- Hey, welcome back from lunch.
To change the paradigm,
let's consider US international tax reform
from the perspective of the
other side of the Atlantic.
How are our US trading
partners in Europe responding
to US international tax reform?
Are we headed to a new round
of global tax competition?
For this topic, our panel
will be moderated by visiting
professor Wolfgang Schoen,
and panelists include
Steve Edge representing
the United Kingdom,
Adrian Crawford representing Ireland,
and Professor Johanna
Hey representing Germany.
Visiting professor Wolfgang Schoen
is Director of the Department
of Business and Tax Law
at the Max Planck Institute
for Tax Law and Public Finance in Munich.
He currently serves as
chairman of the board
of the European Association
of Tax Law Professors.
Professor Schoen was a
member of the global faculty
at NYU Law School, and
a visiting professor
at Columbia University, the
University of Pennsylvania,
and the University of British Columbia.
Steve Edge is a partner
with Slaughter and May based
in London, and is one of
the United Kingdom's leading
authorities on corporate tax law.
A large part of Steve's practice
involves advising non-UK
multinationals on
cross-border transactions.
Steve was called upon
in 2011 to give evidence
to the Ways and Means Committee
of the US Congress about the
UK experience in adopting
a territorial tax system.
Adrian Crawford is a
partner in the international
corporate tax group of KPMG
in Ireland, and also heads up
the Irish tax center of
KPMG based in New York.
Adrian is a former president
of the Irish Taxation
Institute, the premier body
representing the tax
profession in Ireland.
Professor Johanna Hey is a professor
at the University of
Cologne, Germany, and serves
as the Director of the
Institute of Tax Law
at the university.
Professor Hey was a visiting professor
at NYU Law School in 2015.
Professor Schoen.
- Thanks, Larry for this
very friendly introduction.
Thanks to you for coming
to this European panel,
as it has been called,
and you will have learned
from what Larry said,
and also from the program,
that these three guys
represent their countries.
I represent NYU Law School.
Which means that I'm the
first time for me to be
the US guy on the panel.
Now, we have tried to address the issue
of what are the reactions?
What is the perspective from the side
of the European countries?
Not necessarily from the side
of the European Union as an institution,
but from the side of
the European countries
in a multi-layer perspective.
We would like to have a
look at the challenges
to non-US governments.
As opposed to the challenges
to non-US business
because those are different challenges.
The challenges to the non-US
governments will refer
to the issues,
whether they should react
either by legislating.
Whether they should react by coordinating.
Whether they should be react
by going to international
institutions like the
OECD or the WTO, or have
the European Union taking some steps.
Those are the options.
And also non-US business
because they have to think
about what is the impact?
What is the impact on their structures?
What is the stability
of the reform that has
been brought about here?
Et cetera.
Now I would like to cabin that in,
in a certain profession,
and I would like to
start with the question,
the United States as a
competitor for investment.
Is that a challenge for non-US countries?
Now, the reduction of the US
corporate tax rate from 35%
to 21% is indeed a major step.
It's a major step which brings
the United States to the
floor of the competitive
countries when it comes
to the rate as such.
What one should not think is
that this 21% rate, is per se,
extremely low tax rate.
When you look at these countries here.
We have Adrian form Ireland, 12.5%.
We have Steve from the UK, 19%.
We have Yohanna from
Germany nominal corporate
tax rate 15%.
Now that's a joke because
we a business tax on top
of that, another 13%, that would be 28%.
But then you have state corporate tax,
which brings it up to average of 25%.
And then I would say
25% as compared to 28%
in Germany, 25% very soon
in France, 27% in Italy.
I would say the United
States, when it comes
to the corporate tax rate,
is not a huge winner here,
but of course it has made
up a lot of having been
fallen back before.
But other elements in the
new legislation which make
it attractive for countries to move
there for non-US governments.
Not for businesses to move
to the United States, and
that might be something other
countries might take into account.
I think that FDII is an
important thing here,
but we will discuss the
compatibility with WTO law.
I am a bit interested in
what the full expensing
that is now allowed when you invest
in the United States will mean.
That can be highly attractive
for non US corporations
if they would say we set
up a new establishment
in the united stations,
and we get full expensing
on all the movable assets,
that might be a big deal.
Now, competing for business is one thing,
competing for the tech
space is another thing.
And that's where we talk about BEAT.
It's where we talked about GILTI.
We just heard from the previous speakers,
that BEAT is probably not
compatible with WTO rules.
It's probably not compatible
with treaty rules.
I would fully agree with
that having worked both
in tax and trade law.
This is a clear case of
something along the lines
of the DISC legislation,
the FCC legislation in the United States.
And BEAT which is kind of a follow up
to the non-deductibility
of foreign expenditure
under the Ryan Brady health plan
is exactly along the lines
of what has been said before.
This is not mere ensuring
that taxes are collected
in the right fashion,
this goes beyond transfer pricing control.
And this is, in my view,
clearly not compatible with WTO law.
Now, the GILTI thing is,
from the perspective of other
countries, the most interesting part.
Because the GILTI part
is the one which lays
out worldwide taxation for
a specific kind of income
under certain requirements.
So, European countries are told, well,
US goes territorial
under the new tax reform,
but wait a minute, it goes
worldwide for a lot of income.
And insofar, this is something
that goes for excess profits.
That's extremely important
for local subsidiaries
of US multinational worldwide,
and the countries out there
will have to consider.
To what extent the existence
of a reduced tax credit will
be sufficient to keep the
investment in their countries.
Now, when you turn away
from the question whether
the US is a competitor to other countries?
It might be a role model.
It might be a legislative laboratory.
Is full expensing something
that should be accepted
in other countries as well.
It goes into the direction
of cash flow tax.
Proposals like that have been made
in different countries before.
I think many countries
should think about it.
Pass through taxation,
as you have it now in the United States,
the 20% deduction, is completely new,
when you do it on when you
compare the situation in other
countries, but the problem
that is to be addressed here,
what do you do with transparent entities
with powerful entities
once you have reduced the
corporate rate to large extent?
That problem is well known in Europe.
And there are a lot of different answers.
A lot of different
legislatorial reactions,
and I think people will take a closer look
at how the US situation works out.
I do not think that FDII
will, something other people
will follow up given
the WTO problem again.
BEAT, GILTI might look interesting
for all those countries
who are unsure to what extent,
their CFC legislation is still workable.
GILTI might be the simpler,
more far-reaching solution.
The problem for many European countries is
that European law prevents
them from taking action
that creates cross-border investment,
cross-border services,
cross-border establishment
worse than local things.
That is something the US
has more freedom here.
Asian countries have more freedom here.
The Europeans have locked
themselves in, to certain extent.
So that cannot go that
far as the US can do.
Now, does this lead to the
United States as a role model?
The big question here is,
is unilateralism the new paradigm?
And that would be a sad thing.
We have seen the BEPS action plan.
We have seen the G-20 activities.
We have seen the creation
of the inclusive framework,
more than 100 countries around the world,
coordinating their tax policies.
The BEPS action plan was very friendly
to the United States because
all the minimum standards,
all that was mandatory
was basically aligned
with what existed in the
United States before.
BEAT and GILTI clearly
go beyond the consensus.
There was an increased
interest in WTO law.
We haven't seen that before.
And for me, WTO law is like a thermometer.
The temperature rises the
more WTO questions you get,
including questions on our
side like the digital tax
on the US internet industry.
And I think one should find back to a path
of coordinated action.
Challenges to non-US business.
I will not deal a lot with that.
I'm academic, but they will have to think
about restructuring their corporate
and financial situation.
They will have to reorganize
their value chains.
They might think about
relocating headquarters
to the US, or maybe GILTI and other stuff
shifts corporate headquarters
out of the US back to Europe.
That is something my colleagues
will have more to say on.
And we start with Adrian.
- Thank you, Wolfgang.
- Just agree, but okay.
- So I'm not giving any
secrets away when I say
that a lot of US multinationals
operating in Europe would
have had their principal operation
in Ireland, or their headquarters there.
