COMMITTEE ON WAYS AND MEANS BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois E. CLAY SHAW, Jr., Florida NANCY L. JOHNSON, Connecticut AMO HOUGHTON, New York WALLY HERGER, California JIM MCCRERY, Louisiana DAVE CAMP, Michigan JIM RAMSTAD, Minnesota JIM NUSSLE, Iowa SAM JOHNSON, Texas JENNIFER DUNN, Washington MAC COLLINS, Georgia ROB PORTMAN, Ohio PHIL ENGLISH, Pennsylvania WES WATKINS, Oklahoma J. D. HAYWORTH, Arizona JERRY WELLER, Illinois KENNY C. HULSHOF, Missouri SCOTT MCINNIS, Colorado RON LEWIS, Kentucky MARK FOLEY, Florida KEVIN BRADY, Texas PAUL RYAN, Wisconsin	CHARLES B. RANGEL, New York FORTNEY PETE STARK, California ROBERT T. MATSUI, California WILLIAM J. COYNE, Pennsylvania SANDER M. LEVIN, Michigan BENJAMIN L. CARDIN, Maryland JIM MCDERMOTT, Washington GERALD D. KLECZKA, Wisconsin JOHN LEWIS, Georgia RICHARD E. NEAL, Massachusetts MICHAEL R. MCNULTY, New York WILLIAM J. JEFFERSON, Louisiana JOHN S. TANNER, Tennessee XAVIER BECERRA, California KAREN L. THURMAN, Florida LLOYD DOGGETT, Texas EARL POMEROY, North Dakota
Allison Giles, Chief of Staff Janice Mays, Minority Chief Counsel  SUBCOMMITTEE ON SELECT REVENUE MEASURES JIM MCCRERY, Louisiana, Chairman
J.D. HAYWORTH, Arizona JERRY WELLER, Illinois RON LEWIS, Kentucky MARK FOLEY, Florida KEVIN BRADY, Texas PAUL RYAN, Wisconsin	MICHAEL R. MCNULTY, New York RICHARD E. NEAL, Massachusetts WILLIAM J. JEFFERSON, Louisiana JOHN S. TANNER, Tennessee
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process is further refined.

Advisory of June 18, 2002, announcing the hearing

Connecticut Attorney General's Office, Hon. Richard Blumenthal

Johnson, Hon. Nancy L., a Representative in Congress from the State of Connecticut

McInnis, Hon. Scott, a Representative in Congress from the State of Colorado

Maloney, Hon. James H., a Representative in Congress from the State of Connecticut

Neal, Hon. Richard E., a Representative in Congress from the State of Massachusetts

Salch, Steven C., Fulbright & Jaworski L.L.P.

American Institute of Certified Public Accountants, Pamela J. Pecarich, letter

CORPORATE INVERSIONS

House of Representatives,
Committee on Ways and Means,
Subcommittee on Select Revenue Measures,
Washington, DC.

The Subcommittee met, pursuant to notice, at 3:23 p.m., in room 1100 Longworth House Office Building, Hon. Jim McCrery, (Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]

Chairman MCCRERY. The hearing will come to order. Our guests will take their seats.

Good afternoon, everyone. Today the Select Revenue Measures Subcommittee continues its examination of the impact of the Tax Code on the competitiveness of American businesses. The first three hearings looked at possible responses to the World Trade Organization's decision in the Foreign Sales Corporation/Extraterritorial Income Exclusion Act (FSC/ETI) dispute. This hearing will examine the practice known as inversions, whereby some companies move their legal residence from the United States to another country, usually a low-tax or no-tax jurisdiction.

Let me begin by making clear what I said to Mr. Neal and others during House debate last week. I agree inversions are a problem. I agree there is something wrong with a Tax Code which allows American companies to reduce their taxes by moving their nominal residence to another country, and I agree that legislation to address this problem is something this Congress should, and I believe will, take up.

Let me also make clear that my support for legislation to tackle the issue of inversions is not an endorsement of any of the bills which have been introduced to this point. This hearing will give us a chance to evaluate the strengths and weaknesses of current proposals and examine whether other more comprehensive approaches are necessary.

Inversions are not a new phenomenon. In fact, the first inversion to attract significant attention involved a Louisiana company back in 1983. Preventive legislation was enacted in response to that.

A decade later, Helen of Troy inverted in a differently structured transaction. The Internal Revenue Service responded swiftly with new regulations.

Now, two decades after inversions first gained public attention, they are back in the spotlight. The outcry from the press and the public has prompted legislators to introduce a slew of proposals to put a finger in the inversion dike.

Inversions are motivated by two types of tax savings. First, the inverted company generally structures its affairs so as to avoid U.S. tax on its global income, thereby getting around our worldwide tax system. This has sometimes been referred to as "self-help territoriality."

Second, and perhaps even more concerning, inverted companies have engaged in a practice known as interest stripping to reduce U.S. taxes on U.S. income. This occurs when the parent loans money to the U.S. subsidiary. The interest payments made to the parent or other foreign affiliate are deducted from a subsidiary's income, thereby reducing taxable U.S. income. The payments received by the parent are either not considered taxable income or are subject to a very low rate of taxation.

Combined, these incentives provide significant tax savings to inverting companies but erode our U.S. tax base. They also point out the danger of narrow legislative solutions. Just as water will find another way through or over the dike, legislation which leaves in place these incentives but only places them further out of reach encourages clever tax professionals to respond by redesigning and repackaging these inversion transactions.

So long as we are focused on the headline-grabbing inversions and not the underlying factors which prompt these moves, I am concerned we will continue to play catchup with enterprising companies and their tax planners who find ways around the statutes.

The fundamental problem, as identified by the U.S. Department of the Treasury, is the "juice" which makes inversions such an attractive option for many companies. Existing barriers such as toll charges on the shareholders of inverting companies under section 367 are inadequate in some cases. With stock prices depressed and many institutional shareholders indifferent to this tax, this check on inversions is not as formidable as it was once thought.

These challenges suggest the need to think broadly and address not only the narrow issue of inversions but also the broader flaws in our Tax Code which make it attractive for long-established U.S. companies to invert.

I look forward to examining these issues with the witnesses today and to working with my colleagues in the days and weeks to come to craft legislation which responsibly removes the incentive for American companies to send their headquarters overseas.

It is now my pleasure to yield to my good friend from New York, the Ranking Member of the Subcommittee, Mr. McNulty.

[The opening statement of Chairman McCrery follows:]

Mr. MCNULTY. Thank you, Mr. Chairman, and before I make my opening statement, I ask unanimous consent to submit the statement of Congressman Doggett concerning his bill, H.R. 4993.

Chairman MCCRERY. Without objection.

[The statement of Mr. Doggett follows:]

Statement of the Hon. Lloyd Doggett, a Representative in Congress from the State of Texas

The parade of corporations changing their charter and buying a foreign mailbox as their home address is only the most blatant example of abusive corporate tax shelters that increasingly plague our country. Effectively resolving this particular form of abuse is urgent, but the broader issue must also receive prompt attention. Regretfully, just as the Committee has shown no recent interest in exploring tax rip-offs by Enron, it has given no attention to the Abusive Tax Shelter Shutdown Act (H.R. 2520), or related recommendations by the Joint Tax Committee ⁽¹⁾ or the Department of the Treasury ⁽²⁾ since a hearing on November 10, 1999.

When corporations renounce their U.S. citizenship, they take much of their U.S. income with them. Of the $30 million that Stanley Works expects to avoid each year in U.S. taxes under its reincorporation plan, well over two-thirds is apparently a result of moving abroad income earned on operations here in the U.S. Once a company has inverted, several accounting tricks allow it to artificially shift American income to no- or low-tax jurisdictions without first paying its fair share of taxes due in the U.S.

One common means of shifting income is by having a U.S. affiliate borrow heavily from a related foreign company; taxable income generated here can be converted into interest deductions and sent abroad. Even the Treasury Department has recognized that the "U.S. subsidiary can be loaded up with a disproportionate amount of debt for earnings stripping purposes through the mere issuance of an intercompany note. Thus, the desired earnings stripping, and the U.S. tax reduction, can be accomplished without any real movement of assets or change in operations." ⁽³⁾

The Treasury has failed, however, to grasp the seriousness and scope of the problem. Rather than the zero tolerance attitude that is required, the Administration provides the Congress with many suggestions on how to maintain this loophole: through safe harbors based on the company's ability to leverage itself on a world-wide basis; by removing accelerated depreciation values from the formula; and by giving a free-ride 100% deduction on all interest stripping up to a "to-be-determined" threshold.

The use of intercompany debt to siphon American income abroad is only one piece of the puzzle. If you have wondered why some corporations have chosen to celebrate their new foreign address by discarding not only their citizenship but also by swapping a valuable and well-known trade name for something new, one answer is in the royalties. Probably a large consulting firm could only be convinced to name itself after a day of the week if there were significant monies to be made in the process. By generating new intellectual property abroad, and then renting it at unreasonable prices to the U.S. subsidiary, more artificial shifting of American income can occur. A decade ago, the Ways & Means Committee recognized that foreign companies could use royalty payments to evade U.S. taxes in the same way that debt and interest payments are used, ⁽⁴⁾ but the tax code offers even fewer protections against such royalty abuse. This is not new, but it has been ignored during the current debate.

While both pleased that the Senate Finance Committee has provided a bipartisan response through S. 2119 and fully supportive of the approach adopted by Representatives Neal and Maloney in H.R. 3884 of which I am a cosponsor, the broad extent of tax evasion requires a multi-faceted response. It should also be noted that those corporations that were first out of the gate with abusive moves would not be immediately affected by these proposals. Among those corporations which appear to have reincorporated before September 11, 2001 are: Helen of Troy; Triton Energy Corporation; ADT Ltd.; Global Crossing; Tyco International; Fruit of the Loom, Inc.; Xoma Corporation; Transocean Offshore, Inc.; PXRE Corporation; Everest Reinsurance Group; Foster Wheeler Corporation; and Accenture, Ltd. In addition to these, Ingersoll-Rand and Global SantaFe appear to have reincorporated prior to March 20, 2002, the effective date of S. 2119. There is a need to reach those companies that have already expressed an interest in circumventing H.R. 3884 and S. 2119.

I believe the root of the problem lies in extending the valuable benefits of our tax treaties to tax evading corporations, which lack a legitimate claim to use them. Tax treaties quite properly are meant to avoid double taxation but should not be a means for avoiding any taxation.

Most of our more modern income tax treaties recognize that there can be opportunities for abuse in cross-border payments between related parties, through "treaty shopping." Some of our treaty partners may even promote such activity by establishing very low "residency" requirements for purposes of accessing tax treaty benefits. Many treaties contain "limitation on benefits" provisions to limit access to significant (often total) reductions on the withholding taxes levied on interest and royalty payments. Such provisions contains a series of tests meant to ensure that treaty benefits go only to true residents of the tax treaty partner. The Treasury Department has stated, in its technical explanation to the 1996 model income tax convention, that "[t]he assumption underlying each of these tests is that a taxpayer that satisfies the requirements ... probably has a real business purpose ... or has a sufficiently strong nexus to the other Contracting State (e.g., a resident individual) to warrant benefits even in the absence of a business connection...." Unfortunately one of these tests reflects an outdated assumption about residency that renders the limitation on benefits provision of little value where it is most needed.

The limitation on benefits provision, as included in over thirty of our tax treaties, provides that any corporation that satisfies the domestic residency rules of a tax treaty partner and trades its shares primarily on a recognized stock exchange (generally including "any stock exchange registered with the U.S. Securities and Exchange Commission as a national securities exchange under the U.S. Securities Exchange Act of 1934") will be granted full access to the benefits of the tax treaty. In this age of globalized securities markets, a listing on the NASDAQ has no more relevancy in determining whether a company is a resident of a foreign partner to a tax treaty than does an annual beach-side board meeting, but it can nevertheless translate into tens of millions of dollars in taxes evaded for a corporation that chooses to reincorporate abroad and become a "resident" of the right tax haven.

H.R. 4993, the No Tax Breaks for Corporations Renouncing America Act of 2002, would close this loophole. This legislation would require that corporate beneficiaries have true ties to the treaty partner, either through ownership or through a public stock market listing and substantial activities. It is similar in approach to prior congressional action to close tax treaty loopholes that were providing unanticipated and unbargained-for benefits to third parties. ⁽⁵⁾

What American businesses need immediately is a return to a level playing field. When Stanley Works can unilaterally cut its taxes by $30 million overnight, its competitors are disadvantaged and American families are unfairly required to pay an increased share of the costs for meeting our security and other needs.

[An attachment is being retained in the Committee files.]

1. "Study of Present-Law Penalty and Interest Provisions as Required by Section 3801 of the Internal Revenue Service Restructuring and Reform Act of 1998 (Including Provisions Relating to Corporate Tax Shelters)," Joint Committee on Taxation, July 22, 1999.

2. "The Problem of Corporate Tax Shelters: Discussion, Analysis and Legislative Proposals," Department of the Treasury, July 1999.

3. "Corporate Inversion Transactions: Tax Policy Implications," Office of Tax Policy, Department of the Treasury, May 2002, at page 21.

4. See, for example, Hearing Before the Subcommittee on Oversight of the Committee of the Ways and Means on the Department of the Treasury's Report on Issues Related to the Compliance with U.S. Tax Laws by Foreign Firms Operating in the United States. (Pages 2 - 4.) April 9, 1992.

5. See, for example, section 884(e) of the Internal Revenue Code, responding to treaty shopping by foreign corporations to avoid branch profits taxation.

Mr. MCNULTY. I also ask unanimous consent to present for the record the statement of Professor Samuel Thompson of the University of Miami concerning his views in general on corporate inversions.

Chairman MCCRERY. Without objection.

[The statement of Mr. Thompson follows:]

Statement of Samuel C. Thompson, Jr., Professor and Director,
Center for the Study of Mergers and Acquisitions, University of Miami School of Law, Coral Gables, Florida

I. BACKGROUND

My name is Samuel C. Thompson, Jr., and I am a Professor of Law and the Director of the Center for the Study of Mergers and Acquisitions at the University of Miami School of Law.  I am submitting these comments because I have an academic and scholarly interest in the topic of inversions, which involve various transactions in which a publicly held U.S. corporation becomes a subsidiary of a publicly held foreign holding company.  I do not represent any client that has an interest in inversions, and all of the views expressed on this subject are my own and have not been approved by any other person or organization.

As a young lawyer, I worked in the Treasury’s Office of International Tax Policy, and as a practicing lawyer for many years, I counseled clients on various issues relating to the Federal income taxation of international transactions.  As a law professor, I have taught International Taxation for many years, and I have published a casebook on the topic: U.S. Taxation of International Transactions (West Publishing 1994).  I first became interested in inversions and similar transactions in 1998 in connection with a lecture I gave at the University of Cincinnati Law School on Section 367 of the Code.  The lecture was published in the University of Cincinnati Law Review: The Impact of Code Section 367 and the European Union's 1990 Council Directive on Tax-Free Cross-Border Mergers and Acquisitions, 66 U. Cin. L. Rev. 1193 (1998).  I continued my interest in this subject by publishing in the March 18, 2002 issue of Tax Notes an article entitled: Section 367: a 'Wimp' For Inversions and a 'Bully' For Real Cross- Border Acquisitions, 94 Tax Notes 1505 (March 18, 2002) [Section 367: A Wimp and a Bully].  This article was the basis of the Polisher Tax Lecture I gave at the Dickinson Law School on April 24, 2002.  I also recently published in Tax Notes International the following three articles on this subject: Analysis of the Non-Wimpy Grassley/Baucus Inversion Bill, 26 Tax Notes International 741 (May 13, 2002) [Analysis of Grassley/Baucus Bill], Treasury's Inversion Study Misses The Mark: Congress Should Shut Down Inversions Immediately, 26 Tax Notes International 969 (May 27, 2002) [Treasury Misses the Mark], and U.S. Treasury Official Gives Unconvincing Reason For Not “Blockading” Inversions, 26 Tax Notes Int'l 1321 (June 17, 2002) [Treasury’s Unconvincing Reason].  I also made a written submission to the House Ways and Means Committee in connection with its hearing on corporate inversion transactions, which was held on June 6, 2002, and this submission builds on that submission.

