to this problem and the only way to completely address the issue of reversions is to reform our tax code. however, as i've also said publicly, there may be steps that congress can take to at least partially address this issue in the interim. while i don't support the anti-inversion bills we've seen thus far, i personally am open to considering alternative approaches. although i do have a few stipulations as to what proposals are considered. for example, whatever approach we take, it should not be retroactive or punitive. and it should be rev knew neutral. our approach should move us towards or at least not away from the territorial tax system. and should not enhance the bias to foreign acquisitions. most importantly, it should not impede our overall progress towards comprehensive tax reform. toward that end, it should not be inconsistent with our house colleagues' approach. i think there's a growing concern among some of our

friends on the other side of the aisle to use corporate inversions as a political wedge issue in this election year. in fact, i was recently the recipient of a very politically toned letter from treasury secretary lu on this issue. we're going to have to work together. as you can see, mr. chairman. we have a lot to discuss today. i want to thank you for holding this important hearing and i'll look forward to hearing from this very distinguished panel. >> thank you very much, senator hatch. and let me just reiterate i'm very much interested in working with you and our colleagues on both sides of the aisle to address both of these issues. the immediate challenge we're facing with this growing inversion virus. and then, of course, the ultimate cure which is comprehensive tax. we now have six witnesses. our first witness is mr. robert stack who is the deputy assistant secretary for international fashion fairs at

the treasury department. our next with the is pasqual st. herman for the center of economic cooperation and development. the third witness, dr. desaid zia a professor of law at harvard. a fourth witness will be dr. peter merrill, a doctor of the economics and statistics group at price waterhouse. a fifth assistant will be dr. robinson at the tech school of business at dartmouth and the final witness will be will alan sloan who is the senior editor-at-large for "fortune" magazine. our thanks to all of you for coming. it's our custom that your prepared statements will be used. if you could use your five minutes to summarize, that would be helpful. i know senators have many questions. we're going to have votes at

10:45. this will be a bit of a juggling act. we will try to handle this as well as the chaotic senate schedule allows. mr. stack, welcome. >> thank you, senators. chairman wyden, ranking member hatch and distinguished members of the community. i appreciate the opportunity to appear to discuss these important international tax issues to which your committee has devoted substantial effort i'd like to begin by describing the work we're doing in the g-20 betts project and then link that discussion to consideration of the need for international tax reform, as well as measure, outlined in the administration fy-2015 budget proposals to address u.s. base stripping including through so-called inversion transactions. in june 2012 at the g-20 sum miss in los cabos, mexico, the leaders of the world's largest

economies identified as a significant concern the ability of multinational companies reduce their tax bills in high-tax countries by shifting income into low and no-tax jurisdictions. the result was the g-20 oecd betts project. and the betts action plan endorsed by g-20 leaders last september in st. petersburg. the betts action plan outlines 15 specific areas where governments need to work to change the tax rules that encourage companies to shift their income at the expense of the tax base and our own tax base. the betts project is expected to release the first set of recommendations this fall and is set to conclude its work with final recommendations at the end of 2015. the united states has a great deal at stake in the betts project and a strong interest in its success. our active participation is crucial to protecting our own tax base by stripping by multinational companies. because the united states provides a foreign tax credit to

u.s. companies for taxes they pay overseas, the united states also has a strong interest in rules that enjoy a broad international consensus. in addition, as home of some of the world's most successful and vibrant multinationals, we have a stake in insuring that companies play by tax rules that are clear and admin straitable and companies avoid time consuming expensive tax disputes. failure in the betts project could well result in countries taking unilateral inconsistent actions there be increasing double tax aches, the cost to the treasury and the number of expensed tax disputes. i'm happy to report that the ocd betts project has had a promising beginning and area where is work has been done to resolve gaps. i've outlined those in my submission. as the work moves to 2015 there

is more that can be achieved and also several areas where we must build against bad outcomes. and echoing senator hatch, those outcomes would include international norms because they're vague and easily manipulated by tax authorities. or international norms that could erode the u.s. tax base or increase double taxation. the united states needs to remain deeply engaged in moving the betts project to a successful conclusion between now and the end of 2015. while the international discussion over betts are ongoing it's worth acknowledging steps the united states could take today to inform our own tax system to improve competitiveness, secure our tax base and reduce incentives for profit shift big u.s. firms. as the president has proposed, we should reform our business tax system by reducing the rate, broadening the base and imposing a minimum tax on foreign earnings but much would only be a start even with low rates,

u.s. multinationals would continue to aggressively seek ways to lower the tax bills by shifting the income out of the united states. so what tools do we have at our disposal. the administration's 2015 budget contains a series of common sense proposals to protect our u.s. tax base which can be enacted as part of reform or in the contest of our current system. they're outlined in some detail in our budget and in my written testimony but let me highlight two here. one proposal would strengthen our interest stripping rules and level the playing field by eliminating the ability of u.s. subsidiaries by deducting a disproportionate of the united states. it is especially disconcertive to observe among the foreign multinationals that can most graefg civil take advantage of interests in the stripping rules are the inverted companies that is far and parented companies

that were previously u.s.-parented. a second deal in the budget would deal with inversions. in secretary lew's letter to congress i want to underline the serious need for the united states to address the loss of federal tax revenue from corporate transactions and the need to redact our budget proposal or a similar one aimed at curbing them. once companies invert there is a permanent loss to the u.s. income base since it is safe to assume these companies are not coming back to the united states. these inversion tactics are on the increase. indeed we're wear of many more on the works now. it will worsen our fiscal challenges over the coming years and will reward countries that practice race to the bottom tax competition in an effort to lure away our large u.s. multinationals. as the secretary indicated in his june 15th letter, congress should pass antiinversion legislation immediately with an

effective date of may 2014. thank you for the opportunity to speak to you today. i look forward to answering your questions. >> thank you very much, mr. stack. that's very helpful. our next witness will be mr. passqaul. >> thank you for the opportunity to testify here today. the industry was founded in the aftermath of world war i i and the leadership of the united states. it's a country-drive organization with 34 countries u.s. being the largest member and playing a key role. and it works by consensus. it does a lot of work on tax and in the tax area, we do consult extensively on the project related to project shifting we have consulted society, businesses or stakeholders. in this project, we have issued

a number of discussion drafts, more than 3,500 pages of comments have been received and has been taken into account. we have conducted five public consultations as well as webcasts which have been looked at by more than 10,000 viewers. in the area of tax the oecd facilitating orchestration between tax and its countries to eliminate double taxation. taxation is at the core of each country free to set up its corporate tax system the way it chooses. but as a result, there are risks of double taxation which are not conducive to cross-border investments. since the 1920s, a common set of standards has been agreed and the oced has abated this work. in particular, we have have come up with a model transaction and guidelines. these rules have worked well, but they have also not kept pace

with the economy changes. as a result, they have been good at eliminates double taxation, but they have also facilitated unintended double nontaxation. this is an issue for most governments across the world for many reasons. low tax itation in itself is not a problem. on the contrary, the oced favors low income tax and this is an issue for as long as countries decide to have corporate income tax, the korpgt income tax need to be paid by all taxpayers. and there is a need now to, one, make sure that the rules make sense. the current rules are redacted through organization and easy to gain through artificial settings. there is a divorce now between the location of the activity and the location of the profits which can be booked in a

jurisdiction where absolutely nothing is happening. as a result, the sovereign right of countries is undermined. this is a global issue. this is not an issue targeted to u.s. companies. u.s. companies only account for less than a quarter of the fortune global 500 companies. so it's a global issue concerning u.s. and non-u.s. companies. second, there is a need to level the playing field. and an uneven playing field between companies is not conducive to the right relocation of capital. companies are at the domestic level are at a competitive disadvantage because they cannot use the loopholes in the international tax framework. three, there is a need to reduce uncertainty. uncertainty is bad for companies. is bad for investment climate. and there is increased uncertainty because of these rules not making a lot of sense. a number of tax administrations are planning to dispute the

companies which is legal. and a number of companies are working away from the consensus, from the common interpretation of the rules and that results in uncoordinated unilateral measures to corporate tax base but that increases uncertainty. and, therefore, we need to address the serious risk for businesses. the response from governments has taken place in the context of the g-20 which has called to address the issue of base erosion and profit shifting. we have brought all the g-20 and the oecd countries on equal footing to find ways to address this issue of the tax framework by consensus, in two years' time so principles can be agreed quickly to reduce the risk of uncertainty. we need a principled approach and a cost-effective approach to eliminate the compliance for companies and reduce control. this is not a revenue exercise

and should not be, but the useful exercise for the common principles to be more accepted by ensuring consistency in the cross-border environment, increasing such requirement and transparency. the objectives are to secure the consensus, thereafter, reduce uncertainty and improve the way we can solve disputes. we have come up with an action plan of 50 measures which i describe in my written testimony. some of them are about neutralize hybrid mismatches reducing tax or transfer rules. in clushgs i would say the issue of base erosion and profit sharing is widely shared. and here in the u.s. in particular, we are aware that you're planning to address the u.s. tax system. and we hope the work we're doing at the international level with your support and the engagement of the u.s. treasury can be useful to promote growth and

jobs here in the u.s. by fixing some of the issues by the u.s. tax system. the work we hope is particularly timely and we hope it will inform you of your debate. we, of course, will be available to respond to your questions and further assist. >> thank you mr. saint-amans. let's go to dr. desai. >> i'm a professor of finance and a professor of law at harvard law school. recent merger transactions highlight long simmering problems with u.s. corporate tax particularly with respect to international provisions. my comments attempt to outline the origins, the range of alt tiff solutions guidelines for evaluating reforms and some reforms that should be avoided. the last 12 months witnessed remarkable wave. such transactions reflect the effects of policy, and the

changes structure of multinational firms. from a policy perspective, the transactions highlight the increasing costs of employing a worldwide tax regime when other countries no longer retain such regimes. from a firm point of view, the transactions highlight the increased mobility of activity in today's economy. growing decentering of firms where world headquarters have been split up around the world. rather than question the royalties of executives it is critical to understand the underlying and secular forces. inversions are merely the most visible manifestation of these developments. in addition to inversions, these decisions are giving rise to entrepreneurs that anticipate. merger patterns that affect domiciles in the united states.

