Designing a Rational International Tax System for the United States

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By Herm Bouma

Buchanan Ingersoll & Rooney PC, Washington, D.C.

In order to have a more rational international tax system for the United States, the U.S. corporate tax regime should tax all corporations in the same way, regardless of whether they are U.S. or foreign corporations. This would:

1. Eliminate the competitive disadvantages U.S. multinationals experience under the current regime in conducting business abroad;

2. Eliminate the competitive advantages foreign multinationals experience under the current regime in conducting business in the United States;

3. Eliminate the issue of "corporate inversions" since there would no longer be any tax benefit from a corporate inversion; and

4. Obviate the need to distinguish between U.S. and foreign corporations.

There is in fact no rational basis for distinguishing between U.S. and foreign corporations, and thus the attempt should not be made. The current basis for distinguishing, i.e., place of incorporation, exalts form over substance and plays right into the hands of tax havens.

One way to have a corporate tax regime that taxes all corporations in the same way is to adopt formulary apportionment, applied on a worldwide consolidated basis using financial accounting income. This would:

1. Eliminate the lock-out effect (i.e., the current tax disincentive for U.S. parent corporations to receive dividends from their foreign subsidiaries);

2. Substantially reduce the need for transfer pricing;

3. Eliminate the need for controlled foreign corporation rules ("Subpart F");

4. Substantially reduce the problem of "earnings-stripping";

5. Eliminate the tax incentive for moving operations abroad (assuming a sales factor is used to apportion income); and

6. Eliminate the need for corporations to source income and allocate and apportion deductions (for foreign tax credit purposes).

This approach would also solve every "base erosion" issue set forth in the OECD's Base Erosion and Profit Shifting (BEPS) Action Plan, issued on July 19, 2013. In addition, it would be an approach that IRS revenue agents could actually understand.

This commentary also will appear in the June 2015 issue of the  Tax Management International Journal.

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