II. FOCUS OF THESE REMARKS

Several bills have been introduced to stop these inversion transactions, including bills by Representatives Doggett, Johnson, Neal, McInnis, and Maloney and by Senators Grassley, Baucus, Wellstone and Dayton.  I have previously analyzed the bill introduced by Senators Grassley and Baucus.  See Analysis of Grassley/Baucus Bill.  Also, on Friday, May 17, 2002, the U.S. Treasury issued a tentative report on corporate inversion transactions. See Office of Tax Policy, Department of the Treasury, Corporate Inversion Transactions: Tax Policy Implications (May 2002) [Treasury Report], and on June 6, 2002, the Treasury testified on this topic before House Ways and Means Committee. See Treasury’s Unconvincing Reason.  My comments today focus on the Treasury Report, the Treasury’s June 6, 2002 testimony, and the policy question of whether the case has been made to bring these transactions to an end.  I do not comment here on the technical aspects of the bills that have been introduced, but I think the Grassley/Baucus REPO bill would provide a good starting point for closing down these transactions.  This submission does not repeat the sections of the June 6 submission that discuss the background of inversions and summarize the Treasury’s Report.

III. SUMMARY OF MAJOR POINTS

·      By avoiding the CFC provisions, inversion transactions extend de facto territorial taxation to both active foreign income and passive foreign income; not even the most avid proponent of territorial taxation supports such a system for passive income. 

·      The Treasury Report and the National Foreign Trade Council’s (NFTC) Study do not establish that U.S. companies face a competitive problem in conducting business in foreign markets; there may be such a problem, but it has not been established. 

·      The NFTC’s June 11, 2002 position against adopting a territorial system is an acknowledgement that the entire issue needs further study. 

·      Inversions create a real competitive problem for U.S. firms that cannot, or choose not to, engage in inversions, while their competitors pursue such transactions. 

·      There is no reason to refuse to act now on inversions because of concern with similar transactions.  It is possible to address similar transactions, which is the case with the Grassley/Baucus bill, and there is no evidence that cross border mergers with real companies in OECD countries have been used to accomplish the purposes of inversion transactions. 

·      The Treasury and Congress should be careful not to overstate the potential simplification advantages of a territorial system.  As Ron Pearlman, a former Assistant Secretary of Treasury for Tax Policy in the Reagan Administration said many years ago:  “Corporate transactions by their nature are complex and * * * the rules governing those transactions will be complex.” 

·      Without respect to one’s views on the desirability of a territorial system, it is difficult to comprehend on tax policy grounds why the Congress would not act immediately to close down inversions. 

·      After shutting down inversions, Congress and Treasury should then turn their attention to the real issue: a thorough, effective, careful, and honest study of the merits of both (1) a move to a territorial system, and (2), in the words of the NFTC’s June 11 Report, the “reform of our current deferral and foreign tax credit system.”

IV. CRITIQUE OF THE TREASURY REPORT

A. Relationship of Inversions to Possible Move to a Territorial System

The Treasury Report correctly points out that it is appropriate for Congress to consider the possibility of moving to a territorial regime for active income.  Senators Grassley and Baucus[1] made the same point in introducing their anti-inversion bill.  So there is no real debate on whether Congress should consider moving to a territorial system, and the treatment of inversions should have nothing at all to do with that coming debate.

A move in the direction of a territorial system has been one of the principal goals of the National Foreign Trade Council, Inc. (NFTC), an industry sponsored organization, which has argued for such a change in its book: International Tax Policy for the 21^st Century.[2]  The NFTC has been careful only to make the case for a territorial system for active foreign income, and there are principled arguments that can be made for adopting such a regime.[3]  However, with respect to the treatment of foreign passive income, the NFTC has said: “[W]e * * * have * * * recommended no change relating to the basic operation of the foreign personal holding company income rules of subpart F.”[4]  Thus, the NFTC does not argue against the current CFC treatment of passive income, which generally imputes such income to controlling U.S. shareholders.

By avoiding the CFC provisions, the inversion transactions extend de facto territorial taxation to both active foreign income and passive foreign income.  The Treasury Report only addresses the avoidance of tax on foreign source passive income in a footnote, and in that footnote the Treasury says: “Further study must be given to this issue.”[5]  Thus, the Treasury must think that there could be some argument in favor of extending a territorial regime to foreign passive income.  I submit that no principled argument can be made for such a position.  For example, all of our significant trading partners with territorial systems only extend territorial treatment to active foreign income.  Even though the Treasury seems to support a territorial system, it should have recommended immediate action to end inversions on the grounds that these transactions extend the territorial principles beyond the breaking point.

Further, the NFTC has recently backed away from its support for a move towards a territorial system; in a June 11, 2002 Report, it states that its (apparently recently formed) Territorial Study Group “concludes that, on balance, legislative efforts to improve current international tax rules are better spent on reform of our current deferral and foreign tax credit system and on finding a WTO compliant replacement for FSC/ETI than on adopting a territorial system.” Id. Executive Summary at 3.  Thus, since the principal proponent of a move in the direction of a territorial system has abandoned that position and recommended more study, it would be irresponsible for Congress to decide not to immediately shut down inversions.  This recent action of the NFTC emphasizes the need for Congress and the Treasury to carefully study this issue.

B. The Competitiveness Argument

Although the Treasury Report asserts that U.S. corporations face a competitive disadvantage, the Report does not adequately document such a disadvantage.  Thus, I believe that there is absolutely no foundation for the following statement in the Treasury Report:  “The impact of this competitive disadvantage is seen most starkly with the recent inversion activity * * *.”[6]  There is nothing in the Treasury Report to support the assertion that inversions are undertaken to address a competitiveness problem these companies face overseas.  Certainly inversions reduce the overall tax liability, but there is no evidence that the tax liability these companies are facing is greater than the tax liabilities their competitors face.  Although the Treasury says that it reviewed the proxy statements of many companies engaging in inversion transactions, the Treasury Report does not cite to any statements in those proxy statements to the effect that the transactions are being undertaken to allow the companies to address competitiveness problems they face.

In fact, it would appear that our current deferral system for active income, in large measure, addresses the basic competitiveness issue.  For example, assume that a U.S. corporation (USC) operates an active business through a foreign subsidiary located in foreign country (X).  Also, a foreign competitor (FC) that is organized in a country with a territorial system operates a competing active business through a foreign subsidiary in X.  In this case, the foreign subsidiaries of USC and FC face the same foreign tax in X, which is, say, at a 30% rate.  The CFC provisions do not require the imputation to USC of the income of its sub, because the income is active income earned in X.  Therefore, at the time the business operations are conducted or earnings are reinvested, there is a level playing field for USC and FC in X from an income tax perspective.

At the time the earnings of the subs are repatriated, USC is subject to tax on the repatriated amounts, but USC is, subject to certain limitations, allowed a foreign tax credit for the 30% taxes the sub has paid to X.  Where the tax paid to X is less than the U.S. tax liability, the full amount of the foreign tax is generally allowed as a credit.  Thus, in such case, the net additional tax due to the U.S. would be the 5% difference between the 30% rate in X and the 35% corporate rate in the U.S.  On the other hand, under the territorial system that applies to FC, it can repatriate the income from its sub tax-free.  Thus, in this case, the competitive disadvantage faced by USC with respect to its current operations is the present value of the 5-percentage point difference in tax rates between the U.S. and X, which is to be incurred at some point in the future when the income is repatriated.  A careful analysis of this type of situation could lead to the conclusion that this difference is insignificant from a competitiveness standpoint.

Let me be clear, I am not asserting that there is no competitiveness problem.  I am merely stating that (1) the Treasury Report has not presented evidence of a competitiveness problem, and (2) the issue needs to be carefully studied.  There are many elements to this competitiveness issue.  For example, consider the impact the following facts have on competitiveness: (1) the U.S. has the lowest tax to GDP ratio of any of its major trading partners except Japan,[7] and (2) in Japan, the corporate tax is 13% of total tax revenues, whereas in the U.S. the corporate tax is only 9% of total tax revenues, which is the average for the OECD.[8]  The competitiveness issue is too complex and too important for any one to “jump the gun.”

C. The Reverse Competitiveness Argument with a De facto Territorial System

While the Treasury Report focuses on the competitiveness problem between U.S. companies and their foreign competitors, the inversion transaction creates a competitiveness problem between competing U.S. firms.  For example, assume that the major U.S. competitor of Coopers Industries, which is considering an inversion, also competes with Coopers in foreign markets.  Also, assume that the competitor’s shareholders vote no on a proposed inversion transaction because the tax cost to the shareholders under the Section 367 regulations is too high.  However, Coopers Industries goes forward with its inversion transaction, because the tax cost to its shareholders is not a barrier to the transaction. In such case, it would appear that Coopers Industries has attained a real competitive advantage over its U.S. competitor.  Also, the lower tax rate might give Coopers an advantage in attracting capital.  It would appear that this is a much more serious competitiveness problem than the potential and unproven competitiveness problem Coopers Industries may face with its foreign competitors.

D. Treatment of Similar Transactions

The Treasury Report argues for moving slowly on inversions because there are other transactions that can have a similar effect, such as initial incorporations in tax havens in going public transactions and acquisitions by substantial foreign acquiring corporations of U.S. targets.  It appears that the Grassley/Baucus anti-inversion bill would apply to many foreign, going public incorporations, and in any event, the bill should be amended to clarify and broaden its application to these transactions.[9]

With respect to real cross border transactions, there seems to be no evidence that these transactions are motivated for the purpose of avoiding the U.S.’s CFC provisions.  Indeed, most such transactions involve acquiring corporations that are located in countries that have CFC provisions, such as the U.K., Germany, and France.  But if the purpose of any such transactions is the avoidance of the U.S.’s CFC regime, the IRS should be given the tools to challenge those transactions along the lines of the prior approval provisions of the Grassley/Baucus bill.[10]  There is no need to wait on addressing inversions, because these similar transactions can be also addressed.

E. Concern with Congressional "Deal Chasing"

If creative lawyers and accountants come up with new inversion schemes not covered by the legislation, which is certainly a possibility, Congress should act to shut down such transactions.  Indeed, this has been the pattern with legislation dealing with tax shelters.  For example, during the Ford Administration in 1976, Congress enacted the “at risk” rules under Section 465 to address real estate tax shelters.  These rules proved ineffective, and as a response during the Reagan Administration in 1986 Congress enacted the very effective passive loss rules under Section 469.  Also, during the Reagan Administration, in 1981 Congress enacted the disallowance of loss rules under Section 1092 and the mark to market rules under Section 1256 to eliminate tax sheltering in futures straddles transactions, and in 1983 Congress extended those rules to stock option straddles transactions, which had become a new market for such sheltering.  These are examples of what some may refer to as “deal chasing” by Congress.  I believe that in view of the very creative tax bar we have in this country, it is necessary for Congress to be prepared to “chase deals.”  Otherwise, tax planners will find ways to undermine the tax system.

F. Assumption that a Territorial System would be Less Complex than the Current System

Although the Treasury Report criticizes the complexity with our current system of taxation of foreign income, it fails to acknowledge that there will be similar complexities in structuring a territorial system for active income.  For example, there would have to be rules distinguishing between the active income that qualifies for such treatment and the passive income that does not.  It would be a mistake to think that in an interconnected global world of business, it is possible to write simple rules that taxpayers will not be able to abuse.

The Treasury would be wise to listen to the words of Ron Pearlman, a very effective former Assistant Secretary of the Treasury for Tax Policy in the Reagan Administration and a former Chief of Staff of the Joint Committee on Taxation.  In commenting at a 1988 conference on efforts to simplify the corporate tax provisions of the Code, Assistant Secretary Pearlman said:

We think it a bit dangerous * * * to sell these [corporate reform proposals] as simplification.   Corporate transactions by their nature are complex and they will continue to remain complex, we suspect.  We would guess that, ultimately, the rules governing those transactions will be complex.[11]

Since the time Mr. Pearlman wrote those words 14 years ago, as he predicted, corporate transactions have become more complex, and this is particularly true of international corporate transactions.  The lesson the Treasury should learn from Mr. Pearlman is that it would be a “bit dangerous” to sell a territorial regime as simplification.

Also, if simplification is the principal goal in structuring an international tax regime, it might be advisable to move in the opposite direction of a territorial system and eliminate all deferral by simply imputing all of the income of controlled foreign corporations to their U.S. shareholders.  This would eliminate the need to determine subpart F income and could dramatically simplify the foreign tax credit rules.  Indeed, there would be complexity with such a move, but on balance, it could be less complex than either the current system or a territorial system.

G. Decoupling the Territorial Issue From the Inversion Issue

There is no sound basis for coupling the examination of the potential move to a territorial system with the inversion problem.  They are different problems and should be treated as such.  Without respect to one’s views on the desirability of a territorial system, it is difficult to comprehend, on tax policy grounds, why Congress would not act immediately to close down inversions, because these transactions produce territorial taxation for passive income, which is not even supported by the NFTC.  Indeed, the ability of an inverted company to park passive income offshore tax-free will act as a giant magnet sucking capital out of the U.S.

H. Potential Additional Approach to Interest Stripping

Both the Treasury Study and the Grasssley/Baucus bill address interest stripping with potential amendments to Section 163(j).  A potential additional approach to interest stripping might be an amendment to the Code, along the lines of Congressman Doggett’s bill, that overrides any treaty, such as the Barbados treaty, insofar as the treaty is employed in an inversion or similar transaction for purposes of interest stripping or other transactions having a similar effect.  This would merely be a statutory extension of the Treasury’s anti-treaty shopping provisions of the Model Treaty.  The inadequacy of those provisions makes interest stripping possible.

V. TREASURY JUNE 6, 2002 TESTIMONY

A. Summary of Treasury Testimony

On Thursday June 6, 2002, Pamela Olson, the Treasury’s Acting Assistant Secretary for Tax Policy, testified at a hearing before the House Ways and Means Committee on Corporate Tax Inversions.  Her testimony basically followed the arguments made in the Treasury’s May 17, 2002 Interim Report on Inversions. She also recommended, “removing the juice” from inversions by curtailing earnings stripping.  She said, however, that Treasury does not favor action to directly attacking inversions, because a “blockade” against inversions may make other transactions that can have a similar effect “more beneficial.”  Specifically, she referred to start-up incorporations in tax haven jurisdictions and to foreign acquisitions of U.S. companies.  In response to Chairman Thomas’s question concerning the wisdom of a “narrow approach” to inversions, she said something to the effect that “foreign companies will have an advantage if we only address inversions.”  At a later point she said that putting up a “Berlin Wall” against inversions or “blockading” them would be harmful to the U.S.

B. Critique of Treasury's Testimony

This explanation for not immediately “blockading” inversions is unconvincing. First, foreign corporations can acquire U.S. corporations whether or not U.S. corporations can engage in inversions.  Second, the Treasury has cited no evidence that acquisitions by substantial foreign companies located in non-tax haven jurisdictions, such as Germany and France, have been acquiring U.S. companies for tax motivated reasons.  Third, any acquisition of a U.S. company by a foreign company located in a tax haven jurisdiction, such as the prior acquisition by a Bermuda based company of Tyco in a reverse acquisition, likely would be treated as a pure inversion under the Grassley/Baucus REPO bill, and as a consequence, the foreign acquiror would be treated as a U.S. corporation.  , and iIn any event, there seems to be no evidence that foreign acquirors with active business operations in tax havens are acquiring U.S. corporations.   Fourth, the Grassley/Baucus REPO would address in part many start-up foreign incorporations, and the bill should be amended to pick-up these transactions more completely.

The Treasury’s approach would in essence retain the status quo with inversions, except for modification of the earnings stripping provisions, tightening the transfer pricing rules, renegotiating treaties, and enhancing reporting requirements for gain under the Section 367 regulations.  With the exception of the reporting issue, all of these changes are focused on the base erosion aspects, such as interest stripping, of these transactions, and the Grassley/Baucus bill would address these issues more directly and with less complexity by treating the foreign holding companies in pure inversion transactions as domestic corporations.

