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
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.

Advisories announcing the hearing

U.S. Department of the Treasury, Pamela F. Olson, Acting Assistant Secretary for Tax Policy; accompanied by Barbara Angus, International Tax Counsel

SUBMISSIONS FOR THE RECORD

AFL-CIO, statement

Coalition for Tax Competition; Andrew F. Quinlan, Center for Freedom and Prosperity; Daniel Mitchell, Heritage Foundation; Veronique de Rugy, Cato Institute; Paul Beckner, Citizens for a Sound Economy; David R. Burton, Prosperity Institute; James Cox, Association of Concerned Taxpayers; Stephen J. Entin, Institute for Research on the Economics of Taxation; Tom Giovanetti, Institute for Policy Innovation; Kevin Hassett, American Enterprise Institute; Lawrence Hunter, Empower America; Charles W. Jarvis, United Seniors Association; Karen Kerrigan, Small Business Survival Committee; James L. Martin, 60 Plus Association; Edwin Moore, James Madison Institute; Steve Moore, Club for Growth; Grover Glenn Norquist, Americans for Tax Reform; John Pugsley, Sovereign Society; Richard Rahn, Discovery Institute; Gary and Aldona Robbins, Fiscal Associates, Inc.; Tom Schatz, Council for Citizens Against Government Waste; Eric Schlecht, National Taxpayers Union; Fred L. Smith, Competitive Enterprise Institute; Lewis K. Uhler, National Tax Limitation Committee; Paul M. Weyrich, Coalitions for America; Christopher Whalen, Whalen Consulting Group; joint letter

CORPORATE INVERSIONS

House of Representatives,
Committee on Ways and Means
Washington, DC.

The Committee met, pursuant to notice, at 10:53 a.m., in room 1100 Longworth House Office Building, Hon. Bill Thomas (Chairman of the Committee) presiding.

[The advisory and revised advisory announcing the hearing follow:]

Chairman THOMAS. I appreciate our guests finding seats. We probably are not going to be able to accomplish the hearing in one setting based upon activities that will occur on the Floor. My apologies at the beginning to those of you who plan on testifying. It may not be as orderly or sequential as most of us would prefer in dealing with a subject matter that, at once seems fairly simple, and at additional examinations perhaps is a bit more complex than we might have appreciated.

Obviously, the emphasis is that during recent months, many U.S. companies have announced that they will move their principal place of incorporation to a foreign jurisdiction. Principal among those are low-tax countries such as Bermuda. In fact, many companies have already taken this step.

Today, the Committee on Ways and Means will examine, one, the causes behind the reincorporations, but we also want to explore policy options to reduce the incentive for inversions while, if possible, enhancing U.S. international competitiveness. This, of course, builds on the initial hearings we had on the Word Trade Organization (WTO) decision involving foreign sales corporations (FSC) and the Extraterritorial Income Exclusion Act (ETI) debate.

Members have introduced bills, beginning with a Member of this Committee, Scott McInnis, for example, on March 6, Mr. Neal of this Committee, Mr. Maloney, and Mrs. Johnson. They range from an attempt to punish behavior to a moratorium so that we could suspend behavior and examine options.

The Chair has no idea at this point what is the most appropriate way to go. I think that is one of the reasons we are supposed to hold hearings. Oftentimes, people believe the primary purpose of holding hearings is to provide an arena for political shenanigans or for points scored, not in terms of advancing a legislative purpose, but for even as far-ranging an activity as attempting to influence elections.

The Chair wants to announce at the beginning of this, this is serious business. This is obviously not the only hearing that we will hold. We must hold additional hearings based upon the information that Members, having received the U.S. Department of the Treasury testimony in advance, realize that Treasury has gone so far as to provide us with very specific examples of potential law change.

Those of us who reside in States with high taxes oftentimes, and perhaps properly, blame State legislatures when companies flee our State to go to low-tax jurisdictions in surrounding States. California has a number of examples. Historically, the inventory tax, and we thought California was so attractive, these large companies like Sears and others would stay in California forever. We woke up and found out that they had built warehouses in Nevada. I was in the State legislature at the time. They repealed the inventory tax and expected people then to simply move from Sparks, Nevada, where they had invested significant money in the warehouses and come back to California, and guess what, they did not.

So, we cannot ignore the fact that the U.S. Tax Code creates essentially the same phenomena internationally. Corporate inversions, I think, are a symptom of a larger underlying problem with our tax code, and if the corporate tax code has driven many companies to move their mailboxes to other jurisdictions, then I think we need to examine the tax code for suggested changes.

Now, the problem obviously is easily stated. As I said, the solution may be more complex. As we have noted in our foreign sales corporation hearings, competitiveness is sometimes in the eye of the beholder, and it is not as easily assessed as we would like. The United States has some of the world's most complicated rules on international taxation. These rules originate in part, I think, from a misguided belief that we can keep capital in the United States if we just have enough restrictive tax regimes.

We are still--the system we impose on American-based firms sometimes provides advantages to foreign companies that want to buy up American companies, and perhaps one of the reasons American companies want to become foreign companies on their own, on their own volition, is because they do not want to become foreign companies through hostile takeovers.

First today, we will hear from the Treasury Department, which has released a study which I would recommend to anyone as a very useful primer on what we are talking about in terms of corporate inversions. Beyond that, the written testimony submitted by the Treasury, as I said, provides us with very specific tax change suggestions.

We are then going to have a panel to, in part, give us a practical real-world perspective on how the tax system affects business decisions, and we have someone from State government for their reaction, as well.

The questions before us, to a certain extent, are is there something we can do in the short term while we are looking at the long term? Will it be better to move what we believe to be the long term with enough notice that, in fact, we are going to engage in this discussion? Whether is this just one symptom of an international tax code that probably needs to be looked at far more extensively? The problem of inversions being simply one example, which means perhaps, then, something like a moratorium might be appropriate, or perhaps specific legislation addressing the inversion question sooner rather than later, perhaps then looking at other tax aspects on a broader basis.

All of those are questions that are open right now as far as the Chair is concerned. The goal, of course, is to resolve what appears to be an immediate problem but which is symptomatic of the more complex and broader problem initiated by the WTO decision on the foreign sales corporation ETI subsidy, subsequently provided additional reinforcement by the inversion question.

So today, the Chair's hope is to lay the predicate, listen to the concerns, focus on some of the specific suggestions, and assure everyone that there will be more questions raised today than answers and that we will move forward in as expeditious a fashion as possible, perhaps utilizing the Subcommittee on Select Revenue to allow for further expansion of concerns that various corporations might have, foreign-based or domestic, based upon the questions raised today as we look forward to a solution to this problem.

With that, it is my pleasure to recognize the gentleman from New York for any comment he might wish to make. Mr. Rangel?

[The opening statement of Chairman Thomas follows:]

Mr. RANGEL. Thank you, Mr. Chairman. Some housekeeping questions. Mr. Chairman, one of the most important tax issues that has come before this Committee is to make permanent the estate tax repeal. Could you share with us whether you intend to manage this bill on the Floor, and how do you see we are going to maintain our attendance here at the hearing on this most important issue and at the same time the Members be allowed to express their concern about the bill on the Floor?

Chairman THOMAS. I appreciate the gentleman's concern. He might have expected that the Chair expressed that same concern to the leadership. Just let me say, it is difficult to try to get this Committee's work done on the shortened work weeks that are currently in front of us.

