International Tax Reform
Prepared for SIEPR-TPC Tax Reform
Conference
Rosanne Altshuler
January 18, 2013
The Current System
35%
The Current System
35%
15%
Lowland
The Current System
35%
15%
A U.S. corporation sets up an affiliate
In Lowland…
The Current System
35%
15%
… earns $100
and pays $15 in tax
to Lowland
Worldwide taxation with credit
35%
$100
15%
Owes $35 to U.S.
─ $15 credit for taxes
paid to Lowland
= $20 residual tax to U.S.
Worldwide taxation with credit
35%
55%
earns $100 in
Highland and pays
$55 in taxes
Worldwide taxation with credit
35%
$100
55%
Owe $35 to U.S.
─ $35 credit for taxes paid to Highland
= $0 residual tax
and $20 of “excess credits”
Worldwide taxation with credit
Earns $100
35%
15%
55%
Earns $100
Worldwide taxation with credit
35%
15%
$100
Use $20 of “excess credits” from
Highland to offset
$20 owed on income from Lowland
= $0 residual tax
55%
When is Tax on Foreign Earnings Paid?
35%
$100
15%
Owe $20 residual tax to U.S.
on earnings in Lowland
ONLY when the $100
is repatriated
The current worldwide credit and
deferral system creates many avenues for
sophisticated tax planning
It’s complicated…
Sub license
Overseas
buyers
Transfer of
intellectual
property
Royalties
Sub
license
Royalties
License
Royalties
Even Dilbert does Google’s
Double Irish with a Dutch Sandwich
Discontent with the current system has
focused policy makers and analysts on
possible reforms…
How do Territorial Systems work?
35%
$100
15%
No tax owed to U.S. on the
active income earned in Lowland
Territorial taxation through dividend exemption
(royalty payments made to parent would be taxed)
List of OECD countries
Australia, Austria, Belgium, Canada, Chile, Czech
Republic, Denmark, Estonia, Finland, France,
Germany, Greece, Hungary, Iceland, Ireland,
Israel, Italy, Japan, Korea, Luxembourg, Mexico,
Netherlands, New Zealand, Norway, Poland,
Portugal, Slovenia, Slovak Republic, Spain,
Sweden, Switzerland, Turkey, United Kingdom,
United States
Territorial Tax Systems
Australia, Austria, Belgium, Canada, Chile, Czech
Republic, Denmark, Estonia, Finland, France,
Germany, Greece, Hungary, Iceland, Ireland,
Israel, Italy, Japan, Korea, Luxembourg, Mexico,
Netherlands, New Zealand, Norway, Poland,
Portugal, Slovenia, Slovak Republic, Spain,
Sweden, Switzerland, Turkey, United Kingdom,
United States
Worldwide Tax Systems
Australia, Austria, Belgium, Canada, Chile, Czech
Republic, Denmark, Estonia, Finland, France,
Germany, Greece, Hungary, Iceland, Ireland,
Israel, Italy, Japan, Korea, Luxembourg, Mexico,
Netherlands, New Zealand, Norway, Poland,
Portugal, Slovenia, Slovak Republic, Spain,
Sweden, Switzerland, Turkey, United Kingdom,
United States
50
Top Combined Statutory
Corporate Tax Rates since 1986
45
United States
40
35
OECD average
excluding U.S.
30
25
20
1987
1991
1995
1999
Combines central and sub-government taxes.
Source: OECD tax database.
2003
2007
2011
Problems with current system
• Income shifting and its effects on investment
location decisions and revenue
• Lockout effect of repatriation tax and
associated costs of avoidance
• Complexity
• May put U.S. multinationals at a competitive
disadvantage
• Raises little revenue
(Some) Possible Reforms
• Fundamental reforms
– Worldwide taxation with repeal of deferral
– Dividend exemption
• Grubert and Altshuler (2012): combine dividend
exemption with a minimum tax of 15%
– Formulary apportionment
(Some) Possible Reforms
• Incremental reforms
– Lower the statutory rate
– Repeal check the box
– Administration budget proposals and other
reforms of current law
Evaluating the Reforms
• Key considerations
–
–
–
–
–
–
–
Repatriation tax?
Income shifting incentives?
Tax revenue?
Simplicity?
Location incentives for tangible and intangible capital?
Expatriation incentives?
Transition rules?
Effective Tax Rate Simulations*
• Home country (U.S.) with tax rate of 30%
• Low tax country (5% tax rate), high tax country
(25% tax rate), tax haven (0% tax rate)
• A discrete high tech investment in low tax country
based on U.S. R&D
• A routine investment in high tax location
• Income shifting possible but is not costless
*From Grubert and Altshuler, 2012, “Fixing the System: An Analysis of Alternative
Proposals for the Reform of International Tax”
Effective Tax Rate Simulations*
Investment in
low tax
country
(5% tax rate)
Investment in
high tax
country
(25% tax rate)
Current law with 30% rate
-23.6%
13.0%
Current law, 30% rate, repeal of deferral
30.0%
30.0%
Current law, 30% rate, repeal of check the
box
-18.2%
24.2%
Dividend exemption
-29.5%
10.7%
5.6%
12.1%
Dividend exemption with minimum tax of
15%
*From Grubert and Altshuler, 2012, “Fixing the System: An Analysis of Alternative
Proposals for the Reform of International Tax”. Assumes check the box remains in place
unless noted.
Conclusions
• Look for reforms that make improvements to
the current system across many dimensions
including lockout effect, income shifting,
competitiveness, and complexity
• Goals may not be in conflict
– A minimum tax combined with dividend
exemption may have advantages over repeal of
deferral and dividend exemption alone, and
reduce their shortcomings