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Chairman Tiberi Announces Hearing on Tax Reform and Foreign Investment in the United States

June 23, 2011











June 23, 2011


Printed for the use of the Committee on Ways and Means





Subcommittee on Select Revenue Measures
PAT TIBERI, Ohio, Chairma

RICK BERG, North Dakota                

RICHARD E. NEAL, MA Ranking Member
JOHN B. LARSON, Connecticut

JON TRAUB, Staff Director
JANICE MAYS, Minority Staff Director



Advisory of June 23, 2011 announcing the hearing



Nancy L. McLernon
President & Chief Executive Officer, Organization for International Investment

Alexander Spitzer
Senior Vice President – Taxes, Nestle Holdings, Inc.

Claude Draillard
Chief Financial Officer, Dassault Falcon Jet Corporation

Jeffrey DeBoer
President & Chief Executive Officer, The Real Estate Roundtable

PANEL 2:                    

Gary Hufbauer
Reginald Jones Senior Fellow, Peterson Institute for International Economics

Robert Stricof
Tax Partner, Deloitte Tax LLP

Bret Wells
Assistant Professor of Law, University of Houston Law Center



Thursday, June 23, 2011
House of Representatives,
Subcommittee on Select Revenue Measures,
Committee on Ways and Means,

Washington, D.C.

The subcommittee met, pursuant to notice, at 10:02 a.m., in Room 1100, Longworth House Office Building, Hon. Patrick Tiberi [chairman of the subcommittee] presiding.


     *Chairman Tiberi.  The hearing will come to order.  Good morning, everybody, and thank you for joining us this morning for another in a series of hearings on comprehensive tax reform.

     As I think everybody by now knows, under the leadership of Chairman Camp the Ways and Means Committee has been working through a full assessment of our federal tax code.  And, from the assessment, it is clear the tax code stifles job creation at a time when unemployment rates in Ohio and across the country remain well above their historic averages.  The goal is tax reform is to reverse this trend.  The time is long overdue to write a tax code that better incentives job creation in the United States of America.

     Today’s hearing highlights an important contributor to our economy:  foreign companies who directly invest in the United States of America.  Their investment is critical to growing the economy and creating jobs.  Over the past 10 years, affiliates of foreign companies have employed between five and six million workers in America.

     This month the Administration released two reports affirming the importance of foreign direct investment.  I agree, and look forward to working with the Administration to eliminate the regulatory barriers standing in the way of creating greater foreign investment.

     Chairman Camp requested that the Select Revenue Measures Subcommittee further examine inbound issues raised in prior tax reform hearings.  We have heard concerns from U.S. businesses about the tax code.  Many U.S. affiliates of foreign‑based companies view themselves as American businesses, rather than foreign businesses.  Today’s hearing will provide them the opportunity to share their concerns.

     Today’s hearing will also examine tax rules specific to foreign investment, including earnings stripping and transfer pricing.  The effectiveness of those rules in preventing foreign companies from using the tax code to create a competitive advantage over domestic companies is the subject of great debate.

     Finally, I look forward to examining the impacts of the Foreign Investment and Real Property Tax Act.  With talk of a double‑dipper session increasing the availability of capital from foreign investors is a common‑sense step to strengthening the U.S. commercial real estate market.  Last year, Congressman Crowley introduced legislation with me to address this issue.  I understand similar legislation is in the works this year, and I applaud those bipartisan efforts.

     I want to welcome all our witnesses to today’s hearing, and look forward to their testimony.  With that, I yield to our ranking member, my friend from Massachusetts, Mr. Neal.

     *Mr. Neal.  Thank you, Mr. Chairman.  And I want to thank you again for calling this important hearing today.

     Our committee has been examining the impact of tax reform on U.S. multinational companies.  I am pleased to now shift gears, and to focus on the equally important topic of the taxation on foreign‑owned companies operating in the United States.

     In order to remain competitive in a global economy, foreign investment in the United States is critical.  This is especially true during these difficult economic times, when job creation is more important than ever.  And foreign‑owned companies create jobs here, in the United States.  Today these companies employ, as you have noted, over five million Americans, and support an annual payroll of over $400 billion.  In my home state of Massachusetts, U.S. subsidiaries of foreign‑owned companies have created almost 190,000 jobs.

     I was very pleased to hear the announcement by the White House Council of Economic Advisors on Monday that in 2010 foreign direct investment in the United States had increased by 49 percent from the low it reached in 2009.  I certainly look forward to hearing today’s witnesses discuss how we can continue to encourage foreign investment in the U.S.

     Today’s hearing will also focus on whether our current tax system favors foreign companies over domestic companies.  One of today’s witnesses will testify that foreign‑owned companies have a significant competitive advantage in the U.S. marketplace over U.S.‑owned companies.  In my opinion, we should treat foreign and domestic companies equally.  That is why I have introduced legislation to close the loophole that allows the use of excessive affiliate reinsurance by foreign insurance groups to strip their U.S. income into tax havens, avoid tax, and gain a competitive advantage over American companies.

     But before concluding, I would like to thank the chairman for the bipartisanship that he has developed in offering this hearing.  Henry Ford noted that coming together is a beginning, keeping together is progress, and working together offers success.  I hope we will continue to work together on tax reform, and we can use this hearing as a model to continue the work that we have witnessed in both the Majority and Minority status that I have had on this subcommittee.  I believe that is how we will best achieve success in reforming our tax system.

     Thank you, Mr. Chairman.

     *Chairman Tiberi.  Thank you, Mr. Neal.  And I concur.  I want to thank you for your leadership on this specific issue, and just thank the staff, as well.  Both the Republican staff and the Democrat staff worked together on this hearing, and I want to applaud both sides, both staffs, for their hard and diligent work.

     I also want to, before we begin, recognize a new member of our subcommittee, hails from the Commonwealth of Pennsylvania, colleague and good friend, Mr. Gerlach.  Thank you for joining our subcommittee.

     Before we introduce the witnesses for the panel, I ask unanimous consent that all Members’ written statements be included in the record.

     [No response.]

     *Chairman Tiberi.  Without objection, so ordered.  We will now turn to our first panel of witnesses.  I want to extend a welcome to Nancy McLernon, president and CEO of the Organization for International Investment; Mr. Alexander Spitzer, senior vice president of taxes for Nestle Holdings; Claude Draillard, Dassault Falcon Jet Corporation, Little Ferry, New Jersey; and Jeffrey DeBoer, president and chief executive officer of the Real Estate Roundtable, here in Alexandria, Virginia.

     With that, Nancy, you can begin your testimony.  You have five minutes.



     *Ms. McLernon.  Thank you.  Good morning.  Chairman Tiberi, Ranking Member Neal, and distinguished members of the subcommittee, I want to thank you for the opportunity to testify this morning.  I applaud your leadership in holding this timely hearing on the importance of foreign direct investment to the U.S. economy.

     I am president and CEO of the Organization for International Investment.  OFII is a business association exclusively comprised of the U.S. subsidiaries of global companies.  OFII refers to our members as insourcing companies, due to the jobs these firms insource to the United States.

     OFII advocates for fair and non‑discriminatory treatment in U.S. law and regulation for these companies and the millions of Americans they employ.  Our mission is to ensure that the United States remains the most attractive location for foreign investment and job creation for global companies looking to expand around the world.

     This hearing comes at a time when the United States faces serious fiscal challenges at home, and an increasingly competitive global landscape for attracting and retaining investment.  And while the United States remains the world’s largest recipient of foreign investment, its share of global investment has declined dramatically, from garnering 40 percent of the world’s cross‑border capital 10 years ago, to about 17 percent now.

     The committee’s work on fundamental tax reform is vital to ensure that the United States remains the premiere location for global companies to invest.  Simply put, America cannot afford to lose more ground in the race for the world’s investment.

     The U.S. subsidiaries of global companies already play a significant role in America’s economy.  The chairman and Mr. Neal already talked about the number of jobs.  These companies employ over five million American workers, which is about five percent of the private sector workforce.  They maintain an annual payroll of over $400 billion, and account for 6 percent of GDP.  And while they make up less than one percent of all U.S. businesses, these firms pay a full 17 percent of corporate taxes.  And these companies pile billions of dollars in earnings each year back into their U.S. operations, reinvesting over $93 billion, according to the most recent annual data.

     Foreign direct investment tends to disproportionately create and sustain high‑end jobs for Americans.  U.S. subsidiaries pay their employees over 30 percent more than the average company, reflecting the high‑scale nature of their scientific, engineering, and manufacturing workforce.  And in the hard‑hit manufacturing sector alone, U.S. subsidiaries account for 13 percent of the labor force, which is about 2 million jobs.

     Annually, foreign direct investment leads to over $40 billion in domestic research and development, accounting for more than 14 percent of America’s private sector R&D.  And while counterintuitive to some, many globally‑based companies have established their American operations as a platform from which to manufacture goods to sell to the world.  U.S. subsidiaries produce more than 18 percent of total U.S. exports.

     It is worth noting that the vast majority of inbound investment to the United States come from firms headquartered in other developed countries.  In 2010, almost 90 percent of inbound investment came from Canada, Europe, and Japan.  It is worth noting that for all the headlines it generates, Chinese investment accounts for a minuscule portion of foreign investment in the United States:  less than one percent.

     In the midst of recent economic challenges, foreign investment has continued to be an engine for job creation and a catalyst for growth throughout the country.  For example, at a time when the unemployment rate is a focus of national attention, Netherlands‑based Philips Electronics is working to fill 1,500 job openings across the country.  The company already employs over 25,000 people in the United States, including over 1,000 at its manufacturing facility in Highland Heights, Ohio, where they develop, produce, and export high‑end medical imaging technologies such as MRI and CT scanners for customers around the world.

     Philips also chose to place the global headquarters of its health care division in Massachusetts, and does the vast majority of its worldwide health care manufacturing work in the United States.

     However, the competition to attract and retain companies like Philips has never been stronger.  Companies today have an unprecedented array of options when looking to expand their business around the world.

     OFII sees tax reform as an important opportunity to encourage greater investment in the United States.  As American businesses, OFII members share many of the same concerns regarding tax policy as other U.S. companies.  Specifically, we believe Congress should give due consideration to three overriding factors.

     First, OFII is united with the broader American business community, and its support for reducing U.S. federal corporate income tax.  In fact, OFII’s annual survey of chief financial officers showed that the corporate tax rate ranked as the policy change that would have the greatest impact on incentivizing investment here.

     Second, OFII encourages increasing the certainty, transparency, and reliability of the U.S. tax system to allow for long‑term strategic planning.

     And finally, most important to this unique slice of the business community, OFII strongly cautions against any proposals that would disadvantage U.S. subsidiaries in their efforts to do business in our market on a level playing field.  Such policy would surely impact our ability to attract global investment.

     I am pleased to answer any questions you may have, and I look forward to working with this committee and Congress in considering tax reform that will increase investment in the United States.  Thank you.

     [The statement of Ms. McLernon follows:]

     *Chairman Tiberi.  Thank you, Ms. McLernon.

     Mr. Spitzer, you are recognized for five minutes.



     *Mr. Spitzer.  Yes, thank you.  Good morning.  My name is Alex Spitzer.  Mr. Chairman, Ranking Member, members of the committee, I am grateful for the opportunity to share my personal views on international tax policy, as it relates to U.S. operations of multinational firms and, in particular, any impediments that may serve as a barrier to attracting international investment into the U.S. manufacturing base.

     I am senior vice president of taxes for Nestle in the U.S., and have held the top job in the company for the last 26 years.  Nestle, a Swiss public company, is the world’s largest food company, with sales over 100 billion, and was established in 1866, 50 years‑plus before the enactment of the U.S. federal income tax.

     For more than 110 years, Nestle has been insourcing into the U.S. and investing in American factories, jobs, and businesses.  Our first factory in the U.S. was built around 1900 in Upstate New York to produce chocolate products.  Nestle manufactures, in the U.S., a large range of products, including Stouffers, Lean Cuisine, Gerber, Jenny Craig, PowerBar, Hot Pockets, Poland Spring, Deer Park, Edy’s, Haagen‑Dazs ice cream, Nescafe Coffee, CoffeeMate, DiGiorno Pizza, and also in the pet food area, Friskies, Alpo, Purina, and Beneful.

     We have a total of 51,000 employees in the U.S., and 85 manufacturing facilities and 7 R&D centers.  Nestle’s U.S.‑manufactured product sales approximate 28 billion annually, including 600 million in exports out of the U.S.

     Nestle in the U.S. has been consistently ranked by Fortune magazine as the number one consumer food products company in the industry.  Excluding acquisitions, we have invested approximately 5.5 billion over the last 6 years in M&A and factories in our U.S. businesses.  And since I have been at the company, we have reinvested just about all of our U.S. profits back into our operations here to grow our U.S. businesses.

     When Nestle acquires a business, we usually maintain current management and increase investment and expansion, rather than cut costs or dismantle the business.  For example, after we completed our Dreyer’s acquisition, we invested over 100 million in expanding our Bakersfield, California plant, making it the largest ice cream factory in the world.

     Turning to tax policy, there has been much discussion of the U.S. corporate tax rate and its impact on the country’s ability to compete for global investment.  There is no doubt that a lower tax rate and a more transparent tax code would make the U.S. more competitive for investment from abroad.  The rest of the world is moving towards lower tax rates.  Simply put, the U.S. must do the same.

     However, I also want to highlight a number of other areas of particular interest to my business.  The ability of the inbound business community and Nestle itself to deduct ordinary and necessary business expenses related to investments, such as interest and royalty for both federal and state tax purposes is of great concern, and weighs heavily on our investment decisions.

     Not only are inbound companies singled out with regard to restrictions on the deductibility of debt service via section 163(j), recently there seems to be a coordinated IRS effort to audit inbound companies with regard to debt equity type issues, although there is no indication of any abuse.  Despite the fact that a 2007 treasury report found no evidence of widespread abuse with regard to section 163(j), there is still much uncertainty regarding further restrictive legislation in this area.  This uncertainty weighs heavily on investment decisions.

     In addition, various legislative proposals concerning corporate residency rules, treaty overrides, also contribute to the climate of uncertainty.  There is now growing uncertainty at the state level.  In many cases, states seem to be bent on conducting their own individual foreign fiscal policy.  Many states have enacted legislation to deny deduction of interest and royalties paid to foreign parent companies, even those headquartered in treaty countries.  These initiatives would violate the federal and treaty rules concerning permanent establishments.  And, unlike most sub-national governments, the states are not bound by the U.S. tax treaties.

