Katie Niederee, Julia Lawless (202) 224-4515
Hatch: Shift from Worldwide to Territorial Tax System Has Bipartisan Support
Utah Senator Says, “By clinging to its worldwide tax system and a punitively high corporate tax rate, the U.S. has severely diminished the ability of its multinationals to compete in the world marketplace.”
WASHINGTON – In a speech on the Senate floor today, Finance Committee Chairman Orrin Hatch (R-Utah) discussed the importance of shifting from a worldwide to territorial tax system. The shift would modernize our tax system and help make American companies more competitive in the vast global marketplace, incentivize American companies to bring overseas earnings back to invest in their domestic operations, and eliminate incentives to keep money abroad.
“By clinging to its worldwide tax system and a punitively high corporate tax rate, the U.S. has severely diminished the ability of its multinationals to compete in the world marketplace,” Hatch said. “Because U.S.-based companies are subject to worldwide taxation while their global competitors are subject to territorial taxation systems, U.S. companies all too often end up having to pay more taxes than their foreign competitors, putting them at a distinct competitive disadvantage.
Members of Congress from both parties support a shift to a territorial tax system. The idea was also included in the Trump administration’s principles for tax reform and is part of the conversation in current tax reform efforts.
Hatch continued, “And, if we’re going to put together an effective tax reform package, we’ll have to find a way to tackle these issues. The most obvious way, of course, would be a combination of reducing our corporate tax rates, transitioning to a territorial tax system, and ensuring protection of the U.S. tax base from things like earnings stripping and profit shifting. That approach, as it turns out, has bipartisan support. These matters represent a significant portion of our tax reform efforts, and we already know it is one where Republicans and Democrats can agree, at least in concept.”
The complete speech as prepared for delivery is below:
Mr. President, I rise to speak about the ongoing effort to reform our nation’s tax code. Last week, I came to the floor to give what I promised would be the first in an ongoing series of statements about tax reform. Today, I’d like to give the second speech in that series.
As I’ve said before, while there are tax reform discussions ongoing between congressional leaders and the administration, I expect there to be a robust and substantive tax reform process here in the Senate, one that will give interested members, hopefully from both parties, an opportunity to contribute to the final product. I anticipate that, at the very least, the members of the Finance Committee will want to engage fully in this effort.
I’ve been working to make the case for tax reform the last six years, ever since I became the lead Republican on the Senate Finance Committee. This current round of floor statements is a continuation of that effort.
Last week, I spoke on the need to reduce the U.S. corporate tax rate in order to grow our economy, create jobs, and make American businesses more competitive. Today’s topic is closely related to that one. Today, I want to talk about the need to reform our international tax system.
Over the last couple of decades, we’ve enjoyed rapid advancement in technology and communication, which has been a great benefit to everyone and has improved the quality of life for people all over the world. Unfortunately, our tax system has failed to evolve along with everything else.
For example, in the modern world, business assets have become increasingly more mobile. Assets like capital, intellectual property, and even labor, can now be moved from one country to another with relative ease and simplicity. Assets that are relatively immobile – those that cannot be easily moved – are becoming increasingly rare.
The tax code needs to change to reflect that fact.
Our current corporate tax system imposes a heavy burden on businesses’ assets, which creates an overwhelming incentive for companies to move their more mobile assets offshore, where income derived from use of the assets is taxed at lower rates. As I noted last week, there is no shortage of lower-tax alternatives in the world for companies incorporated in the United States.
It doesn’t take a rocket scientist, Mr. President, to understand this concept.
All other things being equal, if there are two countries that tax businesses at substantially different rates, companies in the country with higher tax rates will have a major incentive to move taxable assets to the country with lower rates. And, that dynamic only moves in one direction – there aren’t many companies looking to move to higher-tax countries, like the U.S., from lower-tax jurisdictions.
This isn’t just a theory, Mr. President. This has been happening for years.
An inversion, if you’ll recall, is a transaction where two companies merge and the resulting combined entity is incorporated offshore.
Let me repeat some numbers I cited last week:
In the 20 years between 1983 and 2003 there were just 29 corporate inversions out of the United States.
In the 11 years between 2003 and 2014 there were 47 – nearly double the number in half the amount of time. That number includes companies that are household names in the United States.
This is happening, in large part, because of the perverse incentives embedded in our corporate tax system. And, keep in mind, I’m only talking about inversions. There are also foreign takeovers of U.S. companies, not to mention arrangements that include earnings stripping and profit shifting. The collective result has been a massive erosion of the U.S. tax base and, perhaps more importantly, decreased economic activity here at home.
