Designing a 21st Century Corporate Tax—An Advance U.S. Minimum Tax on Foreign Income and Other Measures to Protect the Base

Abstract

The 21st Century has seen unprecedented levels of corporate tax aggressiveness and avoidance. This Article continues our exploration of second-best international tax reforms that would protect the U.S. corporate tax base and have some likelihood of adoption. In this case, we consider how a U.S. minimum tax on foreign income earned by a controlled foreign corporation should be designed to protect the United States against erosion of its corporate income tax base and to combat tax competition by low-tax intermediary countries. In the authors’ view, a minimum tax should be an interim levy that preserves the residual U.S. tax on foreign income, as distinguished from a final minimum tax that partially eliminates the U.S. residual tax. An interim minimum tax would be a significant improvement over current law and would more effectively limit incentives to seek low-taxed foreign income while ameliorating pressure to retain excess earnings abroad.To achieve the objectives of such a minimum tax, corresponding changes should be made to the U.S. corporate resident definition, the source taxation of foreign multinational corporations, and the residence taxation of U.S. portfolio investors in foreign corporations to reduce tax advantages under current law for investments in foreign corporations. These changes would reduce tax advantages for foreign parent corporate groups and thereby further protect the U.S. tax base, as well as reduce incentives for U.S. corporations to expatriate as a consequence of increased U.S. taxation of foreign income under an interim minimum tax.

The Effect of an Allowance for Corporate Equity on Capital Structure: Evidence From Austria

“…One way to mitigate the asymmetric taxation of debt and equity is the adoption of an allowance for corporate equity (ACE), which is a tax system that provides for a deduction of notional interest on equity. ACE tax systems have been frequently introduced into the tax policy debate over the last few years (IMF 2011;IFA 2012;Shay et al 2015;EU 2016), including the Allowance for Growth and Investment (AGI) proposal by the EU Commission in 2016 (EU 2016) and the EU's DEBRA proposal in 2022. From a fiscal perspective, the adoption of an ACE tax system narrows the tax base of firms and thus generates less tax revenue than a classical corporate income tax system (Finke et al, 2014); however, such an adoption could lead to macroeconomic welfare gains.…”

“… 3. For further information regarding the legal background and details, see Taferner (1999); Gassner (2002); Eberhartinger et al, (2004); Lehner et al (2004).…”