Business Tax Reform: Territorial System, VAT Highlight Senate Hearing

James R. Hines Jr., professor of economics and law at the University of Michigan, advocated tax reform as a means of improving the conditions of American workers. He also pointed out that foreign countries do not generally subject the foreign income of their own companies to home-country taxation as an argument against a residence-based tax system.

Scott M. Naatjes, vice president and general tax counsel for Cargill Inc., spoke about the burdens of the current tax system on Cargill as an international corporation, and how the marginal tax rate is an important consideration with regard to planning, rather than the effective tax rate.

Finally, Reuven Avi-Yonah, professor of law and director of the international tax master of law program at the University of Michigan Law School, spoke about outbound (U.S. corporations investing overseas) and inbound (foreign corporations investing in the U.S.) taxation, and the need to change the definition of residence of all U.S. corporations in order to “police the boundary between U.S. and foreign corporations.”

In questions asked after the testimony, the witnesses discussed the possibility of a change to a territorial system, and spoke against the use of a transition phase if such an action were taken. Avi-Yonah raised the issue of a VAT, pointing to other successful economies that use them. They agreed that the U.S. should not “chase” tax rates, arguing that it cannot compete with such economies as the Caymans, China and Ireland, but instead should compete with countries such as Brazil and India—which, Avi-Yonah pointed out, “have higher rates and do very nicely.” He also argued against favoring businesses that operate offshore over those that operate domestically.