that with the fiduciary duty to retain that it has a fiduciary duty in their retain that that offerings with it certain duties that the firm is discharging the service. where i think that we are on that, we have received quite recently recommendations from our staff as to what steps if any the sec should take following the round table on these issues i expected fully short order to expect -- discuss that with my commissioners. . . education and

pension committee be granted floor privileges for today's session. the presiding officer: without objection. mr. harkin: mr. president, i want to take a time this morning to talk about an issue that has been brewing for a long time, is going to be coming to a head here in the senate sometime in the next several days, i hope, and it's one which compels us, compels us to do something. and that is to raise the minimum wage in the united states of america. mr. president, we have waited too long to do this, and so we have to act on it as soon as possible. so i'd just like to point out some of the data and some of the statistics confronting us right now. first of all, why should anyone be afraid of voting to raise the minimum wage? the american people are way ahead of us on this. you look at the polling data. to increase raising the minimum wage to $10.10 an hour, all voters, 73% -- democrats 90%, independents 71%, and even

republicans 53% -- say we ought to be raising the minimum wage. so the vast majority of american people want to do this. here's just, again, a chart from across the country. here's arkansas, here's florida, georgia, my state of iowa, kentucky, mississippi, wisconsin, all 52, 73%, 61, 54%. the vast majority of americans in these states say yes we need to raise the minimum wage, so it is not just one part of the country. small business owners support raising the minimum wage. 57% say we should raise the minimum wage as opposed to 43%. so small businesses, they get it. voters say that raising the minimum wage will help the economy. this comports with what over 600

economists including several nobel prize economists have said. raising the minimum wage will boost aggregate demand, will raise the g.d.p. in america. the economy benefits. you know what? the american people, they get it. they may not understand all the interkasis of -- intra kasis of economics but they get it. 53% believe it will help the economy. 22% said they don't know. only 21% say it will hurt. so the vast majority of americans understand in their bones that raising the minimum wage is going to help the economy. why? because they know it will put more spending power in their pockets. and when people in lower-wage jobs get more money, what do they do? they don't go to europe. they don't buy private islands and private jets. they spend it in the local economy, on main street where the small businesses are. so, again, that's -- the american people get it.

now why are we -- why should we be concerned about this right now? the minimum wage is not kept up with average wages. in 1968, the minimum wage was 53% of the average wages in america. today it's 36% of the average wages in america. a tremendous decline between those who get the minimum wage and what the average wages are in america. since 2009, the last time that we had an increase in the minimum wage, let's look what's happened to the things that low-income people have to spend their money on. as i said, they're not renting private jets and they're not going to fancy restaurants to eat. but they do have to spend money on electricity, rent, auto repair, food at home, child care and mass transit. so the minimum wage has gone up zero percent since 2009. zero. electricity, 4.2% increase. rent 7.3%.

auto repair 7.6%. food at home 8.8%. child care 11.11%. mass transit 17% increase. so, if you're a minimum wage worker, all your costs have gone up. your income has stayed the same. your income has basically stayed the same. and here's another thing. the american people get, they understand this. c.e.o.'s get big raises. since 2009, the last time we had the increase in the minimum wage, c.e.o. raises have gone up 23%, 14%, 5%. that's about 40-some percent. minimum wage stayed the same. so those at the top keep getting more and more and more. low-income workers, they get nothing. they just keep falling further and further behind. so how are we doing compared to other countries? we always say we're doing all right. americans are doing all right. what are we doing compared to

other countries? here's the national minimum-wage rates in u.s. dollars, in nominal u.s. dollars. right now the united states is third from bottom. there's portugal, spain, united states. look who's ahead of us. austria, japan, canada, the netherlands, new zealand, ireland, belgium, france, luxembourg, australia. australia is at $16.40 an hour, u.s. dollars. ireland, 11.16. new zealand, $10.96 an hour. we're way behind, way behind other countries in what the minimum wage is. and here's who benefits. here's who benefits. 28 million workers will get a raise if we raise the minimum wage. 28 million workers. 15 million women, 13 million men, 4 million african-american

