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Fixing U.S. International Taxation$

Daniel N. Shaviro

Print publication date: 2014

Print ISBN-13: 9780199359752

Published to Oxford Scholarship Online: April 2014

DOI: 10.1093/acprof:oso/9780199359752.001.0001

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(p.215) Index

(p.215) Index

Source:
Fixing U.S. International Taxation
Publisher:
Oxford University Press
Adams, T.S., 110
Altshuler, Rosanne, 42, 80, 86, 98, 199
anti-inversion rules, 35, 68, 73–74, 75, 194
Apple, Inc., 4, 66, 80, 158, 168
iPhone sales, 41–42, 183
Jobs, Steve, 39, 168, 182
arm’s-length transactions, 39–40, 41
Auerbach, Alan J., 25, 38, 77, 180, 185
Avi-Yonah, Reuven S., 26, 39, 42, 80, 198
Bankman, Joseph, 71, 151, 164, 166, 182
Bausch & Lomb, Inc. v. Com., 78
BEPS, OECD project, 140
Bermuda, 35, 42, 66, 72, 190
bilateral tax treaties
double taxation and double non-taxation, 5, 26, 61, 115, 189
source rules, 61–62
taxation of resident companies’ FSI, violation of treaties, 23
branch vs. subsidiary, 12, 48–50, 54–55
Camp, Dave, 188
cap-and-trade system, 138
capital export neutrality (CEN), 14, 121–30
approach, 122–23
deadweight loss, 134
global convention fallacy, 16
global welfare fallacy, 15
global welfare problems, 127–30, 140
clientele effects, 127–29
entity-level corporate income taxation, significance, 129–30
Musgrave analysis, global and unilateral national efficiency perspectives, 121–23, 124
support for, 123, 126–27
traditional global welfare debate, lessons, 133–36
capital import neutrality (CIN), 14, 121–30
approach, 123
deadweight loss, 134
global convention fallacy, 16
global welfare fallacy, 15
global welfare problems, 127–30, 140
clientele effects, 127–29
entity-level corporate income taxation, significance, 129–30
Musgrave analysis, 121–23, 124
support for CIN, 123–25, 127
traditional global welfare debate, lessons, 133–36
(p.216) capital income
foreign individuals, 166, 167
U.S. individuals, 166–67
capital ownership neutrality (CON), 14, 17, 130–33, 134
approach, 130–31
Desai and Hines analysis, 130–33
entity-level corporate taxation and taxation of individuals, lack of conceptual integration, 17
global convention fallacy, 16
global welfare fallacy, 15
global welfare problems, 140
carbon tax, 138
Carroll, Robert, 182, 183
Cayman Islands, 35, 45, 52, 55, 132
CFCs (controlled foreign corporations). See subpart F
China, 122–26, 130
Clausing, Kimberly A., 9, 46, 80, 198
Coase, Ronald, 38
companies defined as U.S. residents, 18
Compaq Computer Corp. v. Com., 88
consumption tax, 38
corporate income tax, conversion into a cash-flow consumption tax, 183–86
value-added tax (VAT), 38, 53, 182
controlled foreign corporations (CFCs). See subpart F
corporate income tax
conversion to cash-flow consumption tax, 183–86
destination basis concept, 183
origin basis vs. destination basis, 183–84
source concept, 183
X-tax, 183, 184–86
no tax before owner-level realization, 181–83
Code Section 1014, 181, 182
corporate inversions, 35
corporate residence and source rules, revision of, 194–99
active business FSI, profit shifting, 196
electivity, 197–98
interest expense of U.S. and foreign multinationals, 197–98
intra-group loans, 197
passive FSI of U.S. companies, 195–96
royalties, 196–97
transfer pricing vs. formulary apportionment, 198–99
corporate residence-based entity-level taxation of FSI. See also corporate residence and source rules, revision of; corporate residence-based taxation
approach, generally, 1, 3
complaints by supporters, 3
deferral, 169–70
foreign tax creditability, 170–71
foreign tax credits and 100 percent MRR, 170
foreign tax deductibility, 171
incentives to minimize foreign tax liabilities, 170
Japanese tax regime, 171
statutory tax rate, differential between domestic source income and FSI, 171–72
