This paper empirically tests a theory laid out in Scholes et al. (2015, p. 315) that the U.S. worldwide tax system reduces the incentive of U.S. parent companies to be tax aggressive in their foreign subsidiaries. Investors subject to a worldwide tax system pay taxes on their worldwide income, regardless of the origin thereof. Therefore, a U.S. investor pays the difference between the effective tax payment abroad and the higher U.S. statutory tax when profits are repatriated. In contrast, investors subject to territorial tax systems gain the full tax savings from being tax aggressive abroad. Our results show that U.S.-owned foreign subsidiaries have a by 1.2 percentage point higher average GAAP effective tax rate (ETR) compared to subsidiaries owned by foreign investors from countries with a territorial system. We contribute to the literature by showing a mechanism, other than cross-country profit shifting, why U.S. multinational companies have higher GAAP ETRs than multinationals subject to territorial tax systems. (authors' abstract) / Series: WU International Taxation Research Paper Series

The current United States tax code regarding foreign sourced income is outdated for a heavily globalized and interconnected world. Multinationals have played certain games with the tax code to lower their domestic and foreign tax bill. This form of tax avoidance has real economic effects that are leading to non-optimal economic outcomes. This paper will begin by offering examples of how multinationals are avoiding taxes, especially in the pricing of intangible assets. Other countries have adopted different ways to tax foreign profits; notably most countries either have a worldwide non-deferral tax system or a territorial tax system. There are costs and benefits associated with both systems of taxation that must be considered before adoption. Ultimately, this paper will conclude that a territorial tax system combined with an overhaul of the current rules regarding transfer pricing will lead to a better economic outcome than the current U.S. system of taxation.

The United States’ Tax Cuts and Jobs Act of 2017 (TCJA) changed a 30-year-old definition of the term “intangible property” and added assessment requirements for two different types of “intangible income”, both of which deviate from the newly changed general definition of “intangible” and most common understandings of the meaning of the word.  While it may appear unlikely that a change in meaning of a single word in a large tax code could have a drastic effect on international taxation, the differing definitions of “intangible” create far-reaching tangible consequences.   The TCJA affects the international taxation of US-based corporations for cross-border transactions, among many ways, by employing different definitions of the word “intangible” in three different provisions.  First, it modifies the general statutory definition of “intangible” to specifically include goodwill, workforce in place, and going-concern value will be examined.  Second, it uses an unusually broad definition of “intangible” in the new tax category of global intangible low-taxed income (GILTI); and third, the meaning of “intangible” as used in assessing so-called foreign-derived intangible income (FDII) essentially creates a broad export subsidy.  Each use of the term will also be assessed on how it ties into the TCJA’s intended purpose for the provision in which it appears.  Additionally, they will be assessed on how they compare with established international tax standards provided by the Organization for Economic Co-operation and Development (OECD) and its Base Erosion and Profit Shifting (BEPS) Plan.   By explicitly changing the definition of “intangible property”, it becomes apparent that the TCJA has increased the scope of potential tax liability for US corporations and has brought the US in line with the OECD’s use of the phrase as used in its model convention.   In examining how the GILTI tax is calculated, it will become evident that the tax can be applied to income that is not connected to intangibles despite the seemingly limited scope implied by its name.  Furthermore, a limitation on foreign tax credit means that GILTI might allow at least some continuation of the old worldwide tax system.  While potentially overly-burdensome, GILTI seems to be broadly in line with the BEPS goal towards reducing profit shifting.   As a result of how “intangible” is defined for purposes of determining FDII, two effects become apparent. First, for tax categorization, it encompasses income from both tangible and intangible assets.  Second, it permits deductions that can be construed as an export incentive.