House Ways and Means Committee
“Global Tax Environment in 2016 and Implications for International Tax Reform”
Wednesday, February 24, 2016
Key Topics & Takeaways
- Maintaining Competitiveness: Rep. Reed (R-N.Y.) asked what necessary steps need to be taken to maintain competitiveness. Wiacek suggested reducing the statuary corporate tax rate and the adoption of a consumption-based tax.
- OECD BEPS: Rep. Price (R-Ga.) asked the witnesses how to protect American companies overseas. He stressed that BEPS is a “revenue grab” by foreign countries on American companies
- Effects on Local Communities: Grinberg added that if we do not produce a competitive system, corporations will shift offshore and high-level and skill opportunities will be overseas, leaving “fewer opportunities for young people in the United States.”
In his opening statement, Chairman Kevin Brady (R-Texas) stressed it is more important than ever to fix our broken tax code. He explained that American job creators are forced to take their jobs to other countries. thus leading to fewer small business opportunities and weaker economic growth. Brady noted that American companies competing overseas are “rightly concerned” that the Organization for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project will result in “higher foreign taxes, higher compliance costs and double taxation.” He asked the witnesses to comment on the European Union’s state aid investigations that will threaten to subject American businesses to retroactive taxes going back ten years. Brady urged Congress to act instantaneously to lower America’s tax gates and to stand strong against global developments that will affect American workers.
Ranking Member Sander Levin (D-Mich.), in his opening statement reaffirmed that there is no doubt there is a clear need for tax reform and changes on how companies who engage globally are taxed. He noted the only way to address tax reform is to undertake it comprehensively on a bipartisan basis. With that, he said “Congress should not be frozen in place” and neglect to address the repercussions of inversions and earnings stripping.
Michelle Hanlon, Professor of Accounting at MIT Sloan School of Management
In her testimony, Hanlon focused on the high U.S. corporate tax while noting that 28 of 33 OECD countries have adopted a territorial tax that allows active business income to be repatriated with little or no country tax. She explained that the consequences of multinational U.S. companies operating overseas and estimated that these companies are holding more than $2 trillion and rising in unremitted earnings. As a result, Hanlon explained, this lock out of foreign earning leads companies to borrow more in the U.S. in order to fund domestic investment and return value to shareholders. She further addressed her concern about inversions, “however focusing on legislation that will discourage inversions will not correct the bigger problems,” with our high tax rate.
Raymond Wiacek, Partner, Jones Day
In his testimony, Wiacek focused on the global markets attracting companies through their tax codes and the effects on local communities when a multinational company moves overseas. Wiacek used past examples and cited Detroit’s declining auto industry. He stated that the competition is “real and fierce.” Furthermore, he explained that when an American company becomes the subsidiary of a foreign company, “it has terrible affects on jobs in our community” and it can be compared to being in the minority versus the majority of Congress.
Itai Grinberg, Associate Professor of Law, Georgetown University Law Center
In his testimony, Grinberg said the international tax environment around the world is becoming less stable and less favorable to American businesses. He stressed that although the BEPS project was intended to address the “global tax chaos,” the post-BEPS environment displays that the project has failed to fulfill its intention. Grinberg explained that our international tax system is allowing American businesses to be turned into “pawns” in an inter-European fight between high-tax France and low-tax Ireland.
Edward D. Kleinbard, Professor of Law, University of Southern California Gould School of Law
In his testimony, Kleinbard stressed that though the U.S. statutory corporate rate is too high, it is irrelevant to American companies overseas. He acknowledged international tax reform as a “two-way street.” Kleinbard stated that when it pertains to BEPS and EU state aid, he finds multinational cries of pain to be “hyperbolic and premature” as all G-20 countries endorsed BEPS. He believes that because the U.S. is the largest importer of foreign direct investment, international tax reform should therefore involve the rethinking of the U.S.’s appeal as a source country in which it becomes a place to invest, not just a jurisdiction from which to invest.
Questions and Answers
Brady asked what is fueling the fire that is making American companies leave overseas. Hanlon said the pressure has been building over time and the U.S. has done nothing to change the tax code. She did mention that although it is too late to fix the damages of the high corporate tax, there is no reason for Congress to rush, as a comprehensive tax reform plan is needed rather than a “Band-Aid approach.”
Effects on Local Communities
Rep. Charles Boustany (R-La.) asked the panelists about the consequences on local communities and Main Street America, but, more specifically for future generations, when an American company moves overseas. Boustany continued to ask if Americans understand the repercussions on the community when a multinational company that has grown in middle America moves to Dublin or Tokyo. Wiacek explained that tax competition is real in our local communities. Grinberg added that if we do not produce a competitive system, corporations will shift offshore and high-level and skill opportunities will be overseas, leaving “fewer opportunities for young people in the United States.”
Rep. Tom Price (R-GA) asked the witnesses how to protect American companies overseas. He stressed that BEPs is a “revenue grab” by foreign countries on American companies. Hanlon responded that the system is broken across the world because there is not an even playing field, but adding that “the view in Europe of what is the right fix is not always best for America.”
Rep. Ron Kind (D-Wis.) asked the panelists if international tax reform should be revenue neutral, and whether the U.S. should be paying for any changes in the international tax code. Hanlon stated that she does not think the reform needs to be revenue neutral. Grinberg said he believes in revenue-losing tax reform and noted that according to the OECD, the corporate tax is the least-growth tax, leading every country towards a consumption tax in its place.
Congressman Tom Reed (R-N.Y.) asked what necessary steps need to be taken to maintain competitiveness. Wiacek suggested reducing the statuary corporate tax rate and the adoption of a consumption based tax. Grinberg added that a consumption tax is simply a pro-growth system.
Similarly, Rep. Kristi Noem (R-S.D.) asked the panelists to be a “bit visionary” about what will happen if the U.S. does not deal with the corporate income tax and international tax. Hanlon said there will be a continuation of the declining trend of American companies leaving the U.S. and more cities will compare to Akron, Ohio. Wiacek referred to the trend as a “slow drum beat of erosion.”
For more information on this hearing, please click here.
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