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Taxation and Development: The U.S. Perspective

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Taxation and Development - A Comparative Study

Part of the book series: Ius Comparatum - Global Studies in Comparative Law ((GSCL,volume 21))

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Notes

  1. 1.

    Staff of J. Comm. on Tax’n, 112th Cong., Background and Selected Issues Related to the U.S. International Tax System and Systems that Exempt Foreign Business Income 2 (Comm. Print 2011), available at https://www.jct.gov/publications.html?func=startdown&id=3793 [hereinafter Background]. The current maximum U.S. corporate tax rate is 35 %. See infra 7.1 for a discussion of the U.S. corporate tax rate structure.

  2. 2.

    Most enacted tax legislation is codified as part of the Internal Revenue Code (I.R.C.), which is Title 26 of the United States Code. The current Code is entitled the “Internal Revenue Code of 1986.” Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended. I.R.C. § 7701(a)(4) (2014). U.S. persons include domestic corporations. I.R.C. § 7701(a)(30) (2014).

  3. 3.

    Background, supra note 1, at 2.

  4. 4.

    Id.

  5. 5.

    Staff of J. Comm. on Tax’n, 111th Cong., Present Law and Background Related to Possible Income Shifting and Transfer Pricing 29 (Comm. Print 2010), available at https://www.jct.gov/publications.html?func=startdown&id=3692 [hereinafter Income Shifting]. Under international law, each sovereign nation has the right to regulate based on a nexus to the territory or to a person (commonly known as source or residence jurisdiction). Restatement (Third) of Foreign Relations Law of the U.S. §§ 402, 403 (1987).

  6. 6.

    I.R.C. §§ 951–964 (2014); Staff of J. Comm. on Tax’n, 109th Cong., The Impact of International Tax Reform: Background and Selected Issues Relating to U.S. International Tax Rules and the Competitiveness of U.S Businesses 13, 15 (Comm. Print 2006), available at https://www.jct.gov/publications.html?func=startdown&id=1498 [hereinafter Impact of International Tax Reform].

  7. 7.

    Staff of J. Comm. on Tax’n, 113th Cong., Present Law and Background Related to Proposals to Reform the Taxation of Income of Multinational Enterprises 3–4 (Comm. Print 2014) available at https://www.jct.gov/publications.html?func=startdown&id=4656 [hereinafter Tax Reform Proposals].

  8. 8.

    Background, supra note 1, at 2.

  9. 9.

    I.R.C. § 957(a) (2014).

  10. 10.

    I.R.C. § 951(b) (2014).

  11. 11.

    I.R.C. §§ 951–964.

  12. 12.

    Impact of International Tax Reform, supra note 6, at 15.

  13. 13.

    Id.

  14. 14.

    The term “transfer price” refers to the “price at which one company sells goods or services to a related affiliate in its supply chain.” Thus, “transfer pricing” is the “system of laws and practices used by countries to ensure that goods and services transferred between related companies are appropriately priced, based on market conditions, such that profits are correctly reflected in each jurisdiction.” The principal tax policy concern is that profits may be “artificially inflated in low-tax countries and depressed in high-tax countries” through aggressive transfer pricing that does not reflect an arm’s-length result from a related-party transaction. Income Shifting, supra note 5, at 132.

  15. 15.

    Id. at 18.

  16. 16.

    Cong. Budget Office, Pub. No. 4150, Options for Taxing U.S. Multinational Corporations 5 (2013), available at http://www.cbo.gov/sites/default/files/cbofiles/attachments/43764_MultinationalTaxes_rev02-28-2013.pdf [hereinafter CBO, Options].

  17. 17.

    Impact of International Tax Reform, supra note 6, at 13 (citing I.R.C. §§ 901, 902, 960, 1291(g) (2014)).

  18. 18.

    Id. (citing I.R.C. §§ 901, 904 (2014)).

  19. 19.

    Impact of International Tax Reform, supra note 6, at 14–15.

  20. 20.

    Id. at 15.

  21. 21.

    Jane G. Gravelle, Cong. Research Serv., R40623, Tax Havens: International Tax Avoidance and Evasion 12 (2013), available at http://www.fas.org/sgp/crs/misc/R40623.pdf.

  22. 22.

    Id. at Summary.

  23. 23.

    Id. at 12–13.

  24. 24.

    Id. at 12; see also Jennifer Gravelle, Who Will Benefit from a Territorial Tax?: Characteristics of Multinational Firms 124, 132, in Territorial Taxation: Challenges and Alternatives National Tax Association, Proceedings of the Annual Conference (2012), available at http://www.ntanet.org/images/stories/pdf/proceedings/12/15_gravelle.pdf.

  25. 25.

    See, e.g., Melissa Costa & Jennifer Gravelle, Taxing Multinational Corporations: Average Tax Rates, 65 Tax L. Rev. 391, 404–7, 409–10 (2012).

  26. 26.

    Bruce Bartlett, Are Taxes in the U.S. High or Low?, N.Y. Times, May 31, 2011, 6:00 AM, available at http://economix.blogs.nytimes.com/2011/05/31/are-taxes-in-the-u-s-high-or-low/.

  27. 27.

    Impact of International Tax Reform, supra note 6, at 29.

  28. 28.

    Id.

  29. 29.

    I.R.C. §§ 871(b), 882 (2014).

  30. 30.

    I.R.C. §§ 871(a), 881 (2014).

  31. 31.

    See, e.g., I.R.C. § 871(h) (2014) (the portfolio interest exception).

  32. 32.

    Impact of International Tax Reform, supra note 6, at 31.

  33. 33.

    Id.

  34. 34.

    Id. Treaties also outline the procedures by which the two treaty countries may mutually resolve inconsistent positions taken by the countries on a single item of income or deduction. Id.

  35. 35.

    United States Income Tax Treaties – A to Z, IRS, available at http://www.irs.gov/Businesses/International-Businesses/United-States-Income-Tax-Treaties---A-to-Z (last updated February 25, 2015) [hereinafter U.S. Income Tax Treaties]. See infra 3.1 for a discussion of the U.S. tax treaty network.

