[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]




 
                       THE OECD BASE EROSION AND
                     PROFIT SHIFTING (BEPS) PROJECT

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON TAX POLICY

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 1, 2015

                               __________

                          Serial No. 114-TP04

                               __________

         Printed for the use of the Committee on Ways and Means
         
         
         
         
         
         
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                      COMMITTEE ON WAYS AND MEANS

                      KEVIN BRADY, Texas, Chairman

SAM JOHNSON, Texas                   SANDER M. LEVIN, Michigan
DEVIN NUNES, California              CHARLES B. RANGEL, New York
PATRICK J. TIBERI, Ohio              JIM MCDERMOTT, Washington
DAVID G. REICHERT, Washington        JOHN LEWIS, Georgia
CHARLES W. BOUSTANY, JR., Louisiana  RICHARD E. NEAL, Massachusetts
PETER J. ROSKAM, Illinois            XAVIER BECERRA, California
TOM PRICE, Georgia                   LLOYD DOGGETT, Texas
VERN BUCHANAN, Florida               MIKE THOMPSON, California
ADRIAN SMITH, Nebraska               JOHN B. LARSON, Connecticut
LYNN JENKINS, Kansas                 EARL BLUMENAUER, Oregon
ERIK PAULSEN, Minnesota              RON KIND, Wisconsin
KENNY MARCHANT, Texas                BILL PASCRELL, JR., New Jersey
DIANE BLACK, Tennessee               JOSEPH CROWLEY, New York
TOM REED, New York                   DANNY DAVIS, Illinois
TODD YOUNG, Indiana                  LINDA SANCHEZ, California
MIKE KELLY, Pennsylvania
JIM RENACCI, Ohio
PAT MEEHAN, Pennsylvania
KRISTI NOEM, South Dakota
GEORGE HOLDING, North Carolina
JASON SMITH, Missouri
ROBERT J. DOLD, Illinois
TOM RICE, South Carolina

                     David Stewart, Staff Director

         Janice Mays, Minority Chief Counsel and Staff Director

                                 ______

                       SUBCOMMITTEE ON TAX POLICY

             CHARLES W. BOUSTANY, JR., Louisiana, Chairman

DAVID G. REICHERT, Washington        RICHARD E. NEAL, Massachusetts
PATRICK J. TIBERI, Ohio              JOHN B. LARSON, Connecticut
TOM REED, New York                   LINDA SANCHEZ, California
TODD YOUNG, Indiana                  MIKE THOMPSON, California
MIKE KELLY, Pennsylvania             LLOYD DOGGETT, Texas
JIM RENACCI, Ohio
KRISTI NOEM, South Dakota
GEORGE HOLDING, North Carolina


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of December 1, 2015 announcing the hearing..............     2

                               WITNESSES

Panel One

Robert B. Stack, Deputy Assistant Secretary for International Tax 
  Affairs, U.S. Department of the Treasury.......................     6

Panel Two

Barbara M. Angus, Principal, Ernst & Young.......................    34
Catherine Schultz, Vice President for Tax Policy, National 
  Foreign Trade Council..........................................    56
Gary D. Sprague, Counsel, The Software Coalition.................    47
Martin A. Sullivan, Ph.D., Chief Economist, Tax Analysts.........    64

                       SUBMISSIONS FOR THE RECORD

Andrew F. Quinlan................................................    85
Business and Industry Advisory Committee (BIAC) to the OECD......    92
Motion Picture Association of America (MPAA).....................   100
National Association of Manufacturers (NAM)......................   105
Tax Innovation Equality (TIE) Coalition..........................   111


                       THE OECD BASE EROSION AND



                     PROFIT SHIFTING (BEPS) PROJECT

                              ----------                              


                       TUESDAY, DECEMBER 1, 2015

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                Subcommittee on Tax Policy,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 10:04 a.m., in 
Room 1100, Longworth House Office Building, Hon. Charles W. 
Boustany, Jr. [Chairman of the Subcommittee] presiding.

    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                       SUBCOMMITTEE ON TAX POLICY

                                                CONTACT: (202) 225-3625
FOR IMMEDIATE RELEASE
Tuesday, November 24, 2015
No. TP-04

                 Chairman Boustany Announces Hearing on

                       The OECD Base Erosion and

                     Profit Shifting (BEPS) Project

    Congressman Charles Boustany (R-LA), Chairman of the Committee on 
Ways and Means Subcommittee on Tax Policy, today announced that the 
Subcommittee will hold a hearing on the OECD BEPS project final 
recommendations and its effect on worldwide American companies. The 
hearing will take place on Tuesday, December 1, 2015, in Room 1100 of 
the Longworth House Office Building, beginning at 10:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
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on Tuesday, December 15, 2015. For questions, or if you encounter 
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    Note: All Committee advisories and news releases are available 
online at 
http://www.waysandmeans.house.gov/.

                              

    Chairman BOUSTANY. Good morning. And I want to call this 
hearing to order.
    You might remember this Subcommittee was formerly called 
the Select Revenue Measures Subcommittee. But, to reflect the 
central role of tax in the Ways and Means Committee agenda, 
Chairman Brady and the rest of the Members decided to change 
its name to the Subcommittee on Tax Policy to give it its 
rightful position among subcommittees.
    I also want to acknowledge the fine work done by the two 
Chairmen before me, Mr. Reichert and Mr. Tiberi, in moving 
forward the agenda on tax reform. Thank you, gentlemen, for the 
fine work of leading the Subcommittee.
    Today the Subcommittee on Tax Policy will examine the final 
recommendations recently issued by the OECD on their Base 
Erosion and Profit Shifting project.
    The alarming increase in foreign acquisitions of U.S. 
companies over the past decade, and especially in the last 
year, have exposed the critical and urgent need for tax reform 
in America. At 39 percent, the United States now faces the 
highest Federal and State combined corporate rate in the 
developed world, which is rapidly draining America of its 
homegrown innovation and business, and forcing companies to 
relocate to countries with more business-friendly tax regimes.
    Globalization of the business marketplace has created 
historic opportunities for growth that were previously 
impossible. U.S. tax policy must account for these changes in 
this rapidly complex changing environment. Just last week, 
Pfizer, an American company founded in 1849 in New York City, 
announced the largest foreign acquisition of an American 
company in history. That is not the first, nor will it be the 
last.
    Foreign acquisition has been pushed over the line by our 
broken Tax Code--and the last time comprehensive tax reform 
took place in the United States was 1986. And since then, our 
international counterparts have capitalized on our lack of 
action, outpacing us to a debilitating degree in adopting tax 
reforms needed to attract capital investment.
    As international tax regimes have evolved, multinational 
companies have also evolved to become increasingly savvy in 
minimizing their overall tax liability. International 
competition for business and a fiduciary duty to shareholders 
obligates companies to be proactive. The political and policy 
hurdles that have prevented tax reform efforts from moving 
forward seem to pale in comparison to the problem America faces 
with the mass exodus of American companies through foreign 
acquisitions.
    Since 2001, global economic instability, alongside the 
increasing mobility of capital and high-value profitable 
business activities, have served as natural and powerful 
motivators for international tax reform. The substantial 
migration of multinational companies to more favorable tax 
jurisdictions has placed front and center an acute 
international awareness that there are limits to the tax 
burdens countries can place on their resident companies before 
they must seek a more favorable tax environment elsewhere.
    All the while, the United States has failed to keep with 
the pace. It is being left behind. Indeed, the need for tax 
revenue resulted in the push by OECD to launch the BEPS 
project.
    The OECD BEPS project was intended to target limited, 
overly aggressive tax planning, and resulted in inappropriate 
tax avoidance. In fact, one key theme of the BEPS project was 
to eliminate cash boxes. In effect, shell companies with few 
employees or economic activities, and which are subject to no 
or low taxes. However, the project quickly expanded into a 
fundamental rewrite of global tax practices, including those of 
the United States, in a relatively opaque process outside the 
reach of U.S. political process.
    The OECD's BEPS project recommendations are deeply 
troubling on a number of levels, not the least of which is the 
aggressive attempt to impose substantial tax policy changes on 
the international community under the guise of eliminating so-
called harmful tax practices to ensure multinational companies 
pay their ``fair share'' of taxes owed in the jurisdictions in 
which they operate. This is a highly subjective standard set by 
the OECD that seems to unnecessarily target American companies, 
while also disregarding the detrimental impact these 
recommendations will have on U.S. companies that currently 
operate under the worldwide system of taxation observed in the 
United States.
    The BEPS project may have been motivated by an underlying 
belief that creating a business-friendly tax regime to attract 
business investment to one's country is itself an illegitimate 
and harmful practice that must be eliminated. But the BEPS 
project ended up making recommendations that will achieve the 
opposite result, by encouraging countries to create patent 
boxes, which will effectively force worldwide companies to 
shift their business operations out of the United States in the 
absence of change.
    Moreover, the exposure of American companies' highly 
sensitive information through the country-by-country reporting 
requirements within BEPS' recommendations 
are not constrained by any rationale for the breadth of 
information required, and are also lacking appropriate 
protections for highly-sensitive information in this regard.
    The BEPS project final recommendations issued this year, 
coupled with the present European Commission investigation into 
alleged receipt of illegal state aid by mostly American 
companies, exposed what appears to be an extremely disturbing 
and multifaceted attack specifically targeted at American 
companies.
    Ladies and gentlemen, we are out of time. We have nearly 
three decades of inertia with regard to tax reform. This must 
be the Congress of action that takes the tough but necessary 
steps to reform our Tax Code for the sake of American families, 
American companies, and America's stature as the world's leader 
in fostering innovation and business growth.
    And, with that, I will yield to my Ranking Member, Mr. 
Neal, for an opening statement.
    Mr. NEAL. Thank you very much, Mr. Chairman. And 
congratulations on your new post. A reminder that I have now 
either been the Chairman or the Ranking Member with the three 
people sitting to my right. So I provide some institutional 
anchor to the conversation that we are about to have.
    Our Tax Subcommittee has a long and rich bipartisan history 
of coming together to address some of the Nation's biggest 
problems. We have worked together in the past, and I hope to 
continue to work together on tackling very important issues of 
this day. Thank you for calling this important hearing on 
OECD's Base Erosion and Profit Shifting project. The timing 
could not be more fitting.
    A new wave of inversions has gripped the corporate world, 
as yet another U.S. multinational has renounced their U.S. 
corporate citizenship. In a record-setting $160 billion deal, 
Pfizer and Allergan--and a reminder, Allergan was also formerly 
an American company--have agreed to merge and create the 
world's largest pharmaceutical company. With this merger, the 
U.S. tax base continues to erode. Perhaps this latest inversion 
will prompt Congress to come together on reforms so this does 
not continue to happen.
    These inversions happen because of a broken Tax Code which 
allows these deals to take place. Congress must take action 
immediately, as we did in 2004, with legislation that I 
sponsored, to stop the flow of inversions until we can 
meaningfully fix our broken Tax Code.
    Our rudimentary Tax Code remains ill-equipped to handle our 
increasingly globalized and digital economy. As a result, we 
have seen an explosion of multinational companies shift 
profits, activities, and property from high tax countries to 
low tax countries. By OECD's best guess, countries are losing 
as much as $240 billion a year in lost revenue.
    I want to commend the Obama Administration and Secretary 
Lew for their efforts in working with the international 
community and finding commonsense solutions to address these 
taxation challenges. I look forward to the hearing, the 
testimony from our distinguished panelists on the best ways to 
address the challenges ahead of us, and to ensure that the OECD 
process is not one where our jurisdictions try to grab revenue 
that rightly belongs to the United States.
    But ultimately, the task of fixing our Tax Code falls on 
us, specifically on this Subcommittee. Mr. Chairman, it is my 
hope that we can use this hearing as a springboard toward 
meaningful reform, one that broadens the base and lowers the 
rate in a revenue-neutral way, as the Obama Administration has 
proposed.
    Thank you, Mr. Chairman.
    Chairman BOUSTANY. I thank the gentleman. Today we will 
hear from two panels comprised of experts on international 
taxation. I am very excited to have these panelists, who are 
all well-known experts in this area.
    Our first panel will be Robert Stack, Deputy Assistant 
Secretary for International Tax Affairs, U.S. Department of the 
Treasury.
    Mr. Stack, thank you for being here today. We appreciate 
the fine work you have done over the years, and we look forward 
to hearing your testimony. Rest assured the Committee has 
received your written statement. It will be made part of the 
formal hearing record. We ask you to keep to 5 minutes on your 
oral remarks, and you may begin when you are ready.

 STATEMENT OF ROBERT B. STACK, DEPUTY ASSISTANT SECRETARY FOR 
   INTERNATIONAL TAX AFFAIRS, U.S. DEPARTMENT OF THE TREASURY

    Mr. STACK. Chairman Boustany, Ranking Member Neal, and 
distinguished Members of the Subcommittee, I appreciate the 
opportunity to appear today to discuss some key international 
tax issues, including the recently-completed G20 OECD Base 
Erosion and Profit Shifting--or BEPS--project. We appreciate 
the Committee's interest in these important issues.
    In June 2012, the G20 Summit in Los Cabos, Mexico, the 
leaders of the world's largest economies identified the ability 
of multinational companies to reduce their tax bills by 
shifting income into low and no-tax jurisdictions as a 
significant global concern. They instructed their governments 
to develop an action plan to address these issues, which was 
endorsed by the G20 leaders in St. Petersburg in September 
2013. The project came to fruition with the submission of the 
final reports to the G20 this fall.
    The BEPS reports cover 15 separate topics. Some reports, 
such as those on the digital economy and controlled foreign 
corporation rules, are more or less descriptive of the 
underlying issues, and discuss approaches or options that 
different countries might take, without demonstrating any 
particular agreement among participants on a particular path. 
Other reports, such as those on interest deductibility and 
hybrid securities, describe the elements of a common approach 
that countries might take with respect to those issues. With 
respect to transfer pricing, the arm's length standard was 
further amplified in connection with issues around funding, 
risk, hard-to-value intangibles.
    And finally, in the areas of preventing treaty shopping, 
requiring country-by-country reporting, fighting harmful tax 
practices, including through the exchange of cross-border 
rulings, and improving dispute resolution, countries did agree 
to a minimum standard.
    I believe that the transparency provided by country-by-
country reporting, the tightened transfer pricing rules, and 
the agreement to exchange cross-border tax rulings will go a 
long way to curtail the phenomenon of stateless income. 
Companies will very likely be reluctant to show on their 
country-by-country reports substantial amounts of income or 
lower--in low or no-tax jurisdictions. And the transfer pricing 
work will better align profits with the functions, assets, and 
risks that create that profit.
    The exchange of rulings will drive out bad practices and 
shine sunlight on the practices that remain. The improvement of 
dispute resolution and the inclusion, where possible, of 
arbitration, will streamline dispute resolution and should 
thereby reduce instances of double taxation.
    Throughout this work, the U.S. Treasury Department worked 
closely with stakeholders--in particular, the U.S. business 
community, which stands to be most directly affected by this 
work. And this was particularly the case in fashioning the 
rules on country-by-country reporting. Across the board, the 
BEPS deliverables are better than they would have been if the 
U.S. Treasury Department had not been heavily involved in their 
negotiation. We are proud of the role we played in the BEPS 
process, but our work is not done.
    Where do we go from here? Well, certain technical work 
remains for the OECD in 2016 and beyond. And the participants 
in the G20 OECD project will be turning its attention to 
implementation of the BEPS deliverables, as well as monitoring 
what countries actually do with respect to those deliverables.
    But we must do more than that. The G20 OECD project has 
produced well over 1,000 pages of material, some of it quite 
technical in detail. It is imperative that we turn our 
attention to ensuring that countries are able to implement 
these rules in a fair and impartial manner, based on the rule 
of law. What good is having carefully crafted new transfer 
pricing rules, if the agent in another country auditing a U.S. 
multinational is compensated based on the size of the 
assessment he or she can make against the multinational, 
regardless of its technical merit?
    Can these rules really be fairly implemented if there is 
not access to a meaningful appeals process? Ensuring the fair 
and effective administration of the BEPS deliverables must be 
part of our ongoing work. Indeed, the best way to foster the 
G20 goal of supporting global growth is to actively promote the 
connection between foreign direct investment growth and 
efficient and effective tax administrations.
    Foreign leaders often come to the United States seeking 
greater foreign direct investment in their countries from our 
investors, seemingly unaware of the impediment to such 
investment resulting from their very own tax administrations. 
We need to do a better job of making the connection between 
fair and efficient administration, foreign direct investment, 
and global growth. We are working hard to ensure that issues 
around effective and fair tax administration are made part of 
the post-BEPS agenda.
    I would like to close by noting that it is no secret that 
the BEPS project was inspired to no small degree by the fact 
that large U.S. multinationals have been able to keep large 
amounts of money offshore in low-tax jurisdictions untaxed 
until those amounts are repatriated to the United States. This 
phenomenon, and the sometimes very resulting low effective 
rates of tax, in turn have led to the perception abroad that 
U.S. multinationals are not paying their so-called fair share.
    Thus, the BEPS phenomenon also lends support to the need 
for business tax reform. The President's proposal to lower 
corporate rates and broaden the base enjoys bipartisan support. 
We look forward to continuing to work with Congress to bring 
business tax reform to fruition.
    Let me repeat my appreciation for the Committee's interest 
in these important issues. And I would be happy to answer any 
questions you may have. Thank you.
    [The prepared statement of Mr. Stack follows:]
    
