Reform US International Taxation Laws to Set a Global Example

Some recent developments should spur action by Congress to reform US tax laws that address international taxation. Congress did this in 2017 but in an ill-conceived way, and it should be revamped.

The OECD initiative, Pillar Two, is a well-intentioned but flawed undertaking, aimed at addressing base erosion and profit-shifting by large multinational enterprises. The Biden administration, with congressional support, should use this nation’s political and economic muscle—and its powers of persuasion—to alter its design.

In another international tax event, the US Supreme Court will hear arguments in Moore v. United States, where taxpayers are challenging the constitutionality of Section 965 of the tax code. This provision—enacted in 2017 as part of the Tax Cuts and Jobs Act—was imposed when Congress adopted a “participation exemption.” It generally allows most domestic C corporations owning 10% or more of shares in a foreign subsidiary a deduction for foreign-sourced dividends it receives from that subsidiary.

Ideally, these two developments could serve as an impetus to replace the poorly considered TCJA international tax approach with a worldwide tax system.

In such a system, profits of foreign subsidiaries of US corporations would be taxed to the corporate parent when they’re earned. But they would be coupled with a US corporate tax rate a few points lower than that for domestic income and a reenactment of a credit for foreign income taxes paid by a foreign subsidiary that would eliminate or at least minimize double taxation on the same earnings.

Adopting this reform to our tax system would sharply reduce incentives to shift operations outside the US, address the very reason Pillar Two was formulated, and perhaps set an example for other countries to follow.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Philip G. Cohen is a professor of taxation at Pace University Lubin School of Business and a retired vice president of tax and general tax counsel for Unilever United States Inc.

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