profit shifting activities that are not value-creating and the subsequent negative impact on all the distortions on the u.s. labor force. while it's attempting to limit the more sensational effects and characterize them as paper shuffling this would be essentially missing the forest for the trees. it would be to focus on u.s. welfare with particular attention on reforms that would improve u.s. wages. these goals are mistakenly thought to achieve by lilting the foreign activities as foreign agentivities can be viewed as quartering activity away from the u.s. in fact, it suggests the opposite. indeed, american welfare can be advanceded by ensuring that investments in the u.s. and abroad are owned by the most productive owner and the americans flourish. a goal now adopted by most comparable countries. while the developments described above have crystallized the case for international tax reform with an increases intention to

switching to a territorial regime. some proposals including those with alternative minimum tax on foreign profits are tantamount to a back door wide world regime with even more complexity than today's system. revenue consider, should be considered large by given the very limited revenue provided by current international tax rules and the remarkable complexity and distortions required. more properly, the corporate tax is ripe for reform. in addition to international rate action the form should address. the growing prominence of non-c and the condition junction between profits. a useful blueprint for reform would include moving to a territorial regime unencumbered. considerable rate of 18% to 20%. and by some taxation non-c

business income. the potential of addressing significant changes in a global economy in a revenue neutral array that will advance welfare. more preferred if feasible. legislation that is narrowly focused on inversions or specific transactions runs the risk of being counterproductive. leading to several unintended consequences. for example, rules that increase the size of the foreign target to ensure the tax benefits of an inversion can deter these transactions but can also lead to more substantive transactions. more substantive transactions are likely to involve the loss that demand the location of more activity abroad including headquarter functions. similarly, similar targeting those firms may lead to foreign firms leading to some transactions to avoid those regulations. while it's tempts to address specific transactions in advance, it is useful to recall that the last wave of

anti-inversion legislation likely spurred these more recent transaction and reduced the prospect of reform in the intervening years. members of the committee, i adviser the foresight in the issues. i'll be delighted to answer any questions. >> thank you very much, professor. we now welcome dr. peter merrill, and look forward to your comments. >> thank you. thank you. chairman wyden, ranking member hatch, members of the committee. thank you for the opportunity to testify today. my name is peter merrill, i'm a principal with pricewaterhousecoopers. and the focus of my practice is economic effects of tax policy. i'm appearing today on my own behalf and the views i express are my own. i've been asked how the international rules compare with the rules of other countries.

my testimony, i will focus on two features of the u.s. corporate tax system that fall far outside international norms. the high corporate rate and the worldwide system of taxation. these features of the u.s. tax system may get more difficult for u.s. companies to compete in global markets. this multinational face ever growing competition from abroad. in the last 15 years, the number of u.s. companies in the forbes global top 500 list has dropped by a third from 200 to 135. the loss of global market shays by local companies is due to a variety of other factors, out of step u.s. tax system is seen by many as a hindrance than a help. the rate including state tax is 39.1%. this is the highest rate among major economies. more than 14 points above the average for the other oecd countries and seven points

higher for the other g-7 countries. an 1986, the u.s. had a relatively low corporate tax rate. however, since then, the other oecd has increased by 13 points while in 1933 to 35 where it has remained since. while it's widely recognized that the statutory corporate tax rate is high, studies show our effective tax rate also is high by international standards. in addition, the u.s. has a worldwide system under which foreign income earned by foreign subsidiaries of u.s. companies is subject to u.s. tax when received by the u.s. parent. unlike the united states, and all other g-7 countries and unlike 28 of the other 33 oeccd countries they have adoptsed territorial tax systems. as a result of these trends,

u.s. multinationals increasingly face foreign competitors that are taxed under territorial systems within the. oecd 93% are foreign competitors on the global top 500 list were based in countries that use territorial tax structures. the significance of this is is that foreign competitors of the u.s. multinationals can invest their foreign profits at home, without an added home country tax. turning to recent reforms in 2009, three oecd adopted tax systems. the uk, japan and new zealand. the uk package also included lowering the income tax rate from 28 to 21, with a further reduction to 20 scheduled next year. the british government articulated the rationale for these reforms, quote, the government wants to send out the signal loud and clear that britain is open for business.

in recent years, too many businesses have left the uk, amid concerns about tax competitiveness. it's time to reverse this trend. that is why the government is prioritizing corporate tax reform. closed quote. japan's adoption of the 95% dividend exemption system had been advocated by the ministry of economy, trade and industry to encourage a repatriation of foreign earnings. japan's corporate tax rate has been cut five points to 35.6%. and president abe's cabinet has reduced it. and also to 2009, new zealand resorted back to a tax system after which it operated in a worldwide system. there be bringing new zealand's tax system back in alignment with international norms. in closing, the combination of our high corporate rate and worldwide system creates an incentive for u.s.

multinationals to reinvest foreign earnings outside the united states. according to a recent study co-authored by tyson, former chair of president clinton's economic visors, switching to a territorial issue would on an ongoing basis increase annual repatriations and create 150,000 jobs per year. would enhance the ability of u.s. companies to compete at broad and create jobs at home. thank you, i'll be happy to answer question. >> dr. merrill, thank you very much. dr. robinson. >> chairman wyden, ranking member hatch and distinguished members of the committee. it is an honor to appear today to testify on the important topic of international taxation.

i'm an associate professor at the tuck's school of business at dartmouth college. my research centers on multinational corporations. it is clear that reform is needed. the international system is one of the most technically complex areas of the u.s. tax code, but raises little revenue. my testimony summarizes in my view, what the academic literatures in economics, finance and accounting collectively offer in terms of evaluating the range of alternative solutions. the top u.s. federal corporate income tax rate is 35%. this is the highest rate of all oecd countries and exceeds the average. proponentses of adopting a territorial system in the u.s. often cite competitiveness issues. a common assertion is that u.s. firms are at a competitive disadvantage because they face larger tax burdens, operate in under a worldwide system than their competitors operating under territorial systems.

generally speaking, this is because u.s. firms face a high home country tax on foreign profits, whereas, their competitives face no home country tax on foreign profits. yet, no country operates either a pure worldwide or a pure territorial system. when loopholes exist that facilitate the indefinite deferral of the home country tax on foreign profits under a worldwide system the pendulum swings back to appear territorial system. likewise, as eligibility for the foreign dividend exemption under a territorial system is appropriately restricteded, the pendulum swings back to appear worldwide system. this means it is possible for a well-designed territorial system to be at least, if not more as burdensome, as the poorly designed u.s. worldwide system that we have today. evidence suggests that u.s. firms are adept at indefinite deferral. one study finds that financially unrestrained u.s. firms shift as

many income as firms operating under territorial systems. also, there is no evidence that the global tax burden of a firm depends on how foreign tax are taxed in the home country of its parent. there is some evidence that certain location differences globally impact, depending on the home country. for example, a firm resident in home country x realizes a larger reduction than operating in source company a than in source country y. whereas, the opposite may be true for these two firms when operating in source company "b." this suggests that the burden of an international tax system depends significantly on solutions that selectively narrow and broaden the tax base with respect to certain types of income turned in specific locations. whether the tax is worldwide versus territorial.

similarly, other research shows that tigs decisions about headquarter relocations, tax haven operations and ownership structures depend on the existence and strength of anti-abuse legislation. maintaining our current worldwide system with deferral or introducing a territorial system leaves the need for anti-abuse positions that are difficult to administer and enforce. another consideration is eliminating implicit costs. avoiding repatriation which triggers the home country tax on foreign profits under our current system prompts firms to allocate economic resources in an inefficient manner. examples include making value decreasing foreign acquisitions or the inability to respond to domestic investment opportunities. maintaining a worldwide system, but eliminating deferral, would greatly reduce these costs. adopting a territorial system may not. firms operating under territorial systems face

implicit costs when attempting to circumvent legislation. to my knowledge there is no estimate of these costs, but my expectation that they would be greater than under a worldwide system, without deferral. my overall assessment is that our international tax system can be adequately reformed. we need not entire abandon our current system in favor of a fundamentally different system. limiting deferral and lowering the statutory rate would generally shift to income eliminating the costs of repatriation. thank you, and i would be happy to answer any questions. >> dr. robinson, thank you. our final witness, mr. alan sloan. >> chairman wyden -- how do you do this? >> it's on. >> chairman wyden, ranking member hatch.