To summarize, the Treasury’sno “blockade” approach would give companies engaging in inversion transactions de facto territorial taxation for all types of foreign income, including:  (1) active foreign income that would be foreign base company sales income and, therefore, subject to imputation under the Controlled Foreign Company (CFC) provisions in the absence of an inversion, and (2) passive foreign income that alsowould be subject to imputation under the CFC provisions in absence of an inversion.  Thus, as indicated above, the Treasury’s acceptance of a de facto territorial approach would even go further than the approach initially proposed by the NFTC.

VI. CONCLUSION

The Treasury has missed the mark by a wide margin in both its Interim Report and in its Testimony.  Under the Treasury’s suggestion for further study of a move to a territorial system, in the interim, companies would be able to engage in inversions and similar transactions that produce a de facto territorial system for both active and passive foreign income.  This is an indefensible tax policy position, and Congress should move quickly to bring a prompt end to inversions and similar transactions by adopting the Grassley/Baucus anti-inversion bill or some similar provision.  After shutting down these transactions, Congress and Treasury should then turn their attention to the real issue: a thorough, effective, careful, and honest study of the merits of both (1) a move to a territorial system, and (2), in the words of the NFTC’s June 11 Report, the “reform of our current deferral and foreign tax credit system.

[1]Analysis of Grassley/Baucus Bill, supra.

[2] National Foreign Trade Council, Inc., International Tax Policy for the 21^st Century (December 15, 2001) [NFTC Report].

[3] I do not believe the case for a territorial system has been adequately made in the NFTC Report or otherwise, but I believe the move to a territorial system for real active foreign income is something Congress should consider. 

[4] NFTC Report, supra note 17 at 26-27.

[5] Treasury Report, supra at 29, footnote 50. 

[6] Treasury Report, supra at 28.

[7] OECD Economic Outlook, 171 (June 2001).

[8] Id. at 174.

[9]Analysis of Grassley/Baucus Bill, supra.

[10] Id.

[11] Pearlman, The Political Environment of Corporate Tax Reform, A Report of the Invitational Conference on Subchapter C 34 (1988).

Mr. MCNULTY. And, as usual, I ask unanimous consent that all Members of the Subcommittee have the opportunity to submit written statements.

Chairman MCCRERY. Without objection.

Mr. MCNULTY. Thank you, Mr. Chairman. I am very pleased that you have scheduled today's hearing of our Subcommittee on this very important subject. Since the estate tax sunset bill was being considered before the House of Representatives at the same time the Committee was receiving the June 6 testimony on this most important issue, it was appropriate that we postpone the full Committee hearing and resume today before this Subcommittee.

I welcome all of our colleagues from the Congress who are appearing before this Subcommittee today to discuss the legislation they have introduced to stop corporate inversion transactions.

We must act on this legislation with great speed. The problem is clear, and the solution is simple. I have no sympathy for the argument that these Benedict Arnold companies are justified in their actions, literally turning their back on this country because of problems they claim with our tax laws. No one should justify tax avoidance at a time of war by complaining about the laws. We have at least two concrete proposals to address this issue.

First, Congressman Neal has authored H.R. 3884, the "Corporate Patriot Enforcement Act," which is coauthored by Congressman Maloney, and merits our particular attention. Their bill would address a real and growing problem of U.S. corporations avoiding taxes through paper reincorporation overseas. The bill would raise $4 billion over 10 years and eliminates any tax benefits for companies that expatriated after September 11, 2001. Companies that expatriated before that date would be brought back into the U.S. tax system in 2 years.

Second, Congressman Doggett has authored H.R. 4993, which also merits our serious attention. His bill would provide a backstop to the Neal bill by eliminating the ability of corporations to use U.S. tax treaties to strip earnings out of the United States for the purpose of eliminating tax. In such circumstances, the bill would limit the availability of tax benefits to treaty-country residents.

Corporate executives may decide that patriotism needs to take a back seat to profits. I believe that Congress will take a different view. At a time when we are asking our Armed Forces to risk their lives in the war against terrorism, I find it contemptible that corporations would renounce their allegiance to this country in order to evade taxes. It is especially troubling that some of these expatriating corporations have profitable contracts with the Federal Government.

The public expects us to act and to act now. Every dollar of tax evaded by corporations fleeing our borders must be paid by someone else.

I want to thank you, Mr. Chairman, for holding this important hearing and providing especially our Members and other interested parties with the opportunity to be heard. Thank you.

[The opening statement of Mr. McNulty follows:]

Chairman MCCRERY. Thank you, Mr. McNulty.

Our first panel today is a distinguished one, to say the least: four Members who have been leaders in the effort to get the Congress to take a look at this issue. Mrs. Johnson, I remember, was taking a leading role in this issue, kind of a side issue on insurance companies; 3 or 4 years ago, she pulled me aside and said we have got to be concerned about this. Then Scott McInnis, I think, was the first one this year to introduce legislation on this subject. Mr. Neal and Mr. Maloney, of course, have the bill that was the subject of Mr. McNulty's opening remarks and have been leaders in trying to get the Congress to shed some light on this issue.

So we indeed have a distinguished panel before us of our colleagues today, and we are very thankful for you all agreeing to come and share with the Subcommittee your ideas, your thoughts, on this very important topic.

So with your permission, gentlemen, I will begin with the lady amongst you, Mrs. Johnson. Mrs. Johnson, and all of you, your written remarks will be entered into the record in full, but as you know, we would like for you to try to summarize those in about 5 minutes. Mrs. Johnson.

STATEMENT OF THE HON. NANCY L. JOHNSON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CONNECTICUT

Mrs. JOHNSON OF CONNECTICUT. Thank you, Mr. Chairman, Mr. McNulty, and Subcommittee Members. I appreciate your convening this hearing on a very important topic: the troubling practice of American companies reincorporating overseas to avoid paying taxes. I am strongly opposed to these moves, including the ones most recently proposed by Stanley Works in Connecticut.

I have introduced legislation to impose an immediate moratorium to stop Stanley Works and other companies from reincorporating in tax havens like Bermuda, while giving the Congress the time to enact broader legislation aimed at keeping jobs and companies in America. My bill, H.R. 4756, would extend through December 31, 2003.

My legislation will stop the destructive practice of American companies renouncing their American identity to avoid the taxes that provide the very services they benefit from. American companies should act like American companies and pay their fair share to keep our country strong.

The Treasury Department's recent report on corporate inversions confirmed that more American companies will exploit this tax loophole if action is not taken to address the cause of the problem.

On June 6, 2002, in testimony before the full Committee, the Treasury Department made clear that a ban, without taking further steps to reform our Tax Code to keep jobs and companies in America, is unlikely to work and could be very harmful to our economy.

The Treasury Department points out that just plugging the Bermuda loophole without solving the larger problem sets U.S. companies up for foreign takeovers because foreign owners would escape the very taxes a U.S. company dodges by moving to a tax haven. Unfortunately, a foreign owner not only escapes taxes but has less incentive to keep jobs in America.

The Treasury Department prefers my moratorium proposal because we need a thorough understanding of all aspects of the fundamental problem to ensure that the solution we adopt does not make matters worse; in fact, does address the problem. The problem is much greater than companies reincorporating overseas to avoid paying taxes, and companies must make sure that we don't plug one hole only to leave others open or create even bigger ones.

The underlying problem is that our Tax Code is driving U.S. companies offshore. The signs have been clear. For example, I have been lobbying for a bill I introduced with Mr. Neal 2 years ago, and again this Congress, to stop reinsurance companies from taking advantage of a similar Bermuda tax loophole.

Insurers originally incorporated in Bermuda that acquired U.S. companies are able to siphon U.S. profits offshore to a tax haven out of the reach of our Treasury Department by reinsuring their U.S.-owned subsidiary's reserves to Bermuda.

Congress should address both the inversion and reinsurance loopholes, as well as any other loophole that exists if we are going to permanently resolve the alarming exodus of U.S. interests to offshore tax havens to avoid paying their fair share of taxes.

And the now near total loss of the reinsurance industry to Bermuda isn't the only sign the Committee has had of this problem. According to testimony heard by the full Committee on Ways and Means 2 years ago, DaimlerChrysler is German-owned because of the U.S. Tax Code. So current downsizing decisions are being made in Germany, not in America.

Prompt passage of my moratorium is essential. It will give Congress the time to develop a more comprehensive solution to keep jobs and companies in America. Without a permanent and all-inclusive approach, loopholes will remain, and tax lawyers will simply circumvent the legislative proposals before the Subcommittee, inviting foreign takeovers of U.S. companies and putting decision-making about U.S. jobs and research and development (R&D) in the hands of foreign executives.

Our goal is simple: Keep companies in America; keep jobs in America. Any proposal that does less is unacceptable. The Treasury Department has recommended specific steps that Congress should take to remove the tax incentives that are driving companies to reincorporate overseas. I support taking action on these urgent changes, but this may take time. Unfortunately, in this politically charged climate, it is often difficult to get the House and Senate to work in a bipartisan way on even the simplest of legislative initiatives to save American jobs.

Given the complexity of this corporate inversion issue and the short amount of time remaining in this congressional session, I urge the Subcommittee to act immediately on my moratorium legislation to stop companies from reincorporating overseas. There is nearly universal agreement that we must take action to stop companies from reincorporating in tax havens.

Given this breadth of support, let us pass a moratorium to stop them in their tracks and send a powerful message, to others who may be looking at other possible tax loopholes, that Congress is watching, and we will be acting as quickly as possible to prevent the dodging of U.S. taxes in a comprehensive way.

A moratorium will ensure that no company slips through the cracks while Congress develops a permanent solution to keep U.S. companies in America, keep them competitive, and protect American jobs. We cannot afford to wait.

Thank you, Mr. Chairman.

[The prepared statement of Mrs. Johnson follows:]

Chairman MCCRERY. Thank you, Mrs. Johnson. Mr. Neal.

STATEMENT OF THE HON. RICHARD E. NEAL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MASSACHUSETTS

Mr. NEAL. Thank you, Mr. Chairman. First let me acknowledge that you and Mr. McNulty have been faithful to your word here about keeping this issue before the Subcommittee, and I want to thank you again personally for scheduling this hearing today for our consideration.

The practice of reincorporating in a foreign country to avoid paying U.S. income tax is inconsistent with American corporate citizenship and blatantly unfair to those individuals and businesses who pay their fair share in taxes.

Since I first wrote to my colleagues in early February about this issue, and indeed 2 years ago with Mrs. Johnson about the reinsurance issue, the stream of corporations signing up to flee the United States has continued unabated. Despite patriotic sentiments expressed around this great Nation in the wake of the attacks of September 11, even public rebukes in newspapers have had little impact, including today's from Allan Sloan in the Washington Post condemning this practice as, quote, "the worst abuse of all, moving corporate headquarters to places like Bermuda to duck U.S. taxes on U.S. income."

To address the problem of corporate inversions, or corporate expatriation, Mr. Maloney and I have introduced H.R. 3884, the "Corporate Patriot Enforcement Act." This bill, supported by both Republicans and Democrats, simply says that companies that reincorporate overseas must pay U.S. income tax when the new company has substantially the same assets and more than 80 percent of the same shareholders of the former U.S. company.

A tougher test is applied to corporate expatriates that have no substantial U.S. business activity in a foreign country and if its stock is principally traded in the United States.

The Neal bill currently has 104 bipartisan cosponsors. That is almost one quarter of this body which has put their name to this legislation. It would save $4 billion in Federal taxpayer money, which would otherwise be siphoned off by expatriate companies.

Earlier this month, Goldman Sachs Chief Executive Officer, Henry Paulson, said he knew of no time before that, quote, "business overall has been held in less repute." Restoring the integrity in our corporations," he said, was crucial for getting the economy back on track. With companies resorting to expatriation schemes that have no legitimate business purpose, it is easy to see why investors have doubts about corporate integrity.

Preventing corporate expatriates from cheating the Federal Treasury while their honest competitors and hardworking Americans pay their fair share is a responsibility this Subcommittee must assume. The solution is common sense. Stop the corporate traitors by shutting down the corporate loophole now and permanently.

We are fortunate today to have experts before us to testify about this issue. We are also fortunate that several Members have been actively engaged on this issue and all have similar approaches to dealing with the problem.

Mr. Chairman, in addition to my written statement, I would also request that the record include a report detailing the more than $2 billion in government contracts won by corporate expatriates and a preliminary list of 25 corporate expatriates and their former U.S. headquarters.

I want to emphasize that my interest in this issue was generated, obviously, based upon the reinsurance question. But at the same time, it was not the American Federation of Labor-Congress of Industrial Organizations, it was not the consumer groups, it was not the green party and Ralph Nader who brought this issue about. It was the business community in America who approached me and said, "We stay. We like America. We like doing business here. We want an American address, and we hope we are not to be penalized for the good work that we undertake."

I want to close on the note that I opened with, Mr. Chairman. Thanks to you and Mr. McNulty, you all have attempted to hear what we all have said on this very, very important question. Thank you.

[The prepared statement of Mr. Neal follows:]

Chairman MCCRERY. Thank you, Mr. Neal. And, without objection, the report to which you refer will be admitted to the record. Mr. McInnis.

[The information follows:]

Corporate Expatriates and US Federal Government Contracts

This information was compiled by the Office of Rep. Richard Neal and is based on a sample of
former US companies from public information sources, and is not intended to be exhausive.

Accenture
Consulting business, formerly part of Arthur Andersen.
Inversion to Bermuda completed in July, 2001.
Total Federal Contracts in excess of $1 billion.

• December 13, 2001: Two Federal contracts awarded from the US Department of Education/Office of Financial Assistance for system redevelopment and operation. Total cost $234.6 million. (www.washtech.com/news/govtit/14177-I.html)
• October, 2001: Company earnings statement released, showing Net Revenue for government contracts topping $1 billion in fiscal year 2001. (www.informationweek.com/story/IWK20011011 50008)
• September 17, 2001: Accenture rates among the Top 10 GSA schedule holders based on sales to the federal government between July 1, 2000 and June 30, 2001, including management consulting projects for the US State Department and Defense Department. Estimated revenues $183.7 million (www.fcw.com/supplements/fedList/200I/fed-acc-09-17-01.asp)
• July 30, 2001: Internal Revenue Service awards 5-year contract to redesign IRS website (the Digital Daily). Total costs expected to reach $46 million.
• Additionally, Accenture holds numerous contracts with state government agencies for consulting work, including as welfare and social services contracts, among other professional services (see e.g., Nebraska, Ohio, Texas).

PricewaterhouseCoopers Consulting (PwCC)
Accounting firm spun-off consulting firm,
which completed inversion to Bermuda in March, 2002.
Total Federal Contracts in excess of $760 million.

• May 6, 2002: PwC is listed as number 46 on the Washington Technology 2002 list of Top 100 prime contractors in the Federal IT market. Contracts totaled $128,328,000. (www.wtonline.com/news/17-3/features/I 82141.html)
• March 25, 2002: PricewaterhouseCoopers wins a $4.5 million contract from the Defense Supply Center for management support services. (www.washingtonpost.com)
• December 15, 2001: The U.S. Army granted a $453 million contract to PwC to implement its new distant-learning initiative. (www.govexec.com)
• August 1, 2001: Listed as one of the top 200 Government Contractors (No. 125) for the fiscal year 2000. Total Government Contracting award for 2000 was $171,752,000, with $69,865,000 in Department of Defense contracts and $101,887,000 in Civilian contracts. (www.eagleeyeinc.com/pressroom/GovExecTop200-2000-2.htm)
• 2000: The Federal Reserve paid PricewaterhouseCoopers $1.4 million to audit the individual and combined financial statements of the Reserve Banks and an additional $200,000 to audit the Fed's pension and thrift savings plan. (www.fmcenter.orp-,/pdf/fedauditindep.l)df)

Tyco International Conglomerate.
Inversion to Bermuda completed in March, 1997.
Total Federal Contracts in excess of $1 billion.

• February, 2001: Listed as one of the top 10 Federal contractors for Architecture/Engineering Services for the US Department of Defense. Total Federal Contracting award for 2000 was $60,976,000. (www.fpdc.gov/fpdc/fpr.htm, Sectionl of the Federal Procurement Report)

- ADT Securities (subsidiary):

• August 14, 2000: ADT security systems awarded contract from the United States Navy for alarm, signal, and security detection systems. Total cost equaled $283,804. (www.washingtonpost.com/wp-srv/WPlate/200008/14/1221081400-idx.html)
• December 20, 1999: ADT announces contract to install aviation security technology (Qcontrol) at Miami International Airport. Contract price not revealed.

