can't prevent a genuine transfer of the headquarters of a uk incorporated group to another member state of the eu. that would controvene the markets. these things tend to be resip rickol. if we go back to my example of a company headquartered in turin if it stays headquarters in turin, it will be resident in italy. on the other hand, eu law prevents any step being taken to stop headquarters being moved to the uk and if it is moved to the uk, it will be resident in the uk and the same in reverse. so in a sense we lack any of the sort of protection from the u.s. under inversion rules but

equally the other member states lack those protections as well. if we then come on to our cfc rules, we revamp our cfc rules broadly at the same time we much to a much more territorial system of tax. that slide gives a very broad summary of the old rules and the new rules. i think two key points about the old rules, they contained a quite strong presumption that activity should be in the uk if it could be, if you like. so therefore, there was a tendency for there to be a pull into the uk. if you moved activity from country x to country whyy, there might be a question why hadn't you moved it into the uk or where wasn't it in the uk in the first place. so that impact on foreign to foreign transactions was

particularly crucial and prar particularly difficult for many businesses to handle. i think another key difference is the current rules are more proportionate proportionate. under the old rules, you could in some circumstances have quite a lot of income that would have otherwise been caught by cfc rules and income that you would logically want to catch with cfc rules, you could avoid that be a technique called swamping where you make sure that income is in an entity that also had a lot of good income that would not trigger the cfc rules. the rules worked on an all entity and nothing entity basis. on those circumstances therefore there wasn't a cfc charge. equally the rules worked rather harshly. in other words where you had a lot of bad income and good income, the current rules would

focus just on the bad income. i go on now to do migrations coming into the uk. there were a large number of businesses that did leave the uk. maybe small in a u.s. context. i noted that what the broad picture is i think a fair number of businesses left the uk a fair number have formed. they did have a project tracking this. when that was closed in 2011 it a attracted two sets of migrations. the groups that are dealt by its large business office would generally be quoted groups and therefore generally larger. there were 15 migrations of

those and 24 other groups, groups that would genuinely smaller. that 24 would exclude migrations that i think you could reasonably conclude were not done for corporation tax reasons. i think it's fair to conclude that the flow of migrations, the flow of groups outside the uk was a significant spur for corporation reform. and it's maybe significant that that corporate tax reform is on support. if we go through various elements, you often find that the previous labor government took some steps and the current coalition government is taking further steps in that direction. for example, we currently have a 21% corporation tax rate which will go down to 20% from the

first of april. the previous labor government reduced the corporation tax rate from 30% to 28%. this government has reduced it 21%. it was the previous government that introduced the foreign dividend exemption and then this government if you like completed that piece of work by also introducing an exemption for foreign branchers. it's probably worth noting on the way through as well we have no withholding tax on dividends paid by uk resident companies. in their sort of similar theme, you know, r and d tax credits were introduced by the previous government and they've been improved by this one. the patent locks was announced by the previous government and introduced by this one. it gives a 10% rate on profits within the box. perhaps most crucially because i think it's fair to say that some of the businesses who left didn't come back till we had

reformed our cfc rules which i think tells you that it is that they are most concerned about. the previous government launched the consultation on reform of the cfc rules. it was then taken forward and actually adopted by this government. so as john said earlier on there is a fair amount of stability in this new regime and i think probably that stability is one of the attractions to businesses who have left and then come back. it seems to me it would be slightly odd if you were to take a step as major as leaving a country to come back until you were sure if the features of that country's tax regime forced you to migrate out of the country. they were not slieklikely to concern before you came back. as to businesses that have returned, a fair number of them have. the ones listed there, including

wpp, the large advertising agency, also some insurance businesses that had left and returned. also, again, as paul mentioned, other groups have come to the uk such as aen, it is an example of a case where the headquarters have moved to the uk. i think there are reasons why we will be in competition to genuine headquarters of businesses. why would we not want to compete just like other countries do. just like the u.s. does. you get the top executives based on the territory on the sense the requirement in our treaties for affective management is quite a strong tie to the territory. they will tend to want around