members of the committee, i'm flattered to be here. i'm honored and especially to be hitting cleanup which is my normal role in journalism. before i proceed, i have to say that i'm speaking for myself alone. i'm not speaking for "fortune" magazine my employer. i'm not speaking for fortune's owner, time inc., i'm not speak for "the washington post" which has run my material for more than 20 years. i, like senator hatch, am appalled to see that inversions are becoming a partisan wedge issue. i don't like this. now, at fortunes several weeks ago we put an american flag on the cover, we called inversions positively un-american. but we weren't being partisan. we were being americans. "fortune" is divided between republicans and democrats. we're acting collectively, not

in the socialist sense, but in the societal sense. this isn't a republican problem. it's not a democratic problem. it's a problem for everybody. it's for all of us. and if you don't stop inversions now with some sort of band aid, by the time you get around to doing it, there will be tens of billions of dollars of taxes that will having lost and will never be recovered. now i am familiar -- i've been writing about inversions and researching them for months. i've heard the argument, well, inversion is a symptom. you can deal with them unless you deal with the whole problem. you deal with the problem, you deal with inversions. well, i happen to have a doctor who is an emergency room doctor. and when someone shows up at the e.r. bleeding, they first thing they do is they put on a to tourniquet, they stabilize the

patient. and then they try to deal with the underlying problem. they don't say, well, gee, we have to deal with the underlying problem. you've got an emergency here. it may not seem that way but you've got the beginning of, i think, a massive flood of inversions, unless you stop this. now, i know very little about tax. i know very little about law. but i do know something about wall street and manias. and i look at this, this inversion thing, it reminds me of the dotcom bubble where people did things that were just crazy. but everyone was doing them. all of these people with degrees and a lot of money and fancy suits whispering in your ear, well, you've got to do this. so people did it. and it was just a disaster. so i've written about wall street for large parts of my career. and they gave us the internet

bubble. they gave us toxic subprime securities. and now, they're giving us inversions. it's a product. it's the latest thing that's good for wall street. there's this whole rationale that surrounds it, but i don't think it's good for society. it just doesn't work. and since i don't pretonight understand anything about the international tax system, except that i don't understand it, and i'm a simple person. i'm a recovering english major. i'm not a legal person. i mean, to me, if i were you, which will probably never happen because i'd have to be nice to people and be polite, and i don't do that well. i would adopt one of the 11 bills, and sandy levin will probably be angry with me, but i would adapt the carl levin version, the one that has a

time, expiration in it. because if you can just stop these things for a while, you can buy time to fix the system. if you sit around and say, well in a few years, we'll do this, it will all be fine, by then, the patient will have lost so much blood, it's going to be hard do do anything remotely neutral in a tax reform. the other complaint, again, i've heard endless ely, oh, it's so unfair to make this may 8th which is the date in the transaction which i believe also happens to be the date that senator wyden published his op-ed in "the wall street journal" which messed me up because he wrote what i was going to write so i was furious. but i came here anyway. so the may 8th deadline was known, okay? if you look at the contracts of some of these deals there are provisions in there, you know, the anti-inversion stuff changes. so it's not as if this is

unprepared or unfair. i mean, everybody knows this. you changed rules retroactively in 2004. and as best i could tell there was not earthquakes or brimstone or fire from the sky. so, please, you know, if you can act like americans, which i know you can, instead of squabbling. and you get the senate to go along and deal with the house, we can stop -- we can put on the tourniquet. we stop the patient from bleeding out, then we fix the system. and that's what i hope you will do. thank you for your time. i'm happy to answer any questions. >> mr. sloan, thank you. colleagues, we'll stick to five minutes, we'll get in as many as we can. i'm going to ask one question of all of you. i'm going to start with you, mr. stack. i have been about as big a flag waver for comprehensive tax reform as anybody around here. and i am going to continue to

keep pushing for bipartisan tax reform as aggressively as possible. the reality is nobody believes that you can get comprehensive tax reform passed this year. and with the investment bankers in that inversion feeding frenzy, there may be 25 more inversions during that time. so, i'm just going to go down the row here this morning and ask each of you, will that be a bad thing for america? mr. stack? >> yes, senator, that's a bad thing for america. that money is not just a one-time hit. that is a hit we take the year a company inverts. and it's a cost we incur throughout the ten years of a budget window. in addition, i just want to add, companies not only reduce their u.s. tax bill on day one when they invert, but they also adopt techniques to keep stripping out of the u.s., for each of the next ten years as well. so we get hit with a double whammy. it has a long-term effect.

it's permanent. so the cost of waiting i think is very high. >> mr. saint-amans. >> i think it's bad. it's a symptom of a disease. either you prevent the companies to invest in the u.s. and i think that's one of the challenges of the u.s. tax code to date. or you result in inversions meaning that you lose the control of these companies which invert in another country and that's a plus for the u.s. although it's bad a symptom of an issue in the tax code. >> dr. desai. >> some the short run, it will feel good to do something. in the long run, it's not going to help the country. i think there are a lot of medical analogies which are being turned around today which are helpful. rather than a tourniquet, we may have a bleeding patient and these things may anesthetize the patience. >> i think i'm going to take that as a no.

dr. merrill. >> on this one, i very much agree with the comments of pascal which is these transactions are a symptom of a very broken system. and certainly, i can understand the desire to put on the tourniquet, but if you leave it on too long without resulting in the underlying problem, you get gangrene. so i can understand the desire to do something in the short term. but there is the risk of unintended consequences. so fixing the system is ultimately the only real answer to stop the problem. >> so you're in the middle of all of this. we'll put you down in that way. my concern about that position for both of you is that tax reform is moving slowly. inversions are moving rapidly. and that is a prescription for chaos. and that is why i want to see us address both of the issues in a bipartisan way. dr. robinson. >> i don't have any -- any data

on this but i do remember reading about inversions, companies leaving other countries such as the uk. and then when a tax system is reformed, they have come back. again, i don't have any data on that, but my sense is that these companies may not be lost forever. i also think, as far as i understand, inversion transactions, it only affects the tax on the future -- future income. it doesn't impact the tax on the accumulated earnings. so in that respect, i don't think we run the risk of waiting to solve the real problem and sort of letting the markets play out as they do. >> you think it would be a bad thing? okay. mr. sloan. >> i think letting 25 companies invert and then fixing the tax code is a recipe for disaster. i know a little bit about how inversion works.

and mr. stack is absolutely right that the problem is not so much what happens to foreign profits. but it becomes much, much easier to move money to earnings strip out of the united states. and you have to stop this. and at some point, when we're not on the clock, i'll bandy medical analogies with my colleagues. but this is not the time so we'll let that go. >> let me see if i can get one other question in, i'll make this for you dr. desai, given what you've said. let's take walgreens. walgreens is an american icon. it's located in the heart of our country, and they are talking about inverting right now. should americans be concerned about the prospect that if walgreens inverts, they will strip profits out of the united states, and put them into tax

havens? is that something americans ought to be concerned about? >> without question. absolutely, there's no question about that. the secondary question is what do we do about it. but absolutely, we should be concerned. >> senator hatch. >> this question is for dr. robinson and dr. merrill. dr. robinson, in your written testimony, you write, quote there's no evidence to support the assertion that u.s. multinational corporations are at a competitive disadvantage because they face larger more correspondent tax burdens than their competitors under a worldwide and territorial tax system, end quote. you then cite three studies in support of your statement, including one study which finds u.s. multinationals have effective tax rates that are 4% lower than multinationals based in the european union. but aren't there numerous studies that show that u.s. multinationals are subject to higher effective tax rates than

foreign-based multinationals? and that seems to indicate that the u.s. -- well, let me put it this way. let me give you an example. dr. merrill cites numerous studies showing in his written testimony a congressional research service released a report earlier this year studying effect of tax rates. and one part of the report, c.r. notes that the effective corporate tax rate in the united states is 27.1%, as compared to the rest of the oecd countries that have an unweighted average of 23.3%. that seems to equate that the u.s. corporate tax rate is almost four percentage points higher, not lighter than the other oecd country, at least by one measure. now, would you please comment on this. i'd also like dr. merrill to

comment on the effect of tax rates phased as faired to foreign-based multinationals. >> all right. so the studies that i wrote in my written testimony measure accounting effective tax rates from financial statements. i'm not sure what dr. merrill is going to follow up in terms of his study. it maybe a difference in how tax rates are measured. but in the accounting literature, there have been a number of studies, published and unpublished, that have searched extensively in differences for the accounting tax rates in firms resident in worldwide versus territorial countries. and also looked at, as i mentioned, the effect of these effect of tax rates on decisions. there isn't, at least to my knowledge, in accounting literature as measured by an

accounting effective tax rate, any evidence to suggest that u.s. firms have higher rates. >> so, in my written statement, there is the comparison of about six different studies that compare effective tax rates to u.s. and foreign companies. none of the studies are specifically focused on the foreign income of multinational companies. and, perhaps, this is what dr. robinson's comment is referring. the studies i referred to to look at u.s. versus foreign companies including accounting data. one of the studies there, published by the business roundtable, compares the financial statement accounting tax rate of companies in 58 different countries. the u.s. had a higher than average book effective tax rate

