- Mark, thank you very much
for your keynote speech
and for your policy observations today.
Next up is the Debate Session
where certain policy aspects
of the International Tax
System will be debated.
This section is somewhat
audience interactive
in that some of you have
handheld polling devices
which will enable you
to register your views
on various propositions as
we go through the segment.
The debate is going to be
moderated by Willard Taylor
and the Debate team includes Mark Mazur,
Professor Rosenbloom of
NYU School of Law School,
Professor Daniel Shaviro
of NYU School of Law School
and Kimberly Blanchard of
Weil, Gotshal & Manges.
Professor Rosenbloom
is the James S. Eustice
Visiting Professor of Taxation
and he's the Director of the
International Tax Program
at NYU Law School.
David is a member of Caplin and Drysdale
and served as International
Tax Counsel and Director
at the Office of International Tax Affairs
in the US Treasury Department.
A frequent speaker and
author on tax subjects,
David has taught international
tax at Stanford, Columbia,
the University of Pennsylvania,
Harvard law schools
and other educational
institutions around the globe.
Professor Daniel Shaviro,
is the Wayne Perry Professor
of Taxation at NYU Law School
and formerly served with the
Joined Congressional
Committee on Taxation.
Professor Shaviro teaches tax
policy related topics at NYU
and is a prolific author on
topics involving tax policy,
budget policy and entitlement issues.
Most recently Professor Shaviro
authored the book entitled
Fixing US International Taxation,
a very fitting title for today's program.
Kim Blanchard is a partner
with Weil, Gotshal & Manges.
Kim is a former chair of the tax section
of the New York State Bar Association
and has lectured and published extensively
on numerous aspects on
international taxation.
Kim is active at the ABA's
International Tax Committee
and serves on the editorial board
of the Tax Management
International Journal.
Kim is the Vice President of
the International Tax Institute
and earned her degree from NYU Law School.
With that, and during this next segment,
we have selected four
propositions to debate
and all within within 60 minutes.
(clock ticking)
Willard and debate team
please assume your positions.
- Okay we should start this.
As Larry said, we have
four debate questions
and after each one of them
You will all pull out your little thing.
If you don't have one of these gizmos,
you can get it at the door,
which will give you an
opportunity to vote.
With four debaters and four propositions,
we have about three minutes each,
on each subject for the speakers
and the rest of the time
will be spent voting.
So, the first question is debate,
is meaningful
as a basis for jurisdiction to tax?
And, if not, and assuming we
keep corporate income tax,
what are the alternatives?
And I know this is something
that you have good,
strong feelings about David
so why don't you begin?
- All right, I will respond
resoundingly in the affirmative
to this question.
I think Corporate Residence is meaningful
as a basis has jurisdiction to tax.
I think the question
needs a little refinement
because I think ...
I think pretty much anyone
would say that we need rules
to differentiate between the
taxation of foreign persons
on a gross basis and a net basis
and in some sense that's a residence test.
We also, I think, need Corporate Residence
to determine the source of income.
For example we currently
source dividends and interest
in accordance with the
residents of the payer.
So, I think of those
purposes, we clearly need
Corporate Residence.
But the question isn't
really going to that.
The question is going to
whether we should have a tax
based on a corporation
based on its residence
and that is really, I think,
an alternative way of articulating
a territorial question
and in my judgment,
Corporate Residence is
still very meaningful
as a basis to tax on that basis as well.
Now, I'm not necessarily saying
our current test of Corporate
Residence is the best one
but the Corporate Residence
as an abstract matter
I think is here to stay.
- Dan.
- Well I'm gonna say I
guess yes, although no.
Is Corporate Residence inherently
a very meaningful thing?
I would say no in the sense that people,
where people live is
meaningful but a corporation
is an intangible energy
so in some abstract sense,
is not a very meaningful thing
but should the US under
the current circumstances
continue to use it?
I would say the answer is
yes because it is useful
even though it's not incredibly meaningful
and I think this is why if you
look at territorial countries
around the world, so-called
territorial countries
that supposedly don't tax
foreign source income,
they actually do have CFC rules
and that means that they are taxing
foreign sourcing to some extent
and they are relying on Corporate
Residence to some extent.
Of course they don't tax
the foreign source income
at least explicitly
directly of other countries'
resident companies by their own measures.
