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Camp Opening Statement: Hearing on Transfer Pricing Issues

July 22, 2010

It is indisputable that worldwide American companies that are subject to transfer pricing rules have a positive effect on our economy and generate high quality jobs for Americans.

Given that our economy remains so fragile, and with unemployment stuck at nearly 10 percent, it is critical that as this committee examines transfer pricing rules, or any other complex tax issue, we also carefully consider the economic implications of altering the current rules.

  • First of all, they are leaders in innovation.  According to a 2009 report by the Business Roundtable, these employers conducted more the three-quarters of the total research and development performed by all U.S. companies.  R&D, as I know Chairman Levin would agree, is critical to sustained job creation here in the U.S.
  • Furthermore, the Business Roundtable study shows that these employers provide larger than average paychecks for Americans, with an average per-worker wage of over $62,000 per year – nearly 25 percent higher than the overall average of about $50,000 per year.

Transfer pricing rules have been a matter of interest for some time and today’s examination will help us all understand a little better how American companies struggle to stay competitive.

Now, it appears by the witnesses invited by the Majority that we will hear the argument that the transfer pricing rules provide an incentive for these companies to ship jobs overseas.  If that is the Majority’s real concern – the tax code pushing jobs overseas – then I would suggest we focus on the real problem, which is the corporate tax rate. 

At 35 percent, the United States has the second highest corporate tax rate among OECD countries – second only to Japan.  Japan, however, has at least recognized its rate is untenable and is taking action to cut it – leaving us to soon have the highest corporate tax rate among our major trading partners.  While the average tax rate of other OECD countries is 23 percent and falling, our high rate discourages investment and job creation.

Unfortunately, the Majority has decided to ignore the underlying problem of our high corporate tax rate and instead has chosen to examine today but one symptom of it – the stress they place on transfer pricing decisions.  In doing so, I fear we will hear today about some proposals that supposedly will cure those ills in ways that actually would further weaken American competitiveness and the U.S. job market.

For example, shifting to an arbitrary “formula apportionment” system ignores not only the international competition U.S. employers already face, but also ignores the fact that such a move could expose worldwide American companies to double taxation.  Unless foreign countries adopted a similar formula – and virtually all use our current “arms-length” standard to determine fair market value – the result could be double taxation.  And if the apportionment is based on something like the percentage of payroll paid in the U.S. versus abroad, such a system might create a perverse incentive to ship jobs overseas to lower companies’ overall tax burden.

The Administration’s proposals are equally flawed.   One of them, in fact, could actually increase taxes on companies that keep high-paying R&D jobs in the U.S. while rewarding companies that decide to move those jobs to low tax jurisdictions.

The arms-length standard for transfer pricing is not a perfect system, and both Republicans and Democrats have studied this issue in detail in order to ensure proper compliance.  In 2004, this Committee requested a report from the Treasury Department, which the previous Administration completed in November 2007.  As a result of that report, it is my understanding that Treasury has continued its work to finalize additional regulations to improve compliance and combat potential abuses. 

Before I close, I want to make a particular point with regard to the pamphlet produced by the Joint Committee on Taxation.  While I certainly appreciate their efforts, it is critical to note that the Joint Tax Committee, by its own admission, did not look at the transfer pricing practices of a representative sample of American companies.  Instead, they focused on only six companies with similar tax liabilities. 

Even more significantly, JCT’s pamphlet fails to meaningfully describe other countries’ international tax systems or their transfer pricing regimes, and it does not adequately discuss the global tax treatment or transfer pricing practices of foreign companies that compete directly against the six American companies that were studied. 

For those reasons, JCT’s pamphlet, while very informative about the law, comes without the critical broader context that policymakers need to evaluate the effects on international competitiveness of proposed changes to our current law.

With that said, I look forward to hearing from our witnesses and learning more about this important and complex issue.

I yield back the balance of my time.