than the other multinationals in that study. world bank does a study. we helped them with that. compare taxes in 183 countries. looking at purely domestic companies. and there's several other studies that i cited there that have you focused primarily on domestic investment. so there are a range of studies. i must say, that looking at a broad range of studies, almost every study i've seen has shown when you do an international comparison of the u.s. effective tax rates versus foreign, whether it's foreign statement whether it's done through marginal effective tax rates, the u.s. consistently comes up above average. i put that on my testimony because it is commonly thought that effective tax rates at u.s. companies are low. but international standards, according to all the studies i've seen, except for ones actually in leslie's testimony, the u.s. comes up in the top

tile. >> may i address? >> yes. >> this question is for dr dr. desai, it seems that discussion in tax reform can result in the debate of capital neutrality versus capital import neutrality. such a discussion usually is not helpful, in my opinion. and typically ends up going nowhere. the unit developed an interesting new theory of international taxation. capital ownership neutrality. the idea being that a tax system should not distort the ownership of assets. and in fact, capital ownership neutrality seems to fit in nicely with the acquisition inversions that we're seeing today in which a u.s. corporation across a smaller foreign corporation inverts as part of an qcquisition. it seems that the u.s. corporation is at a disadvantage if it is competing against a

foreign corporation, based in a country with a territorial-type tax system. as we know, most developed countries have adopted territorial types of tax systems. 28 of the 33 oecd countries have territorial-type tax systems. is it accurate that a u.s. corporation is at a disadvantage? >> doctor, if you could, i brief answer because i want to recognize senator grassley. >> yes. we develop neutrality. it does not matter where the dollars go but who owns what. and it's clear of the manifestation that u.s. firms aren't good owners because of taxation of assets around the world. and it's better to be domiciled somewhere else. >> thank you.

>> mr. chairman, here's what i'd like to do with my five questions. i want to ask mr. stack a question, let him think about it 4 1/2 minutes, led him read a statement. >> colleagues, at this point, we have had a vote called i think it's the consensus of the members that we'll have to break because here in. we'll get as far as we can. senator. >> mr. stack, this is a question i'd like to have you think about. the treasury has recently informed me it has finally begun work on a report mandated by the american job creation act to study the 2004 anti-inversion provisions. when does the treasury department expect to finish its study of the 2004 inversions legislation, and before enacting such important legislation, shouldn't treasury at least complete the report mandated to study the issue? like most of my colleagues here today, i've deep concerns about the practice of companies moving overseas for the primary purpose of avoiding u.s. taxes.

average americans and companies that remain in america are rightfully outraged. when companies leave the united states, leaving the rest of us to in the early 2000s i led an effort to prevent companies from simply setting up a filing cabinet and a mail box overseas to escape millions of dollars of federal taxes. in 2004, when i was chairman, i was successful enacting reforms that establish rules governing inversions for the first time. under these reforms, an inverted company continues to be treated as a domestic company until there is a significant change in ownership or substantive business activities are located in the foreign country. a second feature of these reforms prevents an inverted company from skipping town without first paying taxes on untaxed earnings. prior to these changes, all the company had to do was move its

tax home out of the you'd and file papers with a tax haven. there were no rules or standards for determining whether a transaction had substance or was purely a tax avoidance scheme. a number of companies took advantage of the lack of rules and standards to move to the cayman islands or bermuda as examples. these inversions were purely paper with no substantive change of operation. in 2004, provisions have successfully curtailed abuses targeted by the legislation as a nonpartisan congressional research services said, these reforms, quote, effectively ended shifts to tax havens where no real business activity took place. this is not to say inversions no longer take place. the 2004 reforms were never

intended to establish a berlin wall that forever trapped companies in the united states regardless of business needs. these reforms were targeted at and put an end to egregious abuses epitomized for augelin house that serves as mail boxes for millions. the significant foreign company, usually european, these are not the traditional tax haven countries with little or no corporate tax, but major u.s. trading partners with competitive tax systems and rates. there is little question that lowering one's tax bill continues to be a factor in companies deciding to invert. however, unlike transactions in the early 2000s, these are substantive transactions that come with both risk and benefits

for companies involved as a result factors other than taxes likely play a role in deciding to invert. i do not condone that behavior. one area that should be studied further is a role of tax rules that allow inverted companies to strip income out of the u.s. plays in a company's decision to invert. i'm going to stop and put the rest of it in and ask mr. stack to answer my question on the study we asked for. >> sure, senator. as we mentioned in our letter last week, now that we've gotten great guidance out on inversions, we are working on the study. i apologize. i cannot give a specific time frame for answering it. i would say that given the pace of inversions that have picked up recently, we would not think there would be a need to await the study to bring back our full attention to this issue which is

happening before our eyes. >> thank you, mr. chairman. >> thank you, senator grassley. senator brown. >> thank you, mr. chairman. i would talk for a moment about a question for you, mr. stack, about earnings stripping. companies are using intercompany debt to lever up their u.s. subsidiary and duct interest up to 50% of pretax earnings, shifting profits to the lower tax country. the second element of this tax arbitrage is shifting intellectual property and attributed profits to tax havens. my question is what do we do right now to create a kind of temporary trip wire that will allow legitimate mergers, but prevent those arbitrage-driven inversions? >> thank you, senator. one of the reasons we singled out these anti-stripping proposals in our budget, even without reform these things are going on now and going on particularly in cases where we have inversions.

so whether it be interest stripping, making it harder to take intangibles out of the united states, changing the treatment of instruments that you can take a deduction here and have no income inclusion somewhere else, we think these are all urgent needs that would protect our base even before we do tax reform and will also protect our base while the inversion wave is happening, and they're very important. >> thank you. mr. chairman, i want to ask a question of mr. sloan. i want to make one comment. the more we read about this and i appreciate the chairman has brought this out more effectively than anybody in this senate. when people in this country increasingly think the system's rigged, people in this country increasingly see large companies find ways of avoiding taxes. people struggle to pay their own taxes. people see these large companies having benefitted from a manufacturing tax credit,

infrastructure in our country then using legal means, nobody's arguing, most of us are not arguing they are using legal means, finding ways to avoid taxes. i think this committee needs to take this charge very seriously that the public loses, increasingly loses confidence in this tax system causing others perhaps to cheat and loses, increasingly loses confidence in this legislative's body ability to do anything if we can't narrowly follow mr. stack's advice and senator wyden's ideas and do something narrowly now about inversions, we clearly have not lived up to our public charge. let me ask a question, mr. sloan. we were seeing increasingly more and more stories from senator levin's work on his subcommittee that hedge funds and investment banks are big drivers of these deals which indicates a potentially short-term focus on stock price and fees, the

rewards to wall street are plentiful, as mr. sloan said. premiums offered to shareholders of foreign companies so inverting companies may avoid u.s. taxes. if you would answer a couple of questions, if would you, mr. sloan what role in your mind do equity funds and private equity funds, investment banks hedge funds play in encouraging companies to avoid taxes by completing an inversion? is there any counterweight to this pressure companies received from short term focused investors? >> all of these players are in business to make money. they are in a competitive business. they want to show a higher rate of return than other people so they can continue to attract more money and get more fees. and as long as something is not illegal, they will do it. and if you talk to them socially, they're not bad people. they're human beings, even like senators and journalists. they're regular people, but they

have these forces that drive them. and i think they are perfectly fine corporate ceos who, if you people will just protect them and get rid of the inversion temptation, they are happy not to invert. but everyone now feels pressure and everyone's scared. it's becoming a mania. by the time it waves, it fades away, it's too late. >> thank you, chairman. >> thank you, senator brown. senator schumer is next. i am going to try after the first vote to run over and vote because we have colleagues who feel very strongly about this. senator schum ieschumer. >> thank you. i want to thank you and senator hatch holding this hearing today. we must independent this trend to leave our borders for tax

avoidance purposes. there's been a significant uptick in the number of inversions. 47 u.s. corporations reincorporated overseas through these inversions. during that period, now there are more than a dozen perspective deals. many of my colleagues, particularly on the other side of the aisle argue we shouldn't be looking at this issue in a vacuum right now. they say we should instead be focused on corporate tax reform. i would ask those arguing that we wait for tax reform just how soon do you think that's going to be possible? chairman camp tried tax reform on the republican side. even speaker boehner didn't give it much credence. so if we wait for tax reform, we're going to have lots more inversions and it's going to take far too long if we ever get to tax reform at all. saying that we should wait for tax reform to deal with inversions is a green light to allow many more inversions to occur. for some who make it, frankly,

it's an execution to keep this loophole in place for the foreseeable future. the tax reductions achieved through inversions happen in a couple of different ways, mr. chairman. first, by moving their domecile, they are no longer on u.s. tax and this has been appealing to pharmaceutical companies. walgreens, for instance, is doing the same thing. why is that? well, it's the second piece of the inverter's tax avoidance equation. not only can these companies avoid paying taxes on their internationia internationial optations, they can avoid paying taxes on their u.s. taxes that remain in the united states. one way is through a mechanism in the tax code called the interest expense deduction. it's a five-step process.