And a lot of the groups would also have
used IP structures.
In other words,
structures where the rest of the world,
IP, or the European IP,
was in an offshore company,
possibly an Irish incorporated,
a non-Irish tax resident entity.
And US groups were already
thinking about what they did
or should do with their IP
even before US tax reform.
The reason for that was twofold.
Firstly, Ireland, a number of years ago,
had decided to phase out this concept
of an Irish incorporated,
non-Irish tax resident entity.
Basically, those types of
entities will automatically
become tax resident in
Ireland at the end of 2020
absent moving their management
and control to a tax
treaty country with a tiebreaker clause.
Secondly, of course,
as a result of OECD, we have
this requirement to have
DEMPE functions with the IP
owner to justify, you know,
a large IP return as
opposed to money box return.
So groups are having to think about that
even before tax reform came along.
Some groups had already decided to onshore
to Ireland, get tax depreciation.
Because they could build
up their DEMPE functions
there over time.
Suddenly, we've got tax reform here.
And we've got FDII.
So groups, of course,
will think about, well,
if we're onshoring,
do we now think about
onshoring back to the US.
And modeling is very important
because the new tax regime
is so complicated.
And on a year by year
basis, results can change.
You can lose tax credits,
because of course under the
GILTI or in the GILTI basket,
you've got the 80% haircut.
And then of course,
you cannot carry forward
any unused tax credit.
So you really need to try
and model very carefully.
On the face of it, the GILTI rate,
trumps, or beats the FDII rate.
On the other hand,
you do have this requirement for DEMPE.
So perhaps if you were a young,
emerging startup thinking
about what you would do
with your IP.
In the old days, if I can put it that way,
you might have said, well, look,
we'll move our IP offshore
before it gets very valuable
rest of world offshore IP.
Now you've gotta figure out DEMPE.
And of course, for a lot of groups,
the DEMPE functions are in the US.
And if you're a smaller group,
the pressure, and the
tension, and trying to get
DEMPE functions outside of
the US is a lot greater.
For larger groups, that tends
not to be such an issue.
But I think one of the
important points coming
out of the new regime is
the requirement for a very
stable, predictable and
robust tax structure.
You really need to know where
your income is going to be
as best you can,
that your transfer pricing is very robust.
Simply because you can lose
your your foreign tax credits
if you're not careful.
There was a report called
McCarthy Report in Ireland last September.
What was the McCarthy Report about?
And who was McCarthy?
Well, McCarthy is a professor in Ireland.
The report was commissioned
by the Irish government.
Essentially to see if the
Irish tax code was fit
for purpose, so to
speak in the modern era.
He wasn't asked to look at the
corporate tax rate of 12.5%
in trading income which is essentially
almost like a brand for Ireland right now.
That's got cross party political support.
I think Ireland will need to
be invaded before we would
give up our 12.5% corporate tax rate.
But McCarthy was asked
to look at rules for tax
depreciation and tangibles at our transfer
pricing rules, et cetera.
And he made certain
recommendations, one of which was
that if you onshored your
IP, that there was a kind
of a haircut, but a haircut
with a carry forward
on the amount of tax depreciation
you can use in any one
year against income from the IP.
Basically, you can only shelter
80% of the income derived
from IP in Ireland in any one year,
but the excess depreciation
can be carried forward.
Second point was he said,
look Ireland really,
we've gotta be a good citizen and adopt
the OECD guidelines
including the DEMPE rules,
which we will we will definitely do.
The only question is when?
And what McCarthy said is
we should do it no later the
end than the end of 2020.
Which interestingly,
coincides with the sun setting
period for the NRIIE,
or non-resident Irish
incorporated entities.
So, obviously groups have a
lot to think about if they've
got IP offshore,
or if they've got IP
on shore and they think
they're going to be selling
and growing overseas.
Perhaps one thing which
Ireland has got for it
when you go back to this
importance of a stable regime.
As I say we've had a low tax rate
going back to 1956 actually
when we had a very agricultural economy,
and you actually did zero rate then
if you manufacture and exported.
And we kept that zero rate
until we joined the EU.
When you couldn't you cannot
distort trade by giving
preferential treatment to
exports then with a 10%
rate of manufacturing.
And then EU state aid rules said,
you cannot give favorable
treatment to a sector
of an economy like manufacturing.
And then we said, what the heck,
we just have a 12.5% corporate
tax rate across the board.
So perhaps Ireland would
be an interesting hedge
if you're onshore because of
the stability of the system.
And then maybe concerns about
FDII in the US, and the WTO
as was discussed this morning.
Obviously there's lots of
other things floating around
like digital profits tax,
and the CCCTB and you know,
Stephen may may touch on digital taxation.
So there's lots of
things to put in the mix.
That's Ireland.
- And now we'll have Johanna from Germany.
- Thank you, Wolfgang.
The German situation is
of course quite different
than Ireland or UK because
Germany is one of the last
high tax countries.
With a tax burden of around
30% depending on what the local
taxation is, and that is significantly
above the OECD average.
And this problem is nothing totally new.
The last tax cut we had in 2008.
But in the past, we could
always point to the US and say,
you know, there are other
countries which do not really
have the necessity to follow up
in this tax competition battle.
Now, we lost somehow our
last companion and being
high tax country.
And that of course,
also changes the picture quite a bit
for German multinationals
will Wolfgang said
I'm also a professor.
So I will not talk
about what German
multinationals really do,
but I think there's some
likelihood that especially
if they are already invested
in the US, they will
if they talk about additional investments,
they will of course,
consider the US as being more attractive
than the German location,
especially also because
of the full expanding.
And then if and if there
wasn't a model said
that if the business model
fits into this new rules,
that might be really a
reason to invest in US.
What does the German
legislature or the government
do about it?
Actually, nothing.
It's really a little bit disturbing,
but, and the coalition
contract which was concluded
in March 2018.
So already under the impression
of the US tax reform,
and of course increased
pressure on German tax rates.
This coalition agreement
contains nothing about cutting
the tax rates for the
German corporate income tax.
It has again,
a strong commitment of
tackling tax avoidance
and following the OECD
BEPS recommendations.
So that means that Germany
probably will continue
what it did in the last decade
being very active on abuse legislation,
anti-avoidance legislation.
And that brings me to the second part.
So how do the German rules
interact with what the US did?
So first, maybe only a short point.
Under German CFC considerations,
the US is a tax haven.
This is a little bit surprising,
but we have a threshold in
our CFC legislation of 25%.
So everything what is effectively
taxed lower than 25% would
fall into our inclusion,
taxation if it's passive income.
I mean, of course, depending
on the state taxes,
that might not be the major issue.
But I mean,
just to show you the perspective
of Germany being a real
high tax country, this,
well one has to notice.
I think the most interesting,
and I will take a little bit
more time to talk about that
is quite new anti-avoidance rule
which we enacted in 2017.
That is a German royalty barrier.
They have also an interest barrier,
which resembles somehow what
you did now and the new 163(j).
But this royalty barrier
is something sort of unique
because it was mainly enacted in 2017.
To tackle patent boxes
which are not in line
with the OECD Action 5
recommendations of the
Modified Nexus Approach.
So, how does that interact
with FDII or FDII?
However you pronounce that.
So, if you look at it,
and I can follow up immediately
with a message to you, which I
think will make it very clear
at the problem.
The first what you have to
look at is whether an FDII is
a preferential regime.
Because the German royalty
barrier basically says,
if you have royalty payments,
so a related person, 25% or more,
and this payment is taxed in
the hand of the recipient,
lower than 25%, due to a
special preferential regime,
then the deduction will be restricted.
So, and I think this is, of course,
an interesting question,
is that a special regime?
I would agree that it is.
You could, of course say
but it's not really applying
to royalty income,
because it is some
deemed intangible income.
However, the German wording of this rule
in the German income tax code.
It does not really require
that it is a preferential
restricted to royalty income.
It just says any preferential
regime, and I think
for that reason, it is quite clear
that this falls into the scope.
So, that is the basic
rule, and then there is
an exit clause.