The Chair intends to continue the hearing as best we are able during whatever events may occur on the Floor, with the exception of multiple votes, as you know, which makes it difficult for us to determine when we come back. If there is a single vote, the Chair would like to try to continue the hearing.

It is the Chair's understanding at this time that the debate will begin, dependent upon the current procedural discussion and probably subsequent vote on the decision of the Chair currently going on, that the estate tax debate would begin somewhere in the 12:30 to 1:00 vicinity. The Chair intends to initiate the debate on the Floor, but not to be there during the entire debate. The structure of the debate is 1 hour, equally divided, and then my understanding is the rule made in order a substitute, which would be 1 hour, and then the minority has, as a right of the rules under this new Republican majority, a motion to commit, which I assume you will utilize. That will be occurring in the 2:00 to 3:00 range.

If we can move expeditiously through this hearing, we can lay the foundation for the additional hearings on more of the specific alternatives, as I indicated, the direction that we will probably go. To the degree, our goal here is to score points beyond trying to understand what the problem is and looking at specific legislative decisions, the Chair does not have control over that. Perhaps the gentleman from New York has a better idea of how long those activities would consume Committee time.

Mr. RANGEL. Mr. Chairman, I might suggest that you might consider recessing for 5 minutes until you and I have an opportunity to discuss the problem that we have. I will outline the degree of the problem.

First, the minority believes that both of these issues, the one before this full Committee and the one on the Floor, has a deep-seated political as well as economic significance, and while we recognize that the decision to put these important legislative issues in conflict was not yours, we are not prepared to accept the leadership's position.

Second, during this 5 minutes, the question of multiple votes, I will be glad to share with you that we might expect multiple votes, and I do not want to put witnesses nor those attending this hearing at ill ease, but I might just share with you, if we do not find our way able to recess this hearing until after the proceeding on the Floor, then I have every reason to believe that our Members will be spending a lot of time on procedural issues on the Floor.

In addition to that, it is my understanding, even though I am not certain, that the Chair unilaterally decided that a Member of the U.S. House of Representatives who sponsored a piece of legislation which this hearing is about would not be allowed to testify, and while this is certainly not a Democrat or Republican issue, certain Members of my caucus believe that, from an institutional point of view, they are not prepared to allow that to go by.

I want to list these things to see whether or not you might think that it is wise for you and I to just discuss these things for 5 or 10 minutes to see whether there can be any resolved, and I yield back to you for purpose of response.

Chairman THOMAS. I will tell the gentleman, I have been here since 8:30. My phone number is listed. My presence is known, but if the gentleman wants to take 5 minutes out of the time we now have to try to move forward on this hearing, the Chair, in recognition of the gentleman's presentation of this offer, which the Chair appreciates the way in which it was presented, will certainly take 5 minutes.

Mr. RANGEL. I might add that--

Chairman THOMAS. The Committee stands in recess for 5 minutes.

[Recess.]

Chairman THOMAS. If I could have your attention, please, there is just one vote on the Floor. We will run over, cast that vote, come back, and the Committee will resume. My goal is to resume at 11:30.

[Recess.]

Chairman THOMAS. If our guests can find seats, please. The first panel this morning will consist of Treasury representatives, including Pamela Olson as the Acting Assistant Secretary for Tax Policy at the U.S. Department of the Treasury. My understanding is that Barbara Angus will be with her at the table.

First of all, thank you for joining us. Thank you for the written testimony. It will be made a part of the record and you may address us in any way you see fit. Ms. Olson?

STATEMENT OF PAMELA F. OLSON, ACTING ASSISTANT SECRETARY FOR TAX POLICY, U.S. DEPARTMENT OF THE TREASURY; ACCOMPANIED BY BARBARA ANGUS, INTERNATIONAL TAX COUNSEL

Ms. OLSON. Thank you. Mr. Chairman, distinguished Members of the Committee, I appreciate the opportunity to appear at this hearing on corporate inversion transactions. I commend the Committee Members for your interest in and commitment to addressing this important issue. I also want to thank the Committee for allowing the Treasury Department the time to study, consider, and report on this matter to the Committee. We look forward to working with the Committee to implement the proposals I will outline and any other proposals we or you identify in the course of our ongoing evaluation of the issues presented.

I have attached to my written testimony today a copy of the Treasury study that we released last month on the tax policy implications of corporate inversions and I appreciate the Committee's including that in the record for today.

This Committee is well aware of the facts that precipitated our study and the hearing today: a series of announcements by U.S. companies of their intent to reincorporate outside the United States. The key reason cited for the transactions: Substantial reductions in overall corporate taxes. Corporate inversion transactions are not a new phenomenon, but there has been a marked increase in the frequency, size, and profile of the recently announced transactions. Moreover, rumors of other companies considering the transactions abound.

The Administration has concluded an immediate response is required that addresses the income minimization strategies associated with inversion transactions, strategies that can be employed to reduce the inverted company's U.S. tax on its income from its U.S. operations. An immediate response is required for two reasons. First, these strategies unfairly advantage inverted or other foreign-based companies over U.S.-based companies. Second, these strategies have a corrosive effect on the public's confidence in the U.S. tax system.

We cannot just address strategies that inappropriately minimize U.S. income, however. We must also address the tax disadvantages imposed by our international tax rules on U.S.-based companies with foreign operations. Relative to the tax systems of our major trading partners, the U.S. tax rules can impose significantly heavier burdens on the foreign operations of domestically-based companies. Our objective must be to ensure that the U.S. tax system maintains the competitiveness of U.S. businesses. Why? Because we care about U.S. jobs.

We have identified several specific areas in which action is needed. We believe that addressing the income minimization opportunities conferred by an inversion will remove the juice from the current inversion activity, eliminating the immediate benefits of and, therefore, the impetus for, such transactions.

It would be a mistake to focus such changes solely on inverted companies, however, since an inversion is only one route to accomplishing the same type of reduction in taxes. A U.S.-based start-up venture that contemplates both U.S. and foreign operations may incorporate overseas at the outset, thus positioning itself to achieve the same type of tax reduction. Similarly, an existing U.S. group may be the subject of a takeover by a foreign-based company. The resulting structure may provide similar tax savings opportunities to those provided by an inversion transaction.

A policy response targeted solely at the inversion phenomenon may inadvertently result in a tax code favoring other types of foreign ownership structures at the expense of domestically-managed companies. In turn, other decisions affecting location of new investment, choice of suppliers, and jobs may be adversely affected. While the openness of the U.S. economy has always made and will continue to make the United States one of the most attractive and hospitable locations for foreign investment in the world, there is no merit in policies biased against domestic control and domestic management of U.S. operations. Consequently, the policy response to the recent corporate inversion activity should be broad enough to address the underlying differences in the U.S. tax treatment of U.S.-based companies and foreign-based companies without regard to how foreign-based status is achieved.

There are four specific areas in which action should be taken: Related party debt, related party asset transfers, treaties, and information reporting.