    
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    Chairman BOUSTANY. Thank you, Mr. Stack. I--clearly, this 
Committee now certainly has a sense of urgency about what is 
happening on the international front. And, as developments have 
occurred in a rapid pace, whether it is the creation of 
innovation boxes or patent boxes by European countries, or the 
completion of the OECD BEPS recommendations, we are falling 
behind. We need to pick up our pace. And that means we need to 
move forward with tax reform. We need a firm commitment that 
the Administration will work with us getting beyond where we 
are today, and really roll up the sleeves to try to move 
forward on this.
    But one of the concerns that a number of us have had, as we 
have watched through the fall with the completion of these 
recommendations on the BEPS project, is that Treasury might be 
perceived as speaking or committing to legislative policy 
recommendations on behalf of Congress without full consultation 
with Congress.
    BEPS implementation will focus on getting countries to make 
legislative changes, which will require congressional action in 
this country. And I just want you to outline for us, in signing 
off on BEPS, to what extent did Treasury and others in the 
Administration consult with Congress, or consider whether 
Congress would agree with any of the specific tax policy 
recommendations?
    Mr. STACK. Thank you, Mr. Chairman. I can report very 
directly that the--if you go through the BEPS' 15 action items, 
there are 2 in particular that absolutely would need 
congressional legislative action. One is the work on interest 
stripping, which is in the BEPS project. And there is a second 
piece on what we call hybrid securities. That is a situation in 
which you get a deduction, let's say, in the United States 
because it is treated like interest, but when it is received in 
the other jurisdiction, they view it as a dividend and don't 
tax it, so that creates stateless income.
    We were very careful, Mr. Chairman, not to include those in 
the minimum standard agreed at the OECD, precisely because we, 
as the Administration, could not and would not commit the U.S. 
Congress. I think, if you work through the other items, if you 
think, for example, of treaty matters, where we might agree, as 
a matter of Treasury, to put something in our model, a treaty, 
of course, requires the advice and consent of the Senate. Fully 
mindful of that, all our obligations in the BEPS process take 
into account the legislative processes in the United States.
    I mean I would just add for the record that there is 
nothing in the BEPS project that is a legally binding 
commitment on the part of the U.S. Government. And so, I think 
we tried very hard to respect the legislative role and the 
difference between the legislative and the executive in every 
aspect of our work.
    Chairman BOUSTANY. Well, I appreciate that. And I think 
what we need to do now, going forward, is accelerate our level 
of communication on how we are going to move forward. Because 
other countries are taking steps, very aggressive steps, with 
some of the implementation of these recommendations. And if we 
fail to reform our Code appropriately, we will not lead this 
process, it will be led by others, and I don't think the 
outcome is going to be as amenable to American companies as we 
would all hope.
    I want to shift gears for a minute with one last question 
for you. I want to examine this EU state aid situation. EU 
state aid cases seem to be another example of foreign 
governments targeting U.S. firms to expand their tax bases. And 
we have seen the press reports. I have actually had a 
conversation with folks at Apple who are very concerned about 
this. I believe you share my concern that these EU state aid 
cases will lead to retroactive foreign tax increases on U.S. 
companies that could result in American taxpayers footing the 
bill through foreign tax credits, further eroding our base.
    I am very concerned that the effects will go far beyond the 
EU's initial cases--I mean we are in the early stages of this--
and that these cases could have substantial and direct impact 
on our U.S. companies--and ultimately our U.S. taxpayers.
    In light of the EU's state aid cases, what is Treasury 
doing to protect the interests of the United States?
    Mr. STACK. Thank you, Mr. Chairman. I would like to begin 
this discussion with a note of humility. I am a trained U.S. 
tax lawyer. I am not a European lawyer. I am not a competition 
lawyer in Europe, nor have we seen the final legal documents of 
all the various investigations that are ongoing.
    In light of that, we were faced with a judgement, which is 
do we, as the Treasury Department, simply sit and let these 
cases kind of move forward and unfold with the possibility that 
I can talk--which I will talk more about--of the effect on U.S. 
bilateral relationships and/or the possibility of an ultimate 
foreign tax credit if, indeed, these taxes are determined to be 
creditable, which is an open question I need to put on the 
record.
    Or we could speak now about the U.S. interest in these 
cases, even though the work is not finally done. So what 
Treasury has done is we have made it clear to the EU Commission 
directly that the United States has a stake in these cases.
    The first--our first stake is as follows. The United States 
has income tax treaties with the member states in the EU. We do 
not have an income tax treaty with the EU. And that is because 
income tax in the EU is left to the members to do their own 
income tax. Well, there is a great deal of uncertainty in the 
current proceedings whether or not the commission is 
substituting its own tax determination for that of the member 
states. And if it were to do that, I think it calls into 
question our bilateral relationships with members of the EU. 
And it is worth mentioning that the United States has an 
interest in understanding, with clarity, the precise nature of 
income tax enforcement administration in the EU. That is number 
one.
    Number two, some of the numbers that have been reported in 
the press here are what I would call eye-popping. And while it 
is true--and I will repeat for the record that we have not 
analyzed whether or not taxes required to be paid in these 
jurisdictions will, in fact, be creditable. The fact that they 
may be could mean that, at the end of the day, U.S. taxpayers 
wind up footing the bill for these charges by the EU State Aid 
Commission.
    But let me make two other points that I think are very 
important here.
    One is that I believe we also have a concern that these 
taxes are being imposed retroactively under circumstances in 
which--I do not believe countries, companies, tax advisors, or 
auditors ever expected a state aid analysis of the type that is 
emerging from this work. In our view, when a novel approach to 
law is taken, that is precisely the situation in which a 
prospective remedy would be appropriate, to ensure that the 
behavior ceases without imposing very large tax impositions on 
a retroactive basis. So we have been very careful to note that 
we think the basic fairness calls for these to be retroactive.
    Beyond being public about our concerns, and demonstrating 
the U.S. interest, and demonstrating our concern that fairness 
calls for a prospective approach, to be honest, it is not 100 
percent clear what other tools are at our disposal, except to 
make our concerns known. And we have done that, and hopefully 
will continue to do that.
    Chairman BOUSTANY. We look forward to exploring options 
with you on that. You put your finger exactly on the real 
concern that I and other Members of the Committee have, about 
the retroactive nature of this, and how it is really, in 
effect, going after advance pricing agreements that are in 
existence. And this is deeply problematic.
    I do believe we are going to need policy ideas that can be 
discussed between the Administration and this Committee on 
outlining our way forward on that. I thank you.
    I now yield to Mr. Neal for questioning.
    Mr. NEAL. Thank you, Mr. Chairman. I think on that question 
and the answer that was given by Mr. Stack there would be broad 
agreement on this Subcommittee and the full Committee. I don't 
know that there was anything that the witness said that we 
could disagree with on that. I thought it was right on target. 
So thank you for establishing that.
    Mr. Stack, it appears clear that the Pfizer Allergan merger 
is moving forward, and the resulting inversion of one of the 
largest U.S. pharmaceutical companies is imminent. You and the 
witnesses on the next panel have testified on the need for tax 
reform, and specifically international tax reform, as an 
important and even vital step to ensuring that multinational 
companies remain competitive globally, and continue to create 
jobs and income in the United States. I think you would agree 
so far that such tax reform has been elusive, despite years of 
conversation on the Committee.
    Are there some things that Congress could do right now, as 
we continue our efforts, to reform the Tax Code that could stem 
the tide of inversions?
    Mr. STACK. Thank you, Congressman. Yes, I actually believe 
there are. And tomorrow I believe that if Congress were to 
lower the threshold for an inversion that forces the inverted 
company to retain its U.S. tax domicile from, let's say, 80 
percent of the current statute to 50 percent, I believe that 
this would act very strongly to stem the tide of inversions 
because companies are quite reluctant to, let's say, give up 
control entirely, even in the public context, through a merger 
with another entity.
    Second, I think that plugging our interest-stripping rules, 
so that once a company is inverted it is not able to take 
excess amounts of income out of the United States in the form 
of interest, is an imperative that we could do today, both to 
stem the tide of inversions, and also to level the playing 
field between foreign and domestic U.S. companies. I don't see 
those as necessarily having to wait for the full package of tax 
reform. And this is something I believe Congress could do.
    As Secretary Lew has said, we have tried to do with our 
regulatory authority what we can. But these are some actions 
Congress could take that would help greatly, I believe, stem 
the flow of inversions.
    Mr. NEAL. Mr. Stack, I have also heard from a number of 
multinational companies talk about the bad things that BEPS 
might do. I think everyone in the room would agree that it is 
certainly not in the United States' best interest to do 
something like pulling back from BEPS in the project, or stand 
on the sidelines as the rest of the world implements BEPS rules 
that could greatly impact our multinational corporations. For 
the Members of this Committee, that could be tantamount, I 
think, to malpractice.
    But to look at this from another angle, I think there are a 
number of very important things that the United States could 
specifically do, and that Members of Congress could join in in 
a helpful role.
    There is an opportunity here, I think, for some very 
basic--many things that could be done on insight that other 
countries are now choosing to do. Their authority under the new 
rules is to ensure that the United States, after a period of 
time, would push the participating countries to ensure that 
their efforts are being monitored by their peers. Would you 
offer your insights on that, as well?
    Mr. STACK. Certainly, Congressman. I think the--frankly, 
the next phase that we will be working very intensely on in 
BEPS goes to both the implementation--how will countries 
implement it. And here I mentioned I would like to push for the 
rule of law. And then, what kind of monitoring will we do? Will 
we watch other countries to see how they are implementing these 
rules?
    From the U.S. perspective, there are a lot of areas where 
we are going to care a lot about the monitoring. We care a 
great deal about how country-by-country 
reporting is going to be done, whether it is confidential and 
whether it is used for the appropriate purposes. We are going 
to care a lot about whether new permanent establishment rules 
are applied in a fair and efficient manner.
    So, some of the ongoing work in BEPS is going to be 
creating these monitoring tools, so that, over time, we are 
watching to see that countries are not simply using these new 
rules to grab revenue, but are applying them in a principled 
way. So that will absolutely be part of our ongoing work in 
BEPS.
    And the country-by-country, I should add, in 2020 we 
actually all come back together to assess how the rules are 
working, how countries are doing them, are they producing 
necessary information for countries. And adjustments will be 
made, as necessary, at that time to the proposed rules, as 
well.
    Mr. NEAL. Thank you, Mr. Stack. Thank you, Mr. Chairman.
    Chairman BOUSTANY. Mr. Reichert.
    Mr. REICHERT. Thank you, Mr. Chairman. And I want to take a 
moment, too, to thank you and Pat and the rest of our team over 
here, and then, of course, recognize Mr. Neal for his expertise 
and for being a good partner over the last year I was Chairman, 
and I thank the team on the Democrat side.
    I am an old cop, a retired cop. So I am all about teamwork. 
And I understand that in this world sometimes politics get in 
the way of teamwork. But I think that you are hearing a lot of 
agreement so far with the testimony that you provided. And we 
will see how that goes as we continue to question you, but I 
appreciate all the work that you have done. And, as Chairman 
Boustany said, we really look forward to working with you to 
help make America stronger, and have that fair playing field 
that we all are searching for.
    I want to focus on dispute resolution. You mentioned that 
in your testimony. Prior to the release of the BEPS final 
report, the number of tax disputes initiated between countries 
far outpaced the number of disputes actually resolved. And, as 
countries begin to implement the various changes to their own 
international tax rules, as recommended by the BEPS final 
report, the number of unresolved disputes is almost certain to 
increase. I think you would agree with that.
    However, the final report did not call for mandatory 
binding arbitration. And as you mentioned in your testimony, 
the United States, along with 20 other countries, remain 
committed to pursuing mandatory binding arbitration procedures.
    So, my question, Mr. Stack, is why was mandatory binding 
arbitration, which is, again, of great importance to American 
companies and the United States, in general, not included in 
the final report?
    Mr. STACK. Thank you, Congressman. The short answer is the 
OECD BEPS project was a consensus kind of approach that 
sometimes played to the U.S. advantage, as we were trying to 
push items that we cared about. And in other circumstances, 
countries made clear that they were not yet ready to move 
forward on mandatory binding arbitration.
    The reasons for that, by the way, are not always nefarious. 
I mean some countries don't have experience with it. Some 
countries worry about whether or not they can keep up with 
wealthier countries that might be able to put a lot of 
resources into it. And many countries have a concern that it 
raises issues of sovereignty to give away the right to make 
their tax determinations. And, of course, I suspect some are 
concerned that they would come out on the losing end of many 
arbitrations if, in fact, their tax administration was put to 
the test.
    The good news, however, Congressman, is the fact that--you 
referred to the fact that there are 20 countries ready to move 
forward in mandatory binding arbitration. This is something, 
when we were not successful in getting it in BEPS, we pushed it 
through the G7, and we have created quite a deal of momentum 
around it.
    And I can also report that the 20 countries that are 
interested represent 90 percent of the dispute cases around the 
world. So, by bringing together a lot of the developed 
countries that actually have the cases today, we are able to 
put the real critical mass of countries into the pot of moving 
forward on mandatory binding arbitration, and we are deeply 
engaged in that work at the OECD and the multilateral.
    The thinking I have is if we can get this critical mass of 
countries having experience with binding arbitration, that over 
time it will grow out and attract the countries that for now 
are not willing to do that, most notably a country like India. 
And so we would try to demonstrate its success, make it part of 
the international tax fabric and, over time, I believe we will 
have success in making mandatory binding arbitration a standard 
tool in our international toolbox.
    Mr. REICHERT. And I recognized at the end of your testimony 
you asked yourself the question where do we go from here, and 
you mentioned tech work, implementation, and large document--
1,000 pages. Mr. Neal also asked about reporting and 
monitoring, which you mentioned, again, at the end of your 
comments. And you are looking for fair, efficient, and 
effective, all of those things you mentioned.
    Where do we go from here when it comes to binding 
arbitration? Is it your testimony, then, that demonstrating 
success is a likely way to get countries to come on board with 
dispute resolution language?
    Mr. STACK. Thank you, Congressman. I should have added 
that, as a very concrete next step, we are working in Paris on 
something called a multilateral instrument, which will try to 
put in one instrument the various treaty-related matters that 
have been agreed in the BEPS process. Mandatory binding 
arbitration will, we expect, be part of this multilateral 
instrument, at which point countries can sign up to the 
instrument and, in effect, put it into effect with those 20 
countries, automatically if you will, subject, of course, to 
ratification by the Senate.
    And so, that gives us a very concrete, near-term vehicle to 
move forward with mandatory binding arbitration. And then I 
think we would watch the results and try to build out from 
there.
    Mr. REICHERT. Thank you. I yield back.
    Chairman BOUSTANY. Mr. Larson.
    Mr. LARSON. Thank you, Mr. Chairman, and congratulations to 
you. And kudos always to Mr. Neal and your other predecessors 
who served as Chairmen here, 
as well. And we want to get all these accolades out, and also 
condolences to Mr. Kelly on Notre Dame's loss this past 
weekend. I was with you, I wanted you to know.
    Thank you again for your testimony, Mr. Stack, and for your 
service to the Nation. And if I could, just a couple of 
followup questions, one on what Mr. Neal had to say, and the 
other one is--it relates to the BEPS process.
    There is great concern about wholesale rewriting of the 
rules on the digital economy, with countries wanting the rights 
to tax companies with a so-called digital presence in their 
country. Did that occur? And can you discuss some of the 
Administration's proposals regarding the digital economy and 
subpart F income?
    Mr. STACK. Thank you, Congressman. Yes. I mean I think 
that, as I said in my opening statement, I think the U.S. 
presence in the BEPS project was critical to moving 
international rules to a better place for the United States.
    As the--our digital companies are doing business all over 
the world. They are household names. They have penetrated 
markets and the consciousness of people and politicians all 
over the world.
    And one of the issues we were facing in BEPS was whether or 
not there should be new rules to tax people who sell into an 
economy through the digital economy. And there is a great deal 
of fervor and political pressure to write such new rules. And I 
am proud to report that the digital report in the OECD was an 
excellent discussion of the technical tax elements of digital. 
But, at the end of the day, none of the more aggressive 
proposals for taxation based on a digital presence were 
adopted.
    In the report there are options. And I believe also that 
European countries will turn, over time, more to that 
collection, which is totally appropriate. And I believe we were 
able to play a very constructive role in the digital space.
    With respect to the U.S. issues on digital in our subpart F 
reforms, I would say that, quite different from the work in the 
OECD, whether we needed a brand new paradigm to tax the digital 
age, what we were really doing in the President's budget 
proposals was really trying to conform our subpart F rules to 
the fact that we now have different modes of achieving, in the 
digital space, things that brick-and-mortar countries used to 
do.
    So let me give you a very simple example of our rules. Our 
subpart F rules are based on a premise that, if you sell out of 
the United States, let's say, to Bermuda, and then Bermuda on-
sells, let's say, into Europe, that the presence of this 
intermediate company provides an opportunity to do a little 
game-playing with how much income stays in the United States. 
And so, we have a rule called a foreign-based company rule, 
that says, well, if you're going to buy from a related person 
and on-sell, we're going to treat that Bermuda profit as really 
subpart F, and bring it back into the United States.
    Well, in the digital space, if you think about it, you 
don't need to buy and sell a widget. You might license some IP 
and then stamp a disk in Bermuda and sell it. And really, I 
think the easy way to understand our proposal is we simply 
brought our subpart F rules up to what we had been doing in the 
brick and mortar world, so that similar games could not be 
played by tech companies in the digital space. And we have a 
couple of examples like that in our budget.
    Mr. LARSON. So let me quickly ask you, as well, you 
mentioned that there were--in addressing Mr. Neal's concerns, 
there were two things that Congress could do immediately. We 
all hope, and certainly would like to see the bipartisan effort 
continue for tax reform. But you mentioned there were two 
immediate things, one was lowering the threshold and the other 
was dealing with interest stripping.
    You said going from 80 to 50 percent. Why 80 to 50? And, 
with interest stripping, could you give us a quick explanation 
of how that occurs?
    Mr. STACK. Sure. Thank you. Well, in the interest 
stripping, you know, I often say when I speak, you know, you 
read a lot in the press about these highly-engineered 
structures to do base stripping around the world. And what I 
have said publicly sometimes, if you're a foreign multinational 
you don't really have to do something very fancy to strip out 
of the U.S. base, you just have to--maybe you even dividend up 
a note. You just hand something to your owner and say, ``Now I 
owe you $1 million.'' And those interest deductions start 
clicking in the United States, and we are losing revenue at 
every moment.
    Our proposal--and one that we pushed at the OECD--said, 
``Wait a second. First of all, a multinational shouldn't get, 
in our jurisdiction, any more than its pro rata share of its 
third-party borrowing.'' And without getting too much into the 
weeds, what we did was we came up with a way to say you can get 
your share of global borrowing based on your EBITDA in the 
United States. And that seems fair. Or you can take a fixed 
percentage of your EBITDA so you don't have to prove anything.
    And in the Administration's proposal we put it at 10 
percent. The OECD work suggested a corridor of 10 to 30. But I 
would just point out for the Committee both of those are far 
removed from the 50 percent in our current 163J, which seem to 
permit far more interest stripping than we can probably afford, 
or that is based on sound tax policy.
    Mr. LARSON. Thank you.
    Chairman BOUSTANY. I thank the gentleman. Mr. Tiberi.
    Mr. TIBERI. Thank you, Mr. Stack. I have a headache. This 
is just unbelievable.
    [Laughter.]
    So, in responding to Dr. Boustany's question about the EU 
state aid cases, you said you are not sure what else Treasury 
can do besides express concerns.
    Mr. Neal correctly identified the problem, and that is 
Congress not acting. But I would also argue, Mr. Neal, that 
there has been a lack of leadership at the White House on this 
very issue, as well.
    To me, it is not very complicated. Number one, it is outra- 