taxation of resident companies’ FSI, 167–68
tax base and rate issues, structuring the tax on resident companies’ FSI, 168–72
unilateral national welfare perspective, 167–72
corporate residence-based taxation. See also corporate residence and source rules, revision of; corporate residence-based entity-level taxation of FSI
Delaware and corporate residence, 33, 68, 73, 81
ease of avoidance, 66
electivity
assessment under current U.S. law, 69–75
evaluation of, 68–69
measuring, 69
parameters, generally, 66–69
expatriation and Code Sec. 367, residence determination rules, 35
expatriation by existing U.S. companies, 73–75
mergers and acquisitions by, 73–75
social considerations, 74
substantial business activities, 74
(p.217) foreign companies considering becoming U.S. companies, 68
foreign individuals who value U.S. incorporation, 72–73
formal electivity, 66–67
headquarters jurisdiction, 75–76
home equity bias, 66
jurisdiction
headquarters jurisdiction, 75
incorporation jurisdiction, 34, 66
measuring electivity, 69
new incorporations by U.S. individuals, 69–72
new investment by existing U.S. and foreign firms, 68–69, 75
new start-ups, types, 70–72
niche start-ups, 72
planning and policy issues under the existing U.S. rules, 65–77
prospective multinationals, 72
reduction of electivity, possible rule changes, 75–77
residence rules
anti-inversion rules, Code Sec. 7874, 35, 68, 73–74, 75, 194
business activity, 32–33
Code Sec. 367, 35
as core concept of U.S. international taxation, 32–36
corporate inversions, 35
cross-border shareholding, 33
electivity issues, 34
entity-level determination, 33–34
expatriation and Code Sec. 367, 35
incorporation jurisdiction, 34
jurisdiction
headquarters jurisdiction, 75
incorporation jurisdiction, 34, 66
tax free reorganization rules, 34–35
“toll charge,” 35
reverse endowment effect, 68
start-up businesses, 68, 70–72
substantive electivity, 67, 68
tax realization, 67
typical start-ups, 70–71
cross-border activity
complexity under U.S. international taxation system, 31–32
global welfare perspective, avoiding overtaxation, 138–39
cross-border capital flows, passive or portfolio income, 175
cross-border or multinational investment taxation, 1–2, 3
cross-border shareholding, 33
cross-crediting
marginal reimbursement rates (MRR) for foreign taxes, 11
royalties, 93–94, 196–97
Cunningham, Noel B., 186
deadweight loss
CEN and CIN, 134
marginal efficiency cost of funds (MECF), 161, 162, 163–64
national ownership neutrality (NON), 151–54
NN (national neutrality), 147, 149
tariffs and inbound capital, 157, 160
deductions distinguished from credits, 49
deemed dividends, 58–60
deferral. See also subpart F
accounting benefits and publicly traded companies, 56–57
branch vs. subsidiary, 54–55
as core concept of U.S. international taxation, 54–57
effects, marginal reimbursement rates (MRR) for foreign taxes, 12–13
exceptions to deferral (See subpart F)
“forced move” repatriation of earnings, 57
foreign branch profits, 55
foreign subsidiaries, 55
foreign tax credits and, 82–87, 98–100
foreign tax credits and, taxation of resident companies’ FSI, 24–25
formalistic origin of, 55–56
Generally Accepted Accounting Principles (GAAP), 57
lockout, significance, 95
repatriation of foreign earnings discouraged by, 55–56
trapped earnings abroad, 57
trapped foreign earnings, 95–96
Delaware and corporate residence, 33, 68, 73, 81
(p.218) Desai, Mihir A., 35, 69, 70, 74, 121, 129, 130–33, 144, 148–51, 173–75
destination basis tax, 37–38
Dharmapala, Dhammika, 69, 70, 74, 173–75
“Discussion Draft” (House Ways and Means Committee Chairman David Camp), 188
dividend
portfolio income earned by investors, source determination, 47–48
dividend repatriation, 86–87
dividends
deemed dividends, 58–60
domestic and foreign taxes, distinction between, 7–10
double non-taxation, 5, 7, 61, 115
double taxation, 4–7.