So, you may still deduct
your royalty payments
if this preferential regime follows
the OECD Nexus approach.
And I think that is
very difficult to apply.
I mean, you could of course say,
well, FDII is nothing like
a European patent box.
Because it is sort of
combined with, GILTI has
a different purpose.
But I mean,
you could also say it
clearly is not in line
with the modified Nexus approach.
And then I mean, it's really difficult
to come to real a certain answer to that.
Germany, the officials did
not, so far, did not have
really published opinion on that.
It might be that they wait for the OECD.
And then we are again, at that point
that the OECD now first will analyze FDII,
and then this might be a
basis for the German tax
authorities to apply this
royalty barrier and also
for future WTO cases.
Okay, thanks.
I think this is for now,
maybe the German perspective,
and I hand over to you.
- Walk up there.
- Thank you.
- Can you comment on the
extent to which you monitor
within Germany inward investment?
And the extent, because
clearly I mean, Ireland's been
a fantastic success story, I think,
and I'll talk a bit about that later.
Even though I'm doing the UK bit.
But do you monitor inward investment?
And whether you're you're
winning more people setting up
new factories in Germany,
perhaps foreign investors
rather than local investors?
Spending money there.
Is that not something
that because you've got
such a magnificent economy
and magnificent industry--
- Actually, Steve while
we follow up on that,
when the US entered the tax
reform, or when it became
clear that there would
be a major tax reform
after the presidential election 2016.
I had a meeting
with the Director of the
International Tax Office
at the ministry in Berlin.
I said, what are you
going to do about this?
And they said,
we have a bet, we still think
that the infrastructure we offer,
well educated people we offer,
the legal protection system,
the agglomeration effects.
All that will be sufficient
for people to come in.
And when you look at statistics
by the World Economic Forum,
by the World Bank, et cetera.
Taxes are an important factor,
but it's not the most important one.
It can make a difference on the margin.
- Yeah, I agree.
- And, but how big that margin is?
Actually the German
government is having a bet
on that this margin--
- Absolutely agree with that.
And we all tend to think perhaps
because we're at a tax conference
that taxes are the most important thing
in the world, but it's not.
And there are a whole lot
of things that decide it.
Tax can make a difference at the margin.
And funny enough,
when I did my Ways and
Means thing a few years ago,
people said, well, the UK is mad.
Your generous CFC regimes,
all your businesses are gonna
move offshore, and they forget
that actually businesses
don't move for tax.
They move for other things.
And having, you know, a good location,
having an educated workforce,
all those other things are important.
- I might add that, this
is of course, I mean,
we should not overstate the tax aspect.
But as I said, I mean,
if the deal is really
fitting into these new rules,
and if especially people
think they can work around
BEAT and all these bad stuff in the US,
I think, then this is really
an incentive to go to the US.
And for Germany, I mean,
you know, we always point to our non-tax--
- Assets.
- Assets, but I think
it's also questionable
to some extent.
- Well, and you're right to
point to those and we'll have
a conversation I think, a bit later on,
if we can, about a race to the bottom.
- Maybe just one word of this, I think--
- I'll do my bit eventually, sorry.
- Those businesses wanna sell their goods
to the United States.
- Yeah.
- Those businesses have the
largest incentive to move
their activities to the United States.
Even BEAT, given also the elements
of FDII, that might be interesting.
Those businesses who want to
cater to the world will not
be that interested.
But you want to be on the safe side
when you sell to US customers.
- I agree.
And it's that point in the
great game of poker, isn't it?
How far can you push people
with the bit and perhaps
at the end,
we might just talk a bit
about digital tax as well
because I think so full of things come up.
So what's been the reaction
in the UK to US tax reform?
And seeing, as we've, I think
seen illustrated in the
very interesting talk
so far this morning,
an enormous clash of
economics and politics.
Call me young and naive if you want to,
and I wouldn't mind one of those.
(audience laughing)
But, you know,
I thought there ought
to be a principle behind
taxation and I can't remember,
I think it was Michael
who said this morning,
don't expect anything to
be intuitive going forward
in the US tax system.
Well, that's a shocking
condemnation because I think
we all understand why
as individual citizens,
we're liable to tax in the countries
where we're resident,
corporations, it's a deal.
And there should therefore
be a clear principle
that if you've got a
platform in a jurisdiction,
and we'll talk about
digital platforms later on,
but a physical platform, that
you're using the percentage
of that country, and
they should be something
that therefore justifies
why you're paying the tax.
It's like a hotel, if you check in,
you expect to get what
you're paying for and use,
expect to have to pay for it.
So there's been a certain
amount of incredulity
about this idea of taxing
people, and we've done it.
I'm afraid with banks,
and some would say, I'll come on to that,
that we've done it with
diverted profits tax,
I don't think we have.
That taxing what you can
because they're weak,
or because they don't
vote in your elections,
rather than what you should, I think is
is a way of making tax
almost impossible for people
to pick up and learn even
in an institution like this.
So, and in the UK as well,
I think there's certain
amount of incredulity
as to whether this will ever come to pass.
And, you know, I hope I'm
here in 10 years time.
But will will this all
be sorted out by then?
Who can tell.
And certainly, within the UK, people look
at this and wonder whether
actually it will ever see
the light of day.
And if it does see the
light of day, in full,
whether, actually, the
democrats will will come back
in and change things?
So, business decisions are
not necessarily gonna be
taken based on what they
see as the current regime
because they don't see
that with great clarity.
The other bit, which Wolfgang raised, is
does this change the competitive balance?
And I think the point
that Wolfgang's just made
is absolutely true.
You're usually in a
jurisdiction for a whole host
of reasons rather than tax.
And if it's an expensive
place to be, whether that's,
you know, living in Belgrade
or in London, or doing business
in New York, there's usually
a good reason for that.
Lots of people want to be
there, and the price goes up.
So high taxes won't
necessarily discourage people.
There was a time when I thought
the UK and the US, even
though we're a much smaller
economy, were in competition
for having the worst tax
system in the world.
I'm not sure who won.
Stamp duty certainly
stopped a lot of UK many
A-deals, but there's a great
big fight on transatlantic
merchants as to who
should come out on top.
US with its high, this
is before the 86 reforms,
high tax rates and incredibly
penal subpart F rules,
or the UK we with its stamp
duty, which after all,
is what lost us America
all those years ago.
(audience laughing)
I'm sure you're doing quite well actually
under independent management.
(laughing)
And also, we have then an ACT regime,
which some people in
the room might remember,
which meant that companies
had to pay corporation tax
when they distributed dividends,
even though they may not
actually have any tax liability.
So a company like BP was a
huge lender to the government
paid no UK taxes with all
it's business overseas,
brought dividends back
to UK, they've paid them
on the shareholders, but still
had to pay about two thirds
of its UK corporation tax bill.
So I don't know quite who won that battle,
but obviously the Reagan years
and the Thatcher years changed that.
So, if I just look at,
picking up some of the points
and this, what the view is of the UK
to what's going on at present,
and this US tax reform
having a big impact.
Well, of course,
we've got quite a lot going
on in the world at present,
I'm old enough to remember
thinking as a teenager
what I would do in my last four minutes
when Cuba was happening, and you know,
I'm thinking a little bit about that now.
It certainly seems a bit tense.
Probably doing different
things than I was thinking
about as a teenager, but there we are.
We've also got Brexit going
on in the UK,
and that's certainly
concentrating people's mind.
I'm an optimist on Brexit
for the financial section
and that's the way the press
seems to be going at present.
There's just a huge amount
of infrastructure there.
And I'm also now an optimist
for the UK generally.
So, it's not the highest
thing on our radar screen.
Probably Brexit is more
important than US tax reform.
For those UK multinationals
who are investing
into the US, I think the
net view is that actually
the lower rate,
given that we're now a territorial regime,
having brought ourselves
into line with the rest
of Europe, with certain
modifications and some criticism
from the EUFR CFC rules recently,
that actually it's a net positive.
And why is it net positive?
The lower rate.
