American Institute of Certified Public Accountatns
1455 Pennsylvania Avenue, NW
Washington, DC 20004-1081
June 28, 2002
The Honorable Jim McCrery
Chair, Subcommittee on Select Revenue Measures
House Ways and Means Committee
1110 Longworth House Office Building
Washington, D.C. 20515
Re: Comments for the Record of the June 25, 2002 House Ways and Means Committee Select Revenue Measures Subcommittee Hearing on Corporate Inversions
Dear Chairman McCrery:
The American Institute of Certified Public Accountants (AICPA) is pleased to provide our comments for the record of the June 25, 2002 House Ways and Means Committee Select Revenue Measures
Subcommittee hearing with respect to the issue of corporate inversion transactions. The AICPA is the national, professional organization of certified public accountants comprised of more than 350,000 members. Our
members advise clients on federal, state, and international tax matters, and prepare income and other tax returns for millions of Americans.They provide services to individuals, not-for-profit organizations, small
and medium-sized businesses, as well as America's largest businesses.
Several high-profile U.S. corporations have recently inverted or announced plans to invert,1 In general, an inversion transaction is one in which a U.S.-based company becomes a
foreign-based company, where the new foreign parent company is typically located in a low-tax country.Although corporate inversions are not new, these recent activities and plans have prompted both Congress and the
Treasury Department to focus on inversions and the resulting effect on the U.S.tax base. In addition to the inversion transactions themselves, both Congress and the Treasury Department have been examining earnings
stripping plans (e.g., through U.S. tax deductions for interest payments by a US subsidiary to its foreign parent on "loaded up" intercompany debt) that are often a part of an inversion plan. In response,
several bills have been introduced and the Treasury Department issued a preliminary report reviewing corporate inversion transactions on May 17, 2002 (the "Treasury Report").3 On June 18,
2002, the Senate Finance Commit-tee marked-up a proposal that would address the inversion issue in a somewhat targeted manner.Accordingly, the A/CPA believes it is appropriate to submit comments at this time.
The AICPA appreciates the political and policy issues that have been expressed as part of the inversion debate. We strongly believe, however, that an appropriate response should not focus solely on
the act of inverting, but rather on the incentives for U.S.-based multinational corporations to invert. Such a response should include consideration of both U.S. tax disadvantages facing U.S.-based multinationals as
well as U.S. tax advantages available to foreign-based multinationals. The response should be broad enough to address these concerns regardless of whether a corporate group chooses to be foreign-based as a result of
an inversion,an acquisition, or through initial formation.
We believe the goal of a legislative response should be to ensure that the United States remains an attractive and competitive venue both for basing multinational operations as well as for foreign
investment. In particular, we believe that the U.S. tax treatment for multinational groups with a U.S. parent corporation should be at least as favorable as that for multinational groups with a foreign parent.
Further, we are concerned that any legislation narrowly focused solely on preventing inversion transactions, or making them less attractive, will fail to address the underlying long-term policy issues, and could
have unintended negative effects on the U.S.economy, such as potentially encouraging the takeover of U.S.-based companies by foreign acquirers.
We would like to commend the members of Congress and the Treasury Department for giving this serious issue such prompt attention. We urge caution, however, because inversions involve very complex and
fundamental tax issues that warrant careful consideration. We agree with the Treasury Department's conclusions in the Treasury Report that inversions are symptomatic of underlying differences in U.S. tax law and
policy with regard to U.S.-based companies and foreign-based companies with operations in the United States. The AICPA strongly supports the Treasury Department's recommendation that rather than enacting measures
designed simply to halt inversion transactions, t he broader question o f t he U.S. taxation o f foreign operations should b e addressed through a comprehensive review of the causes of these imbalances.
In view of the potential far-reaching effect of any provisions enacted to deal with inversions, weurge the Congress to address the underlying issues discussed below in a reasoned and carefully
considered manner. If immediate action is deemed necessary, we would encourage the Congress to adopt a bill that would, for a period not to exceed two years, treat a new foreign corporate parent entity, created via
an inversion in which there was no substantial change in operations or ownership, as a domestic corporation for U.S. tax purposes (thereby nullifying the tax benefits of the inversion). Such a measure would provide
more time for appropriate consideration of these important and integrated matters.
We believe U.S. tax rules that treat U.S.-based companies differently than foreign-based companies and put U.S.-based companies at a competitive disadvantage include:
The U.S. anti-deferral regimes (including subpart F) that are dated, complex, overlapping and in many respects, overreaching; and
The U.S. foreign tax credit regime and the limitations thereon, including basketing rules, and, in particular, interest expense allocation rules that can cause double taxation.
The Treasury Report also highlighted a need to address those situations where the U.S. tax base is excessively eroded by intercompany indebtedness (so-called earnings stripping). We agree that
addressing U.S. tax rules that allow foreign-based companies to strip earnings out of the United States would help to equalize the U.S. tax treatment of U.S.-based companies with U.S.operations as compared to
foreign-based companies with U.S. operations. Addressing these issues will also remove many of the underlying incentives for inversions, and prevent erosion of the U.S. tax base by foreign-based companies. Earnings
stripping itself, however, is also a complex issue and we recognize that there will be many issues that will require consideration as these rules are modified. In this regard we note that the current proposed
earnings stripping Treasury regulations have b ecn i n proposed form for over a decade.4 In addition, we urge Congress to be mindful of the possible effect on U.S. taxpayers if other countries
adopt mirror images of selected provisions contained in the Treasury Report, such as the debt/equity ratio adjustment proposed for section 163(j).