geous, what the EU is doing in retroactively targeting U.S. 
multinationals. I just think it is outrageous. But number two, 
to me, in my Fred Flintstone mind, it is not really 
complicated, what the problem is. We have a very uncompetitive 
Tax Code.
    So, you can point to States. I was in Connecticut recently 
and I saw my friend, and the chatter there was about a large 
U.S. multinational company that has been headquartered there 
for a long, long time that was considering moving because of a 
new tax that was put in place in that State.
    In my State of Ohio, we lost longtime multinational--and 
not even multinational--domestic companies not to just India, 
but to Indiana, to Georgia, to Texas. And the companies, many 
of them public, cited the Tax Code in Ohio. And this has 
happened internationally, as well. And yet we talk about trying 
to prevent ways by writing regulations and rules.
    Mr. Stack, I don't understand why we can't look at this 
picture--I am cynically asking, I am not really asking you, 
because it is above your pay grade.
    [Laughter.]
    Why the Administration and Congress can't come together and 
do what happens in communities in Ohio. One community loses a 
major employer to another community because the tax rate is 
lower in that community than the community they left. We see 
this all over. It is the marketplace.
    And, at the end of the day, you write rules to try to stop 
this, and maybe we can--you know, we can hit that peg for a 
little while, but it is going to come up somewhere else. And 
the reality is we have an uncompetitive tax system. And if we 
can lower the rate and go to a system, some exemption-type 
system, that puts our large employers who do business all over 
the world on the same playing field, quite frankly, that the 
rest of the world's rules are on, then we could actually maybe 
see some of this loss of jobs and ultimate loss of revenue 
stop.
    And for the life of me, I can't understand, so I ask you 
this personally, not as a Member of the Administration, someone 
who leans to the left, rather than to the right. What is the 
problem with lowering rates and going to an exemption-type 
system that puts us--puts our employers on a level playing 
field? Why not just do that?
    Mr. STACK. Thank you, Congressman. First of all, I think 
you have just described the President's plan.
    Mr. TIBERI. Wow.
    Mr. STACK. Because the President's plan would lower the 
corporate rates, would broaden the base, and, in many of the 
jurisdictions around the world, where you pay more than a 
minimum tax, you are exactly on equal footing with your 
competitors in those jurisdictions.
    Mr. TIBERI. Boy, oh boy. I remember watching the Democratic 
Convention and Joe Biden making fun of the exemption system, 
saying that would ship jobs overseas. So maybe the Vice 
President needs to get on board with the President, because I 
clearly don't think that what I am describing is the 
President's plan, because we would have passed that back in 
2011. Or maybe you should have passed it back in 2009.
    I mean, clearly, the market is doing something differently 
than what we would like it to do. And so, we have a--not a loss 
of jobs. We have a loss of really good companies. The only 
thing worse than an inversion is the company actually moving 
their headquarters overseas.
    And I don't know about the community you are from. The 
community that I am from, the jobs that--the employers that 
make up the heart and soul of the communities, whether they are 
small businesses, medium-sized businesses, or large businesses, 
are the ones that are headquartered there, because they are 
involved in the United Way, they are involved in the 
educational system. They provide so many dollars to the 
community. And we are losing those.
    And, rather than trying to come up with these BEPS rules 
and anti-inversion rules, I just don't understand and don't see 
the leadership from the White House to say, ``Look, let's look 
at what other countries have done. Let's look at what Ireland 
has done. Let's look at what the UK has done. Let's look at 
what other major employers, countries in the world have done, 
and follow their lead.'' If we would have done that 3 years 
ago, we wouldn't be having this hearing today. And maybe what 
we would actually be having is a great debate in Connecticut 
and in Massachusetts and Ohio and Louisiana about jobs coming 
here from Europe, rather than losing jobs to Europe.
    I yield back.
    Chairman BOUSTANY. I think the gentleman really outlined 
the problem beautifully. I thank him for that analysis.
    Ms. Sanchez.
    Ms. SANCHEZ. Thank you, Mr. Chairman. And I am prepared to 
yield more time to Mr. Tiberi, if he wants to unveil the 
Tiberi-Obama plan.
    [Laughter.]
    Mr. TIBERI. If you will support it, Ms. Sanchez.
    Mr. THOMPSON. I ask unanimous consent that we do a letter 
asking the Vice President to support the Obama-Tiberi plan.
    [Laughter.]
    Ms. SANCHEZ. That is right, that is right. Reclaiming my 
time, Mr. Stack, thank you for being here today.
    You mentioned that the United States had a presence in the 
BEPS discussion, and that was a favorable outcome, to have that 
input. You talked about making it known that we have a vested 
interest in what comes out of that project, and that you favor 
a prospective approach, and that there is this issue of 
retroactivity.
    I am curious to know what other ways did your--did 
Treasury's participation in the BEPS project improve the 
outcome, the overall outcome, of the project?
    Mr. STACK. Thank you, Congresswoman. In preparing for today 
I had occasion to go back through these BEPS action items and 
just think of the ways the United States demonstrated a very 
strong intellectual leadership in--actually, across the board 
of the actions. And let me just give you a couple of examples.
    You know, transfer pricing is the prices that companies pay 
between affiliates across borders. Today, a lot of the action 
is around royalties and intellectual property, which is 
offshore. That constituted three action items: 8, 9, and 10. 
And there was an enormous push around the world to really water 
down the rules that respect contracts and respect the 
separateness of legal entities so that tax auditors and 
administrators could almost have carte blanche to look at a 
multinational setup and say, ``Well, we think so much more 
profit should have been here than there.''
    We were extraordinarily aggressive in the transfer pricing 
space, and I think we have produced a report--and I don't think 
it is--I don't think I need to be the test of it, but I think 
within the U.S. tax community people have seen that move back 
to something that is far more a recognition of the arm's length 
standard and how to apply it.
    On country-by-country reporting, I understand fully that it 
has been the subject of some complaint, because I can 
understand that any time you add burdens, et cetera, then there 
are concerns. But I have to say, on that one, the very first--
first of all, the world started off wanting the multinationals 
to publicly produce their country-by-country data all over the 
world, number one. And number two, the first draft of that 
report didn't just want 6 or 7 items per country. I believe the 
first draft wanted something in the neighborhood of 19 or 20 
items. And there was going to be a--far more complexity.
    And we worked with the business community, and we came back 
to OECD and said, ``Look, this is what can be done in the least 
burdensome way. This is really all companies need.'' And we 
were able to push the country-by-country stuff over the line.
    In the hybrid work--and this is weedy, I will confess, and 
I won't get into the details--but there were times when the 
administra- 
tors around the world wanted U.S. multinationals to identify 
every single item on their books and records that might 
actually cause 
a mismatch. And we said, ``Wait a second. This should be done 
among related parties,'' because that is really where the 
problems are.
    So, I think we went item after item, led very strongly, and 
have improved the quality of the work by our tenaciousness, our 
adherence to principle, and our technical skills.
    Ms. SANCHEZ. I appreciate your answer. And I would just add 
one further thing before I yield back my time, that if Mr. 
Tiberi is interested in us, the United States, conforming our 
laws to that of most nations around the world, I would just 
point out that in the performance rights arena we lag far 
behind where the rest of the world is, and we give up revenue 
that sits overseas because we don't pay performance rights here 
in this country, as other countries do to our performers.
    And, with that, I will yield back the balance of my time.
    Chairman BOUSTANY. I thank the gentlelady. We will go next 
to Mr. Kelly.
    Mr. KELLY. I thank the Chairman. Mr. Larson, thank you for 
your condolences, although I would just say to you that we both 
know Jerry Hogan. Jerry Hogan is the father of Kevin Hogan, the 
quarterback at Stanford. Jerry is a good friend of all of ours. 
His brother, Tom, and I went to school together at Notre Dame. 
And Jerry was also Notre Dame, too. But Kevin--I was happy--as 
much as I hate to see the Irish lose, I love seeing the Hogans 
win. So it is something about this Irish deal that keeps us 
together.
    Mr. Stack, thanks so much for being here today. I am going 
to ask you a question, though. And I think Mr. Tiberi hit on it 
very clearly. Now, I come from the private sector. And in the 
private sector you are always looking for market opportunities. 
And in our case we are looking at a global market. And we are 
looking at competitors who look at us and say, ``This is a 
country whose pocket we can pick,'' because of tax policy and 
regulations that make it very hard for us to be competitive on 
a world stage.
    Now, Senator Levin had proposed a bill in early 2014 that 
would place strict limits on mergers in which they move their 
tax address outside of the United States. Under the Senator's 
plan U.S. companies trying to buy a foreign company and 
relocate their headquarters to a lower tax country would have 
to ensure that shareholders of non-U.S. companies owned at 
least 50 percent of the combined company, up from 20 percent 
now. The bill would consider inverted companies to be domestic 
for U.S. tax purposes if executive control remained in the 
United States and if 25 percent of sales, employees, or assets 
remained in the United States. The measure would have been 
retroactive to May 2014, and would be in place 2 years while 
Congress considers broader tax changes.
    Mr. Levin was responding to 14 companies that had conducted 
mergers since 2011 in which they moved their headquarters 
outside of the United States and into a lower tax jurisdiction. 
At the time of his announcement, Pfizer was contemplating such 
an inversion. Fast forward to today. Pfizer has announced that 
is just what they are doing.
    So, if you just did the Levin bill, that is a bill that 
actually became law, would that by itself forestall this 
migration of the U.S. tax base, considering the question within 
the context, relative of the tax advantage that foreign 
acquirers would gain from tighter inversion rules on U.S. 
companies?
    Mr. STACK. Congressman, yes. I--we have a budget proposal 
that differs from the Levin proposal in some minor ways that I 
can't recall as I speak at this moment. But the general concept 
of telling a company that if you are--if you retain more than 
50 percent ownership by the U.S. shareholders of the formerly 
inverted company, you have it inverted and you are still United 
States, we think would help greatly stem the flow of 
inversions.
    Mr. KELLY. Okay. But I think, when I heard Mr. Tiberi 
talk--and I think we all agree--in the private sector there is 
something about a carrot and a stick, and how you incentivize 
people to behave properly, or the way you would like to see 
them behave.
    So, I don't believe that a bigger stick that makes it 
harder for people to be profitable--and, by the way, we all 
want to see companies be profitable because they hire more 
people, they make more capital investments--I would rather see 
a carrot that makes sense in relation to what the rest of the 
world perceives as a global market, and as an advantage that 
they have, or in restructuring their Tax Code to say, ``Come 
over here and shop with us, you can be here,'' knowing that--I 
think this is the part that is really hard for people to 
sometimes grasp--the total cost of operation includes 
everything, not just your raw materials and your labor, but 
also tax policy.
    When we artificially increase the cost of any product or 
service by a Tax Code or by regulation that makes it impossible 
to be on the same shelf globally as other countries, then it is 
time for us to take a look at what it is that we are doing 
wrong. Not what they are doing wrong. They are responding to an 
opportunity. It is not that they are not patriotic; they are 
just not stupid. Why the hell would you stay here, and continue 
to pay those kind of taxes and follow those kind of 
regulations, and then be held up as the worst people in the 
world because you are not paying your fair share? There is 
something that just doesn't make sense about this whole piece.
    And this is not a Democrat or Republican issue. This is an 
American issue. We continue to lose red-white-and-blue jobs. We 
continue to decimate our local economies. We continue to 
downgrade our ability to compete globally and then blame it on 
some kind of a corporate strategy. That is not the problem 
here. The problem is we have no strategy, going forward, to 
gain market share. And I am talking about global market share. 
If you really want to lift this economy, then do it the right 
way.
    So I don't expect you to respond to that, but, I mean, I 
don't think the Levin bill does it. I would argue against any 
time that somehow a bigger stick, swung harder, is going to 
encourage people to stay. You know what they are going to do? 
They are going to say, ``You know what? I am going to stay. I 
am not going to leave. But in the future, I am making 
investments someplace else, and I will let this die on the 
vine. It can wither and go away. I will still succeed, but it 
won't be here.''
    And I think that is the real crux of the matter. We seem to 
think that somehow, by beating people, that we are going to 
make them perform better. That is not the key. The incentive is 
much, much brighter for America when we actually encourage 
people to make investments here, not tax them out of business 
or regulate them out of business and make them totally 
uncompetitive on a global stage.
    Thank you, I yield back.
    Chairman BOUSTANY. The Chair recognizes Mr. Thompson.
    Mr. THOMPSON. Well, thank you, Mr. Chairman. And I also 
congratulate you on your rise to prominence in this fantastic 
Subcommittee.
    Mr. Stack, thank you very much for being here. And it is 
interesting. We all seem to be coming from the same place on 
the dais, irrespective of the side. We may have a different way 
of articulating it, Mr. Kelly, but I think we all want to make 
sure that the United States is a competitive place where we 
attract businesses, businesses who will stay here, businesses 
who will come here, businesses that will create jobs, 
businesses that will pay a tax level that gives us the revenues 
that we need in order to fund the priorities that we have, as a 
Congress, as Americans.
    And so, I guess my--what I am interested in is maybe some 
help from you, some guidance from you, as to how we get there. 
Your focus has been on business and international tax reform. 
The other side of the equation is the comprehensive tax reform 
that has had us all wrapped around our axles for the last many 
years. And is it your perception that we need to do one before 
the other?
    You talked a little bit about some specific tax policy that 
could be done, irrespective of comprehensive, that would help 
things around, help things move along. But is it better to 
break it off and do the business international, or would doing 
comprehensive help you get to where you believe we need to be, 
in regard to the business and international?
    Mr. STACK. Thank you, Congressman. I would mention, just 
as an opener, there has been, in terms of carrots and sticks 
and competitiveness--as a Tax Policy Committee, I think you 
folks know better than I do that, at the end of the day, the 
most competitive rate might be zero, but then we don't raise 
any revenue.
    So, as tax policy folks, we always are all thinking about 
what is the revenue we need to fund the government we have. And 
finding a happy median with that and these competitiveness 
concerns is kind of an obvious point. And so we are not free, I 
take it, to just join a race to the bottom to, let's say, zero 
corporate tax rates without an alternative revenue source.
    As to the second question, I would simply point out that 
the business tax reform in the last 2 years--there seems to 
have been some bipartisan consensus that a revenue-neutral 
business tax reform could be broken apart and done 
independently. And I think there has been a lot of good work 
done in lowering the rates and broadening the base and trying 
to get to the revenue-neutral business tax reform. Whether or 
not it is better to put it on with the comprehensive and the 
individual, I am simply going to report, as the international 
guy on the team, I am afraid that falls a little above my 
paygrade.
    I don't--I think there is a lot of complicated issues that 
folks--that you all appreciate perhaps better than I do about 
the complexity of going to the full comprehensive, you know, in 
the current environment. And I think there was a judgement made 
at some point to try to do the business-only on a revenue-
neutral basis, and that seemed to be, for a while, the most 
promising thing we could do.
    Mr. THOMPSON. Thank you. Before I yield back, I just want 
to elaborate a little bit on the last point you made, and that 
is the importance of being revenue-neutral. It has to be able 
to pay for itself. And, if it doesn't, all we are doing is 
digging the deficit hole deeper, and passing on greater debt to 
future generations. I think that is real important to keep in 
our focus, as we do any tax policy in this House.
    Thank you, and I yield back.
    Chairman BOUSTANY. I thank the gentleman. Mr. Renacci.
    Mr. RENACCI. Thank you, Mr. Chairman. And I want to thank 
you for holding this hearing on this very important issue.
    It is clear that our international tax system is outdated 
and anti-competitive, and makes U.S. companies vulnerable to 
foreign takeovers. In northeast Ohio we already have one large, 
multinational that has inverted. We have another company that 
is considering inversion. We have another one that looks like 
they are going to be taken over. So these are issues that are 
very concerning to me. And, Mr. Stack, you and I have talked 
about this in the past. So I do think we have to continue to 
look at this and do what is necessary to make sure that we are 
competitive here.
    Mr. Stack, I am going to get into the weeds a little bit, 
though, on one of the items finalized on round one. As you 
know, action 13 requires companies to maintain and report 
significant transfer pricing documentation. Some have said that 
action 13 may be the most important action item arising out of 
the BEPS project. I want to focus on the difference between two 
of the types of documentations that companies will be required 
to report, country-by-country, CBC, reporting; and master file 
information.
    Can you explain what types of documentation businesses must 
provide under these two types of reporting?
    Mr. STACK. Thank you, Congressman. The country-by-country 
report is really a template in which a country would list the 
various jurisdictions around the world in which it does 
business, and then it would list out six or seven economic 
indicators: Its revenue, its taxes paid, its taxes accrued, its 
assets, its retained earnings, its number of employees. And 
then it would have a little code of, like, what kind of a 
business does that company do. It is a distributor or a 
manufacturer.
    So it is really a form, if you will, that sets forth that 
kind of information. The form will be filed with the U.S. tax 
return. And then the U.S. Government will, with appropriate 
treaty or tax information exchange partners, exchange that form 
with jurisdictions around the world that have promised to keep 
it confidential, and use it for kind of a risk assessment.
    The master file is really a different document. And, by the 
