S. HRG. 107–811 CORPORATE INVERSION HEARING BEFORE A SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE ONE HUNDRED SEVENTH CONGRESS SECOND SESSION SPECIAL HEARING OCTOBER 16, 2002—WASHINGTON, DC Printed for the use of the Committee on Appropriations ( Available via the World Wide Web: http://www.access.gpo.gov/congress/senate U.S. GOVERNMENT PRINTING OFFICE 83–645 PDF WASHINGTON : 2003 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate 21-JUN-2000 13:09 Feb 03, 2003 Jkt 083645 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 U:\13HEAR\2003\83645.XXX DORISJ PsN: DORISJ COMMITTEE ON APPROPRIATIONS ROBERT C. BYRD, West Virginia, Chairman DANIEL K. INOUYE, Hawaii TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina THAD COCHRAN, Mississippi PATRICK J. LEAHY, Vermont ARLEN SPECTER, Pennsylvania TOM HARKIN, Iowa PETE V. DOMENICI, New Mexico BARBARA A. MIKULSKI, Maryland CHRISTOPHER S. BOND, Missouri HARRY REID, Nevada MITCH MCCONNELL, Kentucky HERB KOHL, Wisconsin CONRAD BURNS, Montana PATTY MURRAY, Washington RICHARD C. SHELBY, Alabama BYRON L. DORGAN, North Dakota JUDD GREGG, New Hampshire DIANNE FEINSTEIN, California ROBERT F. BENNETT, Utah RICHARD J. DURBIN, Illinois BEN NIGHTHORSE CAMPBELL, Colorado TIM JOHNSON, South Dakota LARRY CRAIG, Idaho MARY L. LANDRIEU, Louisiana KAY BAILEY HUTCHISON, Texas JACK REED, Rhode Island MIKE DEWINE, Ohio TERRENCE E. SAUVAIN, Staff Director CHARLES KIEFFER, Deputy Staff Director STEVEN J. CORTESE, Minority Staff Director LISA SUTHERLAND, Minority Deputy Staff Director SUBCOMMITTEE ON TREASURY AND GENERAL GOVERNMENT BYRON L. DORGAN, North Dakota, Chairman BARBARA A. MIKULSKI, Maryland BEN NIGHTHORSE CAMPBELL, Colorado MARY L. LANDRIEU, Louisiana RICHARD C. SHELBY, Alabama JACK REED, Rhode Island MIKE DEWINE, Ohio ROBERT C. BYRD, West Virginia TED STEVENS, Alaska (ex officio) (ex officio) Professional Staff CHIP WALGREN NICOLE RUTBERG DI RESTA PAT RAYMOND (Minority) LULA EDWARDS (Minority) (II) VerDate 21-JUN-2000 13:09 Feb 03, 2003 Jkt 083645 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 U:\13HEAR\2003\83645.XXX DORISJ PsN: DORISJ CONTENTS Page Opening statement of Senator Byron L. Dorgan ................................................... 1 Prepared statement of Senator Ben Nighthorse Campbell .................................. 4 Statement of Pamela Olson, Assistant Secretary for Tax Policy, Department of the Treasury ..................................................................................................... 4 Prepared statement .......................................................................................... 6 Statement of Hon. Richard Blumenthal, Attorney General, State of Con- necticut, Hartford, CT .......................................................................................... 16 Prepared statement .......................................................................................... 17 Statement of Reuven S. Avi-Yonah, Professor of Law and Director, Inter- national Tax LLM Program, University of Michigan Law School, Ann Arbor, MI .............................................................................................................. 20 Prepared statement .......................................................................................... 22 Introduction: A brief history of inversions ............................................................. 22 Why inversions now? ............................................................................................... 23 The competitiveness excuse .................................................................................... 24 A short-term solution: Redefining corporate residence ........................................ 25 A long-term solution: A modified source-based regime ........................................ 26 Statement of Robert S. McIntyre, Director, Citizens for Tax Justice, Wash- ington, DC ............................................................................................................. 28 Prepared statement .......................................................................................... 29 The scope of the corporate tax shelter problem .................................................... 29 The Bermuda reincorporation loophole .................................................................. 31 The specious arguments for the Bermuda loophole and other offshore shel- ters ........................................................................................................................ 32 Relentlessly, companies seek even more offshore shelters ................................... 33 What we should do to curb abusive corporate offshore tax sheltering ................ 