  36. 36.

    Impact of International Tax Reform, supra note 6, at 31.

  37. 37.

    I.R.C. § 61 (2014). “Gross income means all income from whatever source derived…” Id. (emphasis added).

  38. 38.

    Allison Christians, Samuel A. Donaldson, & Phillip F. Postlewaite, United States International Taxation 5 (2nd ed. 2011).

  39. 39.

    Id.

  40. 40.

    Id. at 64.

  41. 41.

    Id.; I.R.C. §§ 901(a), 901(b) (2014).

  42. 42.

    Christians, Donaldson, & Postlewaite, supra note 38, at 64.

  43. 43.

    Id. at 64–65. As of 2014, 28 out of 34 countries in the OECD have some type of hybrid territorial regime. Tax Reform Proposals, supra note 7, at 36–37.

  44. 44.

    Chye-Ching Huang, et al., The Fiscal and Economic Risks of Territorial Taxation, Center on Budget and Policy 1, Jan. 31, 2013, available at http://www.cbpp.org/files/1-31-13tax.pdf.

  45. 45.

    I.R.C. § 911 (2014).

  46. 46.

    See generally Kim Dixon, Obama Might Back Territorial Tax System: Business Chief, Jan. 31, 2013, available at

    http://www.reuters.com/article/2013/01/31/us-usa-tax-territorial-idUSBRE90U15J20130131.

  47. 47.

    See generally Dep’t of the Treasury, General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals (2016), available at http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2017.pdf [hereinafter Administration’s FY 2017 Revenue Proposals].

  48. 48.

    Tax Reform Proposals, supra note 7, at 59–85; see, e.g., Press Release, Representative Dave Camp, Camp Releases International Tax Reform Discussion Draft (Oct. 26, 2011), available at waysandmeans.house.gov/news/documentsingle.aspx?DocumentID=266168.

  49. 49.

    See, e.g., Nat’l Comm’n on Fiscal Responsibility and Reform, The Moment of Truth (2010), available at http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf; see also Roseanne Altshuler & Harry Grubert, Corporate Taxes in a World Economy: Reforming the Taxation of Cross-Border Income, in Fundamental Tax Reform: Issues, Choices and Implications (John W. Diamond & George Zodrow eds., 2008) (comparing various options).

  50. 50.

    See Stephen E. Shay, J. Clifton Fleming Jr., & Robert J. Peroni, Territoriality in Search of Principles and Revenues: Camp and Enzi, 72 Tax Notes Int’l 155 (October 13, 2013) for a thorough examination of the Camp proposal as well as S. 2091 that was introduced by Senator Enzi in February 2012. See generally Staff of J. Comm. on Tax’n, 113th Cong., Technical Explanation of the Tax Reform Act of 2014, A Discussion Draft of the Chairman of the House Committee on Ways and Means to Reform the International Revenue Code: Title IV- Participation Exemption System for the Taxation of Foreign Income (Comm. Print 2014) available at https://www.jct.gov/publications.html?func=showdown&id=4557 [hereinafter Tax Reform Act of 2014].

  51. 51.

    Tax Reform Act of 2014, supra note 50, at 24. The 10 % shareholder must also satisfy a 6-month holding requirement of the CFC’s stock in order to qualify for the 95 % deduction. Id. at 26.

  52. 52.

    Senate Finance Committee, International Tax Reform Working Group: Final Report 72, July 7, 2015 (Senator Rob Portman, Co-Chair and Senator Charles Schumer, Co-Chair).

  53. 53.

    I.R.C. § 243(a) (2014).

  54. 54.

    I.R.C. §§ 243(a),(c) (2014). In general, the 100 % deduction only applies if the parent and subsidiary corporation are both members of the same affiliated group pursuant to section 1504(a). I.R.C. § 243(b) (2014).

  55. 55.

    I.R.C. § 243(a)(1).

  56. 56.

    I.R.C. § 246(c)(1)(A) (2014). For example, “No deduction shall be allowed…in respect of any dividend on any share of stock… which is held by the taxpayer for 45 days or less during the 91-day period…” Id.

  57. 57.

    Richard L. Doernberg, International Taxation 244 (2012); see also I.R.C. §§ 243(e), 245 (2014).

  58. 58.

    I.R.C. § 902 (2014).

  59. 59.

    I.R.C. § 902(a) (2014).

  60. 60.

    I.R.C. §§ 78, 902(a) (2014).

  61. 61.

    Doernberg, supra note 57, at 249–50; see also I.R.C. § 78 (2014).

  62. 62.

    Ronen Palan, Richard Murphy & Christian Chavagneux, Tax Havens, How Globalization Really Works 30–40 (Cornell Univ. Press 2010); see also Gravelle, supra note 21 at 3.

  63. 63.

    Dhammika Dharmapala & James R. Hines Jr., Which Countries Become Tax Havens?, 93 J. Pub. Econ. 1058, 1065 (2009).

  64. 64.

    Although there is no official list in the Code, there has been proposed legislation over the years to create one, directing the Secretary of the Treasury to “develop and publish” a list, taking factors like: “(1) tax rate in the country, (2) lack of effective exchange of information between governments, (3) lack of transparency in financial services sector” and other relevant information into consideration. H.R. 2740, 113th Cong. (2013).

  65. 65.

    Gravelle, supra note 21, at 3–8.

  66. 66.

    Palan, Murphy & Chavagneux, supra note 62, at 40.

  67. 67.

    I.R.C. §§ 1471–1474 were enacted in the “Foreign Account Tax Compliance” title (Title V) of the HIRE Act. Hiring Incentives to Restore Employment Act, Pub. L. No. 111–147, § 501–35, 124 Stat. 71, 97–115 (2010) [hereinafter HIRE Act]. See, e.g., Tracy Kaye, Innovations in the War on Tax Evasion, 2 BYU L. Rev. 363 (2014) (detailing the FATCA requirements).