way, the work in this space about harmonizing transfer pricing 
documentation around the world precedent BEPS, because 
multinationals were basically stuck with a situation in which 
every country in which they did business was asking for a 
different kind of transfer pricing documentation to 
substantiate what it did.
    So the OECD went to work and said, ``Gee, we could have a 
win-win here. We can simplify this documentation to reduce the 
burdens on business and, at the same time, get the countries 
what they need.'' And that aspect of it consists of two parts, 
really. There is something called the master file, which I will 
talk about, and then there is something called a local file.
    And the local file is, oh, tell me about your foreign 
affiliates that have direct transactions with my country, so we 
can go in and check your transfer pricing. The master file is 
this overview document. Tell us about--in fact, I highlighted 
just a couple of sections of it--give us a high level--it is 
intended to provide a high-level overview in order to place the 
multinational group's transfer pricing practices in their 
global economic, legal, financial, and tax context.
    It is not intended to require exhaustive listings of 
minutiae, a listing of every patent, as this would be 
unnecessarily burdensome. Instead, it is an overview of the 
business, the nature of the operations, its transfer pricing 
policies, et cetera. And in producing that master file, which 
is written by the company, it should include lists of important 
agreements. But the company should use prudent business 
judgement in determining the appropriate level of detail.
    So this is your big, overarching picture. It goes to the 
company. When they come in to audit you they know something 
about you and how you function. And that is the master file.
    Mr. RENACCI. Mr. Stack, I am running out of time, but are 
you concerned that the master file information will be used by 
foreign governments to launch frivolous foreign audits or, even 
worse, leaked to foreign competitors?
    Mr. STACK. I am--one can never say never, Congressman, 
right? However, we have to look at this context of the 
countries had the opportunity to ask for this on their own 
beforehand. We will be vigilant in watching how American 
companies are treated around the world, and we will try to take 
actions appropriately.
    Mr. RENACCI. And I am going to move back to state aid, 
which I know the Chairman talked about.
    It is disturbing to me that American companies are being 
targeted in proceedings and aren't given an opportunity to 
defend themselves. My understanding is that only the countries 
can defend the state aid proceeding at the commission level. 
Companies that are subject to increased retroactive taxes--
which we talked about, almost 10 years--are precluded from 
participating in the commission's proceedings.
    Mr. Stack, do you share the concern of fairness of these 
proceedings, if the company is not allowed to participate in 
these hearings?
    Mr. STACK. Congressman, I am not an expert in the 
procedures in the state aid proceedings, so I am a little 
loathe to kind of judge them, you know, from afar. Obviously, 
opportunities like ability to present your case are part and 
parcel of fairness, in our view. But I don't know their 
procedures well enough to comment.
    What I have chosen is the retroactivity aspect, because I 
think that stares us all in the face to say, ``Hey, these are 
new rules, they should be applied prospectively, not 
retroactively,'' and that is the piece that I have chosen to 
focus in on. And I apologize, I am not a procedural expert to 
know enough for the basis of your question. But, obviously, I 
am concerned about the fair treatment of our companies.
    Mr. RENACCI. Thank you, Mr. Stack. I yield back.
    Chairman BOUSTANY. I thank the gentleman.
    Mrs. Noem.
    Mrs. NOEM. Mr. Stack, thank you for being here today. I 
will keep mine short.
    I am concerned that there isn't mandatory binding 
arbitration procedures in the final report. When the United 
States, obviously, made it a priority, and several other 
companies--or countries, as well, asked for that, we look at 
the number of tax disputes every year--they far exceed those 
that are resolved. And as many countries start to implement 
some of the changes that were recommended in the final BEPS 
report, we are bound to see more tax disputes.
    Why was there no binding arbitration procedures put in the 
final report?
    Mr. STACK. Thank you, Congresswoman. I--we were also 
disappointed that we were not able to have mandatory binding 
arbitration as part of the final deliverables.
    The nature of the BEPS process, however, was a consensus 
process. And so, countries were able, in effect, to veto the 
idea that we would have binding mandatory----
    Mrs. NOEM. I understand that it was a major concern for 
many countries, up to 20 of the major countries that are part 
of the negotiations.
    Mr. STACK. Yes, yes, it is. And the nature of the OECD 
process is it takes one country, basically, to block moving 
something forward.
    Now, on the flip side of that is, when it came to the 
transfer pricing work, the United States was able to be very 
aggressive in saying, you know, ``We have certain demands 
before that work comes out.'' I----
    Mrs. NOEM. So what is our next process? What do we do about 
getting some procedures put in place?
    Mr. STACK. We have 20 countries that have said, ``We want 
to do mandatory binding,'' and they represent 90 percent of 
the world's disputes right now. And we are moving to put that 
in this multilateral instrument that, hopefully, that--part of 
which the United States can join, and hopefully get it signed 
and ratified by our Senate. And we will have made enormous 
progress, even though there will be some outlier countries, for 
the time being, that will not have mandatory binding 
arbitration with us.
    So, it is not a whole loaf, but it is a pretty good loaf.
    Mrs. NOEM. And the time frame on having those 
recommendations ready for the Senate's consideration would be?
    Mr. STACK. So the multilateral is hoping to finish a draft 
in 2016. I think that is very ambitious. So I think we are 
looking over the next couple of years when this would play out.
    And, of course, we need to have those provisions look like 
provisions that we think our Senate would ratify. So there is a 
fair amount of work on that.
    Mrs. NOEM. Okay, thank you. With that, I yield back.
    Chairman BOUSTANY. I thank the gentlelady.
    Mr. Holding.
    Mr. HOLDING. Thank you, Mr. Chairman. I want to follow up 
on a couple of lines of inquiry from my colleagues.
    First, from Mr. Tiberi--just to expand on his comments. You 
know, it is not only about rates. And if we could just simply 
lower the rates, broaden the base, you know, we would be much 
more competitive. It is also compliance cost. I had a series of 
interesting meetings with large multinationals, and just talked 
about how they comply with the U.S. Tax Code, and how they 
comply with other countries.
    You take one particular company, tens of billions of 
dollars in revenue. Their U.S.-based operations, they have 40 
IRS employees in their accounting division to continually 
prepare their returns, and so forth. In their UK-based 
operations with similar amounts of revenue, they are able to 
comply with the Tax Code there with no revenue agents in their 
accounting offices. It is a huge burden to comply with our Tax 
Code. So it is not only a matter of lowering the rates, Mr. 
Chairman, you know, it is a matter of simplifying the system so 
that companies can easily comply.
    I want to follow up a little bit on Mr. Renacci's comments 
about the master files. You know, it is--in the master files--I 
mean the information there is not general. There are a lot of 
specifics there regarding supply chains, service agreements, 
extremely sensitive information. Imagine the sensitivity of a 
defense contractor's information who is doing work all around 
the world, in different countries, dozens upon dozens of 
different countries on every continent. You can imagine the 
angst they would have in supplying, you know, the information 
required by the master file.
    So, I mean, I understand that Treasury will be compiling 
those, collecting and compiling those master files. Is that 
correct?
    Mr. STACK. Congressman, we will--the IRS will collect the 
country-by-country file. The master file goes directly from 
companies to the countries in which they operate.
    Mr. HOLDING. Okay. Will the Treasury also have the master 
files?
    Mr. STACK. We--if--let's say there is a U.S. company that 
operates in foreign jurisdictions. We would not necessarily get 
a master file from, let's say, a U.S. resident multinational, 
because they are our taxpayer, they are here, and we have all 
the information we need about them.
    Mr. HOLDING. So, I mean, if the master file is misused in 
some way, what recourse does a company have?
    Mr. STACK. I think that one of the reasons I would like to 
move our focus--let me back up.
    Companies already today deal with tax administrations that 
don't always behave in the best ways, and they struggle with 
that. And it is one of the reasons we want to move the BEPS 
work more into focusing on tax administration.
    The second thing to keep in mind is companies--countries 
were always free to ask for a master file. What we really did 
at the OECD was homogenize the work so that there is, like, one 
file asked for around the world. We didn't really have a 
special power to tell countries what they could ask of 
multinational----
    Mr. HOLDING. So in the BEPS process, was there 
consideration of some form of recourse that a company might 
have or, you know, special safe harbor provisions, where a 
company could shield sensitive information?
    Mr. STACK. I----
    Mr. HOLDING. Is there any arbiter of that----
    Mr. STACK. On that last point, Congressman, we--the 
companies have the pen on that report, and we do not expect 
them to, willy nilly, give away sensitive information. Because 
we think the master file rules can be read in such a way that 
companies can use judgement to be sure the country gets the 
high-level view that I described without necessarily pouring 
out, you know, super-sensitive information. That was the 
judgement----
    Mr. HOLDING. So, you know, during the BEPS process it was 
clear that the various countries involved were working hard to 
protect their own multinational countries, protect their own 
interests. So Treasury, at the table at the BEPS process, what 
were you doing to protect U.S. multinational countries during 
this process?
    Mr. STACK. I think----
    Mr. HOLDING. Give me your top three hits.
    Mr. STACK. I think the top three hits are the work we did 
to make the transfer pricing respect the legal entities and 
contracts of our companies, I think the work we did to get the 
country-by-country reporting to be manageable for our 
multinationals, and I think the work we did to protect our 
digital companies from overreaching by foreign jurisdictions. 
Those are the three that I would say pop to mind----
    Mr. HOLDING. Give me a couple where you think you failed.
    Mr. STACK. I--we were disappointed that things like 
permanent establishment rules are looser than we would like, 
although there we said, ``Well, we are not necessarily going to 
adopt those, but the rest of the world wants to.'' And there we 
are going to come back on more work to make sure we can ring 
fence the work done on permanent establishment rules.
    And the fact that countries around the world have opted for 
a kind of a very loose principal purpose test for treaty abuse 
was disappointing to us. Now, again, the United States is not 
going 
to adopt that approach, but other countries seemed to want to 
do that.
    We wanted, in both those cases, more clear and 
administrable rules for other countries to follow, but other 
countries had different ideas.
    Mr. HOLDING. Thank you. Thank you, Mr. Chairman.
    Chairman BOUSTANY. I thank the gentleman. And I think Mr. 
Holding hit on some very important questions, given that we 
have 6103 protections for U.S. taxpayers and yet, under the 
master file, we have serious concerns about those kinds of 
protections, going forward.
    Mr. Stack, thank you for being here today. We appreciate 
your testimony. It has been extraordinarily--oh, I am sorry.
    Mr. Reed.
    Mr. REED. I know I am from New York, so we are often 
forgotten here. But if we could have the last word, Mr. 
Chairman, I would appreciate it.
    Chairman BOUSTANY. You got it.
    Mr. REED. Thank you, Mr. Stack. I do want to zero in a 
little bit on this master file issue, because it is of a 
concern to me.
    So what I am hearing from your testimony is, essentially--
and from your written testimony--is the Treasury is going to 
require country-by-country reporting mechanisms for certain 
companies--I think it is $800 million or more, or above. But 
with the master file, Treasury is not requiring that 
information.
    And essentially, what I heard from your testimony--and is 
this accurate--that you are essentially saying companies are in 
the best position to protect their information, therefore we 
are going to let them make the determination as to what 
information they release in that master file? Is that the 
testimony you are offering?
    Mr. STACK. Yes, Congressman.
    Mr. REED. Okay. So what is Treasury going to do if someone 
challenges that determination by the businesses, that maybe 
they erred in their judgement, and a taxing administration 
says, ``We need more information''? What is Treasury's position 
or response to those multinational companies that are in that 
situation?
    Mr. STACK. So those questions--that question could go in 
two directions. The first direction could be that a U.S.--a 
foreign country is always asking our multinationals for more 
information. It is a constant part of being a multinational tax 
director. And then you have the laws of the local country, and 
you--that local subsidiary may or may not have that 
information. And that is kind of a common, everyday dispute in 
the multinational space. So, in this case, that would be no 
different.
    A trickier question could be, well, let's say they don't 
like the level of detail in the master file. And so they----
    Mr. REED. That is my question.
    Mr. STACK. Yes, and they impose a penalty, or they do 
something----
    Mr. REED. Correct.
    Mr. STACK. Then I do think--but I don't think this is 
different in kind from a whole slew of administrative things we 
have to be paying more attention to, to protect our 
multinationals that I would like to get on the next wave of the 
agenda, which is: How do tax administrations act; do they act 
in good faith, in accordance with what the general consensus--
--
    Mr. REED. You are going away from my question here, Mr. 
Stack.
    Mr. STACK. Yes?
    Mr. REED. Because, if I am understanding correctly, 
country-by-country reporting is going to be given to you, the 
Treasury----
    Mr. STACK. Yes, right.
    Mr. REED. And then that is going to be protected by tax 
information----
    Mr. STACK. Yes.
    Mr. REED [continuing]. Treaty agreements, and you will have 
the ability to defend what information is released, et cetera, 
and stand by those companies that are targeted maybe in an 
inappropriate manner.
    But with the master file data, I don't see the same type of 
protection that Treasury is offering to companies that, you 
know, make that error in judgement or say, you know, ``We gave 
you enough information,'' and the tax administration says, 
``No, we are going to hit you with a penalty.''
    Treasury is essentially telling our guys, ``You are on your 
own,'' is what I am hearing from your testimony.
    Mr. STACK. Well, the report does call for countries to 
treat it confidentially. But what I want to emphasize here is--
and this is difficult----
    Mr. REED. How are they going to treat it confidentially?
    Mr. STACK. Because, in many of these jurisdictions, it is 
expected to be treated as tax return information in those 
jurisdictions. So it would just be----
    Mr. REED. So your understanding is that the foreign 
countries are going to protect that information. And what is 
the penalty if the foreign country violates that----
    Mr. STACK. We don't have a specific penalty, Congressman. I 
mean, and that is fair. I think----
    Mr. REED. That is the problem.
    Mr. STACK. It is----
    Mr. REED. That is the problem.
    Mr. STACK. It is, Congressman, except if we never had a 
BEPS project, those countries could ask for the same 
information. We didn't do anything special in the BEPS project 
that the country couldn't have done on its own. What we did do 
was try to get a homogenized look at these----
    Mr. REED. All right, so----
    Mr. STACK [continuing]. Across the countries.
    Mr. REED. Going into the negotiation, you recognized that 
the countries had the ability to potentially----
    Mr. STACK. Yes.
    Mr. REED [continuing]. Abuse or inappropriately use that 
information, but we elected--you elected not to take that issue 
up. You elected to negotiate other points is what I am hearing.
    Mr. STACK. No. Actually, Congressman, I think my big, heavy 
lift in the next part of BEPS is I want to get all the tax 
administration issues like this on the table, and get the world 
to agree to peer reviews and standards for what a fair and just 
tax administration should look like. And when we do that, that 
country could not assert a penalty on a master file, just 
because it is missing some jot or tittle, because that is not 
the spirit of that work.
    That is a reason to stay engaged multinationally, but it is 
more work to be done for--to be sure, and it is a heavy lift. I 
wouldn't doubt that. But it is important.
    Mr. REED. So that is for future consideration and future--
--
    Mr. STACK. Yes.
    Mr. REED [continuing]. Negotiation. Because----
    Mr. STACK. And it is important.
    Mr. REED. Because that is another question I have. One of 
the things I am seeing here, potentially, on the international 
scene, especially with the EU, is the EU seems to be targeting, 
for lack of a better term, this revenue. And as they face 
austerity budgets in the EU, I just see, in my opinion, an 
aggressive attack by the EU to go after this revenue.
    And you just said there is a future BEPS environment that 
you envision. What is post-BEPS? Where are you going? What is 
after? What can we expect in those negotiations, going forward, 
especially when the EU seems to be taking a very aggressive 
approach here?
    Mr. STACK. Yes. I think I just want to--because they are 
doing it through their competition committee, they don't 
necessarily participate in the overall tax work that we do at 
the OECD, and that is part of the problem, I think, that you 
are pointing to.
    Mr. REED. Yes.
    Mr. STACK. In the--coming back to the tax world that I live 
in, I think the next phase in BEPS is how do we implement this, 
how do we monitor each other, how are we implementing it. And 
something the United States is aggressively trying to put on 
the table is how do we make everybody else behave with all this 
information. And that is something that I want to get companies 
and countries to focus on, both through the G20 and also at the 
OECD.
    Mr. REED. I appreciate it. I notice my time has expired. 
With that, I yield back. I appreciate the information.
    Chairman BOUSTANY. I thank the gentleman.
    Well, thank you, Mr. Stack, for appearing before this 
Subcommittee. You helped walk us through some very difficult 
and complicated issues. Obviously, a lot more is going to be 
done in this area. I want to assure you that both sides of the 
aisle of this Subcommittee have a deep interest in how this is 
going to be implemented, and there are a number of outstanding 
questions. So, again, thank you, and we look forward to staying 
in touch.
    We will now call the second panel up.
    [Pause.]
    We will now hear from our second panel of witnesses. We 
have a very distinguished panel, starting with Barbara Angus, 
Principal with Ernst & Young, followed by Gary Sprague, 
Counsel, The Software Coalition. Then Catherine Schultz, Vice 
President for Tax Policy, National Foreign Trade Council and 
Martin Sullivan, Chief Economist, Tax Analysts.
    The Committee, as I stated earlier, has received your 
written statements. They will be made part of the formal 
record. We look forward to hearing your oral remarks, and I 
would ask each of you to limit those oral remarks to 5 minutes.
    Ms. Angus, you may begin when you are ready.

