Expanded Worldwide Versus Territorial Taxation After the TCJA

Abstract

One of the principal U.S. tax policy issues leading up to the Tax Cuts and Jobs Act was how foreign-source active business income of U.S. multinational enterprises should be taxed by the United States if the system of deferring U.S. tax on active foreign income of a foreign subsidiary was ended. Much of the U.S. multinational business community urged that the United States adopt a territorial or exemption system, while others, including many labor-backed groups, favored adopting an expanded worldwide tax regime. As others have observed, Congress chose both. This report takes a preliminary look at the extent to which the TCJA's purely outbound international provisions caused a degree of movement in either direction.

The TCJA created a more complex international system that manages to include elements of territoriality, expanded worldwide taxation, and even deferral. Consequently, the TCJA does not resolve the territorial versus worldwide debate, but extends it.

When the one-time acceleration of tax on deferred earnings is set aside, the TCJA's ongoing outbound rules are estimated to actually lose revenue, thus supporting a conclusion that the U.S. international tax system has shifted toward territoriality, although not nearly so much as territoriality advocates had hoped.

The authors have concluded that expanded worldwide taxation is the normatively preferred position. The report explains how the new global intangible low-taxed income regime may serve as a platform to shift the U.S. international tax regime to expanded worldwide taxation and identifies steps that would accomplish that objective.

Keywords: International Income Taxation, Transnational Taxation, Tax Policy, Income Taxation

JEL Classification: H21, H25, H26, K34