Want to Cut the Cost of Tax Reform? Don't Reward Companies that Shifted Profits Offshore

Abstract

In connection with any transition to a new international tax system, we need an approach that effectively deals with the trillions of dollars of previously untaxed foreign income held by CFCs. There is logic and fairness in applying a rate on those earnings that is less than the 35 percent home country rate because the rules of the game are being changed significantly.

Many U.S. multinationals have had legitimate commercial reasons for retaining their earnings overseas. For these, I can happily accept whatever rate Congress chooses.

However, for those U.S. multinationals that have aggressively pushed the envelope to maximize their stateless income over the past decade and longer through convoluted tax structuring, we as a country cannot be rewarding such behavior with favorable lower-than-35 percent rates.

In this non-technical article posted on the Forbes website for a non-tax expert audience, I explain the above and suggests two approaches to identifying CFC earnings that should be subject to the full 35 percent corporate tax rate when transitioning to a new tax system, with the remainder subject to whatever favorable transition rate Congress might choose.

Keywords: CFC, controlled foreign corporation, transition tax, untaxed foreign earnings, untaxed foreign profits, subpart F

JEL Classification: H21, H25, K34, E62