Today, the Senate Finance Committee held a hearing titled, “The U.S. Tax Code: Love It, Leave It, or Reform It!”

In his opening remarks, Chairman Wyden said, “The U.S. tax code is infected with the chronic diseases of loopholes and inefficiency. These infections are hobbling America’s drive to create more good-wage, red, white and blue jobs here at home. They are a significant drag on the economy and are harming U.S. competitiveness. The latest outbreak of this contagion is the growing wave of corporate inversions, where American companies move their headquarters out of the U.S. in pursuit of lower tax rates.” Wyden continued, “Congress has been aware of the inversion 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 the American economy with increasing intensity. The American tax code is an anti-competitive mess. Accountants, lawyers, and fast-buck artists looking for tax shelters feed off 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 Committee must respond now. First, let’s work together to immediately cool down the inversion fever. The inversion loophole needs to be plugged now. Second, let’s use the space created by these immediate steps to apply the indisputable, ultimate cure: comprehensive tax reform.”  Wyden added, “Global markets are expanding. Stockpiles of cash sitting overseas are growing at record levels. Foreign competitors are getting more aggressive in chomping at the bit to get a deal on the backs of the American taxpayer. The time for action is now. This committee needs to move now, on a bipartisan basis, to close the loopholes that are fueling the growth of the inversion virus. Then the Finance Committee needs to cure the disease once and for all with comprehensive tax reform. Let’s come together on a bipartisan basis to accomplish both tasks, and I will work with each member of the committee every step of the way.”

The witnesses were:

  • Mr. Robert B. Stack, Deputy Assistant Secretary for International Tax Affairs, U.S. Department of the Treasury, Washington, DC
  • Mr. Pascal Saint-Amans, Director, Centre for Tax Policy and Administration, Organisation for Economic Co-operation and Development (OECD), Paris, France
  • Dr. Mihir A. Desai, Mizuho Financial Group Professor of Finance, Harvard Business School & Professor of Law, Harvard Law School, Cambridge, MA
  • Dr. Peter R. Merrill, Director, National Economics and Statistics Group, PricewaterhouseCoopers, Washington, DC
  • Dr. Leslie Robinson, Associate Professor of Business Administration, Tuck School of Business, Dartmouth College, Hanover, NH
  • Mr. Allan Sloan, Senior Editor at Large, Fortune, New York, NY

Mr. Stack testified, “As the work moves into 2015, there is more that can be achieved, and also several areas where we must guard against bad outcomes. One of the key 2015 action items will focus on making dispute resolution more efficient, which we hope will include a significant broadening of the use of mandatory arbitration to resolve tax disputes between the tax authorities of the two countries. When countries know that tax disputes will be settled by a neutral arbitrator, it improves the dispute resolution process from beginning to end. In 2015, we will also work closely with other countries to limit the base stripping that results from excessive interest deductions, a topic of strong interest to the United States and that, as discussed below, is also the subject of one of the President’s FY2015 budget proposals. We must also work hard in several areas to preserve our national interest in rules based on principles and not merely individual country revenue interests.”

Mr. Stack continued, “Whether as part of tax reform or in the context of our current tax system, we should also take a close look at interest deductibility, noting that in this area our thin capitalization rules are inadequate and that our system actually gives an overall advantage to foreign-owned multinationals in this regard….  Another Administration FY 2015 budget proposal would limit the deduction of interest expense of U.S. multinationals related to deferred foreign subsidiary income.”  Stack continued, “In addressing stripping of the U.S. base, it is also important to consider so-called “hybrid arrangements,” which may allow taxpayers to claim U.S. deductions with respect to payments that do not result in a corresponding income item in the foreign jurisdiction. These arrangements serve little function other than to produce stateless income and could easily be reined in….  The Administration’s FY 2015 Budget contains a number of proposals that would discourage the corporate tax base erosion that occurs via intangibles transfers.”  He added, “Finally, and as underscored by Secretary Lew’s July 15th letter to Congress, I want to emphasize the serious need for the United States to once again directly address the potential loss of federal tax revenues from corporate inversion transactions. Letting our corporate tax base erode through inversions will worsen our fiscal challenges over the coming years. Once companies invert, there is a permanent loss to the U.S. income tax base since it is safe to assume these companies are not coming back to the United States….  Regardless of any other base stripping or tax reform legislation adopted, such strengthened anti-inversion legislation is necessary to prevent a permanent reduction in federal corporate income tax revenues. As the Secretary indicated in his June 15 letter, Congress should pass legislation immediately with an effective date of May 2014 to prevent companies from effectively renouncing their citizenship to get out of paying taxes.”