                STATEMENT OF BARBARA M. ANGUS, 
                    PRINCIPAL, ERNST & YOUNG

    Ms. ANGUS. Chairman Boustany, Ranking Member Neal, and 
distinguished Members of the Subcommittee, it is an honor to 
appear before you. My name is Barbara Angus, and I am leader of 
strategic international tax policy services for Ernst & Young. 
Earlier I had the privilege of serving as international tax 
counsel for the Treasury Department, and as business tax 
counsel for the Joint Committee on Taxation. I am appearing 
today on my own behalf, and not on behalf of EY or any client.
    I am pleased to be here to discuss the practical 
implications of the final reports issued by the OECD as part of 
its BEPS project. Other countries are already implementing 
aspects of the recommendations, so this hearing is very timely. 
As the Ways and Means Committee continues its work toward U.S. 
tax reform, it is important to consider the BEPS 
recommendations, the actions that other countries are taking in 
response, and how those actions will affect global companies 
that are headquartered or invested in the United States.
    At the core of the reports issued by the OECD last month 
are recommendations for significant changes affecting 
fundamental elements of the international tax framework. 
Countries must now consider whether, how, and when to act with 
respect to the BEPS recommendations. They will act in their own 
interests and under their own timetables.
    The OECD project arose out of a growing political and 
public focus in many countries on the taxation of foreign 
companies. Therefore, I have no doubt that significant action 
with respect to BEPS will take place across countries around 
the world. Indeed, countries had already begun taking 
unilateral action to address BEPS, even before the OECD issued 
its reports.
    The international tax changes that are embodied in the BEPS 
recommendations have significant implications for all global 
businesses. While the OECD did not deliberately target U.S. 
companies, the recommendations could have a disproportionate 
impact on U.S. businesses because of their geographic spread 
and the particular pressures of the U.S. worldwide tax system. 
Moreover, some countries have singled out U.S. companies, and 
the recommendations could well be used by countries in such 
targeting.
    Global companies face uncertainty in light of the BEPS 
recommendations, significant uncertainty. The BEPS 
recommendations generally reflect a move away from relatively 
clear rules and well-understood standards to less-specific 
rules, more subjective tests, and vaguer concepts. Global 
companies face significant new compliance burdens highlighted 
by the new country-by-country reporting requirement.
    Global companies face significant risk of misuse of their 
business information. The new reporting would put global 
information about a company into the hands of all countries 
where it operates. For U.S. companies, which tend to have the 
broadest global footprint, the risk of breaches of 
confidentiality is particularly acute.
    In this regard, many U.S. companies believe it is in their 
interests for the United States to implement the recommended 
country-by-country reporting so that they can provide their 
information to the IRS to be shared under U.S. information 
exchange relationships, subject to the U.S. rules on 
confidentiality of taxpayer information. This approach would 
mean greater protection and lower administrative burdens than 
the alternative, of U.S. companies directly providing their 
information to multiple foreign countries.
    Global companies face significant risk of controversy. The 
new rules are subject to varied interpretation. Controversy 
imposes substantial resource burdens on both taxpayers and tax 
authorities. For taxpayers, controversy in a foreign country is 
even more complex.
    Global companies face significant risk of double taxation. 
Where countries do not apply the new transfer pricing 
guidelines included in the BEPS recommendations in the same 
way, for example, multiple countries may assert taxing 
jurisdiction over the same dollar of income. One of the BEPS 
focus areas was improving the dispute resolution mechanisms 
used to prevent this kind of double taxation. But the BEPS 
project made little progress in this area, which is a major 
disappointment for the U.S. business community.
    Importantly, there is continuing work in the OECD on BEPS 
that provides opportunity to ameliorate these issues. Business 
input is much needed, and the U.S. business community, which 
has much at stake, should continue its participation in the 
OECD process. In order to ensure that U.S. interests are 
protected, it is essential that Treasury, in consultation with 
the tax rating committees, continues to play an active role in 
all aspects of the OECD/BEPS work.
    Countries' actions with respect to the BEPS recommendations 
will dramatically change the global tax landscape. The aspects 
of the current U.S. tax system that detract from the 
attractiveness of the United States as a location to 
headquarter and invest will become more acute as other 
countries implement the BEPS recommendations. The BEPS project, 
and the response by foreign countries, should be viewed as yet 
another reason why tax reform must be an urgent priority.
    Thank you for the opportunity to present these views.
    I would be happy to answer any questions.
    [The prepared statement of Ms. Angus follows:]
    
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    Chairman BOUSTANY. Thank you, Ms. Angus.
    Mr. Sprague.

