From Switzerland with Love: Surrey’s Papers and the Original Intent(s) of Subpart-F

61 Pages Posted: 8 Jul 2018 Last revised: 26 Nov 2018

See all articles by Nir Fishbien

Nir Fishbien

University of Michigan at Ann Arbor - Law School - SJD Candidate

Date Written: June 20, 2018


For the first time since 1913, and as part of the 2017 tax reform, Congress adopted a tax regime that exempts from U.S. taxation dividends from foreign subsidiaries. By doing so, Congress abandoned the general principle that U.S. residents should be subject to tax on all income “from whatever source derived.” This shift marks a good opportunity for considering the reasons the United States taxed such dividends in the first place. In 1962, Congress enacted ‘Subpart-F,’ which subjected certain earnings of the foreign subsidiaries of American parent corporations to current-base taxation. This was a deviation from the general tax principle of tax deferral, under which earnings of foreign subsidiaries are taxed only upon repatriation of these earnings. An example of a taxable instance would be by a dividend. The new legislation was the result of political compromise. Although the Department of the Treasury (Treasury) supported a wide-scale elimination of tax deferral, Congress eventually adopted a much narrower law which eliminated tax deferral only in instances where it was abused, such as when deferrals are used to avoid paying otherwise owed U.S. taxes. Seven internal Treasury Department reports found in the archives of Harvard Law School’s Law Library reveal the dramatic sequence of events that led to the enactment of Subpart-F, one of the most prominent international tax reforms the United States has ever known. The reports unequivocally support the notion that Subpart-F was initially formed mainly due to the deteriorating U.S. Balance of Payment position, and that its “original intent,” as designed by its main architect, Assistant Secretary of the Treasury, Stanley S. Surrey, was to eliminate tax deferral and protect the U.S. tax base. This was based on the principles of equity, efficiency (Capital Export Neutrality), and elegance. Congress, on the other hand, rejected the proposal and adopted a much narrower piece of legislation, mainly due to the concern that eliminating tax deferral would result in a competitive disadvantage to American corporations operating abroad. Based on the reports, as well as the controlling legal and economic concepts of the time, I argue that Congress was mistaken in limiting the original proposal to eliminate tax deferral. This mistake was the result of relying on overly-emphasized and exaggerated competitive concerns, rather than on concrete and sound tax and fiscal policies.

Keywords: International Tax, Tax Policy, Tax Reform, Tax Deferral

JEL Classification: D63, E61, E62, F42, H21, H25, H26, K34, O38

Suggested Citation

Fishbien, Nir, From Switzerland with Love: Surrey’s Papers and the Original Intent(s) of Subpart-F (June 20, 2018). Virginia Tax Review, Vol. 38, No. 1, p. 1 (2018), Available at SSRN:

Nir Fishbien (Contact Author)

University of Michigan at Ann Arbor - Law School - SJD Candidate ( email )

Ann Arbor, MI
United States

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