Senate Finance on International Tax Reform
Senate Committee on Finance
“Building a Competitive U.S. International Tax System”
Tuesday, March 17, 2015
Key Topics & Takeaways
- Foreign Acquisitions: Sen. Rob Portman (R-Ohio) stated that he thinks the Senate Finance Committee has voiced “a lot of consensus on a lower rate.” He continued that inversions have been reduced by the Internal Revenue Service (IRS) rules issued at the end of 2014, but that he thinks more foreign takeovers occur based on his knowledge from the Financial Times, Wall Street Journal, and the recent EY Report. He asked Smith to explain his company’s biggest competition. Smith responded that it competes with U.S. multinational corporations, but runs into challenges because its foreign earnings are locked out.
- Global Cash Tax Rate: Sen. Orrin Hatch (R-Utah) asked which tax rate is most important to businesses and why. Smith said the investment community finds the long term “global cash tax rate” extremely important. Smith said that if the rate is lowered, then he foresees more choice to invest and less competition for foreign assets.
- Base Erosion and Profit Sharing (BEPS): Sen. Ron Wyden (D-Ore.) asked Olson what reform would best address the problems of base erosion and profit sharing (BEPS). Olson replied that a reduced U.S. rate would weaken the incentive for deductions and leverage. She said that “bringing down the rate”, “having an anti-base erosion feature”, and “defining our own base” would address these issues since other Organisation for Economic Co-operation and Development (OECD) countries are taking this into consideration.
Witness
- The Honorable Pamela F. Olson, United States Deputy Tax Leader & Washington National Tax Services Leader, PricewaterhouseCoopers LLP, Washington, DC
- Mr. Anthony H. Smith, Vice President of Tax & Treasurer, Thermo Fisher Scientific Inc.,, Waltham, MA
- Dr. Rosanne Altshuler, Professor of Economics and Dean of Social and Behavioral Sciences, Rutgers University, New Brunswick, NJ
- Mr. Stephen E. Shay, Professor of Practice, Harvard Law School, Harvard University, Cambridge, MA
Opening Remarks
In his opening statement, Chairman Orrin Hatch (R-Utah) asserted that reforming the international tax system is an important step toward tax reform. He suggested that the primary goal should be to “make the U.S. a better place to do business and to make the U.S. a better place to compete.” He highlighted that the U.S. corporate tax is the highest in the world, while capital and labor have become increasingly more mobile. He concluded that the Senate Finance Committee “should not be looking to increase the burdens on those in the international tax system”, but should “significantly shift in the direction of a territorial system.”
In his opening statement, Ranking Member Ron Wyden (D-Ore.) described the “wave cresting on anti-inversions” and suggested that American taxpayers should not be “on the hook to subsidize these deals.” He said, “Whenever one wave breaks, you can bet there is another one coming in.” Next, he suggested that international tax reform should be bipartisan and the Senate Finance Committee will need to lead the way on tax reform.
In her testimony, Pamela Olson, Deputy Tax Leader and Washington National Tax Services Leader at PricewaterhouseCoopers LLP, asserted that the “current system is a barrier to success” and important changes need to occur. She stated that “95 percent of the world’s customers are outside U.S.” Olson explained that other countries rely on a value added tax (VAT) and that other models exist. She said that the U.S. system places a premium on assets and that the U.S. is “behind other countries in terms of competitiveness and jobs.” She concluded, “If we want to build a sustainably revenue neutral system, we can’t because we don’t have a competitive system.”
In his testimony, Anthony Smith, Vice President of Tax and Treasurer of Thermo Fisher Scientific Inc., discussed the research and development tax credit as an example of a tax advantage in the United States. He suggested that repatriation of earnings should be allowed at a lower cost and that any reforms should also retain Section 199. Smith said “most U.S. companies will value the ability to redeploy” and he urged the Senate Finance Committee to move forward with international tax reform.
