The House Ways and Means Committee held a hearing Tuesday on how other countries have used tax reform to help their companies compete globally.
“Many of our major trading partners across the globe have already reformed their tax laws in ways they believe help their companies expand their own global operations and support good-paying jobs within their own borders,” said Ways and Means Committee Chairman Dave Camp, R-Mich., in his opening statement. “Some of these countries have improved upon the rules they’ve had in place for decades, while others have recently enacted major reforms with global competitiveness in mind.”
He noted that the global marketplace is changing, and said that America must change and adapt its Tax Code.
Rep. Sander Levin, D-Mich., the ranking Democrat on the Ways and Means Committee, pointed out that it was important to pay close attention to the compromises and trade-offs in the corporate tax systems in other countries.
“What kinds of anti-abuse rules did countries with territorial systems have to adopt to stem erosion of their corporate tax base?” he asked. “What do choices about a corporate tax system mean for other countries’ individual tax systems and the necessity of finding other revenue sources such as value-added taxes?”
Frank Schoon, a Netherlands tax partner with Ernst & Young, discussed the Dutch corporate tax system. “Corporate income tax is imposed in the Netherlands on the worldwide profits of Dutch tax resident entities and on the income derived from certain specific sources within the Netherlands of non-resident entities, but with provisions to prevent double taxation of business profits,” he said in his prepared testimony. Schoon noted that the corporate income tax in the Netherlands is currently 20 percent on the first 200,000 euros and 25 percent on the remainder, but the Dutch government recently announced that the rate may be further reduced to 24 percent as soon as the beginning of next year.
Another Ernst & Young tax partner, Jorg Menger, discussed the German corporate taxation system. Under the German taxation system, German corporations are subject to a corporate income tax on worldwide earnings of 15.825 percent, and they are also subject to a second tax known as a trade tax set by municipalities, varying from 7 to 17 percent.
Reuven S. Avi-Yonah, the director of the International Tax Master of Law program at the University of Michigan Law School, told the committee they should focus on closing corporate tax loopholes. “Adopting a territorial tax system is not relevant to the competitiveness of U.S.‐based multinationals. Instead, what will help is plugging the holes that allow companies to shift income to tax havens, and that give other countries a competitive advantage over the United States in attracting investment capital from this country,” he said.
Gary Thomas, a partner in the law firm White & Case LLP, described how Japan had moved to a territorial tax system in April 2009. Japan abolished its indirect foreign tax credit system, but instead adopted a foreign dividend exemption system under which 95 percent of the dividends received from qualified foreign subsidiaries would be exempt from Japanese national and local corporate taxes. He compared Japan’s action with the model it had previously followed from the U.S.
“It is noteworthy that, in adopting the foreign dividend exemption system, Japan explicitly rejected ‘capital export neutrality’ as a key guiding principle in the new global business environment,” Thomas pointed out. “Although this principle had been imported from the United States 50 years ago, the position of the foreign tax credit approach based upon capital export neutrality was characterized as ‘having declined’ while the era of the United States as the dominant capital-exporting country in the world was ending.”
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