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Two Cheers for the Foreign Tax Credit, Even in the BEPS Era

55 Pages Posted: 17 Nov 2016 Last revised: 25 Apr 2017

J. Clifton Fleming Jr.

Brigham Young University - J. Reuben Clark Law School

Robert J. Peroni

University of Texas at Austin - School of Law

Stephen E. Shay

Harvard Law School

Date Written: November 1, 2016


Reform of the U.S. international income taxation system has been a hotly debated topic for many years. The principal competing alternatives are a territorial or exemption system and a worldwide system. For reasons summarized in this article, we favor worldwide taxation if it is real worldwide taxation – i.e., a non-deferred U.S. tax is imposed on all foreign income of U.S. residents at the time the income in earned. This approach is not acceptable, however, unless the resulting double taxation is alleviated. The longstanding U.S. approach for handling the international double taxation problem is a foreign tax credit limited to the U.S. levy on the taxpayer’s foreign income. Indeed, the foreign tax credit is an essential element of the case for worldwide taxation. Moreover, territorial systems often apply worldwide taxation with a foreign tax credit to all income of resident individuals plus the passive income and tax haven income of resident corporations. Thus, the foreign tax credit is actually an important feature of many territorial systems.

The foreign tax credit has, however, been subjected to sharp criticisms and Professor Daniel Shaviro has recently proposed replacing the credit with a combination of a deduction for foreign taxes and a reduced U.S. tax rate on foreign income. In this article, we respond to the criticisms and argue that the foreign tax credit is a robust and effective device. Furthermore, we respectfully explain why Professor Shaviro’s proposal is not an adequate substitute. We also explore an overlooked aspect of the foreign tax credit – its role as an allocator of the international tax base between residence and source countries – and we explain the credit’s effectiveness in carrying out this role. Nevertheless, we point out that the credit merits only two cheers because it goes beyond the requirements of the ability-to-pay principle that underlies use of an income base for imposing tax (instead of a consumption base). On balance, however, the credit is the preferred approach for mitigating international double taxation of income.

Suggested Citation

Fleming, J. Clifton and Peroni, Robert J. and Shay, Stephen E., Two Cheers for the Foreign Tax Credit, Even in the BEPS Era (November 1, 2016). 91 Tulane L. Rev. 1 (2016). Available at SSRN: or

J. Clifton Fleming

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

430 JRCB
Brigham Young University
Provo, UT 84602
United States

Robert Peroni

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

727 East Dean Keeton Street
Austin, TX 78705
United States

Stephen Shay (Contact Author)

Harvard Law School ( email )

1563 Manssachusetts Avenue
Cambridge, MA 02138
United States

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