In her testimony, Rosanne Altshuler, Professor of Economics and dean of Social and Behavior Sciences at Rutgers University, said that international tax reform is a very important topic and emphasized the following six considerations for reform to the minimum tax on foreign income:
- The classification of tax systems as “worldwide” or “territorial” oversimplifies and does not do justice to the variety of hybrid approaches taken in different countries;
- The circumstances that have caused other countries to maintain or introduce territorial systems do not necessarily apply to the United States. Therefore, others’ experiences do not necessarily dictate that the United States should follow the same path;
- The tax policies of countries with dividend exemption systems have been greatly influenced by their separate individual circumstances;
- The burden of the tax due upon repatriation of foreign earnings may be a lot higher in the United States than it was in the United Kingdom and Japan before they adopted dividend exemption systems;
- The fact that the United States raises relatively little corporate tax revenue as a share of GDP compared to other countries while having the highest statutory corporate rate in the OECD has multiple explanations and does not necessarily suggest that U.S.-based companies in any given industry are more aggressive at income-shifting than foreign-based companies;
- The ability of the U.S. to retain higher corporate tax rates and tougher rules on foreign income is declining.
She concluded that her reforms would “restore sanity to the system” and pointed to analysis as a way to close the gap between the U.S. and other countries’ tax systems.
In his testimony, Stephen Shay, Professor of Practice at Harvard Law School, said that a competitive tax system would be able to “fund effectively public goods, such as education, basic research, infrastructure, income security transfers and defense.” He suggested the following three areas of reform to improve the taxation of international business income: 1) Adopt a minimum tax on U.S. multinational corporations foreign business income that is an advance payment against full U.S. tax when earnings are distributed from the foreign business; 2) Strengthen U.S. corporate residence and earnings stripping rules; 3) Reduce the U.S. tax advantages for portfolio investment in foreign stock over domestic stock. Shay concluded that his view is to “tax foreign business income broadly and allow a credit for foreign income tax.”
Question and Answer
Pay for Infrastructure Spending
Hatch asked Shay to explain his recent article in Tax Notes, in which Shay suggested that the reduced rate to pay for highways is not advisable. Shay responded that he has a combination of reasons, but he does “not think we should have a low rate on offshore earnings.”
Inversions & Foreign Takeovers
Hatch asked the witnesses to elaborate on the pressure to invert. Altshuler referred to her report and said it is important to ask if the new system would be less distorted than the current system.
Sen. Eugene Scott (R-S.C.) asked the witnesses to explain changes in inversions. Smith replied that he does not see many changes in the manufacturing industry, but he thinks that fewer higher level jobs exist in the U.S.
Sen. Rob Portman (R-Ohio) stated that he thinks the Senate Finance Committee has voiced “a lot of consensus on a lower rate.” He continued that inversions have been reduced by the Internal Revenue Service (IRS) rules issued at the end of 2014, but that he thinks more foreign takeovers occur based on his knowledge from the Financial Times, Wall Street Journal, and the recent EY Report. He asked Smith to explain his company’s biggest competition. Smith responded that it competes with U.S. multinational corporations, but runs into challenges because its foreign earnings are locked out.
Global Cash Tax Rate
Hatch asked which tax rate is most important to businesses and why. Smith said the investment community finds the long term “global cash tax rate” extremely important. Smith said that if the rate is lowered, then he foresees more choice to invest and less competition for foreign assets.
Base Erosion and Profit Sharing (BEPS)
Wyden asked Olson what reform would best address the problems of base erosion and profit sharing (BEPS). Olson replied that a reduced U.S. rate would also weaken the incentive for deductions and leverage. She said that “bringing down the rate”, “having an anti-base erosion feature”, and “defining our own base” would address these issues since other Organisation for Economic Co-operation and Development (OECD) countries are taking this into consideration.
Sen. Chuck Schumer (R-N.Y.) recommended that the Senate Finance Committee follow the OECD countries and pay more attention to the issues of base erosion and profit sharing. He asked the witnesses how concerned they are about the impact of this activity. Olsen replied that BEPS is an important issue for the U.S. to follow. Shay urged for a broad-based tax and lower rates, but acknowledged that it would be difficult to pay for in the United States.