First, related party debt. The statutory rules regarding the deductibility of interest payments to related parties must be tightened to prevent the inappropriate use of related party debt to generate deductions against income from U.S. operations that otherwise would be subject to U.S. tax. Accordingly, we propose statutory changes to tighten the related party interest disallowance rules of section 163(j). Specifically, we propose replacing the current debt-equity ratio safe harbor with a test that would deny a deduction for related party interest to the extent the U.S. company's indebtedness exceeds its worldwide level of indebtedness. There is no compelling policy justification for allowing interest deductions for related party debt where the U.S. company is more highly leveraged than the worldwide operations.

We propose scaling back the 50 percent of income limitation on interest deductions by revising the definition of income to focus the test on net interest expense as a percentage of income rather than cash flow.

Finally, we propose curtailing the rules that allow companies to carry over to subsequent years interest deductions subject to the limits.

Second, we are undertaking a comprehensive review of related party asset transfers, which can be used to shift income from the United States. We believe that substantial improvements can be made in this area through regulatory changes and focused enforcement. To the extent that we identify problems during our review requiring statutory changes, we will promptly advise the Committee.

Third, we will undertake a comprehensive review of our income tax treaties to ensure that they do not provide inappropriate opportunities to reduce U.S. taxes or to shift income from the United States. Our review will ensure that all our treaties serve the goal of eliminating double taxation, not taxation altogether, or they will be modified to do so.

Fourth, we will require Form 1099 reporting to ensure that inverted companies' shareholders pay the tax they owe on gain recognized in the inversion transaction.

We are continuing to study other areas, including the corporate organization and reorganization rules and the income shifting issues that arise in the context of inversion transactions involving insurance and reinsurance companies.

Finally, we must address the tax disadvantages faced by U.S.-based companies that do business abroad relative to their counterparts in our major trading partners. The burden imposed by our international tax rules on U.S.-based companies with foreign operations is disproportionate to the tax burden imposed by our trading partners on their companies' foreign operations. The recent inversion activity and the increased foreign acquisitions of U.S. multinationals evidence that fact and the significant consequences that may have for U.S. businesses and the U.S. economy. The U.S. rules for the taxation of foreign source income are unique in their breadth and complexity. It is time to revisit them. Our rules should not disadvantage U.S.-based companies competing in the global marketplace.

Our overarching goal is maintaining the U.S. position as the most desirable location in the world for incorporation, headquartering, foreign investment, and business operations. In short, that means keeping jobs in the United States, creating jobs in the United States, and bringing jobs to the United States.

Thank you for your attention. I would be pleased to answer any questions.

[The prepared statement of Ms. Olson follows:]

Chairman THOMAS. Thank you very much, Ms. Olson. As I said in my opening remarks, one, for the fact that you issued a study which may or may not have been serendipitous in terms of its timing, but it was still, nevertheless, very useful. Secondly, your testimony is very specific, and again, that is refreshing, because you have offered some very specific remedies to a specific problem.

You also state in your testimony on page two, the first full paragraph there, that the Treasury preliminary report also discusses the need to address the U.S. tax disadvantages that are caused for U.S.-based companies because of U.S. tax treatment of their foreign operations. We must evaluate our tax system, particularly our international tax rules, relative to those of our major trading partners to ensure that the U.S. tax system is competitive. That sounds like a fairly broad statement about the need to examine far more fundamentally our tax code than the specifics that you provided in your testimony focused on inversions.

As you know, we have embarked on trying to put together a tax package to respond to, because we are required to respond to the WTO decision on the fact that our foreign sales structure is considered a subsidy. Could you give us some specifics of what you meant by that paragraph in terms of what it is that we should be focusing on, and are there other areas in which, for want of a better term, inversions have occurred or might occur that would not necessarily be captured by the specifics that you have provided, or that since we are looking at the way in which we deal with corporations that are involved internationally, other tax aspects that perhaps we should at least begin to lay on the table?

I know that is a very broad question, and obviously, the Chair will appreciate whatever verbal response you can give, but I am anticipating that this may involve a more extensive written response to the question, which you will provide us with over the next few days.

Ms. OLSON. All right. Thank you. First of all, of course, the U.S. operates a worldwide system of income tax, which means that U.S. companies with foreign operations are subject to tax in the United States on the income from those foreign operations. The double tax that can result from that is addressed by our foreign tax credit system, but the foreign tax credit system is extremely complicated. It has a number of limitations and many companies find that they are not able to make full use of the foreign tax credits to offset the double taxation.

In addition, we have subpart F of the tax code, under which we impose current U.S. tax on a number of foreign activities of U.S. companies with foreign subsidiaries without regard to whether or not that income is actually distributed to the U.S. parent. That is another area of the tax code that requires a look, because in that realm in particular, a number of our major trading partners do not tax that income at all, let alone tax it currently.

In addition, we need to look at our interest allocation rules, which function almost opposite of the way that the interest rules function with respect to foreign-owned companies, and they sharply limit U.S. companies' ability to use foreign tax credits.

Chairman THOMAS. That means, then, that obviously, if we are looking at this one particular example which has come to the attention, for want of a better term, of the popular press, it is more or less on the cliché of the tip of the iceberg of things that we need to look at, which then takes me to the bottom of page two in terms of your testimony in which you say a narrow policy response to the inversion phenomenon may inadvertently result in a tax code favoring the acquisition of U.S. operations by foreign corporations and the expansion of foreign-controlled operations in the United States at the expense of domestically managed corporations.

Would it not be ironic if we are attempting to resolve the problem of U.S. companies going foreign to remain U.S. companies if we created a change in the law which made it more advantageous for foreign corporations to acquire U.S. corporations. What did you mean specifically and to what reference is this a narrow policy response directive?

Ms. OLSON. Well, if we passed legislation, for example, that only imposed sharper rules, stricter rules on companies that had inverted, then that would mean that companies that started, for example, in Bermuda or Luxembourg or some other foreign country or currently foreign-owned companies would have tax advantages over U.S. companies that might seek to invert. So if we just focus on the inverted companies, we may create some real discontinuities in the tax code that would advantage foreign-owned companies and we want to avoid that.

I want to mention one other thing on the question that you asked previously. You asked about inversion transactions that might be occurring that might not be caught by the proposals that we have laid out today and one of those is the insurance transactions, which have been occurring for some time, involving inversion transactions into Bermuda. Those would not be captured by the rules that we have talked about here because that is not a problem associated with mis-pricing. At least so far as we know, the transactions have been priced at arms' length market prices. What we try to capture within the U.S. tax base is income, and so we try to appropriately measure income in making sure that we have got arms' length prices.

So long as those transactions, which include a move to Bermuda followed by reinsurance of U.S. risks into Bermuda, are appropriately priced, they would not be captured by the current rules in the tax code, and so for that we need to perhaps take a more fundamental look at the direction of the tax code and whether or not it makes sense in that area to continue to try to tax on the basis of income or whether we should be looking at something more along the lines of what some of our trading partners do, which is to focus a tax on premiums.

Chairman THOMAS. If I understand what you are saying, as companies involve themselves internationally or international companies involve themselves in the United States, if you base your tax system on the income, you are going to be chasing these corporations all over the world and examining the structures that they offer amid different taxing structures around the world to try to figure out how we would extract what would be an appropriate tax on the income, and maybe that is probably not the best way to go in terms of trying to produce revenue in an appropriate amount and that we should look at a different way of dealing with companies that are dealing with insurance.