- Tyco Electronics Corporation (subsidiary):

• October 15, 2001: M/A-Com, a unit of Tyco Electronics, awarded a 10-year contract for technology, equipment, and services to U.S. federal agencies for the Base Radio System, managed by United States Army. Total award up to $1 billion. Additionally, awarded contract for HYDRA land mobile radio systems for Space and Naval Warfare Systems Center. Award not to exceed $46 million. ( www.macom.com/about-macom/press.asp?ID=85)
• July 30, 2001: Elo Touchsystems, Inc., a unit of Tyco Electronics Corporation, was added to the GSA schedule, allowing federal agencies to purchase their touchscreen technology, used by military and civilian agencies. Unable to estimate. (www.fcw.com/few/articles/2001/0720/web-market-07-30-01.asp)

• April 15, 1999: Placed on GSA schedule contract. Under schedule 70, federal agencies may purchase AMP's cable and wiring products for up to $500,000 without seeking additional bids.

Foster Wheeler
Engineering, Environmental, & Construction Company.
Inversion to Bermuda completed on May 25, 2001.
Total Federal Contracts in excess of $600 Million.

• One of the top 10 Federal Contractors for Civilian government agencies in 2000: Total 2000 award $52,713,000.

- Foster Wheeler Environmental Corporation (subsidiary):

• February 5, 2002: Contract awarded by the U.S. Navy, to perform environmental cleanups at contaminated Navy and Marine Corps installations. This was the third consecutive award for this subsidiary. Award not to exceed $100 million. (www.corporateir.net/ireye/ir_site.zhtml?ticker=fwc&script=414&la yout=7&item_id=255272)

• November 30, 1999: Contract awarded for 5-year project by the U.S. Army Corps of Engineers to perform environmental cleanup of ordnance and explosives at the former US Army Training and Doctrine Command Facility at Fort McClellan, Alabama. Total award $50 million. (www.fwc.com/news/rel-I 999/1991210b.cfm)

• November 11, 1999: Contract awarded to build and operate a dry spent nuclear fuel storage facility for the US Department on Energy, guaranteed through 2009, with the option to handle other spent nuclear fuel. Facility to be owned privately by Foster Wheeler and licensed by the NRC. Total award $217 million. (http://newsdesk.inel/gov/contextnews.cfm?ID=51)

• September 27, 1999: Five-year contract awarded, with renewal option, by the Federal Supply service of the US General Services Administration to provide environmental advisory services to federal agencies. Total award (with renewal) $50 million. (www.fwc.com/news/rel_1999/19990927.cfm)

• August 20, 1998: Ten-year contract awarded by the US Department of Energy to handle, treat, and repackage low-level radioactive waste at Oak Ridge National Laboratory. Total award $212 million. (www.em.doe.gov/em30/pvortwt.html)

STATEMENT OF THE HON. SCOTT MCINNIS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF COLORADO

Mr. MCINNIS. Thank you, Mr. Chairman. I too appreciate, as has been earlier communicated to you and the Ranking Member, your interest in this. As previously stated, we should point out again that even at this table as we now speak, we have two Republicans and two Democrats.

This is a bipartisan issue. Our focus should not be a political focus in an election year, our focus should be on what is going on out there. The analogy, the best analogy I can see, is that it is like out at the ranch when you have got a bucket; you know you need a new bucket because the bucket has got some holes in it. But before we get the replacement bucket up to the ranch, we have got to use the one we have, and the first thing you do is plug the holes.

When I talked with Congresswoman Johnson, her moratorium does exactly that. And I think there are good things in all of these bills. I am not locked in on one method. I, like the others here, am locked in on the fact that it isn't right. That is how you can simply put it. No matter how complicated these tax accountants like to make it, no matter what the Chairman of Stanley Works talks about, how it is justified to preserve jobs and et cetera, et cetera, the fact is it doesn't feel right, it doesn't look right, and frankly, it is not right.

I introduced the first bill on this, and my focus really on this issue was not just on the reincorporation that we have seen going on in Bermuda and so on. My focus was also broader than that, and that is what is going on with intellectual property, for example, or the earnings which the Chairman and Ranking Member have both noted.

I will give you an example. When we talk about intellectual property, you could have Stanley Works reincorporate in Bermuda, and then Bermuda takes possession of the name, the trade name Stanley Works; then license it to the American operations. The American operations pay for the rights to use the intellectual property or trademarked name of Stanley Works; it gets to deduct that as a business expense, and the earnings then go to Bermuda.

I mean, this is going on across the country, and I am absolutely convinced that the amount of money that is leaving the borders of this country without bearing the appropriate share of the burden is grossly underestimated. I think there is a lot of money that is going because of corporate greed outside the borders of this country, and it is not just on reincorporations.

So my hope today is that the panel looks at the issue -- and I know you have, obviously, from the statements of the Chairman and the Ranking Member -- but that we broaden this and take a look at the earnings stripping, and we take a look at the intellectual property and what is occurring out there.

I would like to compliment Congresswoman Johnson. I have got some of these corporations, I am sure, in Colorado, but I was not driven to this by a particular corporation. I was reading an analysis on it. In fact, when I was overseas at a North Atlantic Treaty Organization (NATO) meeting, I was so upset by this that I actually called my staff from the NATO meeting and told them to look into it, and find out who in our body is kind of an in-house expert on it, and the first name that came up was Congresswoman Johnson. I have had numerous conversations with her. I have had conversations with Mr. Neal. I think we are prepared to do it if we can just come in with the right way to plug the holes in that bucket. Some of the holes are bigger than the other holes, and some of them may take a different type of fix, but, boy, we are leaking a lot of water.

I would also point out the motivation behind a lot of this, despite what they say is the noble reason they are doing this, i.e., they want to save jobs or the tax system is unfair -- I think probably the more realistic reason was stated by an accountant, and was earlier commented by the Ranking Member, the Ernst & Young tax partner that said, really the earnings are so powerful by doing this that patriotism has to take the back seat.

I can tell you, Mr. Chairman, that when the Chairman of Stanley Works came to my office, which was a surprise to me that he would come to my office, but he did come to my office, I gave him a little wallet-sized list of the soldiers, both men and women, that we had lost to date in Afghanistan, and I asked him to put it in his wallet. So every time he talks about this, pull it out and give it consideration. What kind of obligation do these corporations have in this country?

So, Mr. Chairman, in conclusion, we can get into the merits of each of our bills. They are very similar. They are obviously aimed at the same target. We are in agreement, and we have got to do something.

So, Mr. Chairman, I appreciate the fact that you and the Ranking Member have given us this time in this hearing, and also want to publicly reacknowledge, as I have done a couple times in this statement, your particular conversations with me and your focus on plugging those holes, because where you come from and where I come from, we don't want that water going out of the bucket.

Thank you, Mr. Chairman.

[The prepared statement of Mr. McInnis follows:]

Chairman MCCRERY. Thank you, Mr. McInnis. Mr. Maloney.

STATEMENT OF THE HON. JAMES H. MALONEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CONNECTICUT

Mr. MALONEY. Thank you, Chairman McCrery, Ranking Member McNulty, and Members of the Subcommittee, and thank you for holding this hearing.

It is my sincere hope that this Subcommittee will move quickly to pass H.R. 3884, the "Corporate Patriot Enforcement Act of 2002," referred to as the Neal-Maloney legislation.

As I am sure the Subcommittee is aware, on June 18, the Senate Committee on Finance passed the Grassley-Bachus bill. Clearly, this issue has bipartisan support and deserves quick action in the House. In fact, the Neal-Maloney bill, which is very similar to the Grassley-Bachus bill, already -- as Mr. Neal indicated -- has over 100 bipartisan cosponsors, and we continue to add more virtually every day.

So-called corporate expatriates are former U.S. companies who set up paper headquarters in tax havens to avoid U.S. taxes. Some of these expatriates are even using third countries, such as Barbados, with which the U.S. Government has tax treaties, in order to avoid paying virtually all of their tax obligations. These companies continue in fact to reside in the United States, take advantage of our Federal, State, and local services such as police, fire, and public schools, and, of course, they still rely on the protection of our courageous armed services here at home and around the world. The only difference is they now get it all for free, while U.S. citizens and loyal U.S. companies are paying the bill.

This is outrageous and must be permanently stopped. These Bermuda tax avoidance schemes are especially unpatriotic in light of our recent and current and economic national security situation. The Wall Street Journal reported on June 4 that the Federal deficit could total as much as $200 billion next year. The huge Federal surplus we had only a year ago has been wiped out. Critical programs like Social Security and Medicare are in serious jeopardy just as the largest generation in our history is getting ready to retire. In addition, as our country continues its war on terrorism, all of our citizens, elected officials, and corporations should remain united and committed to defending our homeland and eliminating terrorism.

Corporate expatriates are saying that profit gained from tax avoidance is more important than the security and well-being of our country, and they could not be more wrong.

The Treasury Department, while recognizing the problem, has argued that we need to study the issue. Others have proposed a temporary stop-gap measure that would only extend through the end of next year.

We must not wait. Certainly the tax system needs to be reformed, but there is no reason that fixing the immediate problem needs to be contingent upon changing the entire system. If your house, which may be in need of remodeling, also has a fire in the attic, you don't do the remodeling first. Instead you put out the fire immediately and then move on to the longer-range tasks.

This is precisely the case here. We need to put out the raging fire of this expatriate tax abuse, and then move on to remodel our Tax Code. The calls for delay or study are nothing more but sham excuses for failing to take the action so obviously and urgently required.

So, also in regard to any stop-gap measure, a nationally syndicated Boston Globe columnist recently wrote, quote: ". . . the proposal for a moratorium is so sneaky and pernicious . . . no one can argue why phony expatriation to avoid taxes is good for the United States or for anyone except the executive officers of the companies who do it. So why have a moratorium when a flat-out ban is what is needed?"

I strongly agree. In addition, a stop-gap bill will not ensure that all U.S. corporations are playing by the same rules. Indeed, a stop-gap approach actually allows the situation to get worse. It maintains the disparity in tax treatment, while sending the wrong message -- that the Congress is not really serious about this problem, but is merely trying to let the issues slide until after the election.

These tax schemes are a cancer on the American Tax Code. They need to be eliminated now. Every day we wait, the situation only gets worse. You certainly would not start treatment for cancer and then abruptly stop after 12 months. You work to get rid of the problem once and for all. Of course, the stop-gap may seek to serve as an election year gimmick, but it does not solve the problem. A stop-gap measure is a clear breach of our responsibility to act effectively in the interest of the American people.

In addition, the proposed stop-gap legislation would not apply to those companies who expatriated before September 11. Why would we allow those who expatriated before September 11 to continue to escape their tax obligations? We certainly should not allow expatriated companies to maintain indefinitely a tax advantage over American companies that are loyal to our country. In contrast to the stop-gap proposal, the Neal-Maloney bill fixes the problem permanently and restores all U.S. corporations to a uniform, level tax policy.

The Neal-Maloney bill will end this unpatriotic tax dodge once and for all, and I urge immediate action on the bill. Thank you very much.

[The prepared statement of Mr. Maloney follows:]

Chairman MCCRERY. Thank you, Mr. Maloney, and thank all of you for your testimony.

As is tradition in these hearings when we have Members testify, I am not going to ask you any tough questions. I am going to save those for the experts that will follow, but I do have a couple of thoughts, though, as I listen to you all. You all may not know it, but since you have highlighted this issue, I have taken an interest in it and done some studying, listened to a lot of tax experts, economists, and others who have looked at this situation. I have to tell you that in examining all of the legislation that you all have introduced, including the moratorium, I find flaws with each approach, and I hope that you all will listen to the questions that I and others will ask of the experts who follow you in the next panel, because I am going to try to bring out some of the flaws that I see in your legislation, not because I want to denigrate your efforts or stop the effort to do something about the problem. As I have said repeatedly, I think it is a problem, we ought to do something about it, but I don't want us, the Congress, to do something about it in a way that would have consequences that we may not foresee without more careful examination. That is not to say, Mr. Maloney, that I want to delay. I want to do this as expeditiously as possible, and I want to do it this year. But I don't know that it is necessary for us to just do it right now before we have really fully examined all of the consequences that may follow our actions.

For example, if we were to enact the moratorium, it would, as Mr. Maloney said, kind of freeze in place the advantages that some companies have gained by expatriation. On the other hand, if we go with the Neal-Maloney bill, it seems to me that there may be greater incentive for foreign takeover of American corporations, which is not what we want, I don't think. That in many respects is worse than expatriation or inversion, because generally speaking, when foreign companies take over American companies, we lose jobs as a result of that, and good, high-paying jobs. We lose research and development. We lose executives.

So I think those are the things that we all need to talk about and examine before we come up with a solution. Again, I want to congratulate all of you for getting out there and putting something forward to draw attention to the problem. I do think we ought to just go a little slow for at least a few days and think about this as a group before we go forward.

Mr. McNulty.

Mr. MCNULTY. Thank you, Mr. Chairman. And unlike the Chairman, I think that my opening statement reveals my bias and support on a couple of these approaches. I just wanted to highlight something that I heard Mr. Neal say at the end of his prepared statement, and I want to make sure that we have this in the record. Congressman Neal, did you say that you have identified over $2 billion in government contracts by some of these corporations?

Mr. NEAL. That is correct.

Mr. MCNULTY. How many corporations were involved in that list you compiled, approximately?

Mr. NEAL. They are not numbered here, but I have them. We have five on a contracting basis.

Mr. MCNULTY. Okay, fine. I just think it is ironic that these corporate expatriates are relying so heavily on government funds. Did we get unanimous consent, Mr. Chairman, to put that in the record?

Chairman MCCRERY. Yes.

Mr. MCNULTY. So make sure that list is in the record. Thank you. I thank all of the Members for their testimony.

Chairman MCCRERY. Mr. Foley.

Mr. FOLEY. Thank you very much, Mr. Chairman. I would like to see if any of the panelists would answer the following question. Eighty percent of the transactions valued over $300 million involve foreign companies buying U.S. firms. Do any of your bills deal with foreign companies buying U.S. firms?

Mr. NEAL. Can I give you a little bit longer answer to that, Mr. Foley?

Mr. FOLEY. Not too long. We obviously only have 5 minutes.

Mr. NEAL. Right. Look, the argument that I have in this instance with the question of what is wrong with the corporate Tax Code is based upon what I heard back in 1994 from the election season. When I came to the Committee at that time, after having been out of it for 2 years, all we heard here was what we were going to do about the corporate Tax Code. We had leaders of this Committee saying we were going to pull the Tax Code up by its roots. We had others saying we were going to drive a stake through the heart of the Tax Code. We were going to a long funeral procession for the Tax Code.

I understand there may well be problems with the corporate Tax Code. But for those of us who are watching this train pull out of the station, where President Bush has correctly said we are in a state of war and war calls for a national purpose, we all sacrifice and pull that train together, what troubles me is that it becomes simply an excuse to study it for a while longer.

I am happy to get into a full-scale debate about the corporate Tax Code, but I don't see any evidence, based upon the last 8 years, or the time that I was on this Committee before that, that we were really about to disturb the Tax Code in any major way to address this issue.

Mr. FOLEY. Did anybody on the panel, did you -- you are a Member of the Committee -- offer legislation to change the Tax Code from its high 35 percent --

Mr. NEAL. Mark, I stick to the position of progressivity and have in tax debates, and I will say that we heard from the Committee Chairman at the time, that we were going to move to a consumption tax. The Majority Leader said we were going to move to a flat tax. This room was packed with people who wanted to hear where we were heading. And the truth is -- I think we all would agree on this, at least quietly, we may not be able to agree on it publicly but we would agree on it quietly -- we are no closer today to make any structural changes in the Tax Code than we were then.

Mr. FOLEY. Well, I think we have a significant obligation. I would like to find out, though, if we are going to publish lists of corporations that are apparently unpatriotic, should we be, in the Federal Government, buying Chryslers?

Mr. NEAL. Mark, can I ask you something on that? What are you suggesting by "apparently unpatriotic"? Do you think they are unpatriotic?

Mr. FOLEY. Well, I think we have allowed, through the Tax Code, opportunities to minimize their taxable obligations.

