 paper showing that workers do not primarily benefit from a corporate rate cut—that trickle-down economics are pretty much a fantasy. Apparently, that mainstream 

economic analysis had to be purged because it basically did not jibe 

with the Trump team’s patter. 

They claimed the study was out of date, but they did not find 

reason to take down any of the other papers that date back as far 

as the 1970s. That sure makes it look like the Trump team is simply afraid of the American people getting the facts about taxes. 

And the con job is not just about hiding those facts that are inconvenient. The administration is currently working to pick apart 

the rules that were designed to curb the scourge of inversions, 

what we call the inversion virus, which is a big factor in decimating our tax base. 

6 

Now, folks at home in Oregon at town halls tell me they want 

tough policies to stop companies from shipping jobs overseas, especially in towns where mills and factories are shuttered and Main 

Street is vacant. The American people want red, white, and blue 

jobs with good wages. They believe corporations ought to pay their 

fair share. 

What is on offer, based on what we know today about the Trump 

plan, is going to disappoint. The Republican tax framework that 

has been okayed is essentially a corporate wish list, a massive rate 

cut, a pure territorial system, barely a nod to tough rules to prevent companies from sending jobs abroad or running away to set 

up a headquarters on some zero-tax island. 

Base erosion, a minimum tax—these vital parts of the international tax debate seem to be an afterthought. This is an invitation for corporations to game the system, and the tax lobby has got 

to be licking its chops this morning. 

Bottom line, the President is giving multinationals a green light 

to pay no taxes. Then, for the benefit of people reading the news, 

there is a lot of happy talk about jobs, economic growth, and the 

biggest tax cut ever. It is not hard to predict what will happen if 

this multi-trillion-dollar tax giveaway to the wealthy and corporations is enacted. 

Our tax base will keep eroding, and the deficit will skyrocket. 

Lawmakers are going to come after Social Security, Medicare, and 

Medicaid yet again. And by the way, this is not without precedent. 

Privatizing Social Security was the first priority, the very first priority, of the Bush administration’s second term after its big, 

unpaid-for tax cuts. 

Let us remember that every percentage point decrease in the corporate rate results in a loss of $100 billion in revenue. Perhaps 

that is the kind of issue that caused Senator Corker over the weekend, when I caught him on one of the TV shows, to say that he has 

some big concerns about the deficit. 

Democrats have reached out to the majority with our principles 

for tax reform. There are a lot of members on this side with big 

ideas of how to help the middle class, create jobs, bring some fairness to the tax code through bipartisan reform. As I said, that is 

the kind of thing Dan Coats and I put our names on; that is the 

kind of reform that Ronald Reagan signed into law back in 1986. 

But the framework that was released last week does not resemble what Ronald Reagan accomplished, and it is nowhere near, as 

I say, the reforms built on fairness and fiscal responsibility that 

Senate Republicans over the years have worked with Democrats to 

write into bipartisan plans. 

And wrapping up, I believe international taxation is going to be 

a key part of the debate and involves a lot of very complicated 

questions. 

The committee has a terrific panel of witnesses here. I am particularly pleased that Kim Clausing, professor at Reed College from 

my neighborhood in southeast Portland—which Senator Stabenow 

has visited, by the way—is going to give us a very thoughtful presentation, as Oregonians invariably do. 

7 

And I also respect the views of our other witnesses as well, and 

we have heard from a number of them over the years. 

Mr. Chairman, thank you, and I look forward to working with 

you. 

The CHAIRMAN. Thank you, Senator. 

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

The CHAIRMAN. International taxation is a very complex issue 

area, and we are grateful to each of our witnesses for being with 

us today to discuss it with us. We will hear from each of the witnesses in the order they are introduced. 

First, we will hear from Professor Bret Wells, a professor of law 

and George Butler research professor at the University of Houston 

Law Center. Professor Wells teaches in the fields of tax law and 

oil and gas law. Prior to joining the University of Houston Law 

Center, Professor Wells served as the vice president, treasurer, and 

chief tax officer for BJ Services company. He received his bachelor’s 

degree from Southwestern University and then went on to earn his 

law degree from the University of Texas School of Law. 

Next up will be Dr. Kimberly Clausing, the Thormund A. Miller 

and Walter Mintz professor of economics at Reed College. Dr. 

Clausing’s research is focused on the taxation of multinational 

firms and how their decisions are impacted by government decisions. She is the recipient of two Fulbright Research Awards and 

has worked on related policy research with many different think 

tanks. She has worked previously as a staff economist for the 

Council of Economic Advisers and also served as an associate professor of economics at Wellesley College. Professor Clausing received her B.A. from Carleton College and her Ph.D. from Harvard 

University. 

Third will be Professor Stephen Shay, a senior lecturer on law 

at Harvard Law School. Before joining the Harvard Law School faculty, Professor Shay served as the Deputy Assistant Secretary for 

International Tax Affairs at the U.S. Treasury. Before that, Professor Shay was a tax partner for 22 years with Ropes and Gray 

LLP. Prior to that work, Professor Shay served in the Office of 

International Tax Counsel at the Department of Treasury, including as International Tax Counsel from 1982 to 1987. Professor 

Shay graduated from Wesleyan University with his undergraduate 

degree and earned both his J.D. and M.B.A. degrees from Columbia 

University. 

And finally, we will hear from Professor Itai Grinberg, a professor of law at Georgetown University Law Center. Professor 

Grinberg’s research interests center on cross-border taxation and 

development and U.S. tax policy. Prior to his work at Georgetown, 

Professor Grinberg worked at the Office of International Tax Counsel at the Department of Treasury. Before that, Professor Grinberg 

practiced tax law at Skadden, Arps, Slate, Meagher, and Flom 

LLP. In 2005, Professor Grinberg served as counsel to the President’s Advisory Panel on Federal Tax Reform. Professor Grinberg 

earned his B.A. from Amherst College and his J.D. from Yale Law 

School. 

I want to thank you all again for being here, and you are a particularly great panel. We all look forward to hearing your testiVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 R:\DOCS\32785.000 TIM
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mony here today and your expert views on these important matters. 

So, Mr. Wells, will you please get us started then? 

STATEMENT OF BRET WELLS, PROFESSOR OF LAW AND 

GEORGE R. BUTLER RESEARCH PROFESSOR OF LAW, LAW 

CENTER, UNIVERSITY OF HOUSTON, HOUSTON, TX 

Mr. WELLS. All right. Thank you. My name is Bret Wells, and 

I want to thank Chairman Hatch, Ranking Member Wyden, and 

the other members of the committee for inviting me to testify. 

Before addressing international taxation, I want to make a preliminary statement about the related topic of business tax reform. 

As to business tax reform, Chairman Hatch is to be commended 

for his work on corporate integration. Under his partial dividends 

paid deduction proposal, the dividend deduction can be limited to 

preserve corporate-level taxation for earnings in an amount broadly 

equal to the equity ownership of nontaxable shareholders. A partial 

dividends paid deduction regime narrows the tax distinction between debt and equity. 

A partial dividends paid deduction regime in combination with a 

dividends and capital gains preference can result in a combined tax 

rate on corporate business profits that approximates the individual 

rate, thus eliminating the disparity in tax rates between C corporations and pass-through entities. Thus, a partial dividends paid deduction regime is a critical step in the right direction and should 

be part of the final business tax reform legislation. 

Now I want to make a few statements about outbound international taxation, but I want to start this thought process from the 

perspective of the foreign-based multinational enterprise. 

From the perspective of the foreign-based multinational enterprise, outside of its country of residency, only the business profits 

attributable to a particular territory are subject to taxation in the 

various inbound host countries. So the inbound, foreign-based enterprise is afforded a territorial result regardless of the formal 

international tax choices that might be made by a particular inbound host country. Faced with this reality, each country must decide whether or not to have a system of international taxation that 

would disadvantage their own resident corporations or would instead afford comparable territorial tax results for resident multinational enterprises as are afforded by the country to inbound, 

foreign-based enterprises. 

This committee is well aware that every other G7 country, after 

facing this Hobson’s choice, has opted for some form or variant of 

a territorial tax regime. For the same competitiveness reasons that 

motivated those decisions, this Congress should now adopt a territorial tax regime to level the playing field. But at the same time, 

this Congress must take steps to protect the U.S. tax base from inappropriate profit-shifting strategies. Under current law, the U.S. 

subpart F regime provides a fairly narrow set of exceptions to the 

deferral privilege, and these anti-deferral provisions serve as an 

important backstop to prevent tax avoidance of U.S.-origin profits. 

Another means to attack profit shifting with respect to U.S.- 

origin profits would be to adopt greater source-taxation measures. 

Attacking the profit-shifting problem with a source-taxation soluVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 R:\DOCS\32785.000 TIM
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tion has the favorable benefit of implementing base protection 

measures that apply equally to both U.S.-based multinational enterprises and foreign-based multinational enterprises. 

In contrast, solutions that rely on residency taxation principles, 

such as a minimum tax under the U.S. subpart F regime, only protect against the profit-shifting strategies of U.S.-based multinationals. Thus, I favor source-taxation measures over an expanded 

subpart F regime, exactly because subpart F measures create divergent tax results for U.S.-based multinational enterprises and 

leave in place the inbound earnings-stripping advantages for 

foreign-based multinational enterprises. 

With the balance of my time, I want to highlight three key issues 

with respect to inbound international tax reform. 

First, leveling the playing field requires that Congress address 

each type of inbound earnings-stripping technique that unfairly advantages the U.S. activities of foreign-based multinational enterprises and companies that have engaged in corporate inversions. 

We should not treat those companies more harshly than U.S. companies, but they should not have an unfair earnings-stripping advantage. 

Second, corporate inversions are a telltale symptom of the larger 

inbound earnings-stripping cancer. Thus, instead of attacking the 

corporate inversion messenger in isolation, Congress should focus 

attention on the inversion message, namely that the earningsstripping techniques available to foreign-based multinational enterprises, if left unchecked, create an unlevel playing field that motivates U.S. companies to engage in corporate inversions. Corporate 

inversions are simply the alter ego of the inbound earningsstripping problem and should not be viewed as a separate policy 

problem. 

Third, Congress needs a new approach to the earnings-stripping 

problem. And again, Congress must address this problem in a comprehensive way. I believe that a base-protecting surtax does comprehensively address the inbound earnings-stripping problem, so I 

urge this committee to seriously include this proposal in the final 

legislation. 

This concludes my opening statement. Thank you for allowing 

me to speak at today’s hearing. I would be happy to answer any 

of your questions. 

The CHAIRMAN. Thank you so much. 

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

The CHAIRMAN. We will now go to you, Dr. Clausing. And we are 

looking forward to hearing your testimony as well. 

STATEMENT OF KIMBERLY A. CLAUSING, Ph.D., THORMUND A. 

MILLER AND WALTER MINTZ PROFESSOR OF ECONOMICS, 

REED COLLEGE, PORTLAND, OR 

Dr. CLAUSING. Chairman Hatch, Ranking Member Wyden, members of the committee, thank you for inviting me to share my views 

on international tax reform. 

The most essential trade-off we face in international tax reform 

is between tax competitiveness and corporate base protection. 

First, let us think about this idea of competitiveness. When folks 

talk about competitiveness, they are usually referring to multiVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 R:\DOCS\32785.000 TIM
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national companies. These companies are mobile and they are very 

profitable, but they also tend to face low effective tax rates. 

Of course, we also have many smaller companies that face higher 

tax rates. But our most mobile multinational companies simply do 

not have a competitiveness problem. These companies are some of 

the most successful companies on the planet. 

If you look at after-tax corporate profits over the last 10 years, 

they have averaged 9 percent of national income, 50 percent higher 

than they averaged over the previous 40 years. Our companies 

dominate lists of the world’s most successful companies, and their 

dominance has not dimmed in recent years. 

And our corporate tax revenues are about one-third lower than 

those in peer countries relative to our economy’s size. It is therefore 

difficult to claim that our companies need even more after-tax profits to be successful or to unleash investment. 

That said, there is far more to competitiveness than tax. We do 

need more investments in infrastructure, education, and research 

to equip workers for the modern global economy. 

Now, let us also consider our serious corporate tax base-erosion 

problem. My past research shows that international profit shifting 

to tax havens now costs the U.S. Government more than $100 billion every year. This is big money, money that could be used to 

lower tax rates or pay for key investments. Our corporate tax base 

is also quite narrow. 

Beyond that, the proposed new preferential rates on passthrough income are likely to create a huge new base-erosion problem. This step will drain revenue from our tax system on a large 

scale. So I suggest four guiding principles for future international 

tax reform. 

First, let us not make a bad base-erosion problem worse. Moving 

to a territorial system further tilts the playing field toward earning 

income abroad, and it will make our base-erosion problem larger. 

If a territorial system is adopted, lawmakers should be very serious about tough base-erosion protection mechanisms. Slashing the 

tax rate is not going to be enough here. There will always be jurisdictions with lower and even zero rates. Over 80 percent of our 

profit-shifting problem is with havens that have rock-bottom tax 

rates. 

To reduce profit shifting, a per-country minimum tax could be 

helpful. And this would be far more effective than a global minimum tax. But a simpler and more intellectually coherent plan 

would be to simply combine a rate reduction with the elimination 

of deferral. This evens the tax treatment of foreign and domestic 

income, no longer tilting the playing field toward tax havens. And 

this is the approach behind several bipartisan proposals put together by Senator Wyden and his Republican cosponsors. This approach should be combined with steps to limit inversions, such as 

toughening earnings-stripping laws and other measures. 

A second principle is regarding repatriation. It simply does not 

make good economic sense from either an efficiency or an equity 

perspective to give a big tax break for income that has already 

been earned and moved to tax havens. Special tax breaks on haven 

earnings are not warranted, and evidence suggests they will not 

11 

help investment, they will not help employment, and they will not 

help the middle class. 

Third, let us pay serious attention to the middle class. Business 

tax cuts primarily benefit those at the top of the income distribution. All major respected models distribute business tax cuts primarily to capital or shareholders, and there is a good reason for 

that. 

Recent analysis of the Big Six framework by the highly respected 

and nonpartisan Tax Policy Center showed that, when fully phased 

in, it would give the top 1 percent 80 percent of the tax cuts with 

an average tax cut of over $200,000, whereas the bottom 80 percent 

of the distribution get a tax cut that averages less than $300. After 

decades of increasing inequality and middle-class economic stagnation, tax policy should be working to counter, not reinforce these 

inequalities. 

Finally, let us not increase the deficit. We already have a debtto-GDP ratio over 75 percent, and our Social Security and Medicare 

commitments are due to increase deficits by 2 percentage points 

over the coming decade. We need to keep budget flexibility so we 

are ready if another recession arrives. 

Deficits are basically taxes on our children and grandchildren. 

And on this topic, we also owe future generations a serious response to climate change. Recent hurricanes in Houston and forest 

fires in Oregon serve as a reminder of this urgent priority. A carbon tax is both a very effective response but also a key step towards more efficient taxation. Economists throughout the political 

spectrum back this idea, for good reasons. 

Thank you so much for your invitation to testify today. I look forward to your questions. 

The CHAIRMAN. Thank you. 

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

The CHAIRMAN. Mr. Shay, we will turn to you now. 

STATEMENT OF STEPHEN E. SHAY, SENIOR LECTURER ON 

LAW, HARVARD LAW SCHOOL, HARVARD UNIVERSITY, CAMBRIDGE, MA 

Mr. SHAY. Thank you, Mr. Chairman. Good morning, Ranking 

Member Wyden, members of the committee. 

I want to start with two general observations before getting into 

international tax reform in particular. I agree with Professor 

Clausing. Tax reform should be revenue-neutral or increase net 

revenues. We need to raise the revenue to fund needed public expenditure, not add trillions to the national debt. In the face of 

pressing needs for public investment in human capital and infrastructure, and demographic trends that cannot be reversed, we will 

be forced to spend more in the future, even as we need to spend 

today to help our neighbors in Texas, Florida, Puerto Rico, and 

elsewhere where there are crises. 

It would be foolhardy to adopt a revenue-losing tax reform, particularly one that would benefit those with high incomes, in the unsupported hope based on ‘‘tooth fairy’’ economics that short-term 

growth will outweigh longer-term effects on interest rates and inflation. 

12 

The second general observation I would make is that tax reform 

should maintain or enhance our tax system’s current level of progressivity in distributing the benefits and burdens of government. 

The taxation of cross-border income of U.S. multinationals should 

be analyzed under the same fairness standards that apply to other 

income. In particular, a reduced holiday tax rate on U.S. multinationals’ pre-effective-date offshore earnings will overwhelmingly 

benefit high-income Americans and foreigners who are shareholders of these companies. And it is not justified on policy 

grounds. 

Turning to international taxation, my first choice also would be 

to proceed along the lines of the Wyden-Coats Bipartisan Tax Fairness and Simplification Act of 2011. Why do I say this? 

The evidence does not support claims that U.S. multinationals 

are overtaxed or noncompetitive as a consequence of U.S. tax rules. 

In April 2016, the U.S. Treasury Department found that the average tax paid by U.S. companies from 2007 to 2011 on their book 

earnings plus foreign dividends—actual dividends, not deemed dividends—was 22 percent. I have charts in my testimony at pages 4 

and 5 that illustrate that study. 

The most recently available statistics of income data for 2012, 

which is the most recent year, show that foreign subsidiaries of 

U.S. multinationals—so this is the income that was not paid out 

in actual dividends—paid in the aggregate an average foreign tax 

rate of 12 percent. This is not just a few outliers, this is the average rate of foreign tax on foreign subsidiaries’ earnings and profits 

before tax—12 percent. If you are thinking in terms of a minimum 

tax on foreign income, you have to deal with that. 

And I also have a chart in my testimony at page 6 that shows 

that 52 percent of those low-taxed earnings are earned at even 

lower tax rates in some of those countries, in five countries that I 

consider tax havens. 

So a territorial system has been suggested, at least in the GOP 

tax reform plan that was issued on September 27th. If not designed 

properly, it can leave us worse off than we are today. I have suggested several principles that will help maintain a strengthened 

minimum tax that has some prospect to actually improve from 

where we are today. 

First, the minimum tax should be a relatively high percentage of 

the regular U.S. tax rate adopted in tax reform, no less than 60 

percent and preferably 80 percent of the regular rate that you end 

up at. And I personally think 20 percent is fantasy in a revenueneutral deal, so we are talking higher rates. 

Second, it absolutely needs to be applied on a country-by-country 

basis and not a global basis. If you do it on a global basis, people 

like myself in my prior career can blend high and low foreign tax 

rates, and in some cases this will incentivize foreign investments. 

You need to do it country by country. 

You should allow a foreign tax credit, but the foreign tax credit 

should be prorated so that the amount of foreign taxes you credit 

will not be greater than the portion of those taxes that the minimum tax rate you choose bears to your regular tax rate. 

13 

That is complicated. I will be happy to take it up with your 

staffs. But it is absolutely critical to prevent foreign taxes from 

eroding any minimum tax you actually adopt. 

So, Mr. Chairman, I have other ideas in my testimony. 

I agree with the sentiment that we need to strengthen our source 

taxation rules. I disagree perhaps with Professor Wells’s specific 

proposal, but directionally we are very much on the same page 

there, so I think there is a lot to work with. 

And I thank you for your time, and I will be happy to answer 

any questions. 

The CHAIRMAN. Well, thank you. 

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

The CHAIRMAN. Professor Grinberg, we will turn to you. 

STATEMENT OF ITAI GRINBERG, PROFESSOR OF LAW, 

GEORGETOWN UNIVERSITY LAW CENTER, WASHINGTON, DC 

Mr. GRINBERG. Chairman Hatch, Ranking Member Wyden, and 

distinguished members of the committee, good morning. My name 

is Itai Grinberg. I am a professor of law at Georgetown. It is a 

pleasure to appear before you today. 

There is now a widespread consensus the United States needs to 

abandon its abhorrent worldwide corporate tax system, lower the 

rate, and go territorial. Although some of today’s other panelists 

disagree, this general consensus was even reflected, to some extent, 

in the final proposals of the Obama administration. 

Our corporate tax rate and international tax rules are just totally 

out of line with international norms. Continuing to lag behind 

would cost us an opportunity and employment for our kids. 

The United States statutory corporate income tax rate is the 

highest in the OECD, and our effective corporate tax rate is also 

very high. We are the only major developed economy that has not 

adopted a territorial tax system. 

But what I want to emphasize today is that dropping the rate 

and going territorial are not enough. One of the most senseless aspects of our current law is that, more than any other major economy, we create relative tax disadvantages for being a U.S. multinational as opposed to a foreign multinational, most upsettingly 

with respect to income earned in the United States. 

We make foreign ownership of almost any business more attractive than U.S. ownership from a tax perspective. That creates incentives for foreign takeovers, for inversions, for U.S. companies to 

produce abroad, and for income shifting. 

The consequence is obvious: we are creating incentives for companies to become foreign with negative consequences to U.S. employment. Our reliance on subpart F, a regime that affects only 

U.S. multinationals, as our main anti-base-erosion device, is the 

source of the problem. 

Some may argue that rectifying the situation and leveling the 

playing field would discourage foreign investment. But last year, 97 

percent of inbound foreign direct investment was an acquisition of 

an existing U.S. business rather than a new investment. Acquisitions of existing U.S. businesses do not necessarily create jobs, and 

they can cost U.S. jobs. 

14 

Foreign acquisitions of U.S. businesses can also be beneficial. We 

should welcome them when it makes a business more economically 

productive on a pre-tax basis and, therefore, liable to create employment. But if a business is acquired primarily because of the tax 

benefit of being foreign-owned, that is not economically efficient, 

and it can hurt U.S. employment. Unless we lower the corporate 

tax and level the playing field, the benefits in terms of jobs that 

prior generations obtained from the United States being the world’s 

most important headquarters country for multinationals, will simply bleed away. Meanwhile, the relative tax advantage given to foreign multinationals results in a revenue loss to the United States. 

Separately, the foreign tax credit that comes with our worldwide 

system encourages revenue grabs from U.S. companies. As the committee knows, this has become a massive problem in recent years. 

Globally, we used to have multilateral principles that organized 

the international tax architecture around residence-country taxation. That is all simply falling apart. Countries around the world 

are shifting towards greater source-based taxation, and that is irreversible. Moreover, that process, which has already harmed us, is 

liable to be long, messy, and arbitrary. 

At this point, if we sit still, both our fisc and our companies are 

disadvantaged. If we continue to insist on the idea of worldwide 

residence-country taxation with a foreign tax credit for U.S. multinationals and current law advantages for inbound multinationals— 

neither of which other countries do anymore—we will simply make 

our companies uncompetitive outliers subject to further foreign revenue grabs and continue to lose businesses and revenue at home. 

Meanwhile, with respect to source taxation, there is simply no 

international status quo. As a result, this time, inbound reform will 

not be a one-step process. We are going to have to respond over 

time to the policies of other countries. 

So, when addressing inbound corporate tax reform now, policymakers should give the United States leverage. It is important to 

put the United States in a good position to bargain internationally 

about future rules that will most likely be agreed to multilaterally 

at a later date. For now, we should choose a pragmatic administrable policy that levels the playing field for our national interests and our companies alike. 

Unlike Europe, our policies should be based on a defensible principle, for instance, an inbound corporate minimum tax that applies 

to U.S. and foreign multinationals alike. An inbound minimum tax 

can provide base protection without all the negative consequences 

of a subpart F-type minimum tax. 

Moreover, the inbound policy we come up with now need not be 

perfect. That can come later, either through global negotiation, domestic legislation, or both. 

The key for now is to choose inbound measures that maximize 

our national interests, do not give implicit approval to things we 

would not want to see done abroad, and provide the U.S. leverage 

to help end this period of instability in the international tax regime 

and shape a principled global settlement. 

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

may have. 

The CHAIRMAN. Well, thank you. 

15 

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

The CHAIRMAN. This has been an excellent panel. I really appreciate you. 

This is a question for all of you to briefly respond to. I want to 

be clear that our view is that foreign direct investment fuels new 

jobs across the country. In fact, if the corporate rate drops from 35 

percent to 20 percent, foreign and domestic investments should 

grow markedly. 

It is important to distinguish legitimate business transactions 

from tax-driven earnings-stripping deals. So I am very concerned 

about that. 

So the question for the witnesses is, do you believe that foreign 

multinational companies have significant tax-planning opportunities such as earnings stripping that U.S. multinational companies 

do not have? 

I think some of you have talked on that a little bit, and I would 

just have you repeat. 

Professor Wells, we will start with you. 

Mr. WELLS. There is just no question that that is the case. There 

is just no question. And the reason there is no question is that our 

main base-protection measure since 1962 is subpart F that only applies to resident companies. 

So if you are not a resident company, you are not subject to that 

regime; you get a pass. You can be excused from the room. 

Senator Hatch, when I was vice president of tax, half of my peer 

group engaged in a corporate inversion transaction. Our executive 

officers were compensated based upon relative performance versus 

a peer group. So I spent quite a lot of time trying to understand, 

what were the tax advantages that reduced their taxes on their 

U.S. operations in our sandbox, in the United States? 

And it is clear to me—and it should be clear to everyone here— 

that a corporate inversion is the U.S. company saying, I just want 

to be treated like a foreign-based multinational with respect to 

owning U.S. assets. 

And what techniques are they using to strip the U.S. tax base? 

The same ones that inbound investors use every day. 

When I put together my tax footnote disclosures for SEC filings, 

in the footnotes to that you can see a rate table of what taxes you 

pay in the U.S. versus what taxes you pay internationally. Professor Shay is exactly right: internationally, the U.S. is competitive 

in the international markets and able to achieve a tax rate that is 

comparable outside of the United States. But in the United States, 

the tax rate that is applied on U.S. companies—because they do 

not have the same earnings-stripping benefits—is significantly 

higher than exists for a foreign-owned company that runs those 

exact same U.S. activities. I think that that is a huge issue that 

ought to be addressed. 

We do not want to treat foreign companies in a discriminatory 

way, but we should not give them an advantage that we do not give 

our own domestic businesses. 

The CHAIRMAN. Professor Clausing? 

Dr. CLAUSING. I agree that we should even the treatment of foreign and U.S. firms in the U.S. And it is easier for foreign firms 

16 

to strip income out. My understanding is that there are off-theshelf remedies that would help with that, including tougher 

earnings-stripping regulations. 

There was an article in Tax Notes that went over 10 different 

proposals to tighten earnings-stripping regulations. I believe that is 

163(j), but I will leave that to the lawyers. So I would suggest 

something like that to create a more even treatment. 

The CHAIRMAN. Professor Shay? 

Mr. SHAY. I have said previously that I agree that we need to 

take steps to improve our source taxation. 

But I think it is very important for all the members to understand that there are structural advantages in every income tax system of the world for a company that is not a local resident to invest 

locally. So this is not a United States-only problem, and our companies are vigorous in taking advantage of their external status in relation to other countries. 

So we should take steps to strengthen our source taxation, but 

we should do so mindful that what we do is likely to be copied by 

other countries and that we have to be balanced and nondiscriminatory. 

Notwithstanding that, it seems to me that the concept of nondiscrimination has been taken too far in formal terms and not been 

applied in substantive terms. 

And when we look at the kinds of issues that Professor Wells is 

talking about, I think our substantive differences give us plenty of 

room, and not just room, but encourage us to adopt strengthened 

source taxation to make sure that we do have a level playing field 

for carrying on business in the United States. 

The CHAIRMAN. Thank you. 

Professor Grinberg, you will be the last one. 

Mr. GRINBERG. Thank you, Chairman Hatch. Look, I love foreign 

investment and want it to create jobs when it is actually creating 

jobs. But basically the reality is, multinationals can structure their 

internal affairs between their relateds as they choose, subject to 

legal constraints. And U.S. law keeps a U.S. multinational from 

having its foreign affiliates loan the U.S. money or charge the U.S. 

royalties to lower U.S. tax and increase the tax base in a low- or 

no-tax jurisdiction. U.S. multinationals cannot do that because of 

subpart F, as Professor Wells explained. 

In contrast, foreign multinationals can. They get their U.S. affiliates to agree to pay their foreign affiliates for expensive intercompany obligations, subject to much less binding constraints under 

our law. All they need are basically good transfer pricing studies, 

and they have to live with the, by international standards, weak 

limitations of section 163(j). That gives them a significant financial 

advantage, because it allows them to reduce their U.S. tax liability 

effectively through self-dealing. 

So why does this link back to jobs? Well, this advantage makes 

foreign acquisitions of U.S. firms more common than U.S. acquisitions of foreign firms. And firms continue to have a home-country 

bias for headquarters and R&D jobs as well as the support jobs 

that go around those. 

And you know, if you want to see the data about this, look, there 

is this great German ZEW—Centre for European Economic ReVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 R:\DOCS\32785.000 TIM
17 

search—study by Feld and Voget that basically finds that, if we 

went territorial, we would make the U.S. the acquirer instead of 

the acquired 17 percent more of the time. 

Meanwhile, you know, since the productivity of assets depends in 

part on their owners, if tax reasons are producing less productive 

ownership, the underlying business is going to grow less well and 

produce fewer jobs. 

So not only is the U.S. losing jobs, actually, globally we are decreasing well-being, because the most productive owner is not necessarily owning the asset. 

The CHAIRMAN. Senator Wyden? 

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

And I am very glad that we have the four of you distinguished 

academics, professors, spanning the philosophical spectrum. And I 

think that is exactly why this is an important hearing. 

And I want to start by mentioning, tomorrow the Senate Republicans are going to start, apparently, discussion of a budget that 

eliminates the requirement that the reported tax bill be scored at 

all. Now, I am not sure there is a precedent for it. But what I know 

is, we are going to hear an awful lot of talk about this magical 

growth fairy. And I want to get into with all of you specifically 

what we are talking about. 

Now, Secretary Mnuchin on Sunday said, again, that the tax cuts 

pay for themselves. He said the President’s framework is going to 

cost $1.5 trillion on a static basis. Through a budget gimmick arguing for a policy baseline, you can take $500 billion off the score. 

Then he said the tax cuts are going to create $2 trillion of economic growth so that the bill would actually raise a trillion dollars. 

It was almost like this administration was comatose for Reagan 

trickle-down economics. 

Now, here we are with this terrific panel. And I would just like 

to put to rest this growth fairy theory with respect to tax cuts. So 

I would like to just kind of go down the list, go down the four of 

you, and have a ‘‘yes’’ or ‘‘no’’ answer to the question. 

Do you believe tax cuts pay for themselves? 

Professor Wells? 

Mr. WELLS. From my perspective, other things need to be in the 

system to offset the revenue. So by themselves, I do not think tax 

cuts are going to pay for themselves. 

Senator WYDEN. We will count that as a ‘‘no.’’ Okay. 

Dr. Clausing? 

Dr. CLAUSING. No, I do not think so. 

Senator WYDEN. Professor Shay? 

Mr. SHAY. No. 

Senator WYDEN. Professor Grinberg? 

Mr. GRINBERG. Appropriate tax reform can increase economic 

growth, but only by a certain amount. 

Senator WYDEN. So tax cuts do not pay for themselves? 

Mr. GRINBERG. Yes. 

Senator WYDEN. Look, the reason I am asking is, it is very important we define what this debate is all about. I am one who believes, when we talk about our bipartisan bill and the Democratic 

principles, behavior does matter. That is not the debate. The deVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 R:\DOCS\32785.000 TIM
18 

bate is whether we are going to have this magical growth fairy, and 

then we are not even going to score the proposal. 

I do not even know of a precedent like that. And it certainly defies the public interest to do a major outline for tax reform and 

budget judgments for years to come and then just say, well, gee, 

we are not going to score this thing at all. So I appreciate your 

being clear about that. 

Now, let me go to you, Dr. Clausing, with respect to the Trump 

tax framework claims. One of the arguments for the corporate rate 

reduction is—and again, we understand you need competitive 

rates—they say that the corporate cut is going to primarily benefit 

the U.S. worker. 

My question to you—and I am certainly willing to have anyone 

else be part of this discussion—my understanding is, the mainstream consensus of economists is that overwhelmingly the benefit 

of corporate tax cuts goes not to the U.S. worker, but it goes to the 

shareholders. Is that true? 

And my understanding is it might be, in terms of the ballpark, 

at most 20 or 25 percent as it relates to the benefits that get to 

workers. 

Dr. CLAUSING. That is correct. And all the mainstream models, 

and this includes the CBO, the JCT, the Treasury—— 

Senator WYDEN. Go slowly on that. 

The mainstream models, colleagues. 

Dr. CLAUSING. All the mainstream models, yes. 

Senator WYDEN. The Joint Committee on Taxation—— 

Dr. CLAUSING. The Congressional Budget Office, the Treasury— 

in the study that you can still find on the National Tax Journal 

website and from the nonpartisan Tax Policy Center—all of them 

give the benefits of corporate tax cuts, about 80 percent, to capital 

or shareholders. 

And if you want to think intuitively about why this is, we have 

to recognize that businesses really do understand their own interests. If they are coming in to talk about lower tax rates and how 

it is important to them, but it is actually the case that the workers 

would pay the tax and not them, then you are presuming that businesses do not understand their own economic interests. 

And I am inclined to think that businesses do understand their 

economic interests, which is why they push for these corporate rate 

cuts which primarily benefit managers and shareholders. 

Senator WYDEN. Thank you, Mr. Chairman. 

The CHAIRMAN. We next go to Senator Thune. 

Senator THUNE. Thank you, Mr. Chairman. 

Professor Grinberg, you note in your testimony that the number 

of U.S. multinationals in the Fortune 500 has declined by over 25 

percent from 202 in 2000 to 147 in 2016. 

I would argue, clearly, that the United States’ antiquated international tax rules contribute to that and bear much of the blame. 

And we have an opportunity in tax reform to modernize these 

rules, which have not kept pace with our economy or the global 

marketplace over the past half century. So we have a chance to 

seize this opportunity to make our code competitive again. 

So let me ask you this: if we fail to capture or pick up on these 

recent trends in international tax reform that a lot of other counVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 R:\DOCS\32785.000 TIM
19 

tries have implemented, what do you see as the cost of failing to 

do so? 

Mr. GRINBERG. I mean, I think there are many costs. The cost 

I am most concerned about is opportunity for our kids. I think that 

multinationals, both U.S. and foreign, produce jobs that the data 

shows pay about a third higher than anything else in the private 

sector, on average. And you know, having more U.S. multinationals 

produces more of those jobs at home, because companies are not totally de-centered yet. There is still a home-country bias to R&D, 

headquarters, and support jobs. And that probably will not change 

for the duration of this tax reform. 

So fewer U.S. companies means fewer high-quality opportunities 

for our kids, and that is my biggest fear. 

The other thing is, and you know, the CBO estimates show this 

too, slowly the corporate tax base is going to whittle away. So it 

is maybe pennywise but pound foolish to try to get more revenue 

there. 

That is why the CBO long-term scores show erosion of the U.S. 

corporate tax base, because they are concerned about this trend 

too. 

Senator THUNE. Thank you. I would direct my next question to 

you and to Dr. Wells as well. Do you see reforming our international tax system and, generally, overall tax reform, as is being 

contemplated here, leading to greater economic growth? Does it 

contribute to growth? 

Mr. WELLS. Yes, I do believe it will contribute to greater economic growth, absolutely. But more importantly than that, I think 

that when we think about base-protection measures that will level 

the playing field, that will provide revenue for this Congress to 

meet the other needs. 

And I think what you and others need to consider is, foreignbased companies and corporate inverted companies, they have selfhelped themselves to a territorial regime. No matter what you do, 

this country is territorial as to them. 

You really have just one question: are you going to have the 

same playing field for U.S. companies? That is the question. 

And if we are concerned about earnings stripping and base erosion, let us set up a set of rules that applies to U.S. and foreign 

companies equally to raise the revenue that you need, then the tax 

system is not creating winners and losers. You are collecting revenue in a thoughtful way. 

Proposals like subpart F only apply to U.S. companies and excuse the foreign-based companies. That is the issue that I would 

address. 

So yes, I believe it raises economic growth, but I also believe that 

the way to raise revenue is by leveling the playing field. 

Senator THUNE. But growth would generate revenue as well. 

Mr. WELLS. Growth would also generate more revenue. 

Senator THUNE. I think this was in your response or maybe part 

of a statement that you made, Mr. Grinberg, too, but you talked 

about, when addressing inbound corporate tax reform in this Congress, policymakers should seek to give the United States leverage. 

‘‘It is important to put the United States in a good position to bargain internationally about a future set of broadly accepted rules 

20 

that will most likely be agreed to multilaterally at a later date;’’ 

and that is your quote. 

Would you elaborate on that point? And specifically, what form 

do you see that leverage taking? And how do we balance that with 

the important role that foreign direct investment plays in this 

country, which you also noted? 

Mr. GRINBERG. So again, I do believe that foreign direct investment that creates new investment or otherwise supports increases 

in jobs is important. And therefore, I believe that we should try to 

level the playing field. I do not want to be understood as protectionist, we should simply level the playing field. 

But the bottom line is that, abroad we see countries taking a series of measures that are intended to go after U.S. multinationals. 

So two obvious examples are the state aid investigations out of the 

EU and the recent suggestion by the EU that it would do a turnover tax on just digital businesses, which means just U.S. tech. 

This is not principled. 

Instead, what I am suggesting is a principled approach in which 

we create an inbound minimum tax that treats U.S. multinationals 

and foreign multinationals alike and that defends the base that we 

can protect, which is the base of income earned in the United 

States from U.S. citizens and customers. 

Senator THUNE. Okay, thank you. 

Mr. Chairman, thank you. My time is expired. 

The CHAIRMAN. Okay, thank you. 

Senator Stabenow? 

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

this hearing. 

And I want to talk about one specific industry as we are talking 

about moving production facilities and profits overseas. 

One of the concerns I hear the most from Michigan families is 

about the rapidly rising cost of prescription drugs. Drug prices in 

the United States are increasing at an astronomical rate, outpacing 

the increase in Social Security benefits, wages, and inflation by a 

factor of 10. 

Despite record profits from the sale of prescription drugs, many 

pharmaceutical companies have moved their production facilities 

and profits overseas to get out of paying their fair share in taxes. 

These companies have aggressively taken every possible approach 

to lower their tax liabilities, from inversions to abusing tax havens. 

Dr. Clausing and Mr. Shay, do you think the proposal put forward last week will help solve any of these problems? 

Dr. CLAUSING. I did not see anything that really addresses in a 

serious way tax base erosion in that proposal last week. 

There was mention of a global minimum tax. And as Steve Shay 

already mentioned, with a global minimum tax you have this opportunity to use taxes paid in one country to offset the minimum 

tax that would be due in another country. So in a way, it encourages foreign income in both high- and low-tax countries. So I did 

not think that was a serious response, so far at least, to the corporate tax base erosion problem. 

Senator STABENOW. So nothing at this point yet to solve that. 

Dr. CLAUSING. Nothing yet. 

Senator STABENOW. Mr. Shay? 

21 

Mr. SHAY. Well, in fairness, nothing other than the word ‘‘global’’ 

has been specified, so we have no idea what is being contemplated. 

And the idea of moving forward without knowing what is being 

contemplated and without a score for what is ultimately done is indefensible as a policy matter. 

But if it is under any normal conception of a global minimum 

tax—and of course we do not know what that is, so I hope I am 

not impugned for inferring from what we do not know. But if it is 

any normal conception of a global minimum tax—I have already 

testified that the average rate of taxes paid on all foreign CFCs as 

reflected in the 2012 data is 12 percent, 12.10 to be precise, so if 

the minimum tax is anywhere below that, then you almost certainly have not accomplished a lot. You have accomplished maybe 

a little for Ireland, which has about a 2-percent effective rate. 

But without a per-country approach, it will be relatively toothless. That and the height of the rate are the two key points, and 

we just do not know what those are yet. 

Senator STABENOW. So we are at a point where we have companies raising prices through the roof, getting tax benefits to do research and to create new kinds of medicines that they are charging 

astronomical prices for, many of them lifesaving medicines, and at 

the same time being subsidized by taxpayers through Medicare and 

Medicaid expenditures. And yet, there is nothing in here to address 

what is one of the most important issues I hear about from my constituents. 

What specific steps should we be taking to address the problem 

of drug companies not paying their fair share? 

Dr. Clausing? 