workers. a lot more to say about that. 7 million hispanic workers and 7 million parents will get a raise. again, that's not just minimum-wage workers. a lot of people who make less than $10.10 an hour will get a raise, so it's not just those at $7.25. it's a lot of other people will also get a raise. and that's another thing i've heard from my republican friends. they say there are a lot of people that are making up to $40,000 a year, families that will make more money. that's true. so this isn't just, raising the minimum wage isn't just for people in poverty. that's true it helps them, gets them out of poverty. but it also helps families who may be, maybe there are two workers in the family and they're both low-income workers. they're making above the minimum wage but they're low income. or let's say you have a family with maybe three kids, one breadwinner makes a decent

income of $30,000, the other one makes minimum wage. that family too will get an increase. so here's what happens. about 83%, 83% of families, families in america, will get a raise. that is everyone making less than $60,000 a year. 83% of american families making less than $60,000 a year will get a raise. that's middle income. that's middle america. and there are a few, 17% the economists tell us that make over $60,000. that's families now. will also get a boost. but the majority are families making less than $60,000 a year. so it's a middle-class bill. raising the minimum wage helps middle-class families. it also does one other important thing. it helps kids. you don't think about this a lot. 14 million kids will benefit

from raising the minimum wage. 14 million that are now in low-income families, and they're struggling to get by. and so, i thought it was interesting that the american pediatric association, who you take your babies to to see the doctor, the american pediatric association says, yes, raising the minimum wage will help our kids. it will help them develop better. they'll have better oral health, better immunization rates. it will decrease rates of obesity, complications. the american pediatric association tests for child poverty suggests raising the minimum wage. they get it. they see kids in poverty and low income. they know what's happening to them. by raising that minimum wage, you'll help kids have a better life and a better start in life. so let me just talk a little bit

now about the -- about the basics, about the basics of this bill. first of all, our bill would raise the minimum wage from $7.25 an hour -- where it's been since 2009 -- to $10.10 an hour in three steps. 95 cents, 95 cents, 95 cents over three years. we then index it, index it to rates of inflation in the future so no longer will people who make the minimum wage fall below the poverty line. keep it above the poverty line. the third thing our bill does is raise the minimum wage for tipped workers. can you believe this? when i tell people this, they say, "no, you must be wrong, harkin." tipped workers in america today, minimum wage, $2.13 an hour. people said that can't be right. it is. it's been at $2.13 an hour since 1991. imagine that. $2.13 an hour. well, what our bill would raise

that from $2.13 an hour over about a six-year period of time to about 70% of the minimum wage, which is pretty close to what the historical average was before 1991, that tipped wages would be up there. so it raises it to 70% of the minimum wage over six years and then indexes that also in the future. so, again, why -- why did we settle on $10.10 an hour. why did we settle on $10.10 an hour? some people say, "why $10.10? why not $9"? well, here's why we raised it. we know where the poft line is. back in 1968, it was 120% of poverty. and if we want to raise the minimum wage and get it just

above the poverty line and index it for the future so we wouldn't fall below, what would that be? well, to get it to 107% above the poverty line, just above the poverty line, it would be $10.10. so, again, in 1968, the minimum wage was 120% of poverty line. now it is 81% of the poverty line. our bill would raise it up to 107% of the poverty line. that's why we picked $10.10, because it gets you above the poverty line and then you index it in the future. now, the historic average -- the historic average on this has been people say, well, isn't that a big increase? well, historically, whenever we've raised the minimum wage, the percent increase has been about 41%. our bill rais raises it 39%. so we wanted to keep it also within the boundaries of what

we've done in the past in. the past, about 41%, going clear back to 1939, average about 41%. you might notice that in the 1990's, there was a 27% and a 21%. that's because for some odd reason, we raised it twice in the 1990's. so we looked at the decades. we -- historically we've raised the minimum wage about once every decade. if you look at it in the decades decades, we're, again, right about average. 150%, 60%, 81%. in the 1980's, it was 16%. then in the 1990's we had two steps. in 2007 when we passed it, we raised it 41%. by the way, that was signed into law by a republican president, not a democratic president. and so ours raises it by 39%. so we wanted to get it above the poverty line, index it there but keep it within the boundaries sort of what we've done in the