them advisors, key workers, other people centrally involved in the business. so there are good reasons why you would want a company to move residence into the uk. i think in other circumstances, where we have a company and some other countries tax rules well i think it's hard to say that it's the uk that's encouraging that. equally, i think it's hard to say that we have any incentive to do that. we have no incentive to encourage what are clearly not brass plate operations because there will be some substance. there had been board meetings in the uk. clearly in economic terms there's no great value for having a few people flying for uk. have a ball beating every quarter and fly out again. we're not in the business of encouraging or indeed discouraging that but equally,

it's not really something that is down to the uk tax rules, i would suggest. we do have a fairly coherent set of rules on which companies we regard as ours and which we don't regard as ours. as i said early on i think those rules are pretty consist consistent certainly with our laboring countries but equally, i think if you look also with most other countries, it's not surprising in that context that we've been able to draw from the ocd model tax convention in the definition of affective management. it's there because many countries use it. let me stop there and leave time for discussion. thank you. [ applause ]

>> our next panel is incentives to invert and the market for foreign take overs. corporate inversions are takeovers. and of course there's a market for that. in order to understand that we turned to a young expert on international take overs. that's andrew bird who's an assistant professor at the tepper school of business at carnegie melon university. the commenter in this session will be the professor of law at harvard law school and zuho financial group, professor of finance at harvard business

school but we start with andrew. >> good morning. so i was gratified to hear john's opening remarks this morning and jim has done the same thing so my first slide is to draw the analogy between inversions and foreign take overs. i think that's been done already but of course the incentives to invert generally speaking are to try to reduce taxes on both foreign and domestic income so that could be a stock of past earnings as well as on a go forward basis so we heard about different structures for inversions. they basically involve getting a new foreign parent. now, of course the other place you can get another foreign

parent is if you're just acquired by a foreign company. this has been happening for a long time. but the tax incentives. there's a very close parallel to take over a u.s. company as there are for the u.s. company to find some other way to get a foreign parent. so there are actually a number of advantages from a research perspective of looking at these foreign acquisitions. the main one is that there are many of them. i think inverksssions are very interesting but there aren't that many of them. if you look at foreign acquisitions more generally, hundreds of billions of dollars a year of domestic assets taken over by foreign companies, there's a lot of volatility but because of that to the extent that we're worried with tax eversions things like tax revenues and economic efficiency efficiency, it should be the case that we should be more

worried about the tax incentives underlying foreign acquisitions because just it happens so much more. what i am going to talk about today is going to be how the characteristics of u.s. target firms affect the competition between foreign and domestic ainquirea acquirers. there's at least an implicit competition between domestic and foreign acquirers to do that. the key difference i don't think is controversial now especially between foreign acquirers and domestic acquirers in this market is that they face affective tax rates. this has been true on average for quite a long time now. i am going to talk about three different characteristics of these target firms that i think will do two things. one, it's going to tell us something about behavior. it will tell us about something about what kind of u.s. companies are good targets for foreign take over and in turn

would be good targets for inversions as well. i am picking these character characteristics in a particular way so that they are also going to tell us something about how we can make domestic policy choices and how they will affect foreign acquisitions and inversions. i think some of these are obviously going to affect aversions and acquisitions and some will be more clear after i explain them. we will get into the policy relevance of each one of these as we go. to be clear, the sample across all of these three results, they come from two different papers, acquisitions of publical traded u.s. firms over the last 20 years. all right so start with one that i think is the most straight forward, it's obviously an international tax policy choice that the u.s. has made. it's going to be the world wide system.

well known consequence of choosing a world wide system in combination with deteral so you will have earnings of u.s. multinationals that can't be repatriated without facing quite a large tax. we're going to measure the locked out earnings using an accounting designation called pre which is permanently reinvested earnings. let me explain just briefly what that is. so in principal for accounting purposes, what you should have to do as a u.s. multinational with foreign earnings abroad that face potentially quite a low tax rate there is that you should have to book a tax expense associated with the fact that yes, you're paying a low tax rate right now but there's some potentially large tax expense that you'd have to pay going forward if you ever wanted to bring the earnings back to the u.s. so in principal that's how things should work for accounting purposes. for various reasons, they don't. so there's kind of a special exception to this rule that says if the company certifies that

