Both territorial and worldwide systems for taxing income of multinational companies are difficult to implement because the concepts of income source and corporate residence on which the systems are based have become less economically meaningful. Recent legislation enacted by the House and Senate would move the United States toward a territorial system for taxing US multinational corporations by eliminating taxation of dividends that foreign affiliates repatriate to their US parent companies. To protect the domestic corporate tax base, the bills would introduce a new minimum tax on foreign-source intangible profits of US multinational companies and include measures to curb income stripping by foreign-based multinationals from their US-owned subsidiaries. They would also impose a one-time transition tax, paid over time, on the accumulated foreign earnings of US companies. By eliminating the repatriation tax, the bills would remove a tax distortion that has led US companies to accumulate more than $2.6 trillion of past profits in their foreign affiliates, but would retain incentives for US companies to shift investment and reported profits overseas and would continue to place some US companies at a competitive disadvantage compared with foreign-based companies that pay no home-country tax on their foreign-source income. Compared with current law, the new corporate income tax rate of 20 percent would reduce all these remaining economic distortions.
This paper was first published by the American Enterprise Institute (AEI) here: http://www.aei.org/publication/territorial-taxation-choosing-among-imperfect-options/