The UF Tax Incubator, a group of primarily tax advisors of major law and accounting firms and som... more The UF Tax Incubator, a group of primarily tax advisors of major law and accounting firms and some in-house tax professionals, all of whom have to some extent an agenda to help their multinational clients and employers, have issued a series of recommendations on possible tax law changes. In their July 2024 Tax Notes Federal paper, Subpart F and GILTI Recommendations, they made a number of suggestions that would encourage and help multinationals secure their profit-shifting structures by emasculating the current subpart F foreign base company sales and services income rules.
In this paper, I set out in detail how this group's seriously problematic recommendations would emasculate, or completely eliminate, certain subpart F tools that exist to prevent profit shifting. For example, they recommend eliminating the FBCSI branch rule. The recent Whirlpool case and the response of the National Association of Manufacturers to that case is strong evidence of how important the branch rule is. It must be retained, and this UF Tax Incubator group wants to blithely delete it from the Code.
The UF Tax Incubator, a group of primarily tax advisors of major law and accounting firms and som... more The UF Tax Incubator, a group of primarily tax advisors of major law and accounting firms and some in-house tax professionals, all of whom have to some extent an agenda to help their multinational clients and employers, have issued a series of recommendations on possible tax law changes. In their July 2024 Tax Notes Federal paper, Considerations for Reforming the U.S. Source of Income Rules, they made a number of suggestions that would encourage and help secure multinational profit-shifting structures.
In this paper, I indicate this group's seriously problematic recommendations and provide either specific reasons why they are problematic and/or references to prior papers and other documents that recommend specifically what should be done to improve the U.S. source rules so that profit-shifting structures are curtailed and profits get taxed in alignment with real economic activity.
The attached letter includes concrete suggestions for the IRS Joint Strategic Emerging Issues Tea... more The attached letter includes concrete suggestions for the IRS Joint Strategic Emerging Issues Team to consider. The approaches suggested attack profit-shifting structures and have the potential to collect additional taxes avoided through aggressive and often sham uses of these structures. In particular, the letter and its appendices focus on (i) the application of the periodic adjustment mechanism (which implements the section 482 "commensurate with income" Congressional mandate in transfer pricing for intangible transfers) and (ii) effectively connected income taxation. The letter also refers to four articles authored or co-authored by Stephen Curtis that use publicly available information to calculate amounts of tax due under the periodic adjustment mechanism for four multinationals (Facebook, Apple, Google, and eBay). These articles also make the case for application of ECI taxation to these four multinationals. The letter refers to these as "low-hanging fruit" for the IRS to pursue.
Submission to IRS Re Rev Proc 2015-41 (Procedures for Advance Pricing Agreements) On the expectat... more Submission to IRS Re Rev Proc 2015-41 (Procedures for Advance Pricing Agreements) On the expectation that Rev Proc 2015-41 will be reissued at some point in the future, this submission to the IRS makes a number of suggestions for improvement. The principal suggestions made revolve around our belief that in recent decades the primary use (maybe the only use) by taxpayers of cost sharing agreements is in implementing profit-shifting structures. As such, we recommend that the IRS cease granting APAs for CSAs. Alternatively, if the IRS decides to continue granting APAs, we suggest various standards and requirements that could be applied so as to discourage their use in profit-shifting structures. Also, in order to make the application of the “periodic adjustment” mechanism of Reg. section 1.482-7(i)(6) easier for the IRS, we suggest that any APA for a CSA include required actions toward that end. The submission also includes considerable background on CSAs and why the IRS should be discouraging their use.
The Senate Committee on Finance international tax reform staff discussion draft issued November 1... more The Senate Committee on Finance international tax reform staff discussion draft issued November 19, 2013 sets out certain proposals for international tax reform. In a document titled “Summary of Staff Discussion Draft” issued on November 19, 2013 of the proposals, certain “Unaddressed Issues” were listed and comments were requested. This letter responds to certain of those "Unaddressed Issues". Comments are provided for the following "Unaddressed Issues":1. The pros and cons of the two options for taxing foreign market activities of foreign subsidiaries of U.S. businesses.2. The relative merits of Chairman Camp’s Option C as compared with the proposals in this Senate Finance Committee staff discussion draft.3. The treatment of foreign branches.4. Consideration of a "unitary" approach to international taxation.9. International tax rules affecting individuals.This is Submission 6 of 7 Comment Letters Provided to the Committee.