Dr. CLAUSING. Yes, I think this is a big problem. And if you look 

at the Fortune 500 companies, the ones that have achieved effective tax rates in the single digits are often those such as pharma 

that have a lot of intangible value, which makes it easier for them 

to shift profits abroad. 

So there is a lot that we can do here, from very simple, small, 

incremental steps to big steps. I think the approach that both Mr. 

Shay and I have recommended is to simply lower the rate and combine that with eliminating deferral. You have no disincentive to repatriate, and you are treating income abroad the same as you are 

treating income at home. 

But if you do go to a territorial approach, a per-country minimum tax, I think, is a more promising step than many. And the 

higher that rate is and the closer it is to the U.S. rate, the less distortion there is and the less incentive to move income to tax havens. 

Senator STABENOW. Thank you. 

I would like to ask each of you just really quickly in my time, 

one of the most important things for me is closing tax loopholes 

that send our jobs overseas, and basically supporting American 

businesses. And there is a simple bill called the Bring Jobs Home 

Act I have introduced for multiple years that would just take away 

the deduction for moving expenses. At least we should not be paying for the moving expenses when a company is moving overseas. 

22 

Do you think—I would like to ask each of you, would you support 

stopping the deduction for ordinary and necessary business expenses for a business moving their jobs overseas? 

Mr. Wells? 

Mr. WELLS. I think that the problem is larger than that. For example, on your pharma question—— 

Senator STABENOW. Well, no question it is larger, but—— 

Mr. WELLS [continuing]. A minimum tax under subpart F would 

not apply to any of the pharma companies, because they are not 

U.S. companies anymore. And so if you are looking for a minimum 

tax or a subpart F regime or worldwide, all that discussion you 

heard does not apply to that sector. We need another discussion 

about base protection. 

Senator STABENOW. Well, let me ask though, simply, for any 

company picking up and moving overseas, should their workers, 

the community, through their taxes, pay for the move? 

Mr. WELLS. I think that what we should have is a base protection that is broad and comprehensive to protect the U.S. tax base. 

I think cherry-picking one observation and allowing all the other 

earnings stripping to occur is the bigger problem. So I think targeted reforms are not a solution. 

Senator STABENOW. I realize that is not enough, but it certainly 

would help, though, if they did not have the insult of having to pay 

for the move. 

Dr. Clausing? Just ‘‘yes’’ or ‘‘no,’’ I know my time is up. 

Dr. CLAUSING. Yes, I think that is justified, but there are bigger 

things I would worry about too. 

Senator STABENOW. Of course, of course. 

Mr. Shay? 

Mr. SHAY. I am reluctant to pick out pieces. I think as a symbolic 

matter, it could be helpful. 

Senator STABENOW. Yes. 

Mr. Grinberg? 

Mr. GRINBERG. It is peanuts. We should do something much 

more comprehensive. I do not see any reason for just making that 

change. 

Senator STABENOW. I agree with you: we should have a big bowl 

of peanuts, a lot more than just that, but that would be a nice 

place to start. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Portman? 

Senator PORTMAN. Mr. Chairman, thank you. Thanks for holding 

this hearing. And I appreciate our witnesses today. And what a 

great opportunity we have before us. 

There is a big bowl of peanuts, as my colleague from Michigan 

just said, and that is a tax code that is outdated, antiquated, and 

broken. And it is no wonder; I mean, it goes back to the 1960s. Our 

tax code could qualify for AARP benefits on the international side. 

Many of the members on this panel, at least to my left, were not 

even born when this thing was thought up, and it does not make 

any sense. And you look at the G7 countries, you know, all of them 

are territorial except us. 

23 

And with all due respect, Dr. Shay and Dr. Clausing, I appreciate your testimony, and I know you actually agree with a lot of 

what I think, at least in terms of base-erosion rules, but we have 

to catch up. 

I mean, at one point we were the leader in terms of global tax 

policy. Now, you know, we are struggling to catch up, and it is 

hurting us. And it is hurting the workers I represent. And, darn 

it, we have to figure this out as a committee. 

So you know, E&Y recently came up with a study, Ernst and 

Young, saying there would be 4,700 companies that would be 

American companies today, just in the last 13 years, if we had a 

20-percent rate and a territorial system—4,700 companies. 

Laura Tyson, former chair of the Council of Economic Advisers 

for President Clinton, just came out with her study showing that 

if you went to this kind of a policy we are talking about, 20-percent 

rate and territorial, it would result in $144 billion a year ongoing 

in repatriations coming back and about 154,000 jobs a year. And 

by the way, she said more in the short term because, during the 

transition, it would be even more positive. She is a Democrat, and 

she looks at this and just says, this makes no sense. 

And companies are voting with their feet. Between 2003 and 

2011, there were seven inversions. Between 2012 and 2016, just in 

those 4 years, 33 inversions. 

And by the way, inversions are the tip of the iceberg. It really 

is not the bigger problem. The bigger problem is acquisitions. Foreign companies, as was said here today by Mr. Wells—I think all 

four of you agree with this—have a huge advantage. They can pay 

a premium for U.S. companies. 

And you know, it makes all the sense in the world that we would 

be losing companies. So here are the numbers. In 2016, foreign acquisitions of U.S. companies were over three times greater than 

U.S. acquisitions of foreign companies. That is by volume. 

You could either look at that or look at the study Mr. Grinberg 

cited, which is some German study he referenced: 17 percent more 

U.S. acquisitions of companies. So it would flip, and the U.S. companies would have an advantage. 

Why does this matter? We did a study in the Permanent Subcommittee on Investigations. It was bipartisan. We all really drilled 

down into these inversions and acquisitions, what is really happening. 

I am not from Missouri, but if I was, on this committee, I would 

care a lot about this, because when Anheuser-Busch decided to 

move overseas, they took 5,400 jobs with them. I mean, they did— 

and it is all documented; we have all the information. It is a study 

you can look at. 

We went behind the curtain in these corporate boardrooms to listen to what Mr. Wells talked about today, and I appreciate your 

candor. What goes on in these boardrooms is, they want to be foreign companies for one simple reason: our tax code. 

And when they change their headquarters, they do not just move 

their situs, they move people and investment and commitment to 

the community. That does not include all the nonprofits and charitable institutions in St. Louis that lost out. 

24 

So we have to do this; we have to fix it. And I know there are 

different ways to look at it, I get that, but I do not sense an urgency here today. And I hope that we can get to it. 

Now, in terms of this issue of balancing inbound and outbound 

so you do not end up continuing to benefit foreign investment in 

foreign companies here, we do need to do something. It has to be 

balanced, because we want FDI. It is important in my home State 

of Ohio; it is important in all of our States, but it has to be a level 

playing field. 

And I think Mr. Grinberg has laid out some interesting ideas of 

how we can come up with a way to have that right balance while 

we are encouraging investment here. 

I want to ask you about outbound for a second, because that is 

something we have not talked about as much today. 

Professor Grinberg, countries that have a minimum tax system 

that was talked about by Dr. Clausing and Mr. Shay—France, Germany, Japan, the entire EU, by the way, starting in 2019 after 

they implemented their new policies—they have a carve-out for active business exceptions. Can you comment on these Europeanstyle carve-outs and how we should think about them when designing our own outbound base-erosion rules? 

Mr. GRINBERG. Thank you for that question, Senator Portman. 

So territorial systems often have some rules for base protection 

that then allow an active business exception. The active business 

exception under EU law is incredibly narrow. In other words, all 

you need are five guys and a dog. Okay? 

And the reason you only need five guys and a dog is because of 

this case called Cadbury Schweppes out of the European Court of 

Justice that said that anything but wholly artificial arrangements 

have to be respected. And so the active business exception rule that 

is used in European jurisdictions is quite narrow, and we should 

understand that, if we are thinking about having a similar rule in 

the United States. 

We would not want to create a rule that required a higher level 

of substance, because the problem with rules that say you only get 

deferral if you put substance in a foreign jurisdiction is that the 

higher the substance bar is, the more jobs you are asking to move 

offshore. 

So those active business exception rules require a very limited 

amount of people and activity, especially the EU ones. And one 

should be concerned, if one writes a similar rule, that the IRS 

would up the bar and effectively ask U.S. companies to put more 

people offshore in order to avoid a minimum tax. 

Senator PORTMAN. My time has expired. I appreciate that fact. 

Hopefully, we will have a second round and we can talk more about 

the outbound issues. But thank you very much. 

The CHAIRMAN. Well, thank you. 

Our next one is Senator Cassidy. You are up. 

Senator CASSIDY. Mr. Shay, in your testimony you speak about 

not, I think, bifurcating cash, cash equivalence from non-cash. Very 

briefly, could you just comment on that, please, because I do not 

think you spoke to that in your spoken testimony. 

Mr. SHAY. Yes. I was pretty clear in my testimony, I think, that 

I am not in favor of a reduced rate on pre-effective-date earnings. 

25 

But if, as has been proposed, there is a different rate on earnings 

that are reinvested in illiquid assets—that is the term that is used 

in the framework—versus cash, so there is a higher rate on cash, 

it is not good. It is not a good idea to announce to sophisticated 

business people that if you shift your offshore earnings from cash 

into illiquid assets, which has already, in essence, been announced, 

you are going to get a lower rate by something like 4 percent. And 

then what is really an illiquid asset will become the subject of a 

definition. 

My strong recommendation—— 

Senator CASSIDY. So, can I interrupt you? 

Mr. SHAY. Yes. 

Senator CASSIDY. You are implying that it is perhaps ambiguous 

as to what is cash or cash equivalence as opposed to illiquid? 

Mr. SHAY. It is unspecified at this point. But whatever you do as 

a rule, I will be testing the line of that rule as a tax planner. 

Senator CASSIDY. Okay. 

Mr. SHAY. And the issue for cash is—the reason there is a higher 

rate for cash, presumably, is liquidity. For the companies, as I 

demonstrate in my testimony, that have the most offshore earnings—and the vast preponderance are credit-worthy companies— 

you are better off picking a single rate, whatever it may be, forget 

what my preference may be, than a bifurcated rate, or else you are 

going to have—— 

Senator CASSIDY. Okay, let me interrupt, just because we have 

limited time. 

Mr. Wells, you have been in the boardroom and you have helped 

with those strategies, not that Mr. Shay has not been. Would you 

agree with that assessment? 

Mr. WELLS. Again, I think that I agree with his assessment that 

people are going to do tax planning to try to minimize that outbound tax. So whatever system you put in place, there is going to 

be a reactionary planning. 

But the discussion we are having is only for U.S. companies. We 

are giving a complete pass—— 

Senator CASSIDY. I accept that; I totally accept your premise of 

that. 

Mr. WELLS. Then the question is, well, why are we doing that? 

I mean, what we should do is have rules that are going to apply 

across the board. 

Senator CASSIDY. I get that, but I want to narrow the thing right 

there. 

Mr. Grinberg, any comments on this? 

Mr. GRINBERG. You know, on this point, I agree with the concern 

Steve describes. One needs to be careful about announcing in advance that if you take certain planning steps, you will receive a 

lower rate on previously unrepatriated earnings. 

Senator CASSIDY. And, Dr. Clausing, I presume you feel the same 

way? 

Dr. CLAUSING. That is correct. 

Senator CASSIDY. Okay. 

Mr. Grinberg, Mr. Shay is making the point that we should have 

a country-by-country variation. 

26 

I think I follow what you said, Mr. Shay, that if you have a lower 

effective tax rate in one country and that is the country of domicile 

of the company of which we are—I am saying it in as complicated 

a way as you, but you know far more than I. 

Mr. Grinberg, would you agree with that? 

Mr. GRINBERG. So my view is that we should have an inbound 

minimum tax, not an outbound minimum tax. And therefore, this 

question would drop away, so that would be my strong preference. 

But if one were to have an outbound minimum tax, then I would 

simply point out that a country-by-country approach is not consistent with the way multinationals do business around the world. 

In Europe, you know, you have a completely integrated economy. 

In Asia, it is that way too. Global supply chains cross borders. 

If you go with a country-by-country approach, it is pretty inadministrable because now you have to police the transfer pricing 

decisions on transactions between France and Luxembourg. Do not 

kid yourself that people will not manipulate that stuff in order to 

make sure that they get around the country-by-country approach. 

There are a series of reasons why we got rid of—— 

Senator CASSIDY. So, tax law arbitrage. 

Mr. GRINBERG. Yes. A country approach is unworkable. 

Senator CASSIDY. Mr. Wells, any comments? 

Mr. WELLS. Yes, I think it would be extremely complicated, for 

the reasons Itai just said. 

Senator CASSIDY. Okay, I am almost out of time. I yield back. 

Thank you. 

The CHAIRMAN. Senator Carper and then Senator Cardin. 

Senator CARPER. All right. We are happy you are here. Thanks 

very much for taking a really complex subject and making it even 

more so. [Laughter.] 

I expect someday a light is going to go on in my head and I will 

say, oh, I get it now. It probably will not happen today, but it is 

not your fault. 

Thank you for joining us. 

I have four questions I always ask—my colleagues have heard 

me say this a few times—four questions I always ask whenever 

somebody comes to us and says, this is my proposal for tax reform. 

I ask these questions. One, is it fair? Two, does it stimulate economic growth? Three, does it simplify the tax code or make it more 

complex? And four, what is the fiscal impact, the budget impact, 

of what is being proposed? 

And I do not ask ‘‘yes’’ or ‘‘no’’ questions very often. But I am just 

going to ask a question of you, just starting with you, Mr. Grinberg. Are those four reasonable questions to ask? You can just say 

‘‘yes’’ or ‘‘no’’ or you could say ‘‘maybe.’’ 

Mr. GRINBERG. They are reasonable questions to ask. I happen 

to believe that in the corporate tax space, revenue-losing corporate 

tax reform is better than revenue-neutral tax reform. 

Senator CARPER. Okay, thanks. All right. Thank you. 

Are those, Mr. Shay, reasonable questions to ask? 

Mr. SHAY. In the context of international tax reform, simplification is less important than it is for individuals, low- and middleincome individuals who have to struggle to do their returns. 

Senator CARPER. Okay. 

27 

Mr. SHAY. And multinationals have more capacity to deal with 

complexity. And frankly, you need it more to deal with their economic issues. 

Senator CARPER. Fair enough, thank you. 

Yes, please? 

Dr. CLAUSING. Yes, those are the questions I would ask too. 

Senator CARPER. Thank you. 

Mr. WELLS. In the multinational context, assuming ‘‘fair’’ means 

a level playing field among multinational companies so that everyone is treated fairly, equally, then, yes, I think those are four great 

questions. 

Senator CARPER. Thanks so much. 

One of the things we like to do here is, when we have a difficult 

subject to consider, and where there is a wide range of opinions on 

how to go about addressing it, one of the questions I like to ask 

is, where do you find consensus among the four of you? 

If we could just assume, maybe not a good assumption, that we 

are going to move closer to a territorial tax system as we go 

through these debates and legislation, where do you think there is 

some agreement amongst the four of you? 

And just very briefly, where do you think there is some consensus? 

Mr. WELLS. I think we have broad agreement that on earnings 

stripping, inbound base erosion, source taxation, if not the preferred solution by everyone, is at least a respected point of view, 

that we need to broaden the base and protect against the inbound 

earnings-stripping problem that would exist for both in a territorial 

world. 

Senator CARPER. Good; thank you. 

Where do you think there is some agreement here? 

Dr. CLAUSING. I think there is an agreement to have a combination of a lower rate and closing loopholes and better base protection. 

I think at least three of us are worried about the base protection 

aspect of this on both an outbound and an inbound basis. And I 

think that it is important to keep both of those margins in mind. 

Senator CARPER. Thank you. 

Mr. Shay? 

Mr. SHAY. I agree. There is a consensus that there needs to be 

some strengthening of the source taxation and, I think for all of us, 

anti-abuse constraints on territorial, but the difference within that 

is very substantial. 

Senator CARPER. Good; thank you. 

Mr. Grinberg? 

Mr. GRINBERG. Yes. I think we all agree that one needs to look 

at inbound reform and that one needs to lower the rate. That is 

where I have heard consensus. 

Senator CARPER. All right; thanks. 

Mr. Shay, looking at your resume, my recollection is that you 

were serving in Treasury from 1982 to 1987, which is when we 

were trying to debate and adopt comprehensive tax reform during 

the Reagan administration. And it is interesting that now you are 

a panelist here. But drawing back on the process that we went 

through, the reason why we were successful in finding a comVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 R:\DOCS\32785.000 TIM
28 

promise—it was difficult then, God knows it is difficult now. What 

advice can you share with us from your experience, 1980 to 1987 

when this was running front and center, that would be helpful to 

us now? 

Mr. SHAY. At the time, the Senate and the administration were 

under control of one party, and the House was under control of another party. There had to be a bipartisan starting point. That was 

one. 

Senator CARPER. We need to flip. So you are saying we need to 

flip either the House or the Senate to get real, true tax reform? 

[Laughter.] 

Mr. SHAY. I think bipartisanship is very important for a reform 

that will be sustainable. And there were arguments as to how 

much the 1986 act would sustain. In fact, it has. We are still dealing with huge portions of it today. 

Secondly, tax reform is in the details. You cannot get it done— 

it started at the beginning of 1984. We took a year to draft the proposals in Treasury. They went through the Baker-Darman political 

review in the first part of 1985. They got through the House at the 

end of 1985. They went to the Senate side at the beginning of 1986. 

There was a conference committee at the end of 1986. 

Every single step of the way we made corrections, improvements, 

changes. This cannot be done on the fly. It is just beyond my comprehension that we would try to make a major tax change as quickly as is being contemplated for political objectives. 

Senator CARPER. All right; thank you all. Very good. 

The CHAIRMAN. Okay. 

Senator Cardin? 

Senator CARDIN. Thank you, Mr. Chairman. 

I have been listening very carefully to this hearing, and I think 

the last point, Mr. Shay, is pretty telling because, as I understand 

it, the budget instructions would have us complete our work in the 

next 5 or 6 weeks, at least the Senate, so that is not realistic. 

But I was listening—and on the business tax issues, you all talk 

about harmonizing, that the United States business tax is an 

outlier, that we would like to have a level playing field for American businesses globally. All those I hear are objectives. 

And then I look at the Big Six proposal, Mr. Chairman, and I see 

that their way of getting there is to reduce the business tax rates 

so that we can be more competitive on business tax rates, but no 

real way to pay for it. The traditional ways of using the Joint Tax 

Committee and traditional scoring are not going to be done. They 

have identified very few of the offsets, even with knowing that they 

are going to blow a hole in the deficit. 

So we do not have time to analyze the consequences, Mr. Shay, 

of some of the issues you are talking about. We do know that State 

and local deductions will have an impact on real estate, will have 

an impact on federalism, will have an impact on the ability of our 

States to do their business. We do know that restrictions on business interest deductions will have a direct impact on businesses. 

They will be losers in that regard. 

And I mention all that because I think the point of harmonizing, 

the point of a level playing field, is legitimate. And I think the tax 

rate issues are certainly legitimate concerns. So if we want to sigVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 R:\DOCS\32785.000 TIM
29 

nificantly reduce our business tax rates, then the major difference 

that we have with harmonizing in the global community is the fact 

that we get virtually all of our income from income taxes, whereas 

every other country we are talking about has consumption taxes. 

And it is very interesting that, as we developed the international 

trade rules that Senator Portman is very familiar with, we had no 

difficulty in doing border adjustment on consumption taxes, but we 

do not have border adjustment on income taxes. So it is a double 

insult to the United States on international competitiveness. 

So it seems to me that if we really are looking at harmonizing, 

we have to tackle that problem. And I think the Big Six proposal 

underscores how difficult, if not impossible, it will be—impossible— 

to have competitive business tax rates, which is the driving force 

behind all of the base-erosion things you are talking about, unless 

we look at harmonizing with other revenues coming in other than 

income tax revenues. 

It seems like that is the only way that we are going to be able 

to get to deal with the fundamental problems that you are talking 

about. Where is my logic wrong? 

Mr. WELLS. I would not say you are wrong. But what I would say 

is that an unlevel playing field needs to be fixed. 

Senator CARDIN. And is it not the rates that we are mainly concerned about? 

Mr. WELLS. What I am concerned about—— 

Senator CARDIN. Is it mainly the rates or not? 

Mr. WELLS. To me, it is not mainly the rates. 

Senator CARDIN. So we can continue with a 35-percent corporate 

rate and still be competitive? 

Mr. WELLS. I think it would be great to drop the rates. But I 

think if a foreign—— 

Senator CARDIN. No, I want to drill down on that, because I was 

under that impression. So you believe we can be competitive globally with a 35-percent corporate rate? 

Mr. WELLS. No, I think we need to have a lower rate. 

Senator CARDIN. Okay, so you are agreeing with me that we have 

to lower the rate. 

Mr. WELLS. Yes. 

Senator CARDIN. Now, let me take it to the next step. The United 

States, as far as its percentage of its economy invested in governmental services, is near the bottom of the global community. And 

yet, we have the highest marginal tax rates. Have we not given 

away our competitive advantage because we have been stubborn, 

as we are—Americans are very stubborn—saying that income taxes 

are the way to finance the Federal Government? 

Mr. Grinberg? 

Mr. GRINBERG. Senator Cardin, as I say in my testimony, I agree 

we should find a way to lower the corporate tax rate even further 

and not just meet, but beat our foreign competitors. But I would 

urge you not to make the perfect the enemy of the good. And I specifically reference your proposal in my testimony. And I am an advocate of having a value-added tax to let us sharply reduce corporate and individual income tax rates. But we need to move on 

corporate tax reform. 

30 

Senator CARDIN. I could not agree with you more. And I agree 

with that. I am prepared to move on corporate tax reform, but not 

by increasing the deficit, not by dealing with additional problems 

that are going to be created because of the unintended consequences, not by jeopardizing entitlement programs that are critically important to the American people. I am not going to do it 

under those terms. 

But I am prepared to deal with it, but we have not seen any real 

effort here to isolate international tax reform. We have offered proposals coupled with infrastructure reform, different ways to do it. 

But if you look at the Big Six plan, I think we are heading down 

a proposed path that will be devastating and will not accomplish 

what you are trying to accomplish. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Okay. 

Senator Bennet? 

Senator BENNET. Thank you, Mr. Chairman. 

And just to piggyback on what my colleague was saying, I think 

in the 9-page proposal, there are roughly 200 words, I think, devoted to international taxation. That is what this committee is 

looking at right now. 

And I gather—I apologize for being in the Education Committee 

this morning, which is where I was—but I gather from the conversation today, what we have learned is how complex this undertaking is and the possibility that real, unintended consequences 

can flow if we do not get it right. 

And we face now, because of our own fecklessness, an artificial 

deadline of November 13th here as a procedural matter, which is 

23 legislative days away. That is when that deadline is. And it does 

not have anything to do with creating a better tax code, it just has 

to do with the legislative antics of the United States Congress. 

And I want to ask each of you for your honest view of whether 

you think we can reform the tax code in a way that is going to be 

productive to the American people without a bunch of unpredicted 

mistakes if we rush it through in a period of 23 legislative days; 

in fact, you do not even need to use my language, if we use 23 legislative days to do it. 

Mr. Wells? 

Mr. WELLS. Without seeing legislation, it is difficult to know how 

far apart you are. 

Senator BENNET. And that is another important point. We have 

no legislative language; we have not seen legislation. 

Dr. Clausing? 

Dr. CLAUSING. I think this will be very difficult. And if you try 

to rush it in that way, I think you run the risk of losing a lot of 

revenue by doing the tax-cutting part but not taking seriously the 

base-protection part. And that would be very costly in the future. 

Senator BENNET. Mr. Shay? 

Mr. SHAY. I agree with that. And it is mind-boggling that you 

could think about having a major change with that little consideration. 

Senator BENNET. Mr. Grinberg? 

Mr. GRINBERG. Thank you, Senator Bennet. I mean, we have 

had, like, a 6-year process on tax reform, so I think it just depends 

31 

what the legislative text says. I mean, that is the thing. I assume 

we are not starting from zero, so I think it depends. 

Senator BENNET. Well, I think that is a fair comment, and we 

will see whether there is legislative language coming later. 

What is the risk that we could leave loopholes or make other 

mistakes that multinational corporations could take advantage of 

if we do not do the work thoroughly and well? 

Mr. WELLS. It is hard to imagine that we could make more than 

we already have. I mean, we have earnings-stripping problems that 

are unaddressed. And the resulting legislation needs to fix inbound 

taxation, and we should be more competitive internationally. 

From my perspective, there is very little in the way of inbound 

base-protection measures today. And so for me, I think you have 

an open field with no tacklers in the area. I mean, I think moving 

forward is going to make progress, given how bad the current system is right now. 

But I think we should have a thoughtful move forward, but I do 

not think we need to, as Itai said, let the perfect get in the way 

of the good enough. We need to get a system that better balances 

the multinational and the business environment in the United 

States, because we are lagging behind and we need a sense of urgency to fix that. 

Senator BENNET. We also do not want the highly imperfect to be 

the enemy of the imperfect either. 

Dr. Clausing? 

Dr. CLAUSING. We have a very large problem at present, but that 

does not mean it cannot be an even larger problem. 

And we have been talking a lot about the inbound side, but let 

us look at the outbound side. My estimates suggest that multinational profit shifting to tax havens is costing $100 billion a year. 

We have $2.6 trillion sitting offshore in tax havens. If we move to 

a toothless territorial system where we exempt all foreign income 

and we do not try to protect the base, those revenue losses will 

definitely increase, not shrink. And I think that that is a big risk 

here. 

Senator BENNET. Anybody else? 

Mr. SHAY. I would agree with that. If you do not have strong 

anti-base-erosion, the clients who used to come into my office and 

say, ‘‘Can I do what the big people do?’’ and my question is, ‘‘Do 

you really run your business back in the U.S., do you really need 

your money back in the U.S.?’’ and they say, ‘‘Yes,’’ I say, ‘‘Well, 

then you cannot do it very effectively.’’ 

If you move from deferral and its current restrictions on using 

that money in the U.S. to exemption, then any mom-and-pop business that is of even modest size, at that point can create a foreign 

office, use the five people and a dog that Itai was talking about, 

allocate income there, and then it is exempted. 

This system can be so much worse. Do not go there without 

knowing what you are buying into. 

Mr. GRINBERG. An inbound corporate minimum tax is not a 

toothless territorial system, it is just a fundamentally different approach. Moreover, it takes advantage of the immobility of the U.S. 

customer base, something that Dr. Clausing praised in her testiVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 R:\DOCS\32785.000 TIM
32 

mony to the House Ways and Means Committee only a few months 

ago. 

Senator BENNET. Mr. Chairman, I am out of time, so I just want 

to thank you. 

I also want to thank the excellent witnesses here today whom I 

think give us a sense of how broad the array of choices are that 

we have to make, and I hope we will take the time to make them 

well, because this is something we only get to do once every 30 

years. 

The CHAIRMAN. Okay. Let us go to Senator Isakson. 

Senator ISAKSON. Thank you, Mr. Chairman. 

Dr. Clausing, continue on this subject for a minute about the 

toothless territorial tax system. If it were yours to do and you were 

told to change the U.S. to a territorial tax system, what teeth 

would you install in that system to make it palatable for you? 

Dr. CLAUSING. I would have a tough per-country minimum tax. 

And I think that having it on a per-country basis is absolutely essential here. If you earn income in Bermuda, say, where the tax 

rate is zero, that per-country minimum tax would tax the Bermuda 

income right away. 

If you have a global minimum tax, you can just use taxes paid 

in Germany to offset the Bermuda income. And then you have an 

incentive to move income to both Germany and Bermuda. 

I would also protect the earnings stripping, have tougher 

earnings-stripping regulations. And there are other anti-inversion 

things that are off-the-shelf that Congress could have done a long 

time ago, things like an exit tax and raising the threshold that is 

required to invert. And I think those would be important off-theshelf, easy things to do to help protect the tax base. 

Senator ISAKSON. In Georgia we benefit from a lot of foreign direct investment into our State and have been a big growth State 

in the last decade. If you had selected countries that you had different tax levels for, for those coming to invest in the country, 

could that possibly turn some of that around and send it somewhere else? 

Dr. CLAUSING. I am not suggesting different tax rates for inbound investment, so I do not think that that would apply in this 

context. 

Senator ISAKSON. Okay. 

Mr. Wells, what about you? If you were going to design a territorial system, what teeth would you install? 

Mr. WELLS. The teeth I would have would be that we want the 

business profits that are in the United States subject to one level 

of tax in the United States, so that whether you are a U.S.-owned 

company or a foreign-owned company, you will pay one level of tax, 

that there is not one group of companies that can strip their profits 

to Bermuda or somewhere else. 

We do not want to tax the inbound investor in a punitive way 

that causes them to have a double tax or a triple tax. But they 

ought to be on the same playing field with respect to the profits 

in their U.S. business, whether you are a U.S. company or a foreign 

company. 

I think there are a lot of revenue offsets that are there if you leveled the playing field. And I think what you would say to the inVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 R:\DOCS\32785.000 TIM
33 

bound investor is, if you can be on the same playing field as everyone else, do not have a tax disadvantage but do not have a tax advantage, you are not being competitively disadvantaged. 

And what I would say to the U.S. companies is, you do not need 

to do corporate inversions anymore because you are now on the 

same level playing field with respect to operating a business in the 

United States. 

So from my perspective, if you have a territorial regime, you 

need to make sure that the round-tripping problem that Professor 

Shay mentioned is not going to be possible. But please understand, 

that round-tripping problem is what multinational foreign-based 

companies are able to do today because we have not instituted any 

rules yet as to them. 

Senator ISAKSON. Effectively, going to a territorial system ends 

the repatriation issue for the Congress, because it goes away. Is 

that not correct? 

Mr. WELLS. Depending on what you do with the one-time tax on 

the foreign earnings, but yes. 

Senator ISAKSON. Right, which is behind the question I am asking about the teeth. It is also important to all of us; we want to 

do the right ones. 

Mr. WELLS. Correct. 

Senator ISAKSON. Dr. Clausing, one other question. I read your 

testimony, and one thing really struck me about it that I had not 

thought about. I knew it was happening, but I had not thought 

about it. Ninety percent of the people born in the 1940s have outearned their parents in their lifetime, but only about 50 percent of 

those born in the 1980s are going to out-earn their parents. 

And you talked about a number of solutions—or I do not know 

whether they are solutions, but ways to get to adjust that in our 

policy. One was increasing the EITC, if I remember correctly, and 

the other, I think, had to do with wage stabilization, which I took 

as probably a minimum wage or a wage table that people would 

have to meet. Am I right in that? 

Dr. CLAUSING. I talked about the EITC as an excellent tool. And 

I think economists and policymakers from throughout the political 

spectrum really like the Earned Income Tax Credit, because it encourages work and it brings more income to those lower in the income distribution. 

I also mentioned a wage insurance, which is different from what 

you just characterized. But basically, the wage insurance would 

mean if you lost your job due to technological change, domestic 

competition, or international competition, effectively you would be 

insured for some fraction of the difference between your current 

wage and the old wage. 

And that is part of our Trade Adjustment Assistance now for a 

small number of workers, but that could be expanded and would 

be an important ingredient to sort of help the middle-class workers 

adjust to a modern and technologically sophisticated economy. 

Senator ISAKSON. Thank you very much. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Toomey? 

Senator TOOMEY. Thank you, Mr. Chairman. 

34 

A couple of my colleagues on the other side have raised issues 

about the budget resolution that the Senate Budget Committee will 

be taking up tomorrow, and I just wanted to clarify. 

First of all, under the terms of the budget resolution that we will 

be considering tomorrow, the subsequent tax reform, should this 

committee report out a bill, will be scored. Let us just be clear 

about that: it will be scored. 

And in fact, the way the budget is drafted, it is my understanding that the score will have to be on a static basis against a 

current-law baseline, a legislation that would not expand the deficit by more than $1.5 trillion over the budget window, and if it 

were to do so, it would lose the reconciliation protection that it is 

meant to have. So I would like to be clear about that. 

Second point: several people have suggested that there is this 5- 

or 6-week deadline for getting the tax reform done. I happen to believe that there has been a tremendous amount of work done for 

years which can be compiled, much of which has been intensified 

over the last year, and we in fact can produce a very constructive 

tax reform in that period of time. 

But I would point out that the goal in the budget resolution is 

not binding. The reconciliation instructions do not expire until September 30th of 2018. 

A second point I want to push back on: Senator Wyden asked the 

question of whether tax cuts pay for themselves. To characterize 

this effort as simply a tax cut, I think is a gross oversimplification 

of what we hope to achieve here. And specifically, what I am referring to is, what we are contemplating is a multi-trillion-dollar series of pro-growth reforms, most of which would be offset by a 

multi-trillion-dollar series of base broadenings. 

So we are hoping to have significant rate reductions, a significant 

move towards expensing CapEx, a significant simplification which 

helps compliance, and, of course, a move to a territorial system to 

be mostly offset by diminishing the extent to which the tax code 

currently favors certain activities over others. 

Now, if the pro-growth elements are on the order of $4 trillion 

and the base broadeners are on the order of $3 trillion, there is 

what appears on a static basis to be a net tax cut of a trillion dollars, but until we have defined those things, I do not know how 

anyone can suggest that we can know in advance that we would 

not have enough growth to pay for the small fraction of this reform 

that will score statically as a negative. So I just wanted to make 

that point. 

Professor Grinberg, we have had a considerable discussion this 

morning about how uncompetitive the U.S. international tax system is. The combination of a very, very high statutory rate, together with being one of the very few countries in the world that 

has a global system, contributes to that. 

You have also made the point repeatedly that foreign direct investment in the United States, investment in American businesses, 

can be a constructive thing. And if it is done for economic reasons, 

then America wins, the foreign investor wins, the global economy 

is better off. But I wonder if you could just elaborate a little bit 

on how it is that the current uncompetitive international system is 

harmful to American workers. 

35 

Mr. GRINBERG. The system is harmful in a plethora of ways. 

First of all, there is just the fact that in lots of foreign markets 

U.S. companies are disadvantaged relative to foreign corporations 

because they face a worldwide system with deferral, whereas other 

companies face a territorial system. So you know, the other companies will only pay tax in the country where they are operating, not 

at home. 

But then beyond that, and what I tried to emphasize in my remarks, is that we have created a disadvantage for U.S. companies 

in the United States. And to the extent that we believe that U.S. 

companies, everything else being equal, right—I mean, I love foreign direct investment when it makes the asset most productive 

and when it adds jobs in the United States. And I do not want to 

be understood as discouraging that. I am for that; I welcome that 

kind of investment. 

But at the end of the day, there remains a headquarters bias for 

U.S. companies. And you know, you see it when you see an inversion happen, right? In an inversion, what we see happen is that, 

at first, you have just the tax re-domiciliation. But then there are 

a whole bunch of tax-based pressures, both in terms of our law and 

in terms of foreign law and in terms of the way the IRS audits, 

that create pressures to move the actual headquarters abroad, 

right, to move senior management abroad, to move R&D abroad, to 

move the support jobs associated with that abroad. 

And initially, amazingly, the company actually, when it does 

that, moves Americans, right? So Americans leave the United 

States. 

But here is the thing. Five years later, they want their kids to 

go to high school or college here, and so they come back. And who 

replaces them? Who replaces them is a European. And now you 

have taken a tax-driven re-domiciliation and you have turned it 

into a substantive change in the corporation, a substantive change 

in its leadership and its leadership’s bias at the margins for where 

they are going to put jobs. 

Senator TOOMEY. So I will just finish, Mr. Chairman. 

So the bottom line is, we have a tax code that creates an incentive, apparently a powerful incentive, to headquarter multinationals somewhere other than the United States of America. And 

headquarters are very often a source of really good jobs. 

Mr. GRINBERG. Yes. 

Senator TOOMEY. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Before I go to Senator Cantwell, I have been hearing some complaints about the committee’s process for considering tax reform. 

Now, let me remind my colleagues, in the 6 years that I have been 

the lead Republican on this committee we have held roughly 70 

hearings on tax reform. We have had the options papers that we 

have come forth with. There was the Baucus plan. There was the 

200-page committee staff report on tax reform. We had the bipartisan working groups and all of their reports. 

Now, this is the third hearing we have had in the last month on 

tax reform. And I might add that we are going to have a robust 

and fair markup. 

36 

Long story short, we have been at this a long time, and there are 

very few ideas and proposals that have not been exhaustively examined by this committee. So anybody arguing that we are rushing 

or ramming anything through has a pretty selective memory. So I 

just wanted to make that one point before I call on—— 

Senator WYDEN. Mr. Chairman? 

The CHAIRMAN. Yes, Senator Wyden? 

Senator WYDEN. Just briefly to respond. 

The CHAIRMAN. Okay. 

Senator WYDEN. Mr. Chairman, as you know, I and my colleagues on this side have enormous respect for you and your desire 

to have this committee work in a bipartisan way—— 

The CHAIRMAN. Vice versa. 

Senator WYDEN [continuing]. And of course your history, which 

we are going to talk about tomorrow with the CHIP bill, where you 

started with Senator Kennedy. So I want to be really specific what 

is so troubling. 

Gary Cohn, the President’s top economic adviser, said last Thursday that he was presenting his first and last offer. His words, not 

mine. And when I heard that, I was just stunned by how dramatic 

the difference his words were with your words, which I know are 

very sincere, about wanting to do a bipartisan proposal, and I 

would say how different it was from the process that Ronald 

Reagan followed in 1986. 

I talk to Bill Bradley a fair amount, another tall Democrat who 

was on the committee, with a lot better jump shot than me. But 

the point is, Mr. Chairman, he has described many times the process where the administration spent time with leaders on the committee who worked with the administration trying to find common 

ground. There has been none of that—none of that. 

So I want it understood, this is not commentary about your intentions; quite the opposite. And I have appreciated your comments 

with respect to my work with Senator Coats and Senator Gregg, 

because I think that shows some bona fides for trying to get a bipartisan bill. And I continue to believe that the Democratic principles, particularly given some of your ideas, are very consistent. 

But let us make no mistake about it. When Gary Cohn says he 

has put his first and final offer on the table and we are completely 

in the dark about details, that is stepping all over the history of 

successful tax reform, which is to do it in a bipartisan way. 

And I just wanted to have that on the record. I did not want to 

take the time of my colleague. 

The CHAIRMAN. Well, thank you. Thank you. 

Senator McCaskill, you are next, and then we will go to Senator 

Cantwell. 

Senator MCCASKILL. Thank you, Mr. Chairman. 

Can any of you point to anything specific in the plan that has 

been laid out that would prevent the problem we have now, which 

is a wide disparity among U.S. companies in terms of how much 

they pay? 

We know the effective rate is 22 percent—not the percentage. We 

know that service providers, construction, retail, and agriculture 

are paying 28 or more. And lots of industries have effective rates 

in the teens. And this is for a variety of reasons; it is not just terriVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 R:\DOCS\32785.000 TIM
37 

torial. There are a variety of reasons why there is a wide disparity 

in what corporations pay. 

I have scoured this plan, and I see nothing that levels the playing field here. Is there anything specific that you see in this plan— 

or maybe this is a detail to be determined later? Do you see anything specific in the plan, Dr. Clausing, that would level the playing field among the various corporations? 

Dr. CLAUSING. No. As it is specified now, there is not much to 

hang your hat on in terms of leveling the playing field between different corporations. I mean, they are lowering the top rate, which 

means that the most you could pay would be less. 

Senator MCCASKILL. Right. 

Dr. CLAUSING. So I guess by definition that lowers the discrepancy. 

Senator MCCASKILL. No, I am talking about between corporations. 

Dr. CLAUSING. Yes, but on a relative basis, you are right, yes. 

Senator MCCASKILL. Right. On a relative basis, I see nothing 

here that gets away from some paying zero and others paying at 

the top of the rate. 

Dr. CLAUSING. That is right. 

Mr. GRINBERG. So just one thing, Senator McCaskill. I just want 

to correct you on this 22-percent number. So that is a very particular way of calculating an average actual tax rate. Let me quote 

what the Obama Treasury in its final document said about that 

version of calculation. This is on page 42 and 43: ‘‘Because it is 

backwards-looking, determined by tax rules, decisions, and economic events that occurred in the past, it is not necessarily helpful 

as an indication of the effect of taxes on a new investment, one 

whose returns will accrue in the future.’’ 