  68. 68.

    I.R.C. § 6038D(a) (2014).

  69. 69.

    I.R.C. § 6038D(d) (2014). Underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 %. See Instructions for Form 8938, IRS, (Nov. 2011), available at http://www.irs.gov/pub/irs-pdf/i8938.pdf.

  70. 70.

    Bank Secrecy Act, Pub. L. No. 91–508, Title I, § 121, 84 Stat. 1114, 1114–24 (1970) (codified as amended at 12 U.S.C.S. §§ 1829b, 1951–59 (2012)); 31 U.S.C.A. §§ 5311–22 (2012); see also Report of Foreign Bank and Financial Accounts, IRS, available at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-and-Financial-Accounts-FBAR (last updated Sept. 26, 2014). In 2009, 543,043 FBARs were filed. Susan C. Morse, Tax Compliance and Norm Formation Under High-Penalty Regimes, 44 Conn. L. Rev. 675, 701 (2012) (citing to a 2010 TIGTA report).

  71. 71.

    See generally 12 U.S.C. § 1951 (2012) (discussing usefulness of reports in criminal and tax proceedings as Congressional purpose); see also 31 U.S.C. § 5311 (2012) (concerning protection from international terrorism as purpose).

  72. 72.

    Form 8938, Statement of Specified Foreign Financial Assets, IRS (Dec. 2013), available at http://www.irs.gov/pub/irs-pdf/f8938.pdf.

  73. 73.

    This includes foreign partnership interests. See Instructions for Form 8938, IRS, 4 (Dec. 2011), available at http://www.irs.gov/pub/irs-pdf/i8938.pdf.

  74. 74.

    I.R.C. § 1471(c)(1) (2014).

  75. 75.

    Leandra Lederman, Statutory Speed Bumps: The Roles Third Parties Play in Tax Compliance, 60 Stan. L. Rev. 695, 698 (2008).

  76. 76.

    Lee A. Sheppard, Getting Serious About Offshore Evasion, 56 Tax Notes Int’l 399, 402 (2009).

  77. 77.

    The final regulations phase in implementation of the reporting requirements. See Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities, 78 Fed. Reg. 5874, 5877 (Jan. 28, 2013) [hereinafter FATCA Preamble]. These dates were further amended by 78 Fed. Reg. 55202–55203 (2013). There are later deadlines for those FFIs in countries that have signed a Model 1 Intergovernmental Agreement with the United States. Summary of FATCA Timelines, available at http://www.irs.gov/Businesses/Corporations/Summary-of-FATCA-Timelines (last updated Apr. 13, 2015).

  78. 78.

    I.R.C. § 1471(b) (2014). I.R.C. § 1473(2)(A) (2014) defines a substantial U.S. owner as a person owning an interest greater than 10 % directly or indirectly.

  79. 79.

    OECD, Harmful Tax Competition: An Emerging Global Issue 19–35 (1998), available at http://www.oecd.org/tax/transparency/44430243.pdf [hereinafter OECD Harmful Tax Competition Report]. The 1998 Report identified four main criteria for determining whether a preferential tax regime is harmful: (1) no or low taxation on the relevant income; (2) lack of transparency; (3) lack of effective exchange of information; and (4) the regime is ring-fenced from the domestic economy. Id.

  80. 80.

    This is a non-binding agreement that sets forth two models for bilateral agreements for increasing transparency among nations. OECD, Agreement on Exchange of Information on Tax Matters 4, http://www.oecd.org/ctp/exchange-of-tax-information/2082215.pdf (last visited Aug. 14, 2013).

  81. 81.

    OECD Harmful Tax Competition Report, supra note 79, at 25.

  82. 82.

    See generally OECD, 2000 Progress Report: Towards Global Tax Co-operation: Progress in Identifying and Eliminating Harmful Tax Practices (2000), available at http://www.oecd.org/ctp/harmful/2090192.pdf; OECD’s Project on Harmful Tax Practices: 2004 Progress Report (2004), available at http://www.oecd.org/ctp/harmful/30901115.pdf. In September 2006, the OECD Committee on Fiscal Affairs released its last progress report evaluating the preferential tax regimes in member countries. See OECD, The OECD’s Project on Harmful Tax Practices: 2006 Update on Progress in Member Countries 3 (2006), available at http://www.oecd.org/ctp/harmful/37446434.pdf.

  83. 83.

    OECD, Addressing Base Erosion and Profit Shifting 15 (2013).

  84. 84.

    OECD, Action Plan on Base Erosion and Profit Shifting (2013) [hereinafter OECD BEPS Action Plan].

  85. 85.

    See id., Action 5, at 18. (“Revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on…); see also Actions 11–12, at 21–22.

  86. 86.

    See id., at 31. OECD, BEPS 2015 FINAL REPORTS, http://www.oecd.org/ctp/beps-2015-final-reports.htm.

  87. 87.

    See Joint International Tax Shelter Information Centre Memorandum of Understanding, IRS, www.irs.gov/pub/irs-utl/jitsic-finalmou.pdf (last visited Feb. 16, 2014).

  88. 88.

    Joseph E. Erwin & Fred F. Murray, Exchange of Information and Cross-border Cooperation between Tax Authorities 787, 98b Cahiers de Droit Fiscal International (2013).

  89. 89.

    Final Communiqué, Meeting of the Forum on Tax Administration (FTA), 24 October 2014, Dublin, Ireland, available at http://www.oecd.org/ctp/administration/fta-2014-communique.pdf.

  90. 90.

    OECD, The Global Forum on Transparency and Exchange of Information for Tax Purposes: Information Brief 2 (2013), available at http://www.oecd.org/tax/transparency/global_forum_background%20brief.pdf [hereinafter OECD, Global Forum].

  91. 91.

    Id. at 3–4.

  92. 92.

    OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews: United States 2011: Combined: Phase 1+ Phase2, 5 (2011), available at http://dx.doi.org/10.1787/9789264115064-en [hereinafter OECD, United States 2011 Review].

  93. 93.

    See id. at 11–12.

  94. 94.

    Id. at 11.

  95. 95.

    OECD, Global Forum, supra note 90, at 16.

  96. 96.

    Id.

  97. 97.

    OECD, United States 2011 Review, supra note 92, at 91, 93, 96.

  98. 98.

    Id. at 38–39, 87.

  99. 99.

    OECD, Global Forum, supra note 90, at 16.

  100. 100.

    OECD, Exchange of Information Portal-United States, available at eoi-tax.org (last visited August 12, 2015) [hereinafter OECD, Exchange of Information]; see also OECD, United States 2011 Review, supra note 92, at 74.

  101. 101.

    U.S. Income Tax Treaties, supra note 35; see also OECD, United States 2011 Review, supra note 92, at 79.

  102. 102.

    U.S. Gov’t Accountability Office, GAO-11-730, IRS’s Information Exchanges with Other Countries Could Be Improved through Better Performance Information 4 n. 7 (2011).

  103. 103.

    IRS Publication 901, Table 3 (List of Tax Treaties) (2013), available at http://www.irs.gov/pub/irs-pdf/901.pdf.

  104. 104.

    OECD, United States 2011 Review, supra note 92, at 75–6. See United States Model Income Tax Convention of November 15, 2006, Article 26, available at www.irs.gov/pub/irs-trty/model006.pdf.

  105. 105.

    OECD, United States 2011 Review, supra note 92, at 75–6.

  106. 106.

    U.S. Dep’t of the Treasury, United States Model Technical Explanation Accompanying the United States Model Income Tax Convention of November 15, 2006 86–87 (2006).

  107. 107.

    OECD, United States 2011 Review, supra note 92, at 86.

  108. 108.

    See generally Joseph Erwin, Business Operations in the Territories and Possessions of the United States (except Puerto Rico), 995-2nd Tax Mgmt. (BNA) (2012) [hereinafter Business Operations in the Territories].

  109. 109.

    OECD, Exchange of Information, supra note 100.

  110. 110.

    Staff of J. Comm. on Tax’n, 113th Cong., Testimony of the Staff of the Joint Committee on Taxation before the Senate Committee on Foreign Relations Hearing on the Proposed Tax Treaties with Chile and Hungary, the Proposed Tax Protocols with Luxembourg and Switzerland, and the Proposed Tax Protocols Amending the Multilateral Convention on Mutual Administrative Assistance in Tax Matters 10-12 (Comm. Print 2014), available at https://www.jct.gov [hereinafter JCT Testimony].

  111. 111.

    See id. at 2–3.

  112. 112.

    See U.S. Dep’t of St.,Treaties Pending in the Senate (updated as of April 27, 2015) available at www.state.gov.

  113. 113.

    Patrick Temple-West, U.S. Treasury official urges Senate action on tax treaties, Reuters News Dec. 12, 2013 available at www.townhall.com/news/politics/2013/12/12/us-treasury-official-urges-senate-action-on-tax-treaties-n1762191.

  114. 114.

    See U.S. Const., Art II, Section 2, cl. 2.

  115. 115.

    OECD, United States 2011 Review, supra note 92, at 77.

  116. 116.

    See id., at 76.

  117. 117.

    OECD, Tax Information Exchange Agreements (TIEAs): United States, Global Forum on Transparency and Exchange of Information for Tax Purposes, http://www.oecd.org/tax/transparency/taxinformationexchangeagreementstieasunitedstates.htm (last visited Aug.13, 2015).

  118. 118.

    OECD, United States 2011 Review, supra note 92, at 75–76.

  119. 119.

    Bruce Zagaris, The Procedural Aspects of U.S. Tax Policy Towards Developing Countries: Too Many Sticks and No Carrots, 35 Geo. Wash. Int’l L. Rev. 331, 333 (2003).

  120. 120.

    See, e.g., Agreement between the Government of the United States of America and the Government of the Principality of Liechtenstein on Tax Cooperation and the Exchange of Information Relating to Taxes, U.S.-Liech., art. i, Dec.8, 2008, HP-1320; see also OECD, Progress Towards a Level Playing Field: Outcomes of the OECD Global Forum on Taxation 10 (2014), available at http://www.oecd.org/tax/transparency/44430286.pdf.

  121. 121.

    Id.

  122. 122.

    Id.

  123. 123.

    See generally OECD, Status of the Convention on Mutual Administrative Assistance in Tax Matters and Amending Protocols (2014), available at http://www.oecd.org/ctp/exchange-of-tax-information/Status_of_convention.pdf [hereinafter OECD, Status of the Convention].

  124. 124.

    See generally OECD, Convention on Mutual Administrative Assistance in Tax Matters and Amending Protocols (1988).

  125. 125.

    OECD, Status of the Convention, supra note 124.

  126. 126.

    Staff of J. Comm. On Tax’n, 101st Cong., Explanation of Proposed Convention on Mutual Administrative Assistance in Tax Matters 3 (Comm. Print 1990) available at https://www.jct.gov/publications.html?func=startdown&id=3160.

  127. 127.

    U.S. Dep’t of Treasury, United States Signs Protocol to Multilateral Treaty on Mutual Administrative Assistance in Tax Matters (2010), available at http://www.treasury.gov/press-center/press-releases/Pages/tg726.aspx.

  128. 128.

    OECD, Status of the Convention, supra note 124.

  129. 129.

    See generally Kim Brooks, Tax Sparing: A Needed Incentive for Foreign Investment in Low-Income Countries or an Unnecessary Revenue Sacrifice, 34 Queen’s L. J. 505 (2009), available at http://www.s4tp.org/wp-content/uploads/2011/09/Tax-Sparing.pdf.

  130. 130.

    OECD, Tax Sparing: A Reconsideration 11 (1998).

  131. 131.