The Senate Committee on Finance international tax reform staff discussion draft issued November 1... more The Senate Committee on Finance international tax reform staff discussion draft issued November 19, 2013 sets out two possible approaches (Option Y and Option Z) for international tax reform. This letter makes comments that are common to both Option Y and Option Z. The subject matter of these comments include:1. Repeal of Indirect Foreign Tax Credit for Certain U.S. Persons2. Characterization of Certain Business Entities3. Strengthening Measures Against Corporate Expatriations4. Implementing Tax Residency Based on Place of Incorporation Or Management & Control Being in the United StatesThis is Submission 5 of 7 Comment Letters Provided to the Committee.
This is a letter to the editor of Tax Notes Federal that highlights some changes to subsections (... more This is a letter to the editor of Tax Notes Federal that highlights some changes to subsections (d) and (e) of section 954. These are the definitional rules for what is foreign base company sales income and foreign base company services income. I see this as something that was likely drafted by a disingenuous lobbyist to fall under the radar so that no one would notice it. It significantly reduces what would be subpart F income under current law. This reduction comes from two things. First, a new limitation greatly reduces the transactions that will cause FBCSI and FBCSvcI. Second, the change completely eliminates the FBCSI "branch rule" from the law, something that goes completely unmentioned in both the W-M and JCT section-by-section summaries. Not only does the change in the law look really innocuous, but this major revenue loser shows up in the JCT estimated revenue figures as a revenue gainer since it is mixed in with other items included in the same section of the draft bill. This is a major revenue loser because each dollar that is transformed from subpart F income to GILTI will be taxed at the significantly lower GILTI tax rate. Further, some of this income could be covered by the QBAI exemption that would continue under the Ways & Means bill. Any such income would be free of any U.S. tax and could be repatriated under the section 245A dividend received deduction. This is clearly something that should be eliminated from the bill before it gets enacted.
The U.S. Department of the Treasury on August 24 issued a White Paper that expresses its concerns... more The U.S. Department of the Treasury on August 24 issued a White Paper that expresses its concerns about the European Commission’s efforts to apply the European Union’s State aid restrictions to multinational enterprises’ profit-shifting structures. This article comments on two aspects of the white paper that are technically correct, but require a little more explanation for readers to understand their significance. These two aspects are:First, the article clarifies that the general comments that the White Paper makes about “call[ing] into question the ability of Member States to honor their bilateral tax treaties” might be true, but the specifics of the various targets of the Commission's investigations involve no U.S. treaties. This is because the U.S. MNCs concerned are using profit shifting structures that use tax haven companies and not U.S. companies that could claim the benefits of U.S. tax treaties.Second, the White Paper states that there may be an effective transfer of tax revenues from the U.S. to the EU. Yes, there is the “possibility” that additional foreign taxes paid as a result of these state aid investigations could merely shift tax revenues from the US to the EU. However, the article shows that this is simply not a serious or real possibility.
This is the long paper I wrote that I use as required reading for my introductory course to inter... more This is the long paper I wrote that I use as required reading for my introductory course to international taxation. The course name is "Taxation of Trans-Pacific Transactions" and is somewhat focused at the Asia-Pacific region due to my years residing and practicing there. However, the paper is broader, focusing on international taxation principles and tools generally found in the tax laws of many countries worldwide.The paper includes a chapter providing background and other information on the G-20/OECD BEPS project.Goals of Course:• Develop thought processes and work methodologies for approaching cross-border planning• Gain knowledge of and skills in applying international tax principles and tools• Develop knowledge of and facility in using available English language research sources for Asia/Pacific countries (with a few exceptions, there will not be any focus on US tax law relating to international transactions since such will have been covered in the International Taxation Inbound and Outbound courses)• Learn certain particulars of selected Asia/Pacific countries• Develop sensitivity to identify opportunities for the taxation systems of two or more countries to work well together for the advantage of the taxpayer and its business as well as sensitivity to risks when they do not work well together
The Treasury and IRS issued proposed regulations [REG-100956-19] in December 2019 regarding §§863... more The Treasury and IRS issued proposed regulations [REG-100956-19] in December 2019 regarding §§863(b) and 865(e). The proposed regulations implement the TCJA's amendment to source the sale of inventory property that is produced and sold by the taxpayer at the location(s) where production occurs.<br><br>This Outline of Topics includes background and comments on:<br><br> - Need to Expand Production Sourcing to Include All Group Members<br><br> - Prop. Reg. §1.865-3 – “Purchased and Sold” or “Produced and Sold”<br><br> - Need to Re-Think Approach to Allocation in Prop. Reg. §1.863-3(c)
A number of U.S. companies are either exploring or have completed corporate inversions that move ... more A number of U.S. companies are either exploring or have completed corporate inversions that move their parent company for tax purposes from the U.S. to some more friendly tax jurisdiction. It has been reported that many financial advisors, bankers, etc. are advising their corporate clients to consider such a move.Considering the present lack of any action within Congress to stem this corporate exodus, President Obama and Secretary Lew of the U.S. Treasury Department are reviewing available options not requiring legislation that could help eliminate the economic incentives that drive corporate inversions.Briefly stated, this letter to Secretary Lew describes two approaches not requiring legislation that haven’t been in recent discussion. Both approaches will help discourage inversions as well as some of the profit shifting that has so successfully created many billions of “stateless income”. In addition, these approaches would help reduce some earnings stripping by foreign-based multinational groups.