It is also very different in scope than other measures. Other people tend to look at effective marginal tax rates or effective average 

tax rates where the studies clearly show that U.S. companies are 

uncompetitive internationally. And I would urge you to look at 

those numbers, not the 22-percent number. 

Senator MCCASKILL. The point of my question—and I understand 

the point you are making, and it is a valid one—but the point of 

my question is this disparity between corporations based on other 

loopholes that are in the code. There is nothing being done that we 

can see to eliminate those problems, that you are going to have one 

type of industry that may have a certain business model pay very, 

very little and others pay at the top of the bracket. That is the 

point I was trying to make. And we have to address that. 

Mr. GRINBERG. And I agree that we should try to clean that stuff 

out of the code. 

Mr. SHAY. Senator McCaskill, in some respects, the proposal 

would worsen it to the extent it applies expensing to all assets. 

Senator MCCASKILL. Right. 

Mr. SHAY. Some assets have longer lives, some shorter lives. It 

can have a disparate effect depending on the footprint of the business in particular. It also is quite costly from a revenue point of 

view; at least in the early periods. It turns eventually. But if you 

really want to get more equality in terms of treatment, I think you 

would move towards economic depreciation for all assets. 

38 

∗SEC. 4111. REPEAL OF CERTAIN LIMITATIONS. 

Sections 3205 and 3206 of S. Con. Res. 11 (114th Congress), the concurrent resolution on the 

budget for fiscal year 2016, are repealed. 

That gets pretty much into the weeds and requires, frankly, a lot 

of work and a lot more effort. But that would go in the direction 

that you are asking about. 

Senator MCCASKILL. That makes sense. 

I want to make sure I spend just a moment at the end of my 

time here to talk about pass-throughs. The reason they are called 

pass-throughs is because the income passes through at the taxable 

rate of the person who receives it. 

So let us assume for purposes of this discussion that you have 

somebody who is in the top tax bracket. Right now that is almost 

37 percent. Let us assume they have hundreds and hundreds of 

pass-throughs, like they were a real estate developer. And now all 

of a sudden, they are going to go from a tax rate of 30, almost 40 

percent to a tax rate of 25. And this would be true for upwards of 

90 percent of the businesses formed in America. And the vast majority of the income we are getting from these pass-throughs is in 

fact coming from people in the top tax bracket. This is real estate 

developers, law firms, doctors—you name it. 

So in essence, this is why, when you say ‘‘pass-through,’’ most 

Americans’ eyes glaze over. We are only talking about C corps 

when we talk about a lower corporate rate. We are dramatically 

lowering by 14 points the tax burden on anybody who is wealthy 

who has pass-throughs. Is that correct? Am I explaining that correctly? 

Dr. CLAUSING. That is correct. And if you look at the estimates, 

about 88 percent of the benefit of a tax cut on pass-throughs goes 

to the top 1 percent of the income distribution. It creates a massive 

new base-erosion problem as people will seek to characterize their 

labor income as business income, and you will also lose a lot of income out of the personal income tax base. So this is a huge problem. 

Senator MCCASKILL. A huge problem. Eighty-eight percent of the 

income coming from pass-throughs is for the 1 percent. And I guarantee you, anybody who looks somebody straight in the eye and 

says, ‘‘This is not going to benefit me,’’ who has hundreds and hundreds of LLCs, is just lying to the American people—flat out lying. 

Thank you, Mr. Chairman. 

Senator WYDEN. Mr. Chairman? 

Senator PORTMAN [presiding]. Senator Wyden? 

Senator WYDEN. Per an agreement with Chairman Hatch, I just 

want to make a unanimous consent request to add section 4111 of 

Chairman Enzi’s budget mark, which would repeal existing points 

of order requiring a budget score on a reported bill.∗ Thank you. 

Senator PORTMAN. Without objection. 

Senator Cantwell? 

Senator CANTWELL. Thank you, Mr. Chairman. 

I want to note the impressive list of witnesses we have from 

prestigious universities here today. I am specifically speaking of 

the University of Houston and Reed College. Thank you. 

39 

The other two institutions get a lot of credit, but we like the outof-the-box thinking that comes from other parts of the country as 

well. So thank you both for being here. 

Dr. Clausing, on your statement about broader notions of competitiveness, you outline this issue of making investments in other 

things that help our economy grow and require earning higher 

wages, such as a well-educated workforce. I see later in your testimony you also talk about this from the perspective of the fact that 

there have been sharply declining shares of GDP that go to labor 

versus increasing shares of GDP that go to profits. 

So one of the things that I see, at least in my State, which I 

guarantee you has lots of economic activity, is the importance of 

skilling up the workforce. How important do you think this is to 

our competitiveness, and how much should our tax incentives reflect something that would help us get the skill level to maintain 

U.S. competitiveness? 

Dr. CLAUSING. Yes, I think that is an excellent question. There 

are a lot of aspects to competitiveness that are underappreciated 

in this debate. And if you think about what makes a business really succeed, there are a lot of components. Do they have skilled, innovative workers? Is the middle class healthy enough that they can 

purchase their products? Is our infrastructure sound? Do we have 

healthy spending on R&D? All of these can make our businesses 

more successful. 

And many of those things also require government revenue. So 

that makes attention to deficits particularly important because, if 

you are giving away the government revenue that you would use 

to repair bridges and roads and to fund education, that is a big hit 

to the potential for economic growth. 

Back when they were looking at repatriation tax breaks in previous years, they often paired that with the idea of the infrastructure investment. These days it seems to be paired with the idea of 

deficits. So I think that that is more problematic for competitiveness. 

Senator CANTWELL. Well, I was thinking more specifically about 

incentivizing apprenticeships. You know, given the fact that there 

are so many people who are not skilled in the jobs that we have 

open—something like 67 percent of companies are saying they cannot find the skilled workers that they need—what about investing 

in that as a way to keep our competitiveness? 

Dr. CLAUSING. Yes, I think that is going to be a really important 

issue in the future, not just because of global competition, but also 

because of technological change. We have had a huge transformation in the economy with the role of technology. And computers and robots can do a lot of the things that unskilled workers 

used to do, which means that if you want good job opportunities, 

you need to have skills. So paying for programs and education to 

make our workers more skilled, I think, is essential. 

Senator CANTWELL. What would you say, Mr. Wells? A more robust workforce—I think we define that in the Northwest as people 

who are flexible to change, that is in the context of being able to 

do a variety of things as models and businesses change. You know, 

going from aluminum in aerospace to composites is a big move and 

needs new skills. 

40 

Mr. WELLS. Yes, I agree with what Professor Clausing is saying. 

I think all of those are important factors. And to achieve those 

goals, we are going to need to have revenue to the government to 

be able to fund those objectives. 

And from my perspective, the question then is, what is the fair 

way to raise the revenue? And base protection, preventing earnings 

stripping in a way that levels the playing field, is a nice way to get 

the revenue to meet the goals that you said and that I agree with 

are important goals for the country. 

Senator CANTWELL. Yes. 

Mr. WELLS. So I see those as being—when you think about tax 

reform legislation, we need to have a competitive, neutral system, 

but we need to have a system that really does collect tax in a way 

that will fund the things that the government desires to promote. 

Senator CANTWELL. Well, I feel like if I cannot convince a guy 

who had a TV show called The Apprentice to be for apprenticeships, 

then I do not know what I can convince him of. I am pretty sure 

that what we need to do to maintain the shares of that GDP going 

in the right direction for higher wages and better jobs is to make 

sure we make the investment in those people whom the companies 

are saying they need. So it is not like they are not saying they need 

them. 

So thank you, Mr. Chairman. 

Senator PORTMAN. Senator Cassidy, do you have a question you 

would like to ask? 

Senator CASSIDY. Yes. 

One of our challenges seems to be the treatment of highly mobile 

intangibles. I have read each of your testimonies, but I cannot recall which of you specifically addressed that. But I suspect you all 

have thoughts. 

And with the rise of the so-called modified nexus in the EU patent box regimes, we are seeing jobs and business activity move offshore—and I think you referenced this earlier, Mr. Grinberg—not 

just the intangible assets themselves. 

So I guess the question is—now, by the way, I mentioned this to 

Mnuchin, and Mnuchin said, ‘‘Well, we have modeled it, and having an IP box actually costs the U.S. economy money.’’ So in their 

modeling, they did not think it worked. 

Now, that is a conversation over coffee, and I cannot say that 

that is their final position. I am just saying that at the time, that 

is what he raised. 

So I guess my question for any of you or all of you is, what is 

the proper balance of carrots and sticks for IP income? Because, by 

the way, I look at these companies with a lot of cash overseas, and 

a lot of them have a lot of IP. I gather that a lot of them park that 

license in Dublin and the income thereof goes to Dublin and not to 

us. 

Mr. Wells, do you want to take a crack? 

Mr. WELLS. Okay. So I very much appreciate this question, because it will get me back to a dialogue I had earlier. Let us think 

about countries that have very strict rules on charging related 

party royalty arrangements, like China and Brazil. I cannot charge 

for those, so I will do interest stripping; I will do related party leasVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 R:\DOCS\32785.000 TIM
41 

ing into those countries; I will do supply chain transactions; I will 

charge my costs in in other ways. 

So a multinational comes to a jurisdiction with a toolbox of 

earnings-stripping strategies that are in a variety of categories. 

And then they just ask the question, ‘‘Well, which ones work here?’’ 

So if you enact a targeted rule that deals with royalty stripping, 

that is great. But if you leave the other opportunities available, all 

that is going to do is allow for the multinational to say, ‘‘Well, I 

cannot use a hammer, so I will use a different tool in my toolbox 

to do the same earnings-stripping technique.’’ 

And so what I would caution the Congress to consider is, instead 

of targeting IP or instead of targeting moving expenses, we need 

to deal with this as a holistic question. What are the things that 

are related party payments that are reducing the U.S. tax base and 

shifting profits overseas? 

Senator CASSIDY. Now, I accept that point, but there are some 

industries that seem very IP-heavy, if you will. Now, this is more 

than moving expenses. This is the fact that you are generating 

such a percent of your income from a license. 

Mr. WELLS. Yes. So there are two different aspects to that: inbound royalty stripping for the use of IP in the United States—and 

I think we need better earnings-stripping protections on that. On 

IP migration, this is something Professor Shay and I have written 

and spoken about in other contexts. I think, from my perspective, 

the Treasury Department should do more under section 367(d) to 

prevent the shifting of intangibles from the United States to a foreign jurisdiction. I think they have the authority to do that and 

have not done that. But that is a separate issue that would need 

to be dealt with. 

Senator CASSIDY. Let me just work down the line. 

Dr. Clausing? 

Dr. CLAUSING. Yes, I think intangibles are an important part of 

this tax base-erosion problem. And one thing I would encourage 

you to think about, as you think about other countries’ tax systems, 

is also to look at some of the things that other countries are doing 

to protect their tax base. 

It seems that we are in an important period where we can either, 

you know, all race to the bottom effectively, cutting rates and making tax evasion easier, or we can work together to try to combat 

that problem. 

The EU recently adopted an anti-tax-avoidance directive that 

works with CFC rules, exit taxes, earnings stripping, general antiabuse rules. Member states are going to apply those—— 

Senator CASSIDY. A little bit more slowly. My ears turned 60 

years old this past week, so I apologize. [Laughter.] 

Dr. CLAUSING. Sure. Yes, so the EU is working on this anti-taxavoidance directive with many components, including controlled 

foreign corporation rules, exit taxes to address inversions, 

earnings-stripping rules, and general anti-abuse rules. And the 

member states of the EU are going to be applying these rules as 

of 2019. 

And you know, I think it is clear that if we do not tax this intangible income, other countries will, but there are ways that we can 

support each other in these anti-tax-avoidance efforts. 

42 

To the extent that we prevent our companies, for instance, from 

moving income to Bermuda, that also helps Germany and France 

and other countries where foreign-to-foreign stripping will occur 

too. So I think that there are a lot of ways that countries can work 

together to protect their tax bases in a way that will help the countries that are trying to tax, as opposed to the havens. 

Senator CASSIDY. Mr. Shay? 

Mr. SHAY. Can I take it back one step? I agree with everything 

that Dr. Clausing just said. But by the time we are talking about 

income shifting, we are talking about successful intangibles that 

have been moved—really paper shuffling by good tax lawyers to get 

profits to move. 

What we care about as a country is, where is the R&D conducted? R&D is a deduction. And so really, our ultimate focus is, 

we want the thinking, the knowledge economy to be in the United 

States. And for that, it is not just taxes or it is really not even 

taxes, it is education, starting from the primary, moving into secondary, going into higher education. 

My town and city of Boston and Cambridge lost a headquarters 

to Senator Portman’s State a number of years ago, Gillette, when 

P&G took them. We just got back General Electric, a large amount. 

We got General Electric. Some of it, of course, was incentives, but 

most of it was a knowledge economy that they valued, because they 

know they need to bring their businesses into the digital age. 

Moreover, we have a very significant R&D center for Novartis, 

the Swiss-based company. We have to keep our eye on the ball 

here. It is not just about taxes. We need to preserve our revenue 

so we can fund the education and infrastructure and other things 

that really allow our people to—— 

Senator CASSIDY. But then the paper shuffling can still occur. 

And once that R&D has developed the marketable license, it could 

then be moved overseas. 

Mr. SHAY. Under current law, and that can be substantially affected by the steps that Dr. Clausing was referring to. 

Senator CASSIDY. Mr. Grinberg? 

Mr. GRINBERG. You know, my view is that we need appropriate 

R&D incentives. We should have very, very strong R&D incentives. 

I have previously expressed concerns about a patent box, but I 

have made the point before—and it goes specifically to why Dr. 

Clausing is wrong—that both the BEPS project and the EU have 

blessed patent boxes. And that has made patent boxes less of a bad 

idea than they were before. And that was a decision of the Obama 

administration, so let us understand that. 

Nevertheless, what I think is, we should have appropriate R&D 

incentives that try to incentivize R&D. And if you have inbound 

rules that are appropriate, then there is less of an incentive to 

move to a jurisdiction with a patent box in the first place. 

Senator CASSIDY. Okay. I yield back. Thank you. 

Senator PORTMAN. I thank the witnesses for providing us some 

great input today. 

I am just going to end with a couple of questions that dig a little 

deeper into the outbound side. 

We have talked a lot about inbound. It is very important, and I 

appreciate the focus that all four of you have had on that issue. I 

43 

do think we have to have a level playing field. And as difficult as 

it is to find sometimes, I think we have gotten some good ideas 

here today. 

We all want this FDI to be here in the United States, because 

foreign direct investment creates jobs. But at the same time, we do 

not want to be disadvantaging U.S. companies, particularly by putting in place round-tripping rules and other things on the outbound 

side. 

The one thing I will say about intangible income leaving our 

country—which is more mobile, and that, to me, is the primary 

problem—is that Mr. Grinberg just mentioned patent boxes. Increasingly, our competitive countries in the OECD are saying, it is 

fine if you want to take advantage of our patent box, but you also 

have to move your R&D. 

So to Mr. Shay’s point, absolutely I agree we need a more competitive economy and a knowledge economy and trained employees 

who can handle it. But ultimately, if a company wants to take advantage of the lower rates from a patent box and they are told you 

can take advantage of it only if you include R&D work in that 

country, Ireland is an example, there is an incentive to move out 

of Boston or, in your Gillette case, Cincinnati. So I do think that 

has to be part of our focus here. 

I guess I would just ask you, on the outbound side, the balancing 

act is to prevent that base erosion, particularly intangible income 

going to a low-tax jurisdiction, but not making U.S. multinationals 

uncompetitive. So how do we strike that balance? 

Mr. Wells talked about 367(d) and how Treasury could do more 

with existing law. What do you all think about his idea? And what 

else can we do on the outbound side, particularly with regard to 

intangible income? 

I will start right in the middle with Mr. Shay, and then we will 

move out right and left. 

Mr. SHAY. The patent boxes that I have examined, and I have 

examined quite a few, they are very difficult to design; they are 

very difficult to limit. They end up being essentially rate reductions. So let us be clear that generally they are very poor so far, 

and I am not sure we have seen much effect of anything other than 

changing titles to patents. 

With respect to how we achieve the balance of competitive versus 

uncompetitive, I think today we have had a suggestion of an array 

of ideas, but I think it does come down to—we cannot just look at 

source taxation, we cannot just look at outbound taxation; we need 

to have both be robust and protect U.S. interests. And U.S. interests are a level playing field in the United States and discouraging 

the kind of massive income shifting that Dr. Clausing’s research 

has described. 

And I think if you go in the direction of territorial, if you do not 

have a robust minimum tax, then you are going to have an issue. 

The European Union minimum tax is only five people and a dog 

within the EU. They have a different standard with respect to nonEU countries. So we should really be—again, this comes down to 

details, and we need to be very careful in how we do it. 

Senator PORTMAN. Mr. Grinberg? 

44 

Mr. GRINBERG. So the most important thing we can do is lower 

the rate, lower the rate as sharply as possible. That is the bottom 

line. 

Senator PORTMAN. Lowering the rate helps, because if you have 

a 20-percent rate, you handle a lot of the potential tax avoidance 

problems. But still, there are jurisdictions well below that, some 

with as low as zero, others in the, you know, 10 to 15 range. 

Mr. GRINBERG. The other thing that I would hope we do is make 

it relatively easy in a transition to repatriate IP back into the 

United States so that, if you want to locate here, you can pretty 

easily. 

And then you want appropriate, strong R&D incentives to do 

work in the United States. And then, frankly, if the U.S. moves to 

a system that looks more like the rest of the world, then instead 

of the BEPS process harming us, it can begin to provide us some 

support, because it is getting harder to move IP, as you pointed 

out, to zero-rate jurisdictions where you do not do anything. 

And if there is an inbound tax, well, suddenly, you know, even 

if you go to the zero-rate jurisdiction, you are not going to pay 

nothing coming into the United States, so that is less of an attraction. You are not round-tripping, and you are not round-tripping 

successfully. 

And the same thing applies equally for foreign-based multinationals, so you are not concerned that you cannot do it, but your 

foreign competitors can, which is a big problem under current law 

that round-trippers rightly complain about. 

And so I think that you end up in a better place if you just lower 

the rate as much as you can, create strong R&D incentives, let people bring intellectual property back. That is my instinct. Do not 

create substance rules to force people to take jobs out. 

Senator PORTMAN. Mr. Wells? 

Mr. WELLS. Okay. I think I agree, and maybe all of us agree, 

lowering the rate is a wonderful idea that will help. 

I think that if you move to a territorial regime, which I think you 

should and you must, then what we are saying is that subpart F 

should not serve as an important backstop or it should not be expanded as a base-protection measure. 

As today’s hearing has said, many times we say we worry about 

earnings stripping. Well, the answer to that is not simply to apply 

a tax on only U.S. companies under subpart F. And what I hope 

has come out of this hearing is that, no, subpart F is not the answer to base erosion. 

And if we do go toward a territorial regime and we do not make 

a robust subpart F regime with it, then we really do need source 

taxation. We have to get busy about, how do we protect the U.S. 

tax base from interest stripping, royalty stripping, and related 

party payments generally? 

And I think if we do that, then I think that you can come up 

with a system that will be a level playing field. 

And again, I would just caution with this comment. Every time 

we seem to talk about protecting what is the rate of tax in the 

U.S., to the extent an inbound company can get a tax advantage, 

that puts them at a competitive advantage versus U.S. companies. 

45 

And we need a system that levels that playing field for competitiveness reasons. 

Senator PORTMAN. Dr. Clausing, I am going to ask you to at least 

base part of your answer on the possibility of a territorial system, 

because I think that is what we are talking about in general here. 

And not that I am not interested in your other comments, but if 

you could think about, if there were a territorial system, how would 

it work? 

Dr. CLAUSING. Absolutely. The first thing I would note is that 

lowering the tax rate is definitely not enough, and it is not going 

to get you there. If you look at the actual data on the profit-shifting 

problem, over 80 percent of the profit shifting for U.S. multinational firms is destined to seven havens. And those havens have 

effective tax rates that are typically 2 or 3 percent or sometimes 

less. So simply slashing the rate is not going to handle that baseerosion protection. 

So, assuming you go with a territorial system, I think the key 

is to do tough base-erosion protection measures, including a percountry minimum tax, which I think would be one of the more effective measures you could take. This should be coupled with offthe-shelf remedies to deal with the inversion problem, like a 50- 

percent ownership threshold, exit tax, earnings-stripping limits, 

and the like. 

You can also address the check-the-box regulations and work 

with some of our trading partners on the BEPS steps. Some of 

these steps are Band-Aids, but they are better than nothing at all. 

And focusing on the fundamentals of the economy, I think, is also 

a really important thing that I would come back to—paying for 

your tax cuts, funding education, funding infrastructure. 

Senator PORTMAN. Great. 

Well, listen, thank you all. I could stay here all morning and 

afternoon, but I am afraid you probably have better things to do. 

We have not even gotten into the repatriation and, you know, 

whether it should be bifurcated or not. Any thoughts on that are 

helpful—not today—but presenting those to the committee and the 

staff. Whether there should be differences, as the Camp draft had, 

with regard to subpart F is important. 

So, thank you for what you have done. 

I would just end by saying two things. One, there is an urgency 

here. And I know that people are saying we need more time, more 

time. We have spent, I think Mr. Grinberg said, 6 years—it seems 

more like 20 years—talking about this. And there have been, you 

know, dozens of hearings, broadly speaking, on tax reform. This is 

not something that has not had a lot of debate, not to say we 

should not have more—I am all for it. And I am really happy we 

are in the committee process here, because we need to have public 

debate. 

Infrastructure—our health care was not subject to that, and that 

was a mistake, in my view. I hope that infrastructure will have 

that kind of debate as an example. 

And then finally, I just want to say I think we need to be very 

careful when we talk about this notion that somehow this is tax 

cuts that will pay for themselves. That is not what Secretary 

Mnuchin said over the weekend. I saw his comments. What he said 

46 

was, there will be economic growth that will accompany good tax 

reform, the right kind of tax reform, which includes the business 

side, because our code is so out of date right now. 

There is an enormous opportunity to repatriate profits, but also 

to just allow American companies to be competitive and add more 

jobs here, and that will raise economic growth. And if you increase 

growth—I think it is about .4 percent over what the projections 

would otherwise be—I think that accounts for about the trillion 

and a half that is talked about. 

So it is not that tax cuts pay for themselves, it is that the right 

kinds of tax relief and, more importantly for me, reform will lead 

to better economic growth. And we should take that into account. 

And that is my view, anyway. 

For any of my colleagues who have written questions for the 

record, I ask that you submit them by close of business on October 

13th. 

And with that, again, thank you so much for your time today. 

And please continue to give us input. 

This hearing is adjourned. 

[Whereupon, at 12:27 p.m., the hearing was concluded.] 

(47) 

1PPP numbers adjust for price differences across countries. This makes the United States a 

smaller share of the world economy since price levels are lower in most developing countries. 

A P P E N D I X 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

PREPARED STATEMENT OF KIMBERLY A. CLAUSING, PH.D., THORMUND A. MILLER AND

WALTER MINTZ PROFESSOR OF ECONOMICS, REED COLLEGE

Chairman Hatch, Ranking Member Wyden, members of the committee, thank you 

for inviting me to share my views on the international aspects of business tax reform. Business tax reform is an important priority, and it should reflect the needs 

of our country. We need to raise revenue in a way that is simple, fair, and efficient. 

We can do this without resorting to increasing the budget deficit. And we can do 

this in a way that focuses on the needs of the American middle class. 

In my testimony today, I will discuss several crucial issues related to good business tax reform. First, I will discuss the concept of competitiveness, the contribution 

of our business tax system to the Nation’s competitiveness, and other important features of national competitiveness. Second, I will address the issue of corporate tax 

base erosion, an issue that has plagued our business tax system. Third, I will suggest important priorities in business tax reform, discussing how the corporate tax 

can be modernized to make our tax system better suited to a globally integrated 

economy. Toward this end, our tax system must serve the interests of American 

middle-class workers, workers too often left behind in tax reform proposals. 

ARE U.S. COMPANIES COMPETITIVE?

By any broad measure, our Nation’s businesses are incredibly successful. Corporate profits are a higher share of GDP than they have been at any time in history, 

whether one considers corporate profits in before-tax or after-tax terms. Over the 

past 10 years, after-tax profits have averaged 9.3% of GDP, whereas over the 40 

years before, they averaged 6.2% of GDP. In light of these clear facts, it is difficult 

to argue that our economy is being held back by a scarcity of after-tax profits. Indeed, our companies are awash in cash, but they are missing investment opportunities, due in part to the economic weakness of middle-class consumers. (See Figure 

1.) Also, our companies dominate the Forbes Global 2000 lists of the world’s most 

important companies. (See Figure 2.) While our economy is about one-fifth the size 

of the world economy (16% in purchasing power parity terms (PPP) 1 and 22% in 

U.S. dollar terms), we have larger fractions of the world’s top 2,000 firms: 28% by 

count, 33% by sales, 37% by profits (consolidated), 24% by assets, and 44% by market capitalization. 

48 

2The U.S. statutory rate is high relative to peer nations, but this is not the relevant measure 

of corporate tax burdens since most companies pay effective tax rates that are far lower than 

the statutory rate. See footnote 5 for evidence. 3 Under the U.S. system, some types of foreign income are more lightly taxed. For example, 

foreign tax credits can be used to shield royalty income from taxation. Also, other countries often 

have tougher base-erosion laws, and their adoption of the OECD/G20 BEPS guidelines will continue this trend. See Joint Committee on Taxation JCX–42–11. In addition to tough CFC laws, 

many territorial countries have other provisions aimed at countering corporate tax base erosion, 

including thin capitalization (earnings stripping) rules, which are widely used. Beyond these 

Is the U.S. Tax System Competitive? 

While our corporate tax system certainly has problems, high tax burdens for multinational corporations are not one of them. Due to the aggressive use of corporate 

loopholes, many U.S. multinationals have effective tax rates in the single digits, far 

lower than the U.S. statutory rate.2 And, our purportedly ‘‘worldwide’’ system of taxation generates no revenue from taxing foreign income, while our trading partners 

that use purportedly ‘‘territorial’’ systems of taxation frequently tax more foreign income than we do.3 Further, U.S. corporate tax revenues are lower than the corVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00052 Fmt 6601 Sfmt 6621 R:\DOCS\32785.000 TIM

10317.001 10317.002
49 

measures, there are also new anti-base erosion measures such as the European Union Anti-Tax 

Avoidance Directive and Australia’s anti-avoidance law. 4Much business income is earned by pass-through organizations; this is discussed below. Beyond that, the U.S. tax base is notoriously narrow and there are important distortions within 

the corporate tax code. For example, debt-financed investments are tax-favored relative to 

equity-financed investments. This increased leverage creates financial vulnerability for the U.S. 

economy. 5See Matthew Gardner, Robert S. McIntyre, and Richard Phillips, ‘‘The 35 Percent Corporate 

Tax Myth,’’ ITEP Report, March 2017. See also these studies on effective tax rates: Congressional Research Service: https://fas.org/sgp/crs/misc/R41743.pdf; General Accounting Office: 

https://www.gao.gov/products/GAO-16-363; Treasury: https://www.treasury.gov/resource-center/tax-policy/Documents/Report-Responsible-Business-Tax-Reform-2017.pdf; and the appendix 

of this academics letter: https://americansfortaxfairness.org/files/24-International-Tax-ExpertsLetter-to-Congress-9-25-15-FINAL-for-printing.pdf. 

porate tax revenues of our peer trading partners by about 1 percent of GDP. Part 

of the revenue shortfall is explained by profit shifting to tax havens, and there are 

also other reasons for weak U.S. corporate tax revenues.4 These considerations do 

not mean that U.S. business taxation cannot be substantially improved; I make suggestions below. 

Broader Notions of Competitiveness 

In discussions about the ‘‘competitiveness’’ of U.S. multinational firms, corporate 

interests often emphasize tax burdens as a determinative influence. Yet, for many 

companies, the U.S. statutory rate and our purportedly ‘‘worldwide’’ system have 

more bark than bite, and multinational firms are often able to achieve very low effective tax rates.5 In terms of the ability to generate after-tax profits and market 

dominance, U.S. multinational companies are already quite competitive. 

But broader notions of competitiveness emphasize the fundamentals that determine the health and well-being of our broader economy. Are workers well-educated, 

and do they have the skills required to earn high wages in the global economy? Are 

customers economically secure and sufficiently prosperous that they are not overleveraged? Are standards of living for the middle class rising at a pace that is consistent with societal expectations and a healthy middle class? Is our infrastructure 

sound? Are our political and economic institutions stable? Are we avoiding fragility 

in our financial system and other weak spots that could lead to recessions or crises? 

While we often take such things for granted, they are essential to the success of 

U.S. businesses and the workers within them. In short, the attractiveness of a particular country as a location for production depends on much more than the corporate tax environment. And many crucial ingredients for a competitive economy require government revenue to finance investments in education, infrastructure, and 


10317.003
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6See Kimberly A. Clausing, ‘‘The Effect of Profit Shifting on the Corporate Tax Base in the 

United States and Beyond,’’ 2016, National Tax Journal, December, 69(4), 905–934. Similar 

facts regarding the scale of the problem are reported by many sources, including Keightly 

(2013), Dowd, Landefeld, and Moore (2017), and Guvenen, Mataloni, Rassier, and Ruhl (2017). 

These practices also hurt our trading partners, as discussed in Clausing (2016). 7See Jane Gravelle, ‘‘Policy Options to Address Profit Shifting: Carrots or Sticks?’’, Tax Notes, 

July 4, 2016. 8For the full analysis behind Figures 4 and 5, see Kimberly Clausing, ‘‘The Effect of Profit 

Shifting on the Corporate Tax Base in the United States and Beyond,’’ 69 National Tax Journal 

905, 905–934 (2016). 

essential services. The investments in our economy that make the middle class prosperous will also make our businesses successful. 

CORPORATE TAX BASE PROTECTION

Offshore profit shifting has become a huge problem. My research suggests that 

this problem has increased dramatically over the past 20 years, and profit shifting 

to tax havens now costs the U.S. Government more than $100 billion each year.6

Figure 4 shows the dramatic increase in the revenue lost to profit shifting in recent years, and Figure 5 shows that most profit shifting is artificially directed toward tax havens. Indeed, the income booked in low-tax havens is implausibly high 

by any reasonable metric. In 2010, U.S. affiliate firm profits were many multiples 

of island havens’ entire GDP: over 16 times GDP in Bermuda and over 20 times 

GDP in the Caymans.7 Further, estimates indicate that U.S. multinational firms 

have accumulated over $2.6 trillion in permanently reinvested earnings in tax havens, over $1 trillion of which is held in cash. 

The tax havens that are destinations for profit shifting abroad have extremely low 

effective tax rates, often less than 5%. My research suggests that 82% of our profit 

shifting problem is with just 7 tax havens, the ones shown in Figure 5. And 98% 

of the profit shifting occurs with countries that have effective tax rates that are less 

than 15%. These facts clearly show that lowering the corporate tax rate is not 

enough to stem this type of tax avoidance. Absent tough measures to combat tax 

base erosion, haven tax rates under 5% will remain big magnets for internationally 

mobile income, even if the U.S. corporate tax rate declines substantially. 


10317.004
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9See Michael Cooper, et al., 2016, ‘‘Business in the United States: Who Owns It and How 

Much Tax Do They Pay?’’, Tax Policy and the Economy, 30(1), 91–128. 10See http://www.taxpolicycenter.org/sites/default/files/publication/141541/2001271-options 

-to-reduce-the-taxation-of-pass-through-income.pdf. 

More Base Erosion: The Problem of Favorable Pass-Through Taxation 

While multinational companies almost always operate in corporate form, in part 

due to the benefits of deferral of U.S. taxation on foreign income until income is repatriated, much domestic business activity has moved from corporate to passthrough form. Pass-through income is now over half of business income. For domestic companies, tax burdens are often far lower in pass-through form, and tax avoidance is a big problem. Pass-through businesses often feature opaque organizational 

forms that facilitate tax avoidance. The average Federal rate on pass-through income is 19%, a rate lower than the rate on corporate income, and the movement 

of business income into pass-through form has reduced corporate tax revenues by 

about $100 billion each year.9

Providing a tax preference for pass-through income risks more tax base erosion. 

Rates below the top personal rate will open up massive new opportunities for tax 

avoidance, as (typically high-income) individuals with discretion will be tempted to 

reorganize their income as business rather than personal income. This type of tax 

avoidance was endemic in Kansas after their experiment with lower pass-through 

rates, and in general, it is very difficult to combat without adding immense complexity to the tax system. While some small businesses are the sorts of endeavors 

that are easily romanticized in these types of committee hearings, pass-through organizational form is also popular among very wealthy individuals, including President Trump, who owns many pass-through businesses. According to estimates from 

the nonpartisan Tax Policy Center, an astonishing 85% of a pass-through tax cut 

would accrue to those in the top 1% of the income distribution.10

WHY IS IT IMPORTANT TO PROTECT THE CORPORATE TAX?

1. Revenue. As demonstrated in Figure 3, U.S. corporate tax revenues are lower 

than those of peer nations, due to both profit shifting and the importance of the 

pass-through sector. In the wake of record high corporate profits in recent years, 

the low, flat trend of our corporate tax revenues is particularly noticeable. Protecting the corporate tax base would help ensure adequate government revenues in 


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11See Kimberly Clausing, ‘‘Labor and Capital in the Global Economy,’’ Democracy: A Journal 

of Ideas, 43, 2017, http://democracyjournal.org/magazine/43/labor-and-capital-in-the-globaleconomy/. 12TPC Staff, ‘‘The Tax Reform Tradeoff: Eliminating Tax Expenditures, Reducing Rates,’’ September 13, 2017. Of course, ending deferral would enable further rate reduction; however, a 

move toward a territorial system is likely to worsen erosion. 13For JCT, see https://www.jct.gov/publications.html?func=startdown&id=4528. For CBO, see https://www.jct.gov/publications.html?func=startdown&id=4528. For Treasury, see https:// 

www.ntanet.org/NTJ/66/1/ntj-v66n01p239-62-distributing-corporate-income-tax.html. (This 

was previously available at https://www.treasury.gov/resource-center/tax-policy/tax-analysis/ 

Documents/TP-5.pdf, but it was mysteriously pulled from the Treasury website in recent 

weeks.) For the TPC, see http://www.taxpolicycenter.org/publications/how-tpc-distributes-corporate-income-tax. 

a time when the labor share of income is steadily shrinking.11 Revenues are particularly important to finance urgent priorities that are important for the competitiveness of our economy and the economic health of the middle class: priorities like infrastructure, education, and research and development. 

Business tax reform that is not (at least) revenue neutral increases the government budget deficit. The deficit is already scheduled to increase by about 2% of GDP 

over the next decade due to our aging population and our important commitments 

to Social Security and Medicare. Debt held by the public is now about 75% of GDP. 

Further increasing our indebtedness at this moment in time is unwise. When another recession occurs, and unfortunately recessions do always come, we will need 

room for the natural increases in budget deficits that occur as the economy collects 

less tax revenue and spends more on unemployment. Our current levels of indebtedness already provide little wiggle room. Also, monetary policy will have limited ability to respond to the next recession since interest rates are already quite low. This 

is a bad time for tax cuts. 

Deficit-financed tax cuts increase tax burdens on our children and grandchildren. 

Also, government budget deficits reduce any growth-enhancing effects of tax cuts, 

since they either raise interest costs (due to greater government borrowing) or they 

pull in foreign sources of financial capital, which have the advantage of keeping interest rates lower, but result in future repayments of debts abroad, lowering standards of living at home during that period. 

The nonpartisan Tax Policy Center has calculated that base broadening can only 

finance a limited revenue-neutral corporate rate reduction. Ignoring deferral, if you 

eliminate every single business tax expenditure (some of which are very popular), 

it only pays for a rate reduction to 26%, a far higher rate than those in the news 

lately.12

2. A Fair Tax System. Any proposed business tax plan follows several decades 

of dramatically increasing income inequality, sharply declining shares of GDP that 

go to labor, sharply increasing shares of GDP that go to corporate profits, and middle class wage stagnation. Tax policy should work to counter, not reinforce, such 

trends. 

Business taxation has an important role to play in the progressivity of the tax 

system. As already noted, 85% of pass-through tax rate cuts accrue to the top 1% 

of the income distribution. And, aside from the estate tax, the corporate tax is our 

most progressive tax. All conventional models of corporate tax incidence assign the 

vast majority of the burden of the corporate tax to capital or shareholders, including 

models used by the Joint Committee on Taxation, the Congressional Budget Office, 

the U.S. Treasury, and the nonpartisan Tax Policy Center.13 Given the strong advocacy by shareholders and the business community for corporate tax cuts, it should 

not be surprising that these groups are the ones who would benefit from the tax 

cuts. They understand their own economic interests. 

Those concerned about the well-being of workers might usefully advocate for tax 

cuts on taxes that workers pay: economists agree that workers bear the burden of 

the payroll tax and the labor income tax. For corporate tax cuts to benefit workers, 

the resulting increase in corporate after-tax profits needs to fuel new investments, 

those new investments need to increase the productivity of labor, and the higher 

productivity needs to boost wages. Why rely on such indirect mechanisms to help 

workers when we have far more direct tools? If the aim is to help workers, then 

policymakers should go straight to the taxes that fall on them. 

Further, much of the U.S. corporate tax base at present is excess profits, which 

are profits above the normal level accruing due to intangible sources of economic 

53 

14See http://www.ntanet.org/NTJ/69/4/ntj-v69n04p831-846-excess-corporate-returns-increasing.pdf for evidence on excess profits. 15Leonard Burman, Kimberly Clausing, and Lydia Austin, ‘‘Is U.S. Corporate Income DoubleTaxed?’’, National Tax Journal, September 2017. 16 As examples, see Peter Diamond and Emmanuel Saez, 2011, ‘‘The Case for a Progressive 

Tax: From Basic Research to Policy Recommendations,’’ Journal of Economic Perspectives 25: 

165–90; Emmanuel Farhi, Christopher Sleet, Ivan Werning, and Sevin Yeltekin, 2012, ‘‘NonLinear Capital Taxation Without Commitment,’’ Review of Economic Studies forthcoming: 1–25; 

Thomas Piketty and Emmanuel Saez, 2012, ‘‘A Theory of Optimal Capital Taxation,’’ National 

Bureau of Economic Research Working Paper No. 17989, April; Thomas Piketty and Emmanuel 

Saez, 2013, ‘‘A Theory of Optimal Inheritance Taxation,’’ Econometrica 81 (5): 1851–86. 17Leslie Robinson, 2014, testimony of Leslie Robinson before the United States Senate Committee on Finance, presented at the hearing on international corporate taxation, Washington, 

DC, July 22; Jane G. Gravelle, 2012, ‘‘Moving to a Territorial Income Tax: Options and Challenges,’’ Washington DC: Congressional Research Service. 

value and market power. U.S. Treasury economists now calculate that three quarters of the corporate tax base is excess profits, often in the hands of very few superstar companies.14 Giving a tax cut to this part of the tax base just makes excess 

profits even larger, without stimulating capital investment or wages. 

Finally, if burgeoning corporate after-tax profits were the key to investment and 

wage growth, then the previous 15 years should have already been a paradise of 

wage growth, as after-tax profits in recent years have been about 50 percent higher 

than in decades prior (as a share of GDP), and higher than at any point in the past 

half-century. 

I would urge the committee to focus on the distribution tables when designing tax 

law changes, relying on the well-regarded, nonpartisan economists at the Joint 

Committee on Taxation and the Congressional Budget Office to estimate the effects 

of tax and budget changes. The ultimate test of whether tax legislation will help 

American workers is the distribution analyses. In these analyses, it is important to 

consider the tax system as a whole: business taxes, individual income taxes, and estate taxes should all be considered together. 

3. An Efficient Tax System. Taxing corporate income helps make the tax system function better. Without the corporate tax, individuals could use the corporate 

form itself as a tax shelter. The corporate tax is also our only effective tool for taxing capital income. In my recent research with Leonard Burman and Lydia Austin 

of the Tax Policy Center, we show that only about 30% of U.S. equity income is 

taxed at the individual level by the U.S. Government; the rest is earned in tax free 

accounts, in non-taxable endowments, or by foreign investors.15

Taxing all types of income at the same rate of taxation is a good ideal for tax 

policy. After the last great tax reform (that emerged from this very body) in 1986, 

both capital and labor income were taxed at the same rate. This sort of uniformity 

is consistent with the latest research on the ideal efficient tax policy design.16 Taxing different types of income at the same rate also cuts down on the many gimmicks 

and shenanigans that litter our tax system when tax rates differ. 