they set up a u.s. subsidiary to operate their u.s. business. when that subsidiary owes u.s. taxes, they transfer the corporate funds between the foreign parent and subsidiary and call it a loan to the subsidiary that. triggers a u.s. tax deduction. the interest expense deduction for this subsidiary, which then largely offsets their u.s. tax liability. the loan is repaid through the profits of u.s. tax subsidiary to the foreign parent, and u.s. taxes have been avoided. as a result, they pay little or no tax on their u.s. profits, as well. now, we've attempted to limit this type of behavior in the past. we put a cap on the debt-to-equity ratio of the u.s. subsidiary, but the current law still provides very lucrative tax benefits for intercompany benefit. in fact, mr. sloan, your magazine or your website did an op-ed on this talking about the risks and rewards of inversions,

which mentions the interest expense deduction. so as we work together to put a proposal to combat this growing challenge, we have to look at it from every angle. now, i support the proposal that senator levin and the administration have been working on, an immediate two-year moratorium and increasing the number of foreign shareholders to inversion there 20 to 50, making it more difficult to happen. i do have concerns with the management and control part of the levin proposal because we want to keep jobs at home and the management control proposal may encourage jobs to grow abroad. levin's proposal is not enough. we should include a proposal that further limits or disallows the interest expense deduction to deal with the u.s. profits that they are also trying to avoid. doing so will be a deterrent for those considering an inversion as they'll no longer see that opportunity to avoid u.s. taxation, and it will deal with

the retro active problem. you eliminated pro expectatively, but any company that did an inversion six months ago, a year ago, five years ago will still lose this deduction. so it's a prospective policy action to counter past and future inversion activity. it would ensure we don't leave those inverters at the front of the line, the one whose started the trend with a competitive disadvantage. mr. stack, my only question, my time is running out. i know my dear colleague is waiting. does the administration agree that we should consider measures to further limit or disallow the current interest expense deduction for inverters in any legislative package we pursue to combat inversions this year? >> yes, senator. we fully agree. we think you've shone a light on a very dangerous part of the inversion craze. the ability the day after the inversion transaction to continue to strip the u.s. tax base we have a budget proposal to that effect, but think you

are pointing to a very critical aspect of the problem. >> thank you. i want to say to companies doing inversions, you want to operate here, you want access to this market, access to the work force, access to the economy, understand this here today, to continue to have that access, you are going to have to pay your fair share of u.s. taxes. things are changing. >> thank you, senator schumer. the time for the vote has expired. we are going to go. i'm going to come back as quickly as i can. thanks. >> i wanted very much to be here even though we have to go running out. thank you to each of you. i want to say to my colleagues, we have a place to start tomorrow which is to bring jobs home act. i'm very pleased to be working. it takes a simple first step on what needs to be a series of steps.

if you want to move your company we are not paying the cost to move out of this country. if we want you to come back, we'll let you write that off and give you 20% tax credit. if you leave, you're on your own. that's not enough because we have folks that leave on paper. they are not picking up their plant and leaving. i will stay, mr. sloan, i couldn't agree with you more. this is not a partisan issue. this is an american issue. i think the american public is going to be watching very closely to see companies that need consumers who are doing this. i think they underestimate the reaction of consumers and other businesses in going forward. i do think if we can move forward and overcome a filibuster, get on the bring jobs home act, we could at carl levin. i'm with you. i serve with both my dear colleagues sandy and carl in michigan. carl's approach of a two-year effort to get us to tax reform is the right way to go.

we could add that certainly with the bring jobs home act. i believe that we need to do that and we need to get started on this. i also think it's important, you are right in terms of -- certainly all of you saying we need tax reform, we need to do that, we know we need to do that. we know we are in a global economy. we have to address this. but we also do know that i don't know of any sector paying 35%, our corporate rate. the reality is we have a lot of incentives, we want incentives that relate to manufacturing or r&d or other things, but when i look at the list, from medical devices at 18.8% or financial services 16.5% or petroleum production 11.3% or down to public/private equity paying 0.8% rate, a large disparity and a number of issues we need to

address. here is what i want to comment on. that is the issue around -- we have two issues. corporate tax reform, global economy, how do we address this and incentivize making things and growing things in america and innovation in america. then we have folks that just plain don't want to pay their fair share and benefit from america. so you've got folks on inversions who, they don't want to breathe beijing's air. they want to breathe american air. they don't want water of third world countries. they want to drink the water. they don't want the rule of law of a lot of countries. in haiti talking to our business, as you pull up a cargo ship you can't get the product off the ship without paying a whole bunch of bribes. so they want our rule of law. they want our innovation, education, infrastructure, breathe the air, drink the water, they just don't want to contribute.

that doesn't sound like normal american values to me. what it does is create a race to the bottom where we're not going to have customers, then we're really not going to have businesses as we go forward on here. this is a deep concern to all of us. i guess, mr. sack, i would simply ask when we look at competitiveness internationally from your perspective, certainly the rate is important, but we know even going to 28% that means eliminating r&d tax credit, section 199 for small businesses. that means eliminating accelerate depreciation which is so critical in a state like mine with manufacturing. there's got to be more to it than just tax grade in terms of investing in america. i would ask you if we are going to stay competitive internationally, make things and grow things here, what are some of the other priorities besides lowering the rate?

>> thank you, senator. first on the rates, i would also add the point that a lot of the discussion about rates kind of ignores the fact that there will always be countries with lower rates than ours where people may want to seek to go. there is this tax competition going on. in terms of other things we could be doing, the first thing i want to point out and this relates back to rates, our effective rates, very widely. we don't have a level playing field across our industries. number two, we don't have a level playing field for countries that can take ip and put it offshore or have a broad enough market offshore to take advantage of some of these international provision. in addition to lowering the rates, we think it's very important to broaden the base for these taxes so we can create some akwlt, eliminate the winners and losers so that everybody has the advantage of this lower effective rate as we go forward. as you also point out, maintaining incentives for research and development so that we remain the premier country in

terms of this type of activity is also of critical concern. >> thank you. i believe at this moment i better get over to vote or i'm going to miss the vote. thank you very much. are we in recess. we are in recess at the call of the chair. thank you very much.

as you heard, the committee is taking a recess. there is a series of votes on the senate floor. we will resume live coverage once they do. just a couple of notes about live coverage on the c-span networks. on c-span at this hour, the u.n. security council is getting under way with their meeting on the israeli/palestinian conflict. that hasn't started yet. you'll be able to see it shortly on c-span. our live coverage here on cspan3 late they are afternoon, it's the nomination hearing of robert mcdonald. been nominated by president obama to be the next veterans affair secretary. that is coming up before the veterans affairs committee at 3:00 p.m. eastern. we'll have it live. >> in washington today, as well,

a ruling for the appeals court panel. associated press saying federal appeals court delivered a serious setback to president barack obama's health care law, potentially derailing subsidies for many low and middle income people who bought policies. if upheld, the decision could mean premium increases for more than the millions of americans who purchased under the law. this was a three-judge panel of the district circuit here in the nation's capital. the senate finance committee taking a break for a series of votes on the senate floor. until then, some of the opening statements as the hearing got under way this morning. >> the finance committee will come to order.

these infections are hobbling america's drive to create more good "wall street journal," red white and blue jobs here at home. >> american companies move their head quarters out of the united states in pursuit of lower tax rates. the inversion virus seems to be multiplying every few days. many more deals have either

occurred recently or are currently in the works. medtronic with cavidien was record-breaking when it was announced in june. but the ink in the record books had barely dried when abbvie had announced on friday to acquire shire for almost $55 billion. according to the july 15th edition of "marketplace" and i'm going to quote here, what's going on now is a feeding frenzy. every investment banker now has a slide deck that they're taking to any possible company and saying you have to do a corporate inversion now, because if you don't, your competitors will. the congress has been aware of the add version virus for a long time. in fact, it passed legislation purporting to solve the problem

a decade ago. but the underlying sickness continues to gnaw away at our economy with increasing intensity. the american tax code is an anti-competitive mess. accountants, lawyers and fast-buck artists looking for tax shelters seed off of it. this mess is driving american investment dollars overseas. and according to the joint committee on taxation, it is costing american taxpayers billions. on a bipartisan basis, the finance economy must respond now. first, let's work together, colleagues, to immediately cool down the inversion fever. the inversion loophole needs to be plugged now. second, let's use the space created by the immediate steps to it apply the indisputable, ultimate cure comprehensive tax

reform. now, i've got nine long years of sweat equity in the cause of tax reform. with former senator gregg and current senators begich and coates, we have produced which still is the senate's only bipartisan federal income tax overhaul in almost 30 years. now, i'd be the first to say that senators here have differing views about how to go about enacting tax reform. let's, however, recognize that what really counts is that the finance committee isn't back here once again discussing inversions a decade from now. comprehensive tax reform has to happen soon. the outbreak of inversion showed that without curing the disease once and for all, the illness is going to keep plaguing the american economy.

