Sunday, April 3, 2011
Complicated subpart F rules govern the taxation of transactions between a U.S. parent company and its foreign subsidiaries. The difficulty with interpreting the subpart F rules and applying them to complex derivative transactions has been the subject of extensive tax literature. Few of the proposed solutions have been simple enough to implement quickly and efficiently without wholesale changes to the subpart F system. This Comment focuses on the inconsistent tax treatment of economically equivalent transactions that currently exists under subpart F and the incentives that this system creates for U.S. companies to engage in expensive tax-planning strategies to avoid subpart F taxation. These tax-planning strategies—used to achieve an economically identical result—cost both the government and U.S. companies unnecessary money.This Comment uses the Schering-Plough Corp. v. United States decision to highlight the difficulties in properly complying with subpart F and the lengths to which a taxpayer must go to avoid subpart F. It explores the reasons why the subpart F system was created the way that it was, as well as the competing theories on international taxation that led to the subpart F system. This Comment then proposes that economically equivalent transactions should be taxed the same, either by using the transfer pricing rules—currently used to govern asset sales between a parent and its foreign subsidiary—more extensively in governing cash loans and loans of property between a parent and its foreign subsidiary, or alternatively, by treating asset sales between a foreign subsidiary and its domestic parent as a repatriating event—the same way that a loan between a foreign subsidiary and its domestic parent is currently treated—and taxing the entire transaction under subpart F. Either option would give greater consistency to transactions governed by subpart F and would be relatively simple to implement within the political process.