these earning are permanently reinvested so they are not going to come back to the u.s. for the foreseeable future than the company doesn't have to take this deferred tax expense which has a very big impact on its gap book reported numbers. so the nice thing about is that is that making this designation that is somewhat costly. you're committing that you will not be bringing those earnings back but you get a big benefit in terms your reported numbers. that benefit is larger -- the greater is the potential repat riation tax burden. so when we see firms maybing this designation, these will be firms that see a nontrivial tax cost of repatriated earnings. i will not get into the details, that's not my expertise. i think there seenlm to be lots of ways that foreign take overs to lock these earnings without triggering such a large tax burden. so i am going to look in the

data does that appear to be true. it seems like there are ways to structure acquisitions and then reorganize the structure of the business to access these earnings. if that's true then what we should see is that u.s. target firms with more pre so more locked out earnings should be more likely acquired by foreign companies. in fact, that's what we find. so if we take a target firm with some pre so it's sort of recognized and it has some locked out earnings. we compare it to other similar u.s. target firm that doesn't have any locked out earnings, what we see is the locked out earnings target is 4.4%age points more likely to be acquired by a foreign company rather than a domestic company. i don't know whether that number looks large. it is large. so in this sample, about 16% or so of these acquisitions are by foreign conditions. so this 4 percentage points is quite a lot. i think one of the interesting things is that this is true even after controlling for the

foreign activities of the target so. you might imagine of course foreign acquirers might like u.s. targets with lots of foreign activities just because of a homogenous assumption that these foreign companies are already active in foreign countries. there might be more sin sin earthies. it is tree that they like to acquire u.s. multinationals with lots of foreign activity but even beyond that, the stock of locked out earnings seems to be a big driver of foreign acquisitions. there are two kind of related points that i think drive home the fact that taxes is what's going on here is that this foreign preference foshrks for pre so it's easier for such an acquirer to restructure and get access to these earnings at a low tax cost. even further than that, if we just restrict ourselves to the

two large countries that change from world wide to territorial systems, the uk and japan, we actually see that they increase their preference for u.s. targets with locked out earnings after reforming their international tax system. so it seems to me to be pretty strong evidence that in fact this acquisition behavior is really being driven by this issue of locked out earnings. so across -- so empirical evidence is relatively clear. i think it makes sense intuitively as well that the lock out of earnings caused by the world wide tax system used by the u.s. encourages foreign acquisitions of u.s. companies. right? and i think that just as it's true for acquisitions of u.s. companies, i think it's also true for inversions. so next i will turn to the profitability of the u.s. target so it may not be immediately clear why that's an interesting thing to look at -- well. one thing that we definitely like to know is the affect of the statutory rate in the u.s.

on this kind of behavior on foreign acquisitions. unfortunately it's difficult to do it adirectly because i said the statutory rate doesn't change much. it didn't change at all during my sample. it has been a long time since it has changed. what i think is a useful thing to do is to try to investigate these tax differences. so by tax differences i mean it's not just the u.s. statutory rate that matters, it's also how it differs from the affective tax rates for the statutory rates in other countries so. we can look at that indirectly by looking at the affect of the profitability of target firms on the identity of the acquirer. so the reason that works or at least the reason that it works in theory is that foreign bidders are more likely to acquire more profitable target firms. i think the intuition is relatively straight forward so a dollar of profit yields more after tax cash flow, that lowers your tax rate. all buyers like profitability. they would all prefer the more

profitable firm. they should be willing to pay more for that dollar of profit because they get to keep more of that after tax. before i tell you the result. let me preview. if it's the case that foreign acquirers are particularly interested in high profitability targets, i think that's pretty strong evidence that tax differences across acquirers are important in this market. all right. so one kind of straight forward way of looking at this is just across industry. what we've got in this picture, along the vertical access is the fraction of target firms in that industry which were acquired by foreign acquirer. this varies 5% to 25% in the sample. along the medium profitability of the firms in these industries. if you're wondering the size of the dot is reflective in the number of transactions there were in that industry. what we can see because i have

drawn this line here is that there is a positive relationship so it is the case that industries with higher median profitability experience relatively more foreign take overs. so that's consistent with the theory that i have outlined. now, of course i'm not going to talk too much about alternative theories. you can imagine there are other explanations for the picture. it may be the case that there are lots of foreign acquisitions in mining and mining happens to be relatively a profitable sector. so what you can do is in fact -- let me go back to this for a second. what we can do in fact is look within each of these industries so we have this behavior across industries which is consistent with the theory. but we can look within those industries. so there are relatively a lot of foreign acquisitions in manufacturing. we can look within manufacturing and see whether the more profitable manufacturing targets are more plieklylikely to be acquired by foreign acquirers. in fact, that's likely the case. so just to be a little bit