Most UK multinationals
operating in the US in previous
years, will have demonstrated
what to my mind was
the absurdity of the US
tax system under previous
management, which is they
were paying a higher rate,
but they were allowed to
gear up much more highly
than their US domestic
competitors, and as a result,
they could manage the base,
and the rate wouldn't hurt
them as well.
And that's clearly absurd,
and with anti-competitive
when domestic businesses here
were paying more tax than
their foreign inbound
competitors, that is gone.
And that's probably a good thing,
both for the US and for
companies doing business
in the US.
BEAT has obviously been a difficulty.
But I think people are
looking at that and saying,
we can probably restructure around that,
as people who said this morning.
And therefore the low
rate certainly compensates
for what we may lose on
the roundabouts of a BEAT.
For inward investment
from the US into the UK,
again, come back to Wolfgang's comment.
We think we've got, you know,
a good number of things to offer.
Certainly the US tax system
with deferral in the past
has had an impact on UK markets,
there been a number of big takeover bids,
where it's been thought
that the urge to invest
to prolong the deferral
is perhaps made people buy
British companies or other companies
in Europe with slightly higher price
and that's a sad thing I think
for the US, and actually a
sad thing for the economy
into which they're investing.
And inevitably, the
stateless income, you know,
you we have had so much trouble
in the UK with transfer pricing.
Because if you point to some
guy sitting on a deck chair
in Bermuda, and the
profits that he's earning
for the enterprise that he works for,
where he just happens to
own the IP, and you say
to the revenue, yes, that
really belongs in Bermuda.
And they say,
Well, it looks to me like
a man in a deck chair.
What have you got more than that?
And how does that fit in with DEMPE?
And I'm afraid the only way
we can then deal with it is
to say, well,
strange though it may
appear because they do have
transfer pricing rules.
This really belongs
in the US and they're just not taxing it.
And that's not satisfactory.
Whether that will come to an end now,
what will happen with IP, I don't know.
But but I hope that it it will.
Again, perhaps a commentary
on how sure people are
that the they're going to
see this through to the end,
and it's not going to
be reversed by different
government coming in.
Is that actually, you know,
people are not, in my experience,
radically restructuring
their IP ownership.
WTO, we spent quite a lot
of time on this morning,
I think on that it is too long off.
And I think the most
important thing is Adrian will
know too well,
is that the, if actually you
were in the same position
in state aid,
which is that if something's
found to be state aid,
it's not the country that pays.
It's the taxpayer who's
built the factories,
employed the local people
that has to pay that back.
Which is, to my mind,
a really unfair system
because it's double payment
by the companies concerned.
If you had that behind WTO rules,
we'd all be worrying
about it a great deal.
So it's been intriguing.
In some ways, it's been
like watching a cruel sport
because I really feel sorry
for you guys having to
come to grips with it,
but you know,
welcome to our world in the UK
with a finance act every year, thank you.
- Thank you, Steve.
I think this was a pretty good
overview of what you would
see in Europe.
I find it interesting that
out of three countries,
you have selected, two
are the British Isles,
and one is the continent.
Maybe the situation is a
bit different when it comes
to the overall perspective,
but I think these are good people.
So we would, I would like to
throw a couple of questions
to these people.
And just to react, their
reaction should be very short,
very much to the point
as regards compatibility
of your tax reform, the
tax treaties and WTO.
There seems to be consensus in this role
between non-European and
Europeans, that there is a problem.
But how will non-US countries react?
Do you think they will do something?
The European Union might do something?
Will OECD step in?
Will WTO procedures be initiated?
Adrian, what do you think?
- Yes, I think there there
likely is an issue with both
compatibility with tax treaties,
and WTO rules and balance.
Ireland will not do anything
on its own for sure.
We're too small.
And what I think we would, you know,
we'd follow the European consensus.
And that does seem to be
a bit of head of steam
developing, if I put it that way,
to look to look at those issues.
- Johanna.
- I'm pretty sure that
the EU will do something
about WTO issues, maybe after
the OECD has made its opinion.
I think that the tax treaty
issues are actually pretty
difficult to fix.
Because I mean,
what can the other treaty
country do about it?
So I would really hope that the OECD steps
into it because I mean,
otherwise, you know,
we will not cancel our treaties
with the US even if he
would say it's a breach
of a contract, or of the treaty.
So I really don't know
what the German position will
be on double taxation due
to BEAT, for example.
- Thank you, Steve.
- I think if we were a foreign
tax credit jurisdiction,
we'd be more interested and more involved.
But because we're all
territorial exempt systems,
whether somebody is credible,
doesn't really matter to us.
There's a certain amount
of skepticism as to whether
the US would do anything
even if people told them
it was wrong.
Gradually focus in Europe as I said,
and here on state aid,
which has got real teeth
for the companies concerned.
So I think Johanna is right.
I think OECD will pick it up.
I think EU will then pick it up.
One of the reasons actually
why I'm I'm not really glad,
but but one of the reasons
why I'm pleased with leaving
the EU is I have
regarded, is very worrying
that the EU has intervened
time and again in tax matters,
not just through state aid.
I think that's fine.
I agree you can with state
aid, but but I think there is
a tendency for the EU to
get too involved in trying
to take a single consolidated tax system.
And I think Germany will
be an enormous beneficiary
of that, but I'm not sure
about the smaller countries.
- Actually, I do not know whether
that will come to any end.
- No, maybe not.
- But I would like to catch up with you,
Steve, on what you just
said about the digital tax.
Because these attacks on
digital services may have
a WTO issue as well.
- Yeah.
- But the question is,
to what extent should
the Europeans be a bit
more cautious here?
Not moving forward with
attacks that is maybe not
explicitly but implicitly
violating WTO law, and then
pleading in the tribunal
of the WTO that the US get it wrong.
- I mean, we be talked about
retaliation in terms of WTO law
and it almost looks as if
an advanced retaliation is
now under attack.
And I think that's really
heats up the situation.
So I would really appreciate
if this is left open
until we talk about the
whole set of problems
and the WTO law.
- And the UK would certainly
prefer it if the problem
went away, but I think they
don't think it's going to.
So they're gonna have
to do some work on it.
And we don't come to the
debate with clean hands
because in terms of picking up
some of the stateless income,
we've imposed withholding taxes on royalty
payments going out to
non-treaty jurisdictions.
And if you look at
that, and you say, well,
that withholding taxes
are wrong aren't they,
because they're tax gross
income, not net profits.
And why should you tax somebody
just 'cause they're in a tax haven?
But then you look at it
from the other point of view
and you say, actually,
if somebody is exploiting
intellectual property
in my jurisdiction,
in a way that doesn't create
a permanent establishment,
actually, I have got a right
to tax that because they are,
on a simple basis, using the
facilities for which other
people are taking, are paying.
You know, all the trucks
drive down the roads
that have been built,
and our wonderful broadband
systems have been created
at a cost.
And I suppose I therefore
look at the idea of digital
taxation as being something
which the public, you know,
the masses and the press in our country,
the public finance committee
in Parliament are a complete
pain in the neck, and
going on about things
they don't know about.
But there might be too
big a push at that point.
In which case,
my suggestion, I don't
know whether it solves
the WTO, would be that people
switch from trying to say
a digital presence is a
DEMPE, and try and fit
it within the format of the old regime,
which is we've got beats on the ground,
then you you're using the
facilities in a country should
pay tax, to something that becomes more
of a market access fee.
And, you know, then to my mind,
it has least philosophical cogency.
Even though most people
would say then be careful
what you wish for, you'll
then end up paying more taxes
in other countries than
you collect in the UK.
- And a mark of access is what people call
the tariff 100 years--
- Indeed!
- Or VAT within Europe
you know, but at least
it's intellectually honest.
- But Steve, I mean, basically you say,
no country is innocent.
So any, sometimes you
have withholding tax.
And I think if you compare
that with BEAT, I mean,
BEAT is also a tax on the income,
on actually expenses.