Durst, Michael C., 40, 42, 80, 198
Engler, Mitchell L., 186
entity level corporate taxation, 25
elimination of, possible scenarios and potential benefits, 179–86
corporate income, no tax before owner-level realization, 181–83
corporate income tax, conversion to cash-flow consumption tax, 183–86
destination basis concept, 183
origin basis vs. destination basis, 183–84
source-based taxation, 180–81
source concept, 183
source rules, 180
taxing corporate income directly to individuals, 180–81
X-tax, 183, 184–86
lack of conceptual integration with taxing individuals, 16–17
plan to improve existing U.S. international tax system, 186–99
corporate residence and source rules, revision, 194–99
exemption, 187–90, 193–94
Japan’s international tax rules, 191
minimum tax approach, 191–93
overall global minimum tax rate proposal, 191
tax havens, foreign taxes, and the tagging issue, 190–93
transition issue, shift to exemption or a current accrual system for FSI, 193–94
equity swaps, 173, 174
Facebook, 39, 70, 81
Zuckerberg, Mark, 21, 39, 70, 182
Fleming, J. Clifton, Jr., 93
Foreign Account Tax Compliance Act (FATCA), 140
foreign companies considering becoming U.S. companies, 68
foreign individuals, capital income, 166, 167
foreign subsidiaries
deferral, 55
foreign tax credits, 50
source-based taxation, 44–45
foreign tax credits
actual U.S. taxpayer MRRs for foreign taxes, 87–89
anti-abuse provisions, 89–91
Compaq-style transactions, 88, 89, 90
as core concept of U.S. international taxation, 48–54
credits distinguished from deductions, 49
cross-crediting, 93–95
proposed pooling approach method to impede cross-crediting, 94
royalties, 93–94
separate baskets, 94
deemed-paid or indirect foreign tax credit, 50, 91–92
deferral and
basic new view assumptions, application, 82–85
dividend repatriation, 86–87
new view, significance, 82–87
new view assumptions, 85–87
planning and policy issues under the existing U.S. rules, 82–87
2004’s temporary tax holiday, 86
economic substance, 90
foreign subsidiaries foreign tax payments, 50
foreign tax credit limitations, 92–93
generalized anti-avoidance rule (GAAR), 90
global welfare perspective, 109–11
indirect credits, 50, 91–92
(p.219) limitations, 51–53
anti-abuse and economic substance rules, 54
cross-crediting limitations, 52–53
FSI, active and passive baskets, 52
gatekeeper rules and non-creditable items, 53–54
income taxes only, 53
miscellaneous rules, 53–54
“specific economic benefit” rule, 53
U.S. response to cross-crediting, 53
marginal rate reimbursement (MRR), 49–51
mechanics and incentive effects, 48–51
planning and policy issues under the existing U.S. rules, 87–95
splitter transactions, 91
U.S. companies’ tax planning costs and, 89–95
formulary apportionment. See also transfer pricing
corporate residence and source rules, revision, 198–99
payroll factor, 81
proposal to replace transfer with formulary apportionment, 26
sourcing electivity, 20
sourcing multinationals’ income, U.S. rules’ approach, 42–43
versus transfer pricing, 42–43, 79
France, 32, 60, 118, 136, 157
free trade
advantages, 116–17
anti-free trade measures, 120
violations, 113
free trade agreements, 105, 113, 120, 127, 156
Gates, Bill, 21, 70, 182
General Electric (GE) 2, 4, 54n20, 68–69
Generally Accepted Accounting Principles (GAAP), 57
Germany, 32, 52, 58, 117
global convention fallacy, 15–16
global portfolio neutrality (GPN), 173, 174
global production efficiency
compatibility of countries’ unilateral incentives with dictates of, 119–20
ease of advancing, 117–19
global welfare fallacy, 6, 15