concrete about it, one standard deviation, higher target profitability. this is something like 10 percentage points on assets increasing the rate the buyer will be foreign. this preference could be due to foreign acquirers wanting to acquire a really successful u.s. company but i think this is really a tax story. the first thing if you sort of replicate this exercise for minority transactions so if you're not acquiring control you're just acquiring a stake in these firms dpourksif you do this exercise there, you don't see the profitability sorting. if fact you see that foreign minority purchases are looking for less profitable targets. what i think is a key difference between the majority

transactions and minority transactions is if you only have minority control then you can't really shift income successfully successfully. you really need to have control of the target to exercise the tax rate benefits. the fact that we don't see that when foreign acquirers can't exercise quite a large tax benefit suggests this this is really coming from taxes and not something else. the second piece of evidence here that i think is pretty strong that if you split the acquirers so among the subset of foreign acquirers that like profitability, if you split those into the ones that are resident in tax havens versus not, it's the tax haven acquire acquirers that really like profitability, right? those are the companies that have the biggest tax advantages and they are the ones that are the most willing to bid for miehigh profitability u.s. targets. >> all right so the third result that i wanted to talk about -- so this may not be clear right away why this is necessarily revellevant to this issue that's tax shields, tax reductions.

tax references so the intuition is similar. so foreign bidders are less likely to acquire targets with more tax deductions that's because a tax reference saves you less saves you less sax if you already have some way of lowering your tax rate. if your active tax rate is 0, you don't need tax yields or tax preferences, you've already managed to get all the way down to zero. what that means is that we should see foreign bidders relatively disadvantages with acquiring them with lots of tax deductions. to test this proposition what we'd like to see is a natural experiment. so we'd like to see a case where tax deductions change that is not obviously to do with foreign take overs. i think it's nice because at least i've never heard anybody say that the channel for foreign

take overs was something that was being discussed when bonus de de depreciateion depreciation. so as an example if you take an industry like manufacturing, they got a big increase in allow allowances associated with bonus depreciations. that's by design of their reform. you compare manufacturing to real estate which again the nature of depreciation was almost not affected at all. then what we'd expect to see is a decline in foreign take overs relative to manufacturing. so that's the test that i'm going to do. it turns out that it works. this idea that it's in fact domestic bidders that are more likely to win when a target has a lot of tax deductions. that's actually what we see in the data. let me see a picture of that as

well. here i have skipped the result. i am going to counter a facture story here. so hopefully you can see the differences in the colors on the bars there. so the dark bar is what we actually saw. the dark bar says that we had something like 20% foreign take overs in manufacturing. the light-colored bar is showing supposed bonus depreciation hadn't happened. we hadn't disadvantaged foreign acquirers around this time. that's the level of foreign acquisitions that we would have seen in those industries. so it always would have been higher because bonus depreciation is a one way deal. so maybe you didn't get much in the way of skratx rated deductions but everybody got something. it had a pretty considerable affect. on average, my results show that the reform explains about a 5 percentage point fall. i think it's large in comparison to the numbers that i have told

you before. of the three things that i talked about i think this one is the least obvious, the least obviously related to foreign acquisitions. i don't think it's really -- when bonus depreciation is discussed, i don't think this is really talked about but it appears to be quite important. all right. so i have not much time left so i am mostly going to restrict myself by giving you a summary of the consequences of the behavior that i've talk ed about today and i will mostly leave the policy to meet here in the next panel. but to summarize, so the world wide system of international taxation, a high statutory rate or just big etr differences and a wide tax base encourage foreign take overs. whereas a territorial system or small etr differences which you might get by changing the staut u statutory rate or making it more

difficult. so a tax base with a lot of preferences for example encourage domestic take overs. i think the main policy message is if you had have idea of which way you think the balance between foreign and domestic take overs should go which i mean one could have lots of points of view on that. if you have a point of view on that i think what these results are showing you is how you can use domestic policy to had a chief that goal. i won't say too much about my thought for now anyways on my thoughts for other issues but let me highlight the ownership efficiency issue. i think what's important is it involves the assets that businesses have. what we would like is we get combined are ones that exploit syngergy. as we already heard about

maximizing pretax returns, the further we're going to get away with these organizations, the ideal of maximizing pretax returns. and then of course there are all of these different affects. what matters is really whether we're too high or too high on that. so i talked about some things that are favoring foreign acquisitions. discouraging them so the right direction to go depends on how we're doing so far. with that i guess i will turn it over. [ applause ] great thank you so much for the invitation to be here.