But I mean, you know,
I understand you, I think
correctly that you say
if if each country on
its own, just you know,
goes a way of unilateral actions,
then we have a real mess afterwards.
- We've got chaos, yeah.
- So we would really wish
for someone to coordinate.
And the question is,
will that be the OECD?
After the OECD was so
engaged in BEPS, which,
to some extent, also
brought us to the problem.
- Mr. Centerman has got
to find his next job.
- I was gonna say Ireland's
view is very clear
in this, it should be left
to the OECD for many reasons,
but one of which the US
will be at that party.
And you know,
we shouldn't be trying to
have a European solution.
And we don't want
unilateral action either.
- I think what what Steve
just said about withholding
taxes brings us to
bullet point number two,
will European countries
apply defensive measures?
Will they apply CFC
legislation to the US companies
which are now below 25% limits.
Which are way below those
limits when it comes
to FDII Income.
Where we have the full expensing,
which has a major effect on the tax base.
That has to be included when you look
at the effective factor.
Just to give you an example,
when United Kingdom move
below the 25% barrier,
a couple of years ago,
tons of German companies,
who have bona fide business
interest in the United Kingdom, were hit
by CFC a legislation,
because you'll always have a
couple of passive companies
out there who just administrate
assets, or to just work
as treasury functions.
And then you're hit,
although nothing of that was ever
really the reason behind
establishing these companies
in the first place.
So Adrian, what do you think?
Will Ireland apply anything,
interest barriers, CFC?
- No, we--
- But you have a 12.5% so why should you?
- That's a point.
- I mean the CFC problem
might be really a unique
German problem because
we have this very high
threshold of 25%,
which trust me, we didn't
lower it when when the rest
of the world cut the taxes.
So that that might even be
changed in the next years.
But as I said already, I mean,
the application of the
royalty barrier is discussed,
and I think there's quite a likelihood
that this will happen.
And I mean, we talked about WTO.
We talked about treaty issues.
This is just acute
because this will apply to
the next royalty payment,
as I explained it.
So this will be definitely
applied, I think so.
- Steve, you have CFC legislations?
You have you also have
the diverted profits tax.
- We do which you know,
in this audience people
will think it's directed
just to US companies, it isn't.
I think the other way to look at it--
- Who are the others?
Who are the others?
- You should read the UK press.
- Okay. (laughing)
- There is one particularly
big company that has had
to make quite a significant disclosure,
but everybody's worrying about it.
It's not being the UK's finest hour
in terms of administration.
I think the way to think
about diverted profits tax is
that it is domestic transfer pricing
with with added brutality.
If you didn't get your
transfer pricing right,
you pay a higher tax rate.
I don't think the UK will go
for any offensive measures.
I think you know,
that we've gone through a big tax reform,
and also have been early
implementers of the best
process with anti-hybrid.
And I think we've got enough at present.
So, and I think the UK will
leave UK companies operating
in the US to fend for themselves.
And we'll be worried if there's an impact
on inbound investment.
But I think we would have
a very Irish reaction
to that then and try and make
the UK even more attractive.
- But I think to that extent,
this isn't our typical panel.
Because if we had,
let's say people from France,
from Spain, from Italy,
from Austria on the panel,
even the Netherlands are somehow moving
between the different positions.
- They're withholding tax.
- There might be more forceful,
more forceful reaction.
So what do you think that
the race to the bottom
will move further?
Do you think that other
European countries--
- Start with that
because I don't think so.
It's what we were accused of
when we first did our tax reform,
and we will call it tax haven.
When I came over here,
people used to introduce me as Steve Edge
from that well-known tax haven.
For me, a tax rate of between 15 and 25,
should be regarded as normal.
I think the points you made earlier on,
Wolfgang, that there is
you're paying for something
in the country you're going to.
You should pay something
that somebody would recognize
your tax rate.
Would I five years ago said 20 to 25?
I don't know.
So am I in five years time
gonna be saying 10's okay?
I don't know.
But 15 to 25 seems, okay to me at present.
And I don't see any pressure
in the UK to go lower.
- So for Ireland this is
something like you have been
ahead of everyone for
a couple of years now.
And now they're all in the back.
You see you you see them coming.
How does that make you feel?
- Look, we've had a low tax rate,
if I can put it that way, for many years.
So we didn't have to race there.
And if there was a race, as you say,
we probably won it a long time ago.
But each country is different, you know,
we file VAT rates, we
file income tax rates,
and you you shape your your tax regime,
which is a matter of national sovereignty,
to really suit your economy.
So we we won't change our rate.
And I have a feeling
we're getting near some--
- Yeah we're much closer than we were.
- Yeah, and I also think I mean,
a lot of countries have reduced the rates.
Germany, maybe it's a bit of an outlier.
I think the Netherlands
may be talking about,
have some brain they got
rid of their withholding,
which is effectively an
additional corporate.
- Yeah, my sense is European rates,
maybe apart from Germany,
aren't going to take a big
drop down generally.
- That's also I would
assume there that I mean,
we have already this high pressure
of the European tax competition,
which I didn't know whether the US tax cut
really affect that.
What I think is interesting
is full expensing
and things like that.
This might be you know, another model.
I mean, we are now we have
been into the patent boxes,
maybe this is the next
round of being attractive.
And would be maybe even a smarter one
than patent boxes so...
- Which brings me to my
mind, maybe last question.
Let's keep the next one
here the bullet point,
but number five.
I would like to get let's
say one big point from you.
And that is, is there
anything in the US tax reform?
You'd say, wow, this
is something my country
should adopt as well, Steve?
- Oddly no.
(laughing)
- After this morning, definitely not.
(laughing)
- Not even full expenses?
- Yeah I mean full expenses.
We didn't talk about maybe
it's as bad as the rest.
- Well, then GILTI, I mean GILTI is a--
- Maybe I should make
one point about GILTI.
Because I mean,
if you look at it from
a European perspective,
you think it is a smart rule
of making somehow, you know,
maybe even cutting text competition back
to this 12.5% or 10.5%.
But I mean, if you look at it,
and especially of the structure
of this worldwide application.
I think this is very difficult to judge
what it really does to
other competing countries.
But I am pretty sure that the
German legislator will look
at it very closely, because
our CFC regime is, I mean,
on paper, it is very strict, but it is,
as to my knowledge hardly really applied
as a major threat.
And GILTI at first
instance looks easier than
this act of passive distinction.
So, for that reason,
I could imagine that that
other countries will look
at GILTI as a new CFC rule
quite closely and figure
out whether this might be an alternative.
- Adrian, something you will copy?
Ireland, as perfect as it is.
- No way, Jose.
(laughing)
- Okay, so I think I have
one minute to wrap this up.
You see the reactions are,
they are not hostile, they are interested.
They're people are watching
out, and they will follow up
on what the WTO and the
OECD organizations will have
to say on this.
They will also have a very close look
at the implementation.
In particular of the BEAT.
I think the BEAT is the
most hostile element.
It's also the element which
makes the US drift, to a large
extent, away from existing
tax treaty policy.
And the Europeans still have
to prescribe the US people
what they have to do.
But one thing we would wish for is,
that you know what you do.
And yet you know which
treaties you violate,
and that you know how the position is,
and where the international
consensus stands.
And given the fact that
recent years have seen
this enormous, enormous
amount of coordination
under the agenda,
not only of OECD, they price themselves,
but it's basically the G20.
The G20 with the heads of states
coordinating their policies.
That is something very valuable.
And one should not give
that up very easily.
That's a matter that goes way beyond tax.
Thanks for having us here,
and I wish you good afternoon, thanks.
(audience clapping)
- Okay, thank you,
Well Wolfgang, Steve, Adrian,
and Johanna for your comments
from a European perspective
on US international tax reform.
It is now my honor to introduce
to you Professor Joshua Blank
who's The Faculty Director
at the graduate tax program
at NYU law school, and
for some brief comments.
And then Professor Blank
will then introduce
our keynote speaker.
Professor Blank.
- Yeah, thanks, Larry.
Thanks, Larry.
Good afternoon, My name is
Joshua Blank, and I teach here
in the graduate tax
program at NYU Law School.
