Exploring the Contours of a Proposed U.S. Exemption (Territorial) Tax System
J. Clifton Fleming Jr. & Robert J. Peroni, 𝘌𝘹𝘱𝘭𝘰𝘳𝘪𝘯𝘨 𝘵𝘩𝘦 𝘊𝘰𝘯𝘵𝘰𝘶𝘳𝘴 𝘰𝘧 𝘢 𝘗𝘳𝘰𝘱𝘰𝘴𝘦𝘥 𝘜.𝘚. 𝘌𝘹𝘦𝘮𝘱𝘵𝘪𝘰𝘯 (𝘛𝘦𝘳𝘳𝘪𝘵𝘰𝘳𝘪𝘢𝘭) 𝘛𝘢𝘹 𝘚𝘺𝘴𝘵𝘦𝘮, 109 Tᴀx Nᴏᴛᴇs 1557 (2005).
The Presidential Advisory Panel on Federal Tax Reform and the Joint Committee on Taxation staff have recently advanced similar proposals for a U.S. exemption system regarding particular foreign-source income of particular U.S. corporate taxpayers. According to the authors, both proposals are well meaning but ultimately flawed and unsuccessful attempts to simplify the U.S. international tax rules. The proposals, if enacted, would do little to provide simplification for most taxpayers and would intensify some existing complexities in existing law while adding new complexities of their own. Moreover, the new ownership neutrality defense of those exemption plans is largely capital import neutrality under a new label but with all the old defects. Thus, the authors conclude, it is not surprising that the proposed exemption systems would exacerbate the economic distortions caused by the current U.S. tax rules and that the reform panel's exemption proposal would largely continue the economic bias resulting from the deferral privilege. Further, the authors say that if fundamental international tax reform is to be accomplished, the Bush administration and Congress should consider replacing the present, largely ineffective, antideferral rules with a passthrough system for foreign corporations owned by U.S. persons that ends deferral completely for those shareholders. That approach would simplify the U.S. international tax system and substantially improve its economic efficiency and fairness.
Reprinted in 41 Tax Notes Int'l 217 (2006).
109 Tax Notes