     While I understand this is not within the committee’s jurisdiction, it would be helpful if members would promote the inclusion of the states in upcoming treaties.  If this trend of taxation continues, I am afraid not only will it discourage investment into the U.S., but it will jeopardize our tax treaty network and/or encourage reciprocal treatment by our treaty and trading partners.

     In this regard, a proposal to deal with the growing problem has already been introduced.  I ask that you review and support the Business Activity Tax Simplification Act of 2011, which is currently before the House Subcommittee on Courts, Commercial, Administrative Law of the House Committee on the Judiciary.

     As a U.S. citizen, I think it important for the United States to create a competitive environment to attract and maintain investment by a competitive tax regime, as well as ensure fairness and certainty in our tax rules and administration.  We should put the welcome mat out for investment in an affirmative, proactive manner.

     As the committee moves forward in considering reforms to the tax system, I urge that you do so in a non‑discriminatory way that maximizes job‑creating investment in the United States.

     Thank you for thoughtfully framing this discussion.  I am happy to respond to any questions.

     [The statement of Mr. Spitzer follows:]


     *Chairman Tiberi.  Thank you, Mr. Spitzer.

     Mr. Draillard?



     *Mr. Draillard.  Good morning.  My name is Claude Draillard, and I am the chief financial officer of Dassault Falcon Jet Corporation.  Thank you for inviting me to testify this morning.

     Dassault Falcon Jet Corporation ‑‑ DFJ, in short ‑‑ is a fully‑owned U.S. subsidiary of Dassault Aviation, a French business aircraft manufacturer which is a major player in the global aviation industry.

     Since 1972, DFJ’s operations have grown from a small sales office in New York City to a company with 7 locations throughout the United States. DFJ and its subsidiaries currently employ a staff of over 2,500 workers in the U.S., and is a major provider of jobs, mostly in Arkansas, New Jersey, and other states.  DFJ also has offices in nine other states.  And as the business aircraft market is a global market, we also operate a number of sales offices internationally.

     DFJ and its subsidiaries in the United States are operating in the following lines of business for Falcon aircraft:  sale of new and pre‑owned for the United States, Canada, Mexico, South America, Pacific Rim, and Asia; outfitting and customization of the vast majority of Falcon aircraft, including engineering, and this includes Falcon aircraft sold outside of DFJ’s territory; some research and development work for cabin and cockpit options, either as in-production installation or as after‑market installation; and all after‑market services, such as sales and repair of spare parts.

     DFJ provides quality, high‑salaried jobs throughout the United States.  The nature of DFJ’s business requires the employment and training of highly‑skilled professionals in all locations:  engineers, pilots, support engineers and technicians, aviation mechanics, but also CPAs and other types of professionals.

     DFJ also provides indirect employment all across the United States through a network of suppliers of all sizes, including divisions of major equipment manufacturers, such as United Technologies, as well as local vendors that help provide flexibility to our production operations.

     Because business aviation is a high‑tech, highly regulated industry with very demanding customers, continued investment in technology and facilities is necessary to operate a long‑standing profitable company.  DFJ has a history of reinvesting the cash generated by its American operations back into the United States in the form of new technologies and production upgrades, rather than distributing dividends to its foreign parent.

     This trend has allowed DFJ to make additional investments in the U.S.  DFJ’s average capital expenditure, excluding R&D, in the last 10 years has been in the vicinity of 15 million per year, enabling the company to expand its Little Rock, Arkansas, operations, enhance its maintenance operations, and invest in new IT tools and other product life cycle management tools.

     With the globalization of the economy, the relative weight of the United States market in new orders for new and pre‑owned aircraft has decreased.  Even though it remains a significant market in number of units, the U.S. is no longer a growing market, but mostly a mature renewal market.

     Like everyone else, DFJ is navigating the current economic uncertainties and the dramatic changes in world economic powers.  In this fragile time of recovery and economic change, an array of uncertainties in U.S. tax policies and regulations add obstacles to growth and new investment.  In addition to the U.S. corporate rate already being the second highest in the world, there is concern of a rising direct and indirect tax burden for U.S. businesses.

     At the same time, some emerging countries are experiencing budget surpluses that increase their ability to provide ever bigger tax incentives.  In anticipation of this, businesses are asking themselves, “Should we keep investing in the U.S. when the country’s economy does not seem to be recovering quickly?  Should we look to move where countries are providing tax incentives for investment?”

     Will current provisions to encourage investment and job creation be able to survive, such as R&D credit and domestic manufacturer’s deduction, to provide some measure of relief?

     At the same time, U.S. tax regulations, along with IRS announcements and private letter rulings, have reached a new level of complexity.  Interpretations are becoming ever more difficult to understand and reconcile.  Disagreement in the reading of tax regulations and provisions has significantly lowered the pace of transaction between parties.

     Another layer of complexity is added when state tax legislation comes into play.  For structured transactions such as international leases of business aircraft, a number of elements need to be analyzed on top of federal tax issues, states question the validity for them of tax treaties.  State sales tax, use tax, and income tax provisions make certain types of transactions extremely costly.

     The business aviation industry is geographically shifting.  While DFJ is committed to its United States investments, there is increasing incentive to look elsewhere to deploy our resources.  Needless to say, predictable, pro‑growth tax policy and simplification of federal regulations would make it more attractive to maintain our investment in the United States.

     I will be happy to answer any of your questions.

     [The statement of Mr. Draillard follows:]


     *Chairman Tiberi.  Thank you, sir.

     Mr. DeBoer, you are recognized for five minutes.



     *Mr. DeBoer.  Thank you, and good morning.  My name is Jeff DeBoer, I am president and CEO of the Real Estate Roundtable.

     President Obama had it correct earlier this week when he said investments by foreign‑domiciled companies and investors create well‑paid jobs, contribute to economic growth, productivity, and support American communities.  Unfortunately, the reality is, in the case of foreign capital investment and U.S. commercial real estate, our current laws significantly discourage the type of job‑creating economic growth that the President was touting.

     America needs to be able to compete globally for investment capital for all types of positive economic activities.  And today that simply isn’t the case when we compete globally for capital for our real estate markets.

     Our commercial real estate markets historically have been very positive contributors to economic growth.  Healthy commercial real estate markets provide jobs in construction, design, management, architecture, and many other areas.  Strong real estate values provide the resources through property tax payments and transfer fees to fund local budgets and pay for roads, police, and education needs that we all think are essential to healthy communities.

     But today, while some commercial real estate markets have started to come back, most markets nationwide remain deeply troubled.  They are marked by very weak property values caused by excessively high unemployment, the lack of business expansion, and extremely low consumer confidence.

     In addition, large amounts of commercial real estate debt are maturing.  But because of steep property declines and restrictive credit availability, trillions of dollars of commercial real estate debt nationwide will not be able to be refinanced without large infusions of equity capital.  The resulting burden on our nation’s banking system, particularly community banks, is inhibiting small business lending and holding back job creation.

     Everyone in my industry asks, “Where will the capital come from that is needed to rebalance our loans?”  One source that is ready and willing is foreign‑based capital.  However, while ready and willing to invest, this capital is essentially not able to invest, because the Foreign Investment in Real Property Tax Act, FIRPTA, make it highly undesirable, economically and administratively.

     FIRPTA is a discriminatory tax.  It only applies to foreign investors in U.S. real property.  The 35 percent FIRPTA tax, combined with state and local taxes, and frequently with the branch profits tax, results in a foreign investor paying a tax as high as 54 percent on capital gain.

     In addition, the administrative burdens and cost associated with structuring investments in U.S. real estate is significant.  No other asset class faces this tax.

     A report by University of California professor Ken Rosen found that reforming FIRPTA would unlock billions of dollars in investments into U.S. commercial real estate.  This is capital that is currently sitting on the sidelines or, more likely, going to other countries that have more favorable tax rules.

     The time has come and gone for FIRPTA.  Frankly, it should be repealed, and perhaps you can do that in tax reform.  There are meaningful, cost‑efficient reforms that can and should be made now, however.  We are pleased that Congressman Brady and Congressman Crowley and other members of the committee are working on legislation to make two simple meaningful changes.

     First, the existing small shareholder exemption for foreign investments in publicly‑traded REITs should be doubled from 5 to 10 percent.

     Second, an IRS notice called 2007‑55 should be withdrawn.  Action in this area would significantly help smaller markets, where capital is most needed.  This latter point on the IRS notice does not require legislation; Treasury could do it now with the stroke of a pen.  In this regard, we strongly support efforts that Mr. Crowley and Mr. Brady and others on the committee are making to urge the Treasury to review this notice, and hopefully withdraw it.

     One other significant issue concerns foreign investment in U.S. debt.  There are significant confusions regarding when a foreign source capital can invest in debt in America and restructure that debt.  It would be very helpful to have these guidelines straightened out and made more clear.

     These simple reforms would spur billions of dollars in foreign investment in U.S. real estate debt and equity.  This type of investment would significantly help stabilize troubled lending markets.  It would help create jobs.  It would help move our economy forward.  Importantly, the end result would be to make our nation globally competitive for capital looking to invest in real estate.

     Thank you for including our point of view in today’s hearing, and I look forward to responding to any questions you have.  Thank you.

     [The statement of Mr. DeBoer follows:]

     *Chairman Tiberi.  Thank you to the entire panel.  Very good testimony.

     Question one is for the entire panel, and I will start with Ms. McLernon.  What advantages do you see, from where you sit, do foreign entities have to invest in the United States?  And what are the disadvantages that the U.S. has for foreign entities to provide capital and invest?

     *Ms. McLernon.  Thank you, Mr. Chairman.  What advantages do foreign companies have?  Let’s go with that one first.  I think foreign companies ‑‑

     *Chairman Tiberi.  Not advantages that they have.  What advantages are there for foreign entities to invest in the United States ‑‑

     *Ms. McLernon.  Okay.

     *Chairman Tiberi.  ‑‑ and what are the disadvantages for a foreign entity to invest in the United States?

     *Ms. McLernon.  What I hear time and again from my member companies, in terms of the reason to invest in the U.S., certainly the size of our economy is a main reason for companies to invest.  When choosing amongst a number of different countries, it is the quality of our workforce that comes up time and time again as the main reason for encouraging investment here.

     We have talked on the panel about some companies that have global operations here in the U.S.  So those are the operations they can really place just about anywhere, and they are choosing to place here.  And again, it is the quality of the workforce that I am hearing.

     However, I am also hearing that there is a concern about that quality going forward.  Our investment in the ability to maintain a skilled workforce in the years ahead, I think, has been raised to the top level of concerns for our companies.  They manufacture here at the very high end.  And so those are the types of workers that they are going to look for here, because that’s where it makes sense, where the U.S. can have a competitive advantage.  So, I would say that that is one of the reasons that these companies come here.

     In terms of disadvantages, specifically for my unique slice of the business community, certainly within the tax area, the one issue that, in addition to FIRPTA that was mentioned earlier, is the 163(j) provision in our tax code, which is inherently discriminatory, only impacts practically the U.S. subs of foreign companies.  And it inhibits their ability to expand and grow here by the way in which ‑‑ that these companies are restricted from borrowing from their parent company or borrowing from a third party with a parent company guarantee.

     So that is the provision in our tax code that does provide some disincentives to these firms, in terms of being here.

     *Chairman Tiberi.  Mr. Spitzer?

     *Mr. Spitzer.  Sure.  Nestle invests in the U.S.  And we are a food company, obviously, so, food costs, transportation costs of moving food from Europe to the U.S. are very expensive.  So we go where the market is, where our consumers are, where natural resources are, workforce, et cetera.

     But I think some of the disadvantages ‑‑ I have to echo Nancy’s comments about restrictions on the ability to deduct interest and borrow.  You know, we align our expenses with our profits.  So if we have expenses related to an investment in a factory or a business here, the interest expense that goes with that profit should be aligned.  We align for basic economic reasons, for exchange control reasons.  In other countries, if we are concerned about expropriation or political unrest, we align profits and expenses.  And interest is just a general expense of doing business anywhere.

     So, restricting an inbound investment artificially, as compared to an investment by a U.S.‑headquartered company, is a disincentive.  And further restrictions on interest deductions would be even a greater disincentive to invest here.

     Another disincentive is that most U.S. companies are on the U.S. exchanges.  Nestle is not.  So, for us to use our stock in an acquisition, it is almost impossible.  So we have to do it with cash, and we do all our acquisitions with cash.  So, once again, interest becomes a more important element of that acquisition.

     So, there are substantial disadvantages for a foreign company trying to come in and invest in the U.S.

     *Chairman Tiberi.  Thank you.  Sir?

     *Mr. Draillard.  Well, for Dassault Falcon Jet, investing in the United States was primarily being close to our customers.  The United States is still the number one market for business aircraft, in number of units, by far.  Other countries are emerging, but the United States is still the primary source of new orders for us and for all the major players in this industry.

     The other advantages, as Nancy was talking about earlier, was certainly the skill of the workforce.  But we see ‑‑ and we dramatically see it since, I would say, 2006 ‑‑ a decrease in the level of the workforce.  We are finding locally, especially in areas like the center of the country and the southeast of the country, we have more and more trouble finding local people that have the skills we are looking for a high‑end, high‑technology industry.

     As far as we are talking about disadvantages, disadvantages are mostly in our export efforts.  The lack of tax treaties between the United States and other countries sometimes hinder us from basically growing our business and getting the fruits from our efforts and exporting U.S. ‑‑ well, mostly U.S. ‑‑ manufactured goods.  Even though we are owned by a French company, 60 percent of the airplanes we are selling has U.S. content.

     *Mr. DeBoer.  It is hard to imagine something more disadvantageous than a 54 percent exit tax on an investment in U.S. real estate.  My statement has details on that.

     But on top of that, I would say that the investments that do come in create a tremendous misallocation of resources for American investors seeking to partner with foreign capital sources, because the structures that need to be assembled to make these investments occur at any level require a tremendous amount of tax planning and a tremendous amount of resource allocation that should be going somewhere else, and could be put to a more productive use.

     I would like to also highlight, in addition to this FIRPTA issue which, again, affects investment in U.S. real estate on an equity basis ‑‑ and we need equity to rebalance these loans ‑‑ but think about the debt situation.