And on behalf of the graduate tax program,
I'd like to extend our
thanks to KPMG for sponsoring
this annual event.
This has been one of the
highlights of our academic year
for the last 18 years
here at the law school.
The program offers our students
the opportunity to think
about important tax issues, like obviously
the new tax law today.
But also it gives them a
chance to meet the entire tax
community in the New York area and beyond.
And every year we hear from
our students about how much
they appreciate just having
the chance to meet tax
practitioners from law firms,
accounting firms and government.
And this is really one of the best events
for that opportunity.
I'd especially like to
thank and acknowledge
Larry Pollack for all of his
work in making this event
happen and his role as director
of the NYU KPMG lecture.
And if we can just take
a moment to acknowledge
Larry for a great job.
(audience clapping)
And last, I'd also like to,
on behalf of the tax program,
thank all of our alumni
who are here today.
Our alumni support the
graduate tax program,
and the international
tax program in many ways.
By teaching here as adjuncts,
appearing on panels,
mentoring our students
and our recent graduates,
and supporting initiatives
of both the tax program
and the international tax program
through the Wallace-Lyon-Eustice fund.
We're deeply grateful
to all of you, and again
to KPMG for your support of this program.
It's now my honor to introduce
our keynote speaker Tom Barthold.
Tom is the Chief of Staff
of the Joint Committee on Taxation.
He joined the Joint Committee as a staff
economist in 1987.
And he subsequently has
served as Senior Economist,
Deputy Chief of Staff,
and Acting Chief of Staff.
He's been Chief of Staff since May 2009.
Over the past three decades,
he's worked on a wide variety of issues
for the Committee.
Before arriving in Washington,
he was a member of the
economics faculty at Dartmouth.
For his work
at the Joint Committee on
Taxation, and the tax policy.
The Tax Council Policy
Institute awarded Tom,
its Pillar of Excellence,
and the National Tax
Association has awarded him
the Bruce Davie-Albert
Davis Public Service Award.
Please join me in welcoming Tom Barthold.
(audience applauding)
- Thank you.
Good afternoon.
And thank you very much for
the opportunity to be here
with you today at New York
University Law School.
Which I actually want
to give a special thanks
to because over the years they've sent us
many fine graduates who
served on our staff,
and I think contributed
greatly to the work
of the Joint Committee.
Conference today has got this great title
of the Tax Cuts and Jobs
Act, but of course, you know,
that's not really its name.
It's Public Law 115-97.
It was formerly known
as the Tax Cuts and Jobs
Act before the application
of some of the Byrd Rules
that are applicable in terms
of consideration of
reconciliation legislation
in the Congress.
I was asked to try and entertain you,
give you some insights,
perhaps get an opportunity
to answer questions.
I also have a responsibility
to the bland, not be quoted
saying outrageous things in the tax press.
That's more appropriate
for the other panels
and the panels this
morning were interesting.
So I thought what I should
do is start with sort
of broader context.
As was just noted,
I've been on the joint
committee staff for more than 30
years, I joined just after the passage
of the Tax Reform Act of 19 of 1986.
Between 1986 and this past
December, the Congress has
enacted a number of large tax bills.
But none, I think it's fair to say,
have been as sweeping
in terms of the changes
that they've made in
terms of business taxation
in the United States, and in particular,
cross border taxation.
So let me try and give
a little bit of context
over the third years,
because, well, there was
only, not many major changes
between 1986 and 2017.
Concerns of cross border income earning,
What multinationals are doing,
how multinationals are taxed,
be they US based or be they
foreign based multinationals,
has been a long concern
of the US Congress.
Let me break it up into
roughly three decades.
It's gonna be not perfect division,
and not perfect chronologically.
But if we look at the economic landscape,
just after the 1986 Tax Reform
Act, think of the period
roughly 1986 to 1994.
What's the economic landscape?
What are some congressional concerns?
After the 1986 Tax Reform
Act, US corporate income tax
rate was about the lowest of
the major industrial economies.
So for the most part, you can say,
lower than the rest of the world.
What were concerns that
Congress had at the time?
The concerns were run away plants.
And I mean by runaway plants,
the classic idea of shutting
down a factory operation
in the United States,
opening it up some somewhere
where the somewhere
typically had two factors,
perhaps a lower tax rate
because it was a less developed
country, but often less expensive labor.
You had notable legislation
introduced during that period
by then Congressman, later
Senator Byron Dorgan.
Actually something for the local scene
for those of you that are
old enough and remember
your New York Senator Alfonse D'Amato.
He carried out a notable
filibuster on the Senate floor
regarding trade legislation
that he thought would affect
a runaway plant.
Smith Corona was going to
close a typewriter factory
in upstate New York, and
I know from the chortles
in the room,
that that's viewed as
quite a quaint concept
both in terms of perhaps the
issue of a runaway plant,
as well as the issue
of, what is a typewriter
for several of you in this in this room.
Well, The Ways and Means Committee was
concerned about general
issues in international
competitiveness, cross border taxation,
who's investing in the United States?
Who's investing abroad?
And in late spring of 1991,
they held a series of hearings.
Remarkable both in terms of
the scope of the hearings,
I think it tells you a
little bit about the way
Congress operates then as opposed
to the 21st century Congress,
but the joint committee staff at that time
as we routinely do, produce
background information
for that hearing.
For those of you that want to go back
into into the record,
it's document JCS 691.
It's over 500 pages in length
laying out law and issues,
is one of the more substantial
documents that we've
produced over the years called
Factors Affecting the
International Competitiveness
of the United States.
That was the core issue
that The Ways and Means
Committee was worried about.
The committee held nine days of hearings
with multiple panels.
It's a lot different than the way
that Congress operates today.
But I note that because among the issues
that the Joint Committee
staff highlighted,
were the effect of US savings rate,
the effect of the the deficit,
outbound flow of assets,
what that might mean in
terms of foreign purchases
of US-based assets,
what it might mean for the
location of investment.
Those hearings were actually
followed up by an initiative
by then Chairman Dan Rostenkowski,
and on a bipartisan basis,
Republican Congressman Willis Gradison,
the Foreign Income Tax Rationalization
and Simplification Act,
which would have relaxed
some of the foreign tax
credit restrictions enacted in the 86 Act,
would have provided for
worldwide interest allocation,
would have repealed
deferral, among other things.
That was introduced in 1992.
Well, as you know that that went nowhere.
So let me jump to the next period.
Let's take the decade
roughly 1995 to 2005.
The economic landscape,
I think it's fair to say
had begun to evolve, change,
congressional concerns
changed somewhat with them.
By now, a decade later,
you have a lot of other
major economies catching up
in terms of how we tax foreign businesses.
Foreign tax rates were falling,
in part response to the
Tax Reform Act of 1986
in the view of many.
You had a pickup in cross
border merger and acquisition
activity with foreign
dollars buying US assets,
as had been suggested in
some of the and discussed
in some of the hearings,
some six, seven years before.
Inversions, you were starting
to see the first inversions
of US corporations, the
Clinton administration.
Bless the Helen of Troy inversion,
I believe it was in 1996.
World growth over this
period was quite good,
and for US based multinational
corporations, started
to see profits pile up abroad
because of the incentive
provided by being able to
defer and the reap the effect
of lockout for returning
repatriated dividends.
And then is this period
you both saw the .com boom
and bust, and you saw post 9/11 recession.
Sort of the general economic
landscape, politically
worldwide, a move to single Europe.
You had the WTO challenge against
the fiscal regime in 1997.
The Congressional concerns
had really sort of evolved.
Thought that there was
maybe some, in some aspects,
the Tax Reform Act of 1986
had been too stringent.
And so in 1998, you first
saw the active finance
exception enacted to say
that what had been deemed
passive-based income
could represent active
business activity, if properly measured.
You saw the beginnings of
anti-inversion legislation.
You had the 2000 response
creating the extra
territorial income regime
EPI and response to the fiscal decision.