    See generally James R. Hines, Jr., “Tax Sparing” and Direct Investment in Developing Countries (Nat’l Bureau of Econ. Research, Working Paper No. 6728, 1998), available at http://www.nber.org/papers/w6728.pdf. See Daniel M. Berman & Victoria J. Haneman, Making Tax Law 248–49 (2014) for a discussion of treaty negotiations with Brazil. See also Jason R. Connery et al., Current Status of U.S. Tax Treaties and International Tax Agreements, 42 Tax Mgmt. Int’l J. 485, 488 (BNA) (Aug. 9, 2013).

  132. 132.

    See Hines, Jr. supra note 132, at 10 (“Despite this position, the U.S. does often agree, in an exchange of notes, to grant a tax sparing provision to countries with whom it negotiates tax treaties if it ever grants such a provision to another country in a subsequent tax treaty.”). See, e.g., Brooks, supra note 130, at 520 (“If the United States reaches agreement on the provision of a tax sparing credit with any other country, the United States agrees to reopen negotiations with Bangladesh with a view to the conclusion of a protocol which would extend a tax sparing credit under the treaty.”). Convention Between the Government of the U.S. and the Government of the People’s Republic of Bangladesh for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, U.S.- Bangl., Sept. 26, 2004, 2004 U.S.T. 207.

  133. 133.

    Brooks, supra note 130, at 519–21 (citations omitted).

  134. 134.

    See generally Paul R. McDaniel, The U.S. Tax Treatment of Foreign Source Income Earned in Developing Countries: A Policy Analysis, 35 Geo. Wash. Int’l. L. Rev. 265 (2003).

  135. 135.

    CBO, Options, supra note 16, at 2.

  136. 136.

    Revenue Act of 1962, Pub. L. No. 87–834, § 12(a), 76 Stat. 1013.

  137. 137.

    Id.

  138. 138.

    Id. at 76 Stat. 1015–1016.

  139. 139.

    Pub. L. No. 94–12, § 602(b)(5), 89 Stat. 59.

  140. 140.

    Puerto Rico and the Northern Marianas are commonwealths, meaning that there is a legal relationship with the U.S. set forth in a written mutual agreement. Staff of J. Comm. On Tax’n, 112th Cong.,Federal Tax Law and Issues Related to the United States Territories 1 (Comm. Print 2012), available at https://www.jct.gov/publications.html?func=startdown&id=4427 [hereinafter Tax Issues Related to the U.S. Territories].

  141. 141.

    Id.

  142. 142.

    Id. at 2.

  143. 143.

    Id. However, it is generally only the income tax provisions that are mirrored. For example, 48 U.S.C. §1421i (d)(1) provides a non-exhaustive list of the mirrored Code sections in Guam. Id. at 8.

  144. 144.

    Id. at 2. The mirror code provision for the U.S. Virgin Islands states that “the income-tax laws in the United States … and those which may hereafter be enacted shall be held to be likewise in force in the Virgin Islands of the United States, except that the proceeds of such taxes shall be paid into the treasuries of said islands: […].”48 U.S.C. § 1397 (2012).

  145. 145.

    Covenant to Establish a Commonwealth of the Northern Mariana Islands in Political Union with the United States of America, sec. 601(a), Act of March 24, 1976, Pub. L. No. 94–241; 48 U.S.C. § 1801 (2012).

  146. 146.

    Tax Issues Related to the U.S. Territories, supra note 141, at 2.

  147. 147.

    Id. at 2, 7.

  148. 148.

    Id. at 7.

  149. 149.

    Id.

  150. 150.

    I.R.C. § 881(a) (2014).

  151. 151.

    I.R.C. §§ 881(b)(1)(A)-(B) (2014). Furthermore, “no substantial part of the income of such corporation” may have been used to pay “obligations to persons who are not bona fide residents” of a U.S. possession or the United States. §881(b)(1)(C) (2014).

  152. 152.

    I.R.C. § 881(b)(2) (2014).

  153. 153.

    Tax Issues Related to the U.S. Territories, supra note 141, at 25.

  154. 154.

    I.R.C. § 882(a)(1) (2014) (listing those activities that generate income that is not considered to be effectively connected with the United States).

  155. 155.

    I.R.C. § 881(a) (2014).

  156. 156.

    I.R.C. § 881(b)(2) (2014).

  157. 157.

    Martin A. Sullivan, The Treasury Bailout of Puerto Rico, 72 Tax Notes Int’l 267, 277 (2014).

  158. 158.

    Id.

  159. 159.

    David L. Brumbaugh, Cong. Research Serv., RS20695, The Puerto Rican Economic Activity Tax Credit: Current Proposals and Scheduled Phaseout 1 (2000).

  160. 160.

    Staff of J. Comm. On Tax’n, 99th Cong.,General Explanation of the Tax Reform Act of 1986 999 n. 2 (Comm. Print 1987), available at https://www.jct.gov/publications.html?func=startdown&id=3367 [hereinafter Tax Reform Act of 1986].

  161. 161.

    Id. at 999.

  162. 162.

    Id.

  163. 163.

    Pub. L. No. 94–455, § 1051, 90 Stat. 1525.

  164. 164.

    Staff of J. Comm. On Tax’n, 109th Cong.,An Overview of the Special Tax Rules Related to Puerto Rico and an Analysis of the Tax and Economic Policy Implications of Recent Legislative Options 50 (Comm. Print 2006), available at https://www.jct.gov/publications.html?func=showdown&id=1496 [hereinafter Tax Rules Related to Puerto Rico].

  165. 165.

    Tax Reform Act of 1986, supra note 161, at 1000.

  166. 166.

    I.R.C. § 936(a)(1) (2014).

  167. 167.

    I.R.C. § 936(a)(2)(A) (2014).

  168. 168.

    I.R.C. § 936(a)(2)(B) (2014).

  169. 169.

    Tax Rules Related to Puerto Rico, supra note 165, at 51.

  170. 170.

