sive set of bilaterally agreed rules of source to govern which y had the right to tax income from a given set of internabusiness transactions and which would then be used by the y of residence to allow its foreign tax credit for taxes paid to urce country. lack of international agreement on that subject was striking, e lack of efforts to seek it was also striking. bout the same time, I was one of a number of staff members g on a proposal to amend Code Section 482 which was being d stoutly by certain officials in the IRS on grounds that that ought to be left for them to interpret and apply case-by-case o-called in terrorem basis, and they thought the rule should vague. The House-passed version of the Revenue Act of 1962 that proposal which is still highly relevant to the proceedou have before you today. I refer to it in my written staten note 2. I would like to just pause for a moment and read he House Ways and Means Committee report accompanying 1 6 of H.R. 10650, which was the House version of the Revect of 1962, which proposed to add the new provision which have provided three-factor apportionment among commonly lled units of an international business' income from the sale ls, and that would have been required to be used unless the er could demonstrate that an arm's length price would be a way of clearly reflecting income. - that provision was dropped by the Senate, but the confergreement included language in which the conferees said they at the Treasury now has the power tor DORGAN. What year was that, Mr. Wickham? WICKHAM. Pardon? ator DORGAN. What year was that? WICKHAM. This was 1962, a little over 30 years ago. The Committee report accompanying this said, "However, in ce, the difficulties in determining a fair price under this pro-that is Section 482 essentially as it exists today in the first ce-"severely limits the usefulness of this power, especially there are thousands of different transactions engaged in bea domestic company and its foreign subsidiary. Because of ficulty in using the present Section 482, your Committee has a subsection to this provision authorizing the Secretary of easury's delegate to allocate income in the case of sales or ase between a U.S. corporation and its controlled foreign subon the basis of the U.S. proportion of the assets, compensaf the officers and employees, and advertising, selling, and promotion expenses attributable to the United States and at which nternaby the paid to triking, embers s being at that of 1962 nd read ld be a conferid they o. The ver, in is prohe first ecially in beuse of ee has ary of ales or n subpensa3, and and at 10650 might be added to footnote 2 of my writte cause of its current relevance to activities and wo ury regulations in this area and a possible take-off tive activity. With your permission, I would add t note of the written statement. Senator DORGAN. Without objection, that will be Mr. WICKHAM. Now, the words that the Ways mittee used in that report are prophetic, because did not have the internationalization of business has developed since. That has made enormousl mands on the system, which even in 1962 the Con and Means thought was inadequate to the task. V become even clearer, in our view, that the trans nique is a horse-and-buggy mechanism that is real not at all capable of dealing with the enormous pre upon it. I think that the events of the 30 years since 19 sion of the Congress not to require the Treasury ar specific factor apportionment provide powerful t magnitude of the problems that are connected w the case-by-case, after-the-fact transfer pricing ap the Treasury and the IRS have been insisting. Th merely outlined in my written statement but are further in the articles we submitted. They can with the increasing internationalization of busin creasing demands of revenue-hungry countries, s who are looking for larger shares of taxes on inco tional business. I believe that the search by this Committee for lems under the present system could be more more productive if it is founded on a sharper defi the problems presented. I think that the Treasu recommendations for strengthening the enforceme present system (information-gathering, increase of evades the central problem involved, which is t workable set of rules; a full army of internat agents is not going to solve the problems that we h I think we should look a little more carefully problems. I just want to identify four problems, although related to the other, separate from the tant to do that so that we are not looking for one s problems. There are different problems and di needed. se questions are simply not the subject of rules of law where scientious taxpayer can find the answers, especially where are no comparables. That is a very large number of cases the present system. That lack of rules informing the taxpayout what is expected and that are reducible to numbers reI on tax returns defeats the U.S. system for voluntary self-asent of tax in this area of the law. That necessitates a case-byafter-the-fact approach which brings ill effects that pervade stem at all levels, clear on through competent authority pro gs. habit in some countries other than the United States has for taxation by negotiation and by agreement, frequently agreement, but that's not the U.S. tradition. The U.S. tradis to have the government play its part of laying out what is ted of a taxpayer and what he should do in his tax return, men to generate the forces of good will and conscientiousness e part of them in complying with it. That is being destroyed e present lack of rules, and it can only be supplied, not by ennent of no rules, but by development of some new rules which s lack of rules is very costly. As a matter of fact, the Service reasury in their