Mr. NEAL. Do you think they are unpatriotic?

Mr. FOLEY. I don't like them leaving our shores, no question.

Mr. NEAL. I think they are unpatriotic.

Mr. FOLEY. We can also make the claim that a citizen leaving Connecticut to move to Florida, because we have no income tax, is unpatriotic to its home State of Connecticut.

Mrs. JOHNSON OF CONNECTICUT. Mr. Foley, I would like to just comment on your question. As a Member of the Committee, I want the record to note that the Chairman of the Committee convened a series of four quite extensive seminars in which all Members of the Committee had an opportunity to review the seriousness of the problems facing our country in the international arena. It is a problem so serious, that we are as close to a trade war with Europe as I have ever seen.

I would remind this body that when Reagan was President and Rostenkowski was Chairman of this Committee, we did pass a tax bill that dropped corporate taxes in such a way that our companies were insulated from foreign takeovers, and, in fact, foreign capital poured into America in a positive way.

So it is perfectly possible for us to do what has to be done to defend American jobs, but what came out of that seminar that was very concerning to a lot of us. I asked each panelist at each meeting about the issue of permanently closing this loophole and the moratorium, and all of them agreed that we had to at least do the moratorium. There was tremendous disagreement about whether we should close one loophole without doing the others. The gist of the matter was an absolutely startling chart that one of the people who presented at those seminars showed us about the increased rate at which corporations in America are being bought by foreign companies, as opposed to American companies buying foreign companies, and we are up to something like 80 percent of those mergers being foreign-owned.

Now, DaimlerChrysler is foreign-owned because of our Tax Code. They sat right here 2 years ago and told us that. And now when DaimlerChrysler is in trouble, who is making the decisions about what jobs are going to be cut, what R&D is going to be eliminated? It is the Germans, not the Americans. So this is a very big issue, and that is why I suggested a moratorium.

I don't want companies to reincorporate in Bermuda. It is not right. They need to pay their fair share of American taxes. We may need to be sure that we stop them in a way that doesn't expose our companies to foreign takeovers, because foreign companies who buy American companies don't have to pay those taxes. This is a big and important issue. This is about American jobs. It is about the strength of our economy, and I don't -- I hope that this Subcommittee will move on all fronts, and that is why I introduced the moratorium. Thank you.

Chairman MCCRERY. Before I move to Mr. Brady, let me make clear to my good friend, Mr. Neal, this Chairman of this Subcommittee is not proposing, as much as I would like to, a massive overhaul of our tax system. I agree with you. It is not going to happen any time soon. I think it should, but I am not going to waste a lot of time urging it. That is not what I am talking about when I say we need to examine together opportunities to change the Tax Code that will not only discourage or stop the inversions, the corporate inversions, but also guard against foreign companies taking over American companies and not only taking tax revenue out of this country but jobs out of this country. We can do that, I think, without a massive overhaul of the Tax Code. So let us get together and try to agree on some commonsense, smaller changes than the ones you referred to, and then I think we can make some progress.

Mr. Brady.

Mr. BRADY. Thank you, Mr. Chairman. I appreciate this important hearing, and the testimony of all four Members of Congress, who are here for the right reasons.

A number of companies headquartered in our region, the Houston region, most of them oil and gas service businesses, have announced or completed corporate moves to be incorporated overseas. I may not like it, but the hard truth is that Houston companies have incorporated overseas in order to compete fairly and to endure. As a result, a lot of good manufacturing and research jobs in the Houston region have been preserved and created as a result of corporate inversion.

Let me say that again. Corporate inversions have saved good jobs in Houston and will create more of them. That doesn't make me like it any more. In fact, I think we need to address this. The fact of the matter is that they have been driven overseas but have kept the jobs here.

It seems to me the Congress has a choice. We can ignore the root cause, which is Washington's backward Tax Code, and we could leave very solid American companies vulnerable to foreign firms, or we can create a smarter, fair way to tax these companies that keeps American jobs in towns here.

Mr. Maloney, I know you talked and used a good analogy about it is time to put the fire out, but the fact of the matter is this is about the tenth fire in the kitchen, and while we are putting it out, we probably ought to look at what is causing these fires. That is what this Subcommittee is intent to do: both address the short term, but use common sense and think through the long-term reason for this.

This is a lot like, unfortunately, our seniors who have to go overseas -- to Mexico or Canada -- to buy prescription drugs they can afford. I don't like the fact they have to go there, but I know there is a reason for it. I know there is a reason these companies are reincorporating overseas.

I am real impressed that this Subcommittee is taking a good, thoughtful approach in looking at this, because I think in the end, like most of our tax issues that deal with America versus other countries and that competition, Republicans, Democrats, we are going to have to put our best heads together to work this out.

With that, I would yield back the balance of my time.

Mr. MALONEY. Mr. Chairman, if I could just respond to Mr. Brady's comment on the issue of the need for fundamental change and fundamental reform, I could not agree with you more. Absolutely, I agree with you. I hope and trust that the Subcommittee proceeds in that direction.

I thought the Chairman's comments were very appropriate in terms of addressing some of the other issues that arise because of these corporate expatriations. My point is simply that we cannot put off doing that work. We cannot put off looking at foreign takeovers, and we cannot put off looking at structural reforms of the Tax Code. We can't use the corporate inversion situation as an excuse to put it off.

We have to still address the corporate inversion, the corporate expatriation problem. That has to be addressed. If we address the other issues simultaneously, that is fine, but doing one shouldn't be an excuse for failing to do the other.

Mr. BRADY. I agree. And what is important, too, that we not rush into a bill. For example, I look at your bill and I think it has got some good parts to it, but it has got real flaws. I think we hand a huge advantage to foreign companies under this bill. but I think if we work together to think through and pick out the best parts of the different approaches, we might have a chance at really putting this fire out, once and for all.

Thank you, Mr. Chairman.

Chairman MCCRERY. Thank you, Mr. Brady. Mr. Ryan.

Mr. RYAN. Thank you, Mr. Chairman. I think it is important that we do look at these structural problems.

You know, Nancy, when you talked about the Rostenkowski-Reagan tax bill, what they did then was lower our corporate tax rates so that our companies were more competitive, and then we kept jobs. What has happened since then is that our competing nations have since lowered their tax rates, so U.S. tax rates are higher than our competitor's now. So this thing has come around full circle.

The concern I have with each of these bills -- not as much with the moratorium, but with each of these bills -- is you are going to go out and you are going to ban one form or one kind of inversion. That may be a headline grabber, but the problem is you can always get an intelligent tax lawyer to find a way around the ban you just drafted.

And the other problem is, rather than trying to try and stop inversions at the consequence end and at the result end, you are going to simply set up more foreign takeovers. It has already been mentioned a few times, but if we try and put up barriers to inversions, penalize inversions, you are simply going to make it easy for our companies to be purchased and acquired by foreign countries, foreign competitors.

The other problem that I see is we need to address the "juice," we need to address the source of these things. So that does not mean fundamental tax reform, as much as many of us would like to engage in that, that means writing intelligent legislation that can be done this year, that can really address the source of these inversions, so that you don't have to go around chasing the consequence, the end result. That is, I think, the more intelligent approach that I hope all of us can come together.

I think the four of you have done a great service in bringing the issue to fruition. I think that your bills are intelligently written, in some ways. However, I am concerned that there are a lot of unintended consequences that will result from this, but I would invite comments.

Sure. I think Mr. Neal, first, wanted to. Then, Scott.

Mr. NEAL. Thanks, Paul. Just briefly, I am glad Mrs. Johnson highlighted Reagan and Rostenkowski. Is there anybody sitting up there today that believes in this atmosphere that a Reagan-Rostenkowski bipartisan deal could be done? That was a different era in the Congress. That was an entirely different era.

One of the things that Rostenkowski did here -- and I had dinner with him the other night, he is as proud of that tax act as anything that ever happened on his watch here. Rostenkowski had a lot of Republicans that voted with him. He could regularly get Republicans on this Committee to vote with him. I haven't seen many Democrats that are even asked on this Committee to vote with them, or even allowed once in a while to have a victory on this Committee.

Mr. RYAN. You know, Richie, to allow a Democrat to vote for a Republican tax bill, it just means the Democrat has to vote for a Republican tax bill. It just means that you want to participate in reforming the Tax Code. So I think this Subcommittee -- and I am the new guy on the Subcommittee -- has become so much more partisan, but I think that the partisanship, not just in this Committee but in the Congress, has been absolutely opposed to fundamental tax reform.

So, yes, while you have heard the Majority speak about fundamental tax reform, tried to act on it, you have had every door closed by the Minority on that issue, and, therefore, we haven't reached much progress on this.

Mr. McInnis.

Mr. MCINNIS. Thank you, Mr. Ryan.

I would like to point out to Mr. Neal, there has been a politically driven attack against Representative Johnson's moratorium and that is coming from one side of the aisle. Frankly, we heard in our opening comments from the gentleman that sits to my left, who does not sit on the Committee on Ways and Means, has not come to the intense briefings that we have had on this, and I think it is an unfortunate reflection. So you are right. You bring up one side, I will bring you the other one.

I think this moratorium has some sense to it, because this issue is extremely complicated. The more I got into it, the more I found more ways that they could go around the very mission that we were trying to accomplish, and, you know, whether it is corporate takeovers, I think the foundation here is our earnings stripping. I think that is where the biggest issue is.

So I just want to comment on your statement, does a Democrat ever get to do this? I mean, the whole assault on the moratorium is coming from one side of the aisle. Not from you, Mr. Neal; you and I have been able to work together. But I think it is going to require some bipartisan -- from some people who deal with it on a daily basis, a bipartisan effort. We can do it, and we can move fairly quickly on it.

Mr. RYAN. I yield.

Chairman MCCRERY. Before I recognize Mr. McNulty for another round of questions, let me repeat, we are not going to do a 1986 Tax Act. So forget about it. You can put your mind at ease. We are not going to undertake that. Mr. Neal is right. We couldn't do it right now, but we do need to fix this problem. So let us just cool it and start talking about some things that we can do, rather than things that we can't do, and maybe we will get something accomplished together.

Mr. McNulty.

Mr. MCNULTY. Thank you, Mr. Chairman. Before I ask just one more question, I think there is another thing we ought to cool it on, and that is questioning the motives of Members who testify before this Subcommittee, whether they are Members of the Committee or not. I note, Mr. Chairman, that under your watch, that has never occurred before. In my opinion, all four of these Members came before this Subcommittee today with very sincere and strongly held views, and expressed them quite admirably. I will defend their right to do that, whether they are a Member of the Committee or not.

I just had one other question for Mr. Neal. The question was brought up about possible foreign takeovers. Mr. Neal, in your opinion, were any of the companies that were cited on your list in danger of being taken over by a foreign company?

Mr. NEAL. No. I think it is kind of interesting that in the press release -- I think the four of us, by the way, agree about Stanley Works. I think the four of us are in total agreement about Stanley Works. I want to say that I think that what strikes me about Stanley Works is the press release. They said they were leaving because of corporate taxes. They weren't leaving because they were in danger of being taken over.

The second thing I was party to last week, as I did a TV interview with Bloomberg News on this, Stanley Works went out and hired a PR firm to explain this and to parade the leadership of that company around this town to the radio and TV stations, and then tried to back away when they found out the questioning was so hostile to what they were attempting to do.

So I am not aware of anybody that was endangered on this, and I think that for a press release to say, hey, we are leaving because of corporate taxes or we are leaving because of our tax burden, that was the suggestion that was clearly put in front of all of us. I have got to tell you, that press release really got me worked up, as you can tell.

Mr. MCNULTY. Thank you, Mr. Neal. Thank you, Mr. Chairman.

Chairman MCCRERY. Mr. Weller.

Mr. WELLER. Thank you, Mr. Chairman, and thank you for conducting this hearing. You have held a very worthwhile series of hearings this year on looking at international aspects as well as things we should be doing to make the corporate Tax Code more user-friendly and helping make the United States a better place to do business; to grow and prosper and create and produce, as well as a place to work. I commend you for this series of hearings, and I recognize this is just one more in a series of hearings on issues that we on the Subcommittee are here to address.

I also want to thank my colleagues on the panel today for participating. Three of you I serve with on this Committee are all very thoughtful and hardworking Members and represent your point of view and work very hard. The other gentlemen I don't know quite as well, but I appreciate your participating as well as in this hearing.

The concern I have got is as we look at this issue, I think that the whole issue of inversions really illustrates a problem we have. Why is it that the United States is no longer an attractive place to do business or to headquarter your company? I think that is a fair question to ask. If it is really to your advantage to go somewhere else, something is wrong. I think we have millions of loyal Americans who are entrepreneurs and create new businesses and are proud to build their business and hope to pass on the family business to their kids, and we certainly want to create the kind of climate that gives everyone an opportunity to achieve that.

But the question is: What is it about our Tax Code that actually drives business decision-makers to want to relocate their headquarters elsewhere? Some clearly have made a decision we don't like, which is the issue that is before us today, and legislation has been introduced in response to that. Of course, it is an election year. I think we have to be very careful as we look at this issue that we choose not to make a political response to the issue, but we very thoughtfully and very carefully come forward with good policy that, frankly, makes the United States a more attractive place to do business. We want to do business here.

Mr. Maloney, you indicated in response to one of my other colleague's questions that you are a supporter of overhauling the corporate Tax Code, and since you are not a Member of the Committee, I thought I would give you an opportunity. If we look at overhauling the Tax Code to make the United States more competitive, what is the first thing you would do to our Tax Code to make the United States a more competitive place to do business?

Mr. MALONEY. Mr. Chairman, am I required to use all 5 minutes to answer that question?

Mr. WELLER. No, just 1 minute.

Mr. MALONEY. What I would say to you is, you may or may not be aware of this, I have joined with the Republicans in supporting the notion that in order to force this debate -- this is a debate that is highly conflicted, it has pressures from every divergent point of view and every special interest, and the debate needs in fact to be forced -- I have supported the Republican efforts to sunset the tax cut. I have been a sponsor of this legislation, and I have voted for it on many, many occasions, precisely because we do need to grapple with this issue. We need to take it on.

So I would say to you, the very first thing I would do is bring that legislation forward and try to get it passed, and perhaps you could get it passed in the House and in the Senate.

Mr. WELLER. Reclaiming my time, you would sunset the Tax Code. I personally believe we either need to scrap how we depreciate assets and move to full expensing, or eliminating the corporate alternative minimum tax I believe would help quite a bit.

Let me direct my next question to Mrs. Johnson.

You have talked about your proposal which would provide a moratorium, essentially put up a wall, stop it for a period of time, while we very thoughtfully put forward a proposal that does solve the problem. What do you feel is the basic reason a moratorium would work better than some of the alternative legislation that is before the Subcommittee today?

Mrs. JOHNSON OF CONNECTICUT. I think the advantage of the moratorium is that it could be done fast. You can get that through. You can send that signal very clearly in law but you can't do this, and during the year that you have them you can get together the bill that will address the causes of why companies want to do that.

Now, it may be that we can get together a bill that will address the causes and then we just need a moratorium to prevent this from happening until those bills go into effect, or those tax changes goes into effect. The community, the business community in America understands that they are going to be back on a level playing field. So I think the moratorium has some very real advantages.

Secondly, the moratorium, which is structured very much like the Neal bill, is also circumventable. It is just that for a moratorium it will work. As a permanent fix it won't; because as a moratorium it isn't worth the companies going to the expense of trying to circumvent it. If it is permanent law, there are lots of reasons why then they would just figure out how to circumvent it.

So the moratorium, I would remind you, does have, and I am well aware, has the same weaknesses that the Neal bill has, but on a short-term basis there wouldn't be the motivation to pay tax lawyers to find the way around. A moratorium combined with the bill that addresses the causes is what this Nation needs to keep American jobs here and to keep American taxes in America to support the vital services on which we all depend.

Mr. WELLER. May I have -- just do a quick follow-up, Mrs. Johnson. As a quick follow-up, the Treasury Department when they testified 2 weeks ago on that abbreviated hearing that we had that day raised concerns about Mr. Neal's legislation, and you know their concern was that it would actually cause greater opportunity for foreign takeover by foreign corporations taking over American companies, and with the moratorium would we run that same risk?