So one reason that it is desirable to use
residence of all source,
is when you've got a whole lot
of bad tools in your tool kit
you at least might as well
take out more than one of them.
So source is a really bad tool.
So even assuming that
we only wanted to tax
US source income
and when we have such a bad
tool that doesn't work well
what kind of dragging
out another word to say,
namely the residence rules
makes it slightly less bad
and the reason for that is
that at least for US
companies it's hard to tax,
taxing the foreign source
income is sometimes a proxy
for income that we think was shifted
for the domestic tax place
and this is very much
other countries use it too.
So I think it would be kind of foolish
to give it away right now.
I'll talk later about, in
some of the other questions
how we've may be over-used residents
who use it the wrong way
and made less than the optimal use of it
for kind of handling the
income shifting problem.
- Kim, do you agree with that?
- No, I don't agree with David either.
I think it's very difficult
to separate the question
of whether you think that
Corporate Residence is meaningful
from the two separate questions of
how to determine Corporate Residence,
which David said we don't
have time for that right now,
and how you use it.
And let me start out with the end of that.
In our system, once we determine
that a corporation is a US corporation,
we tax it on its worldwide income,
subject to deferral and all other stuff
we've been talking about today.
Whereas if you're not a US corporation
we only to tax you on
your Fed Act and your ECI.
So it's a very meaningful distinction.
I'm not sure why it's a
meaningful distinction
but that's what we have.
In other countries the
significance of residence
is different.
If you're a resident in a
more territorial country
you're subject to tax on
your income of that country
but not necessarily on worldwide .
So they're just using
it in a different way
and in terms of how we
determine Corporate Residence,
I mean to me that's the real question,
just to take an extreme example,
although not as outre as
it might first appear.
Imagine that you have a client
who is a foreign investor
who invests in a bucket of US
and other worldwide non-US securities
through the simple medium of
a tax transparent partnership
who happens to be a domestic
partnership because why not?
It doesn't matter.
But imagine now that all of a sudden,
because of a mistake somebody made,
or because of a rule
that's in the regulations,
that partnership is not a partnership.
Imagine it's a corporation.
And it's becomes to a US corporation
because it was set up under US law.
Well now this foreign person
owns 100% or close to that
of a domestic corporation,
taxable on its worldwide income
and none of the facts of changed.
So before when there was
no tax at all in the US,
now it's all subject to tax and to me,
that just is not a
system that makes sense.
- Mark, you have a view on this question?
- Yeah so I just wanna make
a couple of observations.
One, really the complaints
about residents based taxation
typically relate to the fact that
in the age of multinationals
being able to choose
where they incorporate,
where they manage their operations from,
it almost is a matter
of choice of residents,
from the standpoint of those things.
However, agreeing with Dan,
even though it may not be a great tool,
it's one that we have and
one that we're using here.
And I think to build on Kim's point,
if you think about extremely examples,
if you think about having
a destination-based tax
on services, that looks a lot like a vat.
And so it doesn't even look like
a corporate or income tax anymore.
It looks like a Vat so really
focusing on extreme examples
you gonna find yourself moving
between different types of taxation
without a good anchor point.
So getting back to Dan's point.
It may not be a great rule,
one that we've got, one
that we're sort of used to.
One that has some applications.
- So we have the first polling question
and on your little device, if you vote a,
Yes Corporate Residence is meaningful
as a basis for jurisdiction
to tax, you push one.
And if you say no, Corporate
Residence is no longer useful
Kim's point of view and there
are lots of alternatives
as a source of income, you press 2.
So go at it.
(chirpy music)
And?
Do we announce this result?
- Florida's not in yet I think.
- [Audience Member] They're
all looking at each other.
It's not gonna wait then.
- With every other candidate.
- one by one.
- Maybe we should just count hands.
(panel laughs)
- [Audience Member]
We're trying to re-poll.
- Okay sorry guys, we gotta re-poll
so you got another chance
to express your views.
One is a.
Can we switch back to the questions?
Can you switch back to the question
so that people can be re-polled?
No, next one next one.
Forward.
it's like Bloomberg going down.
(panel laughs)
The markets are in suspense.
- Usually this goes off without a hitch.
There we go.
- Yes, is 1 a.
No, Corporate Residence is
no longer useful is 2 b.
If everybody could vote again.
- But no more music.
Oh I guess.
- no you get your music.
- I don't think Alex ever got this part.