global welfare perspective, 107–42
reasons for, 136–139
cooperation, difficulties with, 113–20
bilateral tax treaties, 115
double taxation, 113–16
free trade agreements (See free trade agreements)
global production efficiency, 117–20
heterogeneity between countries, 115–16
homogeneity between countries, 115
trade policy and tax policy, 116–20
cooperative possibilities, 111–113, 139–40
double taxation, 110–11, 113–16
foreign tax credits, 109–11
motivation for, 108–13
normative appeal of, 108–9
Pareto deals, 111, 112, 114
traditional global welfare debate, lessons, 133–36
Google, 4, 41, 80, 81
Graetz, Michael J., 109, 110, 121, 173, 174, 190, 196, 198
Grinberg, Itai, 173, 174, 190, 196
Grubert, Harry, 80, 86, 199
Guardian Industries Corp. v. U.S., 54n20
Harrison, Ann, 148
headquarters jurisdiction, 75–76
Hejazi, Walid, 148
Hines, James R., 121, 130–33, 144, 149–53
Hobbes, Thomas, 137
home equity bias, 66, 73, 77, 118, 129, 134, 155
Horst, Thomas, 125
House Ways and Means Committee, 188
Huizinga, Harry P., 74
hybrid entities, 96–97, 196–97
IES Industries, Inc. v. U.S., 54n20
implicit deductibility system, 6, 8, 13, 50
incorporation jurisdiction, 34, 66
(p.220) intellectual property (IP), 41, 72, 93–94, 139, 155
International Monetary Fund (IMF), 62
intra-group loans, 197
intra-group transactions, sourcing electivity, 20
iPhone sales, 41–42, 183
Japan, 3, 136, 171, 186, 188, 190–92
Jobs, Steve, 39, 168, 182
jurisdiction
headquarters jurisdiction, 75
incorporation jurisdiction, 34, 66
Kane, Mitchell A., 68
Kaplow, Louis, 108, 164
Kennedy administration and subpart F, 57–58
Kleinbard, Edward D., 19, 46, 71, 82, 93, 98, 99, 171
Knoll, Michael S., 154
Krugman, Paul, 120
labor income, 165–66
Levin, Senator Carl, 66, 76, 195
LIBOR (London Interbank Offered Rate), 81, 82
Luxembourg, 52, 58, 59, 96, 97
marginal efficiency cost of funds (MECF)
deadweight loss, 161, 162, 163–64
distributional considerations, 162–63
efficiency, 161–62
optimal commodity tax literature, 161–65, 168
Ramsey rule, 163–64, 165
Slemrod & Yitzhaki framework, 22, 161
marginal reimbursement rate (MRR), 12–14
marginal tax rate (MTR), 13
McLure, Charles E., 80
McMillan, Margaret, 148
Microsoft, 70, 130
Gates, Bill, 21, 70, 182
minimum tax approach, 191–93
Morse, Susan C., 194
multinational corporations
cross-border or multinational investment taxation, 1–2, 3
deductions, treatment of, 43–45
deductions distinguished from credits, 49
earnings stripping rules, 45
foreign subsidiaries, 44–45
interest expense, 44–45
research and development expenditures, 44
entity level corporate taxation, 197–98
formulary apportionment, 42–43
interest expense
dedutions, treatment of, 44–45
U.S. and foreign multinationals, 197–98
multinational investment taxation, 1–2, 3
passive or portfolio income, 172
prospective multinationals, 72
transfer pricing, 39–43
arm’s-length transactions, 41
communications, technology improvements, 41
comparable price method, 40–42
formulary apportionment as replacement method, 42–43
intellectual property, 41
multiple margins, 10–14
average and marginal tax rates on FSI, 10–11
marginal reimbursement rate (MRR) for foreign taxes, 11–13
multiple sovereigns and source-based taxation, 36
Murdoch, Rupert, 68
Musgrave, Peggy B., 121–23, 124
national neutrality (NN), 14, 145–50
national ownership neutrality (NON), 14, 17, 140, 144, 150–54
approach, 144
deadweight loss and, 151–54
introduction by Desai & Hines, 144
problems with, 153–54
source rules, issues, 153
use of term “neutrality,” 150–151
national welfare
global portfolio neutrality (GPN), 173, 174