Mrs. JOHNSON OF CONNECTICUT. They did mention that they would support the moratorium as an immediate and short-term solution, and in those seminars I alluded to, both sides, people who had all spectrums of the concerns about the American Tax Code in terms of the position that it leaves American business in and the competitive world, all of those people, whether they were for or against the Neal bill -- and many of them were for it. Some of them were against it, but all of them agreed that we needed to stop that action. All of them also agreed that this whole approach of inversion is being shopped in board rooms; that there are groups of lawyers who are making this a specialty, who are making it their business to sell this alternative to companies. So this could turn into a torrent.

In the other areas that we have faced this possibility, both with the reinsurance when we did the reinsurance bill 3 years ago, nobody believed us, and it was being shopped but in a very limited portion of the business community. This has clearly now taken on a life of its own and has the potential to be a real deluge of activity which would have a very harsh impact on revenues as well as on our economy.

Mr. WELLER. Thank you.

Mr. NEAL. Mr. Chairman, could I just close on one note? Just 2 seconds.

Chairman MCCRERY. Yes.

Mr. NEAL. In general reference to Mr. Weller's comments, you and I worked on subpart (F) together and section 809. Mr. Weller and I did that expensing bill. Mr. Foley and I have a Hospital Preservation Act, which in the end is going to be what the hospital fix is. So I think I have demonstrated every effort to try to find common ground on these issues and that is what I want to do in this instance as well. But I need a little help from the other side.

Thank you.

Chairman MCCRERY. Thank you, Mr. Neal, Mrs. Johnson, Mr. McInnis, and Mr. Maloney. I will say one thing I think has already been accomplished by Mrs. Johnson's moratorium bill, the Neal-Maloney-Bill-McInnis bill, and that is we put corporations on notice that something is afoot here, and I think you have seen some corporations delay their plans to expatriate because of the bills that all of you have introduced and the hearings that we have held. So you are to be congratulated for being leaders on this.

Now with that, I will excuse the first panel and invite our second panel to come forward. On the second panel we have Mr. Steven C. Salch, Partner in Fulbright & Jaworski, and the Honorable Richard Blumenthal, Attorney General of the State of Connecticut. Welcome, gentlemen.

We are told we are going to have a vote in about 10 minutes on the Floor, so we will attempt to get your testimony in and then we may have to recess and come back for questions, if that is okay with you all.

Our first witness on the last panel of the day is Mr. Steven C. Salch, who is a Partner with Fulbright & Jaworski in Houston, Texas, and Mr. Salch has worked on international tax issues for a number of years. He has worked with the American Bar Association and other organizations in trying to figure out and bring some sense to our international tax laws, and so he indeed is an expert on these matters and we look forward, Mr. Salch, to hearing your testimony. Your entire testimony will be admitted into the record, and we would like for you to summarize that in about 5 minutes and you may begin.

STATEMENT OF STEVEN C. SALCH, PARTNER, FULBRIGHT & JAWORSKI, L.L.P., HOUSTON, TEXAS

Mr. SALCH. Thank you, Mr. Chairman. My name is Steven Salch. I am an attorney, and I am appearing before you today in my individual capacity. The views I express are my own.

I appreciate the opportunity to appear and testify regarding corporate inversions. In my written statement, I have tried to provide you with one example of the tax factors that can cause a U.S. business with substantial foreign business operations to conclude that an inversion transaction will be beneficial for its business and those who invest in it. I hope that if you understand that basic model you can better understand the policy issues that underlie the inversion decision, the systemic factors that create those issues, and then some of the recent embellishments.

Let me make it clear, my testimony today does not relate to U.S. operations of foreign businesses. My testimony does address the situation of a U.S. business with U.S. shareholders that has significant business operations and revenues from outside the United States.

It is a very competitive world, and U.S. businesses need to be able to compete effectively in that world. Differences in the tax environment in which a business and its competitors operate can make a difference in the ability of the business to compete. That is why it is important for the Congress and the Treasury Department to consider the competitive impact of tax legislative policy alternatives as they make policy decisions.

It is also important to understand that if there are winners and losers when tax policy judgments are made, the losers may feel compelled to explore a different environment in which to operate. To some extent, I think the case can be made the competitive pressures arising from prior tax policy judgments may have led companies to consider the possibility of engaging in what I call classic inversions. Other industrialized countries of the world have taken a different approach than the United States for the taxation of the foreign business operations of their companies.

The example in my written statement is an effort to illustrate some ways in which a territorial or exemption system differs from the worldwide system of taxation of business operations utilized by the United States. That example also tries to illustrate some of the ways in which those differences can translate into economic consequences. While I have tried to keep the example simple, these are not simple issues and they have no simple solutions. They are issues that are interwoven with other tax issues, including the taxing export income issue that this Subcommittee has been studying this year. They implicate treaties to which the United States is a party and which we ought not to unilaterally override.

In the classic form, inversions do not reduce the U.S. tax on U.S.-sourced business revenue, except insofar as section 482 of the Internal Revenue Code effectively requires an arm's-length charge for inter-company transactions in which the foreign affiliate is a provider to the U.S. business. I am aware that some inversions go beyond the classic example and have embellishments that do reduce the U.S. tax on U.S.-sourced business revenue. In those transactions not all the benefit achieved is attributable to elimination of the systemic problems. Benefits flow for other reasons. Those situations are clearly matters that warrant legislative and administrative consideration. In that regard, while I may have some reservations about certain aspects of the Treasury Department's proposals announced on June 6, I believe those proposals are a good place to begin addressing the non-classic inversions.

Mr. Chairman, thank you again for the opportunity to appear today. I will be pleased to respond to any questions you or the Subcommittee Members might have.

[The prepared statement of Mr. Salch follows:]

Chairman MCCRERY. Thank you, Mr. Salch. Our next witness is the Attorney General of the State of Connecticut, Mr. Richard Blumenthal. Thank you very much for coming, and now we will hear your testimony.

STATEMENT OF THE HON. RICHARD BLUMENTHAL, ATTORNEY GENERAL, CONNECTICUT ATTORNEY GENERAL'S OFFICE

Mr. BLUMENTHAL. Thank you very much, Mr. Chairman. I am honored to be before this Subcommittee, and I thank you and other Members of the Subcommittee for demonstrating the interest and the diligence to pursue this very, very critically important topic. I agree with some of the other speakers who have appeared already, and I would request permission to enter my full statement in the record and to summarize it very briefly.

Chairman MCCRERY. Without objection.

Mr. BLUMENTHAL. Extemporaneously if I may.

I agree with a number of the other speakers that this loophole is unfair, unpatriotic and really does great harm to the credibility of our Tax Code. I believe also it does great harm to the credibility and trust of the American public in corporate management because it operates as a kind of a stealth weapon used by management to evade corporate accountability. I have focused my remarks on the issue of corporate governance and the way that reincorporation to Bermuda seriously weakens and dilutes the rights of shareholders to hold management accountable in the event of self-dealing or malfeasance.

The impacts on corporate accountability are not technical or hypothetical or speculative. They are real and immediate. They are demonstrated, for example, by some of the corporations that have already moved to Bermuda, such as Tyco and Global Crossing, which are using these obstacles to corporate accountability to evade responsibility for management self-dealings and malfeasance.

I appear before you as the chief law enforcement officer of a State who has gone to court to stop a reincorporation that would have been done in a way that was severely misleading to many of its shareholders, the 401(k) shareholders in our State, and as one who is responsible for protecting the public interest and the rights of shareholders in our State, including the rights of the State as a shareholder. So I have a very direct and immediate interest in a topic that is real and urgent.

Corporations often portray the impact on corporate accountability as nonexistent or inconsequential. In fact, these effects go to the core of the body of law we have built to protect shareholder rights, and I would simply offer as an example the reversal that has been done by Stanley Works in its revised statement to the Securities and Exchange Commission (SEC) where it was compelled by pressure from my office, by the threat that we would ask for a SEC investigation, to acknowledge, and I would quote from the revised proxy statement that was submitted only last Friday and came to my office only this morning, and the quote is in the revised proxy statement: "Your rights as a shareholder may be adversely changed as a result of the reorganization because of differences between Bermuda law and Connecticut law and differences in Stanley Bermuda's and Stanley Connecticut's organizational documents."

We still have problems with that statement because it, along with other representations in the revised proxy statement, minimizes the effects which may be more for reacting. They are real, and they are in areas where Bermuda law is extraordinarily opaque. Their legal opinions are not published or officially reported, very difficult to access. In the books and records of Bermuda corporations there is a lack of meaningful limits on the insider transactions, the very kind of self-dealing that we have seen in Enron and many other corporations which have recently come to light. There are no requirements for shareholder approval of substantial sales or exchanges of the corporate assets such as there are in most States, including Connecticut. There are severe limits on derivative actions brought in the name of the corporation, one of the central tools of enforcing accountability, the right of a shareholder to protect the corporation, all of the shareholders, not just his or her own interests. There are serious questions about the enforceability of U.S. judgments against a corporation that reincorporates in Bermuda. As you well know, there is no treaty of reciprocity. There are very severe burdens in time and cost, not to mention the possible burden of a defense raised that a judgment is inconsistent with Bermuda policy, whatever that may be in specific instances. So the rights of creditors, as well as shareholders, may be adversely impacted.

Let me just summarize, if I may, Mr. Chairman, by saying that I am always interested in hearing from corporations, from all of us. I think have used the term that we want a level playing field, and certainly a level playing field is greatly to be desired and sought. I simply urge that these corporations be on our side of the field and that we seek and achieve a result that enforces stability, transparency, and predictability in the requirements that apply to these corporations.

Thank you very much.

[The prepared statement of Mr. Blumenthal follows:]

Chairman MCCRERY. Thank you, Mr. Blumenthal. So, Mr. Blumenthal, your primary concern, at least judging by your oral remarks, is the diminution of shareholder power by virtue of a corporation leaving our shores and reincorporating offshore. Then I take it that you would favor anything, any legislative solution to that. You are not tied to Mr. Neal's bill, although you endorse that, I think, in your written testimony. Is that an accurate statement? I mean, are you tied to Mr. Neal's bill or would you be willing to look at other things that would accomplish the same thing?

Mr. BLUMENTHAL. Mr. Chairman, I appreciate that question because it fills a gap that unfortunately I left out in the summary that I presented. I very strongly support Congressman Neal's bill; that is, H.R. 3884. I believe that closing this loophole should be done permanently because of the certainty that it provides. First, as to shareholders, they have a right to know what the future means in terms of the tax laws that apply to their corporations, and management has an interest in that certainty as well. To provide for a moratorium in 1 year I think undercuts the interests of the corporation in terms of certainty and also the credibility of the Tax Code itself.

Chairman MCCRERY. I am not talking about a moratorium. I am talking about a different approach to solve the problem. You are not adverse to hearing other approaches to solving the problem legislatively, setting aside the moratorium?

Mr. BLUMENTHAL. If the problem is to make sure that there is in fact a level playing field and there are other reforms that the Committee, the Committee on Ways and Means, wishes to consider, I certainly wouldn't foreclose them. I have focused here on the corporate governance issue because I believe, with all due respect, that it has been largely ignored or disregarded by many of the public comments, well intentioned and correct as they have been, in concentrating on the fiscal impact, on the equities involved. I am seeking simply to draw on my own personal experience in enforcing these laws.

Chairman MCCRERY. I appreciate that. I think it is a very important point, and I am glad that you emphasized that during your remarks. Since you have endorsed the Neal bill, I assume you have looked at it, you have studied it, and I want to ask you a few questions about it and get your response.

If a company with manufacturing operations in Ireland, for example, decided to invert to Ireland, would H.R. 3884, the Neal bill, prevent that transaction?

Mr. BLUMENTHAL. Would it prevent reincorporation in Ireland?

Chairman MCCRERY. Right.

Mr. BLUMENTHAL. Well, I don't know that any of the measures that close the tax loophole would bar reincorporation per se. What the impact would be on tax treatment of foreign earnings would depend on how the bill were adopted and what specific form. Of course, I say all this with deference and respect to the author of the bill, who happens to be on this panel, and would yield to him if he has an answer that contradicts mine.

Mr. NEAL. A friend of Ireland as well.

Chairman MCCRERY. Well, the answer is if that company, the resulting company, based in Ireland, had less than 80 percent of the shareholders who were the same as the American company that preceded the Irish company, then the Neal bill would have no impact on that inversion because there are substantial operations in Ireland.

Mr. BLUMENTHAL. I am aware of the limits so far as shareholder -- numbers of shareholders are concerned. Incidentally, although I have endorsed the Neal-Maloney bill, if there are improvements that can be made by this panel or the full Committee or the Congress, I certainly am not wedded to these specific provisions. The basic point is that shareholders need to be protected.

Chairman MCCRERY. Well, that is the answer I am looking for, that you are not wedded to the Neal bill. You are willing to explore other approaches. I think it is appropriate that we point out some flaws in the Neal bill, and I hope that when we get through examining it we can agree that we need to look further and improve upon the Neal approach.

For example, if a company issued an initial public offering (IPO), they issued IPO stock as part of the inversion transaction, the Neal bill wouldn't stop that if the result of that were to dilute the shares of stock of the previous shareholders below 80 percent, which could easily be done. If the new parent, for example, issued stock to the U.S. subsidiary, a so-called hook stock transaction, as done by Ingersoll-Rand, again the Neal bill wouldn't affect that because the probable result would be that the U.S. subsidiary would own more than 20 percent of the new shares.

So those are just a few examples of how a company intent on inversion could easily circumvent the provisions in the Neal bill.

Mr. Salch, can you -- you talked in your written testimony about some of the provisions in our Tax Code that make U.S. companies less competitive in the global marketplace. Can you list some of those for us, just tick some off that are particularly egregious to American companies with foreign operations?

Mr. SALCH. Mr. Chairman, it is going to vary depending from company to company.

Chairman MCCRERY. Is your mike on?

Mr. SALCH. It is going to vary based on company to company, but in broad general terms we start out with the fact that we have two competing systems of income taxation. Ours is worldwide. Many of our major trading partners and competitors are territorial or use a participation or an exemption system to get there with respect to business profits.

Now, let's be sure we are talking about business profits rather than so-called passive income. You have to worry about what that is. From a business profit perspective, if a Dutch company operates in a particular jurisdiction and has an active business in that jurisdiction, it doesn't pay tax on the profits of that operation, whether they are held by a subsidiary or by the Dutch company. That is different.

Initially, it also gives that parent company the opportunity to take profit from this business to another business and reinvest it without having to pay tax on it, which lowers its cost of capital and gives it an opportunity to leverage its business better. If we had a U.S. company that had two foreign subsidiaries, you get the profit from one subsidiary and invested it in the other subsidiary, you would have to pay tax coming through the United States as a dividend.

So, it is that type of a situation that begins to bring this into focus. Some aspects of subpart (F), if you have a Dutch company that has a Swiss subsidiary and a subsidiary in Latin America that grows commodities, agricultural commodities, and the Latin America subsidiary sells those to the Swiss company which then markets them worldwide, the Dutch company doesn't pay tax on any of those profits. Well, our U.S. company might not pay tax on the profits of the producing country, but it will pay tax on the profits of the Swiss company because that is foreign base company sales income. It is active business income. There are 35 people in that office in Switzerland that are actively marketing those commodities and actively arranging the shipment and everything else. It is not passive. But it is subpart (F) foreign base company sales income.

Chairman MCCRERY. Thank you for that short recitation of a few provisions in the Tax Code that make our companies less competitive in the international marketplace.

Now, are these companies that are inverting, that are expatriating, moving offshore, does that make life better for them from a tax standpoint? Do they suddenly step into the shoes of that Swiss company you were talking about and not have to pay taxes on some of those transactions?

Mr. SALCH. Actually, in my example, Mr. Chairman, the Swiss company would pay 5-percent tax in Switzerland on its profits. The companies that are inverting to Bermuda are inverting to a country which imposes no tax, no income tax, period. So they automatically go into a tax-free environment that is totally independent of the participation type exemption or territorial tax system. They also, however, by acquiring foreign status, avoid subpart (F). Subpart (F) no longer applies to their foreign subsidiaries if the foreign subsidiaries go out in the inversion and that is the hook stock that you were talking about. Typically that is used to purchase the stock or the assets of the foreign subsidiaries of the existing U.S. operation and then move that underneath the new inverted foreign parent.

