[By Permission of the Chairman]

Statement of Ingersoll-Rand, Hamilton, Bermuda

I. Ingersoll-Rand’s Corporate Reorganization Was A Lawful And Appropriate Response To Competition

Ingersoll-Rand (“I-R”) is a world-wide manufacturer of a wide variety of brand name industrial products with about sixty percent of its sales in the United States and forty percent in other countries.  It is implementing a global growth strategy, with a particular objective to encourage global cross-brand selling.  To do so effectively, it is essential that I-R be competitive with its foreign-incorporated competitors.

As one element of this objective, I-R met every Treasury Department requirement for a legal corporate inversion when it reincorporated in Bermuda.   The reincorporation was undertaken in full public view in the fall of 2001 and fully reported to the SEC.  It received the approval of eighty-nine percent of I-R’s voting shareholders.  The transaction was completed and closed in 2001.  There was no indication from the Congress, from any Member of Congress during this period, or from any official of the Treasury Department or the Securities and Exchange Commission, that the transaction should be subject to question.  It was not until March 2002 that Members of Congress raised concerns about inversion transactions.  In April 2002, the Treasury Department report on inversions confirmed the complete compliance of this transaction with current law.

Significantly, I-R’s transaction was taxable on the date of reincorporation, both to the corporation and its individual shareholders.  Shareholder taxes on gain from the exchange of stock are the direct result of action taken by the Treasury in 1994 to insure that these transactions would not escape U.S. taxation.  Thousands of I-R's individual shareholders paid millions of dollars of tax on this transaction.  In addition, I-R recognized substantial taxable income.

Labeling I-R's transaction as unpatriotic is unjust.  The reorganization will not result in the loss of any U.S. jobs or the closure of any U.S. plants.  To the contrary, the transaction will increase I-R’s ability to maintain U.S. operations and to expand U.S. manufacturing and  employment in the future.

Finally, if Congress determines that modifications should be made to the limitation of interest expense deductibility for U.S. companies with foreign parents, such modifications should be applicable to all companies.  This approach was adopted by the Treasury Department in its recent proposals to this Committee with respect to foreign reincorporation transactions.  The Treasury Department recognized that U.S.-based companies are subject to an archaic and burdensome tax regime that creates serious problems of competitiveness for those companies with foreign-based rivals.  Imposing more restrictions on interest expense deductibility only for certain types of U.S. companies with foreign parents would exacerbate those problems by providing a further advantage to other types of U.S. companies with foreign parents.

II. A Ban on Inversions Will Be Ineffective and Will Exacerbate the Problem of Foreign Takeovers

At best, a ban on corporate inversions, whether in the form of a prohibition or a moratorium, applies a "Band-Aid" treatment to a symptom of a fundamental problem:  the Code's treatment of foreign source income.  These provisions create an unequal playing field between U.S. and foreign global competitors and thereby encourage foreign takeovers of U.S. companies.  The vast majority of global mergers in the past decade between a U.S. and non-U.S. company has resulted in the corporate parent choosing the location of the non-U.S. partner as its global headquarters.  This is not a coincidence; it is largely the result of our international tax regime.  This trend has far more serious implications for U.S. operations and U.S. jobs than corporate inversions, which maintain U.S. management of all global corporate operations.

Any attempt to ban inversions will further encourage foreign takeovers, injuring American firms, their employees and their investors.  Even a relatively short-term moratorium will encourage foreign takeovers of U.S. corporations.  This is a particular concern at this time because of the sharp reduction in the value of the dollar, making U.S. companies prime targets for takeovers.

By far the most effective way to discourage inversions is to correct the underlying anti-competitive flaws in the U.S. tax code that place U.S. global companies at a disadvantage with their foreign competitors.  It is essential that Congress address at the earliest possible time the Code's international tax provisions that place U.S. companies at such a severe disadvantage.

III. Legislation That Imposes New Taxes Solely On Companies That Inverted Should Be Prospective Only

If Congress determines that reorganizations such as that implemented by I-R should be prohibited, or that additional taxes should be imposed on such a reorganization, it should do so prospectively.  At the very least, such changes to the tax laws should be prospective from the date on which legislation was introduced or announcement of a likely change in the law was made.  This, almost without exception, is the way in which Congress changes the tax laws governing specific transactions so as to avoid fundamentally unfair consequences to taxpayers.

Retroactive application of any prohibition or moratorium to transactions that were completed before March 2002 would be punitive rather than preventative, because those transactions were completed under and fully consistent with existing law before any Member of Congress indicated that a change in law would occur.  Such a retroactive application would be particularly unfair to I-R’s shareholders, who relied on the benefits offered to the company when they voted to incur taxable income from the transaction.  Taxes paid by individual I-R shareholders may have totaled $100 million.  As a practical matter, there is no way of returning to all these taxpayers the taxes paid on this specific transaction or restoring them to their pre-tax situation.  When the Treasury Department issued its new regulations governing the tax treatment for shareholders on inversions in 1994, it did so prospectively.  The regulations did not affect completed transactions.

Nullifying I-R’s transaction retroactively could also be unfair to the company, which made a decision to act based upon the law as it then existed.  If certain of the proposals before this Committee are enacted, companies will have the opportunity to make choices that were not available to I-R in seeking to satisfy the terms of the new legislation.  For example, I-R could have reorganized in a country in which it has substantial business activities, a choice that would improve its treatment under certain proposed legislation and which would have had identical tax consequences to the reorganization in Bermuda.  This choice may be available to any company that has not yet acted, but it was not available to I-R.

In addition, there are serious due process concerns with legislation such as a prohibition on inversions that retroactively imposes a new tax without any notice to the taxpayer.  Only two types of tax legislation are generally subject to retroactive enactment:  (1) changes in tax rates and other such adjustments to existing tax laws, which are often enacted retroactive to the beginning of the tax year for administrative simplicity; and (2) technical corrections to laws that have been enacted recently but unintentionally left “loopholes” that Congress seeks to close retroactive to the original date of enactment.  The Supreme Court has indicated that U.S. taxpayers are on notice that these types of changes in the tax laws may occur retroactively, because such changes put legislative intent into effect in a reasonable way.

The “anti-inversion” legislative proposals that would operate retroactively are not amendments to existing tax law or technical corrections seeking to close a recently-enacted loophole.  Rather, these proposals would retroactively impose wholly new tax burdens, which could raise serious due process concerns.  In 1995, the Joint Committee on Taxation released a report analyzing the due process issues of a proposal to modify the tax treatment of individuals that expatriated.  When applied prospectively, the proposals did not pose due process concerns, but the Joint Committee stated that the retroactive application of one proposal to a date long `before there was any notice would be “an unprecedented retroactive tax law change that would reach back and pull a non-U.S. citizen into the jurisdiction of the U.S. tax system.”  The concerns expressed by the Joint Committee on Taxation were heeded by Congress at that time.  These concerns apply equally to the retroactive elements of certain legislative proposals under consideration by this Committee.