andrew is one of the new generation of folks who's really providing empirical evidence and there's new papers on this topic. let me tell you what i was hoping to do first begin with a review of what andrew went through. i think it's pretty straight forward and then try to address why you might care and talk about some of the issues and problems, in order to maintain my street credibility i do have to at least prompt some questions about results and investigate some alternative explanations for that and then wrap up. so as andrew laid out, there are several results here and there's some nice robustness tests that i want to highlight. foreign acquirers and interest interesting it's more true for acquirers from so called havens then from naubonhavens where you'd

expect it. increases in depreciation allowances decrease the likelihood of foreign acquisition. this again is not immediately intuitive but the way to think about it is if they are scoping out their domestic base with depreciation then there's not as much domestic base to scoop out for the foreign acquirer. that's the simple way to think about it. more locked out earnings are associated with the greater likelihood of foreign aquiz erkwizquiz acquisitions. what's really nice that varies depending on the regime of the country of the acquirer. and this is the really nice thing. when you see a regime shift as in the uk and japan and you see it affect even more so. so a very nice set of results. briefly before i put forward some questions why should you care. i think the first thing to say here is, when i began in this business, it was kmopcommon to think

that taxes were something that you addressed after the investment decision or merger decision you wanted to undertake. the tax experts would then come in and arrange things in order that they were optimized. and this is just been a secular trend. this inversion wave and results suggest that it's no longer true that taxes aren't the afterthought that they are in fact the leading thought in design of these transactions. that gives rise to a variety concerns, are we having aggregate productivity distortions. that's a concern i'm sympathetic too. i want to raise a few others. one is that there's aggregate productivity problems but in this literature, there's been concerns how we don't care how the world is doing. we should care how america is doing. even in national well fair firms, you shouldn't care about

them. the first is highlighted by mike and paul in their earlier discussion although it came up at the end where we might care where headquarter jobs are. mike suggested it was because other advisors around them. there's a whole network of people around them. paul suggested it's because the next generation ofare likely to be nonamericans. that's the reason why in addition to productivity you might care about those particular jobs in a way that. the second to highlight, these are good firms. it's not a disselection mechanism is working in america's favor. it's working against them. what to we know about high profitability firms we know they share rents with workers. that shows up in wagers. we know that firpsms well abroad

do well domestically. these are not the firms you want to have taken over. the final thing to say about this is we know and we need a lot more research but we already know something about the frujility of jobs as a function of distance to headquarters. as you increase the distance between headquarters the likelihood of a layoff increases. the final thing to say is that foreign multinationals in the u.s. have remarkably low profit rates. that might be for a variety of reasons. one reasonable reason for that is that they are particularly good at scooping out the base. if we're seeing that more it would seem problematic from a revenue perspective. >> i think these are things that go beyond aggregate productivity

problems. just a couple of thoughts about the results themselves. the first is, you know the profitability results i think are really interesting and traps the strongest of all of them. i would like to see more which is what i want to do. so the first is as paul highlighted, there's really different mechanisms at place with respect to foreign profits and domestic profits. in the domestic profit setting we care because we think they are scooping out earnings via interest stripping or other allocations with the foreign profits it's more about the taxes and such. i would have the data that identifies that and i would really like to see that. i think industry controls -- paul highlights this, we see big industry affects. we saw oil, we're seeing insurance. pharma. that should be the baseline. i think the majority and minority test is a little difficult to swallow.