past and that's what this bill does. so it's critical, critical to get it above the poverty line. the minimum wage has lost 32% of its purchasing power. so in 1968, if we had kept the minimum wage at the same relative status from 1968 to now, the minimum wage would be $10.71 an hour. it's now $7.25. so in those years, 32% of its purchasing power has been lost by minimum-wage workers. so, again, i wanted to cover a little bit on the tipped wages because that's another important part of our bill. people say, well, tipped wages. you know, people make tips and all that and we keep hearing from some entities that if we raised the tipped wage, it's going to hurt the economy and

it's -- and it's going to hurt the restaurant business. well, that's just not so. just not so. look at the poverty rates. these are just -- if you look at this, this is restaurant servers right here. if you take a state that has a $2.13 minimum wage, which is the federal minimum wage for tipped workers, the poverty rate among restaurant workers is 19.4%. some states have already said that they're going to have their tipped wages the same as the minimum wage. they've done that. where you have a full state minimum wage for tipped workers the same as everybody else, the poverty rate just among restaurant workers falls to 13.6%. if you look at all tipped workers -- and every -- a lot of people think tipped workers, you're only talking about people that wait on tables. that's not so.

40% -- 40% of all tipped workers are not -- are not -- restaurant workers. right now we're talking about pizza delivery people, parking lot attendants, people who work in hair salons, your manicurists. that's about 40% of tipped workers. the presiding officer: your time has expired, senator. mr. harkin: i ask consent for another five minutes o minutes. the presiding officer: is there an objection? without objection. mr. harkin: i thank the senator for allowing me to go on for a few more minutes. if you looked at all tipped workers in a state with $2.13 minimum wage, poverty level is 19.4%. where a state that has the tame fosamefor tipped or non nontipps

16.1%. we've also heard that jobs will be lost if we increase the minimum wage of the well, again, we've looke.well, again, we've e digging here. in states that have a $2.13 minimum wage, tipped wage, same as the federal, the job growth among restaurant workers has been 2%. in a state which has a minimum wage for tipped workers the same as everybody else, the job growth has been twice as much, 4%. this is among restaurant workers, just among restaurant workers. look over here at the sales. per capita, now, these are just restaurant workers. in those states with a $2.13 minimum wage, $1.42 per capita. in states with a full minimum wage, it's $1.68 per capita. that's why economists are saying raising the minimum wage and raising the tipped wage, minimum wage, is good for the economy. it increases aggregate demand. you might say, why would this job growth be more? why would the sales be more in a

state with a higher minimum wage for restaurant workers? easy. if the restaurant workers are making enough money to go out and eat themselves or to do other things, they increase the wages for all of the other restaurant workers in the state. and that's true. how many times have i heard from people who wait on tables or restaurant workers who say, i wish i could make some more money. i'd like to go out and eat myself sometime. but they don't make enough money to do that. but in the states where they have a full state minimum wage, both the job growth and the sales per capita are much, much greater. lastly, and here's it's just -- this is what's unconscionable. this is unconscionable. this is a restaurant worker in the district of columbia and she got a paycheck. and her paycheck is for zero dollars and zero cents. have you ever seen a paycheck for zero dollars?

why is that? because she's a tipped worker making $2.13 and after they took out her fica taxes and sales -- and -- and other taxes and things like that, she got zero dollars. so, therefore, she had to rely upon only her tips. but what are her tips? here's what a lot of people don't understand. how do you classify a tipped worker? how do you classify a tipped worker? if you make more than $30 a month in tips, you can be classified as a tipped worker. think about that. if you make more than $30 a month. so if you work five days a week for a month, that's $150 a day. if you -- that's $1.50 a day. if you make more than $1.50 a day in tips, you can be classified as a tipped worker and be paid $2.13 an hour.

[laughter] i mean, what's -- you look at that and you say, that can't be right. but it is right. that is exactly what's happening. people -- tipped workers are getting -- they're getting at the bottom of the barrel. and yet we rely upon them for so many things. people pushing wheelchairs in the airport. val lavalet attendants, parking attendants. a lot of people are classified as a tipped worker if they make more than $30 a month in tips. $1.50 a day. think about that. $1.50 a day. they get that, they get classified as a tipped worker, and they can be paid $2.13 an hour. so again, mr. president, the time has come. the people of america understand this. working families understand it. this is a civil rights bill. it's a women's issue bill. and i say it's a civil rights bill because if you look at the

people who are going to get benefits, 13 million people, 28% of african-american workers, 32 percent o%of asian and other workers. 50% of people making the minimum wage are with elm. it'women. kids. people who aren't getting adequate nutrition and child care are the kids of people making the minimum wage or tipped wages, even less. so it's a -- it's a civil rights bill, it's a women's issue, it's a kids issue and it's an economic issue for america. it's time to give america a raise and raise