Would this be unique to insurance or would it have relevance to other corporations as well? That is, that pursuing the income of the corporations may not be the most meaningful way to raise appropriate revenue on U.S. activities?

Ms. OLSON. In many ways, our study and the Internal Revenue Code, in general, the complexity of it reflects our continuing dissatisfaction with our attempts to define income. We keep slapping new rules on to chase this, that, or the other thing and it makes it extremely complicated, and in the end, somebody always finds a way around it and then we come back to try once again to define income so that we feel that we have satisfactorily captured within the U.S. base the amount that we want captured.

Chairman THOMAS. At least in terms of the example that you raised, insurance companies, just give me a brief review again of what might be suggested. I do not believe you are offering this as a policy today, but you are using it as an example of the difficulty of trying to tax income. What could be an option that would replace the corporate income tax on insurance companies would be what?

Ms. OLSON. It would be a tax on the premiums written by the insurance companies, which is the way that some of our trading partners tax the insurance business.

Chairman THOMAS. Premiums in the United States?

Ms. OLSON. Premiums written within the United States, and that way, what you would capture within the tax base is all of the risks written in the United States.

Chairman THOMAS. Your concern about too narrow a response obviously means we would lead perhaps to some unanticipated consequences because of the ongoing drive to be the lowest-price competitor, and where the tax code comes into place, we had better be careful of making a change in one area because it may have repercussions in other areas that we have not anticipated, and that, of course, requires, then, a broader look to make sure that if we do make a move, we understand what are the relevant ancillary consequences of decisions that we make, which means we have a bit of a dilemma because we have a relatively immediate problem in dealing with these corporate inversions as we have begun to understand them, especially with the Treasury Department study, and the need, as you indicate, to look at a number of other areas that taxes might be changed, which clearly would not be a short-term response to the immediate problem, and that is part of the dilemma, I think. How do you deal with the immediate problem while you are looking at the larger concerns that may require a more in-depth and a more broadly-based tax modification?

Thank you very much for your testimony. Does the gentleman from New York wish to inquire?

Mr. RANGEL. Thank you, Mr. Chairman.

I regret, as much as you would have wanted to avoid the conflict that we have today between the full Committee hearing testimony on what is a complex tax issue and what is a real important tax issue on the Floor. Through no fault of your own, the Members of this Committee find ourselves before this panel, recognizing that a lot of U.S. companies have announced that in order to avoid U.S. income taxes during a time of war, that they will leave the United States and seek a tax haven elsewhere. So there has to be long- and short-term consequences, and we had thought this matter was going to be in front of the subcommittee. The Chair has decided it is important enough to be in front of the full Committee.

We also thought that since at least two Members of the Congress had information that they could bring to us to say what impact this would have, both of them being from Connecticut, Mrs. Johnson and Mr. Maloney, that they would be able to share some light on this subject matter, and we have learned that notwithstanding the request made by Congressman Maloney, that has been denied and he will not be allowed to testify in front of the full Committee.

I have been here 32 years. I have never heard of a Member, a sitting Member of this body's request to testify being turned down. It is an election year and it is probably a good reason, but we will find out what it is about.

Secondly, we have a bill on the Floor to make permanent the estate tax repeal, which I have been advised in the next 10 years, if you include debt service, is going to cost us $1 trillion. We all are trying to find ways to preserve Social Security, Medicare, prescription drugs, but in this political year, make no mistake about it, to Members of this Committee, it is a very, very important issue because we have jurisdiction.

So we really think--we beg you to reconsider, because of the witnesses, because of the audiences, and because this is not going to work, that just because we are in the minority that you expect us to be two places at one time. I am supposed to manage the bill on the estate tax repeal at the same time. I feel some sense of responsibility as the senior Member to see which way the testimony is going on this complex issue before us.

Now, I know you do not want it to have this conflict, and I do not either, but I will ask you to consider postponing this meeting until after we complete our work on the Floor, and before I put it into a motion, I will ask you to respond whether you would consider it.

Chairman THOMAS. I appreciate the gentleman's presentation. I do want to make sure that all of us understand what the facts are and what the time line is.

The Chair intended to have a full Committee hearing on this subject just as we had a full Committee hearing on FSC, to set the tone so that we could then examine the more specific aspects of areas, as we are now doing on the foreign sales corporation. We had an initial hearing. There was no Member panel at that particular hearing, and we moved forward, notwithstanding the fact there is legislation in dealing with foreign sales corporation tax changes. There was no appeal by the minority at that time about how unfair it was that Members were not allowed to testify.

The letter from Members requesting testimony arrived at the majority office after the minority staff was notified that, as was the case in the foreign sales corporation hearing, there would be no Member panel. I want to emphasize that. The hearing requesting testimony was received after we notified the minority staff that there would be no Member panel, and the assumption clearly is, once we decided that was not going to be the case, then you tried to get a letter in, which you now just used as justification for the requirement that the Members be heard.

The Chair said in his opening statement that we are obviously going to have a series of hearings on this. I am quite sure if I turn to the Chairman of the Select Revenue Subcommittee that he would respond in a positive way to the desire to have Members in front of the Subcommittee because we are not denying anyone who wants to be heard.

In addition to that, this hearing is similar to every other hearing that we have had in which the Committee call for the hearing indicates written testimony can be received from any individual, entity, Member, or otherwise, and it will be made a part of the record, so that the record would never be less than complete unless, of course, individuals wished not to submit the written testimony.

We are holding this initial hearing in exactly the same format as we held the foreign sales corporation full Committee hearing. We have the same structure that we had at that time and then we will move forward examining the specifics just exactly the same way that we are doing with the foreign sales corporation.

Mr. RANGEL. Mr. Chairman, I ask unanimous consent that this Committee allow Congressman Maloney to testify.

[Objections were voiced.]

Chairman THOMAS. Objections are heard.

Mr. RANGEL. Mr. Chairman, I move that this Committee allow Congressman Maloney to testify.

Chairman THOMAS. There is no such thing as a motion.

Mr. RANGEL. Mr. Chairman, I--

Chairman THOMAS. There is a unanimous consent of the Committee rules being in order, but there is not a motion that is in order at a hearing.

Mr. RANGEL. I ask unanimous consent that the Committee recess until such time as the conflict that we have with the business on the Floor and the business before this hearing is resolved.

[Objections were voiced.]

Chairman THOMAS. Hearing objection, and the Chair would note that there is no conflict. The measure that is the jurisdiction of this Committee is not now in front of the Floor and that it is entirely appropriate for this Committee to continue to meet. The Ranking Member's concern about Members managing their time would probably be more appropriate when, in fact, the measure is before us on the Floor. It is not before us on the Floor, and we could be moving forward with the hearing rather than continuing this discussion.

Mr. KLECZKA. Will the Chairman yield on that point?

Mr. RANGEL. Mr. Chairman, as we talked, the rule which sets the guidelines in which this important Committee on Ways and Means tax issue before the Floor is being debated, as you know, you and I participate in testifying before the Rules Committee, so that is of concern to us. In addition to that, we really think that notwithstanding the request, when it was made, that allowing a Member 5 minutes to testify, whether it is a man or woman, Republican or Democrat, is just a courtesy. If we are not going to get any consideration at all, then I have to be forced to move to adjourn formally this hearing.

Chairman THOMAS. The gentleman has moved to adjourn. There is no debate on the motion to adjourn but there is a vote. All those in favor, say aye.

