Thompson: An Imputation System for Taxing Foreign-Source Income

Samuel C. Thompson Jr. (Penn State) has published An Imputation System for Taxing Foreign-Source Income, 130 Tax Notes 567 (Jan. 31, 2011):

This report is based in part on the analysis presented in Thompson's Assessing the Following Systems for Taxing Foreign-Source Active Business Income: Deferral, Exemption, and Imputation, 53 How. L.J. 337 (2010).

Congress should follow the original proposal of the co-chairs of President Obama's National Commission on Fiscal Responsibility and Reform and adopt an imputation system for taxing foreign-source income, and use the revenues gained from the elimination of the current deferral system to lower the tax rate for all U.S. corporations and for foreign corporations doing business in the United States.

Two significant benefits would result from an imputation system: The unlevel playing field, which prefers foreign investment over U.S. investment, would be made level, and U.S. multinational corporations would no longer have an incentive to abuse the transfer pricing rules by allocating excessive income to foreign subsidiaries or to enter into abusive transactions deflecting excessive expenses to U.S. parents. These abuses are significant in the current deferral system and would be even greater with a territorial system, which the commission proposed.

The full report can be viewed here: http://taxprof.typepad.com/files/130tn0567.pdf.