Rolling Back Deferral of Income
Wyden asked Altshuler if rolling back the deferral of income would be a significant step toward corporate tax simplification. Altshuler said a roll back in the deferral of income would still result in a system with firms that have excess tax credits.
International Only Reform
Sen. Pat Roberts (R-Kan.) asked Smith if he would support moving to an international only reform on a separate basis from comprehensive tax reform. Smith replied that international tax reform “can be done on a compartmentalized basis.” He added that “broadening the scope of reforms takes longer.” Roberts responded that he appreciates this approach.
Policy Proposals
Sen. Debbie Stabenow (D-Mich.) said that her bill from last Congress, the Bring Jobs Home Act, would have addressed some of the options discussed by the witnesses. She asked the witnesses to identify a policy option moving forward. Shay responded that more favorable taxation for foreign earnings would be a more preferable way to make the taxation of income as “equal as possible.” He added that the U.S. “cannot control what other countries do” and combined with anti-abuse tax rules, the U.S. needs a “plausible way to come out of this process.”
Sen. John Thune (R-S.D.) asked the witnesses which of the recent proposals to overhaul international tax rules would be the best reform and why. Olson replied that former House Committee on Ways and Means Chairman Dave Camp’s (R-Mich.) proposal would change the minimum tax, but she thinks it is too broadly targeted. Smith also recommended the Camp proposal. Altshuler advocated for a “dividend exemption system” like the Administration’s recent proposal, but she would use a lower rate. Shay said he would prefer the Wyden-Coats plan, but if lower rates are not achieved then he would look at “some form of minimum tax” and thinks the Administration’s plan is the best.
Territorial System
Wyden asked the witnesses for their views on a territorial system of taxation and the elimination of tax havens. Shay replied that income earned by subsidiaries looks like a very different design difference under a territorial system. He continued that he is not aware of a proposal in the U.S. that would, in the words of Wyden, “eliminate tax havens.”
For more information on this event, please click here.
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Senate Committee on Finance
“Building a Competitive U.S. International Tax System”
Tuesday, March 17, 2015
Key Topics & Takeaways
- Foreign Acquisitions: Sen. Rob Portman (R-Ohio) stated that he thinks the Senate Finance Committee has voiced “a lot of consensus on a lower rate.” He continued that inversions have been reduced by the Internal Revenue Service (IRS) rules issued at the end of 2014, but that he thinks more foreign takeovers occur based on his knowledge from the Financial Times, Wall Street Journal, and the recent EY Report. He asked Smith to explain his company’s biggest competition. Smith responded that it competes with U.S. multinational corporations, but runs into challenges because its foreign earnings are locked out.
- Global Cash Tax Rate: Sen. Orrin Hatch (R-Utah) asked which tax rate is most important to businesses and why. Smith said the investment community finds the long term “global cash tax rate” extremely important. Smith said that if the rate is lowered, then he foresees more choice to invest and less competition for foreign assets.
- Base Erosion and Profit Sharing (BEPS): Sen. Ron Wyden (D-Ore.) asked Olson what reform would best address the problems of base erosion and profit sharing (BEPS). Olson replied that a reduced U.S. rate would weaken the incentive for deductions and leverage. She said that “bringing down the rate”, “having an anti-base erosion feature”, and “defining our own base” would address these issues since other Organisation for Economic Co-operation and Development (OECD) countries are taking this into consideration.
Witness
- The Honorable Pamela F. Olson, United States Deputy Tax Leader & Washington National Tax Services Leader, PricewaterhouseCoopers LLP, Washington, DC
- Mr. Anthony H. Smith, Vice President of Tax & Treasurer, Thermo Fisher Scientific Inc.,, Waltham, MA
- Dr. Rosanne Altshuler, Professor of Economics and Dean of Social and Behavioral Sciences, Rutgers University, New Brunswick, NJ
- Mr. Stephen E. Shay, Professor of Practice, Harvard Law School, Harvard University, Cambridge, MA
Opening Remarks
In his opening statement, Chairman Orrin Hatch (R-Utah) asserted that reforming the international tax system is an important step toward tax reform. He suggested that the primary goal should be to “make the U.S. a better place to do business and to make the U.S. a better place to compete.” He highlighted that the U.S. corporate tax is the highest in the world, while capital and labor have become increasingly more mobile. He concluded that the Senate Finance Committee “should not be looking to increase the burdens on those in the international tax system”, but should “significantly shift in the direction of a territorial system.”
