03 October 2017 Senate Finance holds international tax reform hearing The Senate Finance Committee international tax reform hearing on October 3, 2017, focused on how Congress may design the anti-base erosion provisions called for under the Republican unified framework for tax reform, including whether such provisions should apply to US-based multinational companies, foreign-based multinationals, or both. Chairman Orrin Hatch (R-UT), a member of the "Big Six" group that released the framework September 27, noted that it includes anti-base erosion rules as an accompaniment to a move toward a territorial system. He said the international portion of the framework is short on details "because these problems can't be solved in a nine-page framework document — that will require the work and effort of this committee." The "Unified Framework for Fixing Our Broken Tax Code" included the statement: "To prevent companies from shifting profits to tax havens, the framework includes rules to protect the [US] tax base by taxing at a reduced rate and on a global basis the foreign profits of [US] multinational corporations. The committees will incorporate rules to level the playing field between [US]-headquartered parent companies and foreign-headquartered parent companies." Like House Ways and Means Committee Chairman Kevin Brady (R-TX), Chairman Hatch also cast doubt upon a September 29 Urban-Brookings Tax Policy Center (TPC) report that the framework's benefit would be largest for high-income taxpayers. Hatch said the framework does not include sufficient information to produce a credible analysis, "let alone a detailed estimate of revenue and the distribution of tax burden." He also suggested that the TPC report oddly excluded the names of specific authors but nonetheless said it represented only the views of those authors, not the TPC. — Bret J. Wells, Professor of Law and George Butler Research Professor of Law, Law Center, University of Houston, Houston, TX — Kimberly Clausing, Ph.D., Thormund A. Miller and Walter Mintz Professor of Economics, Reed College, Portland, OR In his testimony, Wells said residency taxation principles like the US subpart F regime only protect against profit-shifting by US-based multinational companies, and recommended source taxation anti-base erosion measures that apply equally to US-based and foreign-based multinationals. He suggested "a comprehensively applied base-protecting surtax" that would eliminate the tax benefits associated with earnings-stripping transactions and level the playing field between US-based and foreign-based multinationals. Under the proposal, a related-party payer of a "base erosion shifting payment," representing earnings transferred to a foreign affiliate, would be subject to the surtax "in an amount equal to the amount that would have been collected had those earnings instead been distributed as a partially deductible dividend." The proposal incorporates a rebuttable presumption that the payment in its entirety is a transfer of residual profits. The US payer could seek a refund of the tax from the IRS if it could demonstrate that it utilized a correct application of a profit split transfer pricing methodology. Grinberg said US multinationals are much more constrained than foreign multinationals from stripping income out of the US tax base, and called for addressing the relative tax advantages available to foreign-owned US corporations. He later called for an inbound minimum tax, but not an outbound minimum tax. Clausing and Shay both said a minimum tax should be applied on a country-by-country basis, not a global basis. Grinberg pushed back against that, suggesting a country-by-country approach doesn't take into account how multinationals operate, creates complexity, and could lead to manipulation. During questioning, Chairman Hatch said it is important to distinguish legitimate business transactions from tax-driven earnings-stripping deals, and asked whether foreign multinational companies have significant planning opportunities, such as earnings stripping, that US multinational companies do not. Wells said there is no question that is the case because the main anti-base erosion measure currently is subpart F, which only applies to US-headquartered companies. A corporate inversion is essentially a US company saying it wants to be treated like a foreign-based multinational with respect to owning US assets, and to use the same techniques to strip the corporate tax base that inbound investors use every day, he said. The tax rate that applies to US companies, because they don't have the same earnings-stripping benefits, is significantly higher than exists for a foreign-owned company that conducts those exact same US activities, Wells said. "We don't want to treat foreign companies in a discriminatory way, but we should not give them an advantage that we don't give our own domestic businesses," he said. Grinberg said subpart F keeps US multinationals from having foreign affiliates loan the US company money or charge the US company royalties to lower US tax and increase the tax base in a low- or no tax jurisdiction, whereas foreign multinationals get US affiliates to agree to pay their foreign affiliates for expensive intercompany obligations subject to much less binding constraints. Through good transfer pricing studies and the relatively weak Section 163(j) limitations, they get a significant financial advantage by reducing their US tax liability effectively through self-dealing, he said. Grinberg added that the link to jobs is that the advantage makes foreign acquisitions of US firms more common than vice versa, and firms continue to have a home-country bias for headquarters and R&D jobs, and associated support jobs. Shay said the United States needs to take steps to improve source taxation, but there are structural advantages in every income tax system for a company that is not a local resident to invest locally. "So this is not a United States-only problem and our companies are vigorous in taking advantage of their external status in relation to other nations," he said. Senator John Thune (R-SD) noted the drop in Fortune 500 US-based multinationals, argued that antiquated international tax rules are to blame, and asked whether international tax reform will lead to economic growth. Wells said it will, and in contemplating