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Back to the Drawing Board: The Structural and Accounting Consequences of a Switch to a Territorial Tax System

43 Pages Posted: 5 Feb 2014  

Michael P. Donohoe

University of Illinois at Urbana-Champaign - Department of Accountancy

Gary A. McGill

University of Florida - Fisher School of Accounting

Edmund Outslay

Michigan State University - Department of Accounting & Information Systems

Date Written: February 3, 2014

Abstract

We review the basics of international tax planning by U.S. multinational corporations (MNCs) and the organizational structures that facilitate such planning. We then discuss the potential impacts that adopting a participation exemption regime (i.e., a territorial tax system) along the lines proposed by Representative Camp could have on a U.S. MNC’s worldwide supply chain structure and financing arrangements. We compare the change in a corporation’s global accounting effective tax rate under the current U.S. worldwide tax system and four participation exemption options proposed by Representative Camp. Using a hypothetical set of facts representative of a U.S. multinational with highly mobile intellectual property income, we show that the options produce very different accounting effective tax rates and tax revenues received by the U.S. Treasury. We also point out potential tax planning strategies that could be employed pre- and post-effective date of the implementation of a participation exemption system that would change the expected revenue to be received during the transition to such a system.

Keywords: international taxation, tax reform, territorial tax system

JEL Classification: H25, H26, M41, M48

Suggested Citation

Donohoe, Michael P. and McGill, Gary A. and Outslay, Edmund, Back to the Drawing Board: The Structural and Accounting Consequences of a Switch to a Territorial Tax System (February 3, 2014). National Tax Journal, Vol. 66, No. 3, 2013. Available at SSRN: https://ssrn.com/abstract=2390357

Michael P. Donohoe (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Gary A. McGill

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States
352-273-0219 (Phone)
352-392-7962 (Fax)

HOME PAGE: http://warrington.ufl.edu/fsoa/faculty/facultyinfo.asp?WEBID=1132

Edmund Outslay

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States
(517) 432-2912 (Phone)

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