[inaudible conversations] conversation

>> we'll now call or second panel of witnesses for today's hearing. tom ms. f. gwynn, tax partner as pricewater housecoopers in chicago, steven williams, a manager director at pricewaterhousecoopers, and we appreciate you being with us today. we look forward to your testimony, and i think as you heard pursuant to rule 6 all witnesses who testify are required to be sworn. i ask you to stand and raise your right hand. do you swear the testimony you're about to give before the subcommittee will be the truth, the whole truth and nothing but the truth show help you god? thank you.

>> we'll be using the timing system today which means that about a minute before the red light comes on, you'll see a lying change from green to yellow, give you an opportunity to conclude your remarks. your written testimony, of course, we presented in the record in its entirety and we'll ask that your oral testimony be ten minutes or less, and we understand mr. quinn you're going to present the pricewaterhousecoopers testimony. your mic is not on. >> thank you. good morning, chairman levin, ranking member mccain, and members of the subcommittee, i'm going to make some brief oral remarks but ask my written statement be placed in the record. >> it will. >> i am thomas quinn, cpa and partner at pricewaterhouse coopers. i ban any career with pcw in

1948 and have been advising companies for over 30 years. i'm joined by james bowers, also a cpa and partner in the pwc tax practice. having joined pwc in 1976, mr. bower has been advising clients with respect to tax obligations for over 37 years. i'm also joined by steven williams, managing director with pwc. mr. williams is an economy exist holds a masters degree with concentration in international economics. he has been we pwc since 1982 and specializes the transfer pricing for 28 years. understand that today's hearing relates to the tax implications of a business reorganization that caterpillar gap 15 years ago. i was one of the pwc partners who provided advice in connection with the matter.

mr. bowers is a tax partner who assisted the audit team with the audit of the tax aspects of caterpillar's national statements, and mr. williams provided caterpillar with assistance regarding transfer pricing rules. at the outset, let me say on behalf of pwc, we recognize both the long-standing interest of this subcommittee in corporate tax issues and the importance of those issues. in that spirit, pwc has cooperated fully with the subcommittee throughout this inquire and has willingly accepted your invitation to testify this morning. addressing our engagement with caterpillar, lay lou mr. to provide an overview of our tax practice. pwc is the leading provider of tax services world wilde in terms of size and scope of our tax practice, and we believe in terms of our reputation. we strive to combine our specialized tax knowledge in national and local jurisdictions, with a deep understanding of our client's business and economic

environments, in order to assist them with their tax compliance obligations across the globe. in working with multi national businesses, we routinely eval at it issues of international taxation which can be particularly complex. caterpillar is one of the world's largest manufacturerrers of construction mining equipment, diesel and natural gas engines and industrial gas turbines. cat pill they sale more than 300 types of items on six continences. cat pail already and its subsidiary sells machines and replaces parts for the machine. machine sales lead to part sales and part sales support can and encourage machine sales. there is no separate parts business. it is an integrated activity organized around caterpillar's product groups, and it is designed to maximize both value to its customers and caterpillar's profitablity.

demand for replacement parts derived from the independent dealer network and the field population of machines. that demand is then fulfilled through its logistics organization. caterpillar's business haps has been expanding throughout the world to meet increasing global demand. the late 1990s sale outside the united states accounted for more than 50% of consolidated sales. today more than 65% of sales are outside of the united states. to meet they demand caterpillar established subsidiaries outside of the united states to market its products products and provit support abroad. caterpillar has expanded subsidiary manufacturing facilities worldwide to meet global demand for its products. today the caterpillar group manufactures products in more than 20 countries. in short, indicate pillar has transformed itself from u.s.a.-based manufacturer of machines and parts for sale to