it's going to get tougher to create those good wage red, white and blue american jobs. our cash base is going to keep eroding. cash piles overseas there grow. investments will be driven elsewhere. now, the finance committee invited a number of ceos from the inverting companies to join our discussion today. none accepted our invitation. i hope that these executives will soon change their minds and be willing to answer questions that finance committee members have about this issue. the fact is that without immediate comprehensive tax reform, an antidote to the inversion virus is needed now to protect the american economy. this wave of inversions may be good for shareholders and

investment bankers and private equity firms. yet, the barrage is bad for america. america's free enterprise system is at its best when there is a level playing field. and inversions bestow tax savers on some parties that further distort the free market. absent tax reform being enacted immediately, colleagues, what happens if the inversion virus leads to 20 more inversions over this summer? many inversions to this point have happened in the medical field. but "the wall street journal" just reported that there's evidence of inversion spreading to manufacturing and retail. how many more infections can america's economic body endure. globe markets are expanding. stockpiles of cash sitting overseas grow at record levels. foreign competitors get more aggressive at champing at the bit to get a deal on the backs of the american taxpayer. the time for action is now. our committee needs to move on a bipartisan basis to close the loopholes that are fuelling the growth of the inversion virus. then the finance committee needs

to cure the disease once and for all with comprehensive tax reform. i just want all colleagues to know that i am going to be working with each of you on a bipartisan basis to accomplish both of these tasks. let me recognize my colleague and friend, senator hatch. >> thank you, mr. chairman. i appreciate you holding this, today's hearing. i think we can all agree that addressing the short comings of our international tax system is a critical step on the road to tax reform. as we ask reforms to our tax code, our primary goals should be should be to make the u.s. a better place to do business and to allow american companies more effectively compete with their foreign counterparts in the world market place. sadly, when it comes to our international tax system, much of the tension gets placed elsewhere. for example, in 2013, the oecd

launched its shifting of bets project. while we appreciate of bringing tax authorities together to discuss issues, many of us have expressed concern that the betts project can be used by other countries as a way to increase taxes on american taxpayers. the issues with the negotiations on the betts project are complex and can have far-reaching and negative consequences. while i think we should be willing to work through these issues in an international consensus is reached, we should not be rushed into accepting a bad deal just for the sake of reaching an an agreement. i think we're right to expect that the treasury department will represent its employers and workers in the betts association while discussing with congress while the discussions proceed. hopefully, in the end, the focus of these discussions will return to base erosion principles, instead of ways that foreign companies can raid the american

treasury or american businesses. of course, while the betts negotiations are important, the most high-profile international tax system today happens to be tax inversions. it seems every day we're hearing about a u.s. multinational opting to revert. as i said, i'm glad to be concerned about these corporate inversions. ultimately, the best way to solve this problem would be to reform our corporate and international tax system in a manner that will make our multinationals competitive against their foreign counterparts. that would mean among other things a significant reduction in the corporate tax rate and major changes to make our international tax system more competitive. over the past few months we've seen a handful of legislative proposals to address the issue of inversions. most of them are punitive and retroactive. rather than incentivizing american companies to remain in the u.s., these bills would build walls around u.s.

corporations in order to keep them from inverting. i think that's not only stupid, but i think it's going to -- going to result in results that nobody wants. this approach in my view completely misses the mark. while it may put a stop to traditional inversions it could actually lead to more acquisition inversions as u.s. multinationals would, under this approach, become more tractive acquisition targets for foreign acquisition reversion, the result is the same continued stripping of the u.s.-act base. it reminds me of an old joke. a drunk is looking for something understand a street light. a police officer walks up to him and asks, what is he looking for. the drunk says my keys. the police officer helps the drunk look for a few minutes and finally asks did you lose your

keys here? the drunk said, no, i lost them across the street. the officer responds then why are you looking for them on this side of the street? and the drunk replies because the light is better over there -- over here. once again, the ultimate answer to this problem and the only way to completely address the issue of reversions is to reform our tax code. however, as i've also said publicly, there may be steps that congress can take to at least partially address this issue in the interim. while i don't support the anti-inversion bills we've seen thus far, i personally am open to considering alternative approaches. although i do have a few stipulations as to what proposals are considered. for example, whatever approach we take, it should not be retroactive or punitive. and it should be rev knew neutral. our approach should move us towards or at least not away

from the territorial tax system. and should not enhance the bias to foreign acquisitions. most importantly, it should not impede our overall progress towards comprehensive tax reform. toward that end, it should not be inconsistent with our house colleagues' approach. i think there's a growing concern among some of our friends on the other side of the aisle to use corporate inversions as a political wedge issue in this election year. in fact, i was recently the recipient of a very politically toned letter from treasury secretary lu on this issue. we're going to have to work together. as you can see, mr. chairman. we have a lot to discuss today. i want to thank you for holding this important hearing and i'll look forward to hearing from this very distinguished panel. >> thank you very much, senator hatch. and let me just reiterate i'm very much interested in working with you and our colleagues on both sides of the aisle to address both of these issues. the immediate challenge we're

facing with this growing inversion virus. and then, of course, the ultimate cure which is comprehensive tax. i look forward to working with you and our colleagues. we now have six witnesses. our first witness is mr. robert stack who is the deputy assistant secretary for international tax affairs at the treasury department. our next with the dr. pascal saint-amans for the center of tax policy and administration of economic cooperation and development. the third witness, dr. desai a professors of finance at harvard business school and professor of law at harvard. a fourth witness will be dr. peter merrill, a doctor of the economics and statistics group at price waterhouse. our fifth witness will be dr. robinson at the tuck school of business at dartmouth and the final with it knopf will be mr.

allan sloan, the senior editor at large for "fortune" magazine. our thanks to all of you for coming. it's our custom that your prepared statements will be made a part of the hearing record in their entirety. if you could use your five minutes to summarize, that would be helpful. i know senators have many questions. we're going to have votes at 10:45. this will be a bit of a juggling act. we will try to handle this as well as the chaotic senate schedule allows. mr. stack, welcome. >> thank you, senators. chairman wyden, ranking member hatch and distinguished members of the committee, i appreciate the opportunity to appear to discuss these important international tax issues to which your committee has devoted substantial effort i'd like to begin by describing the work we're doing in the g-20 base erosion and profit shifting

or beps project. then link that discussion to consideration of the need for international tax reform, as well as measure, outlined in the administration fy-2015 budget proposals to address u.s. base stripping including through so-called inversion transactions. in june 2012 at the g-20 summit in los cabos, mexico, the leaders of the world's largest economies identified as a significant concern the ability of multinational companies reduce their tax bills in high-tax countries by shifting income into low and no-tax jurisdictions. the result was the g-20 oecd betts project. and the beps action plan endorsed by g-20 leaders last the betts action plan outlines 15 specific areas where governments need to work to change the tax rules that encourage companies to shift their income at the expense of the tax base and our own tax base. the beps project is expected to release the first set of recommendations this fall and is set to conclude its work with final recommendations at the end of 2015. the united states has a great

deal at stake in the beps project and a strong interest in its success. our active participation is crucial to protecting our own tax base by stripping by multinational companies. because the united states provides a foreign tax credit to u.s. companies for taxes they pay overseas, the united states also has a strong interest in rules that enjoy a broad international consensus. in addition, as home of some of the world's most successful and vibrant multinationals, we have a stake in insuring that companies play by tax rules that are clear and administrable and companies avoid time consuming expensive tax disputes. failure in the betts project could well result in countries taking unilateral inconsistent actions there be increasing double taxation, as well as time consumer tax disputes. the treasury and the number of

expensed tax disputes. beps project has had a promising beginning and area where is work has been done to resolve gaps. i've outlined those in my submission. as the work moves to 2015 there is more that can be achieved and also several areas where we must guard against bad outcomes. and echoing senator hatch, those outcomes would include international norms because they're vague and easily manipulated by tax authorities. or international norms that could erode the u.s. tax base or increase double taxation. the united states needs to remain deeply engaged in moving the beps project to a successful conclusion between now and the end of 2015. while the international discussion over beps are ongoing it's worth acknowledging steps the united states could take today to inform our own tax system to improve competitiveness, secure our tax base and reduce incentives for

profit shift big u.s. firms. as the president has proposed, we should reform our business tax system by reducing the rate, broadening the base and imposing a minimum tax on foreign earnings but such would only be a start even with low rates, u.s. multinationals would continue to aggressively seek ways to lower the tax bills by shifting the income out of the united states. so what tools do we have at our disposal. the administration's 2015 budget contains a series of common sense proposals to protect our u.s. tax base which can be enacted as part of reform or in the contest of our current system. they're outlined in some detail in our budget and in my written testimony but let me highlight two here. one proposal would strengthen our interest stripping rules and level the playing field by eliminating the ability of u.s. subsidiaries by deducting a disproportionate of the united states.

it is especially disconcerting to observe among the foreign multinationals that can most aggressively take advantage of the deficiencies in our interest-stripping rules of the so-called inverted companies, that is foreign parented companies that were previously u.s.-parented. a second deal in the budget would deal with inversions. in secretary lew's letter to congress, i want to emphasize the serious need for the united states to address the potential loss of federal tax revenue from corporate inversion transactions and the need to enact our budget proposal or a similar one aimed at curbing them. once companies invert there is a permanent loss to the u.s. income base since it is safe to assume these companies are not coming back to the united states. these inversion transactions are on the increase. indeed, we're aware of many more in the works right now.