Finally, since the vast majority of the corporate tax base is excess profits, this also 

has efficiency implications. Taxing excess profits does not distort capital investment 

or hiring decisions, and excess profit taxes are far more efficient than taxes that 

target capital or labor. 

IMPLICATIONS FOR BUSINESS TAX REFORM

1. First, Do No Harm: A Toothless Territorial System Heads in the Wrong Direction 

Many in the multinational community use the notion of ‘‘competitiveness’’ to suggest that that the United States should adopt a territorial system of taxation. Yet, 

as noted above, multinational firms already face low effective tax rates that are 

comparable to those of firms headquartered in other countries, and very little tax 

is presently collected on foreign income. Indeed, a well-designed territorial system 

could easily raise the tax burden on foreign income, as noted by many observers.17

So, presumably, those that push for adoption of a territorial system under the 

guise of competitiveness concerns truly have in mind a ‘‘toothless territorial’’ system 

that would lower the tax burden on foreign income. A toothless territorial system, 

without serious and effective base erosion protection measures, risks worsening an 

already large corporate tax base erosion problem. Exempting foreign income from 

taxation would relax the remaining constraint on shifting income abroad, the potential tax due upon repatriation. This turbocharges the already large incentive to book 

profits in low-tax havens, likely generating large revenue losses. 

54 

18See Jane G. Gravelle and Donald J. Marples, 2011, ‘‘Tax Cuts on Repatriation Earnings as 

Economic Stimulus: An Economic Analysis,’’ R40178, Congressional Research Service. This 

paper provides an extensive review of several papers, all of which show no jobs or investment 

stimulus resulting from the repatriation tax holiday. 19One proposal for worldwide consolidation is within Kleinbard’s proposal for a Dual BEIT: 

Edward D. Kleinbard, ‘‘Business Taxes Reinvented: A Term Sheet’’ (September 25, 2017), Tax 

Notes, Vol. 156, 2017. Another fundamental reform worthy of long-run consideration is formulary apportionment. See Reuven S. Avi-Yonah and Kimberly A. Clausing, 2008, ‘‘Reforming 

Corporate Taxation in a Global Economy: A Proposal to Adopt Formulary Apportionment.’’ 

2. Cutting Business Rates Below Personal Tax Rates Risks More Tax Base Erosion 

Discrepancies between the top personal rate and the business rate will create new 

avoidance opportunities as wealthy individuals seek to earn their income in taxpreferred ways, reducing their labor compensation in favor of business income. Companies would be inclined to tilt executive compensation toward stock-options and 

away from salary income, and high-income earners would be inclined to earn income 

through their businesses in pass-through form. Thus, serious tax revenue leakage 

in the personal income tax system is also likely. 

3. Much Ado About Repatriation . . . Why Give Windfalls for Income Already 

Earned? 

U.S. multinational companies have accumulated over $2.6 trillion in offshore profits, sitting in countries with very low effective tax rates, typically less than 5%. 

Companies are able to borrow against these funds, and even invest these funds in 

U.S. financial markets, but they are not able to distribute the funds to shareholders 

in the form of dividends and share repurchases without triggering U.S. tax on the 

repatriated funds. As a consequence, companies have left funds piling up offshore, 

in the hope that Congress will give them a special holiday rate again (as in the 2004 

American Jobs Creation Act), or even enact permanently favorable treatment of foreign income. 

Company decisions about when to pay dividends and repurchase shares are distorted by these tax incentives. However, it is unlikely that repatriation tax is reducing U.S. investment. The companies that have accumulated these earnings abroad 

are the most credit-worthy companies on the planet, and they can easily borrow to 

finance worthy new investments in the United States. In fact, borrowing achieves 

the equivalent of a tax-free repatriation, since the funds abroad accumulate interest 

income that offsets the interest deduction on funds borrowed at home, giving companies the same access to financial capital at no tax cost. 

Despite the hopeful title of the legislation, the 2004 American Jobs Creation Act’s 

repatriation tax holiday did not create jobs or spur investment.18 Instead, it was effectively a tax windfall to shareholders based on companies’ past tax avoidance. The 

only effect was a substantial increase in share repurchases and dividend issues. 

Further, preferential rates on income that has already been earned and that is 

stashed in tax havens makes no economic sense from either an efficiency or equity 

perspective. Giving shareholders a tax windfall on income they have already earned 

does not encourage job creation or investment. Instead, it merely enriches those at 

the very top of the income distribution. We have far more effective tools to encourage new investment, job creation, and the prosperity of the middle class. 

4. Tackling Base Erosion 

Congress should focus on a revenue-neutral (or revenue-increasing) business tax 

reform that reduces the statutory corporate tax rate and eliminates the major corporate tax expenditures including deferral, taxing accumulated offshore earnings in 

full. Eliminating deferral would eliminate the incentive to earn income in low-tax 

countries, by treating foreign and domestic income alike for tax purposes. Pairing 

that reform with a lower corporate tax rate need not raise tax burdens on average, 

although it would create winners and losers among corporate taxpayers. A more 

fundamental reform would require worldwide corporate tax consolidation; this would 

align the tax system with the reality of globally-integrated corporations.19 These reforms should be combined with anti-inversion measures such as better earnings 

stripping rules and an exit tax. 

Taxing foreign income currently also eliminates the incentive to build up large 

stocks of unrepatriated foreign income, now estimated at $2.6 trillion. Settling the 

future tax treatment of foreign income should be a key goal of reform efforts. 

In terms of more incremental reforms, even a per-country minimum tax would be 

a big step toward reducing profit shifting toward tax havens and protecting the corVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00058 Fmt 6601 Sfmt 6621 R:\DOCS\32785.000 TIM
55 

20See Kimberly Clausing, ‘‘The Effect of Profit Shifting on the Corporate Tax Base in the 

United States and Beyond,’’ 69 National Tax Journal 905, 905–934 (2016). 21See Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, ‘‘Distributional National Accounts: Methods and Estimates for the United States,’’ December 2016. 

porate tax base. A minimum tax would currently tax income earned in the lowest 

tax countries. Ninety-eight percent of the profit shifting out of the United States is 

destined for countries with foreign tax rates below 15%.20 However, a ‘‘global’’ minimum tax is a far less effective step. Since companies could use taxes paid in highertax countries to shield income booked in tax havens from the minimum tax, there 

would still be a very substantial incentive to earn income in tax havens. The playing 

field would be more tilted toward both haven income and other types of foreign income; the two streams of income would work together to reduce tax burdens. 

In general, making our tax system compatible with the global economy is an important goal. We need a simplified corporate tax system that actually collects the 

tax that is due. As it is, too many people waste their careers pursuing tax-related 

gimmicks and shenanigans. Profit shifting costs the U.S. Government over $100 billion each year. Simple reforms like a per-country minimum tax—or better yet, ending deferral—would address that problem and make our corporate tax system more 

compatible with the global operations of multinational firms. 

5. Paying Attention to the Middle Class 

The truth is in the distribution tables. Any tax law changes should not worsen 

income inequality. The tax plans of this committee follow decades of dramatically 

increasing income inequality, sharply declining shares of GDP that go to labor, 

sharply increasing shares of GDP that go to corporate profits, and middle class wage 

stagnation. Our tax policy should be working to counter these trends, making sure 

that all American workers benefit from the gains in national income that steadily 

increase our GDP. 

In earlier decades, the middle class did better. Figure 6 shows that pre-tax income 

growth over the period 1946 to 1980 exceeded 100% for the bottom 90% of the population, and income growth was actually lower for the top shares of the population. 

However, between 1980 and 2014, the growth of the bottom 50% is literally invisible 

in the chart, at 1%. Growth in incomes for the middle 40% is 42 percent, and it 

accelerates from there. As a result, there has been an increasing concentration of 

national income at the top of the income distribution. The top 1% now have a fifth 

of national income, 50% more income than the bottom half of the income distribution. (See Figure 7.) 


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56 

22See Raj Chetty et al., ‘‘The Fading American Dream: Trends in Absolute Income Mobility 

Since 1940,’’ NBER Working Paper No. 22910, December 2016. 23This tax rate is lower than many estimates of the tax rate that would truly cause market 

participants to find the ideal level of carbon dioxide emissions, but it would be a sizable step 

in the right direction, and the tax rate could be increased over time. Arguably, the rate should 

be about twice as high, eventually. 

These figures help explain why typical American households are not content with 

the pace of economic progress. The standard expectation that every generation 

would be better off than the prior generation has been disappointed. Nearly 90% of 

children born in the 1940s out-earned their parents, but that share has fallen steadily. For children born in 1970, only 60% out-earn their parents; for those born in 

the 1980s, only half do.22

Our tax system needs to reflect these changing realities by making sure that tax 

cuts are directed to those that are not in the top 1%, focusing instead on the bottom 

80% of the population that has been frustrated by our prior record of economic 

progress. The tax system can better serve American workers by expanding the 

earned income tax credit, by providing wage insurance for workers who have lost 

their job due to technological disruption or due to competitive pressures, and by 

making sure that tax cuts are larger for the middle class than for the rich. We also 

need to work to solidify the economic fundamentals of our economy. This requires 

responsible tax legislation that gives us the revenue we need for vital investments 

in education, infrastructure, healthcare, and other urgent priorities. 

6. Fund the IRS; They Need More Resources to Do Their Job 

In order to administer the tax system in a way that is fair to taxpayers and that 

meets the needs of the country, the IRS needs adequate resources and technology. 

7. Finally, a New Revenue Source Can Make Tax Policy Trade-Offs Less Vexing 

Whatever happens with tax policy in the months and years ahead, we will likely 

aim for more ideal tax policy in the future. To do this, we’ll need a planet that is 

fit for habitation. Climate change is a real and pressing problem, but it is also an 

opportunity for efficient taxation. Normally, taxes burden things we actually want 

to encourage, like work or savings. But carbon dioxide emissions are wreaking havoc 

on the world’s climate, and a tax on carbon is an ideal way to counter them, without 

resorting to burdensome regulations. A carbon tax raises a lot of revenue; a tax of 

$25/per metric ton is estimated by the Congressional Budget Office to generate 

about a trillion dollars in revenue over 10 years.23 And, unlike most sources of revenue, a carbon tax makes the economy more efficient by discouraging something 

that the market, left to its own devices, over-produces. 

A carbon tax can help keep other tax rates lower than would otherwise be necessary. Several very prominent Republican economists have recently suggested a 


10317.007
57 

24See Martin Feldstein, Ted Halstein, and Greg Mankiw, ‘‘A Conservative Case for Climate 

Action,’’ New York Times, February 8, 2017, https://nyti.ms/2kMKE4u. 25See https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/WP-115. 

pdf. 1For instance, Philip Bazel and Jack Mintz find that the United States has a marginal effective tax rate on corporate investment that is more than 15 percentage points higher than the 

OECD average and represents the 3rd-highest marginal effective tax rate in the OECD, after 

only France and Japan. Philip Bazel and Jack Mintz, ‘‘2015 Tax-Competitiveness Report: Canada is Losing its Attractiveness,’’ 9:37 SPP Research Papers (Nov. 2016), https://www. 

policyschool.ca/wp-content/uploads/2016/12/Tax-Competitiveness-Bazel-Mintz.pdf. 

novel way to tax carbon in their ‘‘Conservative Case for Climate Action.’’ 24 They 

propose simply refunding the carbon tax to ordinary Americans in equal amounts. 

This is a masterful policy that will help workers in the bottom 70% of the income 

distribution (since they will receive more from the rebate than they pay in tax).25

The large revenue source keeps overall tax burdens much lighter for those Americans who have struggled the most in recent decades. It will lead to new investments 

and new jobs in cleaner technologies and a healthier planet. A very good idea indeed. 

Thank you again for inviting me to testify today. I look forward to your questions. 

Further Reading 

This testimony draws on several other works by the author, including those 

below. In some cases, sections of text are excerpted. Interested readers are referred 

to the following articles by the author for more detail on these arguments. 

• ‘‘Strengthening the Indispensible U.S. Corporate Tax,’’ Washington Center for 

Equitable Growth, August 2016, http://equitablegrowth.org/report/strengthening-the-indispensable-u-s-corporate-tax/. 

• ‘‘The Effect of Profit Shifting on the Corporate Tax Base in the United States 

and Beyond,’’ 2016, National Tax Journal, December, 69(4), 905–934, https:// 

papers.ssrn.com/sol3/papers.cfm?abstract_id=2685442. 

• ‘‘Competitiveness, Tax Base Erosion, and the Essential Dilemma of Corporate 

Tax Reform,’’ 2016, (6) BYU Law Review, 1649–1680, http://digital 

commons.law.byu.edu/cgi/viewcontent.cgi?article=3075&context=lawreview. 

• ‘‘Labor and Capital in the Global Economy,’’ Democracy: A Journal of Ideas, 43, 

2017, http://democracyjournal.org/magazine/43/labor-and-capital-in-the-global-economy/. 

• ‘‘Is U.S. Corporate Income Double-Taxed?’’ (with Leonard Burman and Lydia 

Austin), September 2017, National Tax Journal, 70(3), 675–706. 

PREPARED STATEMENT OF ITAI GRINBERG, PROFESSOR OF LAW, 

GEORGETOWN UNIVERSITY LAW CENTER

Chairman Hatch, Ranking Member Wyden, and members of the committee, it is 

an honor to participate in these hearings on international tax reform. I am a professor of law at the Georgetown University Law Center. I served in the Office of 

International Tax Counsel in both the George W. Bush and Obama administrations. 

Before joining the Treasury Department I practiced international tax law at 

Skadden Arps in Washington, and in 2005 I served as counsel to the bipartisan 

President’s Advisory Panel on Federal Tax Reform. 

The interconnectedness of today’s global economy and the mobility of capital, intellectual property, and high-skilled labor make all attempts to impose high income 

tax rates on multinational corporations (MNCs) counterproductive. The global market for corporate control combined with the home-country bias for high-quality headquarters and R&D jobs means that lagging in this area will be increasingly costly 

in terms of employment and opportunity, especially for younger generations of 

Americans. 

Our singularly high corporate tax rate and worldwide system are severely out of 

line with international norms. The United States’ statutory corporate income tax 

rate is the highest in the Organisation for Economic Cooperation and Development 

(OECD), and our effective corporate tax rate is also high.1 Every other G7 country 

and 29 of the other 34 OECD member countries allow their resident companies to 

repatriate active foreign business income to their home country without paying a 

significant additional domestic tax. This system of taxation is usually referred to as 

‘‘dividend exemption’’ or a ‘‘territorial tax system.’’ 

58 

2See ‘‘U.S. Tax Code: Love It, Leave It, or Reform It,’’ hearing before the Senate Committee 

on Finance, 113th Congress 2 (2014) (statement of Peter R. Merrill, Director of the National 

Economics and Statistics Group at PricewaterhouseCoopers LLP), https://www.finance.senate. 

gov/download/merrill. 3 Indeed, at the committee’s July 2017 hearing, John Talisman, who served as Assistant Secretary of the Treasury for Tax Policy in the Clinton administration, pointed out that he had 

testified at a hearing in front of the committee in 2011 entitled ‘‘How Did We Get Here?’’ and 

joked that he wondered why the July 2017 hearing wasn’t titled ‘‘Why Are We Still Here?’’, 

‘‘Comprehensive Tax Reform: Prospects and Challenges,’’ hearing before the Senate Committee 

on Finance, 115th Congress 1 (2017) (statement of John Talisman). Those of us who have been 

following these matters for years appreciated the humor, but I feel confident the country would 

appreciate the benefits of corporate tax reform a great deal more. 4See, e.g., ‘‘Comprehensive Tax Reform: Prospects and Challenges,’’ hearing before the Senate 

Committee on Finance, 115th Congress (2017) (statement of Pamela F. Olson), https:// 

www.finance.senate.gov/imo/media/doc/30827.pdf; ‘‘The U.S. Tax Code: Love It, Leave It, or 

Reform It,’’ hearing before the Senate Committee on Finance, 113th Congress 9 (2014) (statement of Mihir A. Desai); ‘‘Navigating Business Tax Reform,’’ hearing before the Senate Committee on Finance, 114th Congress 11 (2016) (statement of James Hines). 5 Julie A. Roin, ‘‘Inversions, Related Party Expenditures, and Source Taxation: Changing the 

Paradigm for the Taxation of Foreign and Foreign-Owned Businesses,’’ 2016 BYU Law Review 

1837, 1852 (Apr. 2017); see also Daniel N. Shaviro, ‘‘Fixing U.S. International Taxation’’ (2014). 6 Indeed, corporations have also become increasingly ‘‘decentered’’ in recent years, such that 

corporate tax residence need not necessarily dictate the location of business functions. Mihir 

There is now a widespread consensus that the United States needs to reform its 

aberrant worldwide corporate tax system and that such reform should involve lowering the tax rate and adopting a territorial tax system. Other countries have been 

taking these steps for years, while also increasing their reliance on consumption 

taxes and decreasing their reliance on corporate income taxes. Indeed, since the 

1986 Act, other OECD countries have reduced their collective average corporate tax 

rate by more than 19 percentage points.2

The committee has examined these issues since at least 2010, and many hearings 

have focused on these matters.3 Substantially reducing the corporate income tax 

rate and moving to a territorial system are important steps the United States 

should take. But these steps are not enough. 

Rather than restate the rationale for lowering the corporate rate and moving to 

a territorial system, which has been eloquently explained by many witnesses at earlier committee hearings over the course of this decade,4 my testimony will focus on 

one significant issue within international tax reform that has received much less attention in prior hearings and from U.S. policymakers generally. The issue involves 

rectifying the relative advantages that U.S. law gives to foreign MNCs investing in 

the United States that make foreign status more attractive than U.S. status. 

The current U.S. international tax regime makes foreign ownership of almost any 

asset or business more attractive than U.S. ownership from a tax perspective, thereby creating tax-driven incentives for foreign takeovers of U.S. firms and foreign acquisition of business units previously owned by U.S. MNCs. It also creates substantial financial pressures that encourage U.S. MNCs to ‘‘invert’’ (move their headquarters abroad), produce abroad for the U.S. market, and shift business income to 

low-tax jurisdictions abroad. Finally, given a global business environment in which 

corporate tax residence is increasingly elective, new firms have significant incentives to incorporate their parent firm outside the United States at the moment of 

formation. The worldwide system and high rate that creates these tax incentives is 

not in America’s interest. 

As is the case with our worldwide system and high rate, in failing to address the 

taxation of foreign direct investment into the United States (known as ‘‘inbound taxation’’), the United States is a global outlier. In the rest of the world, governments 

have been focusing their policy efforts in the last decade almost exclusively on inbound taxpayers that minimize their income in local jurisdictions. Especially given 

this global reality, U.S. corporate tax reform must also focus on how the U.S. tax 

system disfavors U.S. MNCs relative to the treatment of inbound taxpayers. 

In the past, the tax disadvantages of U.S. status were balanced against the nontax advantages of being a U.S.-resident firm. However, foreign firms are increasingly able to replicate the non-tax benefits of being a U.S. tax-resident MNC. The 

globalization of securities markets has made it relatively easy to raise funds in foreign capital markets and to access U.S. capital markets as a foreign firm. The 

globalization of best practices in corporate governance has made U.S. corporate governance rules less of a factor in firm valuations.5 As a result, the tax disadvantage 

increasingly outweighs the non-tax advantages of U.S. residency.6 In our globalized 

59 

Desai, ‘‘The Decentering of the Global Firm,’’ 32 World Economics (Special Issue) 1271 (Sept. 

2009). However, as discussed below, the BEPS project put a premium on shifting management 

and research and development jobs to the locations where an MNC wishes to be taxed. 7See, e.g., Eric Solomon, ‘‘Corporate Inversions: A Symptom of Larger Tax System Problems,’’ 

67 Tax Notes 1203 (Sept. 24, 2012). 8Sarah P. Scott, ‘‘Activities of U.S. Multinational Enterprises in the United States: Preliminary Results From the 2014 Benchmark Survey,’’ 96:12 Survey of Current Business, Dec. 2016, 

https://www.bea.gov/scb/pdf/2016/12%20December/1216_activities_of_us_multinational_enter 

prises.pdf. 9Sarah Stutzman, ‘‘Activities of U.S. Affiliates of Foreign Multinational Enterprises in 2015,’’ 

97:8 Survey of Current Business, Aug. 2017, https://www.bea.gov/scb/pdf/2017/08-August/ 

0817-activities-of-us-affiliates-of-foreign-multinational-enterprises.pdf. 10Moreover, both U.S. and foreign multinationals purchase trillions of dollars of intermediate 

inputs each year from other U.S. companies, helping sustain other private-sector employment 

in America. Kevin B. Barefoot, ‘‘U.S. Multinational Companies: Operations of U.S. Parents and 

Their Foreign Affiliates in 2010,’’ 92:11 Survey of Current Business 51, 52, Nov. 2012, https:// 

www.bea.gov/scb/pdf/2012/11%20November/1112MNCs.pdf. 11 Barefoot, supra note 10, at 54. 12Mihir Desai, C. Fritz Foley, and James R. Hines, Jr., ‘‘Domestic Effects of the Foreign Activities of U.S. Multinationals,’’ American Economic Journal: Economic Policy, no. 1 (Feb. 2009). 13 U.S. Senate Committee on Finance, ‘‘The International Tax Bipartisan Tax Working Group 

Report’’ (2015), https://www.finance.senate.gov/imo/media/doc/The%20International%20Tax% 

20Bipartisan%20Tax%20Working%20Group%20Report.pdf. 

economy, the result over time is a long-term trend towards foreign-resident MNCs 

and away from U.S.-resident MNCs. The inversion phenomenon is just one symptom 

of that trend.7 Since 2000, the number of U.S.-resident MNCs among the 500 largest public companies in the world as measured by Forbes has declined by over 25%, 

from 202 in 2000 to 147 in 2016. 

THE ROLE OF U.S. AND FOREIGN MNCS IN THE U.S. ECONOMY

Globally engaged MNCs, whether they be U.S. or foreign-parented firms, provide 

jobs for a large part of the American work force and higher wage employment than 

other parts of the American private sector. U.S.-headquartered MNCs employ 26.6 

million workers in the United States.8 Majority-owned U.S. affiliates of foreign 

MNCs employ another 6.8 million workers in the United States.9 Together U.S. and 

foreign-headquartered MNCs represent more than 25% of total private sector payroll employment in the United States.10 Total compensation per American worker 

employed by both U.S. and foreign-headquartered MNCs averages about one-third 

more than the rest of the U.S. private sector. 

There are various explanations for why MNCs generally offer better wages and 

jobs than most purely domestic firms. For instance, multinationals may require a 

higher-skilled labor force because of the technological requirements and competitive 

need to produce higher quality goods associated with competing globally. Given that 

MNCs require a higher-quality product, they may pay efficiency wages—as higher 

quality products require higher quality workers, MNCs pay more to induce more effort from workers. 

U.S. MNCs, however, are more closely tied to the United States than their foreign 

competitors. The domestic affiliates of U.S. MNCs perform 84.3% of the worldwide 

research and development undertaken by U.S. MNCs.11 These domestic affiliates 

also represented more than two-thirds of worldwide U.S. MNC employment. 

THE IMPORTANCE OF ENCOURAGING MNCS TO REMAIN AMERICAN

In order to maximize the opportunity for well-paid employment for future generations of Americans, we need to ensure that multinationals can be U.S.- 

headquartered and still compete effectively with their foreign MNC competitors. Expansion abroad by affiliates of U.S. multinationals tends to support their U.S.- 

parent jobs. Economic research shows that more affiliate investment and employment is generally associated with more investment and employment back in U.S. 

parents. For instance, Mihir Desai and James Hines find based on 1982–2004 U.S. 

Bureau of Economic Analysis data that on average, a 10% increase in foreign subsidiary sales is associated with a 6.5% increase in U.S. exports.12 They also find 

that a 10% expansion of foreign employment by U.S. MNCs is associated with a 3.7 

percent expansion of domestic employment by the same firms at the same time. As 

the Senate Finance Committee’s bipartisan international tax working group report 

highlighted, the data suggests that for each dollar of additional wages paid in U.S. 

foreign affiliates, U.S. wages increase by $1.84.13 Relying on still other studies, Greg 

60 

14 N. Gregory Mankiw and Phillip Swagel, ‘‘The Politics and Economics of Offshore Outsourcing’’ (National Bureau of Economic Research, Working Paper No. 12398, 2006). 15 It is clear that policymakers in other major developed economies have this intuition. As 

with some other economic issues, U.S. data in this regard is often more robust than foreign data. 

Study of Japanese MNCs similarly shows that Japanese outbound investment is correlated with 

increased Japanese domestic employment. Mitsuyo Ando and Fukunari Kimura, ‘‘International 

Production/Distribution Networks and Domestic Operations in Terms of Employment and Corporate Organization: Microdata Analysis of Japanese Firms,’’ REITI Discussion Paper Series 07– 

E–063 (2007). 16 Nirupama Rao, ‘‘Corporate Inversions and Economic Performance,’’ 68 National Tax Journal 

1073 (2015). As Rao’s paper highlights, the changes in hiring and investment resulting from inversion are not attributable to the onetime effects on the data due to the inclusion of the foreign 

acquiring firm’s existing workforce and investments. Rather, foreign shares of employment and 

investment are systematically higher two and more years after inversion, relative to the first 

year after inversion. 17 Bureau of Economic Analysis, U.S. Department of Commerce, 17–35, ‘‘BEA Expenditures by 

Foreign Direct Investors for New Investment in the United States,’’ 2014–2016 (2017), https:// 

www.bea.gov/newsreleases/international/fdi/fdinewsrelease.htm. 

Mankiw and Phillip Swagel conclude that for U.S. MNCs, ‘‘success overseas leads 

to job gains in the United States.’’ 14

No study reaches the same conclusion about foreign expansion by foreign MNCs. 

Indeed, the results of the studies described above regarding the effects of U.S. MNC 

growth abroad would suggest that when foreign companies expand outside the 

United States, related headquarters investment and employment would tend to accrue in their home country.15 Importantly—this turns out to be the case even with 

formerly U.S.-tax resident corporations that have substantial presence in the United 

States but change their country of tax residency. Nirupama Rao has shown that 

former U.S. MNCs that undertake inversions subsequently develop higher shares of 

their employees and capital expenditures abroad after inversion, relative to similar 

firms that remain U.S. tax resident.16 In effect, the data suggests that a tax-motivated inversion may subsequently create other incentives to offshore more jobs, just 

like being a historically foreign-headquartered MNC exerts a kind of gravitational 

force that keeps a higher percentage of the best jobs in the firm outside the United 

States. 

GREENFIELD AND BROWNFIELD FOREIGN DIRECT INVESTMENT

Foreign investment into the United States is broadly categorized into two buckets 

by the U.S. Department of Commerce: the establishment of new U.S. businesses or 

the expansion of existing U.S. businesses (referred to as ‘‘greenfield investment’’), 

and the acquisition of existing U.S. businesses (‘‘brownfield investment’’). Greenfield 

investment in the United States by foreign firms should unquestionably be welcomed by the United States. When a foreign MNC purchases a business unit from 

a U.S. MNC, or acquires a U.S. MNC, for the reason that the foreign MNC can use 

that business more productively, and therefore generate higher levels of output and 

employment from that business, we should also welcome that inbound investment. 

Importantly, however, the data suggests that the vast majority of inbound foreign 

direct investment represents the transfer of ownership of businesses rather than 

greenfield investment. In 2016, expenditures by foreign direct investors made to acquire U.S. firms totaled $365.7 billion, whereas expenditures by foreign direct investors to establish new U.S. businesses totaled $5.6 billion and expenditures to expand 

existing foreign-owned U.S. businesses totaled $2.2 billion.17 In other words, less 

than 3% of 2016 foreign direct investments were greenfield investments. The Department of Commerce Bureau of Economic Analysis data for earlier years in this 

century also shows that the vast majority of foreign direct investment consists of 

acquisitions of existing U.S. businesses rather than the establishment of new U.S. 

businesses or the expansion of existing U.S. businesses. 

What drives foreign direct investor acquisitions is that the domestic business 

being acquired has greater financial value to a foreign firm than it does to the prior 

domestic owner. When that higher value is based on the ability of the foreign direct 

investor to make the domestic business more productive, the acquisition is likely to 

support American employment. In other cases, though—as shown in Senator 

Portman’s Permanent Subcommittee on Investigations study entitled ‘‘Impact of the 

U.S. Tax Code on the Market for Corporate Control and Jobs,’’ ‘‘foreign acquirers 

that hail from more favorable tax jurisdictions are able to create value simply by 

61 

18 ‘‘Impact of the U.S. Tax Code on the Market for Corporate Control and Jobs,’’ Permanent 

Subcommittee on Investigations, Senate Committee on Homeland Security and Governmental 

Affairs, 114th Congress 2 (2015) (Majority Staff Report). 19 As Mihir Desai and James Hines have persuasively shown, ‘‘if the productivity of capital 

depends on the identities of its owners (and there is considerable reason to think that it does), 

then the efficient allocation of capital is one that maximizes output given the stocks of capital 

in each country. It follows that tax systems promote efficiency if they encourage the most productive ownership of assets within the set of feasible investors.’’ Mihir Desai and James R. 

Hines, Jr., ‘‘Evaluating International Tax Reform,’’ 56 National Tax Journal 487, 494 (2003). 20 A recent article by Julie Roin addresses the technical questions associated with this problem in depth, and I recommend it to the committee. Roin, supra note 5. 21Other deductible payment streams, including rents, premiums, and management service 

fees made from foreign-controlled domestic affiliates to foreign affiliates can also be used by foreign MNCs to strip the U.S. tax base. 

restructuring the affairs of the U.S. target companies to improve their tax profile.’’ 18

In the subset of foreign acquisitions where that greater value in the hands of a foreign firm is driven by increased opportunities for tax minimization, the resulting increase in foreign direct investment (and the resulting apparent ‘‘increase’’ in employment of Americans by U.S. affiliates of foreign firms and ‘‘decrease’’ in employment 

of Americans by domestic firms) is simply not in the national interest of the United 

States. Indeed, a tax system that artificially encourages foreign ownership of originally U.S. assets that would otherwise be owned by more productive U.S. owners 

is not just disadvantageous for the United States—it will tend to reduce global wellbeing.19

FAVORING FOREIGN MNCS OVER U.S. MNCS REDUCES ECONOMIC OPPORTUNITY

While both U.S. MNCs and foreign MNCs support high-value jobs in the United 

States, U.S. MNCs tend to be more dedicated to U.S. employment. In those cases 

where a business asset would otherwise be equally productive under U.S. or foreign 

ownership, one should on average expect that business asset in the hands of a MNC 

with U.S. tax residence to produce more skilled jobs for Americans than the same 

business asset owned by a foreign MNC. For more than a generation, the labor market here and globally has been characterized by an increase in returns to skilled 

vs. semi-skilled and unskilled labor. Since there is no reason to believe this trend 

is likely to change, fewer skilled jobs located in the United States would reduce the 

opportunity set for younger Americans, and lead to both greater inequality and 

lower standards of living for our children and grandchildren. 

We may one day reach a point where multinational firms are totally ‘‘decentered,’’ 

such that national residence will have no effect on country of employment. But that 

day has not arrived. Moreover, there is no reason to believe it is likely to arrive 

during the probable lifetime of this round of corporate tax reform. Thus, in order 

to maximize opportunity for our kids, we must level the playing field and change 

the tax code to stop discouraging the formation, asset ownership by, and continued 

existence of U.S. MNCs relative to foreign MNCs. To do so, the United States must 

remove the incentives for tax-motivated foreign takeovers of U.S. firms, corporate 

‘‘inversions,’’ and initial foreign tax domiciliation to avoid U.S. tax-resident status. 

To achieve that result it is necessary—but not sufficient—for the United States to 

lower its corporate rate and move to a territorial system. The United States also 

has to deal with the problem of under-taxation of foreign-owned U.S. corporations.20

OUR UNLEVEL PLAYING FIELD

Most debates on international tax reform have thus far focused on income earned 

abroad by U.S. MNCs. However, arguably the greatest structural tax disadvantage 

of being a U.S.-resident corporation relates to the taxation of income earned in the 

United States. U.S. MNCs are much more constrained than foreign MNCs from 

stripping income out of the U.S. tax base. A foreign MNC can reduce the amount 

it owes to the U.S. Government through deductible interest and royalty payments 

from its U.S. affiliates to its foreign affiliates, as well as by charging its U.S. affiliates prices for goods or services that include the value of foreign-owned intangibles 

in high-priced products for resale in the United States.21 A U.S. MNC cannot use 

deductible related party interest and royalty payments in the same way. U.S. MNCs 

are also somewhat more constrained in reducing their U.S. tax liability by embedding foreign-owned intellectual property in products sold into the United States. 

The relative tax advantages that benefit foreign MNCs are in large measure the 

result of specific structural features of our tax law. Most notably, royalty and interest income earned by foreign affiliates of U.S. MNCs is generally subject to inclusion 

62 

22 26 U.S.C. § 871 (2012), U.S. Model Income Tax Convention Article 11–12 (Treasury Department, 2006); U.S. Model Income Tax Convention Article 11–12 (Treasury Department 2016). 23See H.R. 1, 113th Congress, § 4211 (2nd Session, 2014). 24See Matthias Dischinger and Nadine Riedel, ‘‘Corporate Taxes and the Location of Intangible Assets Within Multinational Firms,’’ 95 Journal of Public Economies 691 (2011) (examining a dataset of intangible holdings of the affiliates of EU-headquartered firms and finding 

‘‘a robust inverse relation between the subsidiary’s corporate tax rate relative to other group 

affiliates and its intangible asset holdings’’). 25See Paul Oosterhuis and Moshe Spinowitz, presentation at the Brookings Institute/Urban 

Institute Tax Policy Center/ITPF Conference on Tax Policy and U.S. Manufacturing in a Global 

Economy: ‘‘Tax Incentives to Conduct Offshore Manufacturing Under Current Law’’ (March 15, 

2013). 

on a current basis as part of ‘‘subpart F.’’ The subpart F regime applies only to U.S. 

MNCs. It imposes U.S. tax on certain items of foreign income earned by the foreign 

affiliates of U.S. MNCs. Planning techniques exist to limit the impact of these rules 

with respect to income generated by foreign affiliates in sales made outside the 

United States, but these techniques generally do not work for payments made by 

U.S. affiliates of a U.S. MNC to its foreign affiliates. For example, the benefits of 

section 954(c)(6)—which can limit the impact of subpart F with respect to payments 

made between foreign affiliates—are not available for payments made by a U.S. affiliate of a U.S. MNC to a foreign affiliate of a U.S. MNC. As a result, U.S. MNCs 

can use section 954(c)(6) to reduce the tax burden on their foreign earnings but not 

on their domestic earnings. 

In contrast, foreign-resident MNCs can strip the U.S. tax base with very few limitations by structuring related party interest and royalty payments with their U.S. 

affiliates. They do not need to rely on subpart F planning techniques because subpart F does not apply to them. By statute, interest and royalty payments these foreign MNCs make to their foreign affiliates are theoretically subject to U.S. withholding taxes, but such taxes almost never apply under our tax treaties, which generally reduce these withholding taxes to zero.22

Another way to see the senselessness of focusing our international tax policy debate primarily on residence country taxation of U.S. MNCs is to consider the socalled ‘‘round-tripping’’ debate. Round-tripping is used in the international tax debate as a pejorative term meant to characterize a strategy employed by a limited 

group of U.S. MNCs to reduce their U.S. tax liability on U.S. sales by making deductible payments to foreign affiliates owning the U.S. rights to intellectual property incorporated into goods and services sold into the United States. ‘‘Roundtripping’’ by a subset of U.S. MNCs has been treated as a separate question deserving of special scrutiny in the international tax debate for at least the last 6 years. 

For example, concerns regarding round-tripping motivated the decision to limit the 

reduced U.S. tax rate on putatively foreign intangible income provided in former 

House Ways and Means Chairman Camp’s tax reform proposal to income derived 

from foreign customers.23

However, the same basic planning technique used by ‘‘round-trippers’’—owning 

abroad the U.S. rights to intellectual property associated with the sale of goods and 

services into the United States—is also routinely used by foreign MNCs. Yet when 

undertaken by foreign MNCs this same planning technique has received almost no 

attention, let alone criticism. The lack of attention is despite evidence showing that 

European MNCs (for example) very disproportionately hold their intellectual property in low- or no-tax jurisdictions.24 Given the malleability of corporate residence, 

as well as the evidence that in general U.S. MNCs tend to produce more highquality jobs in the U.S. than foreign MNCs, why would the Congress attack a tax 

planning technique when undertaken by U.S. MNCs, but leave it untouched when 

employed by foreign MNCs? 

Another perverse fact is that foreign MNCs can manufacture in the United States 

and still strip the U.S. tax base, whereas U.S. MNCs cannot. Under subpart F, a 

foreign affiliate of a U.S. multinational is able to earn IP income from embedded 

intangibles on both foreign and domestic sales without being subject to current taxation in the United States only if the foreign affiliate conducts the related manufacturing outside the United States. Thus, U.S. law in effect discourages U.S. MNCs 

from manufacturing in the United States.25

Given the fungibility of tax residence for business units (which can be acquired), 

new businesses (which can incorporate initially abroad), and multinationals as a 

whole (which are now routinely acquired by foreign firms), differentiating tax burdens based on U.S. tax residence or foreign tax residence is simply untenable. Yet 

63 

26 11 Organisation for Economic Co-Operation and Development (OECD), ‘‘Action Plan on Base 

Erosion and Profit Shifting,’’ https://www.oecd.org/ctp/BEPSActionPlan.pdf. 27For more on this issue, see my 2016 testimony before the House Ways and Means Committee, ‘‘Global Tax Environment in 2016 and Implications for International Tax Reform,’’ hearing before the Committee on Ways and Means, 114th Congress 2 (2016) (statement of Itai 

Grinberg). 28 European Commission press release, September 16, 2017, Economic and Financial Affairs 

Council, ‘‘EU finance ministers agreed to develop new digital taxation rules’’ (Sept. 16, 2017), 

https://www.eu2017.ee/news/press-releases/eu-finance-ministers-agreed-develop-new-digital-taxation-rules. 29 Communication from the Commission to the European Parliament and the Council, ‘‘A Fair 

and Efficient Tax System in the European Union for the Digital Single Market,’’ COM (2017) 

547 Final (Sept. 21, 2017). 

our law is heavily based on an antiquated residence principle, and penalizes U.S. 

tax residence relative to foreign tax residence. This legal regime may have been appropriate when it came into being more than half a century ago, when cross-border 

mergers and acquisitions were rare and, when cross-border acquisitions did happen, 

they overwhelmingly involved U.S. MNC acquisitions of foreign firms. Now, however, this legal regime makes no sense. 

THE GLOBAL CONTEXT

The U.S. debate regarding corporate tax reform is happening in a broader international tax context: the international tax environment around the world is becoming both less stable and less favorable to American business. The Base Erosion and 

Profit Shifting (BEPS) project at the OECD was justified as an attempt to prevent 

the old framework for international taxation from falling apart and being replaced 

by unilateral actions, double taxation of cross-border business, and what the OECD 

termed ‘‘global tax chaos.’’ 26 Unfortunately, the post-BEPS environment already 

shows signs of becoming characterized by much of the global tax chaos the BEPS 

project was supposed to prevent. In particular, countries around the world are moving away from residence country taxation and towards source country taxation in 

a variety of often uncoordinated ways. 

As a result of the BEPS project, transfer pricing norms globally were generally 

adjusted to, in the parlance of the OECD, ‘‘align income taxation with value creation.’’ The key practical consequence of this agreement is to require MNCs to move 

high-skilled jobs (rather than merely shifting income) if they wish to benefit from 

the lower corporate tax rates available from America’s competitor countries. Thus, 

a key outcome of the agreements reached in the BEPS project was to increase the 

negative consequences to American workers if the United States failed to lower our 

corporate tax rate and adopt a territorial system. 

