Statement for Inclusion in the Hearing Record of: Hearing on Tax Reform Options: International Issues Held September 8, 2011 Before U.S. Senate Finance Committee - Congress Should (1) Replace the Current Deferral Regime for the Taxation of Foreign Income with an Imputation System Accompanied by a Lower Corporate Rate, and (2) Reject Proposals for Enactment of a Territorial System

10 Pages Posted: 19 Sep 2011

See all articles by Samuel C. Thompson, Jr.

Samuel C. Thompson, Jr.

Pennsylvania State University, Penn State Law

Date Written: September 18, 2011

Abstract

While there are no easy solutions in international taxation, an imputation system offers many benefits over the current deferral system or a territorial system. One of the major benefits of an imputation system is that it will eliminate the bias in favor of foreign investment in low tax jurisdictions over U.S. investment and will eliminate the “lockout” effect. Another benefit is that an imputation system would preserve the U.S. tax base. Under the current deferral system, the U.S. loses billions of dollars in tax revenue, and this would also be true with a territorial system. With more tax revenue coming in every year under an imputation system, the U.S. would be able to significantly lower the corporate tax rate for all corporations. A reduction in the corporate tax rate would lead to an increase in investment in the U.S. by both domestic-controlled and foreign-controlled businesses.

By enacting an imputation system, U.S. multinational corporations would no longer have an incentive to abuse the transfer pricing rules by deflecting (1) U.S. income to foreign subsidiaries, and (2) foreign expense to U.S. parents. Such abuses are significant in the current deferral system, would be even greater with a territorial system, and would be eliminated with an imputation system.

The case for the adoption of an imputation system in conjunction with a lowering of the corporate rate is so strong that the Senate Finance Committee and the House Ways and Means Committee should hold hearings specifically focused on the pros and cons of adopting an imputation system.

Suggested Citation

Thompson, Jr., Samuel C., Statement for Inclusion in the Hearing Record of: Hearing on Tax Reform Options: International Issues Held September 8, 2011 Before U.S. Senate Finance Committee - Congress Should (1) Replace the Current Deferral Regime for the Taxation of Foreign Income with an Imputation System Accompanied by a Lower Corporate Rate, and (2) Reject Proposals for Enactment of a Territorial System (September 18, 2011). Available at SSRN: https://ssrn.com/abstract=1929004 or http://dx.doi.org/10.2139/ssrn.1929004

Samuel C. Thompson, Jr. (Contact Author)

Pennsylvania State University, Penn State Law ( email )

Lewis Katz Building
University Park, PA 16802
United States

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