Wednesday, October 25, 2006
Lawrence Lokken (Florida) has posted Territorial Taxation: Why Some U.S. Multinationals May Be Less Than Enthusiastic About the Idea (and Some Ideas They Really Dislike), 59 SMU L. Rev. 751 (2006), on SSRN. Here is the abstract:
In November 2005, the President's Advisory Panel on Federal Tax Reform issued a report that, among other things, proposed a significant change in the rules for taxing foreign income of U.S. companies: a move from the present worldwide/credit system to a territorial or exemption system under which U.S. persons' income from active business operations in foreign countries, whether carried on directly or thru subsidiary corporations, would be exempt from U.S. taxation. Earlier in 2005, the staff of the Joint Committee on Taxation suggested a similar shift. The Panel and Joint Committee staff relied on two arguments: (1) The current system, by deferring taxation of foreign earnings of U.S.-owned foreign corporations, distorts business decisions on where and how to invest these earnings; and (2) the current system often allows U.S. multinational enterprises to achieve U.S. tax results more favorable than they could obtain under a territorial system. This paper addresses the second of these justifications. It explains some of the techniques used by U.S. multinational enterprises to achieve U.S. tax results more favorable than territorial taxation, and it examines whether these results are inevitable consequences of the current regime or flow from aspects of the current rules that could easily be changed. It concludes that Congress and the Treasury could, without adding significant complexity to the law, reform the historical worldwide/credit system in ways that would ensure tax results largely consistent with the underlying premises of this system. Moreover, if not corrected, many of the deficiencies in the current system will plague the proposed system much as they have the current system. The Panel and the Joint Committee staff fell into a common error in tax policy discussions: comparing current law, in its highly-corrupted state, with an idealized alternative and reaching the obvious conclusion that the latter is preferable. In fairness, the proposed system must be compared with the best feasible version of a worldwide/credit system.