Since the BEPS project ended, countries as diverse as Australia, Chile, France, 

Germany, India, Israel, Italy, Japan, Mexico, New Zealand, Poland, Spain, and the 

United Kingdom have taken additional unilateral legislative or administrative actions. These unilateral actions are not limited by or consistent with the BEPS agreements and are designed to increase levels of inbound corporate income taxation. 

Moreover, a number of these actions have been designed so that, as a practical matter, they are targeted to primarily hit U.S. MNCs. 

For example, in the last few years the European Commission invented a new 

‘‘state aid’’ theory to target U.S. MNCs.27 And last month the European Commission 

went further and considered a joint Franco-German-Italian-Spanish proposal to impose a so-called ‘‘equalization levy’’ on U.S. tech companies based on their gross 

turnover in EU countries, which is supposed to make up for their paying insufficient 

corporate income tax. At the September European Union Economic and Financial 

Affairs Council (‘‘ECOFIN’’) meeting, finance ministers expressed unanimous support for some form of action to tax ‘‘enterprises that use digital technology.’’ The 

ministers agreed to move forward swiftly and to reach a common understanding at 

the ECOFIN in December. Moreover, the current presidency of the ECOFIN asserted that ‘‘[i]f we can agree on the approach inside the European Union, then we 

can also affect the global rules in a way that is favorable to us.’’ 28 Less than a week 

later the European Commission followed up with a statement that ‘‘unilateral initiatives in the EU and internationally will continue to develop,’’ and made proposals 

for various gross-basis taxes on revenues from digital business only.29 As a practical 

matter, this proposed tax is quite obviously targeted at U.S. companies. 

The strategic questions implied by the unsettled state of international tax affairs 

should feature as an important consideration in the policy discussions surrounding 

U.S. international tax reform. Unfortunately, to date many analysts have mainVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00067 Fmt 6601 Sfmt 6621 R:\DOCS\32785.000 TIM
64 

tained the historic American tendency to treat the diplomatic and competitive processes entailed in multilateral discussion of international tax rules as a second-order 

matter. In effect, some analysts pretend that if the United States takes decisive action the rest of the world will just follow, or behave in ways that will not fundamentally alter the policy consequence of U.S. policy. 

Despite being the world’s largest economy, in the international tax diplomatic 

space the United States has been losing for a number of years. We have failed to 

successfully defend our national interests, and have been repeatedly out-negotiated. 

One underlying cause of these failures has been our inability to enact international 

tax reform that defines a corporate tax base that we can successfully defend. 

Historically the multilateral international tax architecture was heavily focused on 

residence country taxation. The international tax architecture around the world is 

shifting towards greater source-based taxation, but that transition is liable to be 

long and messy. 

If we continue to insist on the idea of worldwide residence country taxation of 

U.S. MNCs, we will simply make U.S. MNCs uncompetitive outliers subject to foreign revenue grabs. Moreover, with respect to inbound taxation, it is important to 

understand that we have no international status quo, and we are likely taking the 

first steps in a multistage, multi-country game. 

As a result, the inbound policy result the United States reaches in tax reform in 

this Congress will almost certainly be revisited repeatedly, spurred on by both unilateral actions by other countries and multinational negotiations. This time the inbound piece of international tax reform will not be a once in a generation event. 

Therefore, when addressing inbound corporate tax reform in this Congress, policymakers should seek to give the United States leverage. It is important to put the 

United States in a good position to bargain internationally about a future set of 

broadly accepted rules that will most likely be agreed to multilaterally at a later 

date. 

THE U.S. RESPONSE MUST BE ADMINISTRABLE UNILATERALLY

In crafting our inbound taxation policy we should keep in mind whether any given 

regime requires multilateral cooperation to be effective. For example, proposals that 

are only administrable with significant new information-sharing with foreign sovereigns require international agreement. In the short-term, such agreement seems 

unlikely. 

The difficult international tax diplomatic environment means that for the time 

being it may be more important that U.S. legal changes be administrable by the 

U.S. alone, rather than being as intellectually or technically robust as possible. At 

the same time, changes to our law should not involve technical innovations that we 

would strenuously oppose if used abroad. For example, it would be difficult for the 

United States to maintain that virtual permanent establishments are inappropriate 

abroad and simultaneously move forward with a deemed permanent establishment 

arrangement as part of income tax reform at home. 

To ensure that our policy reflects the principle that we are working to level the 

playing field, the primary inbound measures the United States adopts should affect 

all industries and treat domestic and foreign firms equivalently in theory and practice. That must be one of the principles for eventual international agreement, and— 

unlike Europe—the United States’ Wilsonian tradition stands for being a beacon of 

principle in international relations. Treating U.S. and foreign MNCs equivalently 

also helps preserve international economic law rules that generally prohibit discrimination against foreigners on the basis of national origin. 

Nevertheless, within any inbound piece of tax reform, we also should consider including a punitive measure to discourage the imposition of particularly economically 

destructive taxes. For example, the gross basis turnover taxes on digital business 

proposed by the European Commission represent a mercantilist effort to target U.S. 

firms. The European Commission is proposing to revive a form of particularly inefficient taxation that was largely abandoned long ago. If actions like these are being 

proposed by our trading partners, we need U.S. legislation to make clear that attacks targeted at U.S. MNCs would have meaningful consequences. In that circumstance the balance of economic power would make it possible to reach a principled global settlement. 

In sum, despite the unsettled global environment, the United States needs to act 

on reforming its inbound rules. What we need for the time being on inbound is a 

65 

30 Arguing that some part of income in part attributable to intellectual property should be 

taxed by the source state is not a new idea. See, e.g., Lawrence Lokken, ‘‘The Sources of Income 

From International Uses and Dispositions of Intellectual Property,’’ 36 Tax Law Review 233, 243 

(1981). Some version of this point arguably dates all the way back to the work of the International Chamber of Commerce in the 1920s. See, e.g., Bret Wells and Cym Lowell, ‘‘Income Tax 

Treaty Policy in the 21st Century: Residence vs. Source,’’ 5 Columbia Journal of Tax Law 1 

(2014). 31 ‘‘Unified Framework for Fixing Our Broken Tax Code’’ (Sept. 27, 2017), https:// 

www.treasury.gov/press-center/press-releases/Documents/Tax-Framework.pdf. 32See Daniel Shaviro, ‘‘The Case Against Foreign Tax Credits’’ (N.Y.U. Law and Economic 

Working Paper No. 208, March 2010). 33For further discussion, see ‘‘Integrating the Corporate and Individual Tax Systems: The 

Dividends Paid Deduction Considered,’’ before the Senate Finance Committee, 114th Congress 

Continued 

pragmatic, administrable policy that helps level the playing field between U.S. and 

foreign MNCs. The policy should be based on a defensible principle—for instance an 

inbound corporate minimum tax.30

A MINIMUM TAX TARGETED AT U.S. MNCS SHOULD NOT BE THE FOCUS OF THE

ANTI-BASE EROSION REGIME

One anti-base erosion proposal that has received prominent consideration in recent congresses is some form of minimum tax built onto the infrastructure of subpart F and used to reach intangible income. Unlike an inbound corporate minimum 

tax, such proposals target U.S. MNCs and only U.S. MNCs. In effect a minimum 

tax imposed on only U.S. MNCs is just a worldwide system with a lower rate for 

foreign source income than domestic source income. No other country on Earth has 

such a system. To the extent we impose such a tax at a significant rate we will continue to discourage U.S. tax residence and encourage foreign tax residence for all 

cross-border business. 

Subpart F-based minimum tax proposals target U.S. MNCs to pay more tax to the 

United States just as foreign sovereigns are targeting these same MNCs to pay 

more source country tax. However, because residence taxation is a residual obligation, the end result of enacting a high subpart F based minimum tax would not likely be that U.S. MNCs would pay more tax to the United States. 

Rather, because foreign taxes are generally creditable against U.S. tax liability, 

in a minimum tax system U.S. MNCs will tend to be indifferent to increased foreign 

taxes relative to MNCs resident in territorial countries. Why take the risk of planning to avoid a foreign tax, when under a minimum tax combined with a foreign 

tax credit, the ultimate cost of foreign source country income taxes (up to the level 

of the minimum tax) will generally be borne by the U.S. fisc rather than the company? Moreover, as other countries increase their source-based taxes, a residencebased minimum tax coupled with a foreign tax credit positively encourages other 

countries to specifically target U.S. MNCs with their own source-based taxes. Thus, 

the most likely consequence of enacting a significant minimum tax that applies only 

to U.S. MNCs is that business people and tax professionals will conclude that the 

best way to protect a business asset from attack by both the U.S. and foreign tax 

authorities is to take it out of the U.S. tax net, and make that asset tax resident 

somewhere else. The medium-term consequence of such decisions would be fewer 

jobs for U.S. workers. 

The recently released ‘‘Unified Framework for Fixing Our Broken Tax Code’’ 

makes two key commitments to protect the U.S. tax base. The framework suggests 

the committee will ‘‘incorporate rules to level the playing field between U.S.- 

headquartered parent companies and foreign-headquartered parent companies.’’ 31 It 

also states that ‘‘the framework includes rules to protect the U.S. tax base by taxing 

at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations.’’ To the extent this means that the committee may include a subpart Fbased minimum tax proposal as part of tax reform, it should set the rate as low 

as possible, provide for foreign tax credit haircuts, and pair that idea with an inbound corporate minimum tax. In this way a subpart F-based minimum tax proposal could incentivize U.S. multinationals to risk tax disputes with foreign 

sovereigns rather than decreasing tax payments to the United States, while limiting 

the degree to which a subpart F-based minimum tax would make the playing field 

less level.32 Adopting a form of corporate integration that passes the benefit of only 

U.S. taxes paid by U.S. MNCs through to taxable U.S. shareholders could also help 

ameliorate the foreign tax payment incentive that could be created by even a lowrate subpart F-based minimum tax.33

66 

2 (2016) (statement of Michael J. Graetz, Wilbur H. Friedman Professor of Tax Law and Columbia Alumni Professor of Tax Law at Columbia University), https://www.finance.senate.gov/imo/ 

media/doc/16MAY2016Graetz.pdf; Bret Wells, ‘‘International Tax Reform by Means of Corporate Integration,’’ 20 Florida Tax Review 70 (2016). 34See, e.g., statement of Michael J. Graetz, id., ‘‘Comprehensive Tax Reform: Prospects and 

Challenges,’’ hearing before the Senate Committee on Finance, 115th Congress (2017) (statement of Pamela F. Olson), https://www.finance.senate.gov/imo/media/doc/Pamela%20Olson 

%20Testimony.pdf. 35 At the committee’s 2014 international tax hearing, while Senator Wyden described our system as anti-competitive, Pascal St. Amans—a French socialist who testified in his role as Director of the OECD’s Centre for Tax Policy and Administration—went further and chose to describe 

the U.S. corporate tax system as ‘‘diseased.’’ ‘‘U.S. Tax Code: Love It, Leave It, or Reform It,’’ 

hearing before the Senate Committee on Finance, 113th Congress 2 (2014). 36See Organisation for Economic Co-Operation and Development (OECD), ‘‘Tax Policy Reform 

and Economic Growth,’’ OECD Tax Policy Studies, No. 20 (Nov. 3, 2010); see also, Asa 

Johnansson, Organisation for Economic Co-Operation and Development (OECD), ‘‘Public Finance, Economic Growth, and Inequality: A Survey of the Evidence,’’ ECO/WKP (2016) 70 (Nov. 

22, 2016); Asa Johansson, Organisation for Economic Co-Operation and Development (OECD), 

‘‘Tax and Economic Growth,’’ ECO/WKP (2008) 28 (July 11, 2008). 

The most effective anti-base erosion proposal, however, would be to find a way to 

lower the corporate tax rate even further, and not just meet, but beat our global 

competitors. When corporate income tax rates are significantly lower than those of 

competitor countries, other anti-base erosion measures become both less contentious 

and less important. The most plausible approach to accomplish such an achievement 

would be to adopt a value-added tax and use there venue to sharply lower both corporate and individual income tax rates. A number of highly esteemed witnesses appearing before the committee have made this point,34 and Senator Cardin has introduced a bill with some of these admirable features. While adding another tax base 

is likely outside the scope of the current tax reform effort—as a destination-based 

tax, the value-added tax naturally taxes an immobile factor and therefore is much 

less susceptible to base erosion. Moreover, the revenue generated by a value-added 

tax could be used to cut income taxes sharply across the board without raising concerns regarding fiscal sustainability. Finally, as a tax on consumption, the VAT is 

just more efficient and pro-growth than business income taxes. It also could be a 

fairer way to address the intergenerational consequences of our unfunded entitlement liabilities and help ensure greater prosperity and opportunity for our children. 

CONCLUSION

As both Chairman Hatch and Ranking Member Wyden have pointed out in the 

past, the United States corporate and international tax rules are an anticompetitive 

mess.35

Among taxes currently in use by developed economies, the corporate income tax 

is (as the OECD has pointed out repeatedly) 36 the tax that is the most harmful to 

economic growth. Unsurprisingly, then, governments around the world have come 

to view reducing corporate income tax rates and moving to a territorial system as 

tools to attract investment and jobs. 

Lowering the corporate income tax rate and moving to a territorial system are important to maintain U.S. prosperity and improve growth prospects for our economy. 

The United States cannot stand apart from corporate tax competition in a globalized 

economy and is falling further behind each year. 

To ensure that corporate income tax reform maximizes opportunity for well-paid 

employment for as many of our children and grandchildren as possible, the United 

States must also level the playing field between U.S. and foreign-headquartered 

MNCs. Leveling the playing field requires addressing the relative tax advantages 

available to foreign-owned U.S. corporations that represent one of the most senseless aspects of our current corporate tax code. 

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 hearing on reforming the international code. The goal of the hearing is to examine how Congress can update the 

United States’ system of taxing cross-border income to level the playing field for 

American companies and keep more jobs and investment here at home. 

67 

Today’s hearing will focus on another piece in the complex tax reform puzzle. But 

before I get to details of international tax reform, let me briefly address the elephant in the room. 

Last week, I joined with the Secretary of the Treasury, the National Economic 

Council director, the Senate Majority Leader, the House Speaker, and the Chairman 

of the Ways and Means Committee to put forward a broad unified framework for 

tax reform. 

As the document makes clear, this is just one step in the larger tax reform effort. 

But, let’s not mince words: it is a big step. 

I would be hard-pressed to remember the last time the White House and House 

and Senate leadership were in agreement on an issue as complicated as tax reform. 

We began discussions earlier this year, and, at that time, there were a number of 

high-profile differences among us. I’m very pleased that we have been able to bridge 

so many divides and I am optimistic about our chances going forward. 

I want to express my gratitude to the others who worked on the framework and 

to the members of this committee who have helped us move the tax reform effort 

forward. I particularly want to acknowledge the work of Senator Grassley, who, as 

a former chairman and ranking member of the committee, laid much of the groundwork for the ideas we’re discussing and for the progress we’ve made. It was under 

Senator Grassley’s chairmanship that the Finance Committee, in 2003–2004, initiated the last package of international tax reforms. 

Now, as some have already pointed out, the framework released last week is not, 

by design, a complete plan. Of course, that hasn’t stopped think tanks and analysts 

from speculating about its fiscal and distributional impact. We’ve already seen 

groups attempting to reverse-engineer a completed tax plan from the framework, 

generally filling in blanks with their own ideas and assumptions, and reaching conclusions about a plan they’ve essentially written themselves. Generally speaking, it 

seems that the blank-filling exercise is designed to cast the framework in the worst 

possible light. 

The framework does not include any specific information about things like the 

break points for the individual tax brackets, the value and indexing of the enhanced 

Child Tax Credit, or the precise rate for the top bracket. Without those and other 

key pieces of information, there is simply no way for any outside party to produce 

a credible analysis of the framework, let alone a detailed estimate of revenue and 

the distribution of tax burden. 

But, that didn’t stop a certain think tank from issuing a ‘‘preliminary analysis’’ 

of the framework at the end of last week, nor did it stop any of the framework’s 

critics from citing that analysis as authoritative. It’s odd, however, that the analysis 

came with a disclaimer that it was expressing only the views of the authors, not 

the think tank itself. Even more unusual, no specific authors were listed on the 

analysis, probably because no respectable academic or researcher was willing to 

have their name associated with something so haphazardly cobbled together. 

But I digress. 

As the framework makes clear, this committee will be responsible for writing the 

Senate tax reform bill and I’m going to work with members of the committee to 

make sure we are successful. For now, everyone should take every estimate or analysis about the plan from outside groups with an exceptionally large grain of salt. 

Moving on, I also want to say that my preference has always been for this to be 

a bipartisan effort, and I think there are several elements in the framework where 

Democrats and Republicans can work together and hope we will be able to do so. 

The subject of today’s hearing is a great example of an area where both parties are 

largely in agreement. 

Under our current system, U.S. multinationals that accrue overseas earnings can 

defer U.S. tax on those earnings until they are brought back to the United States. 

In 1962, due to concerns that businesses were moving passive and highly mobile 

income-producing assets offshore, Congress enacted subpart F of the Internal Revenue Code. Under subpart F, income from these sources is immediately subject to 

U.S. tax, while taxes on active and less-mobile offshore income remain deferred 

until the earnings are repatriated. 

This is a bit confusing in the abstract, so let me provide a hypothetical. 

68 

Imagine that an American Company—headquartered in the United States and 

subject to our corporate tax rates—opens a factory in Germany, incorporating a subsidiary there. The income generated by the subsidiary—legally a German company—will be subject to German taxes paid to German authorities. 

So long as the American Company doesn’t bring that income back to the United 

States, its income from the German subsidiary will not be subject to U.S. taxes. 

And, in fact, we are finding that many American companies have been keeping this 

type of income offshore in order to avoid our punitive corporate taxes. 

Now, imagine if the American Company parked its money in stocks, bonds, or 

other passive investments and moved the income generated from those assets to an 

offshore, low-tax jurisdiction. Under subpart F, that type of passive and highly mobile income is immediately subject to U.S. tax, without any deferral. 

Now, I know this is a bit arcane. And frankly, I’d be nodding off if I didn’t know 

how this story ended. 

As a result of subpart F, American companies have engaged in a number of sophisticated and complex tax planning schemes to keep earnings offshore to avoid the 

U.S. corporate tax. 

According to the Joint Committee on Taxation, American companies are currently 

holding more than $2.6 trillion in earnings offshore, thanks, in large part, to our 

worldwide tax system—something often referred to as the ‘‘lock-out’’ effect. 

That’s $2.6 trillion held by foreign subsidiaries of U.S. corporations that the parent companies are unable to invest here at home. That is income that could be used 

to create more American jobs and grow wages for American workers. And, that income has attracted the interests of foreign tax authorities, particularly in Europe, 

who wish to tap into what is, by all rights, part of the U.S. tax base. 

I know some of my colleagues have proposed to solve this problem of earnings 

being locked out of the United States by transitioning to a pure worldwide system 

with no deferral. And while that would rid us of the lock-out problem, it would significantly increase pressures for American multinationals to invert, or be acquired 

by foreign-based multinationals. 

Many of us have talked at length about inversions in recent years and the problems they pose for our economy and our tax base. Perhaps even worse than an inversion is when a larger foreign corporation simply acquires a smaller American corporation. Either way, the result is the same—a foreign corporation becomes the parent of the restructured multinational group. 

Companies take these routes for a number of reasons. 

First, they want to escape the high corporate tax rate in the United States, which, 

as we heard in our last hearing, is the highest in the industrialized world. 

Second, they want to minimize the damage caused by our worldwide tax system. 

If an American multinational can successfully move its tax situs out of the U.S., it 

will only owe taxes on the earnings accrued here. There is also the matter of earnings stripping, which is another complicated topic that I look forward to our witness 

panel discussing today. 

All of these problems are key for today’s hearing because they highlight the shortcomings of our outdated worldwide tax system. 

The solution to these and other problems, to put it very simply, is to transition 

to a territorial-based system like virtually all of our foreign competitors. Under such 

a system, an American company would owe taxes only on income earned in the 

United States. Income earned in foreign jurisdictions would only be taxed by those 

jurisdictions, not here. 

This type of reform would have to be accompanied by enforceable anti-baseerosion rules to make sure companies—both domestic and foreign—do not exploit 

loopholes in order to unduly avoid paying taxes here. That approach is endorsed in 

the united framework. 

It was also suggested in the last Congress by our committee’s bipartisan working 

group on international tax, which was co-chaired by Senator Portman and by current Senate Minority Leader Schumer. Other members of the committee have also 

made significant contributions in the area of international tax reform, including 

both Senator Wyden and Senator Enzi. 

69 

∗Senior lecturer on law, Harvard Law School. I thank Megan McCafferty for assistance with 

editing and visual aids and Lisa Brem, Kim Clausing, Cliff Fleming, and Steven Rosenthal for 

comments on earlier drafts. The views expressed in this testimony are my own, are in my personal capacity, and do not reflect those of any organization for which I render paid or pro bono 

services nor any client. I disclose certain activities not directly connected with my position at 

Harvard Law School at http://hls.harvard.edu/faculty/directory/10794/Shay/. 1 I participated as Treasury Deputy International Tax Counsel and then as International Tax 

Counsel in each step of the process leading to the Tax Reform Act of 1986, starting with the 

initial 1984 Treasury international proposals that became President Reagan’s proposals in 1985, 

to House passage of the bill in 1985 and Senate passage in 1986, through conference committee 

to final legislation in November 1986. I resigned from the Treasury in 1987 after publication 

of an initial round of regulations interpreting international provisions of the Act. 2Professor Lily Batchelder’s September 13, 2017 testimony before this committee provides an 

excellent summary of the relevant data and references to literature. Lily L. Batchelder, Professor of Law, New York University, ‘‘Opportunities and Risks in Individual Tax Reform,’’ testimony before the Senate Committee on Finance, hearing on ‘‘Individual Tax Reform’’ (Sept. 13, 

2017). 3See J. Clifton Fleming, Jr., Robert J. Peroni, and Stephen E. Shay, ‘‘Fairness in International 

Taxation: The Ability-to-Pay Case for Taxing Worldwide Income,’’ 5 Florida Tax Review 299 

(2001). 

Finally, as many of you know, I’ve been interested for some time in the idea of 

better integrating our individual and corporate tax systems. I continue to believe 

that corporate integration, by means of a dividends paid deduction, can significantly 

help with some of our existing problems and I look forward to talking more about 

that today as well. 

Once again, international tax reform is an area that is rife for bipartisanship, if 

we’re willing to work together on goals that members from both parties share. I 

hope people will note that the international portion of the framework is particularly 

short on details. That’s because these problems can’t be solved in a nine-page framework document. That will require the work and effort of this committee. 

PREPARED STATEMENT OF STEPHEN E. SHAY,∗ SENIOR LECTURER ON LAW, HARVARD LAW SCHOOL, HARVARD UNIVERSITY

Good morning, Chairman Hatch, Ranking Member Wyden, and members of the 

committee. My name is Stephen Shay. Thank you for the opportunity to testify before you today on international tax reform. It is a pleasure and honor to be with 

the committee once again. By way of background, I am a senior lecturer on law at 

Harvard Law School. I have served twice in the Treasury Department, the first time 

in the Reagan Administration 1 and the second time as Deputy Assistant Secretary 

for International Tax Affairs in the first term of the Obama administration, and 

practiced international tax law for over 2 decades as a partner at Ropes and Gray 

LLP in Boston. 

My topic today is international tax reform. I set out what I believe should be the 

objectives for tax reform and their implications for international tax reform in the 

next section. I next provide data on tax burdens on U.S. multinational corporations 

(MNCs) and their foreign subsidiaries. Based on conclusions I draw from this data 

and my decades of experience in international taxation, I set out my recommendations for the direction that the committee should take to reform U.S. international 

tax rules. Although I do not favor a territorial system, I offer suggestions on how 

to improve this approach, if that path is chosen. 

EXECUTIVE SUMMARY

Objectives for Tax Reform 

Tax reform should maintain or enhance our tax system’s current level of progressivity in distributing tax burdens and benefits. The most significant social welfare 

fact today is that the income of middle- and lower-income workers has stagnated 

in recent decades and a disproportionate share of income growth has accrued to 

those with highest incomes—the top 1%. While we have recovered from the recession and middle- and lower-income workers have made some gains, the disparity between high-income and middle- and lower-income has grown substantially and income mobility is more constrained than for prior generations.2 The taxation of crossborder income of U.S. MNCs should be analyzed under the same fairness standards 

that apply to any other income.3 In particular, as I discuss later in this testimony, 

a reduced ‘‘holiday’’ tax rate on U.S. MNCs’ pre-effective date offshore earnings will 

overwhelmingly benefit high-income Americans (and foreigners) and is not justified 

70 

4 J. Clifton Fleming, Jr., Robert J. Peroni, and Stephen E. Shay, ‘‘Getting From Here to There: 

The Transition Tax Issue,’’ 154 Tax Notes 69 (2017). 5 U.S. Treasury, Office of Tax Analysis, ‘‘Average Effective Federal Corporate Tax Rates,’’ 

Table 1 (April 1, 2016). 6 As Milton Friedman was said to explain, ‘‘Who do you suppose pays for the difference? The 

tooth fairy? Hardly. You do.’’ Gene Epstein, ‘‘Tooth-Fairy Economics Triumphs in GOP Tax-Cut 

Plan,’’ Barron’s (Sept. 25, 2017). 

on any policy ground.4 Its sole purpose is to provide a one-time source of revenue 

that disguises the future revenue loss from shifting to a weak territorial system. 

Tax reform should be revenue-neutral or increase net revenues. The central importance of our tax system to national competitiveness and growth is to fund public 

goods, such as education, basic research, infrastructure, health-care and income security transfers, and national defense. These government services and capital expenditures support a high standard of living, income security, and physical security 

for all Americans. It is the job of the tax system to raise the necessary revenue to 

fund needed public expenditure and not add trillions to the national debt as proposed in the Senate Budget proposal and the GOP Tax Reform Plan. 

Objectives for International Tax Reform 

International tax reform should maintain or increase, not reduce, the aggregate tax 

on U.S. MNCs’ foreign income. There is no policy justification to advantage international business income of multinational corporations (MNCs) beyond allowing a 

credit for foreign income taxes. Moreover, evidence does not support claims that 

U.S. MNCs are overtaxed or are non-competitive as a consequence of U.S. tax rules. 

The U.S. Treasury Department found that the average tax paid by U.S. companies 

from 2007–2011 on their book earnings plus foreign dividends was 22%.5 The most 

recent publicly available Statistics of Income data for 2012 shows that foreign subsidiaries of U.S. MNCs in the aggregate paid an average foreign tax rate of 12%. 

Foreign income should be taxed currently or, if that is not politically feasible, under 

a per-country minimum tax regime that is effective in discouraging tax avoidance 

through transfer pricing and related techniques that shift income to low tax countries and directly and indirectly erode the U.S. tax base. 

International tax reform should assure that the tax rules for foreign multinational 

companies on U.S. business activity do not provide them an advantage in relation 

to U.S. companies. Tax reform should undertake a fundamental review of U.S. 

source taxation of cross-border activity having a U.S. destination including remote 

digital sales into the United States. In addition, tax reform should strengthen U.S. 

corporate residence and earnings stripping rules. 

Taxation of international portfolio income should be fundamentally re-examined. 

Under current rules, there are U.S. tax advantages for portfolio investment by U.S. 

investors in foreign stock over domestic stock. Similarly, foreign pension funds that 

benefit principally foreign workers receive exemptions and relief from U.S. tax that 

are not reciprocated by foreign countries on U.S. pension funds benefitting U.S. 

workers. A fundamental tax reform effort should re-examine from scratch the U.S. 

rules for taxing cross-border portfolio income, however, the treatment of portfolio income is a subject for development on another occasion. 

BACKGROUND TO TAX REFORM

I draw on the testimony of Professor Lily Batchelder from last month’s hearing 

for three background facts that are critical to sensible tax reform. First, real median 

after-tax and after-transfer income for a working-class household of three has only 

grown 3% from 1997 to 2015—even with the expansion of the earned income tax 

credit. Second, generational advantages and disadvantages are passed on more here 

than in peer countries, leading to less intergenerational mobility here. This is not 

the result of government regulation, but of a failure of government to foster genuinely equal opportunity and assure that we contribute to society according to our 

ability to pay. Third, we face a shortfall in revenues to pay for the services we demand. The CBO estimates of revenues and expenditures under current law project 

unprecedented levels of national debt as a share of GDP. 

In the face of the pressing needs for public investment in human capital and infrastructure, and demographic trends that cannot be reversed, we will be forced to 

spend more in the future. It would be foolhardy to adopt a revenue-losing tax reform, particularly one that would benefit those with high incomes, in the unsupported hope, based on tooth fairy economics, that short-term growth will outweigh 

longer term effects on interest rates and inflation.6 When spending exceeds reveVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00074 Fmt 6601 Sfmt 6621 R:\DOCS\32785.000 TIM
71 

7 U.S. Department of the Treasury, Office of Tax Analysis, ‘‘The Case for Responsible Business 

Tax Reform,’’ 21 (Jan. 2017) (hereinafter, Treasury, ‘‘Responsible Business Tax Reform’’); Don 

Fullerton, ‘‘Which Effective Tax Rate?’’, 37 National Tax Journal 23, 30 (1984). 8Michael P. Devereux and Rachel Griffith, ‘‘Evaluating Tax Policy for Location Decisions,’’ 10 

International Tax and Public Finance 107 (2003). The ATR measure may be contrasted with the 

effective marginal tax rate (EMTR), a metric used to make a decision whether to make a new 

investment or not by evaluating the impact of tax on the cost of capital. Treasury, ‘‘Responsible 

Business Tax Reform,’’ supra note *, at 5–7; Devereux and Griffith, at 107. 9For differences in EMTRs by asset groupings and form of financing, see Treasury, ‘‘Responsible Business Tax Reform,’’ supra note 7, at 7. 

nues, the debt issued to pay the difference simply represents future taxes. What is 

needed is to re-build the income tax base so that it can raise revenues necessary 

to fund expenditures while honoring ability to pay principles. If the income tax base 

proves over time to be unable to support U.S. needs, then it would be necessary to 

employ additional revenue instruments. 

U.S. companies are not over-taxed, domestically or abroad. The U.S. Treasury estimated the average effective ‘‘actual’’ tax rate on U.S. companies, excluding foreign 

subsidiaries, for 2007 to 2011 to be 22%. The Treasury’s measure of the average effective ‘‘actual’’ tax rate is corporate-level tax actually remitted (after credits for foreign taxes paid on foreign income earned directly and credits for foreign taxes 

deemed paid on actual foreign dividends) as shown on tax filings divided by book 

or financial statement income (rather than taxable income). The average rate of tax 

is appropriate for measuring cash flows (used in valuations) and distributional burdens.7 It also is the most appropriate measure for evaluating whether to make a 

new direct investment in one country or another country—a discrete choice between 

two mutually exclusive locations.8

When examined on an industry basis, the disparity in effective average actual taxation between different industries becomes clear with rates ranging from 28% for 

services to 10% for utilities. 

These differences justify reducing tax incentives that treat investments in separate sectors differently and insert the government unnecessarily into economic decision making.9 The ATR data, however, do not support a claim that U.S. companies 

are over-taxed. 


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10 IRS, Statistics of Income Division, September 2015, U.S. Corporations and CFCs, Table 2 

and author’s calculations. 11 IRS, Statistics of Income Division, September 2015, U.S. Corporations and CFCs, Table 2 

and author’s calculations. 

But what about foreign subsidiaries of U.S. companies? Are they unable to compete in the countries in which they operate? The preceding corporate average actual 

effective tax rates do not reflect the even lower average effective foreign tax rates 

that controlled foreign corporation (CFC) subsidiaries of U.S. MNCs pay on their 

foreign income. In 2012, the most recent year for which IRS CFC data is publicly 

available, 52% of all U.S. CFCs’ earnings and profits before tax was generated by 

companies in five tax haven or low-tax countries.10 Moreover, the ratio of these 

CFCs’ foreign taxes paid (as reflected on IRS tax filings) to earnings and profits before taxes (under U.S. tax principles) was 12.10% in 2012.11

The CFC data undercut the claim that U.S. MNCs’ foreign subsidiaries are overtaxed on their foreign income. The low effective tax rates on the earnings of foreign 

subsidiaries contradicts the claim that the subsidiaries cannot compete globally because of taxes. 

The very low average taxes paid on foreign subsidiary income are a major factor 

for retaining the low-taxed earnings to maximize after-tax profits reported on finanVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00076 Fmt 6601 Sfmt 6621 R:\DOCS\32785.000 TIM

10317.009 10317.010
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12See letter from Tom Barthold to Kevin Brady and Richard Neal (Aug. 31, 2016) (estimating 

$2.6 trillion in post-1986 not previously taxed CFC earnings for 2015). For a description of the 

relevant investment in U.S. property rules, see Stephen E. Shay, ‘‘The Truthiness of ‘Lockout’: 

A Review of What We Know,’’ 146 Tax Notes 1393 (2015). 13The Financial Times has run a series of articles examining the investment strategies employed with respect to these cash and securities holdings and implications for financial markets. 

See, e.g., Eric Platt, ‘‘Corporate America’s patchy disclosure on cash piles raises risks,’’ Financial 

Times (Sept. 27, 2017) (30 companies studied have a portfolio of more than $400bn of U.S. corporate bonds, representing nearly 5 percent of the outstanding market). 14Laurie Meisler, ‘‘The 50 Largest Stashes of Cash Companies Keep Overseas’’ (June 13, 

2017). 15Treasury, ‘‘Responsible Business Tax Reform,’’ supra note 7, at 38. 

cial statements by relying on the claim to auditors that these amounts are ‘‘indefinitely reinvested’’ in investments that do not trigger deemed repatriation under U.S. 

tax rules.12 This position is maintained even though large amounts (approximately 

40%) of these retained earnings are held offshore in U.S. dollar cash or marketable 

securities.13 Bloomberg assembled these amounts for public companies with the 50 

largest reported cash holdings.14 The amounts and ratios of offshore to total cash 

for the 10 companies with the highest cash holdings (totaling US$702 billion for 

these companies alone) are shown in the next chart. 

It bears repeating the Treasury Department’s assessment from January of this 

year of the economic effect of the unrepatriated earnings (held in cash or marketable securities): 

The broader economic effects of the unrepatriated income are likely to be small, 

however, because that income is generally held in dollar-denominated assets, 

deposited at U.S. banks, and actively invested in productive uses by the financial system. A common misconception is that income reported as ‘‘permanently 

reinvested abroad’’ must be physically held or invested outside of the United 

States. Instead, that is a tax reporting convention intended to differentiate income that is immediately subject to U.S. tax from that which is deferred from 

tax; while there are limitations on how those funds may be used by the corporation, in general those assets are held for investment at U.S. financial institutions, and thus contribute to investment and capital formation in the United 

States, even if the earnings are not ‘‘repatriated’’ by the MNC.15

Looking at filings for Fortune 500 companies, the Institute on Taxation and Economic Policy found that in 2016 10 companies alone reported over $1 trillion of the 

Fortune 500’s estimated $2.6 trillion (or 38%) of ‘‘indefinitely reinvested’’ offshore 

earnings. 


10317.011
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16See J. Clifton Fleming, Jr., Robert J. Peroni, and Stephen E. Shay, ‘‘Getting From Here to 

There: The Transition Tax Issue,’’ Tax Notes, Apr. 3, 2017, p. 69 (proposing immediate taxation 

of accumulated offshore earnings at regular corporate rates with an option to pay the tax in 

interest-bearing installments). An important practical implication of our analysis is that it 

would be normatively justifiable to dial up the tax rate on pre-effective date earnings, indeed 

to the full pre-effective date tax rate of 35%, if necessary to meet the revenue objectives of a 

tax reform. 17See Steven M. Rosenthal, ‘‘A Tax Break on Repatriated Earnings Will Not Trickle Down 

to U.S. Workers,’’ TaxVox: Individual Taxes (Sept. 25, 2017), available at http://www. 

taxpolicycenter.org/taxvox/tax-break-repatriated-earnings-will-not-trickle-down-us-workers (last 

viewed Sept. 27, 2017). 18Donald B. Marron, institute fellow, Urban Institute and Urban-Brookings Tax Policy Center, testimony before the Senate Committee on Finance, hearing on ‘‘Business Tax Reform’’ 3 

(Sept. 19, 2017). 19See Leonard E. Burman, Kimberly A. Clausing, and Lydia Austin, ‘‘Is U.S. Corporate Income Double Taxed?’’ (May 4, 2017) (building on work of Rosenthal and Austin); Steven M. 

Rosenthal and Lydia S. Austin, ‘‘The Dwindling Taxable Share of U.S. Corporate Stock,’’ 151 

Tax Notes 923 (2016). 20Tax Policy Center, ‘‘Share of Change to Corporate Income Tax Burden by Expanded Cash 

Income Percentile,’’ T17–0180 preliminary results (June 6, 2017), available at http://www. 

The primary businesses of these 10 companies rest on one or more of: (i) technology patents, copyrights, and trademarks created under the protection of U.S. 

laws; (ii) U.S. food and drug approvals authorizing access to and assurance to U.S. 

healthcare consumers; (iii) the internet developed by the U.S. government and 

transitioned to private hands; or (iv) leases of valuable rights to U.S. oil and gas 

natural resources. All of these are fruits of U.S. public goods and legal infrastructure developed and maintained with U.S. taxpayer dollars. Yet, these companies 

have been permitted to routinely use transfer pricing and stateless income planning 

techniques to pay extraordinarily low rates of tax on vast swathes of their income— 

and now the plan is to give them an amnesty rate on pre-effective date earnings? 

My co-authors Cliff Fleming and Bob Peroni and I have explained why a low rate 

on pre-effective date earnings is unjustified on policy grounds.16 In addition to the 

observations we made in that article, I want to emphasize that the benefit of a low 

tax rate on pre-effective date earnings will go to the highest income Americans (and 

foreigners) that are shareholders of these largest MNCs.17

On this point, Donald Marron’s testimony before this committee on September 

19th was crystal clear: ‘‘Retroactive tax cuts do not help workers; the benefits would 

go solely to shareholders.’’ 18 The most recent data show that companies publicly 

traded on U.S. securities markets are approximately 75% owned by U.S. shareholders, including principally individuals (directly and through mutual funds) and 

tax-favored retirement accounts.19 The Tax Policy Center finds that 76% of a retroactive corporate tax change would go to the highest quintile of income earners, 40% 

goes to the top 1% and 27% of the benefit goes to the top 0.1% of taxpayers.20 The 

remaining shares are owned by foreign shareholders. 


10317.012
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taxpolicycenter.org/model-estimates/distribution-change-corporate-tax-burden-june-2017/t17- 

0180-share-change-corporate, last viewed Sept. 27, 2017. 21See S. 727, Bipartisan Tax Fairness and Simplification Act of 2011, 112th Congress, 1st Session, § 204(c) (2011). The GOP Tax Reform Plan of September 27th appears to describe a minimum tax combined with a form of dividend exemption. An important element from a revenue 

perspective is how deductions are allocable to foreign subsidiary earnings eligible for a reduced 

rate of tax. The effects of the minimum tax are not easy to discern without a specific proposal, 

including a specific tax rate. 22See Stephen E. Shay, J. Clifton Fleming, Jr., and Robert J. Peroni, ‘‘Designing a 21st Century Corporate Tax—An Advance U.S. Minimum Tax on Foreign Income and Other Measures 

to Protect the Base,’’ 17 Florida Tax Review 669 (2015) (proposing a minimum tax that would 

partially end deferral by effectively serving as an advance withholding tax with respect to the 

ultimate U.S. levy on repatriated foreign-source active-business income). 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. 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). 

DIRECTIONS FOR TAX REFORM

The preceding discussion leads me to recommend that the committee consider the 

following proposals or areas for reform. 

Improve Taxation of Foreign Business Income 

My first recommendation would be to follow the Wyden-Coats and Trump campaign proposals to tax U.S. MNCs’ foreign subsidiary earnings currently and allow 

deductions allocable to foreign subsidiary earnings in full.21 This would address U.S. 

multinational base erosion and profit shifting that is pervasive under current law 

and would be exacerbated under a final global minimum tax. The claim that U.S. 

