TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, October 6, 2017

Fleming, Peroni & Shay: Incorporating A Minimum Tax In A Territorial System

J. Clifton Fleming Jr. (BYU), Robert J. Peroni (Texas) & Stephen E. Shay (Harvard), Incorporating a Minimum Tax in a Territorial System, 157 Tax Notes 73 (Oct. 2, 2017):

In this report, Fleming, Peroni, and Shay analyze the effects of including a final, low-rate minimum tax on U.S. multinational corporations in a territorial system. They continue to prefer a real worldwide international tax system, but see a final, low-rate minimum tax as a second-best measure to reduce the revenue loss of a territorial system.

A territorial system with an FLRMT perpetuates conventional territoriality’s incentive to locate new business activity in low-tax foreign countries; does not eliminate the competitiveness problem (if there is one); is a weak tax base protection measure; loses revenue compared with a real worldwide tax regime; is not superior to real worldwide taxation regarding the lockout problem; does not end inversions; and perpetuates the complexities flowing from source rules, expense allocation rules, transfer pricing rules, and an FTC. Thus, a territorial regime with an FLRMT is not a virtuous compromise between a conventional territorial system and a real worldwide regime. A real worldwide system remains the superior U.S. international tax reform option.

If, however, the United States adopts a territorial system, adding an FLRMT to that system would produce deficit-reducing revenue that would otherwise be lost. From that standpoint, an FLRMT would be a lesser evil compared with the zero tax on foreign-source active business income that would be used under a conventional territorial or exemption system. In other words, when the FLRMT is viewed as a lesser evil, there is no tax principle involved; only revenue is at stake. However, the amount of revenue in play could be substantial if the FLRMT rate were set at a meaningful level.

Finally, an FLRMT might be a Trojan horse in the form of an interim step leading to either a pure territorial regime that imposes a zero tax on foreign-source active business income or a real worldwide system that imposes a current tax on that income at the regular corporate rate. It is, however, impossible to predict with certainty how those contingencies would be resolved, and political dysfunction could likely cause the FLRMT to morph into a permanent fixture. Accordingly, the FLRMT should be supported for revenue reasons and not because it might lead to one’s preferred position. In our own case, we have long argued for a real worldwide system, and that remains our strong preference; however, if we were forced to choose between a theoretically pure territorial system and one with a well-designed 81 FLRMT, we would choose the latter.

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