• Tax Foundation: Rethinking U.S. Taxation of Overseas Operations
  • December 2, 2011 | Author: Jonathan M. Prokup
  • Law Firm: Chamberlain, Hrdlicka, White, Williams & Aughtry - West Conshohocken Office
  • Our in-house and private-practice corporate readers will likely enjoy one of the Tax Foundation’s newest reports: Rethinking U.S. Taxation of Overseas Operations. As the abstract describes:

    The United States produces a third of the world’s wealth

    but contains less than 5 percent of the world’s population.

    This disparity pushes many U.S. businesses and

    entrepreneurs to embrace globalization to improve

    productiv­ity and expand market reach. Large and small

    businesses alike are increasingly using the tools of faster

    information, cheaper transporta­tion, and overseas

    workforces that blur the traditional notions of taxes and

    services based on geographic lines.


    The U.S. government can effectively pro­mote this

    dynamism and growth with a tax system that taxes

    profits earned in the United States but leaves taxation on

    activity occurring in other countries to those other

    countries. Instead of pursuing this economic concept of

    neutrality, however, the U.S. government seeks to tax the

    profits of U.S. corporations wherever in the world they are

    earned. This worldwide tax system differs from most

    other countries, where only activity within the country’s

    borders is taxed (territoriality).


    U.S. corporations operating overseas there­fore face a

    unique combination of burdens not borne by their

    international competitors: taxes owed to the United

    States, taxes owed to the country where the operating

    activity takes place, and a complex tax system that

    attempts to reduce the resultant economic harm but

    involves an array of credits and definitions (primarily the

    Internal Revenue Code’s Sub­part F).

    Many of the report’s “key findings” won’t come as news to our corporate readership.  For example, one of the findings is that “Under Subpart F, ‘active’ income can be deferred from U.S. tax until repatriated home, while ‘passive’ income (royalties, interest, dividends) is generally subject to immediate U.S. taxation.”

    Nevertheless, the report makes a number of interesting criticisms of the Subpart F regime - e.g., that the regime is based on an outdated model of corporate operations. The solution, according to the report, is to move to a territorial tax system, an idea that has drawn recent support from the House Ways and Means Committee as well as GOP presidential candidates. As the report acknowledges, however, ““[F]rom a tax collection standpoint, it could be said that a worldwide tax system is better than a territorial taxation system as a tax revenue source.” (citation omitted)  Given the federal government’s yawning budget deficits, the interests of the “tax collection standpoint” may well prove paramount.