letting our corporate tax base erode through inversions will worsen our fiscal challenges over the coming years and will reward countries that practice race to the bottom tax competition in an effort to lure away our large u.s. multinationals. as the secretary indicated in his june 15th letter, congress should pass anti-inversion legislation immediately with an effective date of may 2014. thank you for the opportunity to speak to you today. i look forward to answering your questions. >> thank you very much, mr. stack. that's very helpful. our next witness will be mr. pascal saint-amans. we welcome you. >> thank you for the opportunity to testify here today. the oecd was founded in t aftermath of world war i and the leadership of the united states. it's a country-drive organization with 34 countries u.s. being the largest member and playing a key role. and it works by consensus.

it does a lot of work on tax and in the tax area, we do consult extensively on the project related to project shifting we have consulted society, businesses or stakeholders. in this project, we have issued a number of discussion drafts, more than 3,500 pages of comments have been received and has been taken into account. we have conducted five public consultations as well as webcasts which have been looked at by more than 10,000 viewers. in the area of tax the oecd facilitates corporation between tax and its countries to eliminate double taxation. taxation is at the core of each country free to set up its corporate tax system the way it chooses. but as a result, there are risks of double taxation which are not conducive to cross-border investments. since the 1920s, a common set of

standards has been agreed and the oecd has abated this work since the 1950s. in particular, we have have come up with a model transaction and transfer pricing guidelines. these rules have worked well, but they have also not kept pace with the economy changes. as a result, they have been good at eliminates double taxation, but they have also facilitated unintended double nontaxation. this is an issue for most governments across the world for many reasons. low taxation in itself is not a problem. on the contrary, the oecd favors low income tax and this is an issue for as long as countries decide to have corporate income tax, the corporate income tax need to be paid by all taxpayers. and there is a need now to, one, make sure that the rules make sense.

the current rules are redacted through organization and easy to through globalization and there is a gain through artificial settings. there is a divorce now between the location of the activity and the location of the profits which can be booked in a jurisdiction where absolutely nothing is happening. as a result, the sovereign right of countries is undermined. this is a global issue. this is not an issue targeted to u.s. companies. u.s. companies only account for less than a quarter of the fortune global 500 companies. so it's a global issue concerning u.s. and non-u.s. companies. second, there is a need to level the playing field. and an uneven playing field between companies is not conducive to the right relocation of capital. companies are at the domestic level are at a competitive disadvantage because they cannot use the loopholes in the

international tax framework. three, there is a need to reduce uncertainty. uncertainty is bad for companies. is bad for investment climate. and there is increased uncertainty because of these rules not making a lot of sense. a number of tax administrations are trained to dispute the position of companies which are legal. and a number of companies are walking away from the consensus, from the common interpretation of the rules and that results in uncoordinated unilateral measures to corporate tax base but that increases uncertainty. and, therefore, we need to address the serious risk for businesses. the response from governments has taken place in the context of the g-20 which has called to address the issue of base erosion and profit shifting. we have brought all the g-20 and the oecd countries on equal footing to find ways to address this issue of the tax framework

by consensus, in two years' time so principles can be agreed quickly to reduce the risk of uncertainty. we need a principled approach and a cost-effective approach to limit the compliance for companies and reduce control. this is not a revenue exercise and should not be, but the useful exercise for the common principles to be more accepted by ensuring consistency in the cross-border environment, increasing such requirement and transparency. the objectives are to secure the consensus, thereafter, reduce uncertainty and improve the way we can solve disputes. we have come up with an action plan of 15 measures which i describe in my written testimony. some of them are about neutralize hybrid mismatches reducing tax or transfer rules. in conclusion, i would say the issue of base erosion and profit

shifting is widely shared across countries, and here in the u.s. in particular, we are aware that you're planning to address the u.s. tax system. and we hope the work we're doing at the international level with your support and the engagement of the u.s. treasury can be useful to promote growth and jobs here in the u.s. by fixing some of the issues by the u.s. tax system. the work we hope is particularly timely and we hope it will inform you of your debate. we, of course, will be available to respond to your questions and further assist. >> thank you, mr. saint-amans. let's go to dr. desai. welcome. >> thank you. it is a pleasure to appear before you today to discuss international tax reform. i'm a professor of finance and a professor of law at harvard law school. recent merger transactions highlight long simmering problems with u.s. corporate tax particularly with respect to international provisions. my comments attempt to outline

the origins, the range of alternative solutions guidelines for evaluating reforms and some reforms that should be avoided. the last 12 months witnessed remarkable wave of merger transactions that facilitated the expatriation of u.s. corporations. such transactions reflect the effects of policy, and the changes structure of multinational firms. from a policy perspective, the transactions highlight the increasing costs of employing a worldwide tax regime when other countries no longer retain such regimes. and a corporate tax rate that stands well above rates employed by our oecd countries. from a firm point of view, the transactions highlight the increased mobility of activity in today's economy. growing decentering of firms where world headquarters have been split up around the world. and the growing importance of nonu.s. markets for u.s. firms. rather than question the loyalties of executives, it is critical to understand the underlying and secular forces. inversions are merely the most visible manifestation of these developments. in addition to inversions, these

decisions are giving rise to entrepreneurs that anticipate. merger patterns that affect domiciles in the united states. the importance of offshore cash for u.s. corporations. investment patterns by u.s. and foreign companies. profit shifting activities that are not value-creating and the consequent negative impact on all the distortions on the u.s. labor force. while it's attempting to limit the more sensational effects and characterize them as paper shuffling this would be essentially missing the forest for the trees. reform should be focused exclusively on advancing u.s. welfare with particular attention on reforms that would improve american wages. these goals are mistakenly thought to achieve by lilting the foreign activities as foreign activities can be viewed as diverting economic activity away from the u.s. in fact, it suggests the opposite. indeed, american welfare can be advanced by ensuring that investments in the u.s. and abroad are owned by the most

productive owner and the american firms flourish abroad. a goal now adopted by most comparable countries. while the developments described above have crystallized the case for international tax reform with an increasing attention on switching territorial regime. some proposals including those with alternative minimum tax on foreign profits are tantamount to a back door wide world regime with even more complexity than today's system. revenue consider, should be considered large by given the very limited revenue provided by current international tax rules and the remarkable complexity and distortions required. more properly, the corporate tax is ripe for reform. in addition to international rate action the form should address. the growing prominence of non-c and the condition junction

between profits. a useful blueprint for reform would include moving to a territorial regime unencumbered. considerable rate of 18% to 20%. and by some taxation non-c business income. the potential of addressing significant changes in a global economy in a revenue neutral array that will advance welfare. more fundamental reform s more preferred if feasible. legislation that is narrowly focused on inversions or specific transactions runs the risk of being counterproductive. leading to several unintended consequences. for example, rules that increase the size of the foreign target to ensure the tax benefits of an inversion can deter these transactions but can also lead to more substantive transactions. more substantive transactions are likely to involve the loss

that demand the location of more activity abroad including headquarter functions. similarly, similar targeting those firms may lead to foreign firms leading to some transactions to avoid those regulations. while it's tempts to address specific transactions in advance, it is useful to recall that the last wave of anti-inversion legislation likely spurred these more recent transaction and reduced the prospect of reform in the intervening years. members of the committee, i adviser the foresight in the issues. i'll be delighted to answer any questions. >> thank you very much, professor. we now welcome dr. peter merrill, and look forward to your comments. >> thank you. thank you. chairman wyden, ranking member hatch, members of the committee. thank you for the opportunity to testify today. my name is peter merrill, i'm a principal with

principal with pricewaterhouse coopers.pricewaterhouse coopers. and the focus of my practice is economic effects of tax policy. i'm appearing today on my own behalf and the views i express are my own. i've been asked how the international rules compare with the rules of other countries. my testimony, i will focus on two features of the u.s. corporate tax system that fall far outside international norms. the high corporate rate and the worldwide system of taxation. these features of the u.s. tax system may get more difficult for u.s. companies to compete in global markets. this multinational face ever growing competition from abroad. in the last 15 years, the number of u.s. companies in the forbes global top 500 list has dropped by a third from 200 to 135. the loss of global market shays by local companies is due to a variety of other factors, out of step u.s. tax system is seen by many as a hindrance than a help.