The House Ways & Means Committee Discussion Draft proposes a territorial taxation system for ... more The House Ways & Means Committee Discussion Draft proposes a territorial taxation system for the United States. This article published in Tax Notes on 23 January 2012 was taken from the author's comments on the Discussion Draft as submitted to the Committee in conjunction with a hearing held on 17 November 2011. See full comments at http://ssrn.com/abstract=1997482. The full comments include many additional issues not covered in this article. The Discussion Draft importantly includes a dividend-received deduction of 95% instead of 100% as a mechanism to disallow expenses that are attributable to exempt foreign earnings. This mechanism causes the receipt of a dividend to be a "taxable event". The Draft also proposes elimination of the section 956 "investment in U.S. property rules". This elimination along with a dividend being a taxable event will continue the current encouragement of U.S. MNCs to stockpile earnings overseas in tax havens and will encourage intercompany loans of such funds that will further reduce the US tax base from the interest charged. Changes are suggested that will eliminate these detrimental effects.
The OECD through its BEPS initiative should strongly recommend to OECD member and non-member coun... more The OECD through its BEPS initiative should strongly recommend to OECD member and non-member countries that they abandon the territorial and deferral systems that they currently use. To replace these systems, they would implement full-inclusion systems under which all foreign income, including profits in foreign subsidiaries, would be currently taxed by each MNE’s home country. A foreign tax credit mechanism would prevent double-taxation.This action would eliminate or significantly reduce the motivation of multinationals to shift profits into tax havens and other low-tax countries. As such, there would be significantly reduced MNE profit-shifting structures that erode the tax bases of all countries and require considerable time and resources of all tax authorities as well as of the multinationals that must create and maintain complicated supply-chain and other tax-motivated structures.Other benefits include an expanded tax base for all countries, simplification through elimination of home country transfer pricing issues and need for CFC rules, and a more level-playing field competitively both for competition between multinationals headquartered in different countries and for competition between pure domestic companies and multinationals headquartered in that country. And the expanded tax base could allow a reduction in the overall corporate tax rate, a factor that could make the change to this full-inclusion system more politically acceptable.The basic concept is simple. By being subject to current home-country taxation on its worldwide earnings, a multinational’s motivation for complicated structures that shift profits into tax havens from countries where operations, sales and services take place is significantly reduced or eliminated.
This lengthy PGP submission to Treasury and the IRS includes recommendations in a number of inter... more This lengthy PGP submission to Treasury and the IRS includes recommendations in a number of international tax areas for regulation changes, improvements, and modernization. It includes for a number of areas suggested regulatory language that could be considered.
Much of the submission concerns sourcing and effectively connected income rules. It also covers the existence of unanticipated partnerships among an MNC's group members that conduct joint business activities. Regarding subpart F, it makes suggestions concerning the manufacturing branch rule. Finally, it includes suggestions regarding the manner in which tax treaties should or should not apply to certain hybrid entities and how cost sharing agreements should be administered under Rev Proc 2015-41. It also encourages the application by the IRS of section 482 "commensurate with income" periodic adjustments to appropriate taxpayer profit-shifting structures.