Those opposed?

In the opinion of the Chair, the noes have it. The noes have it--

Mr. RANGEL. I ask for a roll call vote.

Chairman THOMAS. The Clerk will call the roll.

The CLERK. Mr. Crane?

Mr. CRANE. No.

The CLERK. Mr. Crane votes no.

Mr. Shaw?

Mr. SHAW. No.

The CLERK. Mr. Shaw votes no.

Mrs. Johnson?

Mrs. JOHNSON OF CONNECTICUT. No.

The CLERK. Mrs. Johnson votes no.

Mr. Houghton?

[No response.]

The CLERK. Mr. Herger?

[No response.]

The CLERK. Mr. McCrery?

Mr. MCCRERY. No.

The CLERK. Mr. McCrery votes no.

Mr. Camp?

Mr. CAMP. No.

The CLERK. Mr. Camp votes no.

Mr. Ramstad?

[No response.]

The CLERK. Mr. Nussle?

[No response.]

The CLERK. Mr. Johnson?

[No response.]

The CLERK. Ms. Dunn?

[No response.]

The CLERK. Mr. Collins?

Mr. COLLINS. No.

The CLERK. Mr. Collins votes no.

Mr. Portman?

Mr. PORTMAN. No.

The CLERK. Mr. Portman votes no.

Mr. English?

Mr. ENGLISH. No.

The CLERK. Mr. English votes no.

Mr. Watkins?

Mr. WATKINS. Pass.

The CLERK. Mr. Watkins passes.

Mr. Hayworth?

Mr. HAYWORTH. No.

The CLERK. Mr. Hayworth votes no.

Mr. Weller?

[No response.]

The CLERK. Mr. Hulshof?

Mr. HULSHOF. No.

The CLERK. Mr. Hulshof votes no.

Mr. McInnis?

Mr. MCINNIS. No.

The CLERK. Mr. McInnis votes no.

Mr. Lewis?

Mr. LEWIS OF KENTUCKY. No.

The CLERK. Mr. Lewis votes no.

Mr. Foley?

Mr. FOLEY. No.

The CLERK. Mr. Foley votes no.

Mr. Brady?

[No response.]

The CLERK. Mr. Ryan?

Mr. RYAN. No.

The CLERK. Mr. Ryan votes no.

Mr. Rangel?

Mr. RANGEL. Aye.

The CLERK. Mr. Rangel votes aye.

Mr. Stark?

Mr. STARK. Pass.

The CLERK. Mr. Stark passes.

Mr. Matsui?

Mr. MATSUI. Aye.

The CLERK. Mr. Matsui votes aye.

Mr. Coyne?

[No response.]

The CLERK. Mr. Levin?

Mr. LEVIN. Aye.

The CLERK. Mr. Levin votes aye.

Mr. Cardin?

Mr. CARDIN. Aye.

The CLERK. Mr. Cardin votes aye.

Mr. McDermott?

[No response.]

The CLERK. Mr. Kleczka?

Mr. KLECZKA. Aye.

The CLERK. Mr. Kleczka votes aye.

Mr. Lewis from Georgia?

[No response.]

The CLERK. Mr. Neal?

Mr. NEAL. Aye.

The CLERK. Mr. Neal votes aye.

Mr. McNulty?

Mr. MCNULTY. Aye.

The CLERK. Mr. McNulty votes aye.

Mr. Jefferson?

[No response.]

The CLERK. Mr. Tanner?

Mr. TANNER. Aye.

The CLERK. Mr. Tanner votes aye.

Mr. Becerra?

Mr. BECERRA. Aye.

The CLERK. Mr. Becerra votes aye.

Mrs. Thurman?

Mrs. THURMAN. Aye.

The CLERK. Mrs. Thurman votes aye.

Mr. Doggett?

Mr. DOGGETT. Aye.

The CLERK. Mr. Doggett votes aye.

Mr. Pomeroy?

[No response.]

The CLERK. Mr. Houghton?

[No response.]

The CLERK. Mr. Herger?

[No response.]

The CLERK. Mr. Ramstad?

[No response.]

The CLERK. Mr. Nussle?

[No response.]

The CLERK. Mr. Johnson?

[No response.]

The CLERK. Ms. Dunn?

[No response.]

The CLERK. Mr. Weller?

[No response.]

The CLERK. Mr. Brady?

[No response.]

The CLERK. Mr. Coyne?

[No response.]

The CLERK. I'm sorry, Mr. Watkins passed.

Mr. WATKINS. No.

The CLERK. Mr. Watkins changes his vote from pass to no.

Mr. McDermott?

[No response.]

The CLERK. Mr. Lewis from Georgia?

[No response.]

The CLERK. Mr. Jefferson?

[No response.]

The CLERK. Mr. Pomeroy?

[No response.]

The CLERK. Mr. Chairman?

Mr. STARK. Clerk?

The CLERK. Yes?

Mr. STARK. How am I registered?

The CLERK. Mr. Stark is recorded as pass.

Mr. STARK. Off pass, please, onto aye.

The CLERK. Mr. Stark changes from pass to aye.

Mr. Chairman?

Chairman THOMAS. No.

The CLERK. Mr. Chairman votes no.

Chairman THOMAS. The Clerk will announce the vote.

The CLERK. Sixteen noes, twelve ayes.

Chairman THOMAS. There being 16 noes, 12 ayes, the motion is not agreed to.

Mr. KLECZKA. Mr. Chairman?

Chairman THOMAS. The gentleman from Wisconsin?

Mr. KLECZKA. Inquiry of the Chair. You indicated to Ranking Member Rangel that the bill to repeal the estate tax was not currently on the Floor, and the Chairman is correct. We are debating the rule which precedes the bill. Is it the Chairman's intention that once the bill proper comes up, the Committee will recess so we can participate in the debate on this legislation?

Chairman THOMAS. I would tell the gentleman that any Member who wishes to participate in a debate or go somewhere else is not required to attend this hearing.

Mr. KLECZKA. Well, but Mr. Chairman, this--

Chairman THOMAS. This hearing will go forward.

Mr. KLECZKA. This hearing is important enough that the Members should be here, also. I am at a loss as to why the Chairman would schedule this hearing and send the bill to the Floor at the same time. I am somewhat suspect that maybe this hearing should overshadow what we are doing on the Floor so the public does not know we are providing a big giveaway to the wealthy of the wealthy on the House Floor. That is my suspicion--

Chairman THOMAS. I tell--

Mr. KLECZKA. Nevertheless, Mr. Chairman--

Chairman THOMAS. I tell the gentleman--

Mr. KLECZKA. We might think we are powerful on this Committee, but we still--

Chairman THOMAS. Get your point out.

Mr. KLECZKA. Despite that, cannot be in two places at once.

Chairman THOMAS. I understand that. This is a very difficult job--

Mr. KLECZKA. This is a pretty big Committee, but we have not mustered that trick.

Chairman THOMAS. It is a complex job and oftentimes we are forced to make decisions on a priority basis, and--

Mr. KLECZKA. Priority schmiority, Mr. Chairman. We could have had this hearing yesterday.

Chairman THOMAS. I understand--

Mr. KLECZKA. We could have had it tomorrow. We could have had it Tuesday.