     We have a tremendous amount of commercial real estate debt that is, essentially, under water and needs to be restructured.  This troubled debt, if it is acquired by a foreign capital source, foreign capital sources have to worry about being deemed to be in the trader business here in the United States.  And so they are very hesitant to make these investments, because they don’t know quite what the guidelines are from the Treasury Department.  This has been on their business plan since 2006.  They have been petitioned by a wide array of actors in this area to make guidelines and safe harbors more clear for investors.  And so I would urge that that also be looked at.

     *Chairman Tiberi.  Last question for the entire panel, as well, and we will start here on this side, with Mr. DeBoer.

     In addition to your comments about FIRPTA, is there anything specifically in the tax code, the current tax code, that makes it less likely to see foreign capital, foreign investment, foreign companies to come into the United States?  And if you could, elaborate in addition to what you have already elaborated on FIRPTA.

     *Mr. DeBoer.  Well, again, I think that, as has been stated, we are in a global economy.  And so it’s not always just what is in our tax law, but it is what is in other countries’ tax laws.  And the way other nations treat real estate investment is much different than the way that our nation treats real estate investment.  So, in addition to this barrier that we have, we look at it as a barrier compared to what other nations have, and we see it to be highly discriminatory here.

     So, I guess I would leave it at that.

     *Mr. Draillard.  I would tend to agree with what has just been said.  On top of that, I would say that the earnings stripping is probably one of the biggest problems that we see not so much ourselves, but our customers.

     *Mr. Spitzer.  Yes, I think 163(j) is the biggest impediment.  But also debt equity issues.  I mentioned that the IRS, the administration of the law by the IRS, concerning inbound companies.  And debt equity is another way of disallowing interest deductions.

     And I also think ‑‑ Nestle is a very large company, obviously.  We are big boys, we can handle ourselves with the regulations and the IRS.  But if you want to attract medium and smaller foreign businesses into the U.S., I think the general complexity, uncertainty, and the administration of the law are barriers to inviting mid‑sized and smaller investments.  And I think that’s a very important point to make.

     I know in the transfer pricing area, for example, we have been to court now three times on our royalties.  Our business model is, like many U.S.‑headquartered companies, to maintain our intellectual property in our home country Switzerland.  It is less expensive to do, because of the synergistic nature of it.  So trademarks, R&D, et cetera, and we charge out globally for it, in the form of royalties for both trademarks and R&D, although we conduct a lot of R&D here.

     So dealing with the IRS on these issues, we have had battles with them, we have gone to court three times, went to trial once, summary judgment once, and then a settlement once.  And trial, summary judgment we won 100 percent, settlement we won well over 90 percent.  So, the bottom line is, even when you are right, it is very expensive to deal with transfer pricing issues.

     The same thing on debt.  We went to court on debt equity issue in trial back in the 1990s.  We won 100 percent.  But for a large company like Nestle, we can do it.  We have the resources. It is not pleasant.  But for medium sized and small companies, it is daunting.  And once you have that reputation out there as a difficult place to invest in, it is very hard to bring investment in.

     I know the states are out there, encouraging European companies and Asian companies to come in.  I don’t think the U.S. does anything like that.  And maybe the U.S. should do something like that.

     *Ms. McLernon.  Mr. Chairman, I will just go ahead and make it ‑‑ get it out onto an even more basic level.  I think the rate is an impediment.  And our companies, just as Nestle explained, sometimes when the congress passes a provision that they expect can be helpful, in terms of the rate, like an R&D tax credit, which can be very helpful, the way that the IRS administers that is not reliable.

     And I have had one of my CEFOs from one of my companies say, “I cannot count on that.  We have been litigating it for 10 years,” even though they do a lot of R&D here.  “So, I think of ‑‑ when I am thinking of investing in the U.S., I think of the rate, and I throw that up on the white board, and that is what we look at.”

     So, you know, boiling it down to its most simple level, I would say that the rate itself was a big impediment.

     *Chairman Tiberi.  Thank you.  I will recognize the ranking member, Mr. Neal.

     *Mr. Neal.  Thank you very much, Mr. Chairman.  There is very little that has been offered by our panel that I would find myself in disagreement with.  But I think that we use this process to enlighten, as well.

     Mr. Draillard noted that many companies ‑‑ many countries offer incentives to secure investment.  But I think it bears noting as well that we have got some pretty stubborn problems ahead of us here in America, not the least of which is paying for the war in Iraq, a VA system that is sure to be stretched for the next 50 to 60 years for the 31,000 men and women who have served us with great honor over these years, and, let us be candid, not a bad deal for our European friends under the umbrella of what we call NATO.  They have spent about one percent of their GDP since the end of World War II on national defense, and the American taxpayer and the American soldier has pretty much been in a position to foot the bill.  That is part of the consideration.

     Now, I want to say to you that corporate tax reform needs to be changed, and it certainly does.  And the hearings that Chairman Camp and others have offered are certainly instructive, and hopefully will take us in a new direction.  But not to miss the point that there are some serious obligations that America has, going forward.

     And, as part of the process of the hearing, it strikes me that we need to note those obligations and understand clearly that, as I indicated a couple of moments ago, I think the American taxpayer has been pretty generous with the defense that they have provided to the rest of the world, and frequently point out to critics of America that the reason that many of our friends across the globe are not speaking a different language, it is because of the American taxpayer and the American soldier.  We provide that umbrella of protection for much of the rest of the world.

     And Secretary Gates, to his credit, has put it forward once again, as I did probably 20 years ago, in discussions that, at the same time, we are looking at some structural deficits that were significant.

     Now, Ms. McLernon, you indicated ‑‑ and I would like to hear from the other panelists, as well ‑‑ the R&D credit.  That is a big deal for Massachusetts.  We are, despite the fact, a medium‑sized state ‑‑ some might consider it a small state ‑‑ we rely heavily upon that R&D credit, largely because of the technology and, let’s be candid, because of the people that we attract in Massachusetts to live on cutting edge opportunities.

     So, how might you suggest that we do a better job, one, with predictability, as it relates to the R&D credit, because I think you are entirely correct, that you cannot, from year to year, wonder if it is going to be around, or wonder what the rate is going to be?  And, at the same time, how would you suggest that we do a better job of administering it beyond just that issue of predictability?

     And we can move to the other panelists, as well, after you.

     *Ms. McLernon.  Okay, thank you.  All the points that you just stated, I absolutely agree with.  And while the intent of Congress is to put this in place to encourage more R&D in the U.S., I think the IRS has sort of hijacked it.  It has become an issue that is always investigated very heavily at the IRS.  And companies ‑‑ pharmaceutical companies, in particular, who ‑‑ you would think research means research means research; it doesn’t always turn out that way.

     And by being able to convey more appropriately what the IRS should be doing, and what Congress’s intent ‑‑ perhaps could be helpful, because it is not getting, I think, what you want it to be, because of the uncertainty that not only the non‑permanent nature of it, but how the IRS is looking at it.

     *Mr. Neal.  Thank you.  Mr. Spitzer, you also owned that very famous company in Massachusetts, Friendly’s, for a period of time.

     *Mr. Spitzer.  Actually, I think that was Hershey.

     *Mr. Neal.  Oh, Hershey.  I stand corrected.


     *Mr. Neal.  But you wanted to.

     *Mr. Spitzer.  Yes.  We have ‑‑ I know in Massachusetts we have a water company, and we just started a new business, Tribe Hummus, which is manufactured up in Massachusetts.

     *Mr. Neal.  Right.

     *Mr. Spitzer.  So ‑‑ and my son was going to school up in Boston.  So I love Massachusetts.

     But I have a little radical view on some of these things.  The U.S. tax code is so complex and so difficult.  And I think one of the reasons is we try to do so many things with it.  It is not just a revenue raiser.  We try to do political things, economic things, incentives.  And if we could give incentives in a different way that does not involve the tax code, then we won’t have the IRS auditing in such a way that it becomes so difficult to achieve those incentives.

     If we could give out grants of some sort ‑‑ I know it is ‑‑ politically difficult, but it does create a real problem in trying to actually take advantage of the things that the government wants to give us to promote businesses.

     But I just want to add ‑‑

     *Mr. Neal.  Please.

     *Mr. Spitzer.  ‑‑ Nestle’s R&D exceeds every other food company in the world.  I think about 1.3 percent of our sales is the amount we devote to R&D.

     *Mr. Neal.  Yes.

     *Mr. Spitzer.  Which is huge.

     *Mr. Draillard.  As far as R&D tax credit is concerned, our main concern is the definition of R&D.  And here we need, nonetheless, stability, but more visibility on this definition, more clarity on this definition.

     R&D means research and development.  And development is not fully defined in the U.S. tax code.  And this hinders us from a number of issues ‑‑ if we could actually ‑‑ we thought were eligible for tax credit, like first of a kind installation.  When you install for the first time a brand new system on a new airplane that hasn’t been installed ever before, and it is actually manufactured in the United States and installed for the first time in the United States, this is not eligible.  And this is troublesome.

     *Mr. Neal.  Mr. DeBoer?

     *Mr. DeBoer.  Mr. Neal, clearly we need to pay for our wars.  We support ‑‑ I agree with everything that you said.  In the case of real estate investment, I guess I would say don’t you find it astounding that America, where everyone wants to live and invest, has now slipped to third, globally, in terms of the chase for global funds for real estate, behind the UK and Germany?  I find that astounding.

     And, in terms of revenue ‑‑ and I think that is where you are going on this ‑‑ who, really, is paying the FIRPTA tax?  What kind of foreign investor is actually paying a 54 percent exit tax here?  Not very many.  And so, if you lower that ‑‑ effectively ‑‑ tariff, you are going to bring in more capital, you are going to create more jobs, you are going to stabilize communities and ease up on some of the problems in our local community banks.  So that is sort of where we are coming from on this.

     *Mr. Neal.  In some of the hearings and discussions that we have had, and I have had back home, I still have not been able to get clarity from many corporate leaders on the issue of the R&D, however.  When I have asked them if they were to get a 28 percent or 27 percent corporate rate, would they be willing to give up R&D, a great deal of uncertainty.

     Thank you, Mr. Chairman.

     *Chairman Tiberi.  Thank you.  I recognize the gentleman from Illinois, Mr. Roskam.

     *Mr. Roskam.  Thank you, Mr. Chairman, and thank you for all four panelists, for your testimony this morning.  It has been helpful and instructive.

     You know there is people that are involved in the public debate on this issue ‑‑ I don’t think anybody that is present here today, in terms of members ‑‑ but there is a sub‑text, as it relates to foreign investment, and that is this, that people think ‑‑ I would say uninformed people would think ‑‑ that you are going to invest in the U.S., no matter what, that there is the imprimatur of the U.S., and sort of the worldwide reputation and so forth, that no matter how bad things get here, you are still going to come.  I think that is actually a dangerous way of thinking.  I don’t think it is true.

     Can you walk us through ‑‑ you each mentioned different components in your testimony, you know.  Ms. McLernon, you said that the U.S. share has dramatically declined over the years.  Mr. Spitzer ‑‑ and I am paraphrasing, just jotting down notes from your testimony ‑‑ you said the rest of the world is moving to a lower tax rate, and the U.S. should, too.  Mr. Draillard, you said that the U.S. is no longer a growing market, and investors are beginning to question whether this is really where the action is ‑‑ those are my words and not yours, but I think that was your theme ‑‑ and then, Mr. DeBoer, you were basically making the argument, you know, essentially, why should capital come here.

     Can you give us the ‑‑ a sense of what it is that companies and foreign investors are looking out over the global landscape?  What is attractive?  What are the things that you are looking for?  You mentioned predictability, and so forth, but what are the things that you are looking for that the U.S. can emulate?  And who are we competing against?  And what is the nature of that competition right now?  Let us start with you, Ms. McLernon.

     *Ms. McLernon.  Thank you very much, Congressman.  You are absolutely right, in terms of the U.S. has always thought that global companies were going to come here because we were the “it” country, and this was the place to be.  The numbers that are now available don’t support that, even though foreign investment from 2009 to 2010 went up, because it was down so low in 2009.

     As I indicated, our share is really dropping, precipitously.  And that is for a variety of reasons, some of which outside our country.  Other countries are aggressively marketing to get this investment.  I think that is one of the reasons that the Administration announced an effort last week called Select USA, which is going to try to actively recruit, among other things, foreign companies to the U.S.  So, I think that there definitely is some evidence that we are losing our ability to do it.

     From my membership perspective, tax policy certainly is a factor in determining investment.  But I would also add that a skilled workforce, as I mentioned earlier, as well as infrastructure investment, is quite important, as well.  The ability to move people, product, and information is critically important, and especially when companies can really locate their global operations anywhere to serve the world.

     They are not only operating them out of their home country.  As I mentioned before, there are several U.S. or foreign‑based multinationals that have their global operations for certain divisions here in the United States.  But in order to attract that, we need a smart, skilled workforce and a strong, sound, state‑of‑the‑art infrastructure system, as well as a transparent, non‑discriminatory tax code with a lower rate.  Those are the things that I have heard prioritized from my membership.

     *Mr. Spitzer.  Sure.  I think we have a few employees in your district in our candy factories there, well over 1,000.

     *Mr. Roskam.  Don’t you dare go to Ohio or Massachusetts and shine any apples this morning.


     *Mr. Spitzer.  Well, we have some things in Ohio, as well.

     But if we are going to be in this country, producing products, I think the competition, from our perspective, would be Canada and Mexico, where we can easily put a plant up in Canada, or put one in Mexico, and bring the products in.

     And so, if we have more restrictive problems and ability to deduct our business expenses, either at a federal level or a state level ‑‑ and let me just make a couple comments about the states, which I already did ‑‑ some of the provisions in the states are so perverse, that they actually ‑‑ if you make investments here, then they try to bring in your foreign affiliates into the country, which is just the opposite of what you are trying to do.  You want to encourage investment, not discourage it specifically.  So, whatever the committee can do to encourage or discourage this kind of behavior will be helpful.

     But within Nestle, we have investments all around the world in 140 or so countries.  Nestle in the U.S. competes with these other countries for the capital to make investments.  So, if the profits look better in some other country, a developing country or wherever, we are going to put our capital where we think we can make the most money.  And so, the more restrictions on our ability to earn money here will obviously sway the investment decisions to other markets.  And so we have to be very thoughtful about this.

     *Mr. Roskam.  Mr. Draillard?

     *Mr. Draillard.  Mr. Congressman, I think you got my theme right.  We are going where our customers are.  And our customers, even our U.S. customers, are going everywhere.

     So, what is attractive was your first ‑‑ the first part of your question.  What is attractive is where can we sell airplanes.  What is attractive is where can one find workforce that we can bring in to any of our facilities, either in the United States or in France.