This article focuses solely on the big picture issue of whether international tax reform should t... more This article focuses solely on the big picture issue of whether international tax reform should take the form of a territorial system or an alternative full inclusion system. Of course, it is also necessary to compare these possible new systems with the current hybrid deferral system that has been in place for many years. With little if any explanation of how it might be better for our nation and society as a whole, many persons and commentators whose companies or clients stand to benefit have called for a territorial system. Such persons have included CEOs, members of the professional tax community, business groups, and lobbyists. This article attempts to assess this issue on a more objective basis through a balanced understandable summary of the principal policy issues and consequences.
In connection with any transition to a new international tax system, we need an approach that eff... more In connection with any transition to a new international tax system, we need an approach that effectively deals with the trillions of dollars of previously untaxed foreign income held by CFCs. There is logic and fairness in applying a rate on those earnings that is less than the 35 percent home country rate because the rules of the game are being changed significantly.Many U.S. multinationals have had legitimate commercial reasons for retaining their earnings overseas. For these, I can happily accept whatever rate Congress chooses, whether it is at the lower 3.5 percent level of TRA 2014, the 14 percent level in the Administration's Green Book, or the 20 percent level in the Baucus discussion draft.However, for those U.S. multinationals that have aggressively pushed the envelope to maximize their stateless income over the past decade and longer through convoluted tax structuring, we as a country cannot be rewarding such behavior with favorable lower-than-35 percent rates.In this article, I suggests two approaches to identifying CFC earnings that should be subject to the full 35 percent corporate tax rate when transitioning to a new tax system, with the remainder subject to whatever favorable transition rate Congress might choose.
This lengthy submission includes recommendations in a number of international tax areas for regul... more This lengthy submission includes recommendations in a number of international tax areas for regulation changes, improvements, and modernization. It includes for a number of areas suggested regulatory language that could be considered. Much of the submission concerns sourcing and effectively connected income rules. It also covers the existence of unanticipated partnerships among an MNC&#39;s group members that conduct joint business activities. Regarding subpart F, it makes suggestions concerning the manufacturing branch rule. Finally, it includes suggestions regarding the manner in which tax treaties should or should not apply to certain hybrid entities and how cost sharing agreements should be administered under Rev Proc 2015-41. It also encourages the application by the IRS of section 482 &quot;commensurate with income&quot; periodic adjustments to appropriate taxpayer profit-shifting structures.
The UF Tax Incubator, a group of primarily tax advisors of major law and accounting firms and som... more The UF Tax Incubator, a group of primarily tax advisors of major law and accounting firms and some in-house tax professionals, all of whom have to some extent an agenda to help their multinational clients and employers, have issued a series of recommendations on possible tax law changes. In their July 2024 Tax Notes Federal paper, Subpart F and GILTI Recommendations, they made a number of suggestions that would encourage and help multinationals secure their profit-shifting structures by emasculating the current subpart F foreign base company sales and services income rules.
In this paper, I set out in detail how this group's seriously problematic recommendations would emasculate, or completely eliminate, certain subpart F tools that exist to prevent profit shifting. For example, they recommend eliminating the FBCSI branch rule. The recent Whirlpool case and the response of the National Association of Manufacturers to that case is strong evidence of how important the branch rule is. It must be retained, and this UF Tax Incubator group wants to blithely delete it from the Code.
The UF Tax Incubator, a group of primarily tax advisors of major law and accounting firms and som... more The UF Tax Incubator, a group of primarily tax advisors of major law and accounting firms and some in-house tax professionals, all of whom have to some extent an agenda to help their multinational clients and employers, have issued a series of recommendations on possible tax law changes. In their July 2024 Tax Notes Federal paper, Considerations for Reforming the U.S. Source of Income Rules, they made a number of suggestions that would encourage and help secure multinational profit-shifting structures.
In this paper, I indicate this group's seriously problematic recommendations and provide either specific reasons why they are problematic and/or references to prior papers and other documents that recommend specifically what should be done to improve the U.S. source rules so that profit-shifting structures are curtailed and profits get taxed in alignment with real economic activity.