Chairman MCCRERY. Likewise, they would not be subject to the foreign base sales and service requirement.

Mr. SALCH. That is correct. That is correct.

Chairman MCCRERY. Thank you, Mr. Salch. Before I go to Mr. McNulty, let me just say, Mr. Blumenthal, again I appreciate your highlighting the issue of shareholder rights.

One thing you didn't mention which I think maybe the Members of this Subcommittee ought to talk about before we finish our examination of this subject is the question of executive pay, stock options, and so forth, and how they might be treated differently from shareholders' stock when these inversions are made.

Mr. BLUMENTHAL. If I may, Mr. Chairman, I made that point in my written testimony, that very often there are not so hidden or disguised rewards in terms of executive compensation. I agree that that is an area that may deserve further scrutiny.

Chairman MCCRERY. Thank you. Mr. McNulty.

Mr. MCNULTY. Thank you, Mr. Chairman. I thank both of our distinguished witnesses for their testimony, and I yield to Mr. Neal.

Mr. NEAL. Thank you, Mr. Chairman, and thank you, Mr. McNulty.

Mr. Salch, do you think that Stanley Works did the right thing?

Mr. SALCH. In what respect do you ask that question, Mr. Neal? I should say I am not as familiar with Stanley Works as you are, but I will try and answer your question. What do you mean, did the right thing? In what respect?

Mr. NEAL. Do you think in this atmosphere where President Bush has asked for $48 billion more for our national defense, where he has asked for $38 billion more for the establishment of a Homeland Security Department, do you think Stanley Works is doing the right thing by shedding their responsibility?

Mr. SALCH. What responsibility have they shed?

Mr. NEAL. To contribute to the payment of the request that the President has made for the common defense. He has stated that the national purpose here is war.

Mr. SALCH. Well, they haven't moved anywhere yet, Mr. Neal.

Mr. NEAL. They certainly are trying very hard.

Mr. SALCH. My understanding is that they would continue to pay U.S. tax on their U.S. business operations and their U.S. business income.

Mr. NEAL. Let me ask you, do you think that their decision to move their corporate address to Bermuda is the right thing?

Mr. SALCH. Mr. Neal, that goes to a matter of corporate governance, which is beyond the purview of a poor old tax lawyer like me.

Mr. NEAL. Mr. Blumenthal, do you think that Stanley Works is doing the right thing?

Mr. BLUMENTHAL. No, I don't, Mr. Neal. I believe very strongly that they are doing the wrong thing, beyond the issue of patriotism or allegiance to country. I happen to think that this move has proved to be a disaster to Stanley Works' image.

You know, my first experience with Stanley Works as Attorney General was to defend this corporation against a hostile takeover. We literally, and I personally, went to court when a major national corporation in effect wanted to pursue it, and we stood shoulder to shoulder. We believe in Stanley Works as a company. It is a well-established American corporation, and I think this entire experience has given it an enormous black eye, certainly costing it way beyond the $30 million that it would have gained in tax savings, and I believe very strongly, with the fundamental point that you have made, that it has enjoyed and benefitted from services that are provided by this country. It should be required to pay its fair share of those services and that is one of the fundamental reasons I think this loophole should be closed.

Mr. NEAL. Mr. Blumenthal, are you knowledgeable about why Barbados was included with the inversion decision of Stanley Works?

Mr. BLUMENTHAL. Barbados is the means by which additional tax savings are achieved if foreign income in effect is funneled through the Barbados. My understanding is that there are additional savings to the corporation. In fact that may be one of the pivotal means by which the savings are achieved following the reincorporation to Bermuda.

Mr. NEAL. Mr. Salch, would that be your understanding as well?

Mr. SALCH. My understanding is that Barbados was used because of the Barbados-U.S. treaty.

Mr. NEAL. For the purpose of sheltering vs. income?

Mr. SALCH. Also a reduced withholding rate on interest.

Mr. NEAL. Okay, thank you.

Mr. Blumenthal, given the number of lawsuits that have been filed against Enron, what conceivably could be done in this instance by a company taking on a new corporate address in Bermuda to shareholder rights?

Mr. BLUMENTHAL. I think many of the shareholder lawsuits that have been brought against Enron could not be brought under Bermuda law or would encounter much greater obstacles in cost and time if Enron were a Bermuda corporation instead of a company incorporated in this country, and judgements obtained against Enron in this country would face very severe hurdles in enforceability in another country. All of the kinds of self-dealing, malfeasance, violation of shareholder interests and rights I think would be much more difficult to pursue, if they could be pursued at all, if Enron were a Bermuda corporation.

Mr. NEAL. Well, based upon your good work and the work of other Attorneys General across the country, where some would argue that it was perhaps the responsibility of boards of directors and others to have taken a harder look at some of these decisions, do you think that it is legitimate that individuals like yourself who hold these offices should be having to make these decisions about pursuing those who have neglected their responsibilities as boards of directors, as members of boards of directors?

Mr. BLUMENTHAL. I think in representing our pension funds as well as a parens patriae action defending our citizens' interests, we have a right and responsibility to be in court pursuing wrongdoing when it occurs among boards of directors or officers. So I think it is an obligation, as well as an opportunity to use laws of our States and to seek to make those laws as transparent and enforceable as possible. I think it is part of the job of being in law enforcement.

Mr. NEAL. Thank you. I think my time has expired, Mr. Chairman.

Chairman MCCRERY. You can have another round.

Mr. NEAL. Okay.

Chairman MCCRERY. Mr. Brady.

Mr. BRADY. Thank you. First of all, I want to make it clear no one on this panel that I know of is defending corporate inversions. On the other hand, we recognize there is no more dangerous combination than an election year, a lot of political rhetoric, and U.S. jobs at stake. What we are trying to find here are solutions to this problem, a problem, by the way, that rather than pointing fingers at companies we probably ought to be pointing fingers at ourselves. They are following U.S. tax law created by Congress and hopefully solved and addressed by Congress.

Mr. Salch, the introduced inversion bills disregard a company's inversion and continues to treat the company as a domestic U.S. corporation. From your experience, and you have a lot, does this approach make U.S. companies even bigger targets of foreign takeovers or smaller targets of foreign takeovers?

Mr. SALCH. It is always difficult to tell looking down your crystal ball, but I think if I had to be an odds maker, I would say that the odds are more likely than not that it would make them bigger targets rather than smaller targets. It just takes some people out of the marketplace.

Mr. BRADY. Sure. From a policy standpoint and a job standpoint, isn't making -- isn't foreign acquisition, foreign takeovers of all U.S. companies a potentially large threat to U.S. jobs? I mean, when these takeovers occur decisions are made elsewhere. Sometimes they can be a benefit to us when the situation is right, but isn't that also a real live threat to U.S. jobs?

Mr. SALCH. Mr. Brady, that is stretching my tax lawyering a little bit, too. Let me just say that from some experience dealing with U.S. and foreign firms, there may be a tendency to think if you are a U.S. firm and you are in your own hometown, if that is where your business and your people are, you may think long and hard about dismissing those people, whereas if your business is someplace else it might be an easier decision to make. I mean that is just human nature.

Mr. BRADY. Sure, and I think the point of all of this is as we look for solutions, very thoughtfully, as we put our best heads together on this, we need to look at those consequences. I am not interested in making U.S. companies more attractive to be taken over by foreign firms. I want them to keep U.S. jobs and their U.S. headquarters here and do it in a good thoughtful way.

I yield back the balance of my time.

Chairman MCCRERY. Thank you, Mr. Brady. Let me just follow up very quickly, Mr. Salch, to try to give you an example along the lines Mr. Brady was talking about.

Let's assume that there were two companies interested in acquiring a U.S. company. One of those companies was a U.S. company. The other company is a foreign company. Now, both of those corporations look at the transaction, and at least on a tax basis which one would have the clear advantage, assuming that that U.S. corporation that they are wanting to acquire has foreign operations, foreign income.

Mr. SALCH. That last assumption, that the U.S. corporation has foreign operations and foreign income. I think illustrates the point I have tried to make in my written statement. If that foreign company is based in a country which has a territorial system, whether it is exemption or participation or whatever, they have an advantage in terms of rates of return, in economic theory, that would allow them to price that acquisition differently than the domestic corporation looking at the same transaction from its perspective, and I think that is one of the concerns that is illustrated in the example in my written statement.

Chairman MCCRERY. Thank you. Mr. Ryan.

Mr. RYAN. Thank you, Mr. Chairman. Gentlemen, thank you for coming here today because this is really a fairly new issue for our Subcommittee.

We have had, I think, on record 25 inversions over the last 25 years, or something to that effect, and about 8 of those occurred in the last 2 years. So it is a relatively new issue that Congress and the country are considering. As I see this thing unfold, there are basically two ways to look at it. An inversion is a unique isolated problem that needs to be banned or abolished in tax law, or an inversion is a symptom of a larger problem, which is our tax structure is much, much less competitive relative to our competing nations. I think that that broader view captures the whole picture much more accurately, so we need to hear more from experts like yourself, Mr. Salch, as we look at how we fix and address these changes. I wanted to ask you a couple of quick questions.

Have you reviewed the Treasury Department's corporate inversion study?

Mr. SALCH. Yes.

Mr. RYAN. I had a couple of concerns about that. Again, as we react quickly, which I think we are going to do in this Congress, we want to make sure we don't involve some unintended consequences, make someone pay more taxes than they otherwise were paying for no reason. My questions are in these two areas. One, if we go from a 1.5 to 1 ratio, safe harbor debt to equity ratio, safe harbor regime to a worldwide debt to equity ratio, where we compare a domestic holding company or domestic subsidiary's debt to equity to the worldwide debt to equity ratio, do you think we are going to get some people we shouldn't be getting? Meaning, aren't there a lot of businesses like a manufacturing business that may have in the U.S. operation a credit, high capital intensive or financial services business, but because of their structure has higher debt in the United States than they otherwise would on the worldwide basis, and aren't we going to in effect capture those people with safe harbor rules that will in effect raise their taxes for no good reason?

Mr. SALCH. It gets to be a very complicated question to answer because you have to decide what your view of money is, is it fungible and can it flow? If money is fungible and it can flow, then the next question is, is the decision on financing made on a businesswide, expanded, affiliated group basis? If it is, then the Treasury Department's position on 163(j), which is what you are talking about, doesn't seem to me to be a bad policy decision with which to begin, because what it says to the business is you can make your decision where you want to deploy your resources and in what relationship you do that. We are going to sort of level that playing field around the world wherever you operate as far as we are concerned, and then the issue is will our trading partners follow suit, and most of them probably would, in my judgment.

Mr. RYAN. So, you think if we tighten up 163(j) along the lines of the Treasury Department that there will be residual actions by our foreign competitors?

Mr. SALCH. To some extent there already are. They are already there. This is not a new and novel technique necessarily. To the extent that they are not already there, if you want to say that from a global sense everyone is concerned about preserving what they believe to be their tax base, which is their domestic base outside, even in the so-called territorial regimes you are looking at their own domestic tax base, then they will be interested in measures which eliminate stripping of that tax base or eroding that tax base.

Mr. RYAN. Well, again on 163(j), do you think that there are legitimate business reasons why a foreign owned company group may choose to place more debt in a U.S. subsidiary because of more readily access to our U.S. capital markets? I mean, our capital markets in the United States are very efficient. Money is cheaper in the United States. To me that is a good thing for our economy. We want our capital markets to be accessed. We want people to borrow more money in our capital markets than in, say, foreign capital markets. Are there or are there not legitimate reasons why a company that is held foreign but has a large U.S. subsidiary would want to increase their debt load in the United States because of cheaper capital markets or access to these capital markets?

Mr. SALCH. Well, understand, Mr. Ryan, that 163(j) doesn't have to do with bank debt or capital market debt. It has to do with related party debt.

Mr. RYAN. If it is intercompany debt or if it is indebtedness guaranteed by the foreign parent, doesn't that include whether or not they are going to have more access or less access to the U.S. capital markets? If we follow through with this, this idea that we need to tighten this up on 163(j).

Mr. SALCH. Again, if you believe that money is fungible and that there are markets within which a multinational can borrow around the world, then I don't think that a global base that the Treasury Department proposed is going to necessarily prejudice access to U.S. markets for that business to borrow as it would any foreign market. The business may borrow wherever it is cheapest and able to borrow and then deploy it wherever it wishes to do so. All this does is say for in terms of preserving our tax base on U.S. revenues with interest payments that are moving outside, here is where we draw the line, and it is a line that is drawn worldwide without regard to where you borrow.

Mr. RYAN. Okay. So as we draw that line, would it be safe to conclude that in seeking to, you know, stop the juice on inversions we will also cut back on the ability for a company to access U.S. capital markets and raise its indebtedness by intercompany debt or guaranteed debt in their U.S. subsidiary relative to where they are today?

Mr. SALCH. No. It is not reasonable because 163(j) has nothing to do with capital market access. It has nothing to do with where you borrow or at what rate you borrow or where you deploy the borrowed funds.

Mr. RYAN. Won't it raise -- don't you believe it will raise the cost of borrowing if their taxes are increased?

Mr. SALCH. No. Well, it raises the cost of borrowing in the sense that you are not going to necessarily be able to deduct interest if your rate of borrowing is above your worldwide rate of borrowing.

Mr. RYAN. That is right. That is what I am trying to get.

Mr. SALCH. So to that extent it becomes more expensive for you to leverage in the United States than it does to use equity in the United States.

Mr. RYAN. Thank you. It took me a while to get there, but that is what I was trying to get at. Appreciate it.

Chairman MCCRERY. I think Mr. Ryan raises some interesting points and ones that we ought to consider. I am not sure that the conclusion he reaches is one that we ought to embrace right now without further examination. I think Mr. Salch's remarks were right on point, that there are a lot of different motivations for accessing capital markets, both here and abroad, and we ought not conclude that just because a guarantee by the foreign parent would bring that under 163(j) and preclude them from deducting that interest would necessarily preclude them from accessing our capital markets.

Mr. RYAN. If the Chairman would yield.

Chairman MCCRERY. Sure.

Mr. RYAN. I am not drawing a conclusion. I am trying to get some answers, and this is thick stuff and I think it is important that we dig as far as we can to see if there are some unintended consequences that might result from passing these recommendations, and that is really where I am trying to go.

Chairman MCCRERY. Well, I agree. I think we ought to examine this very carefully to try to make sure that there are not unintended consequences that would be deleterious to job creation here in the United States, and that was the whole point I tried to make in the opening in our discussion with Mr. Neal and the other panelists.

Mr. Weller.

Mr. WELLER. Thank you, Mr. Chairman, and again I want to express gratitude to our distinguished panel here, our second panel, two experts in important areas. In building on some of the points that were made by colleagues, particularly Mr. Brady and Mr. Ryan, the flaw that I hear the greatest concern about, the Treasury Department illustrated it a few weeks ago and I hear it from others, regarding Mr. Neal's proposal regarding the issue of inversions is that it would make American owned and headquartered companies more attractive for foreign takeover. I was wondering, Mr. Blumenthal, does that concern you about the proposal? Are you concerned about that as well?

Mr. BLUMENTHAL. It would concern me certainly, if I thought that this kind of proposal would have a dramatic or a material effect on foreign takeovers of American companies. I think there are a variety of factors that affect these kinds of takeovers. I am not a mergers and acquisitions lawyer, but the reasons for foreign takeovers involve a great many complex and sometimes changing financial issues just as access to foreign or domestic capital markets is more complex than perhaps we can summarize.

Mr. WELLER. Mr. Blumenthal, you had indicated your primary premise is you are here as an advocate of shareholder rights in the presentation that you made. If a company is taken over by a foreign company, an American company is taken over by a company that is headquartered in a foreign nation, does that concern you on the impact of shareholder rights and how it impacts the rights of American shareholders of that company?

Mr. BLUMENTHAL. Very much so.

Mr. WELLER. As we discuss this, I think, you know, as Mr. Ryan pointed out, that inversion really is -- a growing course of inversions really illustrate a symptom of our complicated Tax Code and now that we are in a global economy and, of course, we want to be more competitive in a global economy, our Tax Code is one of the issues out there and the inversions clearly are illustrating that we have a problem. I asked Mr. Maloney, what would be the first step he would take to make our Tax Code more competitive, and he suggested sunsetting the Tax Code. Do you agree?