    Tax Reform Act of 1986, supra note 161, at 1000.

  171. 171.

    Tax Rules Related to Puerto Rico, supra note 165, at 52.

  172. 172.

    Pub. L. No. 104–188, § 1601, 110 Stat. 1755.

  173. 173.

    Brumbaugh, supra note 160, at 4.

  174. 174.

    I.R.C. § 936(j)(1) (2014).

  175. 175.

    A corporation is an “existing credit claimant” if (1) the corporation is engaged in the active conduct of a trade or business within the possession on October 13, 1995, and (2) the corporation has elected the benefits of the Puerto Rico and possession tax credit pursuant to an election which is in effect for its taxable year that includes October 13, 1995. I.R.C. § 936(j)(9)(A) (2014).

  176. 176.

    I.R.C. §§ 30A(g), 936(j)(8)(A) (2014).

  177. 177.

    I.R.C. § 30A(a)(2)(A) (2014).

  178. 178.

    I.R.C. §§ 30A(d), 936(a)(4) (2014). The credit’s phase-out rules were dependent on whether the existing claimant elected the economic activity limitation or an alternative percentage limitation. There was also an additional base-period cap that applied in either 1999 or 2002 depending on which limitation applied. Brumbaugh, supra note 160, at 4–5.

  179. 179.

    Edgar Rios-Mendez & Jeanelle Alemar-Escabi, Foreign Income: Business Operations in Puerto Rico, 7320 Tax Mgmt. (BNA) A-184 (2012).

  180. 180.

    Id.

  181. 181.

    Id.

  182. 182.

    Tax Issues Related to the U.S. Territories, supra note 141, at 29.

  183. 183.

    Id. at 28.

  184. 184.

    Id. at 29.

  185. 185.

    Id.

  186. 186.

    Id.

  187. 187.

    Id.

  188. 188.

    Tax Issues Related to the U.S. Territories, supra note 141, at 29.

  189. 189.

    Business Operations in the Territories, supra note 109, at A-163.

  190. 190.

    Id.

  191. 191.

    Id. at A-164.

  192. 192.

    I.R.C. § 881(b).

  193. 193.

    Tax Issues Related to the U.S. Territories, supra note 141, at 23.

  194. 194.

    Id.

  195. 195.

    Business Operations in the Territories, supra note 109, at A-164.

  196. 196.

    Id.

  197. 197.

    Tax Issues Related to the U.S. Territories, supra note 141, at 20.

  198. 198.

    Id. at 20–21.

  199. 199.

    48 U.S.C. § 1421 et seq.

  200. 200.

    S. Rep. No. 107–173, at *1-*2 (2002).

  201. 201.

    Id. at *2.

  202. 202.

    Pub. L. No. 107–212, §116 Stat. 1051 (2002).

  203. 203.

    S. Rep. No. 107–173, supra note 201, at *2; see also Tax Issues Related to the U.S. Territories, supra note 141, at 21.

  204. 204.

    Business Operations in the Territories, supra note 109, at A-203.

  205. 205.

    Tax Issues Related to the U.S. Territories, supra note 141, at 18.

  206. 206.

    I.R.C. § 881(b) (2014).

  207. 207.

    Tax Issues Related to the U.S. Territories, supra note 141, at 18.

  208. 208.

    Business Operations in the Territories, supra note 109, at A-201.

  209. 209.

    Id.

  210. 210.

    Id. Under § 901 et seq. as adopted by American Samoa.

  211. 211.

    Doernberg, supra note 57, at 206; See also Marc Rosenberg, How a Taxing Problem has Taken its Toll: A Common Person’s Guide to an International Taxation Dispute, 20 B.U. Int’l L.J. 1, 9–10 (2002) (discussing DISC).

  212. 212.

    Doernberg, supra note 57, at 206.

  213. 213.

    Id.

  214. 214.

    Id.

  215. 215.

    Staff of J. Comm. on Tax’n, 108th Cong.,General Explanation of Tax Legislation Enacted in the 108th Congress 166 (Comm. Print 2005), available at http://www.jct.gov/s-5-05.pdf. [hereinafter Tax Legislation in 108th Congress].

  216. 216.

    Doernberg, supra note 57, at 206–7. See generally FSC Repeal and Extraterritorial Income Exclusion Act 2000, Pub. L. No. 106–519, § 942, 114 Stat. 2423, 2426.

  217. 217.

    Tax Legislation in 108th Congress, supra note 216.

  218. 218.

    Pub. L. No. 108–357, Title I § 101, 102, 118 Stat. 1418.

  219. 219.

    This section provided a phase-in period. The applicable deduction was 3 % for taxable years beginning in 2005 or 2006 and 6 % for taxable years beginning in 2007, 2008, or 2009. I.R.C. § 199(a)(2) (2013).

  220. 220.

    Tax Legislation in 108th Congress, supra note 216, at 170.

  221. 221.

    Section 199 allows “[a] deduction of an amount equal to 9 % of the lesser of – (A) the qualified production activities income [(“QPAI”)] of the taxpayer for the taxable year, or (B) taxable income (determined without regard to this section) for the taxable year. I.R.C. § 199(a)(1) (2014).

  222. 222.

    Tax Legislation in 108th Congress, supra note 216, at 170; see also H.R. Rep.No. 108–755, at 314 (2004) (Conf. Rep.).

  223. 223.

    I.R.C. § 199(b)(1) (2014).

  224. 224.

    QPAI is defined as “[t]he amount equal to the excess (if any) of – (A) the taxpayer’s domestic production gross receipts (DPGR) for such taxable year, over (B) the sum of – (i) the cost of goods sold that are allocable to such receipts, and (ii) other expenses, losses, or deductions (other than deductions allowed under this section), which are properly allocable to such receipts.” I.R.C. § 199(c)(1) (2013).

  225. 225.

    I.R.C. § 199(c)(4)(A)(i) (2014).

  226. 226.

    I.R.C. § 199(c)(4)(A)(ii) (2014).