- Okay, this is it do or die.
- No.
- It hasn't worked.
- Okay, so tell me what,
can you work on this,
and we'll go ahead and
do the other questions.
- Do a vote at the end
of the next question.
- Do a vote of hands, do the hands.
Maybe do the hands.
Well, why not have a show of hands.
- A third vote.
- Because we can't.
- Dan I'm not capable
of counting the hands.
The second debate question
if you can put that up.
have we got it up?
The second debate question.
Is the US tax system really broken?
Is reforming the US
corporate tax a top-tier item
for policymakers or can
we just muddle along?
So Mark this is your
specialty what do you think?
- Well I think I just spent 30 minutes
talking about the US tax system
and really that needs to be fixed
and should be a top-tier
issue for policymakers.
I think the President
recognized that in his framework
for business tax reform.
I think that it's been a top-tier issue
for the administration for some time.
As I point it out,
under the current rules,
there's just too much in the
way of disparities between
how Industries are taxed,
how assets are taxed,
how different forms of financing a text.
And so the basic problem we have here
is that we have a series of
provisions in the corporate tax
that really aren't doing
with their intended to do.
So I think it really
would be a top-tier issue
for policymakers.
- But not really broken.
- Not really broken, right.
- Okay, Dan, your view?
- Well, there's no question that the rules
to the corporate tax system is pretty bad
but if it's really suddenly broke
and there's a like, big crisis,
I'd like to see what
the evidence of that is.
It seems like it's just kind of bad
as it's been bad for a long time.
Maybe it's marginally a trending worse
but I don't see that it's
getting dramatically worse.
I personally, just apart from
the fact that it's my field
so it was fun for me if people are working
and then doing stuff in this area.
Leaving that aside, I would kind of
tend to tell policymakers there are
a lot of Higher priorities.
Think about the infrastructure
and the highway system,
education and rising in
equality and things like that.
I'd sort of like prioritize
a lot of those things ahead.
And one thing that I'm
not that persuaded about,
is the virtue of doing
standalone corporate tax reform
where you kind of reform
the corporate tax system.
You lower the rate and
you broaden the base
and you kind of keep everything
else in the income tax,
the same, the way it was before.
If you don't do that carefully,
you can cause all kinds
of messy problems like,
you kind of disrupt, not
that it's wonderful now,
but you disrupt the relationship between
the corporate and
non-corporate business sectors.
For example, if the latter
gets a base broadening
without the rate cut,
you also create problems
with the relationship
between the corporate tax
and individual tax.
I very much think of the
corporate tax is a backup
to the individual tax.
A lot of it is for
problem of owner-employees
who underpay themselves, because
it's their money either way
and if you have, the
individual rate is a lot higher
than the corporate rate.
You got some issues there
that you're not really having
owner-employees who might
be very successful people.
In some cases, paying the rate
they kinda supposed to pay.
Then they hold the stock till death
and then they get the stock on the basis.
So I think that's a pretty big problem.
I think there's this kind of fascination,
because the '86 tax reform was a kind of
a powerful experience, and I get that.
I went through it myself.
I was a staff and I thought
it was great and so forth.
I also had a good time with it on all that
but there's this kind of thing,
Oh we've gotta do it again.
Not a quote Karl Marx as
I don't normally do that,
but he has a famous quote about,
everything happens twice.
Once is tragedy and once is farce,
and I think the political situation
has changed a lot since
then between the parties.
The fact that it would now
just be the corporate system
as a standalone.
I worry that we're kind
of getting into farce
into doing ill-thought
things that don't really fit
into the whole fabric, if we kind of do
stand-alone corporate tax for now
and put it above all other priorities.
- Kim, do you ...?
- I'm really glad that Dan
mentioned the '86 reformat
because that was kind of the
centerpiece of my reaction
to this question, but let
me step back for a minute.
I do think that the US tax
system is irretrievably
and fundamentally broken and
it think it has been that way
for some time.
It didn't suddenly happen.
It had created over
many, many, many years.
When I began practicing in 1981,
after graduating from
this fine institution,
we got the Economic Recovery Tax Act,
ERTA we all called it.
And then next year after that we got TEFRA
and then two years later we got DEFRA
and then we got tax reform.
And then after tax reform in
'86, every year after that,
with one or two exceptions,
we got more on top of all of that.