33 Statement of Martin A. Regalia, Vice President for Economic Policy and Chief Economist, U.S. Chamber of Commerce, Washington, DC ..................... 34 Prepared statement .......................................................................................... 36 The impetus for corporate inversions ..................................................................... 36 Congressional response ........................................................................................... 37 Asserted rationale for the congressional proposals ............................................... 37 Response to congressional rationale ....................................................................... 37 A more appropriate and beneficial solution ........................................................... 38 Statement of William G. Gale, Senior Fellow and Deputy Director for Eco- nomic Studies, The Brookings Institution, Washington, DC ............................ 38 Prepared statement .......................................................................................... 40 Analysis .................................................................................................................... 41 Additional submitted statements and questions and answers ............................ 61 Prepared statements of: The AFL–CIO ................................................................................................... 61 Accenture Ltd. .................................................................................................. 63 Questions submitted: To Patricia Olson .............................................................................................. 65 By Senator Ben Nighthorse Campbell ............................................................ 65 To William Gale ................................................................................................ 65 By Senator Richard C. Shelby ......................................................................... 65 To Reuven Avi-Yonah ....................................................................................... 66 By Senator Richard C. Shelby ......................................................................... 66 (III) VerDate 21-JUN-2000 13:09 Feb 03, 2003 Jkt 083645 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 U:\13HEAR\2003\83645.XXX DORISJ PsN: DORISJ VerDate 21-JUN-2000 13:09 Feb 03, 2003 Jkt 083645 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 U:\13HEAR\2003\83645.XXX DORISJ PsN: DORISJ CORPORATE INVERSION WEDNESDAY, OCTOBER 16, 2002 U.S. SENATE, SUBCOMMITTEE ON TREASURY AND GENERAL GOVERNMENT, COMMITTEE ON APPROPRIATIONS, Washington, DC. The subcommittee met at 10:08 a.m., in room SD–192, Dirksen Senate Office Building, Hon. Byron L. Dorgan (chairman) pre- siding. Present: Senator Dorgan. OPENING STATEMENT OF SENATOR BYRON L. DORGAN Senator DORGAN. I am going to call the subcommittee to order and begin the hearing today. First of all, good morning to all of you. This hearing is to look at the issue of reincorporation into offshore tax havens by Amer- ican corporations. In the last decade, about 20 major U.S. corporations have re- incorporated or, on paper, set up shop in offshore tax havens like Bermuda or the Cayman Islands. Companies such as Tyco, Fruit of the Loom, and others are among those that have used this tactic. This tactic is described in many cases as something called ‘‘cor- porate inversion,’’ and it is happening largely for one reason—be- cause some companies are feeling that if they involve themselves in a ‘‘corporate inversion,’’ they can reduce substantially the share of U.S. taxes that they are paying. In the aftermath of 9/11 last year, who these kinds of practices raise questions of patriotism. Let me show a couple of clippings of stories that have been writ- ten about this in recent years as some large and high-profile com- panies have used this tactic. This is a Washington Post story. Alan Sloan wrote a column, ‘‘Uncle Sam Gets Shorted by the Bermuda Bye-Bye.’’ I will not read it, but it talks about companies playing tax games and moving to Bermuda from New Britain, CT—this is Stanley Tools, and they have since changed their mind about that—but it talks about the incentive for that company wanting to move offshore. One of the paragraphs in this article reads: ‘‘One of the problems I have with all of these companies going to Bermuda in a time of war and budget deficits is that it amounts to a selective repeal of the corporate income tax. It is available to Stanley’’—in this case, he was talking about Stanley Tools—‘‘but not to the local hardware store that sells Stanley Tools. It is available to Monday’’—again,