Like individuals who are citizens or residents of the United States, domestic corporations must report and pay U.S. tax on their worldwide income. However, exposure to U.S. worldwide taxation has always been more theoretical than real. Because under the Code corporate residence is determined almost exclusively by place of incorporation, avoiding U.S. tax on foreign-source earnings usually requires nothing more than operating abroad via a subsidiary registered in a foreign jurisdiction. As a foreign corporation, the subsidiary is liable for U.S. tax only on its U.S.-source income. This arrangement does not allow domestic corporations to completely escape tax on their foreign-source earnings. When the foreign subsidiary distributes its earnings to its domestic parent or when the domestic parent sells shares in the foreign subsidiary, the gain is in principle subject to U.S. tax. Thus, prior to the enactment of the 2017 Tax Cuts and Jobs Act (TCJA), the U.S. international corporate tax regime was in practice one of deferral.
The pre-2018 deferral regime was criticized both by advocates of territoriality and by advocates of worldwide taxation. The former objected to the tax on repatriated. foreign-source income. The latter objected to deferral because the time value of money could drastically reduce the effective rate of tax on foreign-source earnings. Consequently, the discussion was not whether to keep or scrap the deferral regime, but what should replace it: current tax on worldwide income – whether earned directly or via a subsidiary – at full corporate tax rates or complete and permanent exclusion of foreign-source income from the tax base. In fact, the TCJA did neither. It eliminated the tax on repatriated earnings, while simultaneously taxing on a current basis some of the foreign-source income generated via subsidiaries.
The article, written by a trio of scholars whose series of jointly authored articles have had a significant impact on the discourse of international tax policy, looks at the extent to which the TCJA moved the ball in either direction. It begins by examining the Joint Committee on Taxation’s revenue scores for the relevant TCJA provisions. It argues that although those scores are the best currently available estimates of the effects of these provisions on U.S. tax revenues before considering dynamic macro-economic effects, the manner in which revenue estimates are constructed tends to conceal important elements of what has happened. Accordingly, this revenue effects approach requires taking additional considerations into account. It also explains why the post-TCJA U.S. outbound international income tax regime remains far removed from an ideal expanded worldwide taxation regime and suggests steps that would move it towards that end.
One problem faced by the authors, and of which they are fully aware, is the relevant TCJA provisions have components cutting in offsetting ways that require the Joint Committee’s revenue scores to be used with caution. Moreover, reaching a conclusion requires comparing the pre-TCJA U.S. regime with the system as revised by the TCJA and then attempting to evaluate the effects of the differences. The article summarizes the Joint Committee on Taxation’s scoring of the TCJA changes and concludes that, according to that scoring, the TCJA results in a more complex system that has only a tilt in the direction of expanded worldwide taxation. From that standpoint, the major impact of the TCJA is to raise new issues and to increase complexity. The new regime includes elements of territoriality, expanded worldwide taxation, and deferral. It is difficult therefore to describe the TCJA either as a move toward either of the traditional touchstones of international tax theory. Under the authors’ calculations, the international corporate tax regime established by the TCJA is, as one might expect, a revenue loser relative to a pure worldwide tax regime and a revenue gainer relative to a pure territorial regime.
In keeping with their own oft articulated preference for a worldwide tax regime, the authors conclude with a suggestion that could in their mind help move the current regime in that direction. One of the innovations of the TCJA was the introduction of a tax on global intangible low-taxed income (“GILTI”), which imposes tax on some of the foreign-source income generated by foreign subsidiaries of domestic parents. The idea is that, while the subsidiaries themselves are not subject to U.S. tax on their foreign-source income, some of that income is attributed to the U.S. parent and subject to current U.S. taxation. Expanding the GILTI tax mechanism could, the authors posit, move the U.S. international corporate tax regime toward a worldwide system.