Chairman THOMAS. I will respond to the gentleman that this hearing has been scheduled for some time. The Chair is not in control of the scheduling of the Floor.

Mr. KLECZKA. Oh, do not give us that. You knew damn well when that bill was coming up.

Chairman THOMAS. I understand the gentleman's difficulty in dealing with the complex world.

[Laughter.]

Mr. KLECZKA. No, the problem is being in two places at once, okay? Now, maybe Mr. Thomas can do that and walk on water at the same time, but I think the bulk of this Committee has not been able to do that.

Chairman THOMAS. If the gentleman has finished--

Mr. KLECZKA. The truth does hurt, sir, and I--

Chairman THOMAS. If the gentleman is finished with his parliamentary inquiry, which it was not, and the Chair would--

Mr. KLECZKA. It was only an inquiry of the Chair. It was not parliamentary.

Chairman THOMAS. Fine. The Chair has responded to the inquiry.

Now, does anyone wish to ask questions of the Treasury Department based upon what the Chair considers some of the finest testimony that has been offered under any Administration as a specific guide to assist this Committee in dealing with the very difficult problem in front of us?

The gentleman from Illinois?

Mr. CRANE. Thank you, Mr. Chairman.

Ms. Olson, has the Treasury Department surveyed any of the companies that have inverted or been acquired by a foreign company and asked them what changes to our tax laws would have kept them a domestic company?

Ms. OLSON. Yes, Mr. Crane, we have spoken with a number of companies over the course of our study of the inversion transactions to learn what was motivating the transactions and have identified some of the things that I discussed in response to my question from Mr. Thomas regarding the subpart F rules, the complexity of the foreign tax credit rules, the interest allocation rules. Those are things that particularly complicate and make it expensive for U.S. companies to compete against their foreign competitors in the same lines of business.

Mr. CRANE. Would you not agree that current tax law, like the 30 percent withholding tax on the dividend income received by offshore investors in U.S. mutual funds has the effect of a punitive export tax, and does this force U.S. mutual funds offshore in order to be competitive against foreign investment funds?

Ms. OLSON. That is an issue that we are looking at and we will continue to look at that and I appreciate you raising the question.

Mr. CRANE. I understand that some of the highest average worker wages are paid by the investment management industry here in the United States. As a matter of national public policy, would we not prefer as a Nation to employ those workers in financial services firms here in the United States rather than shipping high-quality jobs offshore? By keeping this economic activity in the United States, would we not enhance the collection of U.S. tax revenues? Instead of exporting products, we are exporting high-paying jobs. What kind of national public policy is that?

Ms. OLSON. It sounds to me like one we should change quickly.

[Laughter.]

Mr. CRANE. Finally, in light of the economic devastation from September 11 that hit the financial services industry particularly hard, would not correcting this flaw in U.S. tax policy assist in putting some of the victims back into quality jobs?

Ms. OLSON. That is certainly something we can take a look at.

Mr. CRANE. Thank you.

Chairman THOMAS. Does the gentleman from California, Mr. Stark, wish to inquire?

Mr. STARK. Thank you, Mr. Chairman.

Ms. Olson, if the Chair had allowed Congressman Maloney to testify, you would have learned that the Boston Globe, in referring to Congresswoman Johnson, suggested that her proposal for a moratorium was so sneaky and pernicious that no one could argue that it was anything but a phony way to avoid taxes and could not argue that it was good for the United States or anybody except the executive officers of companies who do it, or like the Stanley Works, plan to do it. So why should we have a temporary basis when a flat-out ban was needed?

Then, of course, Mr. Maloney speaks to the workers and the common people in his district, unlike Mrs. Johnson, who only talks to the executives and stockholders, of which she is one of the Stanley Works. In talking to one of the retirees, Congressman Maloney determined that this retiree at the Stanley Works would be facing a tax bill of $17,000. As any retiree could tell you, that is a huge amount to pay, and particularly in the face of Mrs. Johnson supporting the privatization of Social Security and the privatization of Medicare. That would leave this Stanley Works machinist with precious little.

Now, again, as I say, because you did not have the opportunity to hear from Congressman Maloney, who is concerned, vitally concerned about the people in his new district, could you tell me why we would allow the Stanley Works machinist to wait with this hanging over his head like the Sword of Damocles while the Republicans privatize Social Security and Medicare and then subject him to a tax bill which for him is substantial, while the executives at Stanley would be getting $30 and $40 million in extra compensation? Can you explain why the Boston Globe would have called Mrs. Johnson's moratorium sneaky and pernicious?

Ms. OLSON. First, I would say that I think that trying to put up a Berlin Wall in response to these transactions is something that is unlikely to work and likely to have harmful effects on the U.S. economy. If we were unable to craft a response to the inversion transactions that would take the juice out of the transactions, remove the reasons for doing them quickly, then it would seem to me that approaching it from the standpoint of a moratorium, a temporary move in that direction might be appropriate.

What we have put forward today is what we think is a set of proposals that will go a long ways towards eliminating the impetus for the inversion transactions and so we think that is a preferable route to a moratorium. A moratorium would be preferable to putting up a complete block on these kinds of transactions because they are just not going to work, and they are going to have other effects that are going to be harmful for the economy.

Mr. STARK. What is not going to work, Ms. Olson?

Ms. OLSON. I am sorry?

Mr. STARK. What will not work?

Ms. OLSON. An approach such as saying companies just cannot move. Number one, people will find ways to get around it, and number two, if you target something solely at inversion transactions, what you are then ignoring is the fact that companies can start offshore, that foreign companies can acquire U.S. companies and achieve the same results, and that is not good for the economy.

Mr. STARK. Is it better for the economy to have them invert?

Ms. OLSON. No. We definitely do not want them inverting. That is why we have tried to come up with a--

Mr. STARK. So we could stop that. We could eliminate that permanently, could we not?

Ms. OLSON. That is definitely what we would like to see happen.

Mr. STARK. So if we followed Congressman Maloney's approach, and the approach that most of us feel would be much more certain to prevent the harm coming to these workers in Connecticut than we would under some moratorium which might last for 16 or 18 months. Then we would be right back in the soup, would we not?

Ms. OLSON. No, I do not think we would be back in the soup because the reason to do a moratorium is to have time to consider fully what you ought to do to--

Mr. STARK. Nothing gets considered in this Congress, Ms. Olson--

Ms. OLSON. I am afraid there is, Mr. Stark--

Mr. STARK. You are seeing that. They will not even allow Members of Congress who are experts in this field, who have a concern for the workers in Connecticut, like Congressman Maloney, to testify, only to protect the inadequacy of the representation that is given to them by Congresswoman Johnson. That is the problem we have in this Congress.

Chairman THOMAS. The gentleman has the right to say whatever he chooses to say.

Mr. STARK. Thank you, Mr. Chairman. I wish that that were extended to all Members of Congress.

[Laughter.]

Chairman THOMAS. The gentleman can get on the Committee. If the gentleman is willing to give up his seat to allow the other Member on the Committee, he can express himself right now.

Mr. STARK. We could operate with a certain amount of courtesy and decency and get rid of the fascist--

Chairman THOMAS. The gentleman's time has expired. Does anyone else wish to respond? That comment does not need to have a response.

The gentleman from Florida?