MNCs would not be able to compete if the corporate rate is reduced to 20% (or 24% 

under the Wyden-Coats proposal) is unsupported and a claim for special treatment 

for foreign income that should be justified with evidence. 

A second best approach would be adopt an advance minimum tax on foreign business income under the current law deferral regime and to defer U.S. deductions allocable to deferred foreign income until the foreign income is taxed. This is described 

in my 2015 Senate Finance Committee testimony and is developed in greater detail 

in a co-authored Florida Tax Review article.22


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23See J. Clifton Fleming, Jr., Robert J. Peroni, and Stephen E. Shay, ‘‘Designing a U.S. Exemption System for Foreign Income When the Treasury Is Empty,’’ 13 Florida Tax Review 397 

(2012) (hereinafter Fleming, Peroni, and Shay, ‘‘Designing Exemption’’). 24 J. Clifton Fleming, Jr., Robert J. Peroni, and Stephen E. Shay, ‘‘Incorporating a Minimum 

Tax in a Territorial System,’’ 156 Tax Notes 54 (Oct. 2, 2017). 25For example, if the corporate rate were 20%, the minimum tax should be at least 12% and 

preferably 16%. 26The foreign income taxes eligible for the credit would be limited to the ratio that the minimum tax rate bears to the regular U.S. rate. This is the same approach taken in the section 

965 temporary tax holiday provision. See IRS Notice 2005–64, § 4.03, 2005–36 IRB 471, 476– 

478. 27With respect to private equity and other investment funds, subpart F should be modified 

so that it applies at the level of the fund (whether the fund is a domestic or a foreign partnership) and U.S. investors can no longer escape current taxation of subpart F income by being 

less than 10 percent owners of the fund. 

A territorial system such as one referred to but not specified in the GOP Tax Reform Plan of September 27 is a least good proposal and indeed can, if not designed 

properly, leave the tax system materially worse off than under current law. My coauthors and I detailed design features that should characterize a principled territorial system in a 2012 article.23 In a new Tax Notes article we describe how to incorporate a principled minimum tax in a territorial regime.24 Key design features 

of such a minimum tax that are critical to protecting the tax base include the following: 

1. To avoid gaming, a U.S. territorial system should apply to both foreign branch 

income and dividends received from foreign subsidiaries. 

2. There should be no deferral; the minimum tax should apply to the foreignsource income of U.S. MNCs as the income is earned either directly or by foreign affiliates. 

3. The minimum tax should be a relatively high percentage of the regular U.S. 

tax rate (no less than 60% and preferably 80%).25 The minimum tax should 

be applied on a country-by-country and not a global basis as is suggested in 

the GOP framework. Allowing blending of high and low foreign taxes will in 

some cases incentivize high-taxed foreign investments and shifting of U.S. income to be low-taxed foreign income in other cases. 

4. A foreign tax credit should be allowed against the minimum tax but only in 

the ratio that the U.S. minimum tax rate bears to the regular U.S. corporate 

tax rate.26 Only the pro-rated amount of foreign taxes allocable to minimum 

taxed income on a country-by-country basis should be creditable against the 

U.S. tax on that income. Cross-crediting should be severely limited or there 

again will be incentives to mix and match investment by the level of tax on 

the return from the investment. 

5. A U.S. territorial system should exempt only dividends paid out of foreignsource active business income that has borne a meaningful tax and only 

foreign-source branch income that has the same characteristic. No sound policy 

objective is achieved by going further and exempting other income. An exemption should not apply to foreign-source income that was treated as a deductible 

payment in the foreign country—royalties, rents, and interest should be fully 

taxed and only withholding taxes on that income allowed as a credit against 

the U.S. tax on that income. Consistent with practice in other developed countries, current taxation of passive income (under subpart F) should be retained 

so that the exemption does not encourage tax avoidance on passive income.27

6. Corporate overhead, interest, and research and development deductions should 

be properly and fully allocated to exempt income and disallowed. Limiting the 

exemption to 95% (or some other percentage) of otherwise qualifying income as 

a substitute for properly allocating deductions between exempt income and 

non-exempt income inappropriately expands the exemption subsidy to domestic 

income. Foreign losses should be prorated between exempt foreign income and 

taxable income. The portion allocable to exempt foreign income should be disallowed; only losses allocable to taxable income should be deductible. 

If these design principles are followed, it is possible for such a regime to improve 

current taxation of international operations over current law. 

77 

28See J. Clifton Fleming, Jr., Robert J. Peroni, and Stephen E. Shay, ‘‘Getting Serious About 

Cross-Border Earnings Stripping: Establishing an Analytical Framework,’’ 93 North Carolina 

Law Review 673 (2015). 29This committee should discourage any such steps. For various reasons, including inducing 

inversions in any interim period, it would be especially foolish to encourage repeal of the regulations in hopes of improving a revenue score for a legislative change. 

Honor 2004 Congressional Commitment to One-Time-Only Amnesty; If Not, Use the 

Highest Possible Single Rate 

The committee should resist taxing pre-effective date earnings of the largest U.S. 

MNCs at a low amnesty rate that will overwhelmingly benefit high income American and foreign shareholders. This is unjustified on policy and distributional 

grounds. Moreover, the additional revenue will be sorely needed to reduce the massive deficits that would result from the GOP Tax Reform Plan of September 27th. 

There should not be a higher rate on cash and cash equivalents and certainly not 

one announced in advance without an immediate effective date. A dual rate structure will require a definition of cash and cash equivalent and a measurement on 

a set date that, if prospective, will be subject to planning and manipulation. At a 

minimum, it would create an incentive for pre-effective date investment in ‘‘illiquid 

assets’’ which could have unintended effects on markets in which U.S. MNCs hold 

large portions of outstanding securities. If experience with the manufacturing deduction is any guide (where Starbucks coffee roasting can obtain a tax benefit for manufacturing), definitions will be stretched with the well-paid assistance of K Street 

denizens. If any relief is given, which is poor policy, use a single rate as close to 

the historic rate as possible (and certainly not below the new regular corporate tax 

rate). 

Strengthen U.S. Corporate Residence Rules 

If taxation of foreign income is reformed along the lines described above, or with 

most plausible anti-base erosion provisions in a further development of the tax reform legislation, there will be continued pressure on U.S. corporations to change corporate residence. The United States should broaden its definition of a resident corporation to provide that a foreign corporation would be a U.S. tax resident if it satisfied either a shareholder residency test or the presently controlling place of incorporation test. 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 

my colleagues and I have explored many of the relevant issues and I strongly encourage the committee to pursue this avenue. 

Strengthen U.S. Source Taxation Rules 

The first and most direct way to generally strengthen U.S. source taxation is 

through improved earnings stripping rules that should not be limited to interest.28

If the committee does not adopt a general limitation on deductions for net interest 

expense, which would subsume earnings stripping, then it is important to adopt a 

limitation on deduction for excess related party interest. There have been robust 

proposals by Representative Camp and the Obama administration so 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. It would be a significant mistake for 

the administration to undo the substance of the recently finalized section 385 regulations before a replacement of equal strength is firmly in place.29

It is foolish to believe that the U.S. tax base is immune from the same source 

tax avoidance, base erosion, and profit shifting that has afflicted other developed 

countries and given rise to the G20/OECD BEPS project. Structural advantages for 

foreign-controlled domestic companies constitutes an integral part of the current 

international tax architecture and is found in almost every country’s tax system. 

The sources of advantage include remote sellers using digital commerce and foreign 

businesses using treaties and information technology advances to avoid direct local 

activity. In addition to adopting robust anti-earnings stripping rules that extend beyond interest to other deductible payments, it is time to engage in a more fundamental review of U.S. source taxation interests and legal rules. It is striking that 

a so-called fundamental tax reform effort over many years has disregarded this area 

that badly needs re-thinking and updated rules. 

78 

1For a more detailed analysis of my views on an earlier iteration of a dividends paid deduction proposal, see Bret Wells, ‘‘International Tax Reform By Means of Corporate Integration,’’ 

19 Florida Tax Review 71 (2016); see also testimony of Bret Wells at the hearing on ‘‘Integrating 

the Corporate and Individual Tax Systems: The Dividends Paid Deduction Considered’’ before 

the Senate Finance Committee (May 17, 2016). 2See, e.g., Michael J. Graetz and Alvin C. Warren, ‘‘Integration of the U.S. Corporate and Individual Income Taxes: The Treasury Department and the American Law Institute Reports’’ 

(1998); see also staff of the Joint Committee on Taxation, ‘‘Overview of Approaches to Corporate 

Integration,’’ JCX–44–66 (May 13, 2016); Republican staff of the Senate Finance Committee, 

‘‘Comprehensive Tax Reform for 2015 and Beyond’’ at 122–237, 113th Congress, S. Prt. No. 113– 

31 (Dec. 2014). 3See Republican staff of the Senate Finance Committee, ‘‘Comprehensive Tax Reform for 2015 

and Beyond’’ at 249–293, 113th Congress, S. Prt. No. 113–31 (Dec. 2014); see also staff of the 

Joint Committee on Taxation, ‘‘Background and Selected Issues Related to the U.S. International Tax System and Systems That Exempt Foreign Business Income,’’ JCX–33–11 (2011) 

(analyzing nine major trading partners of the United States that provide for an exemption system); staff of the Joint Committee on Taxation, ‘‘Present Law and Issues in U.S. Cross-Border 

Income,’’ JCX–42–11 (2011) (reviewing policy considerations between a territorial and worldwide 

tax system). 

CONCLUSION

International business income is but a part of the larger mosaic that comprises 

the U.S. economy. 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. 

There is no normative reason to privilege foreign business income beyond allowing 

a credit for foreign income taxes. My recommendation is to tax foreign business income broadly and allow a credit for foreign income taxes. I encourage you not to 

gamble with a territorial system with weak protections and not to give away tax 

benefits to the undeserving rich and foreigners. 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. Neither the tooth fairy nor dynamic scoring will alter this 

fundamental reality. 

I would be pleased to answer any questions the committee might have. 

PREPARED STATEMENT OF BRET WELLS, PROFESSOR OF LAW AND GEORGE R. BUTLER

RESEARCH PROFESSOR OF LAW, LAW CENTER, UNIVERSITY OF HOUSTON

My name is Bret Wells, and I am the George R. Butler professor of law at the 

University of Houston Law Center. I would like to thank Chairman Hatch, Ranking 

Member Wyden, and the other members of the committee for inviting me to testify. 

I am testifying in my individual capacity, and so my testimony does not necessarily 

represent the views of the University of Houston Law Center or the University of 

Houston. I request that my full written testimony be included in the record. 

Before addressing international taxation, I want to make a preliminary statement 

about the related topic of business tax reform. As to business tax reform, Chairman 

Hatch is to be commended for his work on corporate integration as part of tax reform—specifically, his partial dividends paid deduction proposal. A partial dividends 

paid deduction regime provides a corporate tax deduction that can approximate the 

stock ownership held by U.S. taxable investors.1 The existing scholarship makes a 

compelling case that significant efficiencies can be achieved through corporate integration.2 By limiting the dividend deductibility to the amount of equity held by U.S. 

taxable shareholders, the partial dividends paid deduction regime preserves corporate level taxation for earnings in an amount broadly equal to the equity ownership of nontaxable shareholders. A partial dividends paid deduction regime narrows 

the distinction between the tax treatment of debt and equity. A partial dividends 

paid deduction regime, in combination with a dividends and capital gains preference, in tandem can result in a combined tax rate on corporate business profits 

that approximates the individual tax rate, thus eliminating the disparity in tax 

rates between C corporations and pass-through entities. Thus, a partial dividends 

paid deduction regime is a critical step in the right direction and should be part 

of the final business tax reform legislation. 

Now, I want to address outbound international taxation. This committee is well 

aware that our major trading partners have all opted for some variant of a territorial tax regime and that the divergent approach taken by the United States poses 

competitiveness concerns.3 This reality creates an urgent need for this Congress to 

79 

4For a more detailed analysis of my views on a territorial tax regime and the earning stripping issues inherent in such a regime, see Bret Wells, ‘‘Territorial Taxation: Homeless Income 

is the Achilles Heel,’’ 12 Houston Business and Tax Law Journal 1 (2012). 5 Earning stripping has been identified as a systemic challenge that requires a further legislative policy response. See, e.g., staff of the Joint Committee on Taxation, ‘‘Present Law and Background Related to Possible Income Shifting and Transfer Pricing,’’ JCX–37–10 (2010). For a 

more detailed analysis of my views on how U.S.-based multinational enterprises are competitively disadvantaged because of the extra earning stripping opportunities that exist for foreignbased multinational enterprises that do not exist for U.S.-based multinational enterprises, see 

Bret Wells, ‘‘Territorial Taxation: Homeless Income is the Achilles Heel,’’ 12 Houston Business 

and Tax Law Journal 1 (2012). 6 By Homeless Income, I mean to refer to that category of a multinational corporation’s consolidated income that has been removed from the tax base of the country of origin via a relatedparty tax deductible payment and relocated to an offshore affiliate’s country of residence that 

chooses not to tax this extra-territorial income or provides concessionary taxation to this category of income. Thus, the income is ‘‘homeless’’ in the sense that it lost its tax home in the 

country of source. The origins of the homeless income mistake is dealt with extensively in my 

Continued 

consider how to structure a territorial tax regime that provides parity with the tax 

systems of our major trading partners but at the same time protects the U.S. tax 

base from inappropriate profit shifting strategies. Under current law, the U.S. subpart F regime provides a fairly narrow set of exceptions to the deferral privilege, 

and these anti-deferral provisions serve as an important backstop to prevent tax 

avoidance of U.S. origin profits by U.S.-based multinational enterprises. Another 

means to address the tax avoidance concerns that underlie the U.S. subpart F regime would be to adopt greater source taxation measures to protect the U.S. tax 

base. Relying on a source taxation solution to address the profit shifting problem 

is consistent with a territorial tax regime and has the favorable benefit of implementing base protection measures that apply across-the-board to both U.S.-based 

multinational enterprises and foreign-based multinational enterprises. In contrast, 

solutions that rely on residency taxation principles (such as the U.S. subpart F regime) only protects against the profit shifting strategies of U.S.-based multinational 

enterprises. Thus, I favor source taxation measures over an expanded subpart F regime exactly because subpart F measures create divergent and discriminatory tax 

results for U.S.-based multinational enterprises and leaves in place the inbound 

earning stripping advantages for foreign-based multinational enterprises. Thus, for 

competitiveness reasons, this Congress must consider a territorial tax regime, and 

as part of that consideration Congress must utilize tax base protection measures 

that are even-handed.4 Expanding residency-based solutions via an expansion of the 

U.S. Subpart F regime creates artificial winners and losers based on the ultimate 

place of residence of the global parent company. The United States needs an international tax system that protects U.S. taxation over U.S. origin profits and is consistent with the tax regimes of our major trading partners. 

For the balance of my time, I want to highlight three key issues with respect to 

inbound international tax reform. 

1. EARNING STRIPPING IS MULTIFACETED AND REQUIRES A COMPREHENSIVE SOLUTION

For corporate tax reform to be sustainable in a global environment, the United 

States tax system must be designed to ensure that business profits earned within 

the United States are subject to U.S. taxation regardless of where a multinational 

corporation is incorporated. Today’s tax system does not achieve this objective, and 

its failure to do so creates earning stripping opportunities for foreign-based multinational enterprises that allow them to achieve a lower tax burden with respect to 

their U.S. operations than can be achieved by U.S.-based multinational enterprises 

conducting those same operations.5 Thus, U.S.-based multinational enterprises are 

competitively disadvantaged by our own tax system. 

How does this inbound earning stripping problem arise? When a U.S. subsidiary 

makes a cross-border tax deductible payment to a low-taxed offshore affiliate, the 

overall income of the multinational enterprise has not changed. The multinational 

enterprise has simply moved assets from one affiliate entity’s pocket to another affiliate’s pocket. But, from a U.S. tax perspective, this related party (intercompany) 

transaction is quite lucrative. This intercompany transaction affords the U.S. affiliate with a U.S. tax deduction that reduces the U.S. corporate tax liability of the 

U.S. affiliate. The intercompany payment creates income in the hands of the lowtaxed offshore affiliate that often escapes U.S. taxation and often avoids any meaningful taxation in the offshore jurisdiction. There are five intercompany techniques 

that can be utilized to strip out this U.S. origin ‘‘homeless income’’ 6 from the hands 

80 

earlier writings in Bret Wells and Cym Lowell, ‘‘Tax Base Erosion and Homeless Income: Collection at Source is the Linchpin,’’ 65 Tax Law Review 535 (2012); Bret Wells and Cym Lowell, 

‘‘Income Tax Treaty Policy in the 21st Century: Residence vs. Source,’’ 5 Columbia Tax Journal 

1 (2013). 7The outbound migration of foreign-use intangibles is another systemic challenge to the current U.S. international taxation regime that does not involve an inbound Royalty Stripping 

Transaction and thus would not be prevented by a Base Protecting Surtax. But, the Treasury 

Department can and should amend its existing cost sharing regulations to disregard a funding 

party’s tax ownership of an intangible above its actual functional contribution toward the intangible’s creation apart from funding. For a further detailed analysis of this issue, see Bret Wells, 

‘‘Revisiting § 367(d): How Treasury Took the Bite Out of Section 367(d) and What Should Be 

Done About It,’’ 16 Florida Tax Review 519 (2014). 8The U.S. subpart F rules serve as a backstop to prevent a U.S.-based multinational enterprise from stripping U.S. source profits via inbound Interest Stripping, Royalty Stripping, and 

Lease Stripping transactions. For a more detailed analysis of my views on how the U.S. subpart 

F regime serves as a backstop to prevent U.S.-based multinational enterprises from benefitting 

from these earnings stripping techniques and how this subpart F backstop regime does not 

apply to foreign-based multinational enterprises, see Bret Wells and Cym Lowell, ‘‘Tax Base Erosion and Homeless Income: Collection at Source is the Linchpin,’’ 65 Tax Law Review 535 (2012); 

see also Bret Wells, ‘‘Territorial Taxation: Homeless Income is the Achilles Heel,’’ 12 Houston 

Business and Tax Law Journal 1 (2012). 9 Corporate inversions cause significant revenue losses and ongoing policy concerns. See Congressional Budget Office, ‘‘An Analysis of Corporate Inversions’’ (September 2017), available at 

https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/53093-inversions.pdf. In 

the past, Congress has attacked the corporate inversion phenomenon as a stand-alone problem. 

In my view, Congress will not eliminate the corporate inversion phenomenon until Congress 

eliminates the inbound earning stripping advantages that motivate these transactions. 10For a more in-depth discussion of my views on why the corporate inversion phenomenon 

is best understood as a commentary on the broader inbound earning stripping problem and 

should not be viewed as a stand-alone problem, see Bret Wells, ‘‘Corporate Inversions and 

Whack-a-Mole Tax Policy,’’ 143 Tax Notes 1429 (June 23, 2014); Bret Wells, ‘‘Cant and the Inconvenient Truth About Corporate Inversions,’’ 136 Tax Notes 429 (July 23, 2012); Bret Wells, 

‘‘What Corporate Inversions Teach Us About International Tax Reform,’’ 127 Tax Notes 1345 

(June 21, 2010). 

of the U.S. affiliate: (1) related party Interest Stripping Transactions; (2) related 

party Royalty Stripping Transactions;7 (3) related party Lease Stripping Transactions; (4) Supply Chain restructuring exercises; and (5) related party Service 

Stripping Transactions. 

Multinational enterprises come to every jurisdiction, including the United States, 

with a toolbox of tax planning techniques that utilize all five of the above earning 

stripping categories. So, to have a sustainable system of business taxation, the 

United States simply must address earnings stripping by addressing each of the categories of earning stripping transactions. Foreclosing one, but not all, of the earning 

stripping categories simply motivates a foreign-based multinational enterprise to 

use other tax planning tools. 

2. CORPORATE INVERSIONS ARE NOT A STAND-ALONE PROBLEM BUT MERELY

THE ALTER EGO OF THE INBOUND EARNING STRIPPING PROBLEM

Corporate inversions are a telltale symptom of the larger inbound earning stripping cancer. Thus, corporate inversions cannot be handled as a stand-alone problem. 

Again, my first key point bears repeating: the current tax system provides significant earning stripping advantages that afford a better tax result for the U.S. activities of foreign-based multinational enterprises than exist for U.S.-based multinational enterprises that conduct similar U.S. activities.8 This reality causes U.S.- 

based multinational enterprises to want to become foreign-based multinational enterprises, or in other words to enter into a corporate inversion transaction so that 

the post-inversion company can avail itself of the same earning stripping opportunities as its foreign-based competitors without the impediment of the U.S. subpart F 

regime. 

This is the point to be learned from the corporate inversion phenomenon: 9 corporate inversions are an effort by U.S.-based multinational enterprises to become 

foreign-based enterprises exactly because the inbound earning stripping advantages 

available to foreign-based multinational enterprises are coveted by U.S.-based companies.10 Thus, instead of attacking the corporate inversion messenger in isolation, 

Congress should focus its attention on the inversion message, namely that the earning stripping techniques available to foreign-based multinational enterprises, if left 

unchecked, create an unlevel playing field that motivates U.S.-based multinational 

corporations to find pathways to successfully engage in corporate inversions. Said 

differently, corporate inversions tell Congress that it must solve the inbound earnVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00084 Fmt 6601 Sfmt 6621 R:\DOCS\32785.000 TIM
81 

11 Although adoption of a Base Protecting Surtax is my preferred policy response, the committee should consider this proposal alongside other thoughtful reform proposals that have been 

offered by other scholars. See, e.g., J. Clifton Fleming, Jr., Robert J. Peroni, and Stephen E. 

Shay, ‘‘Getting Serious About Cross-Border Earnings Stripping: Establishing an Analytical 

Framework,’’ 93 North Carolina Law Review 673 (2015) (provides a comprehensive expense disallowance approach to earning stripping transactions); Michael C. Durst, ‘‘Statutory Protection 

for Developing Countries,’’ 69 Tax Notes International 465 (Feb. 4, 2013) (endorses disallowance 

of related party payments made to tax haven affiliates); Reuven S. Avi-Yonah, ‘‘A Coordinated 

Withholding Tax on Deductible Payments,’’ 119 Tax Notes 993, 995–96 (June 2, 2008) (endorses 

a withholding tax on earning stripping payments that is refundable if subjected to meaningful 

taxation in the offshore jurisdiction). 12For a more detailed analysis of the original formulation of the Base Protecting Surtax set 

forth in this testimony, see Bret Wells and Cym Lowell, ‘‘Tax Base Erosion and Homeless Income: Collection at Source is the Linchpin,’’ 65 Tax Law Review 535 (2012). 

ing stripping problem on a holistic basis if it wants to eliminate the tax incentives 

for these transactions. Corporate inversions are simply the alter ego of the inbound 

earning stripping problem and should not be viewed as a separate policy problem. 

3. A BASE PROTECTING SURTAX SHOULD BE PART OF

INBOUND INTERNATIONAL TAX REFORM

Congress needs a new approach to address the earning stripping problem, and it 

should address this problem in a comprehensive manner. I believe that a base protecting surtax is a solution that comprehensively addresses the inbound earnings 

stripping problem, and so I urge this committee to seriously consider it as part of 

international tax reform.11 By imposing a base protecting surtax on all five categories of earning stripping transactions, a surtax would be collected upfront in an 

amount equal to the amount of tax that would have been collected had the intercompany payment instead been paid as an intercompany dividend distribution. A base 

protecting surtax is essential even if Congress were to enact a partial dividends paid 

deduction regime because a foreign-based multinational enterprise can strip ‘‘homeless income’’ out of the U.S. tax base in a manner that achieves a better result than 

can be achieved via a partial dividends paid deduction. Thus, Congress needs to 

level the playing field with a base protecting surtax. 

If appropriately designed, a base protecting surtax would be applied on the payer 

in each of the five types of earning stripping transactions. As such, it is not a withholding tax on the payee. The base protecting surtax collects a surtax upfront on 

the payer’s share (not the payee’s share) of the residual profits that are earned by 

the multinational enterprises from within the United States and remitted as a tax 

deductible payment to a jurisdiction outside of the U.S. tax base. Thus, the surtax 

protects the U.S. tax base from being reduced by reason of earning stripping transactions and as such would provide tax revenue for tax reform. Moreover, by eliminating the tax benefits associated with earning stripping transactions, Congress will 

eliminate the fuel that drives the corporate inversion phenomenon. And finally, a 

comprehensively applied base protecting surtax levels the playing field between 

U.S.-based multinational enterprises and foreign-based multinational enterprises. 

CONCLUSION

Let me conclude my testimony by stating that this committee is to be commended 

for considering fundamental business tax reform. Business tax reform requires a 

careful consideration of international tax reform, and in my view any resulting legislation must be structured to withstand the systemic inbound earning stripping 

challenges that face the United States. Thank you for allowing me to speak at today’s hearing. I would be happy to answer any of your questions. 

APPENDIX A 

The base protecting surtax that I and a co-author originally proposed 12 in 2012 

is updated in this testimony to mesh with a corporate integration proposal that 

would utilize a partial dividends paid deduction with the following elements: 

1. Base Protecting Surtax on Base Erosion Payments. A related-party U.S. payer 

of a base erosion payment would be subjected to a Base Protecting Surtax on 

the earnings that are transferred to a foreign affiliate in an amount equal to 

the amount that would have been collected had those earnings instead been 

distributed as a partially deductible dividend. The purpose of the Base Protecting Surtax is to collect, as a surtax, a tax calculated on the gross amount 

82 

13For further detail on why I believe transactional transfer pricing methodologies are inadequate to address the transfer pricing issues of multinational enterprises and why I believe all 

transfer pricing results in the multinational enterprise context should utilize a profit split methodology as the primary transfer pricing methodology or alternatively should be used as a mandatory confirmatory check to all other transactional transfer pricing methodologies, see Bret 

Wells and Cym Lowell, ‘‘Tax Base Erosion: Reformation of Section 482’s Arm’s Length Standard,’’ 15 Florida Tax Review 737 (2014). 

of the earning stripping payment so that an equivalent tax is collected for what 

would have been due if the base erosion payment instead had been remitted 

as a tax deductible dividend to the foreign affiliate. The rebuttable presumption is that the base erosion payment represents, in its entirety, a transfer of 

residual profits. 

2. Refund Process. If the U.S. payer believes that the amount of the Base Protecting Surtax is in excess of the amount needed to protect the U.S. tax base 

because, in fact, a portion of the base erosion payment represents a reimbursement of actual third-party costs and does not represent, in its entirety, a transfer of U.S. origin profits between affiliates, then the U.S. payer could request 

a redetermination by the Internal Revenue Service (Service) through a ‘‘Base 

Clearance Certificate’’ process. However, the burden is on the U.S. payer to 

demonstrate that the Base Protecting Surtax was assessed on an amount that 

exceeded the amount of residual profits that were actually transferred by the 

U.S. affiliate to a foreign affiliate, and this burden would only be satisfied if 

the taxpayer demonstrated that a correct application of a profit split methodology 13 confirmed the taxpayer’s assertion. Until the taxpayer meets this burden of proof, the surtax would not be refunded. So, the audit incentives for 

transparency in this posture are reversed as the government has collected the 

tax upfront and it falls to the taxpayer to develop the case for a refund, and 

so the taxpayer now has every incentive for transparency and expeditious handling of the audit proceeding. 

The purpose of the base protecting surtax is to serve as a backstop to prevent 

elimination of the residual U.S. taxation on any of the five categories of inbound 

earning stripping transactions that create ‘‘homeless income’’ out of U.S. origin business profits. By imposing a base protecting surtax on all five of the enumerated inbound Homeless Income strategies, the base protecting surtax collects an upfront 

tax in an amount equal to the amount that would have been collected had those 

earnings instead been distributed as a dividend subject to the applicable withholding tax on the grossed-up dividend. A Base Protecting Surtax is essential in a 

dividends paid deduction regime because without it the foreign-based multinational 

enterprise has inbound earning stripping strategies at its disposal that affords it the 

opportunity to strip profits from its U.S. subsidiary in a manner that circumvents 

U.S. taxation over U.S. origin profits that are unavailable to U.S.-based multinational enterprises. 

The proposed Base Protecting Surtax is a surtax on the payer and is not a withholding tax on the payee. The Base Protecting Surtax seeks to collect the tax that 

is due on the payer’s share (not the payee’s share) of the residual profits that are 

earned by the multinational enterprises from the United States. The surtax makes 

the following two assumptions about inbound earning stripping strategies: (1) base 

erosion payments represent, in their entirety, a transfer of residual profits to the 

offshore recipient, and (2) the onshore payer should have reported and paid source 

country taxes on those residual profits that arose from the U.S. affiliate’s activities 

within the United States. The transfer pricing penalty and documentation provisions do a fine job of ensuring that routine profits are reported by the onshore U.S. 

subsidiary, but these provisions have not been successful at ensuring the self-reporting of residual profits by the U.S. affiliate. 

If the U.S. multinational enterprise discloses its overall books and proves that the 

combined profits of the multinational enterprise are less than the full gross amount 

of the base erosion payment, then a refund of the surtax (in whole or in part) could 

be made, but in this refund determination the taxpayer would be required to utilize 

a profit split methodology, not one of the transactional transfer pricing methodologies. The proposed Base Protecting Surtax relies on a profit split methodology 

(which is one of the accepted transfer pricing methods) and the surtax is refundable 

if it overtaxes the combined income. Moreover, the technical taxpayer for the surtax 

is the U.S. affiliate payer. Thus, because the surtax can be reconciled with the arm’s 

length standard and because the surtax is not a withholding tax on the recipient, 

the proposal is consistent with existing treaty obligations. 

83 

PREPARED STATEMENT OF HON. RON WYDEN, 

A U.S. SENATOR FROM OREGON

The Trump team says their international tax framework is about creating jobs 

and firing up the country’s economic engine, but the details show that’s just part 

of the con job being pulled on the middle class. Behind the scenes, the administration recently scrubbed from the Treasury website a 2012 paper showing that workers do not primarily benefit from a corporate rate cut—that trickle down economics 

are a fantasy. Apparently that mainstream economic analysis had to be purged 

since it didn’t jibe with the Trump Team’s patter. 

They claimed the study was out of date, but they didn’t find reason to take down 

any of the other papers that date back as far as the 1970s. This sure makes it look 

like the Trump team is afraid of a well-informed public. And the con job isn’t just 

about hiding inconvenient facts. The administration is currently working to pick 

apart the rules that were designed to combat the inversion virus and the decimation 

of our tax base. 

People at town halls tell me they want tough policies in place to stop companies 

from shipping jobs overseas. Especially in towns where mills and factories are shuttered and Main Street is vacant, Americans are desperate for more red, white, and 

blue jobs with good wages. And they want corporations to pay their fair share. 

What’s on offer in the Trump plan is likely to disappoint. 

The Republican tax framework okayed the entire corporate wish list. A massive 

rate cut. A pure territorial system. But there was barely a nod to tough rules to 

prevent companies from sending jobs abroad or running away to set up HQ on some 

zero-tax island. Base erosion, a minimum tax—these vital parts of the international 

tax debate appear to be an afterthought. This is an invitation for corporations to 

game the system, and the tax lobby must be licking its chops. 

Bottom line, the President is giving multinationals a green light to pay no taxes. 

Then for the benefit of people reading the news, there’s a lot of happy talk about 

jobs, economic growth, and the biggest tax cut ever. 

It’s not hard to predict what will happen if this multi-trillion dollar tax giveaway 

to the wealthy and corporations is enacted, our tax base continues to erode, and the 

deficit skyrockets. Lawmakers will come after Social Security, Medicare and Medicaid yet again. And this isn’t without precedent—privatizing Social Security was 

the first priority of the Bush administration’s second term after its big, unpaid-for 

tax cuts. Let’s remember that every percentage point decrease in the corporate tax 

rate results in a loss of $100 billion in revenue. Perhaps that’s the kind of issue 

that caused Senator Corker to say that he’s got big concerns over the deficit. 

Democrats have reached out to the majority with our principles for tax reform. 

There are a lot of members on this side with big ideas of how to help the middle 

class, create jobs, and bring some fairness to the tax code through bipartisan reform. 

That’s the kind of reform that Ronald Reagan signed into law back in 1986, but the 

framework that was released last week is nowhere near what Reagan accomplished. 

And it’s nowhere near the reforms built on fairness and fiscal responsibility that my 

colleagues Dan Coats, Judd Gregg, and I worked to write into our bipartisan plans 

more recently. 

As I wrap up, international taxation is going to be a key part of the tax reform 

debate, and it involves a lot of extraordinarily complex questions. The committee 

has an excellent panel of witnesses here today who can address international tax 

much more thoughtfully than the Trump framework does. So I look forward to the 

discussion. 

(85) 

COMMUNICATIONS

AMERICAN COUNCIL OF LIFE INSURERS (ACLI) 

101 Constitution Avenue, NW 

Washington, DC 20001–2133 

www.acli.com 

The American Council of Life Insurers (ACLI) is pleased to submit this statement 

for the record for the October 3, 2017 Senate Finance Committee hearing regarding 

international tax reform. We thank Chairman Hatch and Ranking Member Wyden 

for holding this hearing. 

The American Council of Life Insurers (ACLI) is a Washington, DC-based trade association with approximately 290 member companies operating in the United States 

and abroad. ACLI advocates in state, federal, and international forums for public 

policy that supports the industry marketplace and the 75 million American families 

that rely on life insurers’ products for financial and retirement security. ACLI members offer life insurance, annuities, retirement plans, long-term care and disability 

income insurance, and reinsurance, representing 95 percent of industry assets in the 

United States. 

As the Committee considers updating the United States’ international tax system 

in order to make our nation more competitive in the global economy and preserve 

our tax base, there are industry-specific matters to consider for life insurance companies with global interests that relate directly to our growth and competitiveness 

overseas. Our hope is that international tax reform reflects policies that treat our 

active business income on par with the income of non-financial services companies, 

though such income would likely be treated as ‘‘passive income’’ if earned by a nonfinancial services company. Our bricks and mortar and working capital ‘‘assets’’ are 

unique to this industry, thus meriting attentive consideration. 

Locally Regulated Business With Existing Robust Anti-Base Erosion Rules 

U.S.-based global life insurance companies operate where our customers are. U.S.- 

based global life insurance companies are highly regulated in the countries in which 

we do business and by federal and state regulators in the United States, and our 

local investments are heavily regulated and used to support our long-term product 

guarantees. The industry has long been subject to robust anti-base erosion rules— 

the active financing exceptions to Subpart F, or ‘‘AFE’’ rules. These rules apply at 

the entity level to ensure that each company is a properly regulated insurance company and that a substantial portion of our business is with local customers. The 

rules also apply similarly to test that our investments and related income are qualifying insurance investments and income. For the most part, these rules have reflected the way we do business. 

As the committee contemplates shifting from our current complex international tax 

rules to a territorial system, the industry applauds the stated goals of lower corporate tax rates, the ability to be more competitive globally and, of course, future 

tax structure simplicity. Additionally, we ask that several sector-specific issues be 

considered. 

Transition Tax Should Apply Lower Rate to Reserves Required to Stay 

Local 

First, under the recently released ‘‘United Framework For Fixing Our Broken Tax 

Code’’ (9/27/17) (the ‘‘Tax Framework proposal’’), the transition to a new territorial 

tax system includes a one-time deemed repatriation tax with bifurcated taxes for 

foreign earnings held in illiquid versus cash or cash equivalent foreign earnings. 

Earnings and profits (‘‘E&P’’) invested in cash deposits and marketable investment 

assets of insurance companies that support their regulatory required reserves are, 

86 

as a practical matter, invested in assets that are similarly illiquid. The transition 

tax should be so applied and a practical method for doing so can be found under 

the current AFE rules. 

Transition Tax Should Apply on One-CFC Basis 

Second, the amount of E&P and foreign tax credits subject to the deemed repatriation tax should be calculated on a ‘‘one-CFC basis,’’ so that all of the foreign entities owned by members of a U.S. group are treated as a single foreign corporation. 

Under such a proposal, the aggregate amount of foreign earnings subject to the tax 

would be reduced by any earnings deficits. In addition, the pool of foreign taxes 

deemed to have been paid in respect of those earnings would reflect all taxes paid 

by companies whose earnings deficits were taken into account in determining the 

amount deemed to have been repatriated. 

Pro-Competitive Reforms to Active Finance Rules Advisable 

Third, as noted previously, the current international tax system applies the antibase erosion Subpart F AFE rules to insurance companies. To the extent this set 

of rules remains intact in a new territorial system, three improvements should be 

considered. First, the AFE rules should be reformed to allow related-party reinsurance premiums to qualify as exempt from Subpart F as long as the related insurance company paying the reinsurance premium qualified under the AFE rules, and 

the insurance contract being reinsured was treated as qualifying and thus an exempt contract under the AFE. This would correct the current fact that U.S. tax law 

discourages the ability of U.S.-based global insurance companies to pool and diversify risks of their foreign affiliates by reinsuring risks to affiliated companies, which 

restriction runs counter to international norms, sound business practice, the way in 

which our global competitors operate their global insurance businesses and the expectation of regulators. 

The second AFE-specific proposal is that the rules for calculating reserves of qualifying foreign insurance companies should be modernized and simplified. Under the 

AFE rules, foreign subsidiaries of U.S. life insurance companies must use U.S. tax 

principles to calculate reserves for purposes of determining the amount of investment income that qualifies under the AFE, rather than using the actual amount of 

local country reserves. This recalculation requirement was originally designed as an 

anti-abuse rule, but this requirement is too restrictive and overly complex, failing 

to take account of the capital requirements that insurance companies must satisfy 

in order to operate a business competitively in a local jurisdiction. Congress should 

further encourage the IRS to provide more generally applicable guidance that would 

apply on a country-by-country basis to allow local country reserves or capital requirements to be utilized for purposes of calculating the investment income that 

would be exempt from Subpart F. 

Minimum Tax Application 

We understand the need for anti-base erosion measures as part of a reformed international tax system. As the AFE rules serve that purpose for our industry, it would 

be unnecessary and overly complicated to apply another layer of restrictive rules to 

income that is already qualifying under the AFE, such as a minimum tax. If a minimum tax were to apply to our industry, such a tax would create tremendous anomalies unless it was computed on a global basis, as is suggested by the Tax Framework proposal, rather than on a CFC-by-CFC basis. 

The American Council of Life Insurers appreciates the opportunity to file this statement for the record, along with an attached, more detailed, description of the issues 

outlined here. The life insurance industry stands ready to work with you in the interest of international tax reform whose goals—producing economic growth and ensuring competitiveness—are worthy. 

INTERNATIONAL TAX REFORM PRIORITIES FOR U.S.-BASED 

GLOBAL LIFE INSURANCE COMPANIES 

October 3, 2017 

The following proposals reflect the fact that U.S.-based global life insurance companies operate through local companies where our customers are, that we are highly 

regulated in the countries in which we do business and by federal and state regulators in the United States, and that our local investment income is heavily regulated and used to support our long-term product promises, or ‘‘guarantees.’’ 

87 

1The Camp proposal literally referred to E&P earned after December 31, 1986 as being subject to the one-time transitional tax. Post-1986 undistributed earnings as defined in section 

902(c)(3) only includes earnings in the first taxable year that a foreign corporation has a 10 percent U.S. shareholder. The one-time tax should only apply to post-1986 undistributed earnings. 

The U.S. shareholder paid for the E&P earned prior to a U.S. shareholder owning the foreign 

company, which should not be subject to the one-time tax. 

In addition, it is important to note the industry is already subject to robust antibase erosion rules—the active financing exceptions to Subpart F, or AFE rules—that 

have existed in their current form since 1998, and that are now permanent. These 

rules apply at the entity level to ensure that each company is a properly regulated 

insurance company and that a substantial portion of our business is with local customers. The rules also apply similarly to test our income as qualifying insurance income. For the most part, these rules reflect the way we do business. However, one 

proposed exception is described below, and relates to our ability to reinsure and get 

coordinated capital and investment efficiencies for our local country businesses. 