                 STATEMENT OF GARY D. SPRAGUE, 
                COUNSEL, THE SOFTWARE COALITION

    Mr. SPRAGUE. Chairman Boustany, Ranking Member Neal, and 
Members of the Subcommittee, thank you for inviting me to 
appear today on behalf of The Software Coalition to provide 
testimony on the impact of the OECD G20 BEPS project on U.S. 
software companies. In particular, how the BEPS project will 
reduce the U.S. tax base and create disincentives for U.S. 
multinationals to create R&D jobs in the United States. The 
members of our coalition are listed in our written submission.
    Our comments today will focus on those BEPS developments of 
greatest significance to the U.S. software industry, namely 
corporate income tax nexus in countries into which our 
companies export goods and services, transfer pricing, R&D 
employment incentives, and the unraveling of consensus among 
countries on international tax norms. While my comments are 
delivered on behalf of the U.S. software industry, U.S. 
multinationals and other high-tech industries are similarly 
impacted.
    First, the changes to tax treaty rules that establish when 
an exporter is subject to income tax in the country into which 
it exports goods or services. A key focus of the BEPS work was 
a push by market countries to obtain greater taxing rights over 
non-resident exporters which make sales into their countries. 
The BEPS work significantly reduces the threshold for income 
tax nexus, so that a member company of an MNC group may have to 
file tax returns and pay taxes in a market country, even if it 
has no physical presence in that country.
    Second, with respect to the OECD transfer pricing 
guidelines, these guidelines determine how much of a group's 
income is subject to tax in a particular country where that 
group operates. The principal effect of these transfer pricing 
changes will be to decrease the returns allocated to intangible 
property and other assets in favor of returns to people 
functions. This also will increase tax collections by market 
countries, since U.S. software companies do not hold their 
intangible assets in such countries.
    Third, I will comment on the BEPS work regarding incentive 
tax regimes for R&D employment. The BEPS work recognizes that 
countries may set their national tax rate at any level. Most 
OECD member states have significantly reduced their rates of 
corporate income tax in recent years. At the same time, the 
BEPS work has created guidelines for targeted R&D employment 
regimes. Several countries that compete with the United States 
for technology investments have enacted so-called IP Box 
regimes that provide an even lower incentive tax rate for 
income derived from IP developed in their country. These rules 
create a strong incentive for U.S. multinationals to locate R&D 
functions in those countries.
    Finally, I would like to comment on a particularly 
unfortunate side effect of the current political and 
administrative environment relating to international tax. In 
our view, the BEPS process has encouraged, or at least tacitly 
permitted, some countries to circumvent the normal consensus-
building process at the OECD and to act unilaterally. This 
stands in stark contrast to much good work the OECD has done 
historically to develop an international tax consensus.
    On the related point, we note the EU state aid cases 
represent another example of foreign governments endeavoring to 
tax income which ultimately is part of the U.S. tax base. What, 
then, are the implications for U.S. tax policy? We believe that 
Congress should enact comprehensive international tax reform, 
which would include reducing the corporate tax rate to an 
internationally competitive rate--for example, to 25 or even 
20, as some have suggested.
    As part of such comprehensive reform, we favor a 
territorial system, such as a 95 or 100 percent dividend 
exemption system, consistent with other major OECD countries, 
and a transition rule that allows tax-favored repatriation of 
earnings.
    Further, the United States should enact a best-in-class IP 
Box regime that provides an effective incentive to protect and 
create R&D jobs in the United States. Please see our letter of 
September 14 to Chairman Boustany and Ranking Member Neal, 
which details our recommendations on the proposal.
    This proposal would provide the following benefits to the 
United States: Preserves the competitiveness of U.S. 
multinationals; it encourages the repatriation of IP by those 
U.S. multinationals which now hold their IP offshore, and 
discourages newly emerging companies from migrating their IP 
outside the United States in the first place; third, it would 
reduce the incentive for inversions through foreign 
acquisitions by diminishing the incentive for tax-motivated 
foreign takeovers; finally, it would encourage U.S. job growth 
and innovated industries by countering the incentives which now 
exist for U.S. multinationals to locate R&D jobs offshore.
    The work on BEPS is not finished. Therefore, we would 
encourage U.S. Treasury to continue taking an active role in 
ongoing technical discussions to be held in 2016 and beyond. In 
particular, the new tax nexus rules will present U.S. 
multinationals with considerable unnecessary expense and 
increased compliance burdens.
    Accordingly, Treasury should encourage our treaty partners 
to adopt alternative means of compliance and reasonable 
transition periods.
    I very much appreciate the opportunity to provide testimony 
on behalf of the software industry, and would be pleased to 
answer any questions.
    [The prepared statement of Mr. Sprague follows:]
    
    
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    Chairman BOUSTANY. We thank you, Mr. Sprague.
    Ms. Schultz.

STATEMENT OF CATHERINE SCHULTZ, VICE PRESIDENT FOR TAX POLICY, 
                 NATIONAL FOREIGN TRADE COUNCIL

    Ms. SCHULTZ. Chairman Boustany, Ranking Member Neal, and 
Members of the Subcommittee, thank you for inviting me to speak 
today about the G20 and OECD report on Base Erosion and Profit 
Shifting. I request that my complete statement be made part of 
the record.
    The National Foreign Trade Council, organized in 1914, is 
an association of some 250 U.S. business enterprises engaged in 
all aspects of international trade and investment. The NFTC 
believes the current U.S. tax law is outdated and must be 
modernized by enacting tax reform that reduces the U.S. 
corporate income tax to be more in line with our trading 
partners, and adopts a competitive territorial tax system that 
does not disadvantage U.S. businesses competing in foreign 
markets. Competitive U.S. tax reform would address many of the 
concerns raised in the BEPS project.
    The Treasury Department staff should be commended for their 
efforts to attempt to ensure the rules that were drafted were 
as grounded as they could be in reasonable and objective tax 
law. Unfortunately, this was a difficult task, since the BEPS 
project was politically driven and, we believe, appeared to be 
aimed more at raising revenue from U.S.-based multinational 
corporations, rather than other global companies.
    We have several concerns with the CBC report. The country-
by-country report is intended to provide information that is to 
be used only as a high-level risk assessment tool. Completing a 
CBC report will be cumbersome and expensive for taxpayers, 
particularly for taxpayers who have operations in many 
countries. There are many NFTC members who operate in over 100 
countries. If tax authorities release taxpayer information to 
the public, as some recommend, there is concern about 
determining the correct amount due on a tax return, based on 
media reports, rather than tax law. Companies understand they 
must share tax information on a confidential basis to the 
relevant tax authorities, where it can be explained in context. 
However, they are unwilling to be subject to audit by media 
spin.
    It is important to note that if the United States does not 
require country-by-country reporting subject to confidential 
information exchange via the U.S. treaty network, U.S. 
companies will still have to comply with the reporting 
requirements, because each country will demand that the local 
subsidiaries of companies produce a global CBC report under its 
local variation of the rules, which will be expensive, and may 
expose confidential information to improper disclosure.
    The NFTC hopes the United States will continue to make the 
case to maintain the confidentiality of CBC reporting, as the 
countries who participated in the BEPS project will review the 
implementation of the CBC reporting in 2020.
    Countries are already adopting these reporting guidelines, 
and many are not following the BEPS report guidelines. Indeed, 
China has already said that it will require entire value chains 
to be reported in all local analysis. Companies are concerned 
with how the information they are required to file under the 
master file will be used by local authorities. We believe it is 
important for Treasury and the IRS to provide further guidance, 
so companies can report their information to the IRS with 
section 6103-protected information exchanged via the U.S. 
treaty network. Otherwise, as I have noted, countries will be 
entitled to request it for--without section 6103 protections.
    There are several other concerns that the NFTC member 
companies have with the final BEPS report, and I will try to 
get through them pretty quickly.
    The action 7 on permanent establishment changes several of 
the longstanding definitions of what constitutes a permanent 
establishment, which subjects a business to income in a local 
country. Action 7 changed the definition of a deemed income tax 
permanent establishment to achieve in-country tax results under 
applicable transfer pricing rules. This will result in more 
companies being subject to tax in a local jurisdiction, and 
could result in potentially double or triple taxation for 
companies.
    I am not going to spend a lot of time going over the 
transfer pricing rules, but we do have a lot of concern about 
the new rules on value creation. It is often hard to determine 
where value is created. In a value creation that is supposedly 
tied to function, it will be difficult to determine the final 
values, because value and function are not always linked. So we 
have a lot of new transfer pricing rules with new value 
creations. It could actually be very difficult. 
Some countries are adding additional value creation 
requirements. 
China is considering a value contribution method that departs 
from the BEPS guidelines. Location-specific advantages will be 
used--analysis.
    The NFTC is concerned about the general aggressive global 
tax enforcement environment. The BEPS report action 11 analyzed 
base erosion and estimated how much is lost to--worldwide to 
aggressive tax planning. Interestingly, this analysis was not 
done prior to the start of the BEPS project, but only at the 
very end.
    As countries continue their aggressive stance to collect 
enough taxes to counter base erosion, who will determine what 
enough is? If BEPS is hard to determine beyond a I-know-it-as-
I-see-it standard, how will it be determined when it no longer 
exists? As other governments increase taxes on U.S. 
multinational companies, the United States is likely to provide 
foreign tax credits to those companies to offset double 
taxation on the same income. As the number of foreign tax 
credits increase, we will see more base erosion. But this time 
it will be the U.S. base that is eroded.
    What can Congress do to protect the U.S. base from being 
eroded further? The NFTC is strongly in favor of tax reform 
that lowers corporate income taxes in line with our trading 
partners, and moves to a competitive territorial-style tax 
system.
    Thank you for the opportunity to present the views of the 
National Foreign Trade Council, and I would be happy to answer 
any questions.
    [The prepared statement of Ms. Schultz follows:]
    
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    Chairman BOUSTANY. We thank you, Ms. Schultz.
    Mr. Sullivan.

            STATEMENT OF MARTIN A. SULLIVAN, PH.D., 
                 CHIEF ECONOMIST, TAX ANALYSTS

    Mr. SULLIVAN. Good morning, Chairman Boustany, Ranking 
Member Neal, Members of the Committee. Thank you for inviting 
me to discuss the BEPS project and its effect on the U.S. 
economy.
    In 2013, the OECD initiated the BEPS project to address the 
flaws in the international tax system that allowed 
multinationals to shift profits but not corresponding business 
operations from high- to low-tax countries. At the core of the 
OECD's response is a focus on aligning taxable profits with 
value creation with economic activity, with economic substance. 
This is likely to have significant consequences for the 
competitiveness of multinationals, on how multinationals 
allocate investment across borders, and on how countries engage 
in tax competition.
    Check-the-box regulations issued in 1996 made it easier for 
U.S. multinationals to shift profits into tax havens. The BEPS 
alignment of taxable profits with business operations would 
take much of the juice out of these--out of this check-the-box 
tax planning. In 1998, when Treasury wanted to withdraw check-
the-box regulations, many questioned why the United States 
should have rules that help foreign governments collect taxes. 
Now it is the BEPS project that will help foreign governments 
collect taxes.
    Before, multinationals could lower their taxes with tax 
planning that had minimal impact on real activities. Now, to 
lower taxes, they will be required to shift jobs and capital 
investment to low-tax countries. If BEPS succeeds, we will be 
entering a new era when cross-border profit shifting is 
replaced with cross-border shifting of jobs and of capital.
    Countries with low tax rates and real economies, countries 
like Ireland, Singapore, Switzerland, and the United Kingdom, 
are the likely winners. Their gains will come at the expense of 
high-tax countries that will lose jobs and will lose 
investment. With a combined Federal-State rate of 39 percent, 
the United States is particularly vulnerable.
    The likely response by foreign parliamentary governments 
that can more easily change their tax laws will be to set their 
corporate rates even lower than they are now. The UK has 
already announced that it will reduce its corporate rate to 18 
percent in 2020. Competition for real activity will increase. 
The already problematic effects of the high U.S. corporate rate 
will be compounded by these rate cuts.
    Reducing the corporate tax rate has always been a top 
priority. The BEPS project will raise the stakes. The critical 
question is how do we pay for it. The economics of corporate 
tax reform are trickier than most people realize. It is 
entirely possible that any revenue-neutral corporate tax reform 
that rolls back investment incentives will impede and not 
promote economic growth.
    At the top of the list of usual suspects to pay for a rate 
cut is a reduction in depreciation allowances. Unfortunately, 
the positive growth effects of a rate cut are more than offset 
by the negative effects of slower capital recovery. If you add 
to that capitalization of R&D, as proposed by Chairman Camp, 
you have a tax reform that penalizes capital formation, with 
the heaviest burden on domestic manufacturing.
    Clearly, to boost America's competitiveness, we need a new 
approach. Revenue neutrality within the corporate sector is not 
a useful guiding principle for 21st century tax reform. We need 
to downsize our most economically damaging tax and replace 
those revenues with revenues from other sources.
    One option is for the United States to follow the example 
of other nations and adopt a value-added tax. This would 
greatly enhance U.S. competitiveness because revenue from the 
capital-repelling corporate tax would be replaced with a 
highly-efficient consumption tax.
    Another approach would be to shift away from taxing 
business entities and toward taxing investors. The main 
advantage of this approach stems from differences in cross-
border mobility. Investors are less mobile than investment. 
Most OECD countries have raised shareholder taxes, while 
cutting their corporate taxes. And because the burden of 
corporate taxation is increasingly falling on labor, a shift 
from corporations to shareholders will increase progressivity.
    On the international side, the Camp approach to territorial 
taxation, including all of its strong anti-base erosion 
provisions, still seems correct. We need to banish lock-out 
from our international tax rules. To the extent we impose any 
tax on foreign profits, we should levy that tax as profits are 
earned, not when they are distributed.
    We need strong and tough earnings stripping rules. It is 
common practice for foreign-headquartered multinationals 
operating in the United States to cut their U.S. tax by paying 
interest to foreign affiliates. Earnings stripping is a major 
motivation for inversions.
    Finally, as proposed by Chairman Camp, we need to adopt a 
one-time tax on unrepatriated foreign profits. From an economic 
perspective, this tax is as good as it gets. As a tax on old 
capital, it does not affect incentives on new investment. 
Congress should consider a deemed repatriation proposal with 
rates substantially higher than those proposed in the Camp 
plan, and use those revenues for tax cuts that promote domestic 
jobs and domestic capital formation.
    Mr. Chairman, thank you very much.
    [The prepared statement of Mr. Sullivan follows:]
    