And make no mistake, Mr. President, our foreign competitors are fully aware of these incentives. They’ve recognized that lowering corporate tax rates can help them lure economic activity into their locations. Yet, in the face of this competition the U.S. tax system has remained virtually frozen.
As I noted last week, reducing the corporate tax rate would help alleviate these problems. But, more will be required, including reforms to our international tax system.
Currently, the U.S. uses what is generally referred to as a worldwide system for international tax, which means that U.S. multinationals pay the U.S. corporate tax on domestic earnings as well as on earnings acquired abroad. Taxes on those offshore earnings are generally deferred so long as the earnings are kept offshore, and are only taxed upon repatriation to the U.S., after accounting for foreign tax credits and the like.
Put simply, Mr. President, this type of system is antiquated. The vast majority of our foreign counterparts have already done away with worldwide taxation and have converted to a territorial system. Generally speaking, a territorial system is one in which multinational companies pay tax only on earnings derived from domestic sources.
By clinging to its worldwide tax system and a punitively high corporate tax rate, the U.S. has severely diminished the ability of its multinationals to compete in the world marketplace. Because U.S.-based companies are subject to worldwide taxation while their global competitors are subject to territorial taxation systems, U.S. companies all too often end up having to pay more taxes than their foreign competitors, putting them at a distinct competitive disadvantage.
Generally speaking, foreign-based companies pay taxes only once at the tax rate of the country from which they’ve derived the specific income. A U.S. multinational, on the other hand, generally pays taxes on offshore income at the rate set by the source country, but then gets hit again – and at a punitively high rate – when it repatriates its earnings back to America.
This needs to change, and it’s not only Republicans who are saying that. Many Democrats have recognized this issue as well.
For example, I’ll cite the Finance Committee’s bipartisan working group on international tax, co-chaired by Senators Portman and Schumer, which examined these issues thoroughly and produced a report in 2015. In that report, after noting that most industrialized countries have lower corporate rates and territorial systems, this bipartisan group of Senators said “This means that no matter what jurisdiction a U.S. multinational is competing in, it is at a competitive disadvantage.”
The report by Senators Portman and Schumer and the members of their working group also referred to something called the “lock-out effect.”
Simply put, the lock-out effect refers to the incentives U.S. companies have to hold foreign earnings and make investments offshore in order to avoid the punitive U.S. corporate tax. This isn’t a dodge or a tax hustle on the part of these companies – they’re simply doing what the tax code tells them to do.
The tax code essentially tells U.S. companies: You can have $100 in Ireland, say, or you can have $65 in the US. Well – no surprise here – companies generally opt to have $100 in Ireland.
Currently, a huge amount of capital – as much as $2.5 trillion or maybe more – held by U.S. multinational companies is effectively locked-out of the U.S. and unavailable for investment here at home. However, as Senators Schumer and Portman, and their colleagues on the international tax working group noted, those funds can easily be used to grow the economies of those foreign countries that have kept their tax codes up to date.
These are massive problems, Mr. President. And, if we’re going to put together an effective tax reform package, we’ll have to find a way to tackle these issues. The most obvious way, of course, would be a combination of reducing our corporate tax rates, transitioning to a territorial tax system, and ensuring protection of the U.S. tax base from things like earnings stripping and profit shifting.
That approach, as it turns out, has bipartisan support. These matters represent a significant portion of our tax reform efforts, and we already know it is one where Republicans and Democrats can agree, at least in concept. In other words, there is ample reason for our Democratic colleagues to join Republicans in the tax reform discussions.
These issues are aren’t just important for faceless corporations or tax planners. They are important for American workers, up and down the income scale. Anyone hoping to have a job and opportunities here in the U.S. – and not somewhere else – has an interest in reforming our international tax system.
If we pass up this current opportunity to address these issues, people should expect to see more and more economic activity and the headquarters and supporting staff of more household-name companies moved outside the United States. With bipartisan recognition of the need for reform, and agreement on international concepts already having been displayed, we owe it to the American people to work together and fix this problem.
As I’ve said multiple times, I hope my friends on the other side of the aisle will be willing to work with us on tax reform. But, if they decline, and, sadly, we’ve seen some indication that they will, Republicans will need to be ready to take steps to fix these problems.
I think we will be ready. Indeed, I think we are more than up to the challenge.
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