u.s. dealers, into a global manufacturer of products and parts for dealers around the world. in 1998, as the globalization of caterpillar's business continued to evolve. caterpillar ingaged mcdermott and pwc to advise the company with respect to international task position. to develop our advice pwc tax professionals first gauged in an extensive study of indicate pill already razz organization and global operating footprint, spending considerable time at caterpillar's operating facilities all over the world. we observe third business organization as it existed in 1998 failed to capture the evolution of the true economics of the business. and subjected the current to current u.s. income taxation, income earned from the sale of products to foreign customers, largely as a result of the subpart f rules. working with caterpillar's operation's group its tax

department and mcdetermine mat, we analyzed alternatives that would better align the true economics of the business with caterpillar's operations and positively affect its global effective income tax rate. after reviewing the information provided by mcdermott and pwc, and in light of the evolution of the global operating footprint, caterpillar decided to undertake a significant reorganization of its foreign operations. considering the growth of its foreign operations, cat pill already ender it made sense to centralize in one company the manufacture and distribution of products outside of the united states. through caterpillar overseas, caterpillar already had a stinct shall business presence in switzerland with hundreds of person nell behlesed in a multistory facility in geneva, including a number of key corporate executives inch 1999 cat pill larry transferred

assets to csarl, company bailed in switzerland. that company took over operations across the globe to handle sales of machines and parts outside of the united states. caterpillar inc. continued to handle sales of parts and machines in the u.s. from its outset, caterpillar csarl carried the risks and profits and losses from being the owner and seller of the machines and purchased finished replace emt parts in international markets. caterpillar purchase parts directly from third party supplies and sold finished products to third party dealers. because of the sales no longer involved the related party transaction between cat pill splash its foreign affiliates or between foreign affiliates themselves they were subject to the fundamental u.s. tax rule that foreign business income is not taxed until they income is remitted to caterpillar in the united states.

the reorganization culminated in changes to roles and responsibilities, at significant and economic and legal effects and resulted in significant tax savings. after the global business reorganization, caterpillar inc.'s role included acting as a service provider for certain purchases method by caterpillar in exchange for a service fee. caterpillar licensed its rights to caterpillar csarl to make machines to purchase and distribute replacement parts and to use caterpillar technology and trademark on the products for sale outside the united states, in exchange for a license fee. because cat pill splash caterpillar csarl were related companies these payments were subject to irs transfer pricing rules. pwc tested the prices annually, not only under the best method as required by u.s. law but also enough each of the other relevant transfer pricing methods prescribed by the

treasury regulations. each analysis supported the arms length nate tour of cat pillar's related party pricing in addition to providing tax services pwc has been auditing cat pail already's statements for many years. we have been asked to -- the independent rules. the delivery of task consulting services to audit clients has long been permitted by the rules of the sec, the pcaob, and the aicpa. pwc venezuela tax and odd kit services to caterpillar complied give this standards. they assess independence on quarterly and yearly and disclose to caterpillar's odd did committee any relation happy to that bore on on newspapers. pwc venezuela provision of tax self-s to caterpillar as an audit client was appropriate. chairman levin and members of the sub committee, thank you for this opportunity to testify

about pwcs tax services with respect to caterpillar. we firmly believe then and firmly believe today that the tax services we provided and the positions caterpillar tack in that regard complied with the law and were entirely appropriate. likewise, we believe that our tax and auditing engagement satisfied the letter and the spirit of the independence rules that govern our practice. we'd be happy to answer any questions you may have. ...

for you or the people in the company's tax department. is that correct? >> in part that's true. we also had significasignifica nt contact with individuals in the operations department of caterpillar. it was dependent very much on the understanding of the operations in the business and contact with them is critical. >> now prior to the tax consulting engagement caterpillar had been reporting most of the income from the sale of its replacement parts outside of the u.s. on its u.s. tax return. is that correct? >> that is correct. >> that is when it sold parts to caterpillar's non-u.s. dealers.

