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Issues in the Taxation of Foreign Source Income

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  • Daniel J. Frisch
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    Abstract

    This paper examines some aspects of the tax treatment of U.S. multinational corporations. The emphasis is on problems of coordination of the different tax systems faced by the firms. The U.S. corporate income tax must take account of the fact that the firms' over- seas income is taxed by the host governments, in a variety of ways. Currently, the foreign tax credit is the principle mechanism for making these adjustments; it is examined, along with alternative methods such as territorial treatment and a deduction for foreign taxes. The paper also considers the closely related question of coordinating measures of taxable income. The most common method, the arm's length rule, is examined. Alternatives to it, including allocation by shares and a partial case involving allocation of research and development expenses, are also considered. First, the revenue effects of these tax regimes are simulated, with no behavioral responses considered. Responses in location of investment decisions are then included. The data are taken from the corporations' U.S. tax returns, cross-tabulated into approximately 240 industry and country cells.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0798.

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    Date of creation: Nov 1981
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    Publication status: published as Frisch, Daniel J. "Issues in the Taxation of Foreign Source Income." Chapter 9 in Behavioral Simulation Methods in Tax Policy Analysis, ed. Martin Feldstein. Chicago: UCP, (1983).
    Handle: RePEc:nbr:nberwo:0798

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    1. H.l, 1977. "Introduction," Population (french edition), Institut National d'Études Démographiques (INED), Institut National d'Études Démographiques (INED), vol. 32(1), pages 129-130.
    2. Philippe Evrard & Daniel Hassan & Claude Viau, 1977. "Introduction," Cahiers d'Économie Politique, Programme National Persée, Programme National Persée, vol. 4(1), pages 42-43.
    3. H. L, 1977. "Introduction," Population (french edition), Institut National d'Études Démographiques (INED), Institut National d'Études Démographiques (INED), vol. 32(1), pages 33-34.
    4. Horst, Thomas, 1980. "A Note on the Optimal Taxation of International Investment Income," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 94(4), pages 793-98, June.
    5. H.l., 1977. "Introduction," Population (french edition), Institut National d'Études Démographiques (INED), Institut National d'Études Démographiques (INED), vol. 32(1), pages 297-298.
    6. Stiglitz, Joseph E., 1973. "Taxation, corporate financial policy, and the cost of capital," Journal of Public Economics, Elsevier, Elsevier, vol. 2(1), pages 1-34, February.
    7. Daniel Hassan & Claude Viau & Philippe Evrard, 1977. "Introduction," Cahiers d'Économie Politique, Programme National Persée, Programme National Persée, vol. 4(1), pages 10-12.
    8. Feldstein, Martin & Hartman, David, 1979. "The Optimal Taxation of Foreign," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(4), pages 613-29, November.
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    Cited by:
    1. Martin Feldstein, 1982. "Domestic Saving and International Capital Movements in the Long Run and the Short Run," NBER Working Papers 0947, National Bureau of Economic Research, Inc.
    2. Roger H. Gordon, 1985. "Taxation of Investment and Savings in a World Economy: The Certainty Case," NBER Working Papers 1723, National Bureau of Economic Research, Inc.
    3. Daniel J. Frisch & David G. Hartman, 1983. "Taxation and the Location of U.S. Investment Abroad," NBER Working Papers 1241, National Bureau of Economic Research, Inc.

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