Mr. Secretary, Take the Tax Juice Out of Corporate Expatriations

The lack of government response to the current wave of tax-motivated corporate expatriations is disheartening. Senate Finance Committee Chair Ron Wyden, D-Ore., Sen. Carl Levin, D-Mich., and Rep. Sander Levin, D-Mich., are to be praised for their leadership on this issue; however, in the current political environment there is little reason to believe that a statutory solution will be enacted. One looks in vain at the tax press each day to see what action is being taken, not just talked about, and as of this writing, nothing has been done. This article demonstrates that it is not necessary for Treasury to wait for Congress to act on corporate expatriations. This article describes the principal tax benefits companies seek from expatriating and outlines regulatory actions that can be taken without legislative action to materially reduce the tax incentive to expatriate. These proposals for regulations are supported by existing statutory authority. They would be good policy and consistent with, or easily integrated with, publicly proposed tax reform proposals. One of the Treasury secretary’s most important responsibilities is the health of the tax system under the laws adopted by Congress. Congress has given Treasury broad and in some cases sweeping authority to adopt regulations, including specific grants of authority that bear on issues at the heart of corporate inversions. The proposals here are just one set of alternatives available to Treasury that could powerfully affect the incentive to expatriate. Others no doubt have improvements to these or other alternatives to propose; however, when a material portion of the U.S. corporate tax base is at risk, doing nothing borders on the irresponsible

Base Erosion and Profit Shifting: A Roadmap for Reform

In this Editorial, the authors explain the context of this special issue of the Bulletin for International Taxation. The fundamental premise of the BEPS project is that a coordination of national responses to BEPS can both eliminate double non-taxation and protect against material unrelieved double taxation. The articles in this issue further a dialogue among tax policymakers, taxpayers, advisors and academics that is critical to achieve this objective

Lessons the United States Can Learn From Other Countries' Territorial Systems For Taxing Income of Multinational Corporations

The United States has a worldwide system that taxes the dividends its resident multinational corporations receive from their foreign affiliates, while most other countries have territorial systems that exempt these dividends. This report examines the experience of four countries – two with long-standing territorial systems and two that have recently eliminated taxation of repatriated dividends. We find that the reasons for maintaining or introducing dividend exemption systems varied greatly among them and do not necessarily apply to the United States. Moreover, classification of tax systems as worldwide or territorial does not adequately capture differences in how countries tax foreign-source income

Formulary Apportionment in the U.S. International Income Tax System: Putting Lipstick on a Pig?

Perhaps surprisingly, this Article has shown that the debate over formulary apportionment is little more than an alternative path to the larger debate over worldwide taxation versus territorial taxation. The present U.S. international income tax regime for U.S. MNEs is an implicit, overly-generous, and incoherent quasi-territorial system that relies on residence rules, source rules, and the arm’s-length approach to apportion international business profits between domestic income that is currently taxable by the United States and foreign income that is effectively exempt, or nearly so, from U.S. taxation because of deferral and cross-crediting. This version of territoriality is quite ugly because it is highly complex and it imposes only modest restraints on the ability of U.S. MNEs to shift income out of the U.S. tax base to low-tax foreign countries. Four forms of explicit territoriality have been proposed as alternatives to the current U.S. system. The first is traditional territoriality, which relies on source rules and the arm’s-length approach to apportion international business profits between taxable domestic income and exempt foreign income. This is a simpler regime than the current U.S. system because it confers exemption directly rather than implicitly through deferral and cross-crediting. It does, however, preserve the capacity of taxpayers to shift income to low-tax foreign countries subject only to the modest restraint imposed by the arm’s-length approach. Most importantly, it is inconsistent with the principle of ability-to-pay and it provides a powerful incentive to locate business activity in low-tax foreign countries. The other three forms of territoriality that are currently part of the debate are three-factor, two-factor, and single-factor global formulary apportionment. Each of them is simpler than either the current U.S. system or traditional territoriality, but each of them leaves U.S. MNEs with considerable capacity to accomplish erosion of the U.S. tax base through income shifting and each of them shares the defects of traditional territoriality regarding inconsistency with the ability-to-pay principle and distortion of business activity. Thus, U.S. policy makers are left with a choice between a normatively flawed and distortive territoriality that imposes modest restraints on income shifting through the arm’s-length approach (i.e., both the current U.S. system of de facto territoriality and traditional territoriality) and a simpler but normatively flawed and distortive territoriality that still allows a substantial amount of income shifting (i.e., three-factor, two-factor, and single-factor global formulary apportionment). This unhappy dilemma can be avoided by adopting real worldwide taxation or, alternatively, by keeping the current regime while creating a Subpart F income category for low-taxed foreign income and insulating that category from cross-crediting with a separate foreign tax credit limitation basket. A more limited form of formulary apportionment then should be used for, and tailored to, particular forms of income, such as intangible income and global trading income, that present discrete taxation problems. Nevertheless, when such income is earned by a U.S. MNE, allocation of income to a foreign jurisdiction under this more limited form of formulary apportionment should not ipso facto result in the income being exempted from U.S. taxation

