Nir Fishbien (S.J.D. 2018, Michigan), From Switzerland with Love: Surrey’s Papers and the Original Intent(s) of Subpart-F, 38 Va. Tax Rev. ___ (2018):
For the first time since 1913, and as part of the 2017 tax reform, Congress adopted a tax regime that exempted from U.S. taxation dividends from foreign subsidiaries. By doing so, Congress abandoned the general principle that U.S. residents should be subject to tax on all income “from whatever source derived.” This shift marked a good occasion for considering the reasons the United States taxed such dividends in the first place. In 1962, Congress enacted a new law, also known as ‘Subpart-F’, which subjected certain earnings of foreign subsidiaries of American parent corporations to current-base taxation. This was a deviation from the general tax principle of tax deferral, under which earnings of foreign subsidiaries are taxed only upon repatriation of these earnings (by a dividend, for example). The new legislation was the result of a political compromise. While Treasury supported a wide-scale elimination of tax deferral, Congress eventually adopted a much narrower law, eliminating tax deferral only in cases where it was abused by using it to avoid otherwise owed U.S. taxes.
Seven internal Treasury Department reports found in the archive of Harvard Law School Library reveal the dramatic sequence of events that led to the legislation of Subpart-F, one of the most prominent international tax reforms the United States had ever known. The reports unequivocally support the notion that the idea behind Subpart F was initially formed mainly due to the deteriorate U.S. Balance of Payment position, and that its “original intent”, as designed by its main architect, Assistant Secretary of the Treasury, Stanley S. Surrey, was to eliminate tax deferral and protect the U.S. tax base. This was based on the principles of equity, efficiency (Capital Export Neutrality), and elegance. Congress, on the other hand, rejected the proposal and adopted a much more limited in scope legislation, mainly due to the concern that eliminating tax deferral would result in a competitive disadvantage to American corporations operating abroad.
Based on the reports, as well as the controlling legal and economic concepts of that time, I argue that Congress was mistaken in limiting the original proposal to eliminate tax deferral. This mistake was the result of relying on overly-emphasized and exaggerated competitive concerns, instead of on concrete tax and sound fiscal policies.