Mr. Chairman, Members of the Subcommittee, thank you for holding this hearing on inversions, transactions where companies reincorporate offshore to avoid U.S. taxation.  I had hoped to be able to offer some questions at the hearing in the full Ways and Means Committee on June 6, but unfortunately was unable to do so.  I look forward to today's opportunity to discuss the issues.  I especially look forward to working with the Treasury Department and the Committee to address the plague of inversions that has visited itself on our country.

Near the beginning of this year, I first became aware of inversion transactions, and frankly became incensed.  On  March 6, I introduced H.R. 3857, the first legislative proposal designed to target inversion transactions.  My proposal would treat inverted companies as U.S. companies, ignoring the paper-thin transaction designed to avoid taxes.  This bill has bipartisan support, including support from a number of Members of this Ways and Means Committee, including Rep. Nancy Johnson (CT).  I also cosponsored H.R. 4756, Representative Nancy Johnson's bill that she introduced to impose a moratorium on these inversion transactions.  It is clear from those facts that this is not a partisan issue or a political issue -- and people should get over trying to make it one.  Rather this is an issue of policy, and I am pleased that the Subcommittee will have the opportunity to discuss the policy issues here today.

My bill is similar in design to several of the bills introduced afterwards, applying a two-level test to the transaction.  The first is a clear bright line test based on a high level of stock ownership by the same owners following the inversion.  The second, involves a lower level of ownership following the inversion, and sets out a three part test to distinguish transactions with little substance.  The effective date on this legislation includes transactions completed on or after January 1, 2002.  That date was not designed to include or exclude any particular company, but rather reflected fair warning to every company contemplating these tax avoidance techniques. 

As I have told anyone that asks me, my overriding goal is to end these inversions, the exact means of how that happens is less important to me than the result.  I am absolutely willing to work on better ways to go about achieving that overriding goal.  I am aiming a missile at inversions -- but if that missile won't get the job done, then get me one that will -- because that's the one I want to use.  My goal in this case is about the end result, the end result that prevents these inversions from occurring, not about how we get there and not about who gets the credit along the way.

When I was drafting my legislation,  I sat down with my staff and sought out advice from recognized experts about how to address the issue.   My legislation reflects some of that advice, but I am the first to admit that we have learned quite a bit about these transactions since February and early March of this year.  I have become convinced that the most significant aspect driving these inversions is the ability to strip out U.S. earnings, via payments to the foreign parent for interest, dividends and the use or licensing of intangibles.  On April 11 of this year, I announced that it was my intention to work to tighten the earnings stripping rules, so I have been on record for several months as recognizing the need to address earnings stripping.

That earnings stripping was such a significant part of these transactions was not well understood in February.  If we can take the financial incentive out of the transactions, then I am convinced that companies inverting to avoid taxes will cease.  Moreover, as I have learned more about these transactions, it has become clear that if an inverted company can strip earnings to achieve a lower tax rate, so can an existing foreign company that owns a U.S. subsidiary.  That issue needs to be addressed as well, because it will leave a large hole in any policy response to inversions if we just close one window but ignore the other window next to it that is wide open.  I will continue to look into these complex transactions and work to refine and revise my approach as new information yields new facets of these transactions.

A tax partner for a leading accounting firm, Ernst & Young, commenting on the current climate regarding inversions, noted that "we are working through a lot of companies who feel that it is, that just the improvement on earnings is powerful enough that maybe the patriotism issue needs to take a back seat to that."  I cannot disagree with this sentiment strongly enough.  I cannot help but view this issue as a patriotic issue; this country provides tremendous liberties and protections to the employees of the companies that invert and the individuals who run these companies.  We have a right to expect that everyone shoulders a fair share of the burden.  Avoiding taxes just shifts the burden from these companies to every other American.  Focus for a moment on the young men and women who are now fighting the War on Terrorism in Afghanistan and elsewhere.  I would like to think that if these soldiers can shoulder their burden, we can expect our companies to shoulder their own fair share.  Of course these companies should preserve American jobs, but tax avoidance is not the way.

To give you some perspective from the common man, as I have traveled Colorado discussing this issue, I have had small business owners ask me how they can reduce their effective tax rates by 10%, like the inverted companies do.  You're out of luck, I tell them.  I have supported legislation that gives these small businesses lower tax rates.  I am all for reducing the taxpayers' burden, but for everyone, not just the select few companies that have little concern for the sacrifices made by many to allow us the freedoms we hold dear. 

We should consider the competitiveness issue from the perspective of a small or midsize business that is trying to compete with an organization that avoids U.S. taxation by stripping out any U.S. earnings.  How is a small or midsize business to compete against that kind of 10% margin advantage?  We on the Ways and Means Committee should stop the politics and get down to the tough business of figuring out how to help the people who work for and own those small and mid-size business -- because the real competitiveness issue is how they can compete to sell their products and services against some other company with a 10% advantage.

Many have noted that inversions are a symptom of the U.S. tax code's flaws, especially our international tax provisions, which I agree are tremendously complex and burdensome.  Many of the companies which have chosen to turn their back on this country argue that the tax code drove them to take the action.  One response has been that the U.S. international tax system should be reformed to address the complexity and fairness of the Internal Revenue Code and address the problem.

The way I view this issue is best illustrated by considering a person who has a bucket that has sprung leaks.  The first thing you do is plug the leaks, then you work on how to get a new bucket and make decisions about what kind of bucket to get.  I propose to plug the leaks in our international tax system that are inversions, and I agree we can and should work on fixing the larger and more complicated problem of how the tax code's complexity could lead to inequities and make the U.S. tax system less competitive.

I would also like to highlight an oversight or unclear provision regarding the requirement that shareholders pay capital gains upon a company inverting.  That is the current law, but many shareholders may have no idea, and that is because there is absolutely no clear requirement that individual shareholders receive a Form 1099 that tells them there has been some event that might trigger capital gains tax.  I have a strong suspicion that many innocent shareholders don't even realize that the company they own some shares in has inverted.  That information reporting requirement needs to be fixed. 

I would also take issue on a related point made by some companies which claim that the U.S. taxpayer is not losing out in these inversions.  Some companies have claimed that the capital gains received on the transaction will make up for years of reduced taxes the company will pay -- implying the U.S. taxpayer won't see any loss for years.  Fact is, this argument ignores that a large percentage of the shareholders of these companies are held by either tax exempt or tax deferred vehicles, like pension plans, 401(k) plans or IRAs.  Those shares won't be paying any capital gains, and in one inversion case I know of, just over 50% of the shares were held in accounts that do not pay capital gains on the transaction.  I also would note that it is a lot easier to get the necessary shareholder vote if such a large percentage of shareholders aren't paying any toll charge, another reason I have doubts about the significance of the votes that authorize these transactions.

Finally, I am very pleased that the Treasury Department was able to produce its report in such a short time period.  The Bush Administration has taken these transactions seriously, and worked to produce a meaningful look at the transactions and the causes and possible cures.  In that report, the Treasury Department noted that earnings stripping and the transfer of intangibles are both significant components of these transactions; I don't think our current limitations on earnings stripping are working well, otherwise, why would these companies take these steps to take advantage of the transaction.  I would like to work with the experts who know the tax code inside and out, like the Treasury Department, to fix this problem.  

In conclusion, I very much appreciate Chairman McCrery scheduling today's hearing on inversions.  This is an important issue for the Ways and Means Committee to consider.  This is not a partisan issue, it is an issue of how to ensure our tax laws are applied in a fair and consistent manner -- to everyone.  I look forward to the other testimony and to working with the Committee, the Department of Treasury and others to address this problem.