Mr. BLUMENTHAL. I do agree.

Mr. WELLER. So you feel that that -- and what would you do from that point of sunsetting the Tax Code, what would you do from that point once you end it?

Mr. BLUMENTHAL. Well, I am not prepared, with all due respect, to talk in detail about what I would do on the Tax Code. I agree that there ought to be real reform. I take from the Chairman's remarks that far-reaching reform is probably not going to happen in the remainder of this year or in this session of the Congress, that it will be the subject of further study. I do think that for the sake of the credibility of the American business as well as our Tax Code, this measure makes sense now.

Mr. WELLER. Mr. Salch, now, the concern that Mr. Neal's proposal would actually encourage or leave American corporations vulnerable for foreign takeover, how would you change his proposal to address that issue? Have you put any thought into that?

Mr. SALCH. I guess I have to start out by saying I don't think his proposal will work. There are ways to deal with this proposal and that is why people like me make a living. If I told him how I could fix his proposal then I probably would really get fixed. I am not really sure because, as I said in my testimony, the concern I have is that we have a level playing field and Mr. Neal's bill, well thought, takes a slice and in that one little slice it says you can't do these things. Then there is everything else that is left un touched. I am not so sure -- as a matter of fact, I am reasonably sure that we can develop methodologies to deal with the other things and still keep them moving forward for these people who are within the slice.

Mr. WELLER. Mr. Salch, the feeling is we need to put a stop to inversions. We need to put a stop right now. Would a moratorium be more effective in quickly bringing a halt to any future inversions that are being considered right now in corporate America?

Mr. SALCH. Not the way the bill is written, no. It takes Mr. Neal's definitions, and quite honestly, there are a lot smarter people than I am and I am sure who can drive a bigger truck than I could build through it.

Mr. WELLER. So there is a lot of -- this is something that is going to take a tremendous amount of thought; we can't rush into is what you are saying?

Mr. SALCH. Mr. Weller, as I sit here I am reminded that then Treasury Secretary George Shultz told this Committee in 1969, when the Committee was considering limitations on artificial losses and the Chairman asked Mr. Shultz if he could guarantee that if the Committee enacted that measure it would stop all the abuses then perceived. Mr. Shultz thought about it and said, Mr. Chairman, it is the best mousetrap we can build right now but there are 10,000 lawyers and certified public accounts (CPAs) out there trying to build a better mouse while we are talking about it, and now there are probably about 30,000 lawyers and CPAs in this country and then another 50,000 outside. I think that is, I guess, the nature of the beast that we have to deal with. I am not sure there is a perfect way to stop inversions without stopping all business dead in its tracks, and that is certainly not desirable.

Then I think we have all learned over the years that whatever lines are drawn there is always a two-edged sword and somebody will find some way to work the other side of the line. That is the problem with section 482 and earnings stripping. It works great when you are trying to get income flowing into the United States with respect to services and goods that are exported, but it doesn't work so well sometimes when the flow is coming this way.

Mr. WELLER. I have run out of time. Thank you, Mr. Chairman.

Chairman MCCRERY. Thank you. Mr. Neal.

Mr. NEAL. Thank you, Mr. Chairman. Mr. Salch, do you favor inversion?

Mr. SALCH. Mr. Neal, I don't favor or disfavor inversions. I don't like the embellishments that I see to some of the more recent inversions, which are based strictly on transactions. I have serious policy reservations about that, but what I call a classic inversion I don't think is un patriotic.

Mr. NEAL. You don't think it is unpatriotic?

Mr. SALCH. No, sir.

Mr. NEAL. Do you do any inversion work?

Mr. SALCH. Pardon.

Mr. NEAL. Do you do any inversion work?

Mr. SALCH. I have done inversion work. I don't have any currently in process, now, sir.

Mr. NEAL. I have a list here of 25 companies, and I don't think that any one of these companies was threatened with takeover as they went to Bermuda. Could I send these companies along to you because the suggestion has been made here by some Members of the Committee that the reason that these companies might be leaving is because of American taxes that conceivably also threaten them with merger or takeover or -- but I have got 25 companies here, and I am not aware of any of them that were being threatened with takeover.

[The information follows:]

Corporate Expatriate List ⁽¹⁾

1. Information compiled from various news sources, by the Office of Representative Richard Neal.

Mr. SALCH. I don't have the benefit of your list, sir, so I can't comment.

Mr. NEAL. I am going to send it along to you.

Mr. SALCH. Okay, that is fine. That is good.

Mr. NEAL. Maybe you can take a look at it and if you could get some evidence for us here.

Mr. SALCH. Sure.

Mr. NEAL. Okay. I would appreciate that.

[The information follows:]

Fulbright & Jaworski, L.L.P.
Galveston, Texas 77551-5719
July 9, 2002

Hon. Jim McCrery
Chairman
Subcommittee on Select Revenue Measures
Committee on Ways and Means
House of Representatives
1102 Longworth House Office Building
Washington, DC 20515

Dear Chairman McCrery:

During the Subcommittee Hearing on June 25, 2002, Representative Neal stated he would forward to me a list with the names of 25 businesses and asked if I would indicate whether I knew any of them were takeover candidates at the times stated in the list.  I have received that list.  Most of the businesses named on the list are clients or former clients.

The Texas Disciplinary Rules of Professional Conduct, the ethics rules mandated by the Texas Supreme Court for attorneys licensed in Texas, preclude me from unauthorized disclosure of confidences of clients or former clients.  Because of those ethical constraints, it would not be ethically appropriate for me to comment in response to Mr. Neal’s request.

I apologize for any inconvenience this may occasion for the Subcommittee.

Very truly yours,

Steven C. Salch
Partner

Mr. NEAL. Mr. Blumenthal, do you think that the shareholders were aware of the fact that Stanley Works' Chief Executive Office John Trani conceivably would have received 58 cents on every dollar, I guess up $30 million or so, based upon their decision to relocate?

Mr. BLUMENTHAL. They certainly weren't told about it. If they knew they had information that the majority of them, in fact the vast majority of them, didn't have and weren't told that kind of information really should have been given to them along with the fact that many of them would have to pay capital gains taxes. They weren't told, for example, that $150 million in capital gains taxes would have to be paid by shareholders.

Mr. NEAL. Many of these employees are retired.

Mr. BLUMENTHAL. Are retired and many are in 401(k) plans.

Mr. NEAL. 401(k) plans.

Mr. Chairman, could we have a copy, if Mr. Blumenthal would provide it for us, of the newest proxy statement included in the record?

Chairman MCCRERY. Without objection.

[The information follows:]

RISK FACTORS

Certain Stanley Connecticut Shareholders Will Recognize a Taxable Gain as a Result of Exchanging their Stanley Connecticut Common Stock for Stanley Bermuda Common Shares in the Reorganization

Our tax advisor, Ernst & Young LLP, has advised us that generally for U.S. federal income tax purposes shareholders who are U.S. holders will recognize gain, if any, but not loss, on the receipt of Stanley Bermuda common shares in exchange for Stanley Connecticut common stock pursuant to the reorganization. Such a holder will generally recognize gain equal to the excess, if any, of the trading price of the Stanley Bermuda common shares received in exchange for Stanley Connecticut common stock in the reorganization over the holder's adjusted tax basis in the shares of Stanley Connecticut common stock exchanged therefore. Generally, any such gain will be capital gain. Shareholders will not be permitted to recognize any loss realized on the exchange of their share of Stanley Connecticut common stock in the reorganization. In such case, the aggregate adjusted tax basis in the Stanley Bermuda common shares received would equal the aggregate adjusted tax basis of their shares of Stanley Connecticut common stock. Thus, subject to any subsequent increases in the trading price of Stanley Bermuda common shares, any loss would be preserved. The holding period for any Stanley Bermuda common shares received by a U.S. holder recognizing gain with respect to the reorganization should begin the day after the effective date of the reorganization. The holding period for any Stanley Bermuda common share received by U.S. holders with a loss on their Stanley Connecticut common stock will include the holding period of the Stanley Connecticut common stock exchanged for those shares.

WE URGE YOU TO CONSULT YOUR TAX ADVISORS REGARDING YOUR PARTICULAR TAX CONSEQUENCES OF THE REORGANIZATION.

The Benefits of the Reorganization Could be Reduced or Eliminated if There Are Unfavorable Changes in or Interpretations of Tax Laws

Several members of the United States Congress have introduced legislation that, if enacted, would have the effect of eliminating the anticipated tax benefits of the transaction. On March 6, 2002, Representative Richard E. Neal (along with 18 co-sponsors) introduced legislation (H.R. 3884) that, for U.S. federal tax purposes, would treat a foreign corporation, such as Stanley Bermuda, that undertakes a corporate expatriation transaction such as the reorganization as a domestic corporation and, thus, such foreign corporation would be subject to U.S. federal income tax. The Neal Legislation is proposed to be effective for corporate expatriation transactions completed after September 11, 2001. Representative James H. Maloney has also introduced legislation that is substantially similar to the Neal Legislation, including a September 11, 2001 effective date (H.R. 3922). Representative Scott McInnis has also introduced legislation that is substantially similar to the Neal Legislation, except that it is proposed to apply to transactions completed after December 31, 2001 (H.R. 3857). Representative Nancy Johnson has also introduced legislation that is substantially similar to the Neal Legislation, except that it is proposed to apply to transactions completed after September 11, 2001 and beginning before December 31, 2003 (H.R. 4756). Furthermore, Senator Charles Grassley, the Ranking Minority Member of the Senate Finance Committee, along with Senator Max Baucus, the Chairman of the Senate Finance Committee, also introduced legis1ation, which was approved by the Senate Finance Committee on June 18, 2002, that is substantially similar to the Neal legislation, except that it is proposed to apply to transactions completed after March 20, 2002 (S. 2119). If any of the Neal Legislation, the Maloney Legislation, the McInnis Legislation, the Johnson Legislation or the Grassley Legislation were enacted with their proposed effective dates, the anticipated tax savings from the reorganization would not be realized. Senator Paul Wellstone has also introduced legislation that is substantially similar to the Nca1 Legislation, except that it is proposed to apply to tax years beginning after December 31, 2002 without regard to when such transactions were completed (S. 2050). If the Wellstone legislation were enacted with its proposed effective date, the anticipated tax savings from the reorganization would be substantially eliminated.

Several other members of the United States Congress and the Treasury Department are currently investigating transactions such as the reorganization. On May 17, 2002, the Office of Tax Policy of the Department of the Treasury issued their preliminary report on off-shore reincorporation transactions which concluded:

"We must work to ensure that our tax system does not operate to place U.S.-based companies at a competitive disadvantage in the global marketplace. The tax policy issues raised by the recent inversion activity are serious issues. Further work is needed to develop and implement an appropriate and effective long-term response. As an immediate matter, careful attention should be focused on ensuring that an inversion transaction, or any other transaction resulting in a new foreign parent, cannot be used to reduce inappropriately the U.S. tax on income from U.S. operations. A comprehensive review of the U.S. tax system, particularly the international tax rules, is both appropriate and timely. Our overreaching goal must be to maintain the position of the United States as the most desirable location in the world for place of incorporation, location of headquarters, and transaction of business."

Because of differences in Bermuda law and Connecticut law and differences in the governing documents of Stanley Bermuda and Stanley Connecticut, your rights as a shareholder may be adversely changed if the reorganization is completed. For a description of these differences. see "Summary -Rights of Shareholders" on page 11 and "Comparison of Rights of Shareholders" beginning on page 40.
 

Mr. NEAL. Would that be okay? I want to thank you both for your testimony, and I don't have an opponent at the moment, so for the suggestion to be made, as it has been made, that some of this is about politics is wrong. I started on this with reinsurance 2 years ago largely driven by corporate considerations. One of the great things about an election is that the election does crystallize the issue for the great judge in the end, the American people, to decide, and I am hopeful that this debate is going to continue. I am hopeful that we will have good witnesses like you two to continue this debate back home.

Most importantly, I am hoping that average taxpayers who understand that if we are spending $48 billion more for defense, $38 billion more for homeland security, and these companies are leaving, I hope the average taxpayer understands they are going to pick up the difference.

Thank you, Mr. Chairman.

Chairman MCCRERY. Thank you.

Mr. Salch, do you happen to know the trend in the last few years in terms of foreign companies taking over American companies or American companies taking over foreign companies?

Mr. SALCH. I believe that the Associated Press (AP) reported earlier this month that there was a study that starting in 1998 there had been a steady increase in the amount of merger activity or acquisition activity and investment activity with foreign owners in the United States. So, to that extent from 1998 forward the AP, for whatever that is worth, reports that the trend is an up trend.

Chairman MCCRERY. In fact, I believe in that same story it said that 80 percent of the large transactions since 1998 have been foreign takeovers of American companies. Is that -- do you recall seeing that number?

Mr. SALCH. I believe that is right, sir.

Chairman MCCRERY. So even though you can't say they were takeover targets, the fact is over the last few years the vast majority of mergers between foreign companies and U.S. companies have involved foreign takeovers of American companies. There must be some reasons for that, and I would submit that the testimony that we have heard here today illustrates clearly that one of the reasons is the underlying tax provisions that are the subject of this hearing.

Mr. BLUMENTHAL. Mr. Chairman, may I respond briefly to that point, because I think it is a very insightful and thoughtful one. I think all of us, at least on both sides of this panel, have very, very grave concerns about foreign takeovers of American companies, and I certainly share that concern with you. I am not here to advocate one reform or another, whether sunsetting or any particular measure of fundamental reform. I think the concern about takeovers has to be seen separately from this measure, with all due respect, and may relate to more fundamental issues regarding our Tax Code. I think it perhaps conceptually and practically can be separated from the reason that we are here today.

Chairman MCCRERY. Well, I appreciate your remarks but I disagree with you, respectfully. I think they are intertwined, because if we take away from an American company a tool to avoid or to reduce the U.S. taxes and avoid being such an attractive takeover target, then they have nowhere else to go but to be taken over if they are a right target.

So I do think that the issues are intertwined and we ought to address, to the extent that we can, both issues in a single piece of legislation. That just seems to me to make a lot of sense. I believe this Committee and this Congress has a duty to try to balance our -- all of our desire to make sure that corporations in America pay their fair share of taxes with our desire to make sure that our economy is one that is suitable for the creation and preservation of good jobs. There is no question that a foreign takeover of an American corporation has a more harmful effect on jobs in America than an inversion. So, I do think they are related, and if we don't look at both, I think we are not doing our duty to the taxpayers and to our constituents.

Mr. BRADY.

If the Chairman will yield just a moment, I want to point out what Mr. Salch just said, not 10 minutes ago, that the bill as it currently is written would make U.S. companies more likely to be taken over by foreign companies. So we cannot separate the issue of foreign takeovers of U.S. companies from corporate inversion -- again, known as defending these actions -- but we also don't want to create another very unpatriotic effect of chasing and driving U.S. companies overseas and those jobs with them.

Mr. NEAL. Mr. Chairman, would you be so kind as to give me the last word?

Chairman MCCRERY. Sure.

Mr. NEAL. In a report here from the U.S. Department of Commerce in June 2002, by Tom Anderson, he says: "In 2001 outlays by foreign direct investors to acquire or establish U.S. businesses decreased substantially."

Chairman MCCRERY. With all due respect --

Mr. NEAL. You said you would give me the last word, Mr. Chairman.

Chairman MCCRERY. I know, but since you are reading from the report, and I just happen to have a report on the report here, you should know that even though that is true, what you said --

Mr. NEAL. It is basically always true, Mr. Chairman.

Chairman MCCRERY. Even though what you said is true -- let me see -- even with the big drop last year, the overall spending was still higher than for any year prior to 1998, the overall spending on foreign acquisition of American companies.

Thank you, gentlemen, very much. Excellent testimony.

Mr. BLUMENTHAL. Thank you, Mr. Chairman.

Mr. SALCH. Thank you, Mr. Chairman.

[Whereupon, at 5:5 p.m., the hearing was adjourned.]
[Submissions for the record follow:]

American Institute of Certified Public Accountants, Pamela J. Pecarich, letter