Mr. SHAW. Ms. Olson, I would join the Chairman in complimenting you on a very clear and precise description of the problem. I think Mr. Stark was getting into it. Clearly stated, does the legislation filed by Mr. Maloney, H.R. 3922, solve the problem that we are trying to solve?

Ms. OLSON. No, we do not believe it does solve the problem we are trying to solve. We think it would miss a lot of things. It would have other effects, and those other effects could be very harmful for the economy.

Mr. SHAW. Thank you. I think, Mr. Chairman, some of the comments that have been made from the other side of the aisle, I think fully explain why we should not turn these hearings into political contests between someone on the Committee and someone not on the Committee. It would absolutely, I think, be a tragedy if hearings of this Congress were to stoop to that level so that we ended up having these type of spats every other year during election years. I think that is very unfortunately. I would, frankly, compliment the Chairman for holding firm on that.

I have a question regarding the stock transactions. This is the trading of American incorporated stock for foreign incorporated stock. As I recall from your comments, that is a taxable gain, is that not correct?

Ms. OLSON. Yes, it is. There is tax on the shareholders when they exchange the stock in the U.S. company for stock in a Bermuda company.

Mr. SHAW. Would it result in a stock loss, also, if the stock was below what the stockholder paid for it?

Ms. OLSON. No. The loss is not recognized.

Mr. SHAW. The loss is not recognized. How about stock options held by corporate employees? Is that taxable if the exchange is made for an option on a foreign stock?

Ms. OLSON. Assuming it is an option covered by section 83, no, it is not treated as property, so it would not be treated as a taxable exchange.

Mr. SHAW. We could clearly make it taxable?

Ms. OLSON. Yes, we could.

Mr. SHAW. Thank you. Thank you, Mr. Chairman.

Chairman THOMAS. I thank the gentleman. Does the gentleman from California, Mr. Matsui, wish to inquire?

Mr. MATSUI. Thank you, Mr. Chairman.

Ms. Olson, one of the concerns that I have regarding the testimony you just gave--first of all, let me just say this. Mr. Neal and Mr. Maloney's bill basically, and correct me if I am wrong, but just the bare essentials would be that if a company reincorporates offshore but maintains essentially its shareholders and there is no change or very little change in shareholders, that company then will be treated for tax purposes as a U.S. company? It seems to me that that is pretty straightforward. It does not add a lot of complications in it, which seems to make a lot of sense, given the kind of offshore reincorporation that is being anticipated now. I say that and perhaps when you answer some of my questions, you might want to respond to that.

The concern I have is that in Mr. O'Neill's comments in the press release when the Treasury Department's preliminary report was issued, I will just quote. "When we have a tax code that allows companies to cut their taxes on their U.S. business by nominally moving their headquarters offshore, then we need to do something to fix the tax code." It sounds like we either move to a value-added tax or a national sales tax or perhaps lower U.S. corporate taxes as a way to do this, and, of course, that would do it. We can eliminate U.S. corporate taxes and there is no question in that situation that you would probably not see inversion.

On the other hand, I could see a lot of corporations 6 months later saying our environmental laws are just too stringent and it might be better just to take companies offshore and have them open up there because we can save hundreds of millions of dollars over the next decade by doing that, or labor standards, or any other standards. Maybe our antitrust laws are too stringent, so we will just move some of the businesses offshore for that purpose.

I guess that is a consequence of globalization, and we all recognize that is happening. We cannot change that. We do not want to change it. It obviously lifts all boats.

I think the answer you are giving basically will allow corporations to make that case of lower taxes for almost every other U.S. regulation or U.S. law that we have to maintain U.S. standards in terms of our country and what we stand for, national character. We are playing, to some extent by making this argument, right into the hands of those people that I disagree with that demonstrated in Seattle, Washington.

I would hope that, somehow, you can try to come up with something that might have a little bit more weight to it, because I am afraid that that argument will be used by everybody. I mean, it is a very dangerous position, I think, if you extend it beyond where we are.

I would like some of your thoughts on this, because I think there is a value in discussing the larger issue of the impact of globalization on U.S. regulations and U.S. laws. There is no question that at the National Oceanic and Atmospheric Administration discussions, this will be a major issue. We are going to get into competition policies, obviously with the GE-Honeywell deal, with the recent European Union complexity in terms of how they view antitrust laws and how we do with respect to Microsoft.

I think we are going to have to discuss these things, and somehow, the Congress and the American public is going to have to be well aware of the direction we are going. I think this is just the tip of the iceberg that we are seeing, and to suggest that we just eliminate U.S. corporate taxes or we lower U.S. taxes is not the answer because we can make that case for almost everything in terms of what we stand for as a Nation.

Ms. OLSON. Thank you, Mr. Matsui. You are absolutely right. I want to first address the Neal and Maloney bill. We are not enthusiastic about any kind of a bill that would just kind of erect a blockade against companies going because we think that it would produce other ways of doing the same thing.

This bill--you have heard said before, I am sure, that tax lawyers are among the most creative people alive and if you erect some kind of a rule, they will find their way around it. The Neal-Maloney bill, I think, is one that people would fairly quickly find their way around, and because of that and because of the other ways of achieving the same effects that the inverted companies are achieving, we do not think that is the right direction to go. So we think it is better to focus on the underlying problems and try to fix the underlying problems.

With respect to the questions about our tax system in general, I am sure you have read the press about the Secretary directing us to begin thinking about tax reform, and that is something that we have underway. One of the things that is clear when you spend a lot of time looking at the tax code is that basing our tax system on income is something that is inherently very difficult to do. It is a very complicated process to figure out how you appropriately measure income.

What I know the Secretary wants us to do is not to think about anything that reduces revenues, but rather to find the most efficient way of collecting for the government the revenues that it needs to operate. So one of the things that we may want to explore is whether there are alternatives to an income tax on business tax that might more efficiently collect the revenues that we need from that sector of the economy to fund government, and when we do that, I think it is critically important that we look at what is going on in our major trading partners.

I think that the quality of life that we have here in the United States is surpassed nowhere and that is a natural magnet for business to the United States. I think the concern about quality of life also means that the countries that we have to be most concerned about are our major trading partners and whether our rules are in step with our major trading partners.

Professor Michael Graetz in a book that he wrote a few years ago observed that in looking at our tax system and in particular international tax reform, we could no longer merely contemplate our own navel, and I think that is exactly right. We have to think more broadly, as you have suggested, about how other countries tax things, what their other rules are like on the antitrust side, the environmental side, et cetera. I think our focus will be mainly on our major trading partners whose systems are, in many respects, similar to ours, but in important respects differ from ours.

Mr. MATSUI. Thank you.

Chairman THOMAS. The gentleman's time has expired.

Mr. MATSUI. Mr. Chairman, reluctantly, given what Chairman Rangel has said earlier, or Ranking Member--

Chairman THOMAS. The gentleman's time has expired.

Mr. MATSUI. I want to make a preferential motion.

Chairman THOMAS. Does the gentlewoman from Connecticut wish to inquire?

Mr. MATSUI. Mr. Chairman, I make a preferential motion. Mr. Chairman, I would like to make a preferential motion, a privileged motion at this time, in that--

Chairman THOMAS. All you have to do is move.

Mrs. JOHNSON OF CONNECTICUT. Thank you, Mr. Chairman.

Mr. MATSUI. I move to adjourn, Mr. Chairman.