Defending Worldwide Taxation With A Shareholder-Based Definition Of Corporate Residence

This Article argues that a principled, efficient, and practical definition of corporate residence is necessary even if some form of corporate integration is adopted, and that such a definition is a key element in designing either a real worldwide or a territorial income tax system as well as a potential restraint on the inversion phenomenon. The Article proposes that the United States adopt a shareholder-based definition of corporate residence that is structured as follows: 1. A foreign corporation is a U.S. tax resident for any year if fifty percent or more of its shares, determined by vote or value, was beneficially owned by U.S. residents on the last day of the immediately preceding year (or was the average ownership for the year by U.S. residents as determined by averaging U.S. resident ownership on the last day of each quarter of the preceding year). A foreign corporation presumptively satisfies this test if any class of its shares is regularly traded in one or more U.S. public capital markets or is marketed to U.S. persons. 2. This presumption can be rebutted by the foreign corporation showing that U.S. resident beneficial ownership of its shares is below the fifty-percent threshold. 3. The presumption can be overcome in the same way by the IRS if it encounters cases where a foreign corporation that is actually foreign-owned lists a class of shares on a U.S. exchange in order to achieve U.S. resident status for tax-avoidance reasons. This proposed shareholder-ownership test, however, would be an alternate definition; a corporation would continue to be a U.S. tax resident if it were formed under the law of a U.S. jurisdiction. Finally, this Article examines the common objections to a shareholder-based definition of corporate residence and explains why those objections are unpersuasive

Defending Worldwide Taxation With A Shareholder-Based Definition Of Corporate Residence

This Article argues that a principled, efficient, and practical definition of corporate residence is necessary even if some form of corporate integration is adopted, and that such a definition is a key element in designing either a real worldwide or a territorial income tax system as well as a potential restraint on the inversion phenomenon. The Article proposes that the United States adopt a shareholder-based definition of corporate residence that is structured as follows: 1. A foreign corporation is a U.S. tax resident for any year if fifty percent or more of its shares, determined by vote or value, was beneficially owned by U.S. residents on the last day of the immediately preceding year (or was the average ownership for the year by U.S. residents as determined by averaging U.S. resident ownership on the last day of each quarter of the preceding year). A foreign corporation presumptively satisfies this test if any class of its shares is regularly traded in one or more U.S. public capital markets or is marketed to U.S. persons. 2. This presumption can be rebutted by the foreign corporation showing that U.S. resident beneficial ownership of its shares is below the fifty-percent threshold. 3. The presumption can be overcome in the same way by the IRS if it encounters cases where a foreign corporation that is actually foreign-owned lists a class of shares on a U.S. exchange in order to achieve U.S. resident status for tax-avoidance reasons. This proposed shareholder-ownership test, however, would be an alternate definition; a corporation would continue to be a U.S. tax resident if it were formed under the law of a U.S. jurisdiction. Finally, this Article examines the common objections to a shareholder-based definition of corporate residence and explains why those objections are unpersuasive

Designing a 21st Century Corporate Tax—An Advance U.S. Minimum Tax on Foreign Income and Other Measures to Protect the Base

The 21st Century has seen unprecedented levels of corporate tax aggressiveness and avoidance. This Article continues our exploration of second-best international tax reforms that would protect the U.S. corporate tax base and have some likelihood of adoption. In this case, we consider how a U.S. minimum tax on foreign income earned by a controlled foreign corporation should be designed to protect the United States against erosion of its corporate income tax base and to combat tax competition by low-tax intermediary countries. In the authors’ view, a minimum tax should be an interim levy that preserves the residual U.S. tax on foreign income, as distinguished from a final minimum tax that partially eliminates the U.S. residual tax. An interim minimum tax would be a significant improvement over current law and would more effectively limit incentives to seek low-taxed foreign income while ameliorating pressure to retain excess earnings abroad. To achieve the objectives of such a minimum tax, corresponding changes should be made to the U.S. corporate resident definition, the source taxation of foreign multinational corporations, and the residence taxation of U.S. portfolio investors in foreign corporations to reduce tax advantages under current law for investments in foreign corporations. These changes would reduce tax advantages for foreign parent corporate groups and thereby further protect the U.S. tax base, as well as reduce incentives for U.S. corporations to expatriate as a consequence of increased U.S. taxation of foreign income under an interim minimum tax