The House Ways and Means Committee on February 24, 2016, focused on the urgency of tax reform that reduces the statutory corporate tax rate and moves toward a dividend exemption system, conducting a hearing on international tax reform that was dominated by discussion of the pressures being put on US-based multinational companies, including the adoption by other countries of elements of the OECD BEPS project, and EU state aid investigations. Republican members emphasized the effects that US companies moving overseas — due to global tax pressures or acquisition by foreign competitors — have on communities, and said the urgency of the issue should be better communicated to average Americans.

While most of the witnesses agreed with this point of view, the hearing did turn partisan in some respects as many Democrats questioned whether moving to a more territorial tax system along with adoption of some type of innovation box would indeed make both US companies and the US economy more competitive.

"I am convinced that America is beginning to hear the giant sucking sound of American companies and jobs and investment overseas. Part of that is generated by our global competitors, who are shrewdly understanding how our tax code works and are moving aggressively. But the root cause is our tax code," Chairman Kevin Brady (R-TX) said in concluding the hearing. "I am convinced the first step we can take toward overall pro-growth tax reform is to permanently lower the tax gates and allow our US companies to bring their profits back home to invest in our communities, in jobs, in research and development, in growth ... " he said.

Chairman Brady said Congress must act now and that he is charging the Committee and Tax Policy Subcommittee Chairman Charles Boustany (R-LA) with developing the solution. Rep. Boustany told reporters following the hearing that he wants to have a draft bill ready by the end of March, though it was unclear whether that means releasing draft legislation or having it actually considered by the Subcommittee. He was reported as telling the American Action Forum yesterday that enactment of international tax reform this year is "probably unlikely" given the tight time frame and current president, but that the Committee would nonetheless see how far it can go with a bill.

Additionally, some witnesses said today that attention on inversions is overblown when compared to other merger and acquisition activity targeting US companies, as well as broader shifts in global taxation that threaten to further leave US companies behind if the tax system is not changed.

Committee Democrats did not endorse the approach being taken by the Committee Majority, and instead called for comprehensive rather than piecemeal tax reform, revenue neutrality in any such legislation, and legislation specifically addressing inversions. Ranking Democrat Sandy Levin (D-MI) focused on earnings stripping in the context of inversions on the heels of his introduction yesterday of The Stop Corporate Earnings Stripping Act of 2016 (H.R. 4581), which seeks to limit interest deductions for foreign-controlled inverted groups in a manner similar to legislation introduced by Senators Chuck Schumer (D-NY) and Dick Durbin (D-IL) in 2014.

Testimony

Witnesses at the hearing were:

— Michelle Hanlon, MIT Sloan School of Management
— Raymond Wiacek, Jones Day
— Itai Grinberg, Georgetown University Law Center
— Edward Kleinbard, University of Southern California and The Century Foundation

During testimony, Hanlon encouraged members "not to benchmark current policies to those of the [United States] in the past, but rather to the tax systems of other countries that are competing for business activity and jobs right now and in the future." Grinberg said the international tax environment around the world is becoming less stable and less favorable to American business due to the BEPS project and EU state aid investigations that are "an extreme example of the emerging challenges."

Wiacek lamented that, when a large US-based multinational is acquired by a foreign corporation, many smaller companies around it are harmed. "We all praise how these companies are the job generators, and it's true," he said. "But most of them are part of the supply chain of a multinational, or provide goods and services to the employees of that multinational."

Q&A

During questioning from Chairman Brady, Hanlon said the US tax system is so out of line with the rest of the world that US companies leave and seek a better environment elsewhere. In terms of urgency, Hanlon said lawmakers are already late in addressing the issue but there are some obvious things that could be done, including lowering the corporate rate. "So rather than a Band-Aid approach, go after the real solution," Brady said.

Chairman Brady also referred to Wiacek's testimony regarding the effect on local communities when US-based global companies are acquired by foreign-based competitors. Wiacek spoke of the devastation in Detroit, where the whole economy was once based on the auto industry, and said the United States cannot afford to lose another round of US companies in strong sectors like technology and pharmaceuticals. In light of the frequent discussion of inversions, he suggested more attention should be put on acquisitions of US companies in non-inversion transactions.

Similarly, Grinberg said inversions are "the tip of an iceberg," and are symptoms of much deeper problems. He said the EU state aid investigations should help explain the direction the rest of the world is taking, namely more significant source country taxation, to which US companies will be exposed if the US retains its current system. He said the right way to proceed is a much lower corporate tax rate and a move towards a dividend exemption system at a minimum, while keeping in mind that the world is moving away from residence country taxation and toward source country taxation, and away from income taxation and toward consumption taxation. Grinberg said the United States should think seriously about moving towards a system that better defines the US tax base that it wishes to defend and then taxing exclusively on that basis, jettisoning the concept of corporate residence.

Rep. Pat Tiberi (R-OH) raised the issue of how the loss of US companies affects communities, and how the actions of other nations heighten that effect. In response to prior comments that attacking the BEPS project is premature, Wiacek said that the United States is not in control of international taxation, and other nations are "galloping forward" and not necessarily inclined to adopt all of the BEPS proposals. "The whole international system is getting rewritten right now in Paris and Brussels and we better catch up because we'd like to put a stamp on it, because they are not writing it in a way that is favorable to us," he said.

Rep. Boustany said lawmakers must impart the urgency of the problems facing US companies to the public, who may not understand terms like EU state aid, inversions, and OECD BEPS action items, but do understand what happens when a US-based multinational company leaves and goes overseas. "We need to make that case and impart that sense of urgency through this country because American business is under assault," Boustany said, asking the witnesses to provide supporting data.

Wiacek said such data could be provided, but from an anecdotal perspective it is easy to see what changes when an iconic brand leaves an American city.

Boustany implored other members to make the case about the urgency of the problem, and said he is tired of the punitive measures promoted by Democrats against American businesses. "We have to win for the American worker, for the American people. It's time to act now," he said.

Member statements and witness testimony from the hearing are attached.

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ATTACHMENTS

Levin Statement

Brady Statement

Grinberg Testimony

Hanlon Testimony

Kleinbard Testimony

Wiacek Testimony