Tax Base Erosion and Homeless Income: Collection at Source is the Linchpin

85 Pages Posted: 19 Jul 2011 Last revised: 14 Sep 2012

See all articles by Bret Wells

Bret Wells

University of Houston Law Center

Cym Lowell

McDermott, Will & Emery

Date Written: July 18, 2011


A growing consensus exists that the US desperately needs to reform its US international tax laws. Furthermore, international tax reform will need to raise revenue for the US fisc while preserving the ability of US multinationals to compete without a tax handicap. We have been curious about the origins of our current system. How did we get in such a dire need for reform?

In our paper, we examine the international tax policy debate undertaken in the post-World War I world in conjunction with the League of Nations in the 1920s and 1930s. In this period, the global economy was dominated by the war victors. The tax policy debate questioned whether the international tax system should be premised on a residence or a source basis of taxation. An outcome of this debate was that the avoidance of double taxation became the foundation of the modern treaty network. The model treaties of the League of Nations, the Organization for Economic Cooperation and Development, the United Nations, and the United States emerged from these debates and enshrined residency country entitlement to tax residual income as the foundational principle (the “Foundational Premise”). Unfortunately, the Foundational Premise, coupled with One-Sided Transfer Pricing Methodologies, has created Homeless Income (i.e., income not subject to tax in any country).

After engaging in this historical review of how Homeless Income has arisen, we set forth a policy response that seeks to address the Homeless Income problem. Our solution is to require that all cross-border related party payments from a US payor to a foreign entity should be subject to a base protecting surtax equal to a percent of the amount of the payment designed to reflect a normative effective tax rate for the payee (the “Base Protecting Surtax”), unless the US payor reaches agreement with the Internal Revenue Service (the “Service”) that a lower or no Base Protecting Surtax is required after evaluating the global income of the foreign entity and the US payor in light of the overall business and the functions and risks performed in the United States by the US payor (a “Base Clearance Certificate,” which would be similar to an advance pricing or comprehensive assurance program agreement). The purpose of this Base Clearance Certificate process is to assure that income earned by the US payor, and its resultant domestic tax liability, represents an appropriate application of US transfer pricing principles (applying Two-Step TP Methodologies of residual profit split or formulary apportionment as appropriate to the facts and circumstances). The US payor would include the Base Protecting Surtax in its own tax payments and annual tax returns. Thus, this proposal prevents Homeless Income before it is created because it collects an upfront surtax on the gross amount of the base erosion payment. After setting forth this proposal, we then evaluate how this proposal attacks the Homeless Income problem and could be incorporated into other international tax reform proposals that are currently being debated.

Keywords: International Tax Reform, Subpart F, Deferral, Territorial Taxation, Tax Treaty, Homeless Income, Stateless Income, Base Erosion, Transfer Pricing, Income Shifting, Abuse of Treaties, Source Country Taxation, Homeless Income

Suggested Citation

Wells, Bret and Lowell, Cym, Tax Base Erosion and Homeless Income: Collection at Source is the Linchpin (July 18, 2011). 65 Tax Law Review 535; U of Houston Law Center No. 2011-A-6. Available at SSRN:

Bret Wells (Contact Author)

University of Houston Law Center ( email )

4604 Calhoun Road
Houston, TX 77204-6060
United States

Cym Lowell

McDermott, Will & Emery ( email )

3811 Turtle Creek Boulevard
Suite 500
Dallas, TX 75219
United States
972-232-3063 (Phone)

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