And then ultimately,
that evolved into in 2004,
the American Jobs Creation Act AJCA
which notably, in terms of
cross cross-border activity,
included not just the
domestic production activity,
deduction of Section 199
which was the direct response to the fisc
and the EPI decisions,
but also enacted CFC looked through,
for US based multinationals,
and significantly had
the elective section 965
repatriation holiday.
Concerns at this time
politically also involved
base stripping by foreign-based
businesses operating
in the US, and by
inverted US corporations.
The US Congress had
called on the then called
the Government Accounting
Office, now called
the Government Accountability
Office, the GAO.
Undertook several studies
on the level of taxes
or the effective tax rates
of foreign-based companies
as opposed to US-based competitors.
Treasury was mandated to
undertake a study of possible
earning stripping by
foreign-based multinationals
and by formal formerly US-based companies
that had inverted.
Again, the tax writing
committees themselves held some
major hearings at this,
in this period in response
to these concerns,
Ways and Means, and finance
both over this period,
had some significant hearings.
But beyond, as I noted,
active financing exception,
anti-inversion legislation,
and the American Jobs Creation
Act, nothing really big yet.
The more modern era, let's say post,
take it as post 2005.
I think over the last decade,
the last 12, 14 years,
you've actually seen
more intensity of concern
about how the US fit
into the world system.
How our system might affect
incentives for investment
in the US, incentives abroad.
The US corporate rate now
is clearly seen as greater
than that of the rest of the world,
notably with what I guess
now three years ago,
the reduction by the Japanese.
To our my German friends
on the last panel,
you said you like to
take pride in pointing
to the United States
is having a higher tax
rate than you.
I think Japan still has you
beat by a little bit so you can
take a look at the Japanese.
Hope that's a helpful
thought for you there.
If anything, over the last 12 years,
I think you've seen an
increase in both cross border
merger and acquisition activity
and inversion pressure,
and political concerns
that arise from that.
Some notable US brand names,
for example would be
Anheuser-Busch, Heinz, among others.
For those of you that like
to go to a ball game and have
beer and hot dog, that sort of thing.
Again, even after the
elective repatriation holiday
of AJCA, reported profits held
offshore have grown rapidly.
Again, with pickup in worldwide growth.
And also over this period
of the last 10 plus years,
more countries, shed the vestiges
of a worldwide taxation system
and have gone to dividend
exemption systems,
leaving the United States
as an more of an outlier.
Well, what were the congressional concerns
over this period?
Loss of tax base was
a significant concern.
Many of you in this room might recall
that in Ways and Means, in 2010,
the Ways and Means Committee held
a notable hearing on income
shifting for which they had
asked, the Joint Committee
staff to prepare a report.
The report was based on some case studies
of multinational corporations,
and laid out ways
in which income, particularly
that from intellectual
property, might be cited abroad,
reducing the US tax base
relative to what you might see
as the sales and underlying
reported financial
profitability in the
domestic market as opposed
to the foreign market.
And I'll note that in fact,
that work that the Committee undertook
in its investigation
predated the the BEPS,
the entire BEPS project.
Part of that work was in fact cited
in the initial BEPS report.
The concern not just
with the tax base loss was,
in noting that intellectual
property perhaps was being shifted,
was a concern of Congress.
Do jobs follow the intellectual property?
Lockout of domestic investment
from accumulated foreign
earnings remained a significant
congressional concern
and a question of,
to what extent was foreign
investment a substitute
for US investment?
Or to what extent was it a
complement for US investment?
When did growth abroad help promote growth
in the United States?
When was it at the expense of growth
in the United States?
In addition to then over this period,
the initiation of the BEPS
project within the OECD
saw congressional concerns
about state aid cases.
Maybe we should characterize
this as an economic
nationalism concerned by
some members of Congress.
Were US companies being targeted?
And were they being
targeted to the detriment
of potential future growth
by those companies or future
growth in the US economy?
And I note these things
because I think in many ways,
you sort of see a drift of
concerns along with drift
in the changing economic environment
away from that classic runaway
planned concern that was
there 30 years ago
when, when the Congress was
first addressing cross-border
issues, and issues of
international competition.
Over this period, if anything,
what to do considering different ideas,
looking at what's happening in Europe,
what's happening in Asia
became much more of a focus
of the congressional committees.
The Ways and Means Committee, for example,
held hearings in 2006, 2010, 2011, 2017,
complemented by their
counterpart on the Senate side
with the Finance Committee,
holding hearings in 27,
2011, 2014, 2015.
All substantial hearings
asking for academic comment.
Asking for practitioner comment.
Asking for comments
from the business sector.
At this time, during this
period, you also saw much,
much more active attempts at trying
to advance potential change.
Chairman Dave Camp former chairman
of the Ways and Means Committee
initiated a series of working
groups to get members to do,
outside the hearing
process an in depth study.
And as I think most everybody
in this room so aware,
in 2014 introduced his some of his ideas
for how you might move the
United States to a territorial
system, lower the corporate tax rate,
have a very broad business tax tax reform.
You'll remember in that context,
in the current day context,
Chairman Camp's option C.
On the other side of Capitol Hill,
you had again on the bipartisan basis,
you had Democratic Chairman
of the Finance Committee,
Max Baucus, introduce a series
of discussion drafts of possible options
to, again, move the US tax
system and cross border
taxation away from where it had been
since the 86 Act.
With the change in congressional majority.
Current Chairman of the
Finance Committee, Orrin Hatch,
again established his own
series of working groups,
somewhat paralleling the work
that the Dave Camp had done.
Again, to just try and study in depth come
up with options.
And again, I note because of
the bipartisan aspect of it,
that the International Working Group.
Which was headed by Senators
Portman and Senators Schumer,
basically gave a Bipartisan
endorsement to let
me just characterize it
as something territorial.
In other words,
moving away from the worldwide system.
Doing something that maybe moved
the United States to
conform more with the rest
of the world.
Well, that's kind of a
quick but also long walk
through 30 years.
Just to summarize,
I think some of the classic runaway plant
concerns have receded.
It's not so much about specific plants.
The concern has been much more about
what's the growth potential
in the United States?
What's the employment potential?
Is it a good job potential?
Base erosion has increased as a concern.
Base erosion both not from
just that the plant leaves,
but is it the engine that leads
to future economic growth?
Some of the intellectual property,
some of the research jobs is that fling.
Is the tax system working
against retention of those?
There's also a concern in that respect of
to what extent are
multinational corporations,
be they US based, or
when you look inbound,
the base concerns on inbound investment,
to what extent are multinational
corporations paying
their fair share?
Again, not a well
defined economic concept,
but an important political concern.
And let me not downplay what
I characterized as potential
thinking in terms of economic nationalism.
The loss of headquarters operations
and what we are considered
headquarters jobs of good
jobs, skilled jobs, you know,
high end jobs is an important concern
for many members.
And I emphasize all those because a number
of those concerns have
had now for two decades,
a clear bipartisan flavor to them.
Now, obviously, the legislation
that was recently passed,
Public Law 115-97, for
lack of a short title,
was passed on a on a partisan basis.
There's no denying that.
You've had a lot of discussion
about the international
provisions this morning.
We're about to have more later.
We're going to get an in depth analysis,
economic analysis from
my friend, Alan Vilad
in a little while.
Let me just give a high a
few high-level thoughts here.
First of all, I outline these concerns.
Do we think the law was trying
to do, Public Law 115-97,
was it doing something to try
and address those concerns?
Well, in simple terms, sure.
Think of the runaway plant the growth.
Well, what's the, kind
of a first order reaction
in terms of the policy initiative?
Reduce the corporate tax rate
to make after tax returns
in the United States more attractive.
And moreover than just reducing
the corporate tax rate,
let's have 100% expensing.
Because economically and 100%
expensing basically means
we've exempted the entire normal return
to the capital investment.
So if that's not a pro-growth,
pro-domestic growth policy,
there's not not much it is.
Now there's other things
that the DEMP had,
the interest changes
in interest limitation,
changes in NOLs.
There's a number of
other important details
that I glossed over.