In sum, we agree with the findings of the Treasury Report that there is a need for a methodical,well-reasoned consideration of a complex set of issues regarding the U.S. tax treatment of U.S.-based
companies versus foreign-based companies, regardless of whether the foreign-based company is an inverted U.S. company. In addition, we recommend caution when considering legislation that attempts to address
corporate inversions without adequately addressing t he current disparate treatment of U.S.-based companies versus foreign-based companies, a treatment that may have long-term adverse consequences for the U.S.
economy. As noted in the Treasury Report:
Measures designed simply to halt inversion activity may address these transactions in the shortrun, but there is a serious risk that measures targeted too narrowly would have the un/mended effect of
encouraging a shift to other forms of transactions to the detriment of the U.S. economy in the long run.
Our goal is a healthy economy and U.S. job growth. We encourage legislative changes that enhance U.S. competitiveness in the global market and eliminate the current underlying advantages under U.S.
tax law for foreign-based companies.
The AICPA would be happy to offer our further assistance on this legislation. Please contact me at (805) 653-6300 or firstname.lastname@example.org; Andrew Mattson, Chair of the International Tax Technical Resource
Panel, at (408) 369-2566 or Andy@mohlernixon.com; or Eileen Sherr,AICPA Technical Manager at (202) 434-9256 or email@example.com.
Pamela J. Pecarich
Chair, Tax Executive Committee
Members of House Ways & Means Committee
Members of Senate Finance Committee
Mr. Jon Traub, Legislative Director to Rep. McCrery
Mr. Bob Winters, Special Counsel, House Ways & Means Committee
Ms. Allison Giles, Majority Chief of Staff, House Ways & Means Committee
Mr. John Kelliher, Chief Counsel, House Ways & Means Committee
Mr. James Clark, Chief Tax Counsel, House Ways & Means Committee
Mr. Greg Nickerson, Tax Counsel, House Ways & Means Committee
Ms. Janice Mays, Democratic Chief Counsel, Ways & Means Committee
Mr. John Buckley, Democratic Chief Tax Counsel, Ways & Means Committee
Mr. John Angell, Staff Director, Senate Finance Committee
Mr. Russell Sullivan, Chief Tax Counsel, Senate Finance Committee
Ms. Mafia Freese, Tax Counsel, Senate Finance Committee
Ms. Anita Horn Rizek, Democratic Tax Professional Staff, Senate Finance Committee
Mr. Kolan Davis, Republican Staff Director and Chief Counsel, Senate Finance Committee
Mr. Mark Prater, Republican Chief Tax Counsel, Senate Finance Committee
Ms. Lindy L. Paull, Chief of Staff, Joint Committee on Taxation
Mr. H. Benjamin Hartley, Senior Legislation Counsel, Joint Committee on Taxation
Mr. E. Ray Beeman, Legislation Counsel, Joint Committee on Taxation
Mr. David G. Noren, Legislation Counsel, Joint Committee on Taxation
,Mr. Oren S. Penn, Legislation Counsel, Joint Committee on Taxation
Mr. Thomas A. Barthold, Senior Economist, Joint Committee on Taxation
Ms. Pamela F. Olson, Acting Assistant Secretary, for Tax Policy, Treasury, Department
Mr, Rob Hanson, Tax Legislative Counsel, Treasury Department
Ms. Barbara M. Angus, International Tax Counsel, Treasury Department
***** 1 For example, Ingersoll Rand, Coopers Industries and Global Marine inverted m 2001,while Stanley Works has announced inversion plans for 2002.*****
*****2 H.R. 3857 introduced by Rep. McInnis (R-CO): H,R, 3884, "Corporate Patriot Enforcement Act of 2002" introduced by Rep. Richard Neal (D-NIA); H.R. 3922, "Save America's Jobs Act
of2002" introduced by Rep. Maloney (D-NY); H.R. 4756, "Uncle Sam Wants You Act of 2002"introduced by Rep. Nancy Johnson (R-C-'N); H,R. 4993, "No Tax Breaks for Corporations Renouncing America Act
of 2002" introduced by Rep. Lloyd Doggett (D-TX); S. 2050,introduced by Sen. Paul Wellstone (D-MN) and Sen. Daylon (D-MN); and S. 2119, "Reversing trr Expatriation of Profits Offshore (REPO) Act"
introduced by Sen. Max Baucus (D-MT) and Sen. Charles Grassley (R-Iowa). *****
***** 3 U.S. Treasury, Office o f Tax Policy, CorporaTe Inversion Transactions: Tax Policy Implications, Doc. 2002-12218, 2002 TNT 98-49,http://www.treas.gov/press/releascs/docs/inversion.pdf. ****
***** 4 Prop. Reg. Sees. 1.163(j)..0. 1.163(j)-10 (June 13, 1991). *****