The Function of Corporate Tax-Residence in Territorial Systems
28 Pages Posted: 16 Jul 2014 Last revised: 30 Sep 2014
Date Written: September 27, 2014
In this symposium Essay, I explore the instrumentality of corporate tax-residence determination in territorial tax systems. Using the United States as a case study, I show that tax-residence determination had a historic “positive functionality”. Namely, tax-residence positively pointed to the source of income earned, and distributed by, a corporation. However, in current economic environment the positive functionality is obsolete. Instead, the modern functionality of corporate tax residence is a “negative” one. That is, to assure that income is not sourced at a jurisdiction in which income could not have possibly been produced. Under such a view, corporate tax-residence should be constructed as an anti-income-shifting mechanism. One way to achieve such result is to base corporate tax-residence determination on formulary apportionment that takes into account the corporation's real economic attributes, as well as the proportional part of corporation’s contribution to the control-group earnings. The functionality of formulary apportionment in this context is not to allocate tax jurisdiction (the traditional use of formulary apportionment), but rather to assure that a corporation is not a resident where it has no economic existence. Current territorial reform proposals in the United States ignore the important function of tax-residence in supporting source-taxation. I therefore conclude with a call to incorporate a reform of corporate-tax residence determination in any territorial reform legislation.
Keywords: International Tax Reform; Territorial Taxation; Worldwide Taxation; Corporate Tax; Tax History; Comparative Taxation; Corporate Tax-Residence
JEL Classification: E62, H23, H25, H29, K34
Suggested Citation: Suggested Citation