     What is attractive is also the protection of our technology.  We are ‑‑ hopefully still ‑‑ number one in the high end of the business jet market.  And the reason for that is our edge in aviation, in aerostructures, basically.  And we need skills for that.  And we need to protect that know‑how.  And stability of the political structure is one of the biggest factors we look at.

     Tax, in that effect, we see tax as part of the stability of political structures in the economic environment.  And, therefore, even though it may not be a deal‑killer, the tax rate is something we definitely look at.

     *Mr. DeBoer.  Foreign investors are looking for the same things in real estate that domestic investors are looking for.  They are looking for current income streams, and, more importantly, they are looking for capital gain on the outside.  So the tax policy, particularly relating to the capital gain ‑‑ and that is where FIRPTA affects things ‑‑ is very, very important.

     On top of that, I think what was previously mentioned about transportation, infrastructure, the ease of these foreign investors to come in, see their investments, visit the United States, is very, very important.  And those are other policies, aside from tax policy, that are very important.

     As far as competitors, I mentioned the UK and Germany.  But also, global capital flows are going tremendously into Brazil, into China, into India.  It is no surprise.  And again, for those investments, it is not for the steady income stream right now, but it is for the value add and the capital gain that will come later on.

     *Mr. Roskam.  Thank you.  Thanks, Mr. Chairman, I yield back.

     *Chairman Tiberi.  The gentleman from Minnesota, Mr. Paulsen, is recognized.

     *Mr. Paulsen.  Thank you, Mr. Chairman.  And I just want to follow up a little bit on the discussion about research and development just for a second, because I think you identified how your companies, your membership in your companies, as a part of the testimony, it is such an important component of jobs here, of economic development.  And I just want to expand a bit.

     Can you just share some thoughts about why that is so important?  I do understand, working with the med tech industry, in particular, that the incentives to attract research and development are much stronger in other countries than they actually are here, in the United States.  What actually happens when R&D is actually conducted here, in the United States?

     What types of jobs are we talking about, whether it is in the food industry, whether it is in med tech or other membership companies?  But can you maybe just elaborate a little, Ms. McLernon?

     *Ms. McLernon.  Yes, absolutely.  Our companies produce about 14 percent of private sector R&D.  So it is an important part of what we do here, and we contribute a lot to the U.S. R&D base.

     Much of the reason that our companies do R&D here ‑‑ I think we have talked on ‑‑ is the quality of the workforce.  It is also access to universities.  But these are high‑end jobs.  Because we create 14 percent of research and development, it leads back to the fact that our companies pay 30 percent higher than average company.  And this is because it conveys the higher‑level, high‑skill nature job that these companies tend to support, in scientists and engineers.


     And so, I would say that research and development, when it happens here, especially with using American scientists and engineers, the U.S. economy benefits.  I think many countries around the world, including the U.S., are actively trying to recruit that R&D.  And the U.S. has done a pretty good job, considering other countries are actively working in this area.

     *Mr. Paulsen.  Yes.  So it is safe to say ‑‑ Mr. Spitzer and Mr. Draillard, please comment, too ‑‑ but it is safe to say where the innovation starts, where it occurs, is where you are going to have sort of the supply chain, if you will, of other follow‑up ‑‑

     *Ms. McLernon.  Yes, there is certainly ‑‑

     *Mr. Paulsen.  ‑‑ progression of other jobs.

     *Ms. McLernon.  There is certainly a multiplier effect, if you will, of R&D investment.

     *Mr. Paulsen.  Right, right.

     *Ms. McLernon.  Absolutely.

     *Mr. Paulsen.  Mr. DeBoer, I am going to just change themes here real quick, before my time runs out.  But Mr. DeBoer, you talked about modifying FIRPTA as a part of your testimony, to encourage greater foreign direct investment in U.S. commercial real estate space here in the United States.

     And I think when a lot of people think of commercial real estate, they think of Washington, D.C., they think of New York, they think of kind of the big, commercial real estate spaces.  But how would the modification of some of the proposals you are offering or proposing ‑‑ how would that help midwestern community banks?

     Because you sort of alluded that ‑‑ I caught that in your testimony, also.  But how does that help Midwestern community banks ‑‑ and Minnesota is an example ‑‑ give more  ‑‑ get more access to credit for small businesses?

     *Mr. DeBoer.  Thank you for the question, because I think a lot of people are confused about how this would benefit markets outside of New York or Washington or San Francisco, which are actually doing reasonably well.

     It goes to what I was talking about before.  Investors want capital gain.  They want to invest in areas where they can see those values come back.  As you know, there has been some value decline across the country.  Certain markets are hit more hard than other markets.  These are areas that need tremendous amounts of equity.

     These owners have been essentially hanging on now since 2006/2007-time period, they have been funding the debt service out of their own pockets, out of their own equity.  The jobs have not come back, the loans need to be balanced.  There is a tremendous amount of these loans that are held by community banks.

     Re‑balancing these loans will help ease the pressure on the community banks, point number one, which will allow the banks to then be able to lend more of their capital, and devote more of their attention to providing small business loans to American small businesses to create jobs.  So, helping ease that side of the balance sheet for community banks would be very, very helpful.

     Then you look at the real estate, itself.  A lot of these assets have had deferred maintenance on them.  In other words, people ‑‑ they are starting to run down.  People are running out of capital.  They cannot, you know, tenant them up and put them in the transaction stream and keep their values up.  If they can get capital put into them, construction workers will go back to work and architectural firms will go back to work, and transactions will occur so transfer taxes can occur and help communities.

     This ‑‑ in particular, part two of what I talked about, the notice, the IRS notice, this is a situation that would directly help smaller communities, as opposed to larger cities, in attracting investment.  That is where foreign capital wants to partner with local owners to recapitalize, reposition these assets.  That will be very, very helpful in smaller markets, sir.

     *Mr. Paulsen.  Thank you, Mr. Chairman.

     *Chairman Tiberi.  Thank you, sir.  Before I recognize Dr. Boustany, I want to just note, Mr. Spitzer, that Mr. Neal and I both appreciate the presence that you have of Nestle jobs in our states.  And now that Mr. Roskam has left, we are willing to work with you to divvy up those Illinois jobs to Ohio and Massachusetts.  So we can talk about that later.


     *Chairman Tiberi.  Dr. Boustany is recognized for five minutes.

     *Mr. Boustany.  Thank you, Mr. Chairman.  Let me say Louisiana is open for business, so we can talk about this.

     You know, this is about economic growth and competitiveness.  And as policy makers, obviously we are very concerned about economic growth as part ‑‑ a major part of the equation to deal with this high unemployment we have in this country, you know, just the sluggishness, all the problems we are seeing in the news, daily.

     And as I reviewed some of the stats that we had in testimony in the written binder here, you know, Louisiana, over 48,000 jobs from foreign subsidiaries, 5.7 million jobs in the U.S., which is basically 5 percent of our U.S. private workforce.  Less than 1 percent of U.S. business, yet 17 percent of corporate tax revenue, as Ms. McLernon pointed out.  And yet, I think all of you said that we are underperforming, as a country, when it comes to foreign direct investment.

     So, one question I have ‑‑ and I think, Mr. Spitzer, you alluded to this earlier ‑‑ and that is the indirect jobs that basically are created and sustained as a result of foreign subsidiary activity, do we have actual numbers, or some sort of a sense of the number of indirect jobs here created in the U.S., as a result of direct job growth from foreign subs?

     *Ms. McLernon.  As an organization we haven’t done that calculation, but absolutely indirect jobs need to be included.

     I mean sometimes an investment can absolutely transform a local economy.  When Michelin invested in North Carolina, they have transformed that area from a textile industry to one that attracts global investment because of all the different suppliers that came to help serve them.  And so, you know, absolutely.  Indirect jobs should be part of this.

     *Mr. Boustany.  And given that many of your companies are involved in U.S. exports to foreign countries, and the President’s goal is to increase U.S. exports, and linking our small and mid‑sized firms into this global market is critically important in that respect ‑‑ and so it seems to me that this indirect job growth would be something that we would want, from a policy standpoint, but it is also a way of linking our small and mid‑sized firms into the global supply chain.  Is that a fair statement?

     *Ms. McLernon.  Yes.  No, I would agree, Congressman.  I think that by interacting with globally‑engaged companies, it can encourage small and mid‑sized companies to get globally engaged.

     In addition, sometimes when a company from abroad that has suppliers in its area want to come and help serve that company when it invests in the U.S., actually are incentivized to come and set up shop, employ people here, do a Greenfield investment in order to serve that global company here in the United States.

     So, there are a variety of indirect jobs that can come about when a global company invests.

     *Mr. Boustany.  And, Mr. Spitzer, you raised the issue of indirect jobs in the context of what your company does.  Do you have any numbers, estimates?

     *Mr. Spitzer.  No, unfortunately, I don’t.  But, obviously, in the food industry there is third‑party packaging, third‑party transport, resources, et cetera.  So it is ‑‑ the numbers are huge in our industry, but I don’t have the numbers.

     *Mr. Boustany.  So, as a country, given that we are underperforming in attracting foreign direct investment, we are losing ground.  It seems to me that, looking at those policies that are having this detrimental impact, and making the kinds of corrections that you have all suggested, would help us with our unemployment problem, and help us get this country back on a path of sustained and strong economic growth and job creation.

     *Mr. Spitzer.  Oh, absolutely.  Yes, of course.

     *Mr. Boustany.  Thank you.  All of you have mentioned the complexity.  Mr. Spitzer, you focused on this a good bit, and talked about the coordinated effort by the IRS to audit under section 163(j).  And I, as the chairman of the Oversight Subcommittee on this full committee, I would be interested in learning more about the problems you have with all that.

     *Mr. Spitzer.  Sure.  Actually, it is not 163(j), it is section 385, which is ‑‑ it is sort of a debt equity question ‑‑

     *Mr. Boustany.  Okay.

     *Mr. Spitzer.  ‑‑ looking to see how much debt you have versus the equity, and looking to see did you dot all the I’s, cross all the T’s on borrowing from your foreign affiliate, foreign parents.

     And you know, as I indicated, there is no ‑‑ as far as I know, there is no sense that there is actual abuse out there, or any documentation there is an abuse.  But it is very expensive to deal with these issues.  And, as I said earlier, we had to go to court many, many years ago on this particular issue.

     Since then, 163(j) came in, which is a further restriction on the ability to deduct interest.  So they still both exist, simultaneously.  And the IRS seems to be pushing now this section 385 debt equity issue.

     I want to mention one example of the perverseness of 163(j).  We, Nestle in the U.S., can borrow on its own.  We don’t.  Because if we were to borrow on our own, it would cost us more interest.

     *Mr. Boustany.  Yes.

     *Mr. Spitzer.  Which means that we are going to get less back on our investment, which means our investments are going to be smaller.  And if we borrow on our own, and pay a higher interest rate, we are going to pay less U.S. taxes.

     So, it is very perverse, especially when you are borrowing from third parties with a guarantee of your parent company.  So, if I borrow from a U.S. bank, Citibank, and I get a guarantee from our U.S. parent so that we can get a lower rate, it does not make any sense that this should be some sort of tainted interest expense.  This is all within the U.S.  And we are actually trying to make a larger investment, not a smaller one.

     *Mr. Boustany.  Thank you, sir.  I see my time has expired.

     But one last comment, Mr. Chairman.  You know, we hear a constant refrain about the IRS needing more resources to manage its workload.  But at the same time, we are hearing from these folks that the code is so complex that it creates all this additional need for resources, both at the IRS and on the part of these companies, just for compliance.  And so we have to tackle this problem of complexity in the tax code, as we do reform.

     And I yield back.

     *Chairman Tiberi.  Thank the gentleman.  With that, I yield to the gentleman from Texas, Mr. Marchant, for five minutes.

     *Mr. Marchant.  Thank you, Mr. Chairman.  What single piece of legislation that is pending before this committee, this subcommittee or committee, would you think that we should pass that would have the most immediate positive effect on investment, job creation by your clients or your industry or your company?

     *Ms. McLernon.  As of now, I don’t ‑‑ our organization is not focused on a particular piece of legislation that you are currently considering, other than ‑‑ I don’t know if the FIRPTA legislation is part of what this subcommittee is focused on.

     So, I would say, in terms of global investment, that would certainly be a piece of legislation that we would support.  Generally, on tax reform, again, it is about the lower rate and pushed in a transparent manner that is consistent and non‑discriminatory.

     *Mr. Marchant.  Mr. Spitzer?

     *Mr. Spitzer.  Sure.  I was just down in Texas yesterday, in Austin.  So ‑‑ a great state.  We have some water businesses down there.  We own Ozarka Water, which is ours.

     I don’t know all the legislative proposals that are in front of you.  Obviously, a lower tax rate is very helpful.  All the OECD countries, except for Japan, have a much lower rate than the U.S. does.  And Japan is considering lowering its tax rate, as well, below ours.  So, we are not competitive on a tax‑rate‑basis with other developed countries.

     Obviously, I have talked about 163(j), and any further restrictions in that area would be very difficult for a company like ours to deal with.  And I certainly think there should be some liberalization there concerning third‑party borrowings that are simply guaranteed by our parent companies.  It just doesn’t make sense to me.

     A proposal that has been out there is this corporate residency proposal.  I think it was sort of directed at inverted companies, which are pretty limited now, and maybe some hedge funds.  It’s a baby and the bath water situation, in my mind.  As I understood the legislation, as proposed here, any decision‑making in the U.S., whether it is by corporate officers or not, might bring a foreign company into the U.S. for federal tax purposes.

     So, for example ‑‑ I don’t want to pick on Sony, but Sony’s chairman, Howard Stringer, spends time in Tokyo, spends time in London, spends time in New York ‑‑ I think one‑third, one‑third.  If, all of a sudden, under these proposals under corporate residency, Sony Japan woke up and found it was a U.S. company, it would be devastating.  All their affiliates around the world would be CFCs.  Dividends to the Japanese shareholders would be subject to the U.S. withholding taxes.

     And, unlike so many other countries ‑‑ or few countries ‑‑ that have these sort of residency requirements, like the UK and Holland, it is very formalistic.  The proposals in the U.S. would be very difficult for anybody to deal with.  And I think any advisor would have to recommend to their clients, “Get every decision‑maker out of the U.S. pronto,” because the consequences could be so horrific.

     *Mr. Marchant.  Thank you.