  227. 227.

    I.R.C. § 199(c)(4)(A)(iii) (2014).

  228. 228.

    See, e.g., Tracy Kaye, The Gentle Art of Corporate Seduction: Tax Incentives in the United States and the European Union, 57 U. Kan. L. Rev. 93 (2008); see also, Tracy Kaye, Corporate Blackmail: State Tax Incentives in the United States, in State Aid and Law (Alexander Rust & Claire Micheau eds., 2013).

  229. 229.

    Kenneth P. Thomas, Investment Incentives and the Global Competition for Capital 2–3 (2011). Because of the range of credits offered by U.S. states and municipalities as well as the lack of a universal data collection and recordation procedure, it is extremely difficult to achieve an accurate total of investment incentives offered throughout the United States. Id. at 102–106.

  230. 230.

    Thomas, supra note 230, at 106–107. Further, he estimated for 2005 total state and local subsidies to be $64.8 billion and $69.8 billion if the benefits of accelerated depreciation are included in the total. Id. See also David Cay Johnston, On the Dole, Corporate Style, 59 St. Tax Notes 127 (2011) (citing Thomas, supra note 230).

  231. 231.

    Thomas, supra note 230, at 96. State aid in the European Union is controlled through the adoption of overall regional aid guidelines. Id. at 96–97, 101.

  232. 232.

    Id. at 97–102.

  233. 233.

    Id. at 1. “Alabama … in 2002 gave Hyundai about $117,000 per job on a present value basis … .” Id.

  234. 234.

    Id. at 176; see also Johnston, supra note 231, at 127.

  235. 235.

    Thomas, supra note 230, at 98–99.

  236. 236.

    Mark L. Nachbar, Credits and Incentives: Alabama Through Hawaii, 1450-2nd Tax Mgmt., 1450.01-1450.02 (BNA) (2008); see generally Mark L. Nachbar et al., Credits and Incentives, Nos. 1450-2nd, 1460-2nd, 1470-2nd, and 1480-1st, Tax Mgmt. (BNA) (2008).

  237. 237.

    See, e.g., David Brunori, The Future of State Taxation 6 (1998) [hereinafter Brunori,State Taxation] (stating that “[c]ommentators generally agree that incentives violate the most basic principles of sound tax policy”); David Brunori, “The Politics of State Taxation”: Thou Shalt Not Use Tax Incentives, St. Tax Today 557 (2002) [hereinafter Brunori, Thou Shalt Not Use Tax Incentives] (stating tax incentives violate “the cardinal rule that tax systems should be designed so that they have a minimal impact on economic activity”).

  238. 238.

    See Brunori, Thou Shalt Not Use Tax Incentives, supra note 238, at 557 (describing States, corporations, and consultants as actively in pursuit of granting and obtaining tax breaks); see also Brunori, State Taxation, supra note 238, at 6 (stating that tax incentives have increased “primarily because political leaders lack the will to reject them”).

  239. 239.

    A CFC is defined as “any foreign corporation if more than 50 % of (1) the total combined voting power of all classes of stock of such corporation entitled to vote, or (2) the total value of stock of such corporation, is owned … by United States shareholders on any day during the taxable year of such foreign corporation.” I.R.C. § 957(a) (2014).

  240. 240.

    Pub. L. No. 108–357, § 422, 118 Stat. 1418, 1514–19 (2004).

  241. 241.

    Dhammika Dharmapala, C. Fritz Foley & Kristin J. Forbes, Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act, 66 J. Fin. 753, 782–3 (2011).

  242. 242.

    Staff of Permanent Subcomm. on Investigations of the S. Comm. on Homeland Sec. and Governmental Affairs, 112th Cong., Majority Rep. on Repatriating Offshore Funds: 2004 Tax Windfall for Select Multinationals 6–7 (Comm. Print 2011), available at http://tjn-usa.org/storage/documents/PSI.Repatriationreport.101011.pdf [hereinafter Repatriating Offshore Funds].

  243. 243.

    I.R.C. § 965(a)(1) (2014); see also Repatriating Offshore Funds, supra note 243, at 6.

  244. 244.

    I.R.C. § 965(a)(1); see also Melissa Redmiles, The One-Time Received Dividend Deduction, IRS, Statistics of Income Bulletin 102, 102 (2008), available at http://www.irs.gov/pub/irs-soi/08codivdeductbul.pdf.

  245. 245.

    I.R.C. §§ 965(a)(1)-(2) (2014). (“[c]ould be claimed either in the last tax year that beg[an] before October 22, 2004, or the last year that beg[an] during the 1-year period beginning on October 22, 2004.”).

  246. 246.

    Redmiles, supra note 245, at 102.

  247. 247.

    Repatriating Offshore Funds, supra note 243, at 6–7. I.R.C. § 965(b)(1) (2014).

  248. 248.

    S. Res.1637, 108th Cong., 150 Cong. Rec. 2066 (2004) (enacted).

  249. 249.

    Redmiles, supra note 245, at 103.

  250. 250.

    Id.

  251. 251.

    Rodney P. Mock & Andreas Simon, Permanently Reinvested Earnings: Priceless, 121 Tax Notes 835, 835–48 (2008).

  252. 252.

    S. Res. 1637, supra note 249.

  253. 253.

    See generally Dharmapala et al., supra note 242; Thomas J. Brennan, Where the Money Really Went: A New Understanding of the AJCA Tax Holiday (Northwestern Uni. Sch. of Law, Law and Economics Series No. 13–35, drft. Aug. 19, 2013), available at http://ssrn.com/abstract=2312721; Floyd Norris, Tax Break for Profits Went Awry, N.Y. Times, Jun. 5, 2009, at B1, available at http://www.nytimes.com/2009/06/05/business/05norris.html.

  254. 254.

    Donald J. Marples & Jane G. Gravelle, Cong. Research Serv., R40178, Tax Cuts on Repatriation EarningsAs Economic Stimulus: An Economic Analysis 8 (2011).