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    Chairman BOUSTANY. Thank you, Mr. Sullivan. We will now 
proceed with questions. Let me start with Ms. Schultz and Ms. 
Angus.
    Under the BEPS action item 13, the master file information 
that is required is something of concern. We had some 
discussion on it earlier. Based on what we know today, what 
recourse does a company have if it discloses sensitive business 
information to a foreign jurisdiction and that information gets 
out to a foreign competitor?
    Ms. SCHULTZ. Yes. I think, as Mr. Stack said, companies 
have to work very hard to try to make sure that whatever 
information is provided is not proprietary. But a lot of 
countries are requiring that information.
    So, you may say, ``I am going to put this much information 
on, and if they ask for additional information they can do it 
through the audit process and we will then, you know, have a 
separate conversation to review that information,'' but the way 
it is set up right now, a lot of these governments are already 
making these changes, and are going to require that 
information. It is going to be very difficult, if information 
is required and it doesn't go through an exchange of 
information provision, for companies to be able to control what 
happens with that information.
    There is also a big push by some of the civil society to 
make sure that as much information gets published as possible. 
They think that to have corporate transparency you need to have 
all the tax information out in the public. So a lot of the 
proprietary information that companies really hold very 
tightly, especially value chain information, is stuff that they 
are very concerned could get released or could get given to 
some other governments, or through civil society, and released 
in another way.
    Chairman BOUSTANY. Thank you. Ms. Angus, do you want to 
comment?
    Ms. ANGUS. I agree with----
    Chairman BOUSTANY. Please turn your microphone on.
    Ms. ANGUS. I agree with the comments by Ms. Schultz, and 
also Mr. Stack, that the master file is an important document 
to focus on. Because it is a more extensive document than the 
country-by-country report, it can provide more information. It 
is in narrative form. So precisely what information is provided 
and how it is described is in the hands of companies, and they 
will need to approach this very carefully to be compliant with 
the requirements but give themselves as much protection as they 
can.
    Once a master file is provided to a government, as with any 
other information that a company has to provide to the tax 
authority, it then falls under that country's rules as to the 
protection of that information, and we certainly have seen 
experiences where U.S. companies have had unfortunate 
experiences in the past with countries not protecting 
information the way that it is protected in the United States.
    I think that is an important issue to be considered as the 
work in the OECD goes forward. The OECD has an opportunity to 
take a leadership role here and get countries really focused on 
the price of obtaining the information that they want about 
companies has to be to protect that information.
    Chairman BOUSTANY. I thank you. And I see in the country-
by-country reporting it is limited to large multinational 
groups with consolidated group revenue of at least 750 billion 
Euro. Does the master file disclosure requirement in action 13 
have similar restrictions?
    Ms. ANGUS. It does not have those restrictions, as 
specified by the OECD. And the countries that have already 
begun to adopt the master file have not always put in any 
restrictions. So it could apply to any company of any size.
    Chairman BOUSTANY. I thank you. And finally, a question for 
Mr. Sprague.
    BEPS was supposedly meant to level the playing field and 
address tax evasion and tax avoidance in an even-handed 
fashion. Can you elaborate further on how BEPS is encouraging 
the creation of IP regimes in various countries? Are these 
patent boxes, or innovation boxes, likely to effectively force 
companies that use a lot of intangibles to move operations out 
of the United States?
    Mr. SPRAGUE. Thank you, Mr. Chairman. The short answer to 
the last question is yes. The BEPS process, very interestingly, 
resulted in, essentially, a setting of minimum standards for IP 
boxes. So even though general corporate tax rates outside of 
the United States are lower, considerably lower, than the U.S. 
rate, every country that has adopted an IP box will have an 
even lower rate for income in the IP box. It is remarkable, how 
many countries have either already adopted or are intending to 
adopt an IP box. The rate in the UK, for example, is 10. The 
rate in Ireland is likely to be 6.25. Those are very powerful 
incentives.
    The agreement that has come up through the BEPS process 
essentially is to establish a connection, a very direct 
connection, between the amount of income that can be taxed in 
the IP box and the amount of R&D development activity that is 
performed in the country. So, as a consequence, the very direct 
result of the IP incentive is to incentivize all companies--
U.S. companies included--to move R&D functions into the 
countries that offer such IP boxes.
    Chairman BOUSTANY. I thank you.
    Mr. Neal.
    Mr. NEAL. Thank you much, Mr. Chairman.
    Mr. Sprague, you correctly noted that many of our 
competitors, particularly in the G20, have lowered their 
corporate rate. And you cited the British, for example, as Mr. 
Sullivan did. Simultaneously, while lowering that corporate 
rate, Prime Minister Cameron is now calling for more defense 
spending. Who is going to make up the difference in revenue?
    Mr. SPRAGUE. Well, that is a political question that I 
guess----
    Mr. NEAL. I am going to give Mr. Sullivan a shot at it, as 
well.
    Mr. SPRAGUE. You guys get to--you get to decide. You know, 
my--from an international corporate tax competitiveness 
perspective, I am a private practitioner. You know? I work with 
companies. They ask me what the tax rate is outside the United 
States compared to the United States, and I tell them. And that 
provides a very powerful incentive for them to move operations 
outside the United States.
    And one very important result of the BEPS process--I think 
Ms. Schultz commented on this--the transfer pricing changes, in 
particular, are going to encourage companies, our clients, U.S. 
multinationals, U.S. software companies, to put high-value jobs 
outside the United States, because it is those high-value jobs 
that are going to solidify the foreign structures to make them 
stand up better to challenges of the market jurisdictions.
    Mr. NEAL. Mr. Sullivan.
    Mr. SULLIVAN. Thank you, Mr. Neal. You know, the question 
keeps coming up over and over again. Or it doesn't--actually, 
it doesn't come up enough. How are we going to pay for a lower 
rate?
    I am in favor of a low corporate rate. I would go to 10--I 
would go to 15 percent to 10 percent. But we have to find 
alternative sources of revenue. Obviously, a value-added tax is 
not very popular in the U.S. Congress right now, although it is 
what other countries have done to lower their corporate taxes. 
And perhaps the more realistic alternative that you also see in 
other countries is raising taxes on shareholders, raising taxes 
on investors.
    So you would move the point of imposing tax on capital away 
from the mobile corporations that can move outside of the 
United States and place that burden on shareholders. And you 
see more and more in the academic community experts are 
recognizing that this is a far better approach than trying to 
impose tax on corporations.
    Mr. NEAL. Thank you. And, Mr. Sprague, how much of the 
trapped cash that U.S. multinationals have held overseas is 
attributable to software companies, do you know?
    Mr. SPRAGUE. I don't know, offhand. I mean there are many 
industries that have trapped cash overseas. I think there are 
articles that publish those statistics from time to time.
    Mr. NEAL. What is the software industry currently doing 
with that money?
    Mr. SPRAGUE. Generally, the money is used to reinvest 
outside the United States, reinvest in operations outside the 
United States, make acquisitions outside of the United States. 
Because of the lockout effect of U.S. tax law, the income or 
the cash can't be dividended back to the United States without 
the punitive U.S. tax. And so it is much more efficient to 
deploy that cash to grow business operations outside the United 
States.
    Mr. NEAL. Mr. Sullivan, do you want to comment on that?
    Mr. SULLIVAN. Well, the--I think one--maybe one way of 
thinking about this is what will they do with the money if the 
money is brought----
    Mr. NEAL. That is the point, yes.
    Mr. SULLIVAN [continuing]. If they are allowed to bring it 
back. And we saw, back in 2004, when we had a repatriation 
holiday--I don't know about specifically the software industry, 
but, despite all of the discussion about how it was going to be 
used for investment and plant and equipment and job creation, 
most of it went into paying dividends and share buybacks.
    Mr. NEAL. And I think that is the point. And I--having 
experienced that moment, when it was suggested that the 
repatriated money could be used for job creation, that 
certainly--we--there is broad agreement today that certainly 
did not happen.
    Mr. SULLIVAN. And you know, we certainly want to get rid of 
the lockout effect.
    Mr. NEAL. Exactly.
    Mr. SULLIVAN. We don't want to have that money trapped 
offshore.
    Mr. NEAL. Right.
    Mr. SULLIVAN. But I think some of the claims about how much 
benefit we will get for it as being a major stimulus that will 
transform the economy is a little bit overblown.
    Mr. NEAL. You know, there seems to be some consensus 
amongst the panelists that trying to get that money back at a 
reasonable rate would be very productive for America's economic 
purpose. And I think that is where we ought to be focusing our 
attention, but not to miss the point that that argument was 
made here.
    I was on the Committee at the time and objected strongly to 
the notion that that money should be brought back at five and a 
quarter. And it was brought back at five and a quarter. And 
even the most aggressive proponents of bringing that money back 
later acknowledged not only did they not do any hiring, but 
that the money was given to the shareholders, and it was called 
good management. Now, that is up to them to make the 
determination. But not to miss the point, under the guise of 
job creation, that money was returned.
    Thank you, Mr. Chairman.
    Chairman BOUSTANY. Mr. Reichert.
    Mr. REICHERT. Thank you, Mr. Chairman. Thank you all for 
being here, and for providing your testimony, taking time out 
of your busy schedules to be with us today. Just a quick 
followup question on BEPS action 13 that the Chairman was 
pursuing.
    I would just like a little bit of a--more elaboration, Ms. 
Angus, on--and Ms. Schultz--on what other countries are doing. 
So you have referenced the more than 60 countries in the last 2 
years that are now taking actions related to BEPS action 13. So 
what are those actions that other countries are taking, and how 
do they affect the United States? Either one of you would be--
--
    Ms. ANGUS. With respect to country-by-country reporting--in 
particular, we have seen a flurry of activity starting before 
the OECD final reports, but speeding up since the issuance of 
the reports last month. And there are three countries that have 
already adopted country-by-country reporting: Mexico, Poland, 
and Spain. There are several others that have legislation in 
the process 
that is expected to be completed shortly that will have 
country-by-country reporting in place, and many other countries 
are considering it.
    At the same time, there are countries that have also acted 
with respect to putting in place master file requirements.
    Mr. REICHERT. Ms. Schultz.
    Ms. SCHULTZ. I agree with Ms. Angus, that you start to see 
the countries that originally were called unilateral actors. 
Now they are called early adopters, before the BEPS report was 
finished. It just sort of changed the dialogue a little bit on 
who was doing what.
    But just by putting the BEPS action report--by starting the 
BEPS project, countries already started to make changes in 
their tax laws, and said that they were doing it because of 
BEPS. There were a lot of countries doing tax reform. There are 
countries that have started to add the--as Barbara said, 
countries are already starting to do the things from the BEPS 
action report, but a lot of them started well before the BEPS 
project was finished. There was a lot of tax reform taking 
place. There were a lot of countries taking a look at their 
rules, both indirect and direct taxation on how they were 
taxing the income that they considered to be the BEPS income, 
the base erosion income.
    And one of the things that Mr. Sullivan said about the VAT, 
a lot of governments, because the United States is the only 
OECD country without a VAT system, a lot of these governments 
had already started to look at the VAT and said, ``If you need 
a specific agent for VAT purposes, we will give you a PE for 
direct tax purposes.'' So governments have started to try to 
figure out a way to get more income tax from U.S. 
multinationals in many other ways, not just looking at the CBC 
and the master file.
    So, by doing these early actions, there has been an awful 
lot of activity prior to the finish of the BEPS project, where 
companies have had to be more aware of where the changes were 
coming.
    Mr. REICHERT. And what are the impacts on American 
companies?
    Ms. SCHULTZ. It is much more expensive for American 
companies. We are seeing companies--just the complication of 
complying with all these different rules, and paying attention 
to who is changing their rules under which--at which time, it 
is becoming a little bit more difficult for companies to make 
sure that they are ready to comply with all these different 
rules.
    It has also increased the number of disputes already, 
significantly. The number of audits is up. And the number of 
disputes is going to go up substantially, as well.
    Mr. REICHERT. Ms. Sprague--or Angus, I am sorry.
    Ms. ANGUS. I would just add that it--certainly change is 
happening like this all around the world. At the same time it 
creates significant uncertainty. In many cases the changes are 
not fully described or detailed, so there is uncertainty about 
how the rules will be applied.
    And we are seeing an increase in tax authorities using the 
label of BEPS to justify challenges of companies under current 
law. So, potential for significant retroactive effect, where 
the law hasn't been changed, but they are using this as an 
excuse to make a challenge against a company.
    Mr. REICHERT. Thank you, and I yield back, Mr. Chairman.
    Chairman BOUSTANY. Mr. Larson.
    Mr. LARSON. Thank you, Mr. Chairman, and I thank all of the 
panelists for your testimony.
    Mr. Sullivan, if I could, I would just like to ask a couple 
of questions. And one of them--and what I appreciate about 
these hearings--and I want to say, Mr. Chairman--is that this 
provides us an opportunity to demystify for the American public 
a lot of the terminology that we utilize. I can imagine someone 
tuning in--I don't think our ratings are probably that high, 
but I can imagine someone tuning in and listening to the 
conversation here, and when I go home to Augie and Ray's and I 
talk about the lockout effect, and I talk about base erosion 
and earnings stripping and check-the-box, et cetera, they kind 
of look at me and say, ``Well, yes, but what are you doing 
about jobs.''
    And while I do think that there is a direct correlation 
between these, Mr. Sullivan, if you could, briefly discuss how 
we can make changes to some of our international tax rules to 
help grow jobs in this country, while preventing the further 
base erosion, if possible. And then I would like you to expand 
upon what you had to say about what is going on in academic 
circles about a discussion--you and Ms. Schultz mentioned the 
VAT tax. Probably the unlikelihood of that happening, but the 
thinking as it relates to shareholders and investors. So answer 
those two questions, sir, if you would.
    Mr. SULLIVAN. Thank you, Mr. Larson. That is quite a 
challenge, for an economist to put something in plain English, 
but I will try.
    [Laughter.]
    It is about jobs. And we want domestic job creation. And 
when we look at our tax system, the major flaw of our tax 
system is the corporate tax. It has always been a flaw. But for 
the prior 50 years we have had so much economic growth that we 
haven't really--we have been able to endure it.
    But now we really can't afford to have a high corporate tax 
rate. And so, what we--all roads will lead you to the same 
conclusion. We need to get the corporate tax beaten down as 
much as possible, because it repels capital from the domestic 
economy, which raises productivity, which raises wages, which 
creates jobs. And so we need to be thinking about different 
types of proposals.
    And so, we want--so the conventional tax reform is about 
broadening the base and lowering the rates. We don't really 
have that option any more. We need to broaden the base. We need 
to lower the rates without getting rid of domestic--incentives 
for domestic capital formation. And so we need to look at other 
sources of revenue.
    And I think, you know, it is an education process. At first 
we thought we could broaden the base and lower the rates, and 
now we see that it is not possible. We can't get the rate below 
30 percent. We need to get it to, you know, to 20, and we can't 
even get it to 30 right now. And so, what I think more and more 
academics are looking at--on both sides of the aisle, this is 
not a partisan issue--is where else can we get revenue. How can 
we collect tax in a more efficient way? Nobody likes to raise 
taxes on anybody, but where are the best places to look?
    And if you look at what is going on around the world, where 
everybody is--all the other countries are lowering their 
corporate rate, they are raising their value-added taxes. And 
we don't have that option. But also, what they are doing is 
they are--they have fairly high taxes on their--at the personal 
level. Ireland has very high personal tax rates. The UK has a 
45 percent top individual rate. And all throughout the world 
you see this conscious decision to lower the corporate rate and 
replace it with a higher individual rate.
    Mr. LARSON. And so how would that--as you were saying in 
the--how would the proposal work, in terms of shifting 
responsibility to shareholders and investors? How would that--
what kind of revenue would--could that get us toward revenue 
neutrality? Could that help make up the base? What is the 
thinking along those----
    Mr. SULLIVAN. Well, the--it is--there are limitations on 
how much you can raise the taxes at the shareholder level. You 
can certainly get the capital gains rate back up to 28 percent. 
You could certainly think about getting the dividend rate back 
to--at the regular level. And then we raise a significant 
amount of revenue that could be used for lowering the corporate 
rate.
    Mr. LARSON. Thank you. I yield back.
    Chairman BOUSTANY. Mr. Kelly.
    Mr. KELLY. Thanks, Mr. Chairman, and thank you all for 
being here.
    I continue, though, to--as I listen to all of you, coming 
from a little different world than the world I am existing in 
right now, other than really pro-growth tax reform and 
regulation reform, all the rest of these things are interesting 