     *Mr. Draillard.  Number one would be absolutely the corporate tax rate.  Their ‑‑ simplification is also a big item on our list, just for the reason that it is a layer of fixed cost for most companies.  And the smaller the companies, the bigger that burden is, and that hinders them from basically operating and doing business, especially in a state like yours.  We have a number of local vendors in Texas that work for our Little Rock, Arkansas, facility.  And we see the burden of just administering federal and state regulations, tax regulations, being so huge.  Just complying has become such a huge burden that it is a fixed cost that they cannot basically overcome.

     *Mr. Marchant.  Thank you.

     *Mr. DeBoer.  We understand that Mr. Crowley and Mr. Brady are readying legislation to be reintroduced on FIRPTA.  We would urge that that be immediately passed.  It would have tremendous salutary benefits.

     The guts of this legislation is legislation that passed the House in the last congress with 402 votes in support of it.  It died in the Senate, but perhaps we can move that ‑‑ see that action this year.

     Incidentally, there is one thing that could be done immediately that would have very, very direct and almost immediate benefits, and that is this IRS notice dealing with how liquidating distributions are treated from private domestic REITs back to foreign investors.  That could be done by the stroke of a pen, administratively.

     And, again, we understand that some members are looking at urging the Treasury Department to look in this area, and we would absolutely urge you to do that as quickly as possible, and it would have immediate benefits.  Thank you.

     *Mr. Marchant.  Thank you.

     *Chairman Tiberi.  The gentleman from North Dakota, Mr. Berg, is recognized.

     *Mr. Berg.  Thank you, Mr. Chairman.  This is an important hearing; I appreciate all your input.

     Mr. Draillard, I ‑‑ you have got a great plane.  And I mean I just think that is unique.  If you think about a global business, quite frankly, when you are making jets you can make them pretty much anywhere.  And they are going to sell where the economies are the strongest.

     And so, you know, I am very interested in kind of ‑‑ I was interested in your written testimony.  And I just kind of want to ‑‑ I mean, clearly, the number one thing we need to do is have a strong economy.  That will help the aircraft industry.

     I am a private pilot, so I will never fly a jet, but I am always jealous of jet owners and flyers.

     But what are the things that we could do to encourage more jobs to come to America in the aircraft industry?  I mean what would be the one thing, from a policy tax standpoint, where, you know, every manufacturer that is not in the United States would say, “Hey, we really need to look at the United States as a manufacturing” ‑‑ or “a component for our production?”

     *Mr. Draillard.  There are many things we could do.  And actually, I am at a loss of where to start, but three main things come to mind.

     The first one is federal versus state taxes for structured financing of aircraft.  A lot of companies, even very large companies, Fortune 500 companies, finance for different reasons their acquisition of the airplane, probably up to 70 or 80 percent.  The structure of the leases or of the asset‑backed mortgage that they take against the asset is very cumbersome, from a tax standpoint.  And, frankly, from an OEM perspective, I think the only people making money out of it are the tax lawyers.

     The other thing we can definitely ‑‑

     *Mr. Berg.  I am also a tax lawyer.  Teasing, teasing.

     *Mr. Draillard.  Good for you, sir.

     *Mr. Berg.  I am teasing.


     *Mr. Draillard.  But, you know, I am a simple equipment manufacturer, so that is way over my head.

     The second thing we can definitely do is encourage R&D.  Research and development is paramount to continue to modernize our equipment.  There is a fleet of airplanes, of corporate airplanes, that are 30 years old in this country.  Very soon they are going to fall short of any regulation towards green flying.  They are going to come short of any regulation towards the navigation equipment.  So we need to encourage R&D and retrofit of airplanes, because this is going to be the structure of the next 30 years of flying in this country.

     The third thing we can do is increase the number of tax treaties with other countries, because aviation is big in this country.  This country is the birth of aviation, of corporate aviation.  However, other countries are developing.  If we want to keep our jobs ‑‑ and I am not talking only of Dassault Falcon Jet here, but there is a number of jobs in Wichita, Kansas, and in Georgia that are related to business aviation ‑‑ if we, as a country, want to save those jobs and make sure that we expand those industries and expand those areas of the country, we need to have broader, more clear tax treaties with other countries, so we can export airplanes from the United States, and not have them built somewhere else.

     *Mr. Berg.  Thank you.  Very good.  Mr. DeBoer, on the FIRPTA?

     *Mr. DeBoer.  FIRPTA.

     *Mr. Berg.  FIRPTA.

     *Mr. DeBoer.  FIRPTA.  Yes, I know, I ‑‑

     *Mr. Berg.  There is a lot of acronyms out here, I am trying to ‑‑

     *Mr. DeBoer.  Let’s just get rid of it, then we don’t have to worry about it.


     *Mr. Berg.  That is pretty clear in your testimony.

     I guess if you could, give just a brief background on why it is law.  What were the political dynamics that caused it to become law?  And I know you have some suggestions for changing it, but maybe just address that briefly.

     *Mr. DeBoer.  Sure.  You know, I will.  Can I just make one comment prior to that?

     I found very interesting what you said about attracting the jet manufacturing industry and jobs here.  Keep in mind we are talking about real estate.  Real estate is here.  It is not going anywhere.  These are jobs that are in America, and we should be trying to make those assets as healthy and transferable as possible.  And I just wanted to make that general point.

     FIRPTA itself was put in law in 1980.  And I should have said to the chairman I appreciate very much being included in this hearing today, because since that time there really hasn’t even been a hearing on FIRPTA.  It was repealed, incidentally, in the 1986 tax act by the Senate, but ultimately didn’t survive conference.

     It was put in place at a time when the world was obviously much, much different.  People were a little bit concerned here that foreign entities were coming up into the United States and bidding up the value of farmland.  In fact, the evidence showed that foreign investment was less than two percent in farmland at the time.  The individual senator who promoted FIRPTA in 1980 was ultimately the individual who led the repeal charge in 1986, when he realized that this was not what was happening in farmland in America.

     So, not only was the underlying basis at the time somewhat flawed, but you look ahead to today and you see what is going on globally, as we talk about ‑‑ and the basis of this hearing is attracting global capital to the United States.  Everybody is in competition for capital.  And so, the United States today, and investors and real estate owners today, are much more global in where they look for their capital sources to make their properties valuable, and to make them productive parts of the community.

     So, a lot has changed.  Some of the facts about how it was originally put in place have changed.  A number of the tax policy issues that underlie somewhat some of this stuff have changed a lot since then.  And certainly the global competition for capital has significantly changed.

     *Mr. Berg.  Thank you.  I will yield back.

     *Chairman Tiberi.  Thank you.  We are joined today by a gentleman from the full committee who is not a member of this subcommittee, but you are welcome to come any time, the gentleman from New York, Mr. Crowley.

     *Mr. Crowley.  Thank you, Mr. Chairman.  Just on a lighter note, Mr. Draillard, have you or your company ever hired a tax lawyer?

     *Mr. Draillard.  [No response.]

     *Mr. Crowley.  I rest my case, your honor.  Just teasing.

     Thank you, Mr. Chairman, and thank you, Mr. Neal, for holding this important hearing today.  The U.S. has the most foreign direct investment of any nation in the world today, and has been the beneficiary of a growing number of companies with headquarters in other countries doing business here in the U.S., as has already been mentioned.

     President Obama stated earlier this week that “at a time where we need to use every tool in our toolbox to continue to put Americans back to work and grow the economy here at home, promoting foreign direct investment is an important opportunity to accelerate our economic recovery.”  I agree.

     And the White House issued a report earlier this week that shows our nation’s open economy and low barriers to foreign investment have helped to make the U.S. an even more attractive investment for abroad.  Stating that, there are still some barriers in the tax code that block the free flow of investment here to the United States, and these include, as Mr. DeBoer has mentioned, the FIRPTA tax laws.

     I am pleased that the House, in a bipartisan way, passed legislation last year to relax the FIRPTA laws to encourage greater investment in the U.S. commercial real estate market.  The bill introduced by Representatives Tiberi, Brady, Berkley, and myself passed the House last year on a vote ‑‑ a very lopsided vote ‑‑ of 402 to 11.  Unfortunately, though, the Senate did not act upon that bill.

     Rep. Brady and I plan to reintroduce a similar bill in the coming weeks.  Additionally, to more immediately break down other barriers to foreign investment in the U.S. caused by the FIRPTA tax laws, Rep. Brady and I are sending a letter to the Treasury and IRS, seeking an administrative solution to a regulation that is choking investment in the real estate sector at a time when we need more, not less, investment here.  And Mr. DeBoer has also expanded upon that.

     That brings me to my question for Mr. DeBoer.  Kevin Brady and I, as I mentioned, are sending a letter to the Treasury Department and IRS later this week, that we are hoping to get a number of Members on the Ways and Means committee, our colleagues, to sign on to.  Our letter seeks the administrative repeal of an IRS rule that adds a new layer of taxation on foreign investors in commercial real estate.

     Could you talk about this IRS regulation, and its impact on the real estate market here in the U.S.?

     *Mr. DeBoer.  Sure.  The ruling in 2007 reversed the long‑standing policy in the tax law, and set, for the first time in the tax law, that a liquidating distribution from a corporation would not be treated as the sale of the stock of the corporation.  This is the only part of the tax law where this is so.  And, making it even worse, it creates a dichotomy, if you will, in the way that domestic investors and foreign investors are treated on liquidating distribution.

     The example might be that you and I engage in a partnership in a domestically controlled REIT, where you have 51 percent, as the domestic owner, I have 49 percent.  We own and operate and put money into real estate and make them more productive, and so on and so forth, and we ultimately sell them at a capital gain.  We dispose of our entire investment.  The liquidating distributions out to the foreign entity would be taxed under FIRPTA.  And, as I have described, could be taxed as high as 54 percent.

     This is somewhat comical, because, if I wanted to, as a foreign investor, I would simply sell my shares if a market existed to sell the shares, and I wouldn’t pay any FIRPTA tax on the sale of the shares.  And so, reversing this 2007 notice would immediately bring a substantial number of foreign investors back into the marketplace on these types of properties.

     *Mr. Crowley.  I want to ask you my second question to expand upon the benefits, not only to cities like New York, but nationwide, in terms of making these changes.  You have already answered that question.

     So ‑‑ but I would make a comment about the issue of what brought this about in 1980.  I think there was also a bit of xenophobia when Japan or some Japanese purchased Rockefeller Center.  I do note that Rockefeller Center ‑‑ I checked, I was there last week ‑‑ it is still in New York City, it never moved to Tokyo.  And so I think that also ‑‑ it is now owned by Tishman Speyer, an American company, as well.  So, I think that also brought that about.

     We saw the similar events take place during the CFIUS issue when Dubai Ports was in negotiation to run a port here in the States.  And I think we brought about a rational solution to that.

     But, Ms. McLernon, could you take a moment to address the concerns of some that increased foreign investment in U.S. commercial and real estate could threaten the nation’s security and the safeguards in place to prevent that from occurring, in light of what happened in CFIUS reform, and what could ‑‑ as we discuss FIRPTA, and what is in place to prevent any threat to our national security.

     *Ms. McLernon.  Congressman, it is an important question.  I should remind those that are in the room that the government already has an interagency committee called the Committee on Foreign Investment in the U.S., known as CFIUS, that reviews all national security implications of foreign acquisitions of U.S. companies.  By and large, the vast majority of these M&A deals do not involve national security.  And, as I mentioned earlier  ‑‑ and I think I have in my written testimony ‑‑ 98 percent of foreign direct investment is from the private sector.

     But the law that governs ‑‑ the rules that govern CFIUS were strengthened, as you mentioned, in 2007 ‑‑ now includes the Department of Homeland Security, includes the national ‑‑ the director of national intelligence.  And any transaction that involves a foreign government now automatically ‑‑ or foreign government‑owned company ‑‑ automatically gets kicked into a longer, more thorough, second‑stage investigation.

     And importantly, even after a deal is completed, if they have not gone through the CFIUS process, the government can actually pull a company back in for review and unwind the deal.  So we have very strong safeguards that are in place, thorough, tough, that scrub these deals to ensure that there is no implication for national security.

     But again, the vast majority of any sort of M&A transactions that happen in the U.S. cross border do not at all involve national security issues.

     *Mr. Crowley.  Thank you, Ms. McLernon, and thank you, Mr. Chairman, for ‑‑

     *Chairman Tiberi.  I thank the gentleman from New York.  And this concludes the first panel for today’s hearing.  Please be advised that Members may submit written questions to the witnesses.  Those questions, and the witnesses’ answers, will be made part of the record.

     I would like to thank the witnesses for their informative testimony from the first panel, and for taking the time to appear today.  Your input has been very helpful to us, as we continue down the road of moving forward on tax reform.  Thank you so much.

     We will begin this second hearing and the second panel of this hearing in a few minutes.  Thanks for coming.

     I would like to thank our second panel of witnesses, and I would like to welcome our three witnesses on the second panel, and I hope you are as good as the first panel.  No pressure, by the way.


     *Chairman Tiberi.  I will introduce our second panel.  Mr. Gary Hufbauer, the Reginald Jones senior fellow at the Peterson Institute for International Economics; Mr. Robert Stricof, tax partner at Deloitte Tax LLP; and Professor Bret Wells, assistant professor of law at the University of Houston.

     Thank you all for joining us today.  You will each have five minutes to present your testimony.  Your full written testimony will be submitted for the record.

     And with that, Mr. Hufbauer, you are recognized for five minutes.



     *Mr. Hufbauer.  Thank you very much, Chairman Tiberi, and members of the subcommittee.  I wish you well on the endeavor to reform the tax code.

     Let me make five points.  First of all, on tax rates.  Among advanced OECD countries, the United States has the second worst corporate tax system, from the standpoint of encouraging investment in plant equipment or R&D, or promoting production at home for selling in export markets.

     The U.S. corporate tax rate is second highest after Japan.  But also, the U.S. average effective corporate tax rate is second highest, and the marginal effective corporate tax rate may well be the highest.  I define all these terms in the testimony.  But however you look at it, we are high on the tax rate story.

     Credible evidence leads me to believe that the output produced by foreign firms operating in the United States would increase by about two percent over a period of time if the corporate tax rate was reduced by one percentage point.  So, if we could actually get the corporate tax rate down to 25 percent ‑‑ a number which has been much discussed in recent months ‑‑ these foreign firms might enlarge their payrolls from about 5 million ‑‑ or, actually, 5.7 million ‑‑ by another million Americans.