is that correct? >> yes. >> 85% or more of its non-u.s. income is included on caterpillar's u.s. tax return. is that correct? >> that is correct. >> after caterpillar executed csarl transaction starting in 1999 is the correct that caterpillar basically reversed those percentages and allocated 15% or less of the non-u.s. parts and come to itself in the united states and 85% or more to csarl in switzerland which had an effective tax rate between four and 6%. is that correct? >> that's correct. in terms of their arrangement that caterpillar had with respect to his relationship with caterpillar csarl that was in fact a business arrangement that included a license for more than just the parts activities themselves and included the entire business activities undertaken by caterpillar csarl

which included their manufacturing machines in france and belgium as well. >> all right but the basic, in terms of the profits of on the parts themselves there was a shift between the 85/152 -- just the parts. >> that is correct. >> take a look at exhibit seven. [inaudible conversations]

>> yes, i have a senator. >> all right. in 1998 -- before we get to the fact that you were hired in 1998 by caterpillar through its tax advisor met dermot willen embrey to review caterpillar's operations to recommend ways to lower caterpillar's overall tax payments. is that correct by the way? >> yes, that is correct. >> is it. >> is a notch or that pwc had an ongoing program called g. top global tax program to reduce corporate taxes? is that true? >> yes. >> pw ce approached a number of corporations to talk them about the g. top program.

is that correct? >> that is correct. >> so that the caterpillar tax strategy was the result of that pwc g. top effort. is that correct? >> it follow that presentation. >> the tax consults pwc conducted a review of caterpillar's operations in the 1998 gave caterpillar a list of 49 possible ways to lower its taxes one of which was the swiss tax strategies that involve assigning of non-u.s. parts profits to a swiss affiliate and that's exhibit seven. is that correct? >> this exhibit seven is from that report and is part of that original investigation. >> was this the strategy that was adopted finally? and very simplified form. >> if you take a look at the top of that exhibit this is 4618.

the purpose was to get cat incorporated out of the chain. that's the top headline. re-characterize marketing company income to achieve u.s. tax deferral. did you read that line? that was its purpose. >> that's correct. >> the description of the idea was to remove caterpillar inc. from the chain of title passage for purchased finish parts. from the u.s. or foreign sources sold to foreign marketers. the foreign marketers would buy and sell two unrelated markets of this was the description of the idea. your own description. >> this is a pwc document. >> to remove from the chain of title to purchase parts. the benefits and lemonades sub character of foreign marketers

profits and purchased finish parts sales and a relatively simple re-invoicing requirements the reimbursing requirement. do you read those words there? did i read those words correct? >> i would also reflects senator that in light of this was done at the beginning of the project in terms of providing ideas in response to caterpillar's tax department with respect to our investigation. i can tell you these invoicing requirements that following the implementation of this, those relatively simple re-invoicing requirements to probably three to four years a very difficult work by caterpillar system team in order to implement. >> we will also get to the implication in a minute. from 1999 to 2004 pwc was paid about 55 billion to implement this tax strategy?

is that correct? >> that is correct. >> is it fair to say that you and mr. williams helped design and implement this strategy from the very beginning in 1999 and mr. bowers worked at the same time that he provided tax advice to the audit while he was working with you. is that correct? >> that is correct senator. >> mr. quinn read the lead partner for pwc tax consulting services on this matter? >> yes i was. >> did mr. williams report to you? >> yes. >> mentioned some of the key contacts at caterpillar and among them i'm asking you where they robin beran tax director rodney perkins senior tax manager? >> yes among the interaction. >> my first round of time is

over. >> thank you mr. chairman. mr. quinn on the earlier panel i was asking the professors the basic relation how does the irs contract with a large multinational corporation i would like to expand that not only to a large corporation like caterpillar but also to large accounting firm like yourselves? can you describe how the irisin treks during -- interacts during the tax year? >> the iras during the entire year is a continued audit as you describe very and maintain it continuous presence on site and actively engage with caterpillar personnel directly in to the extent that we don't have direct interaction with the irs only through caterpillar and one invited in by caterpillar to assist them in those matters. >> was there any consulting done as you are working with caterpillar to comply with a the

law to lower their tax burden? was there any contact by the irs at that time? >> i had no contact with the irs. >> do you know what caterpillar did? >> i do not know that. >> your obviously familiar with enron the firm that used to be called arthur andersen. is that something you would say most cpas or accounting firms are familiar with that situation? >> yes. >> would you happen -- say what happened to arthur andersen was no longer exist because of the enron scandal is that something that in general disciplines the accounting profession? >> absolutely. and reflection upon this offense it has been in terms of my profession that was a considerable change following that activity. >> can you talk a little bit about tax avoidance versus tax evasion? >> sure.