topics to sit around some night, have a nice drink and discuss 
and debate. But the reality of it is, if you look--let's just 
relate it to where we are right now, relate it to football. We 
need to look at what the other guys are doing in order to win, 
and adopt those practices. Look at why the other guys are 
losing, and then thank them for continuing on that same path, 
because it makes your win a lot easier.
    And what you each have said is exactly what we all agree 
on, and that is tax reform. But not just tax reform, but pro-
growth tax reform, based on the market, the global market that 
we now compete in. Sometimes I think we are going back to the 
Dark Ages and we are having debates about how many angels we 
can fit on the head of the pin, instead of how many people we 
can get back to work.
    In my world, profitable companies pay taxes, working people 
pay taxes. That is the key to it. So it takes getting more 
people back to work. But you have to have a product on the 
shelf that competes with everybody else in the global 
marketplace. And you have all talked about it. And it is just 
kind of mystifying that we are sitting here, asking you 
questions like, ``How could we possibly fix this?''
    What is the problem? The cost of operation. So every good 
or service that we do--and I don't care what it is that you 
look at--if we are going to make it harder to go to market, 
more expensive to go to market with a product that can't 
compete on a price range with everybody else in the world, we 
are going to continue to lose. And to think that somehow, by 
having you come in here, and baring your souls to us, or giving 
us ideas is going to get it done, it is not.
    Please tell me about the difference between what the Irish 
did--very charming. Love them, cute as the devil they are, but 
they have been picking our pockets for a long time. And they 
just lowered their rate again, because they looked at the world 
and said, ``Wait a minute. These guys are getting close to us. 
We have to cut our rates.'' Tell me the difference between what 
the Irish are able to do overnight, what Cameron is able to 
do--quickly--and a pivot to making it more profitable, and 
giving you more market share. What is the difference between 
those models and our models? Just real--and I mean real 
quickly, because I think the answer is pretty obvious.
    Any of you. Ms. Angus, what would you do right now, today? 
And what are they able to do that we are not able to do?
    Mr. SPRAGUE. You know, if I can respond to that----
    Mr. KELLY. Sure, Mr. Sprague, please.
    Mr. SPRAGUE. You know, the Irish tax policy has been 
consistent for many years, to hold fast to a low corporate tax 
rate to make them, as they describe, the most competitive 
jurisdiction in Europe for inward investment. They have done 
exactly what Mr. Sullivan did----
    Mr. KELLY. Exactly. But how did they do it? What process 
did they go through to pivot to that position? We have been 
deliberating for years here. I mean they don't have to sit 
around and deliberate on it as much, it seems to me. Isn't it a 
quick response? Isn't it an early conviction made saying, 
``Listen, in order for us to compete we have to act now, and 
not continue to talk?''
    Mr. NEAL. Will the gentleman yield?
    Mr. KELLY. No. I will in a minute, I will in a minute. I 
know we are both Irishmen. I want to get to this.
    [Laughter.]
    Because I am telling you, I know what they are doing.
    Mr. SPRAGUE. You know, their parliament and their ministry 
of finance has always been consistent: ``This is our 
international tax policy.''
    One thing that I think is worthwhile communicating to you 
is that Ireland came under huge pressure from the EU several 
years ago to raise their tax rate because Ireland was 
successful. Ireland achieved----
    Mr. KELLY. Well, of course, yes.
    Mr. SPRAGUE [continuing]. Lots of inward investment----
    Mr. KELLY. If you want to change the rules, that is the 
easy way to do away with your competition.
    Anybody, please tell me how quickly they were able to 
respond.
    Ms. ANGUS. They have a parliamentary system, and we do not.
    Mr. KELLY. Thank you. That is what I am trying to get to. 
We continue to play ring around the rosy with this, and we know 
what the answer is, but we keep saying this is something we 
have to get done, but we just can't do it.
    Mr. SULLIVAN. You know, Mr. Cameron in the UK, and the same 
thing in Ireland, they made conscious decisions to raise their 
other taxes to pay----
    Mr. KELLY. Right. Individuals pay almost 50 percent.
    Mr. SULLIVAN. Excuse me?
    Mr. KELLY. Individuals pay 50 percent.
    Mr. SULLIVAN. Yes.
    Mr. KELLY. But keep in mind they used to pay a lower 
percentage on no wages. They would gladly pay 50 percent on 
higher wages, because they end up with a net gain in their 
pocket. That is not hard to figure out.
    Mr. SULLIVAN. When Ireland was devastated by the financial 
crisis----
    Mr. KELLY. Right.
    Mr. SULLIVAN [continuing]. They cut government worker 
salaries by 15 and 20 percent. They raised all of their other 
taxes, but they kept the corporate rate at 12.5 percent. And 
there was no debate about it.
    Mr. KELLY. Yes. But my point, Marty, is they were able to 
act quickly.
    Mr. SULLIVAN. Yes.
    Mr. KELLY. That is the whole point. The purpose of debate 
is fine, if the consequences are that you actually get 
something done. And this is a Forrest Gump moment. There ain't 
no fixing stupid. Thank you. I yield back.
    Mr. NEAL. Mr. Chairman.
    Chairman BOUSTANY. Yes.
    Mr. NEAL. Just to play up on what Mr. Kelly said, the other 
thing that they did, they took advantage early on of European 
Union subsidies for infrastructure. They were way ahead of the 
rest of Europe. The roadways were done. The Internet was 
prominent across the island. And there is another lesson for 
everybody: Everybody on that island is literate. That education 
is the gold standard of Europe.
    Chairman BOUSTANY. Mr. Renacci.
    Mr. RENACCI. Thank you, Mr. Chairman. I want to thank the 
panel. It has been enlightening to listen to you. And I spent a 
week over in Europe talking with Members that were looking at 
this BEPS project. And Mr. Neal asked a question which I 
thought was kind of interesting, because I asked a similar 
question when I was over there. They are lowering rates. And, 
as we heard, Mr. Cameron is increasing spending. And the 
question was how are they going to do that.
    Well, the answer that I was told was, ultimately, they are 
going to get American companies over there, they are going to 
increase their tax base and their jobs. That gets to Mr. 
Larson's question about jobs. If they can get American 
companies over there, and they can increase the number of jobs 
over there, that is how they are going to raise their tax 
revenues to pay for their military spending. And that is one of 
the things that we have to start looking at, is how we can be 
more competitive.
    The corporate tax rate is a piece of our revenue structure. 
But, of course, we all know the individual tax rate is the 
majority of our revenue that we get in. And how we fix this 
system is that we look toward more jobs here. And today, if we 
continue to do nothing, and more companies go overseas, those 
companies are going to end up taking our jobs over there, 
increasing their payroll taxes, and taking the dollars that we 
should be getting by increasing jobs here.
    I was a businessman for 28 years. If I can save 20 percent, 
I am going to save 20 percent. If I have to pay 20 percent 
more, I am going to have less employees. It is a pretty simple 
fact when you work in the business world here in America, that 
if you can move overseas you are going to do that. So this is 
something we have to move on. And that is why I appreciate all 
of your comments.
    I want to go back to--I am actually glad that we hit on 
action 13, because I really think that is important, and the 
cost to companies to have to provide that. Because that is also 
a job issue. If I have to spend more money here to comply with 
action 13, I am going to have less for jobs. So that is one 
issue.
    Mr. Sprague, I noted that at least one company--well, at 
least one of your member companies is a target of these state 
aid investigations. But this is for the entire panel. Does it 
appear that U.S. companies are being targeted more than the EU 
companies when it comes to state aid? I don't know who can 
answer that, but----
    Mr. SPRAGUE. Well, there--of the various companies that 
have been targeted, only one is a non-American company. We, of 
course, don't have information as to how the competition 
directorate made their decisions, but many commentators have 
noted the fact that all of the rest of the targets are, indeed, 
U.S. companies.
    Mr. RENACCI. Yes, it is interesting. Because, again, I go 
back to the fact as--how are European countries going to raise 
their revenues? It keeps going back to figuring out how--a way 
to get the American profits taxed overseas. So these are issues 
that we continue to go back and forth on.
    Ms. Angus, in your testimony you said that the BEPS 
recommendations generally reflect a move away from the 
relatively clear roles and well-understood standards to less-
specific roles, more subjective tests, and vaguer concepts. Can 
you explain how the vague roles adversely impact American 
companies, in particular?
    Ms. ANGUS. Certainly I think vague rules are subject to 
different interpretation in different hands. That is an 
invitation for double taxation, for more than one country to 
seek to tax the same dollar of income.
    I think there are fundamental ways that the BEPS 
recommendations have increased vagueness. Maybe one I would 
single out is the proposed changes to the permanent 
establishment rules, the rules for setting a threshold for when 
a country is considered to have taxable--a company is 
considered to have a taxable presence in a country.
    The BEPS recommendation would move away from a relatively 
clear set of rules to much vaguer standards, so that a company 
entering into business in a country won't know when it will 
cross the line and be considered to be like a domestic company, 
and subject to the full rules, the full compliance procedures 
in that country. That adds a huge burden, in terms of the need 
to fully comply with all aspects of the tax system, to file a 
tax return as if it was a domestic company.
    It also can have implications beyond the income tax. If a 
company is viewed as having a permanent establishment, it may 
be required to register for value-added tax. There may be other 
licensing requirements that get carried with it. And, at the 
same time, its home country may not believe that there is a 
permanent establishment there, may not be willing to cede 
taxing jurisdiction. And so you have double tax.
    Mr. RENACCI. Thank you, Mr. Chairman. I yield back.
    Chairman BOUSTANY. I thank the gentleman.
    Mrs. Noem.
    Mrs. NOEM. Thank you, Mr. Chairman.
    Ms. Angus, we talked a lot today about U.S. multinationals. 
We tend to think of them when we are talking about the 
international tax system. But in all reality, in your testimony 
you shared that a company doesn't necessarily have to be large 
to be impacted. And all global companies are going to face 
uncertainty with regard to cross-border operation and 
investment, in light of the BEPS recommendations.
    But could you comment about the impact that the BEPS 
recommendations and related measures might have on smaller 
U.S.-based companies? In particular, looking at what they might 
do in regards to expansion into other countries, and what they 
might do to expand their presence in--overseas, to market their 
goods.
    Ms. ANGUS. I think the issue with respect to smaller 
companies is a really important one that we sometimes lose 
sight of. People think that an international company equates 
with being a large company. That is not true today. The 
smallest of companies can operate cross-border. Some might say 
that the smallest of companies must operate cross-border in 
today's global economy. And for them, the uncertainty, the new 
compliance burdens, the potential for double taxation is 
particularly stark.
    A smaller company doesn't have the resources to invest in 
order to put in the infrastructure to produce a country-by-
country report, to be able to get the representation to 
understand the details of 
the tax rules in every country in which it might be doing some 
business to try to see will it be considered to have a 
permanent establishment in that country, and then need to come 
in to the full compliance net in that country. Those issues 
really can operate as barriers to that activity if the 
potential to serve that market could cause the company to 
suddenly become a full taxpayer in that country, and fully into 
the system.
    The answer might be it is better not to serve that market, 
and that is a really unfortunate answer, I think, for both the 
U.S. company and for the potential consumers in that country.
    Mrs. NOEM. I think that is why I wanted to highlight your 
testimony, because most of the discussion here today people 
would think revolved around very large entities and companies 
that have multiple opportunities to expand into many different 
countries. But in reality today, many small businesses, this is 
such a burdensome change in recommendations that are being made 
here, that it could completely eliminate their ability to be a 
part of a market, or 
even continue to stay in business if a lot of these things are 
implemented.
    So thank you for giving us some more insight into that, 
because, regardless of the size of the company, this could be 
very detrimental into the future.
    Thank you. I yield back, Mr. Chairman.
    Chairman BOUSTANY. I thank you.
    Mr. Reed.
    Mr. REED. Thank you, Mr. Chairman. I am interested in 
having a conversation about research and development, and what 
this BEPS project and tax policy is doing in regards to where 
R&D is located.
    So, Mr. Sprague, I read your testimony and found some of 
your comments insightful here. For your member corporations or 
companies, most of their R&D is done where? I think I know the 
answer to that, but I just want to make sure we are clear on 
that.
    And after the BEPS project, where do you see that 
impacting, and how does that negatively or positively impact 
that R&D component of your member companies?
    Mr. SPRAGUE. Well, major U.S. multinationals will tend to 
do R&D in many places around the world. The life cycle of an 
R&D-intensive company coming from the United States is that R&D 
will start out being done in the United States. But as the 
company grows, they will tend to look for excellence elsewhere. 
Sometimes that is in India. You know, sometimes that is in 
other places.
    The effect of the BEPS process on the choice of location 
for R&D will be, I think, in two areas. One is for countries 
that do have an innovation box, they are putting on the table 
an incentive: Please move your R&D to our country. So every 
R&D-intensive company will look at that and make a decision as 
to whether it is worthwhile to move the R&D to the UK, for 
example, in order to take advantage of that innovation box.
    The other incentive is a little more subtle, and that goes 
to the transfer pricing points. U.S. software companies are, by 
and large, organized in fairly efficient structures. They 
generally will have a centralized sales entity somewhere, to 
try to minimize the footprint and the higher tax market 
jurisdictions. And a big theme, as I noted in my testimony, of 
the transfer pricing is the market jurisdictions will try to 
attract income into the market countries and tax it there, so 
that counter to that, under the BEPS project, is to move high-
value functions--not just R&D, but high-value management 
functions--into places like Ireland, for example, in order to 
provide a counterweight to the Germanies and Frances of the 
market jurisdictions.
    So, when thinking about how the BEPS project will influence 
the decision of companies on where to locate high-value jobs, 
the R&D part is part of it. But the high-value job generally--
not just R&D--is also a part of it.
    Mr. REED. So, what is your recommended course, as to try to 
avert that situation, going forward?
    Mr. SPRAGUE. Well, the----
    Mr. REED. The Boustany-Neal bill. I heard it over here, 
but----
    [Laughter.]
    Mr. SPRAGUE. Yes. No, as I said in the testimony, we think 
the single best thing is comprehensive international tax reform 
with a competitive U.S. innovation box to make it more 
attractive for U.S. companies to keep the R&D here.
    Mr. REED. And, obviously, we have had that conversation at 
length today about the possibility of that occurring. And, you 
know, we are not very optimistic that is going to happen any 
time soon.
    So there--is there any short-term--I always operated--when 
I was in private business, I always had a short-term, mid-term, 
and long-term plan. Obviously, if we could get to tax reform on 
a comprehensive basis, you know, that is something that I would 
love to see on a short term horizon. It is highly unlikely, in 
my opinion, we are going to get there in the next 6 months or 
thereafter. So is there anything we could be focusing on from 
the panel to try to stop this loss of high-value, high-
functioning R&D activity that you would recommend to us?
    Ms. SCHULTZ. You could make the R&D tax credit permanent. 
That would help a lot. The fact that the credit is short-term, 
and is always expiring, is really detrimental to long-term 
planning by companies. And having that assurance would really 
be great. If you want to do anything, make the R&D tax credit 
permanent.
    Mr. REED. I appreciate that very much. And I think--
hopefully, we can get that taken care of sooner, rather than 
later. So I appreciate that input.
    Is there anything else, Ms. Angus or Mr. Sullivan, in 
regards to short-term--because I am really concerned about the 
loss. Once you lose that R&D, once you lose those high-value 
positions, it is tough to get that back. So do you have any 
short- or mid-term plans, other than permanency of the R&D tax 
credit, which I totally appreciate and totally support? Is 
there anything else anyone could offer for us?
    Ms. ANGUS. I think that the permanent R&D credit is 
certainly important. I think that comments that have been made 
earlier with respect to the BEPS project, the importance of 
continuing the work, and now pushing it in the direction of 
trying to ensure fair, effective, and a transparent tax 
administration around the world, to counter some of the 
potential for aggressive interpretations of some of the 
proposals that would--for example, overreach in the transfer 
pricing area is a really important thing to continue to work 
on. None of that, of course, is a substitute for all the work 
that you all are doing on tax reform.
    Mr. REED. I appreciate that, Ms. Angus. And that is the 
action 13 issue that we talked about earlier with Mr. Stack 
from the Treasury Department.
    With that, I yield back. I notice my time is up.
    Chairman BOUSTANY. I thank the gentleman. I want to thank 
all of you for your expert testimony. This has been very 
helpful. We have gleaned a lot of valuable information.
    And I'd like to also advise you that Members may submit 
written questions to be answered in writing. Hopefully you can 
get back to us within a couple of weeks with that.
    With that, the Committee stands adjourned.
    [Whereupon, at 12:26 p.m., the Subcommittee was adjourned.]
    [Submissions for the Record follow:]
    
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