And what was shocking to me
when I started practicing
but is no longer shocking because
I've seen it so many times
I'm deadened to it,
is that every time Congress
try to fix something
they had done the last time,
they didn't do it over,
they just added another rule.
So now Bernie Sanders
is proposing legislation
that would add subsection
163(n) to the code, okay?
We're to N because we just
keep adding more on more
every time you add something,
it doesn't work with everything
else that's already there,
the Internal Revenue Service
and the Treasury have no time
to try to catch up and to try and fix it,
and so we go for years without the answers
to the most basic
questions like 959 and 961
which were hideously complex to begin with
but nobody can figure out
what to say about them.
So, I think the one thing
that, present company excluded,
OECD Members, Tax Professors,
and Government policymakers all
underestimate is complexity.
I think whenever you
talk about complexity,
you should assume you know
what it means and triple it
because that's the real world.
- David.
- Well I like a lot of what we said
by each of the other three panelists here,
but I would begin by asking
the more fundamental question
of what exactly we're talking about here.
(audience laughs)
- No fun.
- We didn't want to get into that.
- The question talks
about the US tax system.
Now I don't particularly
think that anything
about the individual tax system is broken.
I understand the complexity,
but it affects a relatively
small number of people.
The Internal Revenue Service
processes 155 million
individual Tax Returns every years,
fundamentally without mistake,
fundamentally without corruption.
I don't think people
realize what an astonishing
achievement that is by comparison
with the rest of the world
however, I don't think we're talking about
the individual system,
I think we're talking
about the corporate system.
If we talk about the corporate system,
I think the word broken
is way too extreme.
I'm sort of with Dan.
Compared to what?
I mean, I think there are things
that cry out for attention
a lot more than the corporate tax system.
The educational system.
The system for infrastructure
in the United States.
Campaign financing, foreign policy
with respect to any 12 Nations
that any of us could reel off
I mean, yeah, can we
do things that are good
for the corporate taxes system?
Sure we can, but is it a
top-tier issue for policy makers?
Only for tax policy makers in my view.
(panel laughs)
- Well I got the thumbs up
that our voting system is working so ...
- Is our voting system really broken?
(panel laughs)
- We can muddle along with that,
but we'll try a polling question
on policy question
number two. If we could,
we'll come back to one.
So number 2A which is 1A,
Yes it's completely broken.
B, which is 2B.
"No, the system is in need of
repair but hardly a crisis."
(Jeopardy music)
- You got all the answers don't you?
- So, 31% think it's completely broken
and 69% think it's in need of repair,
but it's hardly a crisis,
which means that you disproportionately
influenced the audience, Kim,
because you got 31 out of 100,
so very good.
We'll do the number one now.
Should we go back to
number one, if we could?
- [Larry] It's 20 seconds.
- Would you rather we put that at the end?
- [Larry] Yes.
- Okay. So we're gonna go to
the third debate question then.
The third debate question is,
"At a minimum, is the US
international tax system,
or at least the foreign tax credit part
of the system, broken?"
And Kim maybe you want to lead off?
- Sure, you can imagine
what my ultimate answer
to this question is.
First of all, we don't have a
U.S. international tax system.
We have a bunch of rules that
are not very well coordinated
or coherent, and that's what we have.
So, people complain, and tax
practitioners take advantage
of all these rules that don't coordinate.
Of course we do, it's what we do.
There's never any attempt to fix it.
I wanna just go get down to
cases and get one example
of a really big thing that's broken
and that is, our interest
allocation rules.
For those of you who have
a code in front of you,
this is 864E and F, if F
ever becomes effective.
Nothing currently is projected
to become a factor in the year 2020.
So, this is a rule that
was purposefully written
to be unfair.
There's no question about this, okay?
In fact, in 1986, in that famous time,
the Senate's version of our
interest allocation rules
actually was to be fair.
And they said,
"We're gonna allocate interest
on a worldwide, look through basis,
based on, it didn't really
matter at that time,
if you looked through, it doesn't matter
what you base it on,
assets or gross income.
But they were gonna look through
and therefore, you would
always get the same answer
about how you allocate interest
regardless of how you held
through corporate boxes, right?
And that, of course, is the right answer.
And there's nobody who
disagrees with that.
But at the last minute,
they pulled back from the brink,
pulled back from the precipice
and instead, cast the
rule that we have today,
which is, no, in allocating
interest expense,
we are going to be, purposely,
over allocate the foreign source income
by counting the stock
of a foreign corporation
as a separate foreign asset.
