Territorial vs. Worldwide International Tax Systems: Which is Better for the U.S.

Abstract

This article was presented at the 2006 Annual Symposium on International Taxation held at the University of Florida Levin College of Law Graduate Tax Program.

The Report of the President’s Advisory Panel on Federal Tax Reform, entitled “Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System,” was released in November 2005. One of the issues addressed in the Panel Report was whether the U.S. should shift from its current international tax system (taxing the worldwide income of its nationals with a credit for foreign income taxes) to a territorial system (exemption of foreign branch business income and dividends from foreign subsidiaries out of business income). The Panel opted for the territorial system. The report devoted only about twelve pages to the subject, but its recommendation has reignited interest in a subject which has recurred with some regularity over the past decade.