As tax reform turns to the priorities of anti-base erosion, growth and global competitiveness, our priorities reflect a desire to make the technical rules workable and fair 

for our industry. The following recommendations reflect policies that treat our active 

business income on par with the income of non-financial services companies, though 

such income would likely be treated as passive income if earned by a non-financial 

services company. 

a. Application of lower split-rate transition tax to insurance company 

earnings that can’t be repatriated 

The Unified Framework for Fixing Our Broken Tax Code (the ‘‘Framework’’) released by President Trump and Congressional Republican leaders on September 17, 

2017, recommends that Congress include a territorial tax system as part of a comprehensive tax reform bill. The Framework proposes a transition rule from the current worldwide system that would treat foreign earnings accumulated under the existing system as being repatriated, and that foreign earnings held in ‘‘illiquid assets’’ 

would be taxed at a lower rate than earnings held as cash or cash equivalents. 

Under the Tax Reform Act of 2014 (H.R. 1) introduced by House Ways and Means 

Committee Chairman Dave Camp (R–MI), accumulated post-1986 1 undistributed 

earnings and profits (E&P) of CFCs would be subject to a similar one-time transitional tax. The tax rate would be 8.75% for E&P held in cash or cash equivalents, 

and 3.5% for the remainder. The purpose of the lower rate for non-cash and cash 

equivalents is to ‘‘moderate the tax burden on illiquid accumulated E&P that has 

been reinvested in the foreign subsidiary’s business,’’ according to the section-bysection summary of the bill provided by committee staff. The House Republican 

Blueprint included a similar proposal. While E&P invested in cash deposits and 

marketable investment assets of insurance companies that support their regulatory 

required reserves is, as a practical matter, invested in assets that are similarly illiquid, the bill did not apply the lower rate to such E&P. We believe it should apply 

to such cash and investments that support regulatory required insurance reserves. 

A practical method for doing so can be found under the AFE rules. 

Proposal: A method to identify these earnings for insurance groups can be found 

within the AFE rules that exempt certain insurance income from inclusion under 

the subpart F rules. Specifically, an insurance company’s non-cash items could be 

defined in H.R. 1’s section 965(c)(2)(B) by limiting the ‘‘liquid item’’ to the extent 

that the insurance company has cash and investments in excess of the amount of 

reserves determined in section 954(i) with modifications. Thus, the amount that 

would be subject to the higher split-rate is an amount in excess of 110% of reserves 

for a life insurance company, which is as defined in sections 954(i)(2)(A) and 

954(i)(2)(B)(i) and (ii). 

The term ‘‘qualified insurance company’’ would be made by reference to section 

953(e)(3) without regard to section 953(e)(3)(B) (imposing a 50% limitation focused 

on home country risk) and the term ‘‘exempt contract’’ would be made by reference 

to section 953(e)(2) without regard to section 953(e)(2)(B) (imposing a 30% limitation 

focused on home country income). 

While the higher split-rate might apply to the amount of a CFC’s E&P held in cash 

or cash equivalents, that amount, in the case of a regulated insurance company, 

should exclude an amount attributable to assets that are necessary for any regulated insurance company to support its insurance obligations. Such an amount, like 

a manufacturer’s plant and equipment, is recognized as being required to operate 

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the local business and regulatory restrictions govern when a distribution of such 

amount is permissible. 

By removing the home country limitations of section 953(e), section 965 is able to 

focus on the amount of cash and cash-like items that insurance companies must 

maintain to satisfy their regulatory capital reserves and risk profiles. These home 

country limitations are important for determining whether an insurance company’s 

income should be excluded from subpart F income because the income is active and 

maintained in the local home country, but section 965 has a different focus. Section 

965 seeks to determine, in part, the amount of aggregate earnings that are not freely distributable (and thus illiquid) so that an appropriate lower split-rate can apply 

to those illiquid earnings. Maintaining these home country limitations in section 965 

would exclude earnings of insurance companies that are not freely distributable because of local regulatory requirements. 

Revisions to H.R. 1’s language under section 965(c)(2)(B) for determining the cash 

portion have been provided to Senate Finance Committee staff. 

b. Netting entities with positive and negative E&P pools as part of the 

transition to a new territorial tax system 

Since foreign insurance companies are per se corporations for U.S. tax purposes, and 

are subject to local regulatory requirements, we cannot avail ourselves of the ability 

to create larger or combined entities via check the box elections, and we face regulatory restrictions on whether and how we can organize or restructure our regulated 

entities to similarly combine companies having positive accumulated E&P with others having E&P deficits. This is important for purposes of the transition tax on previously untaxed foreign earnings. 

The Camp bill appropriately allowed for the netting of positive and negative earnings so that the one-time tax is applied to net E&P. In so doing, however, the Camp 

bill effectively put a limit on the amount of foreign tax credits that could be utilized 

as part of this process, potentially imposing double tax on some of the earnings subject to the transition tax simply because positive and negative E&P pools are allowed to be netted. Groups with no foreign subsidiaries having negative E&P would 

not face this haircut on their foreign tax credits, and those that are able to combine 

foreign CFCs through self-help would also not be subject to the haircut. In addition, 

the Camp bill failed to take account of so-called trapped foreign tax credits relating 

to CFCs that paid foreign taxes in years when they had positive earnings but happen to have a negative E&P pool at the time of the effective date of the transition 

tax. These trapped credits should also be allowed to be utilized; otherwise, they 

would never be allowed to be utilized going forward in the new territorial system. 

Another oversight in the Camp bill is that the netting of positive and negative E&P 

was at the first-tier U.S. parent level and not at the consolidated U.S. parent level. 

Therefore, a U.S. consolidated group with two U.S. subsidiaries that have CFCs cannot net the E&P of all CFCs. The insurance industry is subject to foreign regulations that restrict the ability of the U.S. group to own all CFCs by the same U.S. 

entity. 

Proposal: The amount of E&P and foreign tax credits subject to the deemed repatriation tax should be calculated on a ‘‘one-CFC basis,’’ so that all of the foreign entities owned by members of a U.S. group are treated as a single foreign corporation. 

Under such a proposal, the aggregate amount of foreign earnings subject to the tax 

would be reduced by any earnings deficits. In addition, the pool of foreign taxes 

deemed to have been paid in respect of those earnings would be all taxes paid by 

companies whose earnings deficits were taken into account in determining the 

amount deemed to have been repatriated. 

c. The AFE rules should be reformed to allow related-party reinsurance 

premiums to qualify 

An insurer’s business is to accept others’ risks and manage, under the supervision 

of regulators, the cost of maintaining sufficient capital to bear those risks. Insurers 

manage exposure to these risks by pooling and diversifying risks (often through reinsurance), and by aligning investment strategies with potential insurance liabilities. While reinsurance is a key function for an insurance company, U.S. tax law 

discourages the ability of U.S.-based global insurance companies to pool and diversify risks of their foreign affiliates by reinsuring risks to affiliated companies. It 

does so by treating premiums paid between affiliates in order to reinsure contracts 

as premium income that is taxed currently by the United States; the income is not 

eligible for deferral under the AFE rules. This restriction runs counter to interVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00092 Fmt 6601 Sfmt 6621 R:\DOCS\32785.000 TIM
89 

national norms, sound business practice, the way in which our global competitors 

operate their global insurance businesses and the expectation of regulators. Pooling 

risk allows an insurance company to hold less capital as a result of the diversification of risk and manage investments in a more efficient manner. 

Proposal: As part of the reform of the U.S. international tax rules, this restriction 

in the AFE rules should be fixed. Specifically, reinsurance premiums should be exempt from Subpart F as long as the reinsurer is a regulated insurance company, 

the related insurance company paying the reinsurance premium qualified under the 

AFE rules, and the insurance contract being reinsured was treated as qualifying 

and thus an exempt contract under the AFE. By limiting this rule to exempt contracts, the reinsurance of U.S. risks will continue to be subject to Subpart F. The 

Framework includes rules to protect the U.S. tax base by including a minimum tax 

on the foreign profits of U.S. multinational companies. To the extent the change in 

the AFE rules that we are suggesting in regards to related party reinsurance transactions outside the United States, it may be appropriate to apply such a minimum 

tax to premium income related to reinsurance that qualifies for this modified AFE 

treatment. 

d. Modernize and simplify rules for calculating reserves of qualifying foreign insurance companies 

Under the AFE rules, foreign subsidiaries of U.S. life insurance companies must use 

U.S. tax principles to calculate reserves for purposes of determining the amount of 

investment income that qualifies under the AFE, rather than using the actual 

amount of local country reserves. This recalculation requirement was originally designed as an anti-abuse rule, to prevent companies from aggressively overstating 

local country reserves in order to maximize the amount of investment income that 

could be subject to deferral from U.S. tax. However, in significant foreign markets 

subject to developed and modern insurance regulation and oversight, this requirement is too restrictive and overly complex. It fails to take account of the capital requirements that insurance companies must satisfy in order to operate a business 

competitively in a local jurisdiction. Moreover, since the financial crisis of 2008, foreign regulators are using or moving towards a risk-based capital approach, wherein 

an insurance company’s required capital is evaluated and measured taking into account the types of risks it has assumed (by looking at net premiums written—total 

premiums less reinsurance that has been ceded—in the local country and loss reserves). Then, the overall capital of the local company, including reserves and policyholder surplus, is taken into account to determine the company’s risk-based capital 

position. 

Thus, the level of regulatory capital that is required to be retained in a country, 

and that cannot be repatriated, is different from the level based on a calculation 

of reserves utilizing U.S. tax principles. 

Present law does provide some relief for U.S. life insurance companies, by authorizing the Secretary to permit U.S. life insurance companies to request a ruling from 

the IRS to use foreign statement reserves. However, the ruling process is limited 

and is tremendously time consuming for both the IRS and taxpayers. 

Proposal: Congress should further encourage the IRS to provide more generally applicable guidance that would apply on a country-by-country basis to allow local 

country reserves or capital requirements to be utilized for purposes of calculating 

the investment income that would be exempt from subpart F. Alternatively, the 

guidance could approve common reserving methods that the IRS has already reviewed and approved via the ruling process. The guidance would be issued only 

after the industry demonstrates to the satisfaction of the Secretary that adequate 

evidence exists that the local country regulator and regulation is robust and meaningful or that the reserving method is commonly accepted. 

e. Anti-base erosion proposals and the AFE rules 

The AFE rules define an active foreign insurance company for U.S. tax purposes 

and would define insurance income qualifying for a new dividend exemption system 

if the Subpart F rules were retained. The AFE rules are robust and restrictive, requiring qualifying income to have a significant nexus to the country where the CFC 

is organized or does business. We understand the need for anti-base erosion measures as part of a reformed international tax system. For our industry, the AFE rules 

serve that purpose; it would be unnecessary and overly complicated to apply another 

layer of restrictive rules to income that is already qualifying under the AFE, such 

as a minimum tax (except in the case of premiums related to reinsurance between 

90 

affiliates, as noted in the AFE reform proposal related to reinsurance, suggested 

above). 

Proposal 1: Any minimum tax that is imposed on earnings of a CFC that would 

otherwise qualify for the territorial system should exclude from its base earnings 

that already qualify under the AFE rules. 

Proposal 2: If a minimum tax were to apply to our industry, such a tax would create tremendous anomalies unless it was computed on a global basis, as is suggested 

by the Framework, rather than on a CFC-by-CFC basis, as was the case with ‘‘Option C’’ in the final 2014 Camp bill. That bill raised the following issues: 

• The tax base for determining Option C was earnings that exceed 10% of the 

basis in the entity’s tangible property. In an attempt to capture more mobile 

income including intangibles related income, this definition also captured the 

earnings of an entity with little or no tangible assets, including financial services companies. Option C failed to recognize that an insurance company’s tangible asset and brick and mortar is its cash and investments that support its 

regulatory required reserves and capital. 

• The CFC-by-CFC effective tax rate calculation requiring the use of U.S. tax concepts to compute the effective tax rate for the entity was never fleshed out in 

detail. For insurance companies, however, it is clear that there would be cases 

in which companies that pay a high effective tax rate in a local country would 

still suffer a minimum tax. This is because of significant differences in the calculation of taxable income between U.S. tax rules and local country tax rules, 

with the most likely differentiator being the calculation of insurance reserves 

and the timing of recognition of gains and losses on investments. 

A. PHILIP RANDOLPH INSTITUTE ET AL. 

100 GROUPS OPPOSING A TERRITORIAL TAX SYSTEM PROPOSED BY 

PRESIDENT TRUMP AND REPUBLICAN LEADERS 

October 2, 2017 

Dear Member of Congress: 

We urge you to reject a proposal to give U.S. multinational corporations a huge tax 

break for sending jobs offshore and a huge loophole to help them avoid paying taxes. 

President Trump and Republican leaders in Congress want to allow multinational 

corporations to pay no U.S. taxes on their offshore profits. This is called a ‘‘territorial tax system.’’ 

It is an incredibly bad idea. Ending taxation of offshore profits would give multinational corporations an incentive to send jobs offshore, thereby lowering U.S. 

wages. It would also be a giant loophole for corporations to use accounting gimmicks 

to move their profits to tax havens, resulting in the loss of billions of dollars in tax 

revenue for the United States. 

Ending taxation of offshore profits would rig the rules in favor of multinational corporations, give them a competitive advantage over domestic businesses, and make 

our tax system more complicated. 

We cannot afford to give multinational corporations a giant loophole to avoid paying 

their fair share of taxes at a time when we need more revenue to create jobs rebuilding infrastructure, educating our children, expanding healthcare coverage, researching new medical cures, and ensuring a secure retirement. 

Voters are unalterably opposed to a territorial tax system. Three-quarters of Americans say they would oppose a tax system that does not tax offshore profits. A June 

2017 Hart Research poll found that 32 percent of respondents believe that foreign 

profits of U.S.-based companies should be taxed at a higher rate than their U.S. 

profits while another 40 percent believe they should be taxed at the same rate. Only 

8 percent believe foreign profits should be taxed at a lower rate, and only 4 percent 

said they should not be taxed at all—which is what a territorial tax system would 

do. 

Please see this fact sheet (http://bit.ly/2hCiVn9) from the Institute on Taxation 

and Economic Policy for a more detailed explanation of why a ‘‘territorial tax system’’ would rig the rules for multinational corporations and against American businesses and working people. 

91 

We urge you to reject this terrible idea. 

Sincerely, 

A. Philip Randolph Institute 

ActionAid USA 

Agenda Project 

Alliance for Retired Americans 

Amalgamated Transit Union 

American Family Voices 

American Federation of Government Employees (AFGE) 

American Federation of Labor and Congress of Industrial Organizations (AFL–CIO) 

American Federation of Musicians of the United States and Canada 

American Federation of State, County, and Municipal Employees (AFSCME) 

American Federation of Teachers 

Americans for Democratic Action (ADA) 

Americans for Tax Fairness 

Asia Initiatives 

Asian Pacific American Labor Alliance 

As You Sow 

Brotherhood of Railroad Signalmen 

Campaign for America’s Future 

Center for Biological Diversity 

Center for Community Change 

Center for Popular Democracy 

Center of Concern 

Citizens’ Environmental Coalition 

Coalition of Black Trade Unionists 

Coalition of Labor Union Women 

Coalition on Human Needs 

Communications Workers of America 

Congregation of Our Lady of Charity of the Good Shepherd, U.S. Provinces 

Demand Progress 

Earth Action, Inc. 

EG Justice 

Economic Policy Institute Policy Center 

Fair Share 

Financial Accountability and Corporate Transparency (FACT) Coalition 

Financial Transparency Coalition (FTC) 

Fix Democracy First 

Food and Water Watch 

Franciscan Action Network 

Friends of the Earth 

Global Financial Integrity 

Health Care for America NOW! 

Hip Hop Caucus 

I.A.T.S.E., International Alliance of Theatrical Stage Employees 

Institute for Agriculture and Trade Policy 

Institute for Policy Studies—Inequality Program 

Institute on Taxation and Economic Policy 

International Association of Machinists and Aerospace Workers 

International Association of SMART, Sheet Metal, Air, Rail, and Transportation 

Workers 

International Brotherhood of Boilermakers 

International Brotherhood of Teamsters 

International Corporate Accountability Roundtable (ICAR) 

International Federation of Professional and Technical Engineers (IFPTE) 

International Labor Rights Forum (ILRF) 

International Longshoremen’s Association 

International Union, United Automobile, Aerospace, and Agricultural Implement 

Workers of America, UAW 

Islamic Society of North America 

Jobs with Justice 

Jubilee USA Network 

Main Street Alliance 

MomsRising 

National Advocacy Center of the Sisters of the Good Shepherd 

National Education Association 

National Employment Law Project 

92 

National Federation of Federal Employees 

National Organization for Women 

National Priorities Project 

National Women’s Law Center 

NETWORK Lobby for Catholic Social Justice 

New Rules for Global Finance 

Other98 

Our Revolution 

Oxfam America 

Patriotic Millionaires 

Pax Advisory 

People Demanding Action 

People’s Action 

Power Shift Network 

Pride at Work 

Progressive Change Campaign Committee 

Progressive Congress Action Fund 

Public Citizen 

Responsible Wealth 

Revolving Door Project 

Rights and Accountability in Development (RAID) 

RootsAction.org 

Service Employees International Union 

Social Security Works 

Tax Justice Network USA 

Tax March 

The Hedge Clippers 

The Language of Connection 

The Leadership Conference on Civil and Human Rights 

Unitarian Universalist Legislative Action Network 

United Food and Commercial Workers International Labor Union 

United for a Fair Economy 

United Steelworkers (USW) 

UNITE HERE 

Wall-of-Us 

Woodstock Institute 

Working America 

Worksafe 

ASSOCIATION OF AMERICANS RESIDENT OVERSEAS (AARO) 

4 rue de Chevreuse 

75006 Paris, France 

Tel: +33 (0)1 4720 2415 

Website: www.aaro.org 

Email: contact@aaro.org 

14 October 2017 

Senate Committee of Finance 

Dirksen Senate Office Bldg. 

Washington, DC 20510–6200 

U.S.A. 

Re: 3 October 2017 Full Committee Hearing on ‘‘International Tax Reform’’ 

Dear Chairman Hatch and other Committee Members, 

On behalf of the Association of Americans Resident Overseas (AARO), I wish to 

make the following statement for the record with regard to the 3 October 2017 full 

committee hearing on ‘‘International Tax Reform.’’ 

The full committee hearing on tax reform was an important step in the on-going 

effort to carry out reform of the United States’ international tax system. The focus 

of this hearing was on taxation of corporations. In his opening statement, Chairman 

Hatch touched on a number of problems with the existing system. He then said this: 

All of these problems are key for today’s hearing because they highlight the 

shortcoming of our outdated worldwide tax system. 

The solution to these and other problems, to put it very simply, is to transition 

to a territorial-based system like virtually all of our foreign competitors. Under 

93 

such a system, an American company would owe taxes only on income earned 

in the United States. Income earned in foreign jurisdictions would only be taxed 

by those jurisdictions, not here. 

Chairman Hatch then added: 

Finally, as many of you know, I’ve been interested for some time in the idea 

of better integrating our individual and corporate tax systems. 

AARO agrees with Chairman Hatch that international tax reform should include individual taxation. AARO’s position on individual international tax reform, as stated 

on our website, is this: 

TAXATION: We believe that the United States puts itself at a competitive disadvantage by taxing its citizens abroad on the basis of their nationality. The ability 

to send an employee abroad to manage, direct, instructor train the employees of a 

foreign subsidiary is crucial to successful competition in today’s global economy. The 

U.S. should put U.S. persons on a par with citizens of other countries and adopt 

Residence-Based Taxation (RBT). The current system of Citizenship-Based Taxation 

(CBT) imposes the risk of double taxation on people already taxed in the countries 

where they live and work. In addition, the compliance costs for U.S. persons abroad 

are as daunting as the enforcement costs for the IRS. 

The Trump administration’s interest in reforming taxation so as to create more jobs 

for Americans is best served by creating more jobs for Americans not only within 

the United States but also overseas. Switching from citizenship-based taxation of 

U.S. citizens to territorial-based taxation would put Americans interested in working overseas on an ‘‘even playing field’’ and would encourage U.S. companies operating overseas to hire more Americans. 

It is a shame when Americans qualified for overseas executive positions, special 

skills positions or other good jobs are passed over by U.S. companies in order to 

avoid the cost of grossing up salaries and/or making double declarations. Had Americans been hired for these jobs rather than foreigners, a good deal of their earnings 

would sooner or later flow back to America; a large proportion of Americans overseas have close relatives Stateside and plan to retire back in their homeland. 

As Chairman Hatch concluded in his opening statement, ‘‘International tax reform 

is an area that is rife for bipartisanship.’’ As a non-partisan group of U.S. citizens 

living and working around the world, AARO urges all members of the Committee 

to include territorial-based taxation of American individuals as an essential part of 

the reform. 

I thank you for your attention and would be most happy to discuss this with the 

Committee staff if there are any questions or concerns. 

Sincerely yours, 

Neil Kearney 

President, Association of Americans Resident Overseas 

CENTER FOR FISCAL EQUITY

Statement of Michael G. Bindner 

Chairman Hatch and Ranking Member Wyden, thank you for the opportunity to 

submit these comments for the record to the Committee on Finance. As usual, we 

will preface our comments with our comprehensive four-part approach, which will 

provide context for our comments. 

• A Value-Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure very 

American pays something. 

• Personal income surtaxes on joint and widowed filers with net annual incomes 

of $100,000 and single filers earning $50,000 per year to fund net interest payments, debt retirement and overseas and strategic military spending and other 

international spending, with graduated rates between 5% and 25%. 

• Employee contributions to Old-Age and Survivors Insurance (OASI) with a 

lower income cap, which allows for lower payment levels to wealthier retirees 

without making bend points more progressive. 

• A VAT-like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT with additional tax expenditures for family support, health care and 

94 

the private delivery of governmental services, to fund entitlement spending and 

replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income 

taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age 

60. 

Attacking unions for the past 30 years has taken its toll on the American worker 

in both immigration and trade. That has been facilitated by decreasing the top marginal income tax rates so that when savings are made to labor costs, the CEOs and 

stockholders actually benefit. When tax rates are high, the government gets the 

cash so wages are not kept low nor unions busted. It is a bit late in the day for 

the Majority to show real concern for the American worker rather than the American capitalist or consumer. The current plan will make things worse. 

Reversing the plight of the American worker will involve more than trade, but we 

doubt that the Majority has the will to break from the last 30 years of tax policy 

to make worker wages safe again from their bosses. Sorry for being such a scold, 

but the times require it. 

The main international impact in our plan is the first point, the value-added tax 

(VAT). This is because (exported) products would shed the tax, i.e., the tax would 

be zero rated, at export. Whatever VAT congress sets is an export subsidy. Seen another way, to not put as much taxation into VAT as possible is to enact an unconstitutional export tax. 

The second point, the income and inheritance surtax, has no impact on exports. It 

is what people pay when they have successfully exported goods and their costs have 

been otherwise covered by the VAT and the Net Business Receipts Tax/Subtraction 

VAT. This VAT will fund U.S. military deployments abroad, so it helps make exports safe but is not involved in trade policy other than in protecting the seas. 

The third point is about individual retirement savings. As long as such savings are 

funded through a payroll tax and linked to income, rather than funded by a consumption tax and paid as an average, they will add a small amount to the export 

cost of products. 

The fourth bullet point is tricky. The NBRT/Subtraction VAT could be made either 

border adjustable, like the VAT, or be included in the price. This tax is designed 

to benefit the families of workers, either through government services or services 

provided by employers in lieu of tax. As such, it is really part of compensation. 

While we could run all compensation through the public sector and make it all border adjustable, that would be a mockery of the concept. The tax is designed to pay 

for needed services. Not including the tax at the border means that services provided to employees, such as a much-needed expanded child tax credit—would be forgone. To this we respond, absolutely not—Heaven forbid—over our dead bodies. Just 

no. 

The NBRT will have a huge impact on international tax policy, probably much more 

than trade treaties, if one of the deductions from the tax is purchase of employer 

voting stock (in equal dollar amounts for each worker). Over a fairly short period 

of time, much of American industry, if not employee-owned outright (and there are 

other policies to accelerate this, like ESOP conversion) will give workers enough of 

a share to greatly impact wages, management hiring and compensation and dealing 

with overseas subsidiaries and the supply chain—as well as impacting certain legal 

provisions that limit the fiduciary impact of management decision to improving 

short-term profitability (at least that is the excuse managers give for not privileging 

job retention). 

Employee-owners will find it in their own interest to give their overseas subsidiaries 

and their supply chain’s employees the same deal that they get as far as employeeownership plus an equivalent standard of living. The same pay is not necessary, 

currency markets will adjust once worker standards of living rise. 

Over time, this will change the economies of the nations’ we trade with, as working 

in employee owned companies will become the market preference and force other 

firms to adopt similar policies (in much the same way that, even without a tax benefit for purchasing stock, employee-owned companies that become more democratic 

or even more socialistic, will force all other employers to adopt similar measures to 

compete for the best workers and professionals). 

In the long run, trade will no longer be an issue. Internal company dynamics will 

replace the need for trade agreements as capitalists lose the ability to pit the interVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00098 Fmt 6601 Sfmt 6621 R:\DOCS\32785.000 TIM
95 

est of one nation’s workers against the others. This approach is also the most effective way to deal with the advance of robotics. If the workers own the robots, wages 

are swapped for profits with the profits going where they will enhance consumption 

without such devices as a guaranteed income. 

If Senator Sanders had been nominated and elected, this is the type of trade policy 

you might be talking about today. Although the staff at the Center supported the 

Senator, you can imagine some of us thought him too conservative in his approach 

to these issues, although we did agree with him on the $15 minimum wage. Economically, this would have had little impact on trade, as workers at this price point 

often generate much more in productivity than their wage returns to them. This is 

why the economy is slow, even with low wage foreign imports. Such labor markets 

are what Welfare Economics call monopsonistic (either full monopsony, oligopsony 

or monopsonistic competition—which high wage workers mostly face). Foreign 

wages are often less than the current minimum wage, however many jobs cannot 

be moved overseas. 

As we stated at the outset, the best protection for American workers and American 

consumer are higher marginal tax rates for the wealthy. This will also end the possibility of a future crisis where the U.S. Treasury cannot continue to roll over its 

debt into new borrowing. Japan sells its debt to its rich and under-taxes them. They 

have a huge Debt to GDP ratio, however they are a small nation. We cannot expect 

the same treatment from our world-wide network of creditors, an issue which is also 

very important for trade. Currently, we trade the security of our debt for consumer 

products. Theoretically, some of these funds should make workers who lose their 

jobs whole—so far it has not. This is another way that higher tax rates and collection (and we are nowhere near the top of the semi-fictitious Laffer Curve) hurt the 

American workforce. Raising taxes solves both problems, even though it is the last 

thing I would expect of the Majority. 

We make these comments because majorities change—either by deciding to do the 

right thing or losing to those who will, so we will keep providing comments, at least 

until invited to testify. 

Thank you for the opportunity to address the committee. We are, of course, available for direct testimony or to answer questions by members and staff. 

DEMOCRATS ABROAD

P.O. Box 15130 

Washington, DC 20003 

USA 

www.democratsabroad.org 

www.votefromabroad.org 

U.S. Senate 

Committee on Finance 

Dirksen Senate Office Building 

Washington, DC 20510–6200 

October 3, 2017 

Re: Senate Finance Committee hearing on ‘‘International Tax Reform’’ 

Dear Chairman Hatch, Ranking Member Wyden, and all Members of the Committee, Democrats Abroad greatly appreciates you holding this important hearing on 

international tax reform and allowing for stakeholders to submit testimony into the 

record. Like you, Democrats Abroad believes that comprehensive tax reform is long 

overdue for middle-class Americans, working-class families, small businesses, job 

creators, and especially so for American taxpayers living and working abroad. 

As you know, millions of U.S. citizens reside overseas, normally for family reasons, 

but also for work, education or adventure. As Americans, we are all subject to taxfiling requirements in both our country of residence and to the U.S. even though 

our use of the services provided by our federal taxes is comparably negligible. Furthermore, the U.S. is only one of two countries in the world still taxing non-resident 

citizens based on the outdated system of citizenship-based taxation. 

Fortunately, with Congress and the Administration ready to move forward together 

on the most significant tax reform in three decades, we believe that lawmakers are 

presented with an ideal opportunity to correct this injustice to Americans abroad 

and restore fairness to the taxation playing field. 

96 

1 Grinberg, Itai, 2012, ‘‘Beyond FATCA: an evolutionary moment for the international tax system,’’ 27 January, Georgetown University Law Center, p. 59. http://scholarship.law. 

georgetown.edu/cgi/viewcontent.cgi?article=1162&context=fwps_ papers. 

Democrats Abroad joins the rest of the Americans abroad community in our strong 

support for a tax reform package which includes: 

• Reforms to the U.S. tax code which reduce inequality, boosts opportunity, and 

raises revenue to meet public demands primarily from those with the greatest 

ability to pay; 

• Residency-based taxation as a replacement for the current system of citizenshipbased taxation; 

• Safeguards to prevent tax abuse by those seeking to hide offshore income; 

• Relief from foreign financial account reporting for Americans abroad genuinely residing in their country of residence; 

• Simplified and improved tax filing for Americans living abroad; and 

• Deficit-neutrality and revenue-neutrality to ensure tax cuts are fully paid for and 

Congress does not add to our nation’s existing debt. 

Itai Grinberg, your witness in today’s hearing, previously wrote a paper on international taxation in which he stated, ‘‘It is inappropriate for regulatory rules to 

make it difficult for [Americans living abroad] to maintain residence country financial accounts.’’ 1 We strongly agree with Mr. Grinberg’s assessment in that everyday 

Americans abroad experience financial hardship which results in not being able to 

save for retirement or utilize financial services in the same manner as Americans 

living within U.S. borders. 

Although we are disappointed that the Senate has decided to advance the FY18 

budget resolution with reconciliation instructions on tax reform, we are encouraged 

by this hearing that all perspectives will be considered by the Senate in crafting tax 

legislation. 

Thank you for your consideration of this submission for inclusion into the hearing 

record. If you or your staff have any questions regarding this letter or if you would 

like to discuss an expanded outline of our tax reform recommendations, please feel 

free to contact me or Ms Carmelan Polce, Chair of the Democrats Abroad Taxation 

Task Force, at cpolce@tpg.com.au. 

Respectfully submitted, 

Julia Bryan 

International Chair, Democrats Abroad 

E-mail: chair@democratsabroad.org 

Phone: (843) 628–2280 

FACT COALITION

1225 Eye St., NW, Suite 600 

Washington, DC 20005 

+1 (202) 827–6401 

@FACTCoalition 

www.thefactcoalition.org 

October 3, 2017 

The Honorable Orrin Hatch 

Chairman 

U.S. Senate 

Committee on Finance 

219 Dirksen Senate Office Building 

Washington, DC 20510–6200 

The Honorable Ron Wyden 

Ranking Member 

U.S. Senate 

Committee on Finance 

219 Dirksen Senate Office Building 

Washington, DC 20510–6200 

RE: October 3rd hearing on ‘‘International Tax Reform’’ 

Dear Chairman Hatch and Ranking Member Wyden, we are writing on behalf of the 

Financial Accountability and Corporate Transparency (FACT) Coalition to thank 

97 

1For a full list of FACT Coalition members, visit https://thefactcoalition.org/about/coalitionmembers-and-supporters/. 2Kimberly A. Clausing, ‘‘Profit shifting and U.S. corporate tax policy reform,’’ Washington 

Center for Equitable Growth, May 2016, http://equitablegrowth.org/report/profit-shifting-andu-s-corporate-tax-policy-reform/. 3 Institute on Taxation and Economic Policy, ‘‘Fortune 500 Companies Hold a Record $2.6 Trillion Offshore,’’ March 28, 2017, https://itep.org/fortune-500-companies-hold-a-record-26-trillionoffshore/. 4 Alexandria Robins and Michelle Surka, ‘‘Picking Up the Tax 2016,’’ U.S. PIRG, November 

29, 2016, http://www.uspirg.org/reports/usp/picking-tab-2016. 5Speaker Ryan Press Office, ‘‘Unified Framework for Fixing our Broken Tax Code,’’ Office of 

the Speaker of the House, September 27, 2017, https://www.speaker.gov/sites/speaker. 

house.gov/files/Tax%20Framework.pdf. 

you for holding a public hearing on the international aspects of tax reform and to 

offer our recommendations on how to improve the American tax system. 

The FACT Coalition is a non-partisan alliance of more than 100 state, national, and 

international organizations working toward a fair tax system that addresses the 

challenges of a global economy and promoting policies to combat the harmful impacts of corrupt financial practices.1

While the problems with the tax code span across many areas, we especially appreciate this hearing’s focus on updating our international tax system and reforming 

the tax code so that it strengthens American business. The tax treatment of multinational corporations is one of the areas of the tax code most in need of substantial 

reform. In fact, a prominent tax economist estimates that up to $135 billion is lost 

each year to offshore corporate tax avoidance.2 The ability of companies to defer 

paying taxes on their offshore earnings has allowed them to accumulate a stunning 

$2.6 trillion in earnings ‘‘offshore’’ on which they are avoiding $750 billion in taxes.3

Allowing multinational corporations to continue to engage in large-scale offshore tax 

avoidance hurts small and wholly domestic businesses. Every dollar companies 

avoid in taxes must be paid in one form or another. On the one hand, offshore tax 

avoidance means that we are short on the revenue to make needed public investments in things like infrastructure, education, and health care that make our economy competitive over the long term. On the other hand, small and domestic businesses are disadvantaged because they are the ones left picking up the tab for all 

the tax avoidance by their multinational competitors. In fact, one study found that 

the total potential burden on small businesses for the cost of federal tax avoidance 

could be as high as $4,481 per company on average.4

We, as a coalition, believe that any tax reform effort should take four critical steps 

to dramatically cut back on the gaming by multinationals. 

1. Stop Giving Multinationals an Advantage over Wholly Domestic and 

Small Businesses 

We should immediately close the loophole that allows companies to defer paying 

taxes by moving their profits offshore. As U.S. citizens, you and I—and every domestic company—pay taxes on what we earn, regardless of where we earn it. None of 

us can defer our tax obligations. But multinational companies can create foreign 

subsidiaries, divide themselves in ways that game the system, and defer paying all 

or most of the taxes due on their foreign earnings. It’s not fair, and it’s anticompetitive. They use our roads and bridges to ship their goods, recruit from our 

colleges and universities, and are protected by our laws and our military. They 

should not, through loopholes and accounting gimmicks, defer paying their share 

and leave the rest of us to pick up the tab. 

Also, we should not favor multinationals over wholly domestic and small businesses 

by giving them a special rate. Shockingly, some—including the so-called ‘‘Big Six’’— 

have proposed a lower tax rate for those companies that shift jobs and money overseas.5 That makes no sense. 

2. Stop U.S. Companies From Claiming Foreign Residence Simply to Dodge 

Taxes 

Some large U.S. companies buy up smaller, foreign companies, move their legal residence to one of the tax haven countries (a paper transaction, no moving van required) and claim they are no longer U.S. residents to avoid paying taxes. They still 

have access to our markets and many of the privileges they enjoyed as U.S. companies, but stop paying the taxes needed to support that access. That means you and 

98 

6The FACT Coalition, ‘‘FACT Sheet: Public Country-by-Country Reporting,’’ September 27, 

2017, http://thefact.co/aldnl. 7 Clark Gascoigne, ‘‘Over 100 Organizations Urge Congress to Reject Giant Tax Loophole for 

Offshoring and Tax Avoidance,’’ The FACT Coalition, October 2, 2017, http://thefact.co/3Kzko. 

I are left paying their share. We should strengthen ‘‘anti-inversion’’ and earnings 

stripping rules to prevent that type of gaming. 

3. Ensure Multinationals Play by the Rules by Publicly Reporting Their 

Profits and Taxes Paid 

Multinational companies do not publicly report on where they are making their 

money or what taxes they are paying to whom. We have no idea exactly how they 

are gaming the system—what they tell us versus what they tell other countries. 

They should have to write it down in one place and report it on a country-by-country 

basis, so that the public can see what they are really paying.6

4. Don’t Make Things Worse 

Our current system allows U.S. companies to delay paying taxes on U.S. profits they 

shift overseas. That’s bad enough. Some in Congress have proposed allowing the 

profit-shifting without ever having to pay what they owe. That’s the ultimate loophole. If we move toward what’s called a ‘‘territorial tax system,’’ which really means 

giving multinational corporations a zero tax on profits they shift abroad, the only 

companies left paying U.S. corporate income taxes would be those too small to game 

the system. It also means that multinational companies would face an incentive to 

offshore jobs to countries with lower tax rates than the U.S. That is why more than 

100 organizations sent a letter to Congress on Monday urging legislators to reject 

a ‘‘territorial tax system.’’ 7

If there is one thing that policymakers, the media, and the public can agree on, it 

is that the tax code is long overdue for a substantial overhaul. We appreciate the 

diligent work you and committee staff have put into exploring these issues and hope 

to work with you moving forward on tax reform. 

For additional information, please contact Clark Gascoigne at cgascoigne@ 

thefactcoalition.org or Richard Phillips at rphillips@itep.org. 

Sincerely, 

Gary Kalman 

Executive Director 

Clark Gascoigne 

Deputy Director 

Richard Phillips 

Policy and Communications Co-Chair 

LETTER SUBMITTED BY GINA M. HUNT

October 1, 2017 

U.S. Senate 

Committee on Finance 

Dirksen Senate Office Bldg. 

Washington, DC 20510–6200 

RE: Full committee hearing, ‘‘International Tax Reform,’’ October 3, 2017 

Dear Sirs and Madams, 

I am writing you today to request that you consider changing international tax laws 

governing American citizens living abroad, not just those governing American businesses and corporations abroad. I don’t imagine that you have any idea what it is 

like for the 9,000,000 of us, so I respectfully request that you read and consider 

every communication sent to you from one of us. 

I earned a salary of just over ÷50,000 last year and paid 40% of that in French 

taxes. That means that I netted somewhere around $35,000 USD—way, way, way 

under your salary, I am certain. I point this fact out because I need you to realize 

that I am not a rich person living abroad but a middle-class one. I own no home 

anywhere and have very little in total assets. And yet, I am required to file taxes 

in the U.S. every year because of citizen-based taxation. I also have my meager 

99 

1The Investment Company Institute (ICI) is the leading association representing regulated 

funds globally, including mutual funds, exchange-traded funds (ETFs), closed-end funds, and 

unit investment trusts (UITs) in the United States, and similar funds offered to investors in 

jurisdictions worldwide. ICI seeks to encourage adherence to high ethical standards, promote 

public understanding, and otherwise advance the interests of funds, their shareholders, directors, and advisers. ICI’s members manage total assets of US$20.5 trillion in the United States, 

serving more than 100 million U.S. shareholders, and US$6.7 trillion in assets in other jurisdictions. ICI carries out its international work through ICI Global, with offices in London, Hong 

Kong, and Washington, DC. 

French bank accounts reported to the U.S. Government every year because of 

FATCA. 

I never owe anything in U.S. taxes, but the paperwork is complicated nonetheless. 

It is costly to have it completed correctly, and that’s the least of the problems with 

these issues. If I were to make twice as much as I make now, I still would not be 

rich, and yet, I would have to pay income taxes on some of that income in both 

France and in the U.S. How can that be justified? It can’t. And citizens who are 

unaware of the requirement to file or citizens who don’t file for any reason can be 

fined outrageous fines even though they owe nothing in U.S. taxes. That is simply 

abusive. 

As for FATCA, this is a clear violation of our 4th amendment rights, plain and simple. It is also the reason that 1 in 10 Americans living abroad cannot get a bank 

account, and that number is growing daily. Think about that for a minute. Could 

you function in your daily life without a bank account? Of course you couldn’t. 

You see, the rich can get around these things. They can pay accountants and lawyers and find a way around anything they want to find a way around. The banks 

find a way around steep fines charged by the U.S. Government for reporting mistakes that they may make and the like by refusing to open bank accounts for Americans. 

But some Americans, those of us who are middle-class and who are the vast majority of Americans living abroad cannot afford to pay our way out of this noose that 

the U.S. Government has put around our necks and is tightening every day. So for 

the past several years, more and more Americans have renounced their American 

citizenship. In 2016, a record number of Americans renounced. Think about that for 

a minute. Record numbers of Americans renouncing citizenship. I never thought I’d 

see that day, and I am heartbroken that it is here. They aren’t the rich, as some 

might have you believe. Again, the rich can get around oppressive regulations. 