In his opening statement, Ranking Member Ron Wyden (D-Ore.) described the “wave cresting on anti-inversions” and suggested that American taxpayers should not be “on the hook to subsidize these deals.” He said, “Whenever one wave breaks, you can bet there is another one coming in.” Next, he suggested that international tax reform should be bipartisan and the Senate Finance Committee will need to lead the way on tax reform.
In her testimony, Pamela Olson, Deputy Tax Leader and Washington National Tax Services Leader at PricewaterhouseCoopers LLP, asserted that the “current system is a barrier to success” and important changes need to occur. She stated that “95 percent of the world’s customers are outside U.S.” Olson explained that other countries rely on a value added tax (VAT) and that other models exist. She said that the U.S. system places a premium on assets and that the U.S. is “behind other countries in terms of competitiveness and jobs.” She concluded, “If we want to build a sustainably revenue neutral system, we can’t because we don’t have a competitive system.”
In his testimony, Anthony Smith, Vice President of Tax and Treasurer of Thermo Fisher Scientific Inc., discussed the research and development tax credit as an example of a tax advantage in the United States. He suggested that repatriation of earnings should be allowed at a lower cost and that any reforms should also retain Section 199. Smith said “most U.S. companies will value the ability to redeploy” and he urged the Senate Finance Committee to move forward with international tax reform.
In her testimony, Rosanne Altshuler, Professor of Economics and dean of Social and Behavior Sciences at Rutgers University, said that international tax reform is a very important topic and emphasized the following six considerations for reform to the minimum tax on foreign income:
- The classification of tax systems as “worldwide” or “territorial” oversimplifies and does not do justice to the variety of hybrid approaches taken in different countries;
- The circumstances that have caused other countries to maintain or introduce territorial systems do not necessarily apply to the United States. Therefore, others’ experiences do not necessarily dictate that the United States should follow the same path;
- The tax policies of countries with dividend exemption systems have been greatly influenced by their separate individual circumstances;
- The burden of the tax due upon repatriation of foreign earnings may be a lot higher in the United States than it was in the United Kingdom and Japan before they adopted dividend exemption systems;
- The fact that the United States raises relatively little corporate tax revenue as a share of GDP compared to other countries while having the highest statutory corporate rate in the OECD has multiple explanations and does not necessarily suggest that U.S.-based companies in any given industry are more aggressive at income-shifting than foreign-based companies;
- The ability of the U.S. to retain higher corporate tax rates and tougher rules on foreign income is declining.
She concluded that her reforms would “restore sanity to the system” and pointed to analysis as a way to close the gap between the U.S. and other countries’ tax systems.
In his testimony, Stephen Shay, Professor of Practice at Harvard Law School, said that a competitive tax system would be able to “fund effectively public goods, such as education, basic research, infrastructure, income security transfers and defense.” He suggested the following three areas of reform to improve the taxation of international business income: 1) Adopt a minimum tax on U.S. multinational corporations foreign business income that is an advance payment against full U.S. tax when earnings are distributed from the foreign business; 2) Strengthen U.S. corporate residence and earnings stripping rules; 3) Reduce the U.S. tax advantages for portfolio investment in foreign stock over domestic stock. Shay concluded that his view is to “tax foreign business income broadly and allow a credit for foreign income tax.”
Question and Answer
Pay for Infrastructure Spending
Hatch asked Shay to explain his recent article in Tax Notes, in which Shay suggested that the reduced rate to pay for highways is not advisable. Shay responded that he has a combination of reasons, but he does “not think we should have a low rate on offshore earnings.”
