Friday, September 30, 2011
[T]his article proposes a modified territorial system with two main prongs. First, Congress should exempt from U.S. taxes all corporate income (other than mobile income) earned in foreign countries with an effective corporate tax rate of 20% or higher. Such income could be repatriated at any time to the U.S., subject to payment of an administrative charge of 5% as is done in countries like France. This charge is a rough way to take into account some of the expense deductions previously taken by multinational corporations in their home countries in order to generate foreign-source income -- for example, a portion of the salaries of U.S. executives who helped start European operations.
Second, Congress should end the current deferral system for foreign-source income earned by U.S. corporations in countries with effective tax rates under 20%. That portion of foreign-source income would be taxed every year in the U.S. at a rate equal to the difference between 20% and the actual rate paid by the U.S. corporation in the tax haven. For example, if a U.S. corporation generated $100 million of income in Barbados, which collected $2 million in taxes on such income, it would pay $18 million in corporate taxes to the U.S. And if the company repatriated that income from Barbados to the U.S., it would pay the administrative charge of 5% or less.