These people are the backbone of America—the middle class, and they are renouncing citizenship because they feel that they have no other choice. This is nothing 

short of tragic. 

You have the opportunity to fix this nightmare imposed on us by the Obama administration. Repeal FATCA. It is not catching fat-cats; it is pushing middle-class Americans over the edge. Change the U.S., the only country in the world other than Eritrea to impose citizen-based taxation, to a system of residency-based taxation. We 

should pay taxes where we live, and believe me, we do, but citizen-based taxation 

and FATCA are cruel and unusual tax regulations that are punishing law-abiding, 

middle-class Americans just because they live outside of the U.S. We are the 

9,000,000 unpaid ambassadors of the U.S. We are hard-working Americans. And we 

deserve a government that does not treat us as criminals and ignore our constitutional rights. 

Thank you. 

Regards, 

Gina M. Hunt 

INVESTMENT COMPANY INSTITUTE (ICI) 

1401 H Street, NW 

Washington, DC 20005–2148 

202–326–5800 

www.ici.org 

The Investment Company Institute (‘‘ICI’’) 1 appreciates the opportunity to provide 

the Committee its comments regarding international tax reform. ICI applauds the 

100 

2https://www.ici.org/pdf/2017_ factbook.pdf, Table 65. 3 Id., Table 66. 

Committee for its efforts to improve and simplify the tax code in a manner that 

spurs U.S. economic growth and job creation. 

As the Committee is aware, an important component of any comprehensive tax reform initiative is updating our international tax system to make our nation more 

competitive in the global economy and to encourage foreign investment in the 

United States. 

ICI supports changes to the Internal Revenue Code (‘‘Code’’) that would increase foreign investment in U.S. regulated investment companies (‘‘RICs’’), more commonly 

known as mutual funds. Specifically, ICI proposes an investment vehicle that would 

encourage foreign investment in RICs by reducing the disparate tax treatment between U.S. and foreign funds and thereby allow RICs to compete more effectively 

with foreign funds for foreign investors. 

Foreign Investment in U.S. RICs Should Be Encouraged 

ICI strongly supports increasing the international competitiveness of U.S. mutual 

funds. Almost 47 percent of all mutual fund assets are held by U.S.-domiciled 

funds.2 The percentage of global fund industry assets held by U.S. funds, however, 

has declined as investment markets have globalized. 

Changes taking place in Asia, Europe, and elsewhere are providing many significant 

opportunities for growth in the asset management industry. ‘‘Cross-border mutual 

funds’’ (i.e., mutual funds that are domiciled in one country but offered for sale in 

other countries) have enjoyed explosive growth. At the end of 2016, there were more 

than 100,000 foreign mutual funds and ETFs in existence, compared to fewer than 

10,000 mutual funds and ETFs domiciled in the United States.3 Today virtually no 

U.S. mutual fund is marketed or offered on a cross-border basis, even though many 

cross-border mutual funds invest in U.S. assets. 

The U.S. tax laws require U.S. mutual funds to distribute essentially all their income and gains on an annual basis to avoid double taxation. This distribution requirement creates a substantial barrier to marketing U.S. funds abroad because foreign investors incur a home-country tax when such income and gain is distributed 

to them. Foreign investors may also be subject to higher tax rates if their home 

country treats capital gain dividends paid by RICs as dividends that are not eligible 

for preferential capital gains tax rates. Many foreign funds, in contrast, are permitted to retain (or ‘‘roll up’’) their income without either current taxation of the 

fund or any obligation to distribute the income to investors. 

U.S. mutual funds could compete effectively against foreign mutual funds if they 

were not required to distribute their income currently to their foreign investors. 

U.S. products would offer several advantages to foreign investors. First, the size and 

sophistication of U.S. funds allow them to invest more efficiently and operate at 

lower cost than their smaller foreign counterparts. Second, the protection afforded 

by U.S. securities regulation is considered state of the art, including in particular 

the protections afforded by the Investment Company Act of 1940. Third, the U.S. 

has a deep pool of highly skilled workers to run its investment products. Fourth, 

the U.S. already has underlying retail investment products in place for all major 

asset classes that would make the IRIC attractive to foreign investors. 

Investment Vehicle to Encourage Foreign Investment in U.S. RICs 

ICI proposes an investment product called an International Regulated Investment 

Company (‘‘IRIC’’) that is designed to reduce U.S. tax disadvantages that prevent 

U.S. mutual funds from competing effectively against foreign mutual funds. Prompt 

enactment of legislation creating IRICs is critical if U.S. mutual funds are to compete in the rapidly globalizing investment markets. If the IRIC proposal is not enacted, U.S. funds (particularly at small and medium sized fund companies) will continue to cede ground to foreign funds. 

The IRIC provides foreign investors with a feeder vehicle through which they can 

access a U.S. mutual fund without triggering certain negative tax consequences in 

their home countries. An IRIC would be a U.S. mutual fund that could be acquired 

only by foreign shareholders (only nonresident alien individuals and their foreign 

estates, and qualified foreign pension funds) and that would invest only in the 

shares of a single U.S. mutual fund that qualifies as a RIC under Subchapter M 

of the Internal Revenue Code. The IRIC would register with the Securities and Exchange Commission under the Investment Company Act of 1940. 

101 

The IRIC would not be required to distribute its income or capital gain annually. 

IRIC investors, however, would effectively pay the same annual U.S. income tax as 

if they had invested directly in the RIC shares held by the IRIC. Instead of tax 

being collected on distributions by the RIC to the foreign investor, however, the tax 

would be paid by the IRIC on the distributions it receives from the underlying RIC. 

The tax rate applied to the IRIC’s taxable income would be 30 percent (the current 

rate applied to taxable distributions, such as dividends, paid to foreign persons) or 

15 percent (if all the IRIC’s shareholders were entitled under applicable tax treaties 

with the U.S. to a rate of 15 percent or less) and the IRIC made a ‘‘treaty IRIC’’ 

election to pay tax at that rate. 

Thus, the same U.S. tax revenue would be collected, but the foreign investor would 

not be subject to tax in his or her home country until the IRIC shares were sold 

(absent a current inclusion tax regime comparable to the PFIC regime in the U.S.). 

The RIC in which the IRIC invests would remain subject to the Internal Revenue 

Code’s distribution requirements, as under present law. 

Conclusion 

ICI commends the Committee for its goal of modifying the international provisions 

of the Code in a manner that will improve U.S. competitiveness abroad and thereby 

enhance foreign investment in the U.S. The proposal that ICI advances is consistent 

with this goal and, if adopted, will increase foreign investment in U.S. RICs. 

ICI would be pleased to work with the Committee on the IRIC proposal or other 

legislation that would level the playing field so U.S. mutual funds are able to better 

compete in the rapidly globalizing investment markets. 

LETTER SUBMITTED BY JEFFERY M. KADET

October 13, 2017 

U.S. Senate 

Committee on Finance 

Dirksen Senate Office Bldg. 

Washington, DC 20510–6200 

Dear Sirs: 

I respectively submit the attached memorandums. I would be please to respond to 

any questions that you might have. 

Yours very truly, 

Jeffery M. Kadet 

MEMORANDUM 1 

CONCERNING INTERNATIONAL TAX REFORM 

Public discussion and what one sees in the press imply that some form of territorial 

tax system, perhaps with some safeguards to hold back profit shifting, is the only 

tax reform option to replace our present dysfunctional ‘‘deferral’’ system for taxing 

U.S. based multinational corporations. Maybe that’s because 99% of the few persons 

who understand what ‘‘deferral’’ and ‘‘territorial’’ really mean work for either the 

multinationals (MNCs) that would benefit from adopting territoriality or the law, 

accounting and lobbying firms that are well paid to service the MNCs. 

As for the other 1%, those are mostly law school professors without lobbyists. (Full 

disclosure: The writer provided international tax advice for more than 30 years to 

MNCs and is now an adjunct faculty member teaching lawyers how to do likewise 

within a graduate Tax LLM program within a law school.) 

Some of the 1% strongly believe that a residence-based system for active business 

income is far far superior to the territorial system, even with safeguards built in. 

There are various terms that are used for residence-based systems. They include 

worldwide consolidation and worldwide full-inclusion. In short, the idea is to tax any 

U.S. headquartered group on all of its income currently at the home country tax 

rate, no matter in which country or in which subsidiary that income is earned. 

There are a few different approaches regarding how such a system could be impleVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00105 Fmt 6601 Sfmt 6621 R:\DOCS\32785.000 TIM
102 

1This memorandum is intentionally short and concise. For more detailed discussion, please see ‘‘U.S. Tax Reform: Full-Inclusion Over Territorial System Compelling,’’ 139 Tax Notes 295 

(April 15, 2013), available at SSRN: http://ssrn.com/abstract=2275488. 

mented (e.g., through subpart F income inclusions or through a consolidation computation), but that is not the purpose of this letter. Rather, the purpose of this letter 

is to set out in brief and concise terms why a residence-based system is vastly superior to a territorial system.1

The chart below summarizes the content of this letter. 

Contrasting Territorial and Residence-Based Systems 

Policy Issue Territorial System Residence-Based 

System 

System Best 

Accomplishing Policy 

Objective 

Competitiveness: 

U.S. MNCs vs. foreign MNCs 

A more level playing 

field but differences 

will persist due to 

varying CFC rules 

among countries 

Competitive disadvantage for a few U.S. 

MNCs versus foreign MNCs 

Territorial 

system 

Competitiveness: 

U.S. MNCs vs. 

pure U.S. domestic corporations 

Advantages of U.S. 

MNCs over domestic corporations increase further 

More level playing 

field 

Residence-based 

system 

Neutrality (including the export of 

jobs) 

Strong encouragement to move jobs, 

activities, and ownership of IP from 

the U.S. to overseas 

Neutrality achieved Residence-based 

system 

Simplification CFC rules and subjective areas like 

transfer pricing 

critical due to exemption of foreign 

earnings 

Real simplification 

through elimination 

of some problematic 

subjective areas 

(e.g., no subpart F 

and TP less important) 

Residence-based 

system 

Broadening the tax 

base (ability to 

generate tax revenues) 

Narrowing the tax 

base by exempting 

foreign earnings 

from any federal 

tax 

True broadening of 

the tax base by 

making currently 

taxable all foreign 

earnings whether 

repatriated or not 

Residence-based 

system 

This base broadening 

can pay for corporate rate reduction 

Encouragement of 

‘‘game playing’’ to 

shift profits from 

U.S. to low-tax 

countries 

Even stronger encouragement than presently exists under 

our deferral system 

Eliminated or significantly curtailed Residence-based 

system 

Lock-out effect Not fully solved if 

95% dividendreceived deduction 

mechanism used 

Totally solved Residence-based 

system 

What will a residence-based system accomplish? 

It promotes fair competition—‘‘We need a level playing field with our foreign 

competitors.’’ This is the rallying cry of the 99% as they argue for not only a lower 

corporate rate but also a territorial tax system. Yet an even more important competition issue is seldom mentioned. That is the present non-level playing field between U.S. corporations that operate solely within the U.S. and those that operate 

internationally. 

Say two U.S. companies manufacture a widget. One does it in Poughkeepsie while 

the other does it through a subsidiary in Singapore. The first has its profits taxed 

at 35% (or in the future some lower rate) plus NY State tax, while the second is 

taxed by Singapore at a much lower rate . . . maybe even zero. This unfairness will 

be much worse under a territorial system. A residence-based system would elimiVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00106 Fmt 6601 Sfmt 6621 R:\DOCS\32785.000 TIM
103 

nate it. And frankly, this domestic-international fairness issue is the tax policy issue 

that is more important to make sure we get right. 

But what about the competition issue with foreign-based MNCs? Without meaning 

to be unkind, the continued whining of MNCs that competition justifies their paying 

little or no tax is simply a red herring. The roughly $3 trillion of accumulated overseas profits is powerful proof of this. And after the U.S. corporate tax rate is reduced to something within G20 norms, the competition issue will be completely put 

to rest. 

It broadens the tax base, allowing for a reduced rate—This is a ‘‘no brainer.’’ 

A territorial tax system eliminates billions from the tax base and puts more pressure on the remaining U.S. taxpayers. Sure, take away more depreciation and other 

benefits from domestic U.S. taxpayers to give tax-free treatment to MNCs that conduct substantial activities outside the U.S. 

A residence-based system broadens the base since foreign income now going untaxed 

becomes currently taxable. A broadened tax base supports the lower corporate tax 

rate that both political parties say they want. And, as noted above, this lower rate 

would make clear that there is no disadvantage faced by our MNCs from their foreign competitors. 

It reduces the incentive to export jobs—Remember those widgets manufactured 

in Poughkeepsie? The tax incentive to move those jobs to Singapore under our current deferral system would become even stronger under a territorial system. Under 

a residence-based system, this incentive to move operations and jobs overseas virtually disappears. 

It is neutral as to physical location and legal ownership—A tax system should 

not affect business decisions regarding the physical location of assets, personnel, 

and operations. Business factors such as being close to raw materials and/or customers, labor, and transportation costs, etc. should govern such decisions. The same 

can be said for the legal ownership of business operations and assets, importantly 

including high value intangibles (intellectual property). 

The deferral system we have now strongly encourages companies to transfer actual 

or economic ownership of valuable intangible property created in the U.S. to tax havens. It also encourages supply chain and other structures that allow MNCs to move 

the bulk of their operating profits out of the U.S. to foreign subsidiaries in zero or 

low tax locations that assume business risk and hold rights to the MNC’s intellectual property. ‘‘Transfer pricing’’ concepts and rules are aggressively used to maximize profits in these tax haven locations and minimize profits in the countries 

where actual R&D, manufacturing, and sales activities take place. 

A territorial system will simply increase the motivation for the game playing that creates these convoluted legal and tax structures. A residence-based system, on the other 

hand, really approaches true neutrality. Under most circumstances, it should eliminate U.S. tax as a factor and allow business decisions to be made solely on the basis 

of relevant business factors. 

It can promote simplification—Simplification is a mixed bag. Depending on how 

a residence-based system is implemented, it could eliminate some very troublesome 

areas of the tax law (e.g., fewer transfer pricing issues and elimination of subpart 

F). A territorial system, for the most part, will leave in place the current complications and likely make them much worse. These complications are necessary to counteract the increased game playing that the territorial system incentivizes. 

It should be added here that the efforts of lobbyists to gut any safeguards against 

future profit shifting (e.g., stronger subpart F rules, a minimum tax, etc.) and the 

creativity of MNCs and their legal, accounting, and tax advisors to come up with 

new schemes mean that game playing under a territorial system will reach new 

heights. This will result in the exact opposite of any tax policy simplification goals. 

It completely solves the ‘‘trapped cash’’ problem—Under the deferral system, 

returning foreign earnings to the U.S. via dividends triggers the up to 35% U.S. tax 

(and sometimes foreign withholding taxes as well). As is well known, many MNCs 

have stockpiled billions of such low- or zero-taxed foreign earnings outside the U.S. 

and often maintain that those earnings are permanently invested outside the U.S. 

to provide higher earnings-per-share, higher stock prices, and higher equity-based 

compensation for CEOs and other executives. 

104 

2 E.g., the October 2011 Discussion Draft from House Ways and Means Committee Chairman 

Dave Camp (R–MI) and the February 2012 proposal from Senator Mike Enzi (R–WY). 3See suggested approach to fix this issue in ‘‘Territorial W&M Discussion Draft: Change Required,’’ 134 Tax Notes 461 (January 23, 2012), available at SSRN: http://ssrn.com/ 

abstract=1997515. 4 ‘‘. . . Instead of rewarding corporations for dodging U.S. taxes, lawmakers should end the 

system of deferral that encourages them to do so, while taxing their offshore profits at the full 

35 percent rate (while still allowing for a foreign tax credit).’’ See ‘‘$2.1 Trillion in Corporate 

Profits Held Offshore: A Comparison of International Tax Proposals,’’ Citizens for Tax Justice 

(July 14, 2015), available at: http://ctj.org/pdf/repatriation0715.pdf. 

A territorial system should eliminate the trapped cash issue. However, a territorial 

system such as those presented in prior years 2 unbelievably fails to do this. The 

mechanism that was chosen (a 95% dividend-received deduction) would continue to 

cause actual dividends to trigger tax to the extent of the 5% taxable portion.3 This 

may seem small. It will, though, impede dividend payments and continue the 

trapped cash problem. This issue is fixable if Congress decides on a 100% dividend 

received deduction. If it does so, though, it must at the same time put in strong 

rules to deny any tax deduction for interest costs and all other expenses that are 

directly or indirectly attributable to foreign investment or foreign business, the profits of which would be exempt under the territorial system. Getting back to simplification, such expense disallowance rules and the need to counteract the accounting games that MNCs will play to minimize the disallowed expenses means more 

complication and less simplification. 

A residence-based system totally eliminates the trapped cash problem. 

Conclusion 

Territorial system vs residence-based system . . . it is not a toss-up. Without doubt, 

for the benefit of our country and from virtually all tax policy perspectives, a 

residence-based system is vastly superior. 

The 99% downplay the above concerns (export of jobs, etc.) and explain that strong 

anti-avoidance rules will of course accompany any territorial system. Such rules, it 

is argued, would prevent many of these terrible results. 

Yes, truly strong anti-avoidance rules could prevent some of the worst excesses. But, 

frankly, it is naive to think that such strong rules would be put in place. First, the 

rules under consideration within Congress would be understood by few and attacked 

viciously by corporate lobbyists. So, whatever gets enacted will be very weak. Second, even if something halfway strong were to be enacted, our high-powered tax consulting community has a century-long tradition of working around anti-avoidance 

rules. So, I have little faith that any strong or effective anti-avoidance rules will accompany a territorial system. And this will mean the continued and accelerated export of jobs along with erosion of the U.S. tax base. 

MEMORANDUM 2 

CONCERNING INTERNATIONAL TAX REFORM 

Taxation of Accumulated Deferred Foreign Income 

as of the Transition Date 

The Committee’s work to develop international tax reform will undoubtedly include 

some transition from the present deferral system to some other system. As an integral part of that transition, it is expected as well that proposals will include taxation on all ‘‘accumulated deferred foreign income’’ existing as of the transition date. 

Tax Rate to Apply to Accumulated Deferred Foreign Income Upon Transition 

At one end of the spectrum, some such as Citizens for Tax Justice say all such earnings should be taxed at the full 35%.4

At the other end of the spectrum, a number of the prior transition proposals would 

apply various rates far lower than 35%, some of them being in the single digits with 

Representative Camp’s Tax Reform Act of 2014 and the House Republican Blueprint 

bottoming out at 3.5% on earnings reinvested into non-liquid assets. 

105 

5See more detail in ‘‘Fair Approaches for Taxing Previously Untaxed Foreign Income,’’ 146 

Tax Notes 1385 (March 16, 2015), available at: http://ssrn.com/abstract=2587103. 6See a partial listing of such structures in ‘‘BEPS: A Primer on Where It Came From and 

Where It’s Going,’’ 150 Tax Notes 793 (February 15, 2016). 

Under the CTJ approach, we would, so to speak, clobber every multinational (MNC) 

that has actually conducted real and legitimate activities in foreign countries in accordance with a consistent congressional intent that goes back almost forever. 

Under the prior transition proposals, we would grant an major windfall to every 

MNC that has engaged in aggressive profit shifting in which they moved 35% profits 

out of the U.S. and into tax havens. They are waiting for this windfall with their 

tongues hanging out. 

Whatever the Committee proposes needs an administratively workable mechanism 

that neither clobbers the former nor rewards the latter. 

Two Approaches for an Administratively Workable Mechanism 5

1. ‘‘Camp’’ Approach. In his 2014 discussion draft, Camp broke CFC earnings into 

two portions by imposing a higher 8.75% rate on earnings being held in cash and 

cash-equivalent forms. The remaining earnings would be subject to the lower 3.5% 

rate. This approach is administratively easy to apply, objective, and definitely a 

workable solution. However, it focuses on the form in which CFC earnings are held 

on the transition date and not on any measure of aggressive profit shifting. But having said this, the existence of earnings that have been subjected to relatively little 

or no foreign tax and that are held in cash or cash-equivalent form is pretty good 

evidence of tax avoidance planning. So, it will generally be a very fair and administratively workable approach. 

With this in mind, the first suggested approach is to use Camp’s solution with all 

CFC previously untaxed foreign income—on transition to a new tax system—being 

subject to 35% but with an FTC offset to the extent of cash and cash equivalents. 

All remaining previously untaxed foreign income would be taxed on transition at 

whatever favorable less-than-35 % rate Congress chooses. 

2. Tax-Structured Vehicle Approach. This approach defines ‘‘tax-structured vehicle.’’ For any such vehicle, its previously untaxed foreign income—on transition to a 

new tax system—would be subject to 35% with an FTC offset. The previously untaxed 

foreign income within all other CFCs would be taxed on transition at whatever favorable less-than-35% rate Congress chooses. 

As a first step to identifying tax-structured vehicles, Treasury would publish a listing of countries that can be used as the place of incorporation of CFCs that earn 

low- or zero-taxed foreign income through profit-shifting arrangements. Treasury 

would also provide examples of structures meant to achieve low- or zero-taxes. 

A presumption of tax-structured vehicle status would be applied to each CFC established in the listed countries. A U.S. shareholder MNC involved with the vehicle 

could attempt to rebut this presumption by establishing to the satisfaction of the 

Treasury secretary or his delegate, based on a facts and circumstances review, that 

the establishment and operation of the specific CFC involved no tax-motivated 

structuring. If this presumption is not successfully rebutted, any previously untaxed 

foreign income within the CFC would be subject to the 35% tax, with an FTC offset. 

If the Committee chooses this ‘‘tax-structured vehicle’’ approach over the ‘‘Camp’’ approach, it is strongly suggested that applicable committee reports include a clear 

statement of the principles behind the definition of tax-structured vehicle and numerous examples.6 Clear legislative instructions would not only provide necessary 

guidance to Treasury and the IRS, but also should importantly limit taxpayer presumption-rebuttal efforts to situations that truly deserve consideration. Further, the 

rules should be clear that the burden of proof is on the taxpayer to support any effort at rebuttal of the presumption. 

Application of Interest 

The various proposals and discussion drafts released over the past 6 years have all 

provided for installment payments but have been inconsistent regarding interest. 

Several have been silent concerning any interest charge. 

This section’s discussion assumes that the Committee will include in its proposals 

the above suggestion for application of a 35% tax rate to all previously untaxed foreign income that results from profit shifting, as determined under the ‘‘Camp’’ apVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00109 Fmt 6601 Sfmt 6621 R:\DOCS\32785.000 TIM
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proach, the ‘‘tax-structured vehicle’’ approach, or any other approach that the Committee adopts. 

For any previously untaxed foreign income that will qualify for a favorable lessthan-35% rate, any interest charge is economically only an adjustment of the favorable tax rate. (This, of course, ignores any effect if the interest were tax deductible; 

in this context, if the Committee requires an interest charge, it should specifically 

be nondeductible.) It also seems likely that most taxpayers would choose to pay in 

installments to defer those tax payments. Given that earlier payment would be beneficial to our country’s finances, perhaps discounts for early payment could be considered if there is no separate interest charge. 

The previously untaxed foreign income that would be subjected to the 35% tax rate 

has resulted from aggressive profit shifting. Therefore, the applicable taxpayer has 

already had the real economic benefit of deferral for years. There is no reason for 

extending the deferral period even more by allowing an interest-free installment 

payment scheme. Accordingly, the Committee’s proposals should include an interest 

charge to the extent of any installment payments. 

REINSURANCE ASSOCIATION OF AMERICA (RAA) 

1445 New York Avenue, NW, 7th Floor 

Washington, DC 20005 202–638–3690 www.reinsurance.org 

Modernization of Rules Governing Foreign Insurance 

Operations of U.S. Companies 

Executive Summary 

Current Tax Rules for U.S. Reinsurers Operating Abroad Do Not Achieve 

Their Goal and Must Be Updated 

The Active Finance Exception (AFE), adopted in 1998, was intended to make U.S. 

insurers with foreign operations more competitive in foreign markets. Changes in 

foreign regulations, developed in the nearly 20 years since the AFE rules were 

adopted, often impose high costs on reinsurers seeking to comply with AFE requirements. Worse yet, the AFE requirements are, in many respects, inconsistent with 

typical reinsurance group operations in international markets. As a result, many insurers’ foreign subsidiaries do not qualify for the AFE exception. 

Without the deferral of tax provided by the AFE, foreign reinsurance subsidiaries 

of an American insurer bear a higher tax burden than their local competitors and 

are placed at a competitive disadvantage. AFE rules must be updated if U.S. insurers with foreign operations are to be competitive internationally. 

AFE rules should be revised to promote U.S. reinsurers’ growth and competitiveness in international markets: 

1. The related party reinsurance disallowance should be revised or eliminated so 

that internal reinsurance from members of a worldwide group does not disqualify a global reinsurance company from AFE status (as it does under current law). 

2. The home country requirements should be repealed or revised. 

3. The insurance rules should exclude the full amount of investment income from 

assets held to satisfy foreign regulatory capital requirements. 

4. Property-casualty (P&C) insurance companies should be allowed to compute reserves using local rules, as life insurers can under current law. 

5. If a minimum tax on foreign earnings is adopted in tax reform, it should exclude any insurance income that cannot be repatriated due to local regulatory 

requirements. 

DISCUSSION 

Reinsurance Association of America 

The Reinsurance Association of America (RAA), headquartered in Washington, DC, 

is the leading trade association of property and casualty reinsurers doing business 

107 

in the United States. The RAA is committed to promoting a regulatory environment 

that ensures the industry remains globally competitive and financially robust. RAA 

membership is diverse, including reinsurance underwriters and intermediaries licensed in the U.S. and those that conduct business on a cross border basis. The RAA 

represents its members before state, federal and international bodies. 

Background 

Reinsurance is a transaction in which one insurance company indemnifies, for a premium, another insurance company against all or part of the loss that it may sustain 

under its policies of insurance. Reinsurers play a critical role in the insurance industry, and thus the economy, through their ability to mitigate risk for individual 

insurance companies. Reinsurance enhances the solvency of direct insurers and 

thereby helps to protect insured individuals and businesses. 

Reinsurance is a global business, with U.S. companies writing substantial foreign 

business, and foreign reinsurers writing substantial U.S. business. By assuming a 

variety of risks, diversified by line-of-business and geographic location, a reinsurer 

creates a more resilient portfolio, and one more likely to withstand the volatility of 

the property-casualty insurance business. A widely diversified portfolio enables a reinsurer to use its capital more efficiently, and thereby to hold down costs for primary insurers and policyholders. 

After the 2008 financial crisis, insurance and reinsurance companies have become 

subject to increasing levels of regulation, such as stricter, risk-based capital requirements (EU Solvency II) and greater internal controls such as Own Risk and Solvency Assessments (ORSA). Compliance costs for local regulation have increased 

dramatically since the AFE was enacted in 1998. In the Senate Finance Committee’s 

International Tax Working Group Report (2015), these problems were identified as 

requiring modification. 

Modernizing the Active Finance Exception rules for foreign operations of U.S. insurers is consistent with the Administration and Congress’s goals of simplifying the tax 

code, reducing the regulatory burden on American taxpayers, and growing the 

American economy. It will make U.S. reinsurers more competitive in foreign markets and expand jobs at U.S. headquarters that oversee foreign operations. 

Modernization of Insurance Tax Rules 

• Related party insurance income is excluded from qualifying insurance income 

under current law. This prohibition penalizes a reinsurance company for following 

standard industry practice. In order to operate efficiently, reinsurers must pool 

their global risks in order to achieve risk diversification and to manage capital 

more efficiently. 

» The law should recognize that reinsurance from members of a worldwide group is not a related party risk if the underlying risks are from 

unrelated parties. 

• The 30% home country requirement for ‘‘Exempt Insurance Contract’’ and 

50% home country requirement for ‘‘Qualifying Insurance Company’’ status in AFE prevent foreign reinsurers from qualifying under AFE. 

» The EU has become more integrated, and EU passporting rights now allow insurers regulated in one EU country to freely operate through the EU. The 

transfer of risks from many EU countries to a regional headquarters—standard 

industry practice—means that an EU headquartered company cannot meet the 

AFE’s same country requirements. 

» This freedom to operate through the EU from a single country causes the 30% 

home country requirement for an ‘‘exempt contract’’ and the 50% requirement 

for a ‘‘Qualifying Insurance Company’’ to be overly restrictive. 

» These requirements are inconsistent with reinsurance company business models. Insurance groups in Europe, Asia and South America, as well as the EU, 

pool risks at a regional headquarters company, yet foreign subsidiaries of U.S. 

insurers following industry ‘‘best practices’’ cannot satisfy the home country requirements because they transfer non-home country risks. U.S. insurers should 

be allowed to compete internationally without tax penalties. 

» The home country requirement should be repealed or revised. 

• AFE Should Recognize Regulatory Capital Requirements: Current APE 

rules limit the amount of investment income excluded to 1⁄3 of premiums earned 

for P&C and health insurance, and 110% of reserves for life and annuity conVerDate Sep 11 2014 21:05 Nov 14, 2018 Jkt 000000 PO 00000 Frm 00111 Fmt 6601 Sfmt 6621 R:\DOCS\32785.000 TIM
108 

1The TIE Coalition is comprised of leading American companies and trade associations that 

drive economic growth here at home and globally through innovative technology and biopharmaceutical products. For more information, please visit www.tiecoalition.com. 

tracts, computed using U.S. tax principles. After the 2008 financial crisis, many 

foreign regulators imposed risk-based capital requirements for greater amounts 

than permitted under current AFE rules. 

» The investment income from these assets is not available to the U.S. parent— 

the U.S. parent is being taxed on income it cannot receive. 

» The AFE rules should exclude investment income from the full amount 

of assets held to satisfy regulatory capital requirements. 

• Translation of Foreign Reserves: Current law’s requirement that foreign insurance reserves must be restated using U.S. tax accounting principles, with respect 

to the computation of both underwriting income and investment income, should 

be streamlined to avoid burdensome recalculations. 

» The need to allow ‘‘more realistic assessment of insurance company reserves’’ 

was specifically mentioned in the 2015 International Tax Working Group Report (p.79). 

» Life insurance companies are permitted to elect to use foreign reserves; P&C 

companies should also be permitted to use foreign reserves. 

» The law should permit property-casualty insurers and reinsurers to 

compute reserves based on local regulatory principles, as life insurers 

can under current law. 

• Tax on Deemed Repatriated Foreign Earnings: Since insurers and reinsurers 

are subject to regulatory restrictions on their ability to repatriate earnings, any 

one-time tax on accumulated foreign earnings should exclude income which cannot be repatriated due to local regulatory requirements. 

» If there are two rates for the tax, as proposed in the Camp bill (H.R. 1, 2014), 

income associated with the insurance business (reserves and capital or ‘‘surplus’’), should be taxed at the lower rate, since it is used for the active conduct 

of an insurance business. 

• Minimum Tax: If a minimum tax on future foreign earnings is adopted, income 

from insurance business should not be taxed twice, once as ‘‘insurance in come’’ 

and, in addition, as ‘‘intangible income,’’ as was possible in the Camp bill. 

TAX INNOVATION EQUALITY (TIE) COALITION

Washington, DC 20005 

info@tiecoalition.com 

202–530–4808 ext. 109 

The Tax Innovation Equality (TIE) Coalition 1 is pleased to provide this statement 

for the record of the Finance Committee’s hearing on International Tax Reform. The 

TIE Coalition comprises leading U.S. technology and bio-pharma companies that 

rely on and invest in intellectual property and intangible assets. Such investments 

help make companies innovative, successful and globally competitive. The TIE Coalition supports comprehensive tax reform that will modernize the U.S. tax system 

and help American businesses compete in a global market. The TIE Coalition believes that the U.S. must: (i) implement a competitive territorial tax system; (ii) 

lower the U.S. corporate tax rate to a globally competitive level; and (iii) not pick 

winners and losers in the tax code by discriminating against any particular industry 

or type of income—including income from intangible property (IP). 

Unfortunately, some past proposals would tax IP income adversely compared to income from other types of assets, creating an unfair advantage for companies who 

don’t derive their income from IP, and significantly disadvantaging innovative U.S. 

companies, especially compared to their foreign competition. For example, the Tax 

Reform Act of 2014 (H.R. 1) as introduced by former House Ways and Means Chairman Camp would seriously disadvantage innovative American companies. Under 

that proposal, Chairman Camp chose the anti-base erosion option known as Option 

C. The problem with Option C is that it would tax IP-based income at significantly 

higher rates than non-IP income, significantly disadvantaging U.S. IP-based companies who compete globally, which would result in more inversions of U.S. companies 

and more foreign acquisitions of U.S. companies. The TIE Coalition is opposed to 

109 

Option C because it would have a devastating impact on both innovative technology 

companies and the nation’s leading biopharmaceutical companies. 

Section 4211 of H.R. 1 specifically targets ‘‘foreign base company intangible income’’ 

for higher taxation by creating a new system in which that income will be immediately taxed in the U.S. at much higher rates (15% or 25%) rather than the 1.25% 

tax rate for all other foreign income, which is only taxed upon distribution back to 

the U.S. The provision does not provide a definition of an intangible asset generating IP-based income subject to Option C. Instead it uses a formula which essentially provides that if a company earns more than a 10% return on its foreign depreciable assets, the income over the 10% threshold will be considered ‘‘intangible income’’ and subject to the higher immediate U.S. tax. Many innovative companies 

have higher margins and earn more than 10% on their depreciable assets, so they 

will be disproportionately affected by this adverse provision. 

To understand the full scope of Option C, the TIE Coalition commissioned a study 

by Matthew Slaughter, the Dean of the Tuck School of Business at Dartmouth. See: 

‘‘Why Tax Reform Should Support Intangible Property in the U.S. Economy’’ by 

Matthew J. Slaughter, http://www.tiecoalition.com/wp-content/uploads/2015/07/ 

IP-White-Paper_January-2015.pdf. According to the study, ‘‘Policymakers should understand the long-standing and increasingly important contributions that IP makes 

to American jobs and American standards of living—and should understand the 

value of a tax system that encourages the development of IP by American companies.’’ (Executive Summary) 

The study found that Option C in the Camp legislation would fundamentally (and 

adversely) change the measurement and tax treatment of IP income earned by 

American companies abroad and would disadvantage IP income earned abroad by 

U.S. companies in three ways. First, it would tax IP income at a higher rate than 

under current law. Second, it would tax IP income more than other types of business income. Third, it would impose a higher tax burden on the IP income of U.S. 

companies compared to their foreign competitors. As a result, the study found that 

Option C ‘‘would aggravate the nettlesome issue of corporate inversions and would 

create additional incentives for foreign acquisitions of U.S.-based IP-intensive companies.’’ (Executive Summary) 

According to the Slaughter study, since globally engaged U.S. companies have long 

performed the large majority of American’s IP discovery and development, it is increasingly important to America’s economic success that these companies operate 

profitably overseas. The Slaughter study finds that the ‘‘United States, not abroad, 

is where U.S. multinationals perform the large majority of their operations. Indeed, 

this U.S. concentration is especially pronounced for R&D, which reflects America’s 

underlying strengths of skilled workers and legal protections such as IP rights that 

together are the foundation of America’s IP strengths, as discussed earlier’’ (page 

30). The Slaughter study concludes that the overseas operations of these companies 

complement their U.S. activities and support, not reduce, the inventive efforts, related jobs, and positive economic impact of their U.S. parents on the U.S. economy. 

In addition to Option C, other international tax reform proposals have singled out 

income from IP for adverse treatment. In 2012, Senator Michael Enzi (D–WY) introduced an international tax reform bill, S. 2091. While the Enzi bill did not propose 

lowering the corporate tax rate, it did propose a territorial system with a 95% dividends received deduction (DRD) for qualified foreign-source dividends. Unfortunately, while the bill reduced the scope of the current law Subpart F regime in some 

respects (by eliminating the current foreign base company sales and services income 

rules under Section 954), it proposed creating a new category of Subpart F income 

under which all income of a controlled foreign corporation (CFC) would be immediately taxable in the U.S. at the full U.S. rate unless the CFC’s effective tax rate 

(ETR) exceeded half of the maximum U.S. corporate rate. Under Senator Enzi’s bill, 

the ETR in the foreign country would have to be more than 17.5% to qualify for 

territorial tax treatment with a 95% DRD and avoid immediate taxation at the maximum U.S. tax rate. 

However, ‘‘qualified business income’’ (as defined in the bill) would be excluded from 

this punitive tax treatment and qualify for the 95% DRD. But, ‘‘qualified business 

income’’ specifically would not include ‘‘intangible income’’ as defined in Section 

936(h)(3)(B). As such, Senator Enzi’s proposal effectively repeals deferral for intangible income earned by CFC’s and denies territorial tax treatment with the 95% 

DRD for intangible income, clearly discriminating against income from intangible 

assets. In addition to discriminating against income from intangible assets, the Enzi 

bill would result in significant additional disputes between the IRS and taxpayers 

110 

regarding how much income is from intangible property as broadly defined in Section 936(h)(3)(B). 

In designing a competitive territorial tax regime, both Congressman Camp and Senator Enzi decided that anti-base erosion provisions needed to be included to protect 

the U.S. tax base, but they both chose options that discriminate against IP income. 

The TIE Coalition has offered several anti-base erosion proposals that do not discriminate against income from intangibles. Two anti-base erosion measures that we 

could support are Option D and Option RS. If base erosion is a concern, it is a concern for all income, not just income from intangibles. 

Option D proposes a territorial system with a graduated DRD based upon the effective tax rate paid by the CFC. The general rule of a 95% DRD would apply to foreign source dividends paid from a CFC that has an effective tax rate equal to or 

greater than 15%. But if the effective tax rate of the CFC is less than 15%, the DRD 

exemption would be reduced using a simple sliding scale. Under Option D, if the 

CFC tax rate is at least 7.5% but less than 15%, the DRD would drop to 85%. If 

the CFC effective tax rate is less than 7.5%, the DRD would be 75%. If the CFC 

effective tax rate is less than 7.5% and the CFC is domiciled in a jurisdiction that 

does not have a tax treaty/possession status/TIEA (or similar relationship) with the 

U.S., the DRD would be 60%. All low-tax active foreign income is treated similarly. 

Income from intangibles is not singled out for especially harsh treatment. 

Under Option RS, low-taxed foreign income of a CFC would be subject to immediate 

U.S. tax unless it is derived from a substantial local business in the foreign jurisdiction where the income is reported and subject to tax in that jurisdiction. Income 

would be considered low-taxed if the foreign effective tax rate (ETR) is 15% or less. 

The substantial local business activity test would be met if all three of the following 

tests are met: (1) the income is derived in the active conduct of a trade or business 

in the foreign country; (2) substantial local activities are conducted in the foreign 

jurisdiction; and (3) the income is treated as taxable in the foreign country. 

Both of these options would address the policy concerns about the possible erosion 

of the U.S. tax base by companies shifting income to low tax jurisdictions, but they 

would not single out income from intellectual property for special treatment. Targeting income from intangible property has sometimes been justified by describing 

it as ‘‘highly mobile’’ income, but that description is not accurate. Transferring an 

intangible asset out of the U.S. is a taxable event under IRC Section 367(d) so that 

any company transferring an intangible asset to a foreign entity must pay an immediate tax on the transfer as if the property had been sold. Determining the value 

of an intangible asset can be difficult but companies and the IRS have been doing 

these valuations for years with greater and greater sophistication and accuracy. 

Moving intangible assets is not an easy or invisible process, and describing intangible assets as ‘‘highly mobile’’ gives the impression that somehow title to these assets can simply be transferred around the globe with no U.S. tax consequences, 

when in fact the transfer of intangible assets to a foreign entity is already subject 

to immediate taxation under Section 367(d). 

In conclusion, the TIE Coalition supports comprehensive tax reform that modernizes 

the U.S. tax system, allowing American businesses to compete in global markets, 

in a manner that does not discriminate against any particular industry or type of 

income, including income from intangible property. At a time when many other 

countries are adopting tax rules designed to attract IP companies to their shores, 

it would be especially harmful to the U.S. economy to adopt a tax policy that will 

hurt, not help, American IP companies who compete globally. Now is not the time 

to drive high paying American jobs overseas. 

Æ