Inversions & Foreign Takeovers
Hatch asked the witnesses to elaborate on the pressure to invert. Altshuler referred to her report and said it is important to ask if the new system would be less distorted than the current system.
Sen. Eugene Scott (R-S.C.) asked the witnesses to explain changes in inversions. Smith replied that he does not see many changes in the manufacturing industry, but he thinks that fewer higher level jobs exist in the U.S.
Sen. Rob Portman (R-Ohio) stated that he thinks the Senate Finance Committee has voiced “a lot of consensus on a lower rate.” He continued that inversions have been reduced by the Internal Revenue Service (IRS) rules issued at the end of 2014, but that he thinks more foreign takeovers occur based on his knowledge from the Financial Times, Wall Street Journal, and the recent EY Report. He asked Smith to explain his company’s biggest competition. Smith responded that it competes with U.S. multinational corporations, but runs into challenges because its foreign earnings are locked out.
Global Cash Tax Rate
Hatch asked which tax rate is most important to businesses and why. Smith said the investment community finds the long term “global cash tax rate” extremely important. Smith said that if the rate is lowered, then he foresees more choice to invest and less competition for foreign assets.
Base Erosion and Profit Sharing (BEPS)
Wyden asked Olson what reform would best address the problems of base erosion and profit sharing (BEPS). Olson replied that a reduced U.S. rate would also weaken the incentive for deductions and leverage. She said that “bringing down the rate”, “having an anti-base erosion feature”, and “defining our own base” would address these issues since other Organisation for Economic Co-operation and Development (OECD) countries are taking this into consideration.
Sen. Chuck Schumer (R-N.Y.) recommended that the Senate Finance Committee follow the OECD countries and pay more attention to the issues of base erosion and profit sharing. He asked the witnesses how concerned they are about the impact of this activity. Olsen replied that BEPS is an important issue for the U.S. to follow. Shay urged for a broad-based tax and lower rates, but acknowledged that it would be difficult to pay for in the United States.
Rolling Back Deferral of Income
Wyden asked Altshuler if rolling back the deferral of income would be a significant step toward corporate tax simplification. Altshuler said a roll back in the deferral of income would still result in a system with firms that have excess tax credits.
International Only Reform
Sen. Pat Roberts (R-Kan.) asked Smith if he would support moving to an international only reform on a separate basis from comprehensive tax reform. Smith replied that international tax reform “can be done on a compartmentalized basis.” He added that “broadening the scope of reforms takes longer.” Roberts responded that he appreciates this approach.
Policy Proposals
Sen. Debbie Stabenow (D-Mich.) said that her bill from last Congress, the Bring Jobs Home Act, would have addressed some of the options discussed by the witnesses. She asked the witnesses to identify a policy option moving forward. Shay responded that more favorable taxation for foreign earnings would be a more preferable way to make the taxation of income as “equal as possible.” He added that the U.S. “cannot control what other countries do” and combined with anti-abuse tax rules, the U.S. needs a “plausible way to come out of this process.”
Sen. John Thune (R-S.D.) asked the witnesses which of the recent proposals to overhaul international tax rules would be the best reform and why. Olson replied that former House Committee on Ways and Means Chairman Dave Camp’s (R-Mich.) proposal would change the minimum tax, but she thinks it is too broadly targeted. Smith also recommended the Camp proposal. Altshuler advocated for a “dividend exemption system” like the Administration’s recent proposal, but she would use a lower rate. Shay said he would prefer the Wyden-Coats plan, but if lower rates are not achieved then he would look at “some form of minimum tax” and thinks the Administration’s plan is the best.
Territorial System
Wyden asked the witnesses for their views on a territorial system of taxation and the elimination of tax havens. Shay replied that income earned by subsidiaries looks like a very different design difference under a territorial system. He continued that he is not aware of a proposal in the U.S. that would, in the words of Wyden, “eliminate tax havens.”
For more information on this event, please click here.