And therefore, to the extent
that that foreign corporation borrows,
it doesn't get taken into account
appropriately in the formula.
That was done on purpose. Right?
And this is the system that we live in,
and this is all about the
foreign tax credit, as you know.
Interest allocation doesn't
matter, for any purpose,
other than figuring out how much
foreign source income you have,
so that you can take your credit,
which, in and of itself, is a violation
of Capital Export Neutrality.
You shouldn't be limited at all,
in a purely export-neutral world,
but here we are, and this
is the rule that we have.
- David?
- Well, once again, I think broken
is language that's too
extreme for the situation.
The international tax
system is very complicated,
but the complications effect
a relatively limited number of people.
And I think, at least in my experience,
most people have come
to live with the rules.
Congress tinkers around
the edge of the rules.
I mean, I would feel differently
if we had a functioning
legislature in this country,
but we don't.
(laughter) So, I mean,
we're doing the best we can
with a system that, by and large, works.
There's a lot of other things in life
that don't work perfectly,
and chop this up as yet another one.
So I don't think it's broken, no.
- Mark?
- I think I agree with David,
that I don't think the system is broken.
I do think there are parts
that need some repair, however.
As I spoke about a little bit before,
there are a number of indications
that there are problems
with the US International Tax System.
I disagree with Kim though.
I think it really is more of a system
and less of an incoherent set of rules.
Though there are some areas
where you might think
coherence can be improved.
We have a system where
some US multi-nationals
are able to achieve very
low effective tax rates
with their operations.
And that exacerbates some of the problems
that reflect differences
across industries,
and that's just not good tax polices.
Also, there are incentives
for U.S. companies
to take aggressive positions
to strip earnings out of the US
and reduce the U.S. tax base.
And then, this has all lead to,
what we hear called Lockout Effect
because companies are reluctant to
(mumbling)
All these things can be
fixed and can be addressed.
And I think the
administration's budget proposal
is a pretty decent step in that regard.
So I think I'd sum up by saying that
the system's complicated,
it reflects the complex
economic activities
of multi-national firms
but probably not broken.
- Dan?
- Well, I guess it won't
be a shock if I say, also,
"Bad, but not broken."
But I do want to mention,
there are a couple of crisis items...
Again, risk of overstating it.
One is, clearly, the whole
stateless income problem,
is a big problem for us
and for other countries,
is something that's, hopefully,
going to be addressed to some degree.
Things have probably
gotten out of hand, a bit.
My sense about a lot of
countries around the world
is that they were willing to
let the multi-nationals plan
and liked it up to a point,
then the idea these
guys are hardly mobile,
we let them play games up to a point,
that's good for them, coming
into our jurisdiction.
But all the nationals
just got too good at it,
'course, the US too, checked the box
to help contribute to that,
so that's why people want
to push back a little bit.
The other thing, I think,
that sort of becoming
a crisis item, and it's
really self inflicted harm,
is just the sheer buildup
through deferral and then,
the accounting rules,
currently reinvested earnings.
You have companies with
just gigantic amounts abroad,
and the problem is,
not that the companies are
being suicidally handicapped,
but that creates,
it's related to the inversion situation.
It was in a debate a few weeks ago,
somewhere else in town
where people were saying,
I know there was an earlier panel today,
I'm sorry, due to my
teaching schedule today,
I couldn't come to it,
about voting with their feed and so forth.
The way I think about companies inverting
by reason of, oh, their cash cow
or buildups abroad is,
suppose you're in town,
you owe a lot of money to the bank,
and then, it turns out,
that if you leave town,
it's easier to avoid repaying the loan.
That wouldn't prove that
the town you lived in
had a terrible tax overhang,
it just means that,
gee, it's pretty stupid to have something
you can get out of by leaving town.
And in the case of the
current wave of inversions,
what's going on is
the companies just find it
easier to access the funds
once they have a non-U.S. parent at top,
even if, technically,
the subs remain under the U.S. parent.
So, I think there are a couple of things
that we need to address,
but it's not really a crisis,
it doesn't necessarily
require fundamental changes.
I do think we should be
thinking more about things
listed as thin capitals,
the type of worldwide rules
that UK and Germany have.