  255. 255.

    Repatriating Offshore Funds, supra note 243, at 7, 9.

  256. 256.

    See, e.g., H.R. 937, H.R. 1036, H.R. 1834, H.R. 2862, S. 727, and S. 1671, (House and Senate bills that were introduced in the 112th Congress). See also Marples & Gravelle, supra note 255, at 1.

  257. 257.

    Administration’s FY 2017 Revenue Proposals, supra note 47, at 9–12.

  258. 258.

    Id. at 13.

  259. 259.

    See Staff of J. Comm. on Tax’n, 113th Cong., Letter to Senator Orrin Hatch (Comm. Print 2014), available at http://www.hatch.senate.gov/public/_cache/files/1b24c4cf-6005-4a4e-bab7-3d9e3820c509/JCT%206-6-14.pdf.

  260. 260.

    Marples & Gravelle, supra note 255, at 1.

  261. 261.

    I.R.C. §11(a) (2013).

  262. 262.

    I.R.C. §§ 61(a), 301(c)(1) (2013). As of January 1, 2013, the maximum rate on dividend income is 20 %. §1(h).

  263. 263.

    I.R.C. § 7701(a)(4) (2013).

  264. 264.

    Christians, Donaldson, & Postlewaite, supra note 38, at 5.

  265. 265.

    I.R.C. § 63 (West 2013). See question 10 for a fuller discussion of section 199.

  266. 266.

    Karen C. Burke, Federal Income Taxation of Corporations and Stockholders 1 (Thomson/West 2007).

  267. 267.

    I.R.C. § 11(b) (2013).

  268. 268.

    Staff of J. Comm. on Tax’n, 113th Cong., Overview of the Federal Tax System as in Effect for 2013 11 (Comm. Print 2013), available at https://www.jct.gov/publications.html?func=startdown&id=4498.

  269. 269.

    Id.

  270. 270.

    Karen C. Burke, supra note 267 at 1; I.R.C. § 11(b)(1)(D) (2014).

  271. 271.

    CBO, Options, supra note 16, at1.

  272. 272.

    Jessica L. Katz, Charles T. Plambeck, & Diane M. Ring, U.S. Income Taxation of Foreign Corporations, 908-2nd Tax Mgmt. (BNA) Detailed Analysis, at I. Overview (2008).

  273. 273.

    A complete list of the types of gains, profits and incomes that are subject to tax are listed under section 881(a)(1). I.R.C. § 881(a) (2013).

  274. 274.

    See e.g., United States, Model Income Tax Convention 2006, arts. 10, 11.

  275. 275.

    I.R.C. § 881(c)(1) (2013). No tax is imposed on certain interest and dividends, namely interest on deposits that are not effectively connected with a trade or business within the United States, the “active foreign business percentage” of a dividend or interest “paid by an existing 80/20 company”, income from a foreign central bank, or dividends paid by a foreign corporation that are treated as income from within the U.S. pursuant to section 861(a)(2)(B). I.R.C. §§ 871(i)(2), 881(d) (2013).

  276. 276.

    I.R.C. U.S.C. § 882(a)(1) (2013). Treas. Reg. § 301.7701-5 (1967). Therefore, the foreign corporation is subject to the same graduated rates of section 11 on its taxable income effectively connected with the conduct of a U.S. trade or business. § 882(a)(1).

  277. 277.

    Christians, Donaldson, & Postlewaite, supra note 38, at 167; see also I.R.C. § 884 (2014).

  278. 278.

    I.R.C. § 884(a) (2014); Christians, Donaldson, & Postlewaite, supra note 38, at 167.

  279. 279.

    I.R.C. § 884(a)-(b) (2014).

  280. 280.

    Katz, Plambeck, & Ring, supra note 273, at I. Overview, D.

  281. 281.

    Id.; Christians, Donaldson, & Postlewaite, supra note 38, at 167.

  282. 282.

    I.R.C. § 884(e) (2014).

  283. 283.

    See generally Trade Investment and Framework Agreements, Office of the United States Trade Representative, http://www.ustr.gov/trade-agreements/trade-investment-framework-agreements (last visited July 14, 2014); see also Bilateral Investment Treaties, Trade Compliance Center, http://tcc.export.gov/TradeAgreements/Bilateral_Investment_Treaties/index.asp_ (last visited July 14, 2014).

  284. 284.

    The Treaty Between the United States of America and the Republic of Armenia Concerning the Reciprocal Encouragement and Protection of Investment, U.S.- A.M., art. xii, Sept. 23, 1992, S. Treaty Doc. No. 103–11.

  285. 285.

    See generally Free Trade Agreements, Office of the United States Trade Representative, http://www.ustr.gov/trade-agreements/free-trade-agreements (last visited July 14, 2014).

  286. 286.

    Id.

  287. 287.

    How did NFTA Affect Tariff Rates within North America?, NAFTANOW.org, http://www.naftanow.org/faq_en.asp#faq-8 (follow “Frequently Asked Questions Hyperlink”; then follow “How did NFTA Affect Tariff Rates within North America?” hyperlink) (“On January 1, 2008, the last remaining tariffs were removed within North America”).

Acknowledgment

I would like to gratefully acknowledge the research assistance of Yasmine Fulena, David Marella, Stephanie Pisko and Courtney Abrahamson and the financial support provided by the Seton Hall University School of Law Dean’s Research Fellowship program.

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    Tracy Kaye

  2. University of Illinois, Champaign, IL, USA

    Tracy Kaye

  3. DePaul University, Chicago, IL, USA

    Tracy Kaye

  4. Georgetown University Law Center, Washington, DC, USA

    Tracy Kaye

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Kaye, T. (2017). Taxation and Development: The U.S. Perspective. In: Brown, K. (eds) Taxation and Development - A Comparative Study. Ius Comparatum - Global Studies in Comparative Law, vol 21. Springer, Cham. https://doi.org/10.1007/978-3-319-42157-5_19

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