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Issues in the Taxation of Foreign Source Income

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  • Daniel J. Frisