Borderline Case International Tax Policy, Corporate Research and Development, and Investment (1997) / Chapter Skim
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III Tax Reform: Prescriptions and Prospects
III Tax Reform: Prescriptions and Prospects
8 INTERNATIONAL TAX AND COMPETITIVENESS ASPECTS OF INTERNATIONAL TAX REFORM
Pages 85-108
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tax treaty network depending on how foreign governments react. Thus, the international implications of fundamental tax reform cannot be ignored.
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· Harmonization. The United States should not depart unnecessarily from widely accepted international income tax norms.
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tax treaty network depending on how foreign governments react. Thus, the international implications of fundamental tax reform cannot be ignored.
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· Harmonization. The United States should not depart unnecessarily from widely accepted international income tax norms.
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The foreign tax credit systems of other countries generally are simpler. · Virtually alone among the major industrial countries, the United States refuses to accept tax sparing provisions in its bilateral income tax treaties.
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Unlike other countries, the United States imposes an alternative minimum tax that limits utilization of otherwise allowable foreign tax credits. This can result in U.S.
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Since the changes in the international tax rules made by the 1986 Tax Reform Act, a number of bills have been introduced in Congress to make incremental reforms in the present international income tax rules.2 In the 104th session of Congress, more fundamental tax reform proposals were introduced that would have replaced the income tax system with a consumption-based tax system. These fundamental tax reform proposals are discussed in the following section and in the last section of this chapter.
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The United States now has bilateral income tax treaties with nearly 50 countries. The treaties provide numerous benefits to investors, including reduced withholding tax rates on income flows between the United States and the treaty partner.
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Rather, multinationals would have an incentive to shift profits out of other countries that impose income taxes and into the United States (by inflating interest and royalty payments to the United States) ; (Avi-Yonah, 1995, p.
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tax system could have a significant impact on decisions relating to the development and use of technology. All three leading tax reform proposals the USA Tax, the Flat Tax, and the National Retail 5The Taxpayer Relief Act of 1997 extended the tax benefit of foreign sales corporations to software exports.
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Royalties received for the use of intangible assets outside the United States generally are considered territorially to be foreign-source income for purposes of the foreign tax credit. Under the so-called look-through rules, foreign royalties 6According to the report of the National Commission on Economic Growth and Tax Reform, "attention must be given to the proper tax treatment of foreign-source license fees, royalties, and other intangibles so as not to discourage research and development in the United States." 7Deductions allowed under section 174 are reduced by an amount equal to 100 percent of the taxpayer research credit.
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It is possible that the drafters were concerned that inclusion of a research credit could jeopardize the legality of border tax adjustments under the GATT. Unlike the USA Tax, however, the Armey Flat Tax does not have border adjustments; consequently, GATT considerations would not preclude inclusion of a research tax credit in a Flat Tax system.
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Foreign withholding taxes levied on royalties and other income would not be deductible or creditable under the Flat Tax. Impact on withholding taxes: As discussed above, it is possible that existing treaties and withholding rates might be jeopardized if the United States unilaterally were to eliminate its income tax system.
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and, in the case of the excess foreign tax credit taxpayer, the utilization of foreign tax credits (in excess of the 5 percent withholding tax on the royalty)
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Thus, for the taxpayer in this example, the USA Tax would increase the after-tax cost of R&D by about 210 percent, depending on whether or not the taxpayer currently is in an excess foreign tax credit position. The potential rise in the after-tax cost of R&D primarily is attributable to the loss of the research and foreign tax credits and the inability to deduct compensation and payroll taxes.
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This represents about a 5-14 percent increase in the after-tax cost of R&D, compared to present law, under both the Flat Tax and the USA Business Tax (see Table 8.2~. INCREMENTAL REFORM OF THE INCOME TAX SYSTEM As an alternative to fundamental tax reform, incremental changes to the existing income tax system could be adopted.
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These tasks certainly would be simplified by proposals to reduce the number of foreign tax credit baskets required by current law. Thus it is time to consider replacing the basket approach entirely with some simpler foreign tax credit system or even with a territorial income tax system (described below)
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Under regular income tax rules, a U.S. taxpayer may claim a foreign tax credit for foreign taxes paid up to 100 percent of its U.S.
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Because passive investment income presumably would be taxed currently, look-through, anti-deferral, and foreign tax credit rules generally would remain necessary for passive foreign income. Transfer pricing issues would be at least as important under a territorial income tax system as they are today.
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In addition, each of the leading fundamental tax reform proposals could increase tax burdens on U.S. technology and U.S.
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Pp. 19-20 in The Effectiveness of Research and Experimentation Tax Credits.
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source 75% Present Law Flat Tax USA Tax ExcessDeficit Armey- Revenue Nunn ItemFTCFTCShelbyneutralDomenici Tax status Tax rate35%35%17%21%11% Effective rate of R&D credit 4.4% 4.4% NA NA NA Foreign tax credit position Excess Deficit NA NA NA AMT no no NA NA NA Gross income 90.68 98.15 104.87 105.56 99.63 U.S. source 45.34 49.08 52.44 52.78 49.82 Foreign royalty, gross of withholding tax 45.34 49.08 52.44 52.78 49.82 Withholding tax 2.27 2.45 2.62 2.64 2.49 Research expense (section 174)
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source 75% Present Law Flat Tax USA Taxa Excess Deficit Armey- Revenue Nunn Item FTC FTCShelbyneutralDomenici Tax status Tax rate 35% 35%17%21%11% Effective rate of R&D credit 4.4% 4.4% NA NA NA Foreign tax credit position Excess Deficit NA NA NA AMT no no NA NA NA Gross income 90.68 98.15 103.11 103.27 102.56 U.S. source 45.34 49.08 51.56 51.64 51.28 Foreign royalty, gross of withholding tax 45.34 49.08 51.56 51.64 51.28 Withholding tax 2.27 2.45 2.58 2.58 2.56 Research expense (sec.
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GLENN Hug BARD Columbia University and the National Bureau of Economic Research INTRODUCTION As multinational corporations play a larger role in the business activities of the global economy, interest in international aspects of capital income taxation has been stimulated. In the United States, debate has centered on the competitive position of U.S.
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