Worse than Exemption

72 Pages Posted: 17 Jan 2010 Last revised: 9 Jun 2015

See all articles by J. Clifton Fleming

J. Clifton Fleming

Brigham Young University - J. Reuben Clark Law School

Robert J. Peroni

University of Texas at Austin - School of Law

Stephen E. Shay

Boston College Law School

Date Written: 2009


In this article, we discuss how various defects in the current U.S. international tax system - deferral, defective income-sourcing and cost allocation rules, lenient transfer-pricing rules, generous cross-crediting, the export sales source rule, the effectively tax-exempt treatment of many types of foreign-source royalties, and the deduction of foreign losses against U.S.-source income - can be combined to make the present U.S. system as generous as, and in some important respects more generous than, a properly designed exemption or territorial system for taxing foreign-source income of U.S. resident corporations. In other words, when judged from a public policy standpoint, the current U.S. system can produce worse-than-exemption results. Because of this, the U.S. multinational corporate community largely has shifted its lobbying efforts away from support for an exemption or territorial system and toward support for changes in the current incoherent international tax system that would further reduce the effective U.S. income tax rate on U.S. corporations’ foreign-source income by magnifying the worse-than-exemption results. In our view, reform efforts in the international tax area should be directed toward comparing the strengths and weaknesses of a properly designed worldwide system with the strengths and weaknesses of a properly designed exemption system, and then proceeding to enact one of those two coherent systems for taxing the international income of U.S. persons. Based on our prior work in the international tax area we believe that such an analysis will lead to a conclusion that a strengthened and properly designed worldwide system is superior to a properly designed territorial system and is definitely superior to our defective and incoherent current U.S. international tax system.

Keywords: Income Taxation, International Taxation, Transnational Taxation, Tax Policy

JEL Classification: D61, E61, E62, F00, H20, H21, H25, H34

Suggested Citation

Fleming, J. Clifton and Peroni, Robert Joseph and Shay, Stephen E., Worse than Exemption (2009). Emory Law Journal, Vol. 59, No. 1, October 2009, Available at SSRN: https://ssrn.com/abstract=1536731

J. Clifton Fleming (Contact Author)

Brigham Young University - J. Reuben Clark Law School ( email )

430 JRCB
Brigham Young University
Provo, UT 84602
United States

Robert Joseph Peroni

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States

Stephen E. Shay

Boston College Law School ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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