2007 Issue 1 - New York City Bar Association

H E R M A N G O L D M A N L E C T U R E
Part I of the paper describes the Panel’s proposal and the arguments it
advanced in favor of the proposed change. Part II sets forth a model by
which the Panel proposal will be evaluated. Part III compares the simplicity
arguments for each of the two international tax regimes. In Part IV,
the efficiency arguments advanced for each system are considered. Part V
analyzes the equity issues under each system. Part VI sets forth my own
conclusions on the issues.
I.
The Panel recommended that the current U.S. international tax regime
be replaced with a two-part system:
1. Foreign active business income, as well as dividends from
foreign subsidiaries out of such income, would be exempt from
U.S. income tax.
2. Current U.S. income tax would be imposed on passive income
and so-called mobile income (including, for example, financial
services business income); a foreign tax credit would be
allowed against the U.S. tax, with all such income being placed
in a single basket. 5
in a Global Setting, 57 Nat’l Tax J. 937 (2004), advanced a new criterion, that of “ownership
neutrality.” That concept was sharply critiqued by Harry Grubert as lacking any “conceptual
basis” and as of no use in addressing “any relevant policy issue.” See comment of Harry
Grubert, 58 Nat’l Tax J. 263 (2005). I find the Grubert analysis persuasive and will not
employ the ownership neutrality concept in this paper. See also the critique of the concept by
Fleming and Peroni, note 3, at 235-239.
Finally, I do not employ the criterion of “international norms,” as was done, for example, by
the Treasury Department in its study of subpart F. See United States Department of the
Treasury Office of Tax Policy, the Deferral of Income Earned Through U.S. Controlled Foreign
Corporations: A Policy Study (2000). The problem is that supposed “norms” change. For
example, prior to the issuance of the first set of regulations under I.R.C. § 482 in 1968, there
was no international consensus and hence no norm about the comparable uncontrolled price
method to be used in the arm’s length pricing methodology. Some 25 years later, when the
Treasury issued proposed regulations, setting forth the largely formulary profit split and
comparable profits methods, there was an outcry from many OECD countries that the international
norm of arm’s length transfer pricing was being violated by the new rules.
5. Panel Report at 240. The Panel Report closely parallels a report prepared by the Staff of the
Joint Committee on Taxation, “Options to Improve Tax Compliance and Reform Tax Expenditures,”
JCS-02-05 (Jan. 27, 2005) at pp. 186-198 (hereinafter JCT Staff Report). This discussion
will include references to that study and notes any differences between the Panel Report and
T H E R E C O R D
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