Will U.S. Investments Go Abroad in a Territorial Tax: A Critique of the President's Advisory Panel on Tax Reform

Abstract

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

The Report of the President's Advisory Panel on Federal Tax Reform (the "Report") recommends the U.S. adopt a territorial tax system that would exclude income earned by U.S. taxpayers actively conducting foreign businesses. This exclusion would also apply to dividends received from controlled foreign corporations to the extent such dividends were attributable to the corporation's conduct of active foreign businesses. The Report justifies this recommendation by stating that a territorial system is simpler than the current global approach employed by the U.S. and that a territorial tax will improve efficiency. In an accompanying article, Professor McDaniel has demonstrated that simplicity cannot be achieved under a territorial or global system. Under either system, the U.S. will have to address source issues, transfer pricing issues and IRC Section 367 concerns.