The attached letter includes concrete suggestions for the IRS Joint Strategic Emerging Issues Tea... more The attached letter includes concrete suggestions for the IRS Joint Strategic Emerging Issues Team to consider. The approaches suggested attack profit-shifting structures and have the potential to collect additional taxes avoided through aggressive and often sham uses of these structures. In particular, the letter and its appendices focus on (i) the application of the periodic adjustment mechanism (which implements the section 482 &quot;commensurate with income&quot; Congressional mandate in transfer pricing for intangible transfers) and (ii) effectively connected income taxation. The letter also refers to four articles authored or co-authored by Stephen Curtis that use publicly available information to calculate amounts of tax due under the periodic adjustment mechanism for four multinationals (Facebook, Apple, Google, and eBay). These articles also make the case for application of ECI taxation to these four multinationals. The letter refers to these as &quot;low-hanging fruit&quot; for the IRS to pursue.
Submission to IRS Re Rev Proc 2015-41 (Procedures for Advance Pricing Agreements) On the expectat... more Submission to IRS Re Rev Proc 2015-41 (Procedures for Advance Pricing Agreements) On the expectation that Rev Proc 2015-41 will be reissued at some point in the future, this submission to the IRS makes a number of suggestions for improvement. The principal suggestions made revolve around our belief that in recent decades the primary use (maybe the only use) by taxpayers of cost sharing agreements is in implementing profit-shifting structures. As such, we recommend that the IRS cease granting APAs for CSAs. Alternatively, if the IRS decides to continue granting APAs, we suggest various standards and requirements that could be applied so as to discourage their use in profit-shifting structures. Also, in order to make the application of the “periodic adjustment” mechanism of Reg. section 1.482-7(i)(6) easier for the IRS, we suggest that any APA for a CSA include required actions toward that end. The submission also includes considerable background on CSAs and why the IRS should be discouraging their use.
The Senate Committee on Finance international tax reform staff discussion draft issued November 1... more The Senate Committee on Finance international tax reform staff discussion draft issued November 19, 2013 sets out certain proposals for international tax reform. In a document titled “Summary of Staff Discussion Draft” issued on November 19, 2013 of the proposals, certain “Unaddressed Issues” were listed and comments were requested. This letter responds to certain of those "Unaddressed Issues". Comments are provided for the following "Unaddressed Issues":1. The pros and cons of the two options for taxing foreign market activities of foreign subsidiaries of U.S. businesses.2. The relative merits of Chairman Camp’s Option C as compared with the proposals in this Senate Finance Committee staff discussion draft.3. The treatment of foreign branches.4. Consideration of a "unitary" approach to international taxation.9. International tax rules affecting individuals.This is Submission 6 of 7 Comment Letters Provided to the Committee.
The Senate Committee on Finance international tax reform staff discussion draft issued November 1... more The Senate Committee on Finance international tax reform staff discussion draft issued November 19, 2013 sets out two possible approaches (Option Y and Option Z) for international tax reform. This letter makes comments that are common to both Option Y and Option Z. The subject matter of these comments include:1. Repeal of Indirect Foreign Tax Credit for Certain U.S. Persons2. Characterization of Certain Business Entities3. Strengthening Measures Against Corporate Expatriations4. Implementing Tax Residency Based on Place of Incorporation Or Management & Control Being in the United StatesThis is Submission 5 of 7 Comment Letters Provided to the Committee.
This is a letter to the editor of Tax Notes Federal that highlights some changes to subsections (... more This is a letter to the editor of Tax Notes Federal that highlights some changes to subsections (d) and (e) of section 954. These are the definitional rules for what is foreign base company sales income and foreign base company services income. I see this as something that was likely drafted by a disingenuous lobbyist to fall under the radar so that no one would notice it. It significantly reduces what would be subpart F income under current law. This reduction comes from two things. First, a new limitation greatly reduces the transactions that will cause FBCSI and FBCSvcI. Second, the change completely eliminates the FBCSI &quot;branch rule&quot; from the law, something that goes completely unmentioned in both the W-M and JCT section-by-section summaries. Not only does the change in the law look really innocuous, but this major revenue loser shows up in the JCT estimated revenue figures as a revenue gainer since it is mixed in with other items included in the same section of the draft bill. This is a major revenue loser because each dollar that is transformed from subpart F income to GILTI will be taxed at the significantly lower GILTI tax rate. Further, some of this income could be covered by the QBAI exemption that would continue under the Ways &amp; Means bill. Any such income would be free of any U.S. tax and could be repatriated under the section 245A dividend received deduction. This is clearly something that should be eliminated from the bill before it gets enacted.