i think the earlier panel described that accurately and correctly that tax evasion is illegal and tax avoidance is appropriate in terms of managing the overall costs associated with your business. as long as it's done within the rules and regulations as provided by the tax authorities. >> so in light of obviously what happened with arthur andersen and enron scandal you are preparing these types of documents and now they are being a congressional senate hearing here. with these concern you if all of a sudden the irs were to deal with this and your interaction? do you think this is basically what accountants do in working with their complaints to comply with the tax code? >> yes, i do. earlier senator you made a statement to the last panel that if you saw a tax rate of 29% what would be your response to your manager of your federal tax function? at the time we started this project caterpillar's tax rate was 35, 35% effective tax rate

and that is exactly what management was asking if service providers. >> that was actually my next question that i was going to ask. how does that relate to other large multinational manufactures and first of all 35 or 36%. where is that in the range of effective tax rates for multinational? >> i would think based upon my study in this area that 35 or 36 wood need not unusual for a manufacturing company which had its sales base all within the u.s.. we take a look at those domestic companies that don't have extensive international operations and the tax rate between 35 and 39% is very much the rule. >> again that is when all your operations and all your sales are in the u.s.? >> correct. >> what happens if you are

multinational and you have 60 or 70% of your going oversees? >> that would depend on how you organize the transaction and affairs because the earlier panel address that fact that many times those operations are subject not only to tax before jurisdiction but because the way it's organized may be subject to u.s. tax at the same time. this document that we just looked at as a good example of that where caterpillar did in fact have extensive amount of international operations but the way the business had been structured in the way the operations department had put in place the relationships it had in moving products to the international markets created a cost which couldn't be avoided. >> there is nothing wrong with any taxpayer trying to comply with the tax code to try to lower their tax burden, correct? >> that's correct. >> can you talk about the types of tax laws enacted by congress to incentivize manufactures to

export privates oversees? can you name some of the tax treatments that this body has an acted to induce that type of behavior that caterpillar was engaged in? >> yes certainly. that history goes back in the times and in fact when i practice in the 1980s the domestic international sales corp. was promoted as an export incentive that was succeeded by the foreign sales corporation which was a tremendous benefit, tremendous benefit for u.s. exporters and u.s. manufactures including caterpillar. >> exactly what did that do? >> at incentivize companies to do manufacturing in the united states and gave them the opportunity with respect to the end, earned on those transactions to reduce their effective tax rate as much as 5% so rather than 35% on the income it would be closer to 30%. >> i had an earlier discussion with the previous panel that if

we tried to change the tax law to try to capture more of those were the income on foreign sales what would a large multi-corporation at least consider doing? >> i think exactly what he suggested. it would move operations offshore and it would move those functions in those jobs to foreign locations outside of united states. the differential in tax rate is so great that you couldn't ignore that as a steward of the corporate assets. >> are you aware of other businesses may be that your clients have done exactly that? >> they have in fact, yes. >> can you give any examples. it's probably not the appropriate place to do that. >> prefer not to. >> thank you mr. chairman. >> senator paul. >> thank you. i buy with to take my time to apologize to caterpillar for this proceeding. i think rather than having an inquisition we should probably bring caterpillar here to give

them an award. they have been in business for over 100 years. it's not easy to stay in business and not easy to stay in business but to keep the business employing 52,000 employees for over 100 years is a remarkable achievement and wish to be complementing caterpillar and perhaps give them a word. caterpillar not only employs 50,000 people that pay $600 million in taxes every year so really we have got the wrong people on trial here. the tax code needs to be on trial here. it would be malpractice for pricewaterhousecoopers to give advice to caterpillar saying we are not going to tell you how to minimize your taxes but here is how to maximize your taxes. you probably could be sued for giving bad advice on how to not maximize -- we have to understand the legal behavior to minimize your taxes is really your responsibility if you have stockholders. you have to do that.

