Document Type

Article

Publication Title

Brooklyn Journal of International Law

Abstract

Among the choices of how the United States could tax the earnings of controlled foreign corporations (CFCs) are these: (1) exempt the income from tax permanently; (2) accrue the income currently and grant either a credit or deduction for foreign taxes; or, (3) defer taxation until repatriation and allow a credit or deduction for foreign taxes at that time. The present system reflects aspects of all three approaches, but mainly accords deferral with a foreign tax credit upon repatriation, except for income taxed currently (actually or effectively) under anti-deferral regimes such as subpart F and the passive foreign investment company (PFIC) rules. The essential premise which the present system rests upon, and variously compromises, is that residence-based, export-neutral taxation is fair and efficient, provided that it alleviates international double taxation and prohibits deferral in appropriate cases. David Rosenbloom's paper examines the U.S. system in light of the traditional criteria-fairness, efficiency, and simplicity- and, with an emphasis on simplicity and a refreshingly congenial approach to fairness and efficiency, concludes that a significant portion of CFC profits should be exempt from U.S. taxation and that much of the balance should be taxed currently, with only a deduction for foreign taxes. Before addressing the paper, I would like to begin with a thoroughly unrealistic situation and then build upon it the complications that have resulted in the inordinately intricate complex of rules in place 'today. The purpose is to suggest that, while present rules are unforgivably complicated and proposals like Mr. Rosenbloom's deserve serious consideration, there may not be room for much improvement short of retreating from income taxation in favor of wage, consumption, or wealth-based tax systems. Unless such a bold direction is taken, and I am not suggesting that it should be, the best prescription may be for modest, incremental change.

First Page

1595

Volume

26

Publication Date

2001

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