handbook-tb

Eric M. Zoltthe right of source countries to have exclusive jurisdiction to decidetax policy for activities conducted in their country.3.2 A more complex viewThe question arises as to how much revenue is really being transferredfrom developing countries to the treasuries of developed countries,and how much foreign investment is being deterred by the absence oftax sparing provisions. The answer is probably very little. This is partlybecause many countries that previously had worldwide tax regimeshave moved to territorial regimes. But even if a country (most notably,the United States) still retained a nominal worldwide regime, severalfeatures of the tax regime make it highly unlikely that the incomeearned outside the country of residence would be subject to current(or, in many cases, future) taxation.For the reasons set forth below, the simple model of foreign directinvestment likely substantially overstates the degree to which the economicbenefits from tax incentives are actually diverted from the foreigninvestor to the tax coffers of the residence country. To see why this is thecase, it is helpful to appreciate that territorial tax systems and worldwidetax regimes may be much less different from one another in practicethan they appear in theory. Figure 1 shows the continuum between taxsystems that are purely territorial and those that are purely worldwidetax regimes. The distinction between worldwide and territorial regimesis blurred as some worldwide regimes have territorial features and someterritorial regimes (primarily through Controlled Foreign Corporation(CFC) provisions) have worldwide features.Although the general rule is that a taxpayer subject to worldwidetaxation (such as in the United States) is taxed currently on incomeearned abroad, the key exception is that taxation in the home countryof foreign income earned through a subsidiary is deferred until theincome is repatriated. While sometimes the deferral is temporary, inmany cases corporations choose to “permanently reinvest” their fundsoutside the United States. Because of the opportunity to defer tax onforeign source active income simply by non-repatriation, United Statescorporations have accumulated an extraordinarily large amount ofcash and other liquid securities outside the United States. Some486