it is a requirement that you try to minimize your costs so rather than chastising caterpillar we should be complemented them. it is a big error not to know where the problem is here. the problem is around the tax code. money is sent to go where it's welcome so money is going oversees. people for decades have been lamenting the loss of american jobs overseas. why? because it's a tax code. we have the highest corporate tax rate in the world. canada is now dumped 15% c. kinsey how we are pushing people and pushing people and then we bring them forward for ridicule to swear an oath and to pry into every nook and cranny of their legal tax behavior. it's insulting to american business and it shouldn't occur. we should be doing the opposite. we should be giving an award to american business that creates 52,000 jobs. there are some policy matters and we could address. what if we lowered the group rotting come tax?

we are at 35 give or take throwing the state rate. if we want to encourage profit earned overseas to come home why don't we have a low repatriation tax, 5% repatriation tax. when we did in 2005, 20 or $30 billion in revenue and hundreds of billions of dollars in income came back to the country to create jobs. why don't we do that? instead of vilifying people for legal behavior. my guess is that mike question ultimately would be do you have a legal responsibility to offer to companies that ask you for a device? are you legally responsible for offering advice that would minimize their tax cost? if you weren't to not tell a company about a legal option to reduce their taxes could they company potentially sue you for not giving you complete advice? >> senator that is our professional proposition to our clients and their expectations

when they come to us we have an expertise in understanding the tax laws that holds the regulations and we can help them understand that so they can take a look at their bona fide business transactions and understand what the tax cost is associated with those. so yes that is the client expectations of what we are bringing them and even if it weren't legal it would be from the standpoint of professionalism it they would be less than what was expected. >> thank you. >> are you done senator paul? senator portman. >> thank you mr. chairman and i appreciate your being here. we have another panel coming up and i would like to talk with them as well but to me the problem here is not caterpillar. it's broke in tax code and i think this is not just an important matter. i think it's an urgent matter. in response to the question

mr. johnson asked earlier you indicated that some of your other clients are moving some of their operations overseas. it's happening as we sit here today and it's a fiduciary responsibility if you are publicly. company as was said earlier to look where you can maximize your profits to the stakeholders. i'm very concerned about it. in my own state of ohio we have companies that have left her state to be domiciled somewhere else because the tax laws. one company merged with the company half its size to take advantage of the rates in ireland and we lost one of our fortune 500 companies to ireland. i met beer drinker. if you want to try to find american beer good luck. luckily i like sam adams and england. every other company is four and zero and when i asked people why including the folks who purchase these companies they tell me it's the tax code.

this is a big deal. it's not just a loss of jobs although that happens. it's also the loss corporate headquarters which has a tangible effect on all of our communities including a lot of the good work better companies do here for the non-profits and to help make a better way of life for everyone in those communities. this is not just an important matter but it's an urgent matter and i think you for holding this hearing. we have a broken code, not just the highest rate among all of the developed countries now which is not a number you want to have now that japan has lowered their rate. we are number one but the fact that we have international tax code system that is so noncompetitive and so complicated that it is driving jobs and investment capital overseas of our oecd partners almost all of them have gone to the territorial system. if you could talk about that for second i would appreciated and mr. quinn you would be the right

person. what impact is this having on your clients as they look at what their options are going forward because of the u.s. tax law being so antiquated and inefficient and noncompetitive? what impact does it have on them and specifically if you could address not just the rape of the just the rape of the fact that we have a worldwide tax system that makes it difficult for them to be able to do business overseas and easier for them to move those businesses overseas. >> eight is the issue at the forefront of many decisions and many conversations that are taking place within corporate tax departments throughout the population us-based multinational companies. this debate around how the u.s. is assigning tax earnings is one of critical importance as u.s. companies continue to grow and stand offshore. that cost becomes an increasingly larger proportion of their overall cost structure for their business in their ability to compete with foreign companies. we have as you said we are one

of the few if not the last remaining country which still taxes worldwide earnings. it does employ a territorial system and that is a considerable competitive disadvantage when companies are trying to compete against companies that don't have the same tax burden even in the u.s. that a u.s. based mnc might have great senator a lot of the debate that i hear in the discussions that take place among my clients a lot of it has to do with rate as well. it's not just the basis of taxation but the rate that applies and i think there was questioning earlier about what is the right rate with this type of activity activity or that would cause this type of activity to go away? if u.s. corporations were established and could be subject to a rate of tax at 20% or less there would probably be very little incentive to continue moving business activities outside of the united states. if you think about the opportunity