The U.S. Department of the Treasury on August 24 issued a White Paper that expresses its concerns... more The U.S. Department of the Treasury on August 24 issued a White Paper that expresses its concerns about the European Commission’s efforts to apply the European Union’s State aid restrictions to multinational enterprises’ profit-shifting structures. This article comments on two aspects of the white paper that are technically correct, but require a little more explanation for readers to understand their significance. These two aspects are:First, the article clarifies that the general comments that the White Paper makes about “call[ing] into question the ability of Member States to honor their bilateral tax treaties” might be true, but the specifics of the various targets of the Commission's investigations involve no U.S. treaties. This is because the U.S. MNCs concerned are using profit shifting structures that use tax haven companies and not U.S. companies that could claim the benefits of U.S. tax treaties.Second, the White Paper states that there may be an effective transfer of tax revenues from the U.S. to the EU. Yes, there is the “possibility” that additional foreign taxes paid as a result of these state aid investigations could merely shift tax revenues from the US to the EU. However, the article shows that this is simply not a serious or real possibility.
This is the long paper I wrote that I use as required reading for my introductory course to inter... more This is the long paper I wrote that I use as required reading for my introductory course to international taxation. The course name is "Taxation of Trans-Pacific Transactions" and is somewhat focused at the Asia-Pacific region due to my years residing and practicing there. However, the paper is broader, focusing on international taxation principles and tools generally found in the tax laws of many countries worldwide.The paper includes a chapter providing background and other information on the G-20/OECD BEPS project.Goals of Course:• Develop thought processes and work methodologies for approaching cross-border planning• Gain knowledge of and skills in applying international tax principles and tools• Develop knowledge of and facility in using available English language research sources for Asia/Pacific countries (with a few exceptions, there will not be any focus on US tax law relating to international transactions since such will have been covered in the International Taxation Inbound and Outbound courses)• Learn certain particulars of selected Asia/Pacific countries• Develop sensitivity to identify opportunities for the taxation systems of two or more countries to work well together for the advantage of the taxpayer and its business as well as sensitivity to risks when they do not work well together
The Treasury and IRS issued proposed regulations [REG-100956-19] in December 2019 regarding §§863... more The Treasury and IRS issued proposed regulations [REG-100956-19] in December 2019 regarding §§863(b) and 865(e). The proposed regulations implement the TCJA's amendment to source the sale of inventory property that is produced and sold by the taxpayer at the location(s) where production occurs.<br><br>This Outline of Topics includes background and comments on:<br><br> - Need to Expand Production Sourcing to Include All Group Members<br><br> - Prop. Reg. §1.865-3 – “Purchased and Sold” or “Produced and Sold”<br><br> - Need to Re-Think Approach to Allocation in Prop. Reg. §1.863-3(c)
A number of U.S. companies are either exploring or have completed corporate inversions that move ... more A number of U.S. companies are either exploring or have completed corporate inversions that move their parent company for tax purposes from the U.S. to some more friendly tax jurisdiction. It has been reported that many financial advisors, bankers, etc. are advising their corporate clients to consider such a move.Considering the present lack of any action within Congress to stem this corporate exodus, President Obama and Secretary Lew of the U.S. Treasury Department are reviewing available options not requiring legislation that could help eliminate the economic incentives that drive corporate inversions.Briefly stated, this letter to Secretary Lew describes two approaches not requiring legislation that haven’t been in recent discussion. Both approaches will help discourage inversions as well as some of the profit shifting that has so successfully created many billions of “stateless income”. In addition, these approaches would help reduce some earnings stripping by foreign-based multinational groups.
The House Ways & Means Committee Discussion Draft proposes a territorial taxation system for ... more The House Ways & Means Committee Discussion Draft proposes a territorial taxation system for the United States. This article published in Tax Notes on 23 January 2012 was taken from the author's comments on the Discussion Draft as submitted to the Committee in conjunction with a hearing held on 17 November 2011. See full comments at http://ssrn.com/abstract=1997482. The full comments include many additional issues not covered in this article. The Discussion Draft importantly includes a dividend-received deduction of 95% instead of 100% as a mechanism to disallow expenses that are attributable to exempt foreign earnings. This mechanism causes the receipt of a dividend to be a "taxable event". The Draft also proposes elimination of the section 956 "investment in U.S. property rules". This elimination along with a dividend being a taxable event will continue the current encouragement of U.S. MNCs to stockpile earnings overseas in tax havens and will encourage intercompany loans of such funds that will further reduce the US tax base from the interest charged. Changes are suggested that will eliminate these detrimental effects.