And one important thing about,
against sloppy or careless
international tax reform,
is we have all these bad parts,
that are really bad, individually,
but interrelated,
they're not exactly good,
when you put them together,
but at least they cure some each other's
and they reduce so many
of the worst problems.
So I think of deferral as a horrible rule,
which is not to judge
what tax rate, if any,
you want to apply to foreign (mumbles)
So, just that deferral is a
terrible way to do things.
And I think of foreign
tax credits as a bad rule
because they kind of make U.S. companies
not care how much foreign tax they pay.
But each of these bad rules
makes the other one less bad.
Companies do try to avoid foreign taxes
because they know to
never bring the money home
until the next holiday.
- Sounds like you're on the verge
of endorsing Kim's position.
- Well, we don't want to let that happen.
(laughter)
That cannot be.
It must be misunderstanding of something.
And anyway, but also,
foreign tax credits
make deferrals less bad
because if you have the credits,
you can bring the money home after all.
So, these two really bad rules,
they're sort of,
not quite equipoise,
they make each other less bad,
and you kind of be mindful of that.
I was glad to the administration,
when it was gonna have proposal
to get rid of deferral,
to the extent of having minimum tax.
Realize, that that meant
the foreign tax problem
has to be addressed.
You can't just let companies
get an automatic, immediate
dollar for dollar,
every time they pay a
dollar of foreign tax.
That would make the foreign
tax credit kind of intolerable.
- We probably should have a sub question,
which is, "Please list
the things that are good
about the system."
(laughter)
But anyway, we did--
- It would be a very short list.
- Yeah, I think it'd be a very short list,
at least from these guys.
- They're all in the
same part of the code.
- So, we move to Polling Question #3,
and the answers are,
well, the question is,
"At a minimum, is the U.S.
international tax system,
or at least the foreign tax credit
part of the system, broken?"
And A1, "Yes, the
international tax system,
including the foreign tax
credit part, is broken."
And 2B...
- Extremely.
- "No, while the U.S.
international tax system is bad,
it can muddle along for awhile
with just modest changes."
Okay.
(Jeopardy music)
- We want to apologize to all the people.
- So long!
- Oh, look at them!
- It's clear that it's a 50/50.
It's clear that Kim is the
most persuasive person here,
although I could also say that
some of you guys found then,
if you liked about the system.
Apart from the fact that, it was broken.
It's unclear.
- I like it, but it's broken.
(laughter)
- Okay, so, we will move
to the fourth debate
and final debate question,
we had to come back and count.
Number one, fourth debate question,
"What about the,"
and this a subject, of course,
that already much involved
in the inversion panel,
"What about the taxation of
inbound or inward investment?
Can the rules for outbound
investment be reformed
without addressing the rules
for inbound investment?"
Dan, what do you think about that?
- Well, I would say that
you can, but why would you?
A couple of things to keep in mind here.
The first is that
a lot of our taxation
of foreign source income
is about protecting the domestic tax base,
though, of course, it only affects it
when U.S. companies are
doing the profit shifting,
it doesn't affect it when other companies
are doing the profit shifting,
and I think the data show
that non-U.S. multi-nationals
have surprisingly low
profitability in the U.S.,
measured by, after their
own income shifting efforts
have gone on.
It's clear they can use
things like debt, for example,
more easily than U.S. companies can.
So, I think it would be
undesirable to address
the outbound, such as thinking about
territoriality and deferral
without addressing the inbound,
but I don't actually like these two words.
They're very formalistic words,
when we're judging things
based on corporate residence.
So if I, personally, create
a Cayman's corporation
that establishes a pizza
parlor in Greenwich Village,
that's gonna be called inbound investment,
'cause it's a Cayman's company.
Obviously, it's not really,
the last people I said that too
said that I'd go to jail if I tried that.
(laughing)
Anyway, so I think that we really have to
be concerned about the domestic tax base
about profit shifting out of the U.S..
So I would use domestic
source and foreign source,
not really inbound and outbound.
We'd potentially make the problems
of the so-called inbound or
domestic source even worse,
if we address the foreign, the outbound,
without addressing that.
But actually, we should
address the inbound stuff
in any event, in part,
because of profit shifting
that foreign companies that
don't have to worry about,
our CFC rules can do.
And I think again, things like,
the way that other
countries use thin capitals,
worldwide debt caps, things like that,
I think that's among the
tools to think about.