Mr. Pascal Saint-Amans stated, “Taxation remains at the core of national sovereignty, and each country must ultimately make its own tax policy choices. The BEPS Project developed out of the recognition that opportunities for BEPS arise from the interaction of different countries’ tax systems, making it impossible for a single country acting unilaterally to effectively address BEPS. BEPS opportunities impair the ability of countries to achieve their tax policy goals, effectively undermining their sovereignty. Uncoordinated, unilateral action by individual countries to exert taxing rights over cross-border activity would only make the problem worse, resulting in double or multiple taxation, increasing disputes for business and among governments, and harming economic growth. The work on BEPS is intended to produce tools that countries can use to address BEPS, in order to ensure that the international tax system continues to function, and that a broader, more robust consensus to eliminate double taxation can be established. The OECD has long recommended that countries reduce the distortive impacts of their tax regimes, and thus improve economic growth, by broadening the tax base (in which measures to address BEPS can be an important part) and lowering the rate. We hope that our work, including the work on BEPS, can support the ongoing tax policy reform discussions around the world and in the United States. BEPS is an important issue no matter what direction US international tax policy takes.”

Dr. Mihir A. Desai testified, “Legislation that is narrowly focused on preventing inversions or specific transactions runs the risk of being counterproductive. These transactions are nested in a broader set of corporate decisions, leading to several unintended consequences. For example, rules that increase the required size of a 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 of U.S. activity as American firms will be paired with larger foreign acquirers that demand the relocation of more activity abroad, including headquarters functions. Similarly, specific regulations targeted at inverted firms may also lead to foreign firms leading such transactions to avoid those

regulations. While it is tempting to address specific transactions in advance, or in lieu, of broader reform, it is useful to recall that the last wave of anti-inversion legislation likely spurred these more significant, recent transactions and reduced the prospect of reform in these intervening years.”

Dr. Peter R. Merrill stated, “U.S. companies are increasingly competing in foreign markets, which account for over 95 percent of the world’s population and over 75 percent of global purchasing power. In many cases, a U.S. company’s sales of goods and services overseas creates jobs and growth in the United States. For U.S. companies to succeed in the global marketplace, they must be able to provide goods and services that are competitive in terms of quality,  innovation, and price. Since the last major reform of the U.S. corporate income tax in 1986, the importance of foreign markets to the success of U.S. business has grown and international competition from foreign-based companies has increased. Over this same period, other advanced economies have reduced their corporate tax rates and moved from worldwide to territorial tax systems. As a result, the U.S. corporate tax system has become an outlier among OECD countries. Reform of the U.S. tax system to bring it more in line with international norms would enhance the ability of U.S. multinationals to continue to compete and succeed in global markets.”

Dr. Leslie Robinson testified, “The association between financial reporting disclosures and tax reporting behavior has two important implications. First, tax policy makers should consider any role of accounting disclosures in evaluating behavioral responses to various reform options. Second, tax disclosure requirements could be considered as additional policy measures to aid in the enforcement of tax policy.”

Mr. Allan Sloan testified, “Looking at this as an outside observer, I think it’s glaringly obvious what needs to be done. First, you pass the Levin legislation—I prefer the Senate version, for reasons you’ll see in a bit—to enact changes that would require inversions to change management and shareholder control of inverting companies. You adopt the March 8 cutoff date. No, that wouldn’t be unfair retroactive legislation. Ever since Senator Wyden’s op-ed ran in the May 8 Wall Street Journal, corporate America has been on notice that a May 8 date is on the table. . . If I were you, I would adopt the Senate version of the Levin legislation, so that there’s a cut-off date, and so that averting inversions for awhile doesn’t totally remove the pressure to do something about the corporate tax code reasonably quickly. I found aspects of Rep. Camp’s proposal interesting, but I don’t pretend to have any expertise in drawing up tax legislation. That’s what you do. It’s not what I do.”

Testimony can be accessed via: http://www.finance.senate.gov/hearings/hearing/?id=5a23092e-5056-a032-5264-b5147118d6be