Structuring an Exemption System for Foreign Income of U.S. Corporations

About half the OECD countries provide a tax credit for foreign taxes on foreign source business income earned by multinational corporations; the other half exempt from domestic taxation active business income earned abroad. We undertake a preliminary inquiry here into the potential structure of such an exemption system for the U.S. Most of the issues raised by an exemption system parallel those debated under the current credit system. This is not surprising; both systems share the same general goal: avoiding international double taxation without stimulating U.S. taxpayers to shift operations, assets or earnings abroad. Shifting to an exemption system might simplify U.S. international income tax law, but only if simplification is made a priority. Some of the potential simplifications of the rules governing international taxation of business suggested here could be adopted whether or not exemption is enacted.