     I am often asked ‑‑ and I want to turn now to revenue collection ‑‑ if U.S. corporate tax rates are so high, why is the revenue collected by the corporate tax system such a modest proportion of gross domestic product.  It is about three percent in a good year.  I am taking the year 2007, and that compared with the OECD average of nearly 4 percent in that year.

     The main reason for the difference is that a very small part of the U.S. tax base of the U.S. GDP belongs to the corporate tax base.  It is about 13 percent, compared to the OECD average of about 22 percent.  Now, why is the corporate tax base so small?  We have a dazzling array of pass‑through corporations ‑‑ pass‑through firms, I should say, which skip the corporate tax system.  And that doesn’t help, clearly.

     But also, large firms who have a choice ‑‑ and that is all large, multinational firms ‑‑ when other things are equal, and then the choice depends on the tax system, they would rather invest ‑‑ produce elsewhere, than in the United States.  So our tax system does a good job of encouraging the best and brightest firms to invest abroad.  But it also does an even better job at discouraging tomorrow’s global 1,000 corporations from investing ‑‑ from putting their headquarters here in the United States.

     Let me turn to an important point, and that is the connection between tax rates, statutory tax rates, and revenue collection.  The important point is that there is no connection.  And I go into this in some detail in a policy brief.  But unfortunately, the way the CBO scores these matters, whenever the corporate tax rate is cut, they say that revenue will be lost.  That is a complete fallacy.  Unfortunately, it colors the ability of the United States to get the corporate tax rate down to a reasonable level.

     Let me say just a few words on inward direct investment.  My view is that the United States should put more attention on reducing its own rate and making the tax system here favorable and inviting to foreign companies than putting additional effort in cracking down on abuse.  I am not saying there is no abuse; I think the tools in the code are adequate, and that is not where the congressional effort should be.  Thank you very much.

     [The statement of Mr. Hufbauer follows:]


     *Chairman Tiberi.  Thank you.

     Mr. Stricof, you are recognized for five minutes.



     *Mr. Stricof.  Thank you.  Thank you for the opportunity to discuss my views on international tax reform as it relates to the U.S. operations of foreign multinationals.  I am a tax partner with Deloitte Tax LLP with over 30 years of experience as a tax accountant.  I am the head of Deloitte’s global U.S. investment services group, which serves large foreign multinationals making investments into the United States.  My practice is largely focused on serving industrial companies in service businesses.

     I am honored to have been invited to participate in this hearing; my remarks will focus on certain impediments posed by the U.S. income tax rules on foreign direct investment in the United States, and technical comments regarding certain legislative proposals that affect multinationals investing in the United States.  These impediments include:  the earnings‑stripping provisions; potential U.S. tax law changes regarding the determination of corporate residency; U.S. income tax treaty override proposals; FIRPTA; and, to add another acronym, FBAR reporting.

     In respect of earnings stripping, as has been said in earlier testimony, I would like to point out that there is no clear‑cut data that demonstrates that there is a systematic problem with earnings stripping.  The Treasury Department conducted a study on this issue, and concluded that there wasn’t clear evidence of earnings stripping by foreign‑based multinational companies making direct investments into the United States.

     In order to further this study and gather more data, Form 8926 was issued.  This form is defective in many ways.  For example, it is unclear whether a taxpayer should rely on the proposed regulations issued in 1991 under section 163(j) when answering the various questions on the form.

     Additionally, there is no guidance as to whether the form should be filed on an expanded affiliated group basis or on a stand‑alone affiliated group basis.  As a result, similarly situated taxpayers are likely filling out the form very differently from one another.  This means that the data that Treasury gathers from form 8926 is likely unreliable, and it is doubtful that an analysis of the information provided on the form will accurately provide reasonable conclusions as to whether earnings stripping is taking place.

     Moving on to corporate residency, it is important to note that determining where a corporation is a resident is essential to identifying where that corporation will be taxed.  The proposed managed and controlled test would determine corporate residency based on the jurisdiction where substantially all of the executive officers and senior management of the corporation who exercise day‑to‑day responsibility for making decisions involving strategic financial and operational policies of the corporation are based.  This will raise uncertainty regarding which operations of a multinational would be taxed in the United States on such entities’ global income.

     Any uncertainty in this area may cause foreign multinational companies to shift U.S.‑based management teams outside the U.S., which would cause the loss of high‑paying jobs in the United States.  The management and control provision will be extremely difficult to administer, and is likely to lead to inconsistent administration that will clog the competent authority process with our treaty partners.  Given the administrative, technical, and policy concerns surrounding the management and control proposal, I would urge the retention of the current law rules on determining corporate residency.

     In respect to the income tax treaty override proposals, the proposals, as drafted, would override almost all of our income tax treaties, in that the active trader business test for qualifying for treaty benefits that is included in almost all of our treaties would be significantly reduced in scope.  The active trade or business test is perhaps the most fact‑intensive test for determining whether an entity qualifies for treaty benefits.

     The test typically requires an entity to show that the business in the home country is substantial in relation to the U.S. business, and the income receiving treaty benefits is related to that business.  Arguably, this is the most rigorous test in the limitation on benefits section of our treaties, and is not one that should be overwritten.

     When legislation was originally proposed, the treaties with Iceland, Poland, and Hungary were perceived to be abusive and abused by non‑treaty ultimate parents.  Since that time a new treaty with Iceland has entered into force, a new Hungarian treaty has been signed, and the Treasury Department has indicated that negotiations on a new treaty with Poland have been concluded.  Therefore, what may have been one of the main reasons for the proposal is no longer an issue.

     My paper also contains comments on FIRPTA and the so‑called FBAR provisions.  In respect to FIRPTA, my main comments relate to the administrative burden the current rule has, as any U.S. corporation is presumed to be a U.S. real property holding company.  Taxpayers, particularly in controlled group transactions, have often missed filings, as they are not thinking about FIRPTA when they know that their subsidiary in the United States has very few assets that are invested in U.S. real property.  Having this presumption has required many taxpayers to request relief for missing filings related to transactions that are not within the scope of the provisions.  A change to this presumption would ease this administrative burden.

     In the context of the FBAR provisions, there are unintended consequences that may result from a foreign parent using a foreign bank account where a U.S. person has signatory authority to make expenditures on behalf of the corporation, but has no personal financial interest in the account.  These persons are required to report their signature authority over a corporate bank account in which they have no personal interest.  These filing requirements should be reviewed in order that they would be more targeted at the persons that have a direct financial interest in these accounts.

     Thank you very much for the opportunity to share with you my views on tax reform in the context of foreign direct investment.  I would be happy to answer any questions.

     [The statement of Mr. Stricof follows:]


     *Chairman Tiberi.  Thank you.

     Mr. Wells, you are recognized for five minutes.



     *Mr. Wells.  Thank you, Chairman Tiberi, Ranking Member Neal, and distinguished members.  In this testimony I would like to address the following items:  first, the issue of tax competitiveness; and second, the issue of tax base erosion.

     Let me start by saying that I believe that tax competitiveness is a serious issue.  When the U.S. activities of U.S. domestic companies are treated less favorably than the U.S. activities of inbound competitors, a serious structural problem is created that deserves careful attention by Congress.  Tax rules that treat U.S. activities of different economic participants differently will cause the tax disfavored economic participant to seek to become a foreign‑owned company.  Or else they risk getting forcefully acquired.

     The capital markets demand that this occur, and the recent corporate inversion phenomenon is a wake‑up call about the serious implications of an unequal playing field.  Foreign‑owned multinationals have a competitive advantage in the United States exactly because they are foreign owned.  Certain U.S. multinationals with inbound investment activity share this advantage.  But the tax advantage afforded to inbound investors arises because of their ability to erode the U.S. tax base through base erosion payments.

     Base erosion payments arise from related party transactions such as intercompany charges for interest, as Mr. Spitzer so eloquently talked about earlier, rents, royalties, as Mr. Spitzer pointed out earlier, service fees, and from intercompany purchase and sales of tangible goods between a U.S. affiliate and a foreign affiliate.  Through effective tax planning, these base erosion payments can create homeless income.

     The income is homeless in the sense that it is not subject to tax in the United States, where it originated, and where the profits were derived, nor is it taxed in the offshore country where it is received.  The ability to create homeless income affords inbound taxpayers a significant tax advantage and unlevel playing field.

     How did it come to be that base erosion payments could be such a powerful tax planning advantage?  To answer this question, it is helpful to consider the historical context of the United States when it formulated its international tax policy.

     In the early years, U.S. multinationals were the dominant source of FDI around the world.  And so, outbound investment far exceeded U.S. inbound investment.  In this setting, the United States Government wanted the residual profits to escape source country taxation so that these profits could be taxed by the country that supplied FDI, meaning the United States in a majority of cases.  Residency taxation took preference over source country rights to taxation.

     And so, to further this policy, the U.S., through our treaties, sought to require source countries to eliminate withholding on interest, rents, royalties, in deference to the home country’s sole right to tax these profits.  The United States relinquished its own withholding rights as a reciprocal measure.  But again, the trade flows were tilted in favor of the United States.

     Today, the trade flows are reversed, with the United States finding itself in the posture of a significant net capital importer.  Further, not surprisingly, taxpayers have reacted to these generous inbound tax rules with full advantage.  Today, inbound investors can use offshore tax favored subsidiaries to transact with their U.S. affiliate, move profits within their affiliated companies without it leaving the economic group, and earn thier income in a tax‑favored way.

     Homeless income is a mistake.  U.S. international tax policy was formed with the desire to prevent international double‑taxation.  This, gentlemen, is a worthy goal.  But the desire to prevent double taxation was never intended to have the consequence of creating homeless income out of U.S. business profits.

     Income earned in the United States economy should bear one level of tax.  And the assumption should now be that it won’t be taxed anywhere in the world, if not here.  And not subjecting profits of inbound taxpayers to at least one level of tax creates an unlevel playing field with domestic companies.

     Homeless income is a mistake that costs the United States Treasury significant revenue.  This mistake places inbound participants in a better economic position versus U.S. companies that do not have base erosion opportunities.  If left unfixed, this state of affairs will cause U.S. companies to become prime takeover candidates, or encourage them to self‑help themselves into inverted companies.

     Again, the corporate inversion phenomenon is merely telling us what we already know.  The basic issue is the following:  inbound companies can utilize multiple avenues to strip earnings from the U.S. tax base with the benefit of creating homeless income out of a significant portion of their U.S. profits.  We need a policy response that protects the U.S. tax base against base erosion, not just because we need more revenue, but because we need equal treatment between U.S. domestic companies and cross‑border inbound participants.

     In my written testimony I provided a proposal that attempts to prevent homeless income.  But let me conclude by saying that it is my belief that Congress cannot allow inbound taxpayers to have significant opportunities that do not exist for U.S. domestic corporations.  Everyone should pay a similar level of tax for similar economic activity in the United States.  The ability of inbound taxpayers to create homeless income out of U.S. profits attacks the very core of the U.S. tax system, and must be addressed.

     Thank you so much for the opportunity to testify.

     [The statement of Mr. Wells follows:]


     *Chairman Tiberi.  Thank the three of you for your great testimony.  I have got a question for all three of you, and I will start to my left here.

     You have all talked about ‑‑ in either your written testimony or your verbal testimony ‑‑ that we have the ‑‑ we have a comparatively high U.S. corporate tax rate, compared to our competitors around the world.  And there are incentives that multinational companies doing business in the United States have to transfer their income overseas.

     What do you suggest we can do, through tax policy, to change that incentive?

     *Mr. Hufbauer.  Thank you, Chairman Tiberi.  Here I think there is a sharp difference between Professor Wells and myself.  We used to have a worldwide tax system as our concept of the norm ‑‑ and I wrote about that in my testimony, I didn’t have time to discuss it.  The worldwide tax system has long not been the norm.  It is now only followed by about six countries, none of which have the high tax rates which the U.S. imposes.

     We are out of step, it isn’t that the world is out of step.  And we cannot go back to 1960, when the United States dominated the world, not only militarily but economically.  We are now in a very competitive situation, as you well know.

     So, my answer to your question is we have to get our rates down to where other countries are, which is if we are going just talk about the OECD countries we need to cut at least 10 percentage points, and I would say 15 percentage points, off the statutory corporate rate.  If we want to talk about China ‑‑ and many people do ‑‑ it has to go further.  We are way out of step.  That is the biggest single thing.  And I think that is where the attention should be focused, not on trying to, as I put it in my testimony, build a moat around a U.S. tax system which is out of step.

     And it is not just out of step with China, it is out of step with Canada.  Canada has a far more competitive tax system than we do.

     I am just focusing on the rates, but I could extend that to many other dimensions, particularly research and development, a favorite subject of mine, or expensing of equipment, or whatever.  I mean we are just a country which does not use its tax system to encourage investment, either in physical capital or intellectual capital.  Thank you.

     *Chairman Tiberi.  Thank you.

     *Mr. Stricof.  It is very difficult for me to address policy issues, as a tax technician.  I am not a tax lawyer; I am just a tax accountant.  But let me give a little bit of my view on this.

     There is a big competition for capital in the world.  People have choices as to where to deploy their capital, where to earn their profits.  If you have a choice of employing your capital in a place where you can pay a 20 percent tax rate, or a place where the combined federal and state rate is easily 40 percent, where would you want to earn your profits?  It is a very simple, methodical type of analysis, and a number of companies do that type of analysis when deciding where they can put their businesses.

     Unlike Nestle, which has to put a lot of its business where the consumers are, a lot of other types of activities can be put anywhere in the world.  The point made for Falcon Jets.  They could be manufactured anywhere, and they can fly here to be purchased by U.S. consumers.  So I think you have to look to see what is going to encourage people to invest here.

     I would also like to address a comment that was given to the earlier panel, which was, “If there was a choice between lowering the corporate tax rate and getting rid of the R&D credit, what would you do?”  Here, in this environment, I think you have to look and see what other countries, for example the UK, Netherlands, and many others have done.  What they have done is they have lowered their corporate tax rate, and also provided incentives for R&D.  They have their patent box regimes and other regimes that encourage specific activities, as well as general activities.

     *Chairman Tiberi.  Thank you.

     *Mr. Wells.  It is a very important question, Chairman.  Let me say that my comment earlier was not to say that I pine for the days when residency taxation were better.  I just want us to understand why we thought it was good to allow earnings stripping in the past, when the U.S. was the dominant source of capital, and would be the beneficiary.

     What we find today is our tax rates are high.  I agree with Mr. Hufbauer on that point.