the top u.s. corporate statutory rate including state tax is 39.1%. this is the highest rate among major economies. more than 14 points above the average for the other oecd countries and almost ten points higher for the average of the other g-7 countries. after the tax reform act of '86, the u.s. had a relatively low corporate tax rate. however, since then, the other oecd countries reduced their rates by a collective average of 19 points. while the u.s. corporate tax rate was increased in 1995 where it remained since. while it's widely recognized that the statutory corporate tax rate is high -- very much appreciate senator portman's patience. i look forward to working with

you closely on these issues. senator portman. >> thank you, mr. chairman. i have had some long conversations with you and i appreciate you championing tax reform. i liked your first response to the inversion proposal. we have a little difference of opinion on tactics here because i do think this is an opportunity for us to encourage solving the problem rather than dealing with the symptom. we heard a lot of testimony today about what will happen if we just go after this particular issue. i know there's some difference among the panelists as to i don't think there is any difference, i hope, about the fundamental problem. mr. stack and i just spoke. i spent a lot of time talking to administration officials about this issue, too. the bottom line is it is advantageous to being an american company. it makes more sense to be a foreign entity to be able to take advantage of a tax system with the great majority of our

competitors who are 93% of our foreign competitors as peter merrill told us today who do have a lower rate. it's a deadly combination to have this high rate and have a worldwide system. i just don't think what we are talking about in terms of a short-term fix is going to help. there's good testimony today about how it could even hurt because if you just deal with inversions, you have some unintended, but perhaps negative consequences, demanding the location of even more jobs overseas is what dr. desai talked about. my concern is foreign acquisitions. recently we sat down with u.s. companies to talk about this issue. i've been doing this the past few years and worked on this in the super committee. we are hearing over and over again the fact already foreign acquisitions are on the rise, even without this rule. if we put this rule in place then we could limit the deductibility of interest as one of my colleagues said, and we

could make it harder to be an american company. we'll have more and more foreign companies owning u.s. assets. some of those will be takeovers. recently, biopharmaceutical company came to see me, last week, from the boston area. i asked about the acquisitions in the boston area biopharma companies. 28 companies have been acquired in the last several years. 17 of those 28 were acquired by foreign entities. you put the hole in the dam here then you are going to have a flood here and have a worse result, more pressure on jobs leaving this country. so i mean we talk a lot about revenue and income-stripping and earnings stripping. i agree when you do a tax code that captures income in the most efficient way, but this is about jobs. my question i guess to mr. stack is what's going to happen if we continue to make it harder to be

an american company? aren't we going to see more, not just acquisitions, but acquisitions of american assets? because foreign companies have higher after-tax profits, it's more profitable for them. they can pay a premium for our assets for subsidiaries being sold. you'll see american companies shrinking if not being taken over by foreign entities. what's your answer to that? >> senator, i think that the tax code as we look out in terms of leveling this playing field, i think it is important for us to take as an opening step that we will never be able to offer, let's say, rates as low as countries that are trying very hard through tax competition to lure companies overseas. so there will often be a tax differential between the united states and other countries that might on the margins fuel some of that acquisition activity. we have a lot of great things in this country though that keep companies here and keep them

competitive and keep them doing very well. so i do agree then, and all the plans on tax reform seek to lower the rate, and there is universal consensus that and we should be bringing it down. and when we bring it down, we will come closer to level the playing field with those foreign -- >> so i think this is not just an important problem. i think it's an urgent problem. i think you have all sounded the alarm here. again, we have differences on the panel and on our panel as to how to address it. but it seems to me when you look at the history of our country, the only time you see major tax reform is when the treasury takes the lead. omb has to be involved in the numbers. what's treasury doing? tell me what concrete steps are being taken to address this, as said today, emergency situation. is it just to plug the hole in the dam here or are you actually looking as the president has talked about over the last couple years actually solving the underlying problem?

>> sure. senator, the president's framework in 2012 really was kind of a far-reaching move forward. to think differently about our international tax rules. and that is to say it was going to be able to bring down the rates, broaden the base to deal with some of the differential effective rates i mentioned earlier. but also through the foreign minimum tax try to cut out some of the game playing that goes by stripping into, you know, very low-tax jurisdictions. we think that kind of set the tone for some of the work that was done both in finance committee and by chairman camp. and that there's a very robust set of proposals, you know, on the table right now. in addition, for many of the things we're talking about today in terms of base stripping, we put several detailed proposals in our budget to get at this opportunity once a company inverts to strip out of the u.s. base, which as everyone knows provides a lot of juice for these transactions so that they can do better once they're offshore reducing u.s. taxes than they could before.

so we think we've shown leadership in our framework. we think we've shown leadership in putting concrete proposals in our budget. i know the president and the secretary stand ready to work with congress on both sides of the aisle to push through international tax reform. >> love to see a proposal. i'd love to see that push. maybe my colleagues see more of it than i do. i've had great conversations with individuals at the treasury and in the administration, including at the white house. but i just don't see the push. i hope we'll use this unfortunate situation where we've got examples every week of another major inversion, another one this past week and happened to be a pharmaceutical company, to actually get us to the point where we're solving the underlying problem. if we make it worse by making it even less advantageous to be a u.s. company, i really worry we'll look back five years from now and see a hollowed-out american corporate base and wonder, what happened? what happened is we ab i did katd our responsibility here in doing our things we have to do to reform our code to make it

competitive. i know my time is up, mr. chairman. i appreciate the testimony today. i hope it results in very specific action by the administration and by the congress. >> thank you, senator portman. i look forward to working with you on these matters in a bipartisan way. i'd say to our guests, i have some additional questions. senator hatch is on a very tight timeline. so i'd like senator hatch to go first. >> very gracious of you, mr. chairman. i appreciate it. it's a pleasure to work with you. this question is for dr. merril. as you know, both japan and the united kingdom adopted territorial types of tax systems in 2009. switching from a worldwide tax system with deferral. these are two countries with large economies. japan is the third largest economy in the world. and the united kingdom is the sixth largest economy in the world. can you tell me why japan and the united kingdom switched from a worldwide with deferral system like the current united states tax system to a territorial

system? and after five years of experience with a territorial tax system, what have been the results for both japan and the united kingdom? >> yes. thank you for the question. the united kingdom was experiencing phenomenon not unlike what we're experiencing now. they saw a number of large multinational companies. you know, some quite significant, that had actually moved their legal headquarters out of the u.k., primarily to ireland. and that was of great concern to the government. they decided that it would be appropriate to adopt a more competitive tax system along the lines of the quote in my oral statement so they would be -- their tax system would be more welcoming to multinational business. one of the factors for the u.k.

is they have many companies there that earn only a small part of their total income, worldwide income, in the u.k. yet, the u.k. was -- had a tax system like ours that was taxing the worldwide income of companies that only earned a small amount of income in the u.k. so in order to become a more attractive location for multinational companies, they went to the territorial-type tax system, 100% exemption of foreign dividends. and they made a number of other changes, lowering their tax rate and a 10% refundability research credit. also a 10% phased-in tax rate on income from patents. they also modified their cse rules. they've done a whole package of things mainly to make it more attractive for multinational companies to be headquartered in the u.k. and they've been successful, as dr. robinson mentioned. some of the companies that left

the u.k. actually have moved their headquarters back to the u.k. in response. japan, different situation. obviously japanese economy has not been attracting the kind of growth that they've been looking for. and they saw japanese multinationals, like the u.s., facing very high corporate tax rate, worldwide system, money not being repatriated to japan. the ministry of economy trade and industry wanted to see that money come back for additional investment in japan, and that's why they made the change. >> thank you. mr. saint-amans, glad to have you here. i appreciate what you said in your testimony, that the work of the osce is done in consensus. presumably, consensus of all member countries means that all member countries will consent to the work the oecd is doing or else the oecd won't do that work

or won't issue such report. am i right on that? >> yes, senator. a consensus means that a report is agreed when no country around the table objects to it. >> and in making sure you have the consensus of the united states, please keep in mind our system of separation of powers. law making capabilities primarily invested with the congress. in obtaining the consent of the united states it is necessary to get the consent of the u.s. congress. so we do appreciate you being here for this hearing. will you please assure me that you understand that to obtain the consent of the united states for the oecd's work, including for the vets project, the congress must be kept informed of the work, and that has to be working in conjunction with the

u.s. treasury as well. >> senator, i do think that not only the secretariat of of course but all the oecd member countries are fully aware of this. we are more than happy to engage with the staff with the senate but without impeding on what treasury is doing. and i would like to add that most of the measures which are contemplated in the project fighting profit shifting are soft, low rules. these are common interpretations of standards, and they do not require translation by parliament but in formation of all stakeholders, and in particular the congress, is taken seriously by the eoecd secretariat. >> mr. stack, let me ask you the same question.

please reassure me the u.s. treasury department will keep congress informed and not get ahead of the congress in the decision making process and in negotiating with the oecd. >> yes, senator. we fully intend to do that. i've already been up to the hill twice to meet with bipartisan staff, both houses. i look forward to continuing that throughout the process. >> we appreciate your work in that regard. thank you for doing that. i want to thank all of you for being here. i have to leave because of other commitments, but this has been extremely interesting. i'm going to read the transcript, and i'll know exactly what you all say. i'm going to hold you to it. thank you. >> he will. be on notice. we're moving towards the end of the hearing. senator portman may have additional questions. but let me give you my sense of where we are. i certainly am not interested in building any walls. i want to close a loophole, and then i want to drain the swamp.

i want to fix this dysfunctional mess of a tax code so we have incentives for creating red, white, and blue jobs, creating jobs here in our country. i know we're going to be calling on you all often in the days ahead. i have a couple other questions about issues that are pending. senator thune, you're next. if i could just finish these two questions, we'll go right to you. the first deals with the implications of inversions on health care costs in america and the implications for the american consumer. i was struck by comments made in "the wall street journal" recently by the ceo of abbott, who said that he was concerned about the higher prices that american consumers would have to pay if proposed inversions like his an