There's some more ambitious things
you can think about, also,
but probably beyond the
scale to this question.
- David?
- Yeah, I have both a simple, short answer
and a much more
complicated, longer answer.
The simple, short answer is,
sure, we can make improvements
in the outbound rules,
the rules for taxation of foreign income
to U.S. purses
without addressing the inbound rules.
We've done it, repeatedly,
I don't see why we couldn't do it again.
And we could, probably,
in the best of all possible worlds,
we could improve things for outbound
without touching, at
all, the inbound rules,
the rules for taxing U.S. source income.
That's the short, simple answer.
The more complicated answer,
and I find this, frankly,
to be the most interesting
of the four questions,
if you had been listening
to these questions,
you'll notice, and indeed, the entire day,
when people talk about
international taxation,
they tend to be talking about
taxation of U.S. multi-national companies.
That tends to drive the
train on everything.
And indeed, even when
we talk about inversions
and protecting the tax base,
it's for inverted companies
investing back in the United States,
and I think, at least, I'm not sure where
the current administration
proposals are on this,
but at one point,
administration was basically
only interested in protecting the base
on inverted companies,
which made zero sense to me.
We are a big inbound country.
We have been for decades.
And I realize that many people
don't like to get their arms around that.
We have not changed the
taxation of inbound,
that is to say, U.S. source investments
earned by foreigners, since 1966.
The framework for what we've got there
has been there for nearly 50 years.
And it's about time we rethought that.
And, in any kind of a tax reform,
that deserves the name.
And I've been practicing for a long time,
I have yet to see one that
does deserve the name.
But in one that did deserve the name,
we would have to include
inbound investment.
You'd have to deal with it
because this is an integral system.
And moreover, the BEPS project
is gonna drive us in that direction.
'Cause a lot has been said
here, on this platform,
today, about BEPS,
but one thing I know about BEPS,
BEPS is the resurgence
of source basic taxation.
However else you wanna characterize it.
And we, as the United
States, are gonna be drawn
kicking and screaming into that
because we are firmly in the
bed of residence taxation.
That's the way we think of things,
that's the way we thought of
things since World War II,
that's the way Congress
looks at the world,
but it's not the way
the world works anymore,
and BEPS is definitely
gonna be a resurgence
of source basis taxation,
with all sorts of implications
for U.S. investors abroad.
And if we cling to our
residence favoritism,
in our rules and our attention span,
and allow the rest of the world
to start focusing on taxing
what happens within their markets,
trust me, other countries are
truly gonna eat our lunch,
so I think, anything serious that we do
has to involve inbound investment.
Will we get serious?
I probably won't be around to see that.
(laughter)
- Mark? (mumbles)
- Sure.
Aside from one hope that David is around
to see a serious tax reform,
and I think a serious tax reform
would do, both inbound investment
and outbound investment,
will affect, I'd like to say,
and I stole this from
Secretary Gingrich, is that
the U.S. is responsible for less than 5%
of the world's population,
responsible for about
20% of the world's GEP,
not responsible for about 20%
of the world's economic growth,
much smaller fraction of growth
gonna be occurring in
the U.S. than elsewhere.
So, international tax rules are important,
and it's important to get
them right in both directions.
I think that we,
and focused on outbound investment,
largely because we have a
larger economic presence,
and we've been a capital
export country for awhile.
However, we have seen a lot of activity
in inbound investment,
and it's one that you want to get right.
You don't want to have a situation where
you can hollow out the U.S. tax base
with rules that apply
to inbound investment,
and you're left, then, with just a shell
of a corporate tax system
that is taxing U.S. down
inside of the corporations,
and that's it.
And so, you don't wanna
be in that situation.
You need to address inbound
investment to do that.
- Kim?
- Yeah, so,
that didn't sound, to me,
like we have a real
debate on this question,
but let me try.
- Since you know you'll win.
(laughter)
- Let me do two things.
First of all, I think,
one thing that we missed,
when we make this, admittedly,
arbitrary distinction
between inbound and outbound,
is the opportunity
for crafting legislation,
as part of tax reform or otherwise,
that is actually coherent
and that does actually address
the fundamental problem of
whatever it is we're trying to solve,
rather than just putting
a band-aid over it
and going on to the next thing,
which is, of course, what we always do.
Let me give you an example of this,
taking off where I was
in the last question,
when I was talking about the
interest allocation rules.