But in terms of a broad policy goal,
you can see part of 30 years
of thrust of policy concern
addressed with those provisions.
Outbound, the base erosion problem.
Well again, members think
both in terms of outbound
investment, and in terms
of encouraging inbound
investment, that those
policies above lower rates
and expensing are good things.
They tried to address the concern of,
are we out of step with
the rest of the world?
By let's create a
dividend exemption system.
Is it a pure dividend exemption system?
No.
Did we have a pure worldwide system?
No, but moved the basic
structure toward ones
of dividend exemption.
Yet a long term concern
had been that issue
of what happens to intellectual property?
What happens to high end jobs?
What happens to research jobs?
Think of the BEPS project,
think of the the hearing work
that the Ways and Means
Committee had done.
That's what motivated as has I think been
explained this morning,
both the GILTI regime and the FDII regime.
Also noted and I don't
think it's been talked
about yet today in terms
of inbound investment.
It's been some note, new
limitations on all corporations
on interest limitations,
in addition to the BEAT proposal.
Again, I'd mentioned economic
nationalism is a concern
that's laying there.
Again I think it's a
story partly of rates,
partly dividend exemption.
I've seen some cross-border,
I think it's fair to say
a number of members have
interpreted our worldwide
system as giving an edge
to headquarters that are not
under a worldwide regime.
So I believe they think
that that addresses some
of those concerns.
Now, I know you want me to
say something more specific
about the bill, and this is where I have
to be really careful.
So let me just take a
couple minutes with a couple
of high-level observations
on some criticisms.
And this is not to defend
the legislation in any way,
but just to make some
remarks about how we think
about analyzing some of the outcomes,
and maybe some of the choices,
some of the motivation.
I think it's important to
keep in mind when we think
about what we're looking
at and how people are going
to plan for the next five years, 10 years,
however they respond,
to think about what the
baseline of comparison is.
I've read a number of
criticisms in the tax press,
or people that have come
in to talk to our staff,
that seem to take as their
baseline of comparison,
a perfect system, and that
you created something, that,
you know, didn't line up
with a perfect system.
Well, that just doesn't seem like the way
to think about it to me,
and I don't think it
was the way the members
of Congress thought about it.
They were trying to think
of we're trying to move
from where we are in
some of these directions
that address the concerns
that that I outlined.
As a particular example,
and I think this reflects
what economists would call
a very partial equilibrium analysis.
I've read two or multiple
comments where people have
said, well, let's look at the GILTI.
Under the GILTI, there's
this 10% deemed return
on a threshold of tangible assets.
Well, obviously that just
means that promotes an outflow
of tangible assets from the United States.
Really?
If we were in 2017 and we
wanted to establish a plant
in Singapore, we're under
a special agreement,
you could effectively
have a zero tax rate,
is anything different now?
If you took the tangible assets,
and you could get a 10% rate of return.
I don't think so.
And in fact,
if you did that plant in the
United States, if you noted,
because you could expense it,
you'd effectively get
a zero rate of return
on those assets.
And you might say, and
under the GILTI, if you were
in Singapore in 2018, then
there might be some return
that potentially would be taxed
depending on your worldwide situation.
So it's very partial
equilibrium analysis to say,
oh, look at that,
those deemed assets, put
a 10% return and say,
there's obviously an
incentive to ship assets
out of the United States.
Another criticism I've
heard somewhat repeatedly
is that it's clear that all the estimates
of this, estimated revenue effects
of this legislation were wrong.
That there's going to be a
massive revenue hemorrhage,
vastly understated by the
work that the Joint Committee,
did and that the Congressional
Budget Office did.
Now this is based on
two lines of thinking.
One, will Congress permit
the expired provisions
to remain expired?
Or those provisions that
have phased in increases
to actually become phased in.
Valid question.
The budget rules remain in place,
voters can have their say.
I can't comment on that,
to the extent that you
think that that's the way
the politics will play out.
That's completely correct.
But I've also heard criticism
that a little bit more
on the line, and I will say,
I rejected is somewhat
glib the comments by some
that say, well,
there's a lot of smart people out there,
the example would be most
of you sitting in this room,
and then, we oh so smart
that surely the revenue
estimates, on which the members base
their decisions, are wrong.
And so, and they're obviously always wrong
in the same direction.
On a very static analysis,
if you went and you looked at the data
on cross-border intercompany trade
like from the Commerce Department.
And you said, let's look at
how that BEAT tax plays out,
you would calculate very roughly a number
that's substantially
bigger than the number
that the Joint Committee
staff reported to members
of Congress as what we thought
the estimated effect would be.
And that's because we
spend a lot of time talking
with folks at the Treasury,
talking among ourselves,
talking with constituents
who would come in and say,
oh, well, if this is the
way things are going to be,
we think we could do this.
We think we could do that.
We tried to build in a
lot of that behavior.
And I think it's a little
bit simplistic to say,
oh, it's obviously wrong,
and they obviously always missed
on the down side.
Not saying our estimates were perfect.
They didn't come down from Mount Sinai.
But still time to play that we gave it,
tried to use the best
analysis that we could,
and we did not assume that
people would not respond
that tax planning would not happen.
We assumed tax planning would happen.
Well, I have two minutes left here.
And I can use that to
take a couple questions,
or I could tell you a little
bit about kind of current
process of technical
corrections and the like.
So, questions or process?
Process, okay.
Well the process is our phone lines,
our email lines are open.
We're soliciting anybody's views
if they think there are technical errors.
The process of identifying
technical corrections actually began
before the legislation was signed.
We noticed that there were some errors,
conflicts between what the
members had directed in terms
of the conference agreement,
and the way it worked
out in the statutory language.
Partly a consequence of it
being a somewhat compressed
time period to pull everything together.
We try and hold, a technical
correction itself is
not something that's small.
It's not something that
benefits one tax payer.
A technical correction,
from our perspective is
what was the member's
intent in the legislation?
If the members intent was clear,
and it's not clearly reflected,
or clearly effectuated in the legislation,
then perhaps a technical
correction is required.
We vet the thinking of these
with treasury department
with Ways and Means
staff, the finance staff.
We try to do it on a bipartisan basis.
That's a little bit different this time.
Then there are in the case of other
legislation because of
the more partisan nature
of crafting the bill.
Along with the technical process,
Joint Committee staff is
planning on producing a blue book
that tries to explain,
pull together the different
pieces of legislative history
all in one place.
We'll use the blue book
to identify some areas
where I think technical
corrections might be needed.
We hope to write better some
of the explanation of some
of the provisions.
Perhaps provide a few more examples.
But the blue book is not
an effort to try and expand
the policy, or change
the policy in any way.
It's an effort to try to be helpful.
In terms of timing, the timing
of blue book is really driven
by members of Congress.
They have other things they want us to do.
So it somewhat depends what
else is going on in Congress.
In terms of technical corrections,
my colleagues on staff and we coordinate
the technical corrections process.
We hope to develop at least
an initial list of technical
corrections that are
agreed to by all parties.
We would then hope that the Chairman
of the two tax writing
committees, and we would also hope
that the ranking members would join them
in introducing legislation.
This legislation typically
does not get passed rapidly.
Technical corrections that were developed
after the passage of the PATH Act in 2015
were first introduced in
December of 2016, and only passed
into law six weeks ago.
The technical corrections
to the 86 Tax Reform Act.
Quick quiz since it's a law school.
86 Tax Reform Act was
passed in October of 1986.
When were the first technical
corrections to the 1986
Tax Reform Act passed?
Tamra, October 1988.
They were introduced,
there were some introduced
before the end of the first
session in 1987.
We hope to have some technical
corrections in legislative
language that the members
would be willing to introduce
yet this session.
No hard deadlines.
I'm well over my time.
I appreciate your indulgence.
I hope my walk through 30
years of history was somewhat
interesting for the for the context.
And I commend you for just, you know,
thinking through these issues
and some of the questions
that you've raised, and
you posed to treasury,
are questions that my colleagues
and I are also pondering.
Thank you very much.
(clapping)