     But focus on the testimony you heard earlier.  Nestle had an effective tax rate less than 10 percent worldwide in their financial statements.  How can it be that a consumer food company in the domestic economies of the OECD can get less than half the percent of the tax rate that this committee is discussing?

     It is because ‑‑ they have told you already ‑‑ their ability to strip earnings out of the U.S. economy and other countries allows them to achieve an effective tax rate that is significantly below the rates we are talking about.  I don’t disagree with Mr. Hufbauer saying that lower rates would be a better system.  But it is not going to be low enough to cause anyone not to want to earnings strip.

     Now, Mr. Hufbauer said China has a more favorable regime.  But let’s remember they have withholding taxes on interest and royalties, and have refused to give zero tax treatment to those types of payments cross‑border.  So we can learn from China.  There is no question that when someone earns profits from the U.S. activity, it should not escape total taxation.

     And the other point I would make is this, that if we allow inbound investors to have a significant competitive advantage versus their U.S. competitors, the corporate inversion phenomenon is telling us the result.  We must treat U.S. companies the same.  And if they are going to pay a full U.S. tax on U.S. business activity, then we must have a system that causes inbound taxpayers not to pay more than their fair rate, but at the same time to pay at least the same rate.  If we don’t, we are rewarding winners and losers unfairly.  And the ability to have interest stripping and royalties stripping is a benefit that an inbound company has, that Nestle has, that others have, that U.S. companies that are U.S.‑based do not have.

     Thank you for the opportunity.

     *Chairman Tiberi.  Thank you.  Mr. Wells, I want to follow up.  Thank you for your thoughts, too.

     You wrote an article about a year ago in Tax Notes ‑‑ and I want to quote from it ‑‑ regarding our corporate tax rate and our worldwide system.  “Disadvantaged ownership of capital by U.S.‑based multinationals creates an incentive to shift that ownership away from U.S.‑based companies to foreign‑owned competitors, and the recent empirical studies suggest that this possesses a significant threat to U.S. domestic job creation.”

     And your article goes on to state that the U.S. should move toward a territorial system that exempts active foreign income.  Do you still believe that, and can you expand on that?

     *Mr. Wells.  Yes.  What I was saying in the article is that the ability for U.S. companies, or the inability of U.S. companies to be able to earn income in the same low‑taxed environment that foreign‑owned companies have is a competitive disadvantage.  And we should expect that foreign‑based companies would have an opportunity to take those companies over to the extent there are synergies for them to acquire them.

     A territorial regime versus our existing regime is ‑‑ there are pros and cons to either approach, okay?  And if you had a territorial regime as the premise of what this committee wanted to propose, it would be incumbent on this committee to make sure that there were base‑protecting measures that would protect the U.S. tax base from being able to be eroded by all taxpayers.  In a territorial regime, the opportunities to erode the U.S. tax base would exist for every participant.  So, it would be a challenge that this committee would be required to take, because everyone would be in the same position.

     But the point I think the committee should consider is whether it’s a territorial regime or a worldwide regime, certainly how we tax inbound activity should try to achieve comparable results for each economic participant, whether they are a U.S. company or a foreign company.  How you treat outbound activities and the disparity between U.S. multinationals and foreign multinationals in third countries is a harder question.

     But certainly taxing the inbound activities, we should attempt to have a horizontal equity between each of those two companies.

     *Chairman Tiberi.  Mr. Stricof, can you comment on that issue?

     *Mr. Stricof.  Most certainly.  Foreign‑based companies, the ones that invest in the United States, are largely in developed countries.  As was pointed out by Nancy McLernon in the earlier panel, China represents less than one percent of all foreign investment into the United States.  So, where is this money coming from?

     The money is coming from Germany, from France, from the UK, and others.  And each of these countries has effectively decided that their equivalent of subpart F ‑‑ because most of them have that ‑‑ do not really need to cover the type of income that is being talked about as being earnings‑stripped.  And, instead, must view that money as being more important to come into their local country however, and then be redeployed in their local economies.

     And what is that doing?  I don’t see where the UK is suffering nearly as much as the U.S. or France or Germany or any of a number of these other countries that have these significant rules.  I see the money coming back to those home countries, and being redeployed in their businesses.

     When it comes to base erosion, what was commented upon was two or three different factors of base erosion.  There are management service charges, there are rent and royalties, and then there is interest expense.  When it comes to management charges, I personally do not see management charges coming into the U.S. to the same degree as I see management charges going out from the U.S. by U.S.‑based multinationals.

     When it comes to rent and royalties, IP is usually centrally located in a country where the company is based. It is appropriate to charge a rent or royalty for the use of IP, just like U.S. multinationals, if the IP is owned by the U.S. company, charges out for the use of IP.  While payments for IP are base‑eroding, I imagine in concept, they are really not base‑eroding with the same negative connotation that has been given.

     And, as I have already commented, in respect of interest expense it is difficult to say whether U.S. companies are eroding their tax base any more than anybody else.  There is just no empirical evidence of that.  Thank you.

     *Chairman Tiberi.  And finally, Mr. Hufbauer.

     *Mr. Hufbauer.  Thank you.  I guess the first point that would be made is when it comes to base erosion ‑‑ and I have written about this at length ‑‑ my big concern is the erosion of the personal income tax.  And quite a bit of legislation has been passed by Congress.  Some of it maybe goes too far, but it is in the right direction to not have U.S. citizens or residents avoid the U.S. tax system by putting their assets abroad.  That, to me, is the big concern.

     In terms of base erosion by corporations or business firms, they ‑‑ I think the only area of important concern is interest payments, for the reasons that Mr. Stricof said.  Royalty ‑‑ I mean our interest, our national interest in royalty, is exactly to keep the rates very low, because our royalty income from abroad of all kinds ‑‑ trademark, copyright, intellectual property patents, or whatever ‑‑ is huge coming in, and rather small going out.  So, if you have a system where a goose ‑‑ you know, sauce for the goose is sauce for the gander ‑‑ we want to get those rates low.

     In addition, I would commend to the congress to think about the kind of patent box system that Netherlands and a few other countries have introduced, not only to keep the rates low, but to tax that kind of income at a very highly preferential rate here in the United States to encourage R&D.  That, to me, is a meaningful R&D encouragement which we should have, and we don’t have.

     But turning briefly to interest income, this is a very  ‑‑ you might say it is homeless on a worldwide basis.  The tax rates are very low, and I have written about that extensively.  They are low here in the United States, they are low abroad.  It is a low‑tax form of income.  It has kind of distorted debt equity ratios globally.  It has contributed to our financial crisis.  I think it is a problem, and I think, if you are going to worry about erosion, it really should focus on the interest side of the whole picture.

     Finally, let me say that I ‑‑ Professor Wells and I are in total agreement, I believe from the excerpt he read, on the necessity of having a territorial system with a view to U.S. outward investment.  So we are in very close alignment there.  Our current system is quite discouraging to U.S. companies, by comparison with companies based in almost any other country.

     *Chairman Tiberi.  Thank you, all three of you.  I will yield to the ranking member, Mr. Neal.

     *Mr. Neal.  Thank you, Mr. Chairman.  Let’s go back over a couple points that have been made here.

     Professor Wells, you are pretty blunt in your testimony that foreign owned multinationals have a competitive advantage in the United States because they are foreign owned.  You go on to say that that tax advantage afforded to inbound investors arises because of their ability to erode the U.S. tax base through base erosion payments.

     What about a specific example, and how prevalent is this?

     *Mr. Wells.  I can give you several specific examples.  One was when I was vice president, treasurer, and chief tax officer of an S&P 500 company.  I saw half of my peer group invert.  And I read the public statements.  Why did they invert?  Why did they want to become foreign multinationals, when it was a paper transaction?  And what they said was is that they needed to get at the same tax rate as their other competitors.  That was the reason they did it.  That was their public statement.

     So the first thing I would say, Mr. Neal, is that ‑‑ the inverted companies are telling us why they did it.

     The second thing, in the article that the chairman referred to I said, “Well, let’s test whether what they said was right.”  So I took the five‑year average tax rate for the inverted companies in my peer group, and I compared it to Schlumberger, the Behemoth in the oil field services sector.  And I said, “What do their tax rates look like?”  And they were within half a percent.  Imagine that.  They got to within a half‑a‑percent.  Now, their tax rate dropped from 37 percent, the average of these companies pre-inversion, down to 20 percent post-inversion.  But the 20 percent post-inversion rate was on par with their other foreign competitors. So, I would say that subsequent experience helps us understand.

     But then there were other acquisitions that I talked about in the article, namely Schneider’s acquisition of Square D, or the Nestle transaction that you just heard about, their acquisition where they pushed debt into the U.S. target company.  The ability to lever their acquisition, and to strip interest out of their U.S. affiliates by intercompany transactions, allowed a significant portion of their U.S. business profits to leave the U.S. and to go to a low‑taxed country.

     And so, I think that we are getting enough anecdotal evidence, both from the testimony you have heard today, the subsequent history of what the inverted companies’ tax rates look like compared to their other competitors, and just knowing that the tax planning tools between inverted companies and foreign‑owned companies are the same.

     I think that the inverted companies have done this committee a great service.  They have given us a knowledge about the cause‑effect dynamics of why their tax rates went down, and why it went down is because they are a foreign company with the same tax planning tools as al other foreign companies.

     *Mr. Neal.  Mr. Stricof, you ‑‑ and then Mr. Hufbauer, would you like to offer your analysis?

     *Mr. Stricof.  Sure, thanks.  I think there are some very valid points that have been made.  I think that when you look at the competitive advantage a foreign company may have, a lot of that has to do with capital flows, whether you talk about them as base‑eroding payments, or whatever.  And one of the major problems the U.S. entities have, as compared to their global competitors, would be solved effectively by territorial taxation.

     What happens in, say, Nestle ‑‑ and I am not trying to use Nestle, other than everybody else has, so I mean no disparaging remarks.  What happens; Nestle decides to make an acquisition, or any company decides to make an acquisition that is based in any country in the world except the U.S.  How are they going to fund that acquisition?

     They can take money from all the other countries they have in the world, repatriate it to their home country at virtually zero taxation; in most of the free world such a repatriation of profits is either tax free or they have a 95 percent exemption of that income coming back, which they can redeploy in the acquisition.

     What I find ‑‑ and I do strategic acquisitions, I don’t do leveraged buy‑outs or other things like that, I do a lot of strategic work ‑‑ I find that when you are doing acquisition planning, who is going to win that acquisition?  U.S. companies go after the target; foreign companies go after that target.  Whoever has the best synergies from a true business perspective is who actually wins the deal.  It has very little to do with the taxes.

     If there are base‑eroding type payments in the form of interest expense that comes back to the parent country, it just allows the foreign multinational to redeploy that cash.  And therefore, they have more cash available to do the acquisition.  I don’t think it is really the fact that it is zero‑taxed as much as that they can get the money back to where they need it to be.

     *Mr. Neal.  Mr. Hufbauer?

     *Mr. Hufbauer.  Thank you.  About 40 years ago, when I was in the Treasury, one of my early tax articles was on the theoretical possibility of inversion.  Well, it was theoretical in the 1970s and, as Professor Wells and others have said, it is something of a reality now.

     But my recommendation, as I have said more than once, is to improve our own tax system as the major answer, rather than additional moats, as the major answer.  I am not saying that we shouldn’t have some moats ‑‑ and we have some which have been put in by Congress ‑‑ but the big issue is not the handful of corporations which invert.  Yes, that is an issue.  But the big issue are the global 1,000 corporations of 2020, and where they will locate.

     I believe there is a very strong synergy between corporate headquarters and R&D and the rest of the economy.  We want as many of these corporations who are yet to grow and yet to come on the scene to locate here, in the United States.  And our tax system is a disadvantage, for reasons that have been said in more detail than I can say.

     And we should think about that, and really concentrate, in terms of inversion, on what I would call crystal clear abuses, but not try to reinvent, in its erstwhile glory, the worldwide tax system as it was conceived by Peggy Richmond, a very distinguished scholar of an earlier era, back in the 1960s.  We are not going to go back to that world.  Thank you very much.

     *Mr. Neal.  Mr. Wells, there are some who have suggested that if we tighten the rules on earnings strippings, it is going to discourage foreign investment.  What is your take?

     *Mr. Wells.  Okay, I have several comments.  The first is that if an investor is told that they will pay the same taxes every other American, whether they are foreign‑owned or domestic‑owned, and that is a discouragement, well, then we have a fundamental problem, Representative Neal.  Because if we will give someone a tax preference in order to be here, then we should expect all of the economic activity to be transformed.  Mr. Stricof and others in the accounting firms will do a fantastic job of reshaping America into the most preferred investor into this country.

     So, we have to start with the premise, in my mind, that we do not want to discriminate against foreign investment, but we cannot allow economic participants to have an unequal playing field.

     Now, on the point earlier about residual profits and royalties, I think that is an issue for this committee to think through.  We relinquished our source country taxation right to tax residual profits because of what was said earlier, because we expected more to come back to the U.S. Treasury, and we expected the other home countries to tax those earnings.

     But if your committee sees that the other country is not taxing those residual profits, that they are escaping taxation and result in no taxation, then the fundamental reason we decided to not have source‑based taxation ‑‑ namely, to allow the other country the primary right to tax these profits at their normal rate ‑‑ that assumption is off.  It is wrong.

     And so, if we are going to have comparable treatment in a world where the other country doesn’t want the deference, then you have to think, well, what does today’s world look like?  In the post‑World War I era when we had these treaties coming about, all of the World War I victors were wanting to fund their war debt, and they would tax the residual profits.  But as Mr. Hufbauer has said, residency taxation is now leaving the earth.

     And so, why do we believe that other countries will tax this offshore income?  And if it is a competitive disadvantage, then we must do something about it.

     So, what I would urge you to think through is not just the question of what we are going to discourage.  We need to have comparable treatment.  And I don’t think that comparable treatment is going to cause anyone to not want to invest in the United States.

     *Mr. Neal.  Thank you.  Mr. Stricof or Mr. Hufbauer, would you care to comment, as well?

     *Mr. Stricof.  One has to decide what is the goal.  And if the goal is to encourage foreign investment into the U.S., to promote job creation, to promote capital investment, anything that one does that restricts that will prevent that result from occurring.  That is what I think.

     If you look at the companies that are making the most investments in this country, you look again ‑‑ just like I said in my earlier response to a question, you look at Germany, you look at the UK, you look at all these other countries.  The capital flows are going back to those countries in a tax‑efficient a manner.  I guess the concept that is being expressed by Mr. Wells is the U.S. should be the tax police of the world, which we have heard about before.  I don’t know what makes the U.S. the tax police of the world.