anti-base erosion measures that will level the playing field and provide revenue, Congress must consider that "foreign-based companies and corporate inverted companies have self-helped themselves to a territorial regime; no matter what you do, this country is territorial as to them." The only question is whether the same playing field should be provided to US companies, he said. If policymakers are concerned about earnings stripping and base erosion, Wells said "let's set up a set of rules that apply equally to US and foreign companies equally to raise the revenue that you need." Senator Johnny Isakson (R-GA) asked about adding "teeth" to the proposed territorial system. Wells said the business profits in the United States should be subject to one level of tax in the United States, so that whether you are a US-owned company or a foreign-owned company, you will pay one level of tax and there is "not one group of companies that can strip their profits to Bermuda or somewhere else. We don't want to tax the inbound investor in a punitive way … but they ought to be on the same playing field with respect to the profits in their US business whether you are a US company or a foreign company," he said. Thune noted the following statement in Grinberg's testimony: "[W]hen addressing inbound corporate tax reform in this Congress, policymakers should seek to give the United States leverage. It is important to put the United States in a good position to bargain internationally about a future set of broadly accepted rules that will most likely be agreed to multilaterally at a later date." Senator Thune asked about the form of such leverage and how to balance it with the important role foreign direct investment plays in this country. Grinberg said foreign direct investment is important and we should try to level the playing field, especially in light of efforts abroad intended to go after US multinationals, such as the European Union state aid investigations and increased efforts to tax companies that use digital technology. He suggested creating "an inbound minimum tax that treats US multinationals and foreign multinationals alike and defends the base that we can protect, which is the base of income earned in the US from US citizens and customers." Senator Rob Portman (R-OH) cited an EY study saying "there would be 4,700 companies that would be American companies today just in the last 13 years if we had a 20% rate and a territorial system," and said foreign acquisitions are an even bigger problem than inversions. He said we need to do something to balance inbound and outbound companies, because we want foreign direct investment, but it has to be on a level playing field. Portman said Grinberg has laid out some interesting ideas to strike a correct balance. Portman said that the balancing act on the outbound side is to prevent base erosion, particularly intangible income, without making US multinationals uncompetitive. He noted Wells' previous comment that Treasury could do more under Section 367(d) under current law. Shay said we can't just look at source taxation and we can't just look at outbound taxation; both need to be robust and protect US interests. If you do not have a robust minimum tax in conjunction with a territorial system, you are going to have an issue, he said. Grinberg called for a lower corporate tax rate; making it easy to repatriate intellectual property (IP) into the United States; and having strong R&D incentives to do work in the United States. If the United States moves to a system that looks more like those in the rest of the world, he said, the OECD BEPS process, rather than harming us, can begin to provide us some support: it is getting harder to move IP to zero-rate jurisdictions where you don't do anything; if there's an inbound tax even if you go to a zero-rate jurisdiction, you are not going to pay nothing to the United States and will not be round-tripping successfully, and the same thing will apply equally to foreign-based multinationals. Wells said lowering the rate is a "wonderful idea," and that the United States must move to a territorial regime that does not expand subpart F. "Subpart F is not the answer to base erosion," he said, adding that we need to protect the US tax base from interest stripping, royalty stripping, and related-party payments generally. "Every time we seem to talk about protecting what is the rate of tax in the US, to the extent an inbound company can get a tax advantage, that puts [it] at a competitive advantage versus US companies, and we need a system that levels that playing field for competitiveness reasons," Wells said. Several Democratic senators — including Tom Carper (D-DE), Ben Cardin (D-MD), and Michael Bennet (D-CO) — said, and some witnesses agreed, the expected timeframe for acting on tax reform is too tight. Cardin — referencing the Senate Budget Committee's FY 2018 budget resolution that sets a November 13 target for the Finance Committee to report out a tax reconciliation bill — said he understands budget instructions call for the work to be completed in 5-6 weeks. He said the unified framework calls for reduced business tax rates but no real way to pay for it. Noting that other countries have consumption taxes, he said it may be difficult, if not impossible, to have competitive business tax rates unless the US system is harmonized with revenues other than an income tax. Ranking Member Ron Wyden (D-OR) said the Senate Republican budget eliminates the requirement that a reported tax bill be scored at all — citing a provision that removes the requirement for an estimate to be publicly available on the website of the Congressional Budget Office not later than 28 hours before a Senate vote — and cast doubt on the argument that tax cuts can pay for themselves. Senator Pat Toomey (R-PA) clarified that, under the budget resolution, the Budget Committee will begin marking up October 4, the subsequent tax reform will be scored and the score must be on a static basis against a current-law baseline. Regarding the November 13 target date, while there has been years' worth of work done on tax reform and tax reform could likely be constructed in a short amount of time, the goal in the budget resolution is not binding, and the reconciliation instructions won't expire until September 30, 2018.
Document ID: 2017-1620 | |||||