The OECD through its BEPS initiative should strongly recommend to OECD member and non-member coun... more The OECD through its BEPS initiative should strongly recommend to OECD member and non-member countries that they abandon the territorial and deferral systems that they currently use. To replace these systems, they would implement full-inclusion systems under which all foreign income, including profits in foreign subsidiaries, would be currently taxed by each MNE’s home country. A foreign tax credit mechanism would prevent double-taxation.This action would eliminate or significantly reduce the motivation of multinationals to shift profits into tax havens and other low-tax countries. As such, there would be significantly reduced MNE profit-shifting structures that erode the tax bases of all countries and require considerable time and resources of all tax authorities as well as of the multinationals that must create and maintain complicated supply-chain and other tax-motivated structures.Other benefits include an expanded tax base for all countries, simplification through elimination of home country transfer pricing issues and need for CFC rules, and a more level-playing field competitively both for competition between multinationals headquartered in different countries and for competition between pure domestic companies and multinationals headquartered in that country. And the expanded tax base could allow a reduction in the overall corporate tax rate, a factor that could make the change to this full-inclusion system more politically acceptable.The basic concept is simple. By being subject to current home-country taxation on its worldwide earnings, a multinational’s motivation for complicated structures that shift profits into tax havens from countries where operations, sales and services take place is significantly reduced or eliminated.
This lengthy PGP submission to Treasury and the IRS includes recommendations in a number of inter... more This lengthy PGP submission to Treasury and the IRS includes recommendations in a number of international tax areas for regulation changes, improvements, and modernization. It includes for a number of areas suggested regulatory language that could be considered.
Much of the submission concerns sourcing and effectively connected income rules. It also covers the existence of unanticipated partnerships among an MNC's group members that conduct joint business activities. Regarding subpart F, it makes suggestions concerning the manufacturing branch rule. Finally, it includes suggestions regarding the manner in which tax treaties should or should not apply to certain hybrid entities and how cost sharing agreements should be administered under Rev Proc 2015-41. It also encourages the application by the IRS of section 482 "commensurate with income" periodic adjustments to appropriate taxpayer profit-shifting structures.
This article focuses solely on the big picture issue of whether international tax reform should t... more This article focuses solely on the big picture issue of whether international tax reform should take the form of a territorial system or an alternative full inclusion system. Of course, it is also necessary to compare these possible new systems with the current hybrid deferral system that has been in place for many years. With little if any explanation of how it might be better for our nation and society as a whole, many persons and commentators whose companies or clients stand to benefit have called for a territorial system. Such persons have included CEOs, members of the professional tax community, business groups, and lobbyists. This article attempts to assess this issue on a more objective basis through a balanced understandable summary of the principal policy issues and consequences.
In connection with any transition to a new international tax system, we need an approach that eff... more In connection with any transition to a new international tax system, we need an approach that effectively deals with the trillions of dollars of previously untaxed foreign income held by CFCs. There is logic and fairness in applying a rate on those earnings that is less than the 35 percent home country rate because the rules of the game are being changed significantly.Many U.S. multinationals have had legitimate commercial reasons for retaining their earnings overseas. For these, I can happily accept whatever rate Congress chooses, whether it is at the lower 3.5 percent level of TRA 2014, the 14 percent level in the Administration's Green Book, or the 20 percent level in the Baucus discussion draft.However, for those U.S. multinationals that have aggressively pushed the envelope to maximize their stateless income over the past decade and longer through convoluted tax structuring, we as a country cannot be rewarding such behavior with favorable lower-than-35 percent rates.In this article, I suggests two approaches to identifying CFC earnings that should be subject to the full 35 percent corporate tax rate when transitioning to a new tax system, with the remainder subject to whatever favorable transition rate Congress might choose.