the identifying assumption, this is a less than 50% investment are the same for majority investment. i think that's a little tough. it's tough because in an unrestricted market where people can take either minority or majority positions they have distinction motivations, particularly about learning the venture of the minority, the other is about control. i'm not sure i like that. i like the haven one. that test is much more convincing to me. i'd like to see lots more. so i'd love to see see a test that originated by jim and his paper which is do they come from the territoryial regimes or world wide regimes. i'd love to see differences in tax rates. its not that the foreigners want to buy things it's the foreigners from low taxed countries. there's a persistent puzzle in all of the results and not me misunderstanding the results but that losses go the other way. so losses are highly significant

in all of these regressions. they go the wrong way. so as i understood them. i didn't quite understand this but it's the high profitability firms an the high loss firms which are being acquired. i don't understand had a it would be useful to think a little more about that. and then finally, i would just say i'd love to see this move away from, you know which firm -- are you acquired by a foreigner to notions of value. i think combined aggregate returns is the way to go here right? so if all of this stuff is true you should see very high combined aggregate returns on the acquisition because you're taking a lot of value away from the u.s. tax payers. so like to see that it should show up in combined aggregate returns that would be a nice place to see it. this has come up briefly but there's a lot of governance issues that come up in these transactions. first the literature has a lot of governance. things to say. if you think about the inversion

setting, the governance issues are first order. the original wave of them were first order. if you thought about paul's discussion of why it was originalate ed originated, if you think about valiant and the concerns about their transaction in this last year it has a similar ring to it. the depreciation results are really interesting for the reasons andrew suggested. i confess i had a little harder time with them. i had a harder time because i think about merger decisions. it's hard to imagine that the short run change on bonus depreciation is going to trigger a very large m and a response. there's some notion that this is they short run thing so why would i then make a long merger decision that was predicated on that. i thought this was a little complicated. you know in general, i'd love to

think more -- this is true in the profitability results as well as here about interest allocation rules and understand how the variation and the ability to use interest allocation could be used to further identify this. that's a little bit in the weeds but there are some other things that you do in the other paper that i'd love to see here. on the final locked out earnings results just a few comments here. this is really interesting and i think if you think about these transactions that happened last year, you know clearly part of it was using off shore tax to finance transactions directly finance transactions. so i think that's really interesting. just briefly, there are two measures here. one is pre, which is permanently reinvested earnings, the other waurngs he talk he talked about is seeing if you had lower foreign average tax rates in the past roughly speaking. so the question is what are we talking about with these measures? >> here is one of the ultimate

ire ironies which is pre is being used to signify cash that i'm not using. so that's a perversion. we're assuming that what the manager says is the opposite. it's that cash not being used is the opposite. that's a little weird. that's okay. it's not clear that it's cash abroad. it's not clear that it's really about the tax or if it's about the counting frictions. so that's also a little unclear. we know that the accounting frictions are important. one alternative way to interpret these results is that they are really about -- maybe this is just another way of saying what andrew said but i think it's important, they are really about firms that have low average foreign tax rates so the other way to understand that result which is those firms are likely to have higher pre. those firms are likely to have the higher quote/unquote prepat

ri ri, repat riation costs. again, losses are puzzling. it would be neat to get more of the kind of variation we saw in some of these other papers, clearly agca would seem to be a time and legislative change that would seem to provide an opportunity to say, well, wait. when you get the repaytriaton tax activity, how does it change. a really nice set of papers and results and part of a wave of new levels of understanding about what the tax system is doing. you know briefly what is the big take away from all of this. i think first this is one piece of the puzzle. we know lots more as well. i just want to briefly talk about that we know not just on

the inbound mma side which is what andrew is talk about. we also know that offshore cash is shaping outbound activity so as one example of this, michelle hanlen and others have papers looking at announcement of results of outbound mma activity by multinational firms that have large amounts of cash abroad. so when microsoft has a lot of cash abroad and buy skype and the answer is they don't think highly of it. so what's the broader lessons. i will finish with this. i think from a policy perspective, i will not spend a lot of time. we have a distinguished panel coming up but i think the clear point is you can't think about inverkssions in isolation. if you todo, the consequence can

be very difficult. by the way the evidence for that is the tax link is there but the more general point is these are all transactions on a continuum. we should understand them as such. the reason that that's important is if you address these problems in piecemeal ways you're likely to cause other problems that are maybe even more severe elsewhere. so when the disease is systemic and if you diagnose it as non70 emic and you treat one piece of it, you delay and see further consequences that are even worse. so the reason to think about this without saying what the right systemic answer is is just to make clear that it's systemic. so when we have approach that's are piecemeal including regulatory that are specifically designed, most obviously changing thresholds from 60 to 80%. they will have consequences that we should understand. they will tilt the playing field sort larger foreign acquirers who then will have an advantage

on bidding u.s. assets. that may be okay but it's not clear why we'd want the policy response to be one that favors their bability to buy u.s. assets other than otherwise. thank you. [ applause ] i got the first microphone so i get to go first. and we're now going to have some questions and answers but i want to start with a question to -- i'm going to start way question to me here.