     If the foreign jurisdictions that are earning the income choose to tax that income or not, why are we trying to interfere with that?  I understand that in treaties, treaties are bilateral, and that they are supposed to ensure that there is no double‑taxation in the world.  The U.S. side of the deductions are appropriate levels of deductions.  That is what I have testified to already, that is what Treasury effectively had no qualms with in the case of historic investment into the United States.  If those other countries choose to allow their own country ‑‑ not to tax that income, why do we care?

     *Mr. Neal.  Mr. Hufbauer?

     *Mr. Hufbauer.  Thank you.  Let me approach the question from 30,000 feet, starting at the Sierra Nevada between California and Nevada.

     I think it is a matter of sovereignty that Nevada has decided not to have a corporate tax, and it is a matter of sovereignty that California has, I believe, one of the highest corporate taxes amongst the 50 states.

     I don’t regard a low level of corporate taxes as an unfair advantage.  It is a matter of what is within the competence of state jurisdiction or national jurisdiction.  So, in my view, if Ireland has a 12‑1/2 percent rate, that is not Germany’s problem.  And it is not the U.S. problem.  That is Ireland’s own decision.  And I do not think it is our job to try to recapture the income which was somehow not taxed by Ireland.

     Or, we can go to a more extreme case, the Caymans.  They have a zero corporate tax.  I don’t think it is our job to somehow try to claw back or cajole the Cayman Islands into coming up to the U.S. corporate tax rate.

     I do feel it is appropriate for the United States to go after money laundering, drug money and personal tax evasion.  But I am pretty strong that the choice of a corporate tax rate between zero and whatever is a national sovereign decision, or a state decision.

     And then I back up from that, still staying at 30,000 feet, to say that tax competition is healthy for the world, yes healthy for the world.  Tax competition at the corporate level, I think, is good for us because it takes us off the notion that, as Senator Long, whom I remember quite well, said, “Don’t tax you, don’t tax me, tax the fellow behind the tree.”  Well, tax competition takes us away from that notion that there is somebody out there who is going to pay taxes, but not us.

     So, that is my 30,000 view.  Thank you very much.

     *Mr. Neal.  Well, let me meet you at 30,000 feet.  Would you ‑‑ and I am interested in your comment, obviously ‑‑ would you argue that a $27,000 post office box in the Cayman Islands or another foreign jurisdiction is a legitimate corporate address?

     *Mr. Hufbauer.  It depends on the kind of activity that is going on there.  But according to data that I looked at, there are far more post box corporations in Delaware than in Cayman.  And I believe that that is within the appropriate rules of a country.  I am not fronting for drug lords and money launderers.  But if it is open, transparent, yes.  It is okay in Delaware, it is okay in Cayman, by my view.

     *Mr. Neal.  So you would suggest that an American corporation that decides to set up shop ‑‑ use the example of Bermuda ‑‑ with simply a post office box and no employees is a legitimate undertaking?

     *Mr. Hufbauer.  If that is what the Bermuda law permits, yes, I will assume that it is.  I am not certain on Bermuda law there.  But if that is a legitimate corporation under Bermuda law, yes.

     *Mr. Neal.  And how am I to respond to those moms and dads who have children in Afghanistan and Iraq, that those post office boxes are used to evade American taxes?

     *Mr. Hufbauer.  Well, if you define it as evasion, which takes me back to the money laundering or improper reporting, absence of transparency, it is totally inappropriate.

     But the threshold question:  Is it evasion?  And here we come to a related question, the degree of transparency.  And as I understand it ‑‑ I won’t go to Bermuda, but for Cayman, as I understand it, they have a very tight relationship with our Justice Department, reporting all financial transactions in which the Justice Department is interested, which probably reflects what the Treasury Department is interested in, as well.

     And so, if we are not into that realm of transactions which are what I would call evasion, yes.  It is all right.

     *Mr. Neal.  Thank you, Mr. Chairman.

     *Chairman Tiberi.  Gentleman from North Dakota, Mr. Berg, is recognized.

     *Mr. Berg.  Thank you, Mr. Chairman.  I appreciate the panelists.  Thanks for being here.

     I would like to crank it up to 50,000 feet, though.  You know, I have been watching tax policy for 30 years.  I have just been in congress a few short months but, I mean, I couldn’t ‑‑ I just want to make the point I think there is always unintended consequences.  I don’t care how much time and effort Congress and staff and people can do to write tax law, you just can’t get it perfect.  And whatever you do, you create opportunities ‑‑ call them loopholes or call them whatever ‑‑ but the code is what it is.

     And again, as we are talking about, you know, interest stripping, as we are talking about how, again, people are following the law, but they are doing it because we have a law that ‑‑ saying we are not going to tax you if you do these things, and you try and fix those, you create other problems.

     And I guess I just wanted to make the point that I think, you know, our chairman here and Chairman Camp, our objective is to simplify the whole tax structure.  If we, in fact, get back to a real simple ‑‑ again, 25 percent, rather than a 35 percent, it makes us more competitive.  And rather than having chapters and chapters and reams and reams of exemptions, maybe we don’t have as many exemptions.  Maybe it is pretty simple, it is pretty black and white, working towards a territorial system.

     And just again, simplifying the tax law ‑‑ again, for those people that make money in tax law and the changes in the regulations, that may not be good, short term.  But I just believe that that would, again, help business focus on making decisions that are good for business and good for customers and good for profits, and not necessarily having to second guess those business decisions, based on taxation.

     So, having said all that, I would like to kind of step back also.  And I believe in best practices.  And so we have talked a lot about what we can do to change.  But I would like to look at the other developed countries around the globe, and say ‑‑ and I would like each of you to kind of respond to this.  And I don’t want to look at today and I don’t want to look at yesterday, but I want to look to the future and say which countries have the right tax environment that we are going to have to compete with in the future, here in the United States?

     And so, if we just could ‑‑ again, if you could say, “Here is a country that I think is going to be where capital is going to flock to, what could we” ‑‑ just share that with this committee, and so we can say, okay, here is something we ought to look to.

     *Mr. Hufbauer.  Thank you.  That is a good 50,000‑foot question.

     I guess I would say the big missing part of the U.S. system ‑‑ and I understand the unpopularity of it ‑‑ is a national consumption tax coming under various names:  a goods and services tax, a value‑added tax.  And we are, again, way out of step with the world.  I think it is quite harmful to our position as an exporter.  Also it makes it very difficult to collect the revenue which our country apparently needs to run the projects that we want.

     So, what I would look to would be a country such as Canada, which has put in a GST.  The rate isn’t terribly high, but it is a revenue raiser.  Canada has reduced its corporate tax.  And, importantly, what Canada has done on the corporate tax ‑‑ and this comes from the Canadian constitutional system ‑‑ is to let about half be collected by the provinces.  And I think that is quite appropriate, because then provinces can decide, in my model of tax competition, whether they want a high corporate tax, which Ontario does, or a low one, which Alberta does.  Let them decide.  Alberta relies more on oil royalties, obviously.

     So, I would put Canada as a model in the business tax area.  I am not talking about the personal tax, and I will not get into the personal tax.  I would also name Australia as a model.  Australia has done a lot of reform over the years, rather similar to Canada.  I don’t think the U.S. can emulate Ireland.  I think Ireland had a great model for a small country.  I don’t think we can go down there probably in the near future.

     I do want to emphasize ‑‑ and this is possibly in response to Congressman Neal’s question to what Mr. Wells says, I don’t want to tolerate what used to be called personal foreign holding companies way back in the 1930s, which become incorporated pocketbooks for U.S. individuals to take their money abroad.  I really want to keep the personal tax system here.

     And I also am quite sympathetic to putting withholding taxes on interest payments on a negotiated basis under treaties. Thank you.

     *Mr. Berg.  Thank you.

     *Mr. Stricof.  For somebody that could only fly at, what, about 10,000 feet, you are doing pretty good at getting to 50,000 feet.

     I have to repeat one statement before I continue, and that is that I don’t know anything about tax policy, I am not good at tax policy, and I am not promoting any specific tax policy.  But I can tell you what I think is going on as a best practice method in various countries.

     And, again, I go back to the developed world and what are they doing?  They have all dropped their corporate tax rates, universally.  Even Japan is talking about, or has already, dropped their corporate tax rate.  Everybody with possibly the exception of Japan ‑‑ has instituted, as well, a major R&D incentive.

     I think that one of the things that made this country great and allowed us to make so much external investment in the 1960s is we owned the intellectual property of the world.  We were the most innovative, the most creative, best educated, you name it.  That was the United States.  And, therefore, in the 1960s we expanded dramatically around the world.

     So, how do we make that happen?  I can’t tell you.  That is a policy issue.  But I can tell you that whoever wins that, 20 years from now will be looking back and be the ones that are saying, “Yes, I did it right.”

     *Mr. Wells.  Representative Berg, I think dropping the rates is probably a good suggestion.  Whether territorial is the answer with safeguards to the U.S. tax base or a worldwide regime, that is something that ‑‑ I think either regime could work ‑‑ but the committee needs to be very careful about.

     I think that we don’t want to be the tax police of the world.  But we are out of the 20th century, and the 20th century thought was that we should allow base erosion payments because the other country will tax the residual profits on a residency basis, and we don’t want double taxation.  The world today is double “no taxation.”  And to the extent that double “no taxation” is a loss of revenue, that is unfortunate for the congress.

     But what I am most concerned about, and what I hope you leave the hearing with is, if one competitor has a no‑tax result, and it is a significant part of their U.S. business, that is a competitiveness issue.  And that is more than just losing revenue that is desperately needed for our country.  That is a competitiveness issue.

     So, as you think about designing a system, if we can have everyone pay a single level of tax, and defer or allow profits to be transferred or stripped to an offshore location only when it is a real country that is really going to subject those profits to a tax at the 20 to 30 percent rate that you have been discussing, then that is fine.

     But if someone is able to strip profits to create zero taxed income, and they are the competitor that can do it and the next competitor cannot, then I can tell you what the next generation of businesses in America is going to look like.  They are going to look like the first person.

     And that is what I would urge you to consider, that as we think about what corporate reform looks like, that it should attempt to get at an equalized tax rate among all economic participants, or we would expect to be the one creating the economic participants of the next generation.

     *Mr. Berg.  Thank you.  I have one other follow‑up question.  And again, everyone is looking at risk versus return.  We could have high tax rates, but if every foreign investor was guaranteed a super return, we would have all kinds of money.  And you know, having said that, we are assuming that things are ‑‑ the return is pretty much even among several countries.  How do we encourage ‑‑ and other than the rates, regulation, I think, has a place in this, as well.

     And I just want to know if there is any ‑‑ you know, over the last ‑‑ I guess the Obama Administration, if there is any regulatory changes recently that you have seen that would inhibit that investment from coming into the United States.

     Again, if we could just ‑‑ each of you respond, or any comments on that.

     *Mr. Hufbauer.  You are right about the risk and return issue.  And this is one of the great strengths of the United States.  We have a very stable legal system.  Property is highly respected, compared to other countries.  Certainly Switzerland would be in the same category, but the legal regime of property rights really cuts down the risk here, compared to a great many countries in the world.  So, that is one of our strengths.

     Now, where do we have problems?  I am not sure that the Obama Administration has done anything out of line in this respect.  I think that our tort system, which is being corrected, I believe, by the Supreme Court ‑‑ and I applauded the recent Wal‑Mart decision ‑‑ does create a certain amount of risk for class action suits, and that sort of thing.  I think that risk is actually on the way down now.  That is not because of the Administration, it is really the courts.

     I know there has been a lot of talk about the Dodd‑Frank bill, and has that made banks less willing to loan, and so forth and so on.  I regard that law as a work in progress, where I am sure Congress will return to it if, in fact, it does discourage lending to small and medium‑sized companies.  That I have actually looked at.  I think the lending situation today is more because of the financial crisis than because of any new legislation.  But that may be an area in the future.  Let me stop there.  Thank you.

     *Chairman Tiberi.  The gentleman may answer the question.

     *Mr. Stricof.  Well, if I can’t talk about policy, I certainly can’t talk about regulation.


     *Mr. Stricof.  But what I can do is applaud the effort towards simplification.  And I think anything that simplifies our tax laws and the enforcement of our tax laws is certainly going to be welcome by the business community, as a whole.  It has nothing to do with inbound versus outbound.  It is just effectively talking myself partially out of a job, but I think anything that goes for simplification is very good.

     But I would caution that the last time somebody decided to have a tax bill that was labeled “simplification” in it, they took the definition ‑‑ I think it may have been ‑‑ I can’t remember if it was gross income or taxable income from ‑‑ it must have been taxable income ‑‑ from the definition of gross income minus deductions equals taxable income to a three‑page definition.

     *Mr. Wells.  I have three quick points.  And, again, I am not an economist like Mr. Hufbauer.  He is probably the most relevant person to ask.  But as a citizen, to me, I think broadening the tax base and making it simple is a wonderful goal.  Everyone should bear the same or as close to the same a tax for similar activity.

     Second, a sustainable fiscal budget.  I think that one of the biggest challenges for foreign investors today is knowing the fiscal situation of the U.S. Government.  And I think that you are getting pulled 100 different directions as to what to do.  But I think that foreign investors would be overjoyed to believe that the fiscal crisis that may be looming for the country has been dealt with thoughtfully.

     And I think the last point would be to know what tax reform will be.  And I think that is not to put pressure on this committee.  It needs to be thoughtful, and you need to take the time to do it exactly right.  But I think if companies and other countries knew that our fiscal house was in order, and they knew what our tax structure was going to be, and that the tax base was as broad and as simple as possible, and we treated everyone comparably, then I think that would achieve the best result for the country.

     *Mr. Berg.  Sounds simple.

     *Chairman Tiberi.  Great way to end today’s hearing.  This concludes today’s hearing.

     Please be advised that Members may submit written questions to the witnesses.  Those questions and the witnesses’ answers will be made part of the record.

     Thank you.  Thank you to the three of you for some really, really good and educational testimony, a discussion, and I believe it helps us, again, get more information as we want to move forward on comprehensive tax reform.  I appreciate your time.

     This concludes today’s hearing.

     [Whereupon, at 12:37 p.m., the subcommittee was adjourned.]


The Honorable Ms. Berkley


Brian Dooley
Mayer Brown LLP
Overseas Shipholding Group