This lengthy submission includes recommendations in a number of international tax areas for regul... more This lengthy submission includes recommendations in a number of international tax areas for regulation changes, improvements, and modernization. It includes for a number of areas suggested regulatory language that could be considered. Much of the submission concerns sourcing and effectively connected income rules. It also covers the existence of unanticipated partnerships among an MNC&#39;s group members that conduct joint business activities. Regarding subpart F, it makes suggestions concerning the manufacturing branch rule. Finally, it includes suggestions regarding the manner in which tax treaties should or should not apply to certain hybrid entities and how cost sharing agreements should be administered under Rev Proc 2015-41. It also encourages the application by the IRS of section 482 &quot;commensurate with income&quot; periodic adjustments to appropriate taxpayer profit-shifting structures.
This lengthy submission includes recommendations in a number of international tax areas for regul... more This lengthy submission includes recommendations in a number of international tax areas for regulation changes, improvements, and modernizations. It includes for a number of areas suggested regulatory language that could be considered.
Much of the submission concerns sourcing and effectively connected income rules. It also covers the existence of unanticipated partnerships among an MNC's group members that conduct joint business activities. Regarding subpart F, it makes suggestions concerning the manufacturing branch rule. Finally, it includes suggestions regarding the manner in which tax treaties should or should not apply to certain hybrid entities.
This submission makes comments on REG-130700-14, which includes proposed regulations on the class... more This submission makes comments on REG-130700-14, which includes proposed regulations on the classification of cloud transactions and transactions involving digital content.
In addition to some suggested changes to reflect industry practice, the submission importantly suggests recognition and the inclusion of an example to deal with profit-shifting structures.
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Papers by Jeffery M Kadet
In this paper, I set out in detail how this group's seriously problematic recommendations would emasculate, or completely eliminate, certain subpart F tools that exist to prevent profit shifting. For example, they recommend eliminating the FBCSI branch rule. The recent Whirlpool case and the response of the National Association of Manufacturers to that case is strong evidence of how important the branch rule is. It must be retained, and this UF Tax Incubator group wants to blithely delete it from the Code.
In this paper, I indicate this group's seriously problematic recommendations and provide either specific reasons why they are problematic and/or references to prior papers and other documents that recommend specifically what should be done to improve the U.S. source rules so that profit-shifting structures are curtailed and profits get taxed in alignment with real economic activity.
Much of the submission concerns sourcing and effectively connected income rules. It also covers the existence of unanticipated partnerships among an MNC's group members that conduct joint business activities. Regarding subpart F, it makes suggestions concerning the manufacturing branch rule. Finally, it includes suggestions regarding the manner in which tax treaties should or should not apply to certain hybrid entities and how cost sharing agreements should be administered under Rev Proc 2015-41. It also encourages the application by the IRS of section 482 "commensurate with income" periodic adjustments to appropriate taxpayer profit-shifting structures.
In this paper, I set out in detail how this group's seriously problematic recommendations would emasculate, or completely eliminate, certain subpart F tools that exist to prevent profit shifting. For example, they recommend eliminating the FBCSI branch rule. The recent Whirlpool case and the response of the National Association of Manufacturers to that case is strong evidence of how important the branch rule is. It must be retained, and this UF Tax Incubator group wants to blithely delete it from the Code.
In this paper, I indicate this group's seriously problematic recommendations and provide either specific reasons why they are problematic and/or references to prior papers and other documents that recommend specifically what should be done to improve the U.S. source rules so that profit-shifting structures are curtailed and profits get taxed in alignment with real economic activity.
Much of the submission concerns sourcing and effectively connected income rules. It also covers the existence of unanticipated partnerships among an MNC's group members that conduct joint business activities. Regarding subpart F, it makes suggestions concerning the manufacturing branch rule. Finally, it includes suggestions regarding the manner in which tax treaties should or should not apply to certain hybrid entities and how cost sharing agreements should be administered under Rev Proc 2015-41. It also encourages the application by the IRS of section 482 "commensurate with income" periodic adjustments to appropriate taxpayer profit-shifting structures.
Much of the submission concerns sourcing and effectively connected income rules. It also covers the existence of unanticipated partnerships among an MNC's group members that conduct joint business activities. Regarding subpart F, it makes suggestions concerning the manufacturing branch rule. Finally, it includes suggestions regarding the manner in which tax treaties should or should not apply to certain hybrid entities.
In addition to some suggested changes to reflect industry practice, the submission importantly suggests recognition and the inclusion of an example to deal with profit-shifting structures.