(p.221) NN (See national neutrality (NN))
unilateral national welfare perspective, 143–77
neutrality. See also specific type of neutrality
generally, 14–15
role in unilateral national welfare perspective, 144
use of single decisional margin, 14
niche start-ups businesses, 72
notional principal contracts (NPCs), income from, 47–48
Obama administration, 3–4, 94, 97, 191, 196
O'Hear, Michael M., 109, 110, 135
optimal commodity tax literature
average/effective tax rate to applicable to resident companies’ FSI, 22–23
marginal efficiency cost of funds (MECF) and, 161–65, 168
Organisation for Economic Cooperation and Development (OECD), 62, 140
origin basis tax vs. destination basis tax, 37–38
Pareto deals, 111, 112, 114
passive foreign investment company (PFIC), 16
passive FSI
subpart F, 166, 196
U.S. companies, revision of corporate residence and source rules, 195–96
passive or portfolio income, 172–75
cross-border capital flows, 175
efficiency effect of tax rules, 173
foreign direct investment, 173
foreign portfolio investments (FPI), 173, 174
foreign tax credits, 174–75
global portfolio neutrality (GPN), 173, 174
inbound, 173–74
outbound, 174–75
source of, 48, 81–82, 172
Pauly, Peter, 148
Peroni, Robert J., 31, 37, 92, 93
portfolio income. See passive or portfolio income
PPL Corp. v. Com., 53n15
prisoner’s dilemma, 16, 136–37, 138
profit shifting. See tax havens
property sales, 38
prospective multinationals, 72
Ramsey, Frank P., 22, 163
repatriation of foreign earnings
deferral
“forced move” repatriation of earnings, 57
repatriation discouraged by, 55–56
dividend repatriation, 86–87
residence-based entity level taxation. See corporate residence-based entity-level taxation of FSI
residence-based taxation. See corporate residence-based taxation
residence determination rules. See corporate residence-based taxation
reverse endowment effect, 68
Richman, Peggy Brewer, 121
Rock, Edward B., 33, 68, 73
royalties, 93–94, 196–97
Sarbanes-Oxley Act of 2002, 73
Shay, Stephen E., 93
Simpson, Helen, 148
Slemrod, Joel, 116, 117, 119, 120, 161, 162
source
accuracy-based source determinations, problem with, 19
approach, generally, 1–2
bilateral treaties, effect of application differences, 61–62
consumption tax, use of destination basis, 38
as core concept of U.S. international taxation, 36–48
costliness of electivity, 80
defining foreign and domestic, 18–19
destination basis tax, 37
determination of source, 18–19
effect on the character of the tax, 80–82
entity level taxation, source-based, 165–67
formulary apportionment, revision of source rules, 198–99
(p.222) multijurisdictional coordination, 79
multinational corporations (See multinational corporations)
multiple sovereigns, 36
origin basis tax vs. destination basis tax, 37–38
passive or portfolio income source issues, 48, 81–82
planning and policy issues under the existing U.S. rules, 77–82
portfolio income earned by investors, source determination, 47–48
services vs. property, 38–39
tariffs and inbound capital, 158–60
transfer pricing, 77–79
formulary apportionment, revision of source rules, 198–99
types of income, 18–19
underlying conceptual problems, 36–39
value-added tax (VAT), use of destination basis, 38
sourcing electivity
cheaper vs. costlier, 19–20
cost-of-electivity framework, 20
intra-group transactions, tax treatment of, 20
costliness of electivity, 80
“specific economic benefit” rule, 53
start-up businesses, 68, 70–72
stateless income, 7, 19, 27, 46, 171
Steinberg, Lewis, 73, 74
Stop Tax Haven Abuse Act, 76, 195
subpart F, 32, 57–61, 62