appearances before the Congress never make ort of the total cost and the total benefits of the present transicing system. There is no cost-benefit analysis supplied to the ess or to the Office of Management and Budget about what resent case-by-case system for enforcement under Section 482 We in our articles have suggested that the Congress insist on al reporting and a cost-benefit analysis of the kind that is red under Executive Order 12291. This should be done on a comnsive, system-wide basis, so that the Congress and the Service he Treasury and policymakers can see what is it costing. are the system-wide costs for revenue agents and for enforceof the system, and what revenue benefits are those costs ng us? at is especially important, as some of the others have indicathe Service's record in Section 482 cases is dismal. It has a 1 of losing these cases. What is the United States getting out entire effort? Is it costing us more than it is yielding in reveIt is an important area and I think it might be of special inin the jurisdiction of the Governmental Affairs Committee. ere is a second problem, and that is ator DORGAN. Mr. Wickham, I want you to summarize this se I need to get to Mr. Kearns so I have time for questions. Service er make nt transd to the ut what tion 482 nsist on at is reì a comService costing. enforcese costs indicatt has a ting out in reveecial inîmittee. ize this estions. President, take the initiative to formulate and tional agreement to a single new set of defini graphically allocating the source of any incom from international business transactions. Prefer accomplished through a single, multilateral trea ment would be sought by all nations having signi al business transactions and which would enter spect to each signatory country as it agrees. That would take quite a bit of time, and mea several steps that we think the United States co the temporary and proposed regulations under they do not do it, steps that the Congress might to cause some changes in direction in this area. With that, Mr. Chairman, I will suspend and pate in trying to answer any questions. Senator DORGAN. Mr. Wickham, thank you ver timony is excellent and I hate to shorten it. Incidentally, I taught economics in college for and I, too, every time I had the opportunity wanted to give the full lesson. But your full less lesson and I appreciate very much the excellent t Mr. Kearns, would you proceed, please? TESTIMONY OF KEVIN L. KEARNS,1 PRESIDENT BUSINESS AND INDUSTRIAL COUNCIL, WAS Mr. KEARNS. Thank you, Mr. Chairman. I com ing this hearing. You did great work in the Hou on Ways and Means and the Pickle Subcommitte there, and it is good to see you in the Senate, ta again. Now, I think maybe my value added for the back and look at the political context just for a dispense with the remarks that I had based on m ny. It seems to me that almost everyone here toda that our system is broken and it is broken very question arises, why don't we fix it? Why did Cha hearings over 2 years ago and nothing has been engage in a major overhaul of the system. I th point of view of my members, I represent 1,500 businesses, they do not have the luxury of plan 1 The prepared statement of Mr. Kearns appears on page 232. at I would like to address just for a minute or 2 is what I I call the 10 myths supported by proponents of the role of forcorporations on our society-actually, proponents of tax avoidby foreign corporations. And I will just go quickly through 10 and then sum up my remarks. th No. 1 is that anyone who wants a foreign_corporation to hore taxes is a protectionist nut. A lot of people have spoken today; I do not think there are any nuts in this room. This is question of protectionism; it is a fundamental question of ess for the American people, for the American taxpayer. e second myth is that the money simply is not there. PresiClinton had the courage in this political campaign to take on ssue and I hope somehow the word of this hearing gets over to White House today to let him know that there are a lot of companies and medium-sized companies in America that much want him to continue his campaign in this regard and fill his campaign promise. -" ok back at articles in the papers since he has been elected see Mr. Goldberg, who is Commissioner of the IRS now, g, "Well, gee, the money is not there." Yet at hearings at you were present before Mr. Pickle, he said, "Well"-Mr. e asked, "We understand it is $20, $30, $40 billion"-he said, , maybe not that much but it is certainly in the billions of s." Now this myth is that the money is not there. th No. 3 is, well, maybe some money is there, but it is really hat Mr. Clinton said, it is not $45 billion, and then the stories to say, well, it is really more like $28 billion, or something hat, so he is $17 billion short. Well, as Senator Dirksen once you know, “A billion here, a billion there adds up when you lking about real money." t as a taxpayer myself, to go after an addition $10, $15, $20 1 is a significant sum. It lightens my tax burden; it makes ican companies more competitive, internationally and domes7, when their tax burdens are lowered. th No. 4 is that enforcing U.S. tax law uniformly will have a tating effect on foreign investment flow into the United 3 or that foreign firms located here will somehow move immey to locate elsewhere. I suggest that simply is not true. This 1 the largest, most richest market in the world. If you are to play in international competition, you have to be in the narket. Foreign firms are not going to pull out wholesale. th No. 5 is that foreign direct investment is some sort of panfrom the United States, that as these transfer pricing effects elt in this country and American firms are weakened by |