Chairman THOMAS. The gentleman from California moves to adjourn. All those in favor, say aye.

Those opposed.

In the opinion of the Chair, the ayes have it. The Committee is adjourned.

[Whereupon, at 12:26 p.m., the hearing was adjourned.]
[Questions submitted from Mr. Neal to Ms. Olson, and her responses follow:]

U.S. Department of the Treasury
Washington, DC 20220

1.  Henry Paulson, the CEO of Goldman Sachs, this week lamented the fact that faith among U.S. investors in corporate executives is at an all-time low, and that this lack of confidence was forestalling a recovery in our U.S. financial markets.  Paulson said, “I cannot think of a time when business over all has been held in less repute.”  However, his concerns are not necessarily shared by other corporate executives.  John Trani, the CEO of Stanley Tools also said this week of his decision to move Stanley to Bermuda, “If you are taking your stewardship seriously, I think you have to do what I did.”  And he added if he had it to do over again, he would have done it earlier.

Does the Treasury Department share the concerns of Mr. Paulson?  Does the Treasury Department believe that corporations fleeing for offshore tax havens will harm the image of corporate America?  Further, does Treasury believe that any such perceptions of greed or disloyalty will lead to a lack of investor confidence hurting our U.S. financial markets?

The Treasury Department is very concerned about U.S.-based multinational companies moving their place of incorporation to outside the United States in order to reduce their U.S. income taxes.  These so-called inversion transactions provide a substantial reduction in taxes through a transaction that is complicated technically but virtually transparent operationally.  Our tax law should not operate to permit that to occur.  As Secretary O’Neill has said, "When we have a tax code that allows companies to cut their taxes on their U.S. business by nominally moving their headquarters offshore, then we need to do something to fix the tax code."

An immediate response is needed to eliminate the juice from these inversion transactions.  We must eliminate the ability to engineer ways to inappropriately reduce the U.S. tax on income earned in the United States.  The response to these transactions should be broad enough to address the underlying differences in the U.S. tax treatment of U.S.-based companies and foreign-based companies, including the ability to reduce the U.S. corporate-level tax on income from U.S. operations.  Inappropriate shifting of income from the U.S. companies in the corporate group to the foreign parent or its foreign subsidiaries represents an erosion of the U.S. corporate tax base.  It provides a competitive advantage to companies that have undergone an inversion or otherwise operate in a foreign-based group.  Moreover, exploitation of inappropriate income-shifting opportunities erodes confidence in the fairness of the tax system.

2.  This week’s major newspapers feature the scandal enveloping Tyco, a former U.S. company now headquartered in Bermuda.  Back in 1999, Tyco argued before the SEC that it should not be bound by SEC rules with regard to shareholder proposals because it was not incorporated in the U.S.  More recently, a Stanley public statement warns, “It may be difficult for you to enforce judgments obtained against Stanley Bermuda in the U.S. courts.

Does the Treasury Department have a concern that U.S. investor rights, including those of state pension funds and employee organizations, may be diminished by the exodus of former U.S. corporations to tax havens?

Because this question regarding investor protections involves matters outside of my area of expertise, I would refer you to the Securities and Exchange Commission.

3.  The SEC filing of Stanley states, “It is intended that Stanley Bermuda’s business will be centrally managed and controlled in Barbados.”  However, Stanley has stated that the move to Bermuda is to lower U.S. taxes on U.S.-source income.

Does Treasury have a concern that the use of Barbados in this situation will be in order to exploit treaty provisions which might allow a company to avoid U.S. taxes on U.S.-source income as well?  Does Treasury have the same concern with the use of Luxembourg by Accenture and PWC, in addition to being based in Bermuda?

The Treasury Department is concerned about the possible use of income tax treaties to inappropriately reduce U.S. taxes on U.S. source income.  To address this concern, we are reviewing and evaluating our tax treaties to identify any inappropriate reductions in U.S. withholding tax that provide opportunities for shifting income out of the United States.  We must ensure that our treaties serve the intended purpose of reducing or eliminating double taxation of income, not eliminating all taxation of income.  Treaties that do not operate consistently with this goal will be modified to do so.  We also must examine whether anti-abuse mechanisms already within our treaties are operating properly.  Because U.S. tax treaties are intended to benefit only residents of either the United States or the treaty partner, U.S. income tax treaties include detailed provisions to prevent the misuse of treaties by residents of third countries.  One of Treasury's key tax policy goals in modernizing our network of existing tax treaties is to bring the limitations on benefits provisions in all our treaties up to current standards so as to remove the opportunity for such misuse.

4.  The reinsurance transaction to tax haven parent corporations is designed specifically to avoid U.S. tax on U.S.-source income.  This is true regardless of whether there has been an inversion by the insurance companies involved.  This is distinguishable from other cases where companies are primarily avoiding U.S. tax on foreign-source income.  So in the case of reinsurance, there is no broader tax policy question of whether our tax code should permit foreign-based reinsurers to avoid U.S. tax on U.S.-source income.

Does the Treasury Department share the concern that insurance companies are using related-party reinsurance transactions to avoid U.S. tax on U.S.-source income, a clear an egregious tax avoidance situation?  Do you agree that a general fix on inversions will not solve the problems of tax avoidance by reinsurance?  And, after three years of study and evaluation of this specific issue, what specifically do you recommend to eliminate the reinsurance abuse if you do not support the provisions of the Johnson-Neal bill, H.R. 1755?

The Treasury Department is concerned about the use of related party reinsurance to avoid U.S. tax on U.S.-source income.  In particular, the use of related party insurance may permit the shifting of income from U.S. members of a corporate group to a foreign affiliate.  Existing mechanisms for dealing with insurance transaction are not sufficient to address this situation.  In this regard, further analysis may be appropriate to consider and evaluate approaches to address the problems presented by related party reinsurance.  Such analysis should include an examination of methods used by our trading partners in taxing insurance companies, including, for example, the use of some countries of a premium-based tax that captures with the country tax base all business written on risks within the country.

[Submissions for the record follow:]

AFL-CIO, statement

Coalition for Tax Competition; Andrew F. Quinlan, Center for Freedom and Prosperity; Daniel Mitchell, Heritage Foundation; Veronique de Rugy, Cato Institute; Paul Beckner, Citizens for a Sound Economy; David R. Burton, Prosperity Institute; James Cox, Association of Concerned Taxpayers; Stephen J. Entin, Institute for Research on the Economics of Taxation; Tom Giovanetti, Institute for Policy Innovation; Kevin Hassett, American Enterprise Institute; Lawrence Hunter, Empower America; Charles W. Jarvis, United Seniors Association; Karen Kerrigan, Small Business Survival Committee; James L. Martin, 60 Plus Association; Edwin Moore, James Madison Institute; Steve Moore, Club for Growth; Grover Glenn Norquist, Americans for Tax Reform; John Pugsley, Sovereign Society; Richard Rahn, Discovery Institute; Gary and Aldona Robbins, Fiscal Associates, Inc.; Tom Schatz, Council for Citizens Against Government Waste; Eric Schlecht, National Taxpayers Union; Fred L. Smith, Competitive Enterprise Institute; Lewis K. Uhler, National Tax Limitation Committee; Paul M. Weyrich, Coalitions for America; Christopher Whalen, Whalen Consulting Group; joint letter