CFC’s defined under, 58
check-the-box rules, proposed legislation, 96, 97
conceptual coherence, 60–61
controlled foreign corporations (CFCs) and, 57–61
deemed dividends, 58–60
overseas tax planning, base company scenarios, 59–60
passive income, 59
deemed dividends, CFC investments, 60
effectiveness, 197
foreign base company rules, 196
Kennedy administration, 57–58
Obama administration, 97
origin of, 58–59, 112
passive FSI, 166, 196
planning and policy issues under the existing U.S. rules, 96–97
Sullivan, Martin A., 95, 168
tagging, 24, 171–72, 190, 192
tariffs and inbound capital, 156–60
standard tariffs and optimal tariffs, 156–58
tax havens
anti-tax haven rules, 7, 171, 187, 189
Bermuda, 35, 42, 66, 72
Cayman Islands, 35, 45, 52, 55, 132
entity level corporate taxation, 190–93
multinational corporations, 45–46
profit shifting, 9
Stop Tax Haven Abuse Act, 76, 195
taxing resident companies’ FSI, motivation, 20–22
Tax Reform Act of 1986, 53, 112, 194n14
territorial taxation. See source
traditional global welfare debate, lessons, 127, 133–36
advancement of global welfare through unilateral action by one or few countries, 134–35
lack of consensus regarding the end, 133–34
no basis for picking either CEN or CON as outright winner, 134
widespread policy shift toward territoriality, limited significance, 135–36
transfer pricing, 39–43, 77–79
arm’s-length transactions, 41
Bausch & Lomb v. Com., 78
communications technology improvements, 41
comparable price method, 40–42
formulary apportionment as replacement method, 42–43, 79
proposal to replace transfer pricig with formulary apportionment, 26
sourcing electivity, cheaper vs. costlier, 20
intellectual property, 41
(p.223) multinational income sourcing, U.S. rules’ approach, 39–43
transition issue, shift to exemption or a current accrual system for FSI, 193–94
transition tax, 26, 86, 194
trapped earnings abroad, deferral, 57
trapped foreign earnings, deferral, 95–96
2004’s temporary tax holiday, 86
unilateral national welfare perspective. See national welfare
United Kingdom, 3, 135, 136, 186
United Nations Committee of Experts on International Cooperation in Tax Matters, 62
U.S. individuals, capital income, 166–67
U.S. international taxation system, 30–64. See also main entry for specific topics
“alphabet soup” (battle of acronyms”), 14–16
bilateral income tax treaties, 61–62
conceptual problems with existing framework, 4–17, 199–200
core dilemma, 25–27
corporate residence determination rules, 32–36
cross-border activity, complexity, 31–32
deferral, 54–57
entity level corporate taxation, plan to marginally improve existing system, 186–99
entity-level corporate taxation and taxation of individuals, lack of conceptual integration, 16–17
foreign tax credits, 48–54
unilaterally enacted (1918), 110, 112
foreign taxes, 7–10
multiple margins, 10–14
need for a new framework, 4
planning and policy issues, generally, 65–102
political factors affecting, worldwide taxation or territoriality, 3–4
primary and secondary source materials, 31
source of income, 36–48
subpart F, 57–61
tax planning and compliance costs, 3
treatment of foreign taxes, 9
worldwide taxation or territoriality, political factors affecting, 3–4
value-added tax (VAT), 38, 53, 182
Viard, Alan D., 182, 183
Voget, Johannes, 74
Weisbach, David A., 151, 163, 164, 166
welfare economics framework, 14. See also global welfare perspective; national welfare
Wells, Brett, 74
World Trade Organization (WTO), 62, 113, 116, 120
X-tax, 183, 184–86
Yitzhaki, Shlomo, 161, 162
Zuckerberg, Mark, 21, 39, 70, 182