The House Ways and Means Committee held a hearing on the current structure of international tax rules and how they might be hampering American employers in global markets.
The committee heard from a group of CFOs, academics and practitioners during Thursday’s hearing. “Ensuring long-term prosperity in the face of increasing global competition requires Congress to re-examine the Tax Code,” said Ways and Means Committee Chairman Dave Camp, R-Mich., in his opening statement. “As we pursue comprehensive tax reform, this committee intends to develop solutions that empower American companies to become more competitive and make the U.S. a more attractive place to invest and create the jobs this country needs.”
Gregory Hayes, senior vice president and CFO of United Technologies Corporation, said it is time to modernize the tax system. His company makes Otis elevators, Pratt & Whitney jet engines, Sikorsky helicopters, and Carrier air conditioning systems. Hayes complained of the 35 percent statutory tax rate in the U.S. for corporations.
“Because we are an American company, we are subject to tax on our worldwide income, no matter where it is earned, at the federal corporate tax rate of 35 percent,” he said. “Combined with state income taxes, the U.S. statutory income rate imposed on corporations hovers at or near the highest among all developed economies. If the rate-lowering trend of our trading partners continues, the U.S. may soon, to its peril, be number one.”
Hayes criticized the amount of complexity and uncertainty in the Tax Code, including provisions like the R&D tax credit that continually expire and need to be re-extended.
Another CFO who testified was Edward J. Rapp of Caterpillar Inc., the Peoria-based maker of construction, mining and farm equipment, diesel engines and locomotives. He said the committee should make “long-overdue reforms” to the Tax Code.” Rapp also highlighted the relatively high statutory corporate tax rate. “In China, the corporate tax rate is 25 percent,” he said. “If Caterpillar earns $1,000 there, we pay $250 to China. If we bring that money back to the U.S., we must pay another $100 to the U.S. Treasury, bringing the total tax rate to 35 percent. However, if a competitor from the U.K. earns $1,000 in China, it pays only the $250 Chinese tax.”
Rapp recommended lowering the corporate tax rate, making the R&D tax credit permanent, and implementing the kind of territorial tax system that is used in other industrialized countries.
“It is important to recognize that there is no pure worldwide system or pure territorial system,” said Rep. Sander Levin, D-Mich., the ranking Democratic member on the committee. “The details matter a great deal, and there are many versions of territorial tax systems.”
Mark A. Buthman, senior vice president and CFO at Kimberly-Clark Corporation, the maker of Kleenex and Scott tissues and Huggies diapers, also complained of the high statutory tax rate and of U.S. taxation of worldwide earnings. “Under the current U.S. system, all income of U.S.-based companies is subject to U.S. tax, whether it is earned in the U.S. or abroad, which creates an incentive for companies to leave their cash outside the U.S.,” he said. “While deferral of tax on the active business earnings of foreign subsidiaries until those earnings are repatriated to the U.S. provides some relief from this burden, the relief is only temporary. Ultimately our goal is to repatriate our surplus foreign income to the U.S. so that it can be reinvested in product development, capital spending or returned to our shareholders.”
He too called for a territorial tax system, a permanent R&D tax credit, and a lower corporate rate.
“A good first step to improving the competitiveness of the U.S. tax system is to reduce the combined federal and state tax rate to a level comparable to the combined rates in the rest of the OECD countries,” said Buthman. “The current combined U.S. tax rate is more than 50 percent higher than the average of the other OECD countries. The second step is to adopt a territorial system which exempts dividend income from U.S. taxation and taxes royalty income at a reduced rate. The current U.S. worldwide tax system imposes a significant tax on foreign earnings that are brought back to the U.S. for reinvestment here at home, discouraging job-creating domestic investment. By eliminating this extra layer of tax, the disincentive for American companies to reinvest their foreign earnings in the U.S. would be significantly reduced.”
A group of lawmakers proposed a bill earlier this week to provide a tax holiday on repatriated overseas profits (see Congressional Bill Would Provide Tax Holiday on Corporate Profits Repatriation). The Joint Committee on Taxation estimates that a one-year tax holiday on repatriated profits would cost the U.S. Treasury $78 billion, however. The CFOs who testified before the committee did not agree with the idea of having a temporary one-time tax holiday on repatriated profits, however, after they were questioned by committee Democrats.
“I think a one-time repatriation is a bad idea,” said United Technologies CFO Hayes. “I would advocate against a one-time repatriation.”
Zimmer Holdings CFO James Crines said, “Done in isolation, I don’t believe it accomplishes the objective of leveling the playing field.”
Kimberly-Clark CFO Buthman said, “It treats the symptom and not the underlying issue.”
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