Now, we all know those rules only apply
for purposes of determining
foreign and U.S. source income
for then, purposes of applying
our foreign tax credit limitation.
But there's no reason, in principal,
they would have to be
limited to that role, right?
And in fact, when you look at
the inbound side of interest,
what you see is, basically, is 163J
and earning stripping,
that takes an entirely different approach
to the problem.
Now, there are proposals out there now,
as part as tax reform,
that are, essentially,
we would all recognize
as something like debt dumping rules.
And what those rules do,
is they say, "Look,
we're gonna look at your
worldwide interest expense.
Money's fungible, we don't
care where you borrowed,
all right?
And you can deduct, in our country,
a proportionate part of
that worldwide interest,
as long as it doesn't exceed, right,
your average interest."
And there are different
ways to measure it,
I think that one of the recent proposals
uses gap, which is probably a bad idea,
but whatever, maybe it's fine.
The point is that that rule
is really an inbound rule,
being proposed as an inbound rule,
but there's no reason on earth
why we couldn't also
make it an outbound rule.
Why don't we think about interest
in one simple, coherent way?
And then, write legislation
to get that way.
In which case, inbound and outbound
would probably be the same
because they'd be the same policy.
The other thing I want to mention,
which is kinda disconnected
from that, but...
The reason that I always get frustrated
when people talk about
inbound and outbound,
although I do it myself
because we just get used
to speaking that way,
is that, at least since the 1990's,
in my experience,
most capital flow, well, not most,
I'm not trying to put a number on this.
Most of the work that I do,
capital flows are multi-directional.
What do I mean by that?
I don't have clients who just
are purely U.S. companies
who make an investment outside the U.S.
or purely foreign companies
that make an investment in the U.S.
What I have, what you see, is
private equity funds that raise capital
from the broad range
of sources, worldwide,
and then invest that capital
in a broad range of targets
and portfolio companies, worldwide.
Half the time,
we're struggling with these things
and coming up with these
complicated structures
that people think are,
maybe, abusive or something.
It has nothing to do with abuse.
It has to do with,
you've got to make the rules work
for both inbound and outbound,
and you gotta do that in,
actually, two different ways
because you've got U.S.
and foreign investors.
And so, it's actually really complicated
to get it even close to right.
And this is why I think,
we just need to rethink our system of
U.S. rules for international taxation
from the ground up,
without thinking about them
as outbound or inbound.
- Okay.
So, Polling Question #4,
"What about the taxation
of inbound investment?
Can the rules be, for outbound investment,
they'd be reformed without
addressing inbound investment?"
Possible answers are 1A,
"Yes, there can be reform
without addressing inbound investment.
No need to change the rules
as part of a reform of the rules
for outbound investment."
2B, "No, it's delusional
to focus solely on outbound investment
without also addressing
the rules for inbound investment.
The distinction between
inbound and outbound
is artificial."
So...
(Jeopardy music)
Kim, this is amazing,
78% agree with you
that it's delusional to focus solely on
outbound investment
without also addressing rules for inbound.
And only 22% are opposed
to that proposition,
I'm not sure where David is on it,
who believe that they're different issues
and no need to change the rules for one,
simply 'cause you're changing
the rules for the other.
So, can we go back to
Polling Question #1 now?
If you'll recollect, the question we had,
related to the first debate question,
"Is corporate residence meaningful
as a basis for jurisdiction to tax?"
Kim said no.
Others were a little bit less certain.
If not, and we keep the
corporate income tax,
what are the alternatives?
Okay, so, 1A is, "Yes,
it's meaningful as a basis
for jurisdiction to tax."
And 2-B is, "No, corporate residence
is no longer useful,
and there are lots of alternatives,
such as source of income."
(Jeopardy music)
Yes, corporate residence is meaningful,
for 53%.
No, it's no longer useful,
47%.
So, Kim has swept the field,
as often is the case.
- I'm just happy you'll buy 17 (mumbles)
(laughing)
- Dan, it sounds like you're
used to being the minority.
(laughing)
Anyways, we're early,
Larry, but thank you.
(applause)
- Okay, so thank you,
Mark and David, Willard and Kim and Dan,
for your participation
in the debate session.
We're now going to have
the afternoon break,
which is across the hall.
Please return your polling devices
on the way out,
and we'll resume at 3:10
with Alan Byard's presentation.
Thank you very much.
