Consolidating Foreign Affiliates

Abstract

Proposal for Change
A:Consolidate Foreign Affiliates
Congress and the Treasury should seriously consider repealing section 1504(b)(3), thereby including as part of the consolidated filing group affiliated foreign corporations that are owned by the common parent and other members of the group. This act would expand the consolidated return to its logically proper scope and would end deferral (of U.S. taxation of active business income earned by foreign affiliates) based on the happenstance of corporate shells having been placed between them and their owners in the consolidated group. However, if the current debate over deferral, after consideration of the consolidation extension, ends in a decision to retain some sort of deferral, then consolidation of foreign affiliates still will produce a superior measurement of the entire business income without regard to legal structures. In conjunction with including foreign affiliates in the consolidated group, Congress can make a principled choice about how much of the foreign income of the group should be excluded from current (or any) taxation, based on income sourcing or some other administrable measurement.