my question is, when you were talking about the distinction between distinction of foreign oin ownership and domestic ownership and point out some of the benefits that come interest domestic ownership and domestic head quartzers were you suggesting that we should have severe rules on foreign acquisitions of american companies like have laws that put up -- how who we know when we have the right treatment which is apriln issue that andrew raised as well in his presentation? >> well, i certainly wouldn't favor barring foreign ownership. i don't think that's the right answer. i don't have a perspective on the optimal rate. i wouldn't pretend to but i think the reason to think about it is is simply to say that we seem to have a distorted market and the tax rules are creating that distortion. is at first approximatation

removing the distortion would be an advantageous thing. i think it's less about putting up rules than removing. the second thing to say is that i think it changes our attitude from a policy per spektinspective that we don't understand -- we understand that having an american firm that's headquartered in america and succeeding abroad is broadly a positive thing. i think that's the mind set change that's required. so we should understand that it may well be very good to have an american firm be located here and succeeding abroad. we should not be indifferent to that and having a subsidiary of a nonu.s. firm here. again, this is where research should go. i think it's really important and interesting. >> we do have time for some questions. >> sir.

>> thank you. how would this change if we cut the u.s. rate from 35% to 25%? it almost seems like you're setting yourself up for just a renewed cycle when the uk will have a 20% corporate rate and ireland has a 12.5%. the uk patent box is going to be 10% and when ireland gets their patent box it's going to be 6 1/4%. i don't want to make a speech just ask the question. does this reduce the desirability of the type of corporate tax reform that everybody is talking about where we cut the rate from 35% to say 25%? >> i think that question was for you andrew. >> sure. so i think to some extent that's the nature of competition. from a broader perspective, that may not be desirable but that's

the behavior that we're seeing across countries but it doesn't necessary that necessarily that there's anything to be done about it. of course there are opportunities for cooperation. i think the oecd is doing a lot of different things to maybe try to mitigate maybe what you're talking about but i don't think by itself -- i think the fact that you know, competitors for investment to the u.s. are doing these kind of things, i think there needs to be some kind of a response. >> bill gayle. >> hi. thanks. i was intrigued by the results of the paper and by the comments. i just want to think through this to see if i'm thinking through it right. you said that higher profitability raises the likelihood of foreign purchase and bonus depreciation reduces the likelihood of foreign purchase. so suppose we go -- we have a revenue neutral change that reduces the tax rate but restricts depreciation rules to pay for their lower tax rate.

it seems like at a first order that means that the overall profitability would not be affected and bonus depreciation would go away. so it seems to me like the net impact of that would be to increase foreign purchases of american companies. i'm wondering if that's right? do you have a sense of how big that would be for revenue neutral tax reform et cetera? >> so an exact number is maybe a little beyond the scope of my investigation but i think your intuition is right. if you do kind of a back of the envelope calculation about combining the two effects, the results i'm finding is that is what you would get. >> yes i'd like to just follow-up on one comment that he made. the story i'd often heard about this acquisition of a lot of money by u.s. firms overseas since they don't have anything

to do with the money it costs them a lot to bring it back. it encourages them outbound mergers with purchase foreign firms. wonder if you had looked at anything to do with outbound mergers and if we're looking at something that's a gross affect. more mergers in both directions or a net affect of foreign take overs when we're looking at the u.s. tax rules. >> so i think there's pretty strong evidence for both of those channels. i think the nature of this kind of empireical work, looking at individual mergers, it's difficult to answer how big is the new channel. what we can say that there's a certain amount of fdi that's going in and out and that's it's affected by these types of incentives. that it's hard to say whether on net it's an increase or a decrease. it's a change in the character of the fdi that we see. >> john thaniels.

>> so i think there's a nice parallel between the paper that he sited that michelle hamlin recently published that shows that firms with foreign cash tend to invest it in ways that the market doesn't like. the microsoft/skype, example. you ask why do they do that. if i link with andrews paper if i'm a firm sitting around with a lot of cash and that makes me a more likely target for a foreign take over, what am i going to do? i am going invest that cash. i don't think that's true in the microsoft case but it may well be true in others. so there may be an agency cost issue here. >> i mean the way i would say it is definitely a agency cost issue but also reinforcing circle. the what's triggering the suboptimal use of the offshore cash is in pressure because of the foreign

acquirer. so that's a reinforcing cycle of sorts. no particular reason to like it for sure. >> firms with cash are more apt to be acquired. i'm afraid this is our last question. >> sorry. i was just going to pick on that point from john because as i understood what andrew said is that it's -- if the firm is acquired, it's more likely to be acquired by a foreign firm rather than a u.s. firm. it wasn't the result that it's more likely to be acquired per say. is that right? >> exactly right. it may be true. it raises the possibility that there's additional pitches at raising reservations which is at least implicit in the paper. >> if there's anything that we've learned in this section is that there's competition for everything. part of what there's competition for is our time. if we want on we would eat into the break and i know we don't want that.

we have time for a 15 minute break. we will reconvene at 11:15. [ applause ] >> we're going to get started. our panel is entitled policy responses. it means that we are to enlighten the audience as to how to solve all of the problems that have been discussed earlier today. and for those of you who know the players you will expect

unanimity among the panel. i will say paul began the day by pointing out that i don't understand boxes. i should correct him. i don't understand formulas either. but words, actually, you can probably get some benefit from. that's what we're going to engage in up here. i'm tempted to introduce the group by describing the red corner and blue corner but i won't do that. i'll just introduce them from my left, in the order they are going to speak. most of these people are well known to you and i won't say much about them. michael defrow runs the center for business taxation and teaches economics at the cyed business school at oxford so you should not brief what his resume

says in the book. it's at least ten years out-of-date. shaven s stephen shay teaches at harvard law school. he was deputy assistant secretary international at the treasury department and practiced law in boston for many years. jim heins is a university of michigan economics and law professor, trained in economics and teaching law which tells you a lot about law schools these days but jim is the director of the itpf research institute and i think along with myer, wrote the first analysis of corporate inversions at least the first one that i remember reading. ed is now a professor at the university of seasoningouthern

california. he was a practitioner in new york for in years and chief of staff of the joint committee on taxations. so we have an experienced and knowledgeable group and i am the referee. michael, you're up. >> okay. thank you. thanks for inviting me. i got five minutes, i beliefvebelieve. what i thought i'd do is address broad questions. my fellow panelists now far more about the u.s. tax code so i will leave them to trade section numbers with each other and deal with the big questions, i think. i just wanted to make a few very broad points to start off with. we will talk about policy and policy recommendations. we often get disagreements between people and often the disagreements stem from what we take as given in the tax system. when we're thinking about inversion rules for example are

we taking this given the rest of the earth tax system or not? how broad are we talking about? i think quite a lot of disagreements stem from actually people starting from different points. so i hope we can you know, be clear with each other exactly and with the audience exactly where we are starting from here to try to make explicit what we think is given and what we don't. second point there are lots of problem -- taxes cause lots of problems and governments address those problems in a number of ways. but quite often they address them in ways that don't address -- they don't address the underlying problem itself but they deal with the symptoms. i think there are many examples of that. there are many examples and international tax for exam. i think if we just think about international tax broadly, then what is the international tax do? when we go back to the 1920s compromise, michael has referred to it.

active business income tax in the source company and difivends tax in the host country. it causes innumerable problems because we have to figure out what revenue, source and dividends mean. there are problems trying to allocate profits between jurisdictions that come down to those problems. we already talk ed about how we measure residences is it corporations, affective management and control and those kind of issues. so actually as an aside, in five minutes to be quick. the oecd is taking the existing systems given. it started off saying we're going to have a fundamental review but actually what it is doing is taking the principals given and trying to fix some of the problems that it observes there. it's trying to fix it in ways which actually may well be introducing more problems down

the road. so one of the things that the oecd project seems to be doing is to say we ought to be looking for economic substance. now, that's, you know that may or may not be a good idea but it's not actually part of what the original system is trying to do. so it would be much better in my view to actually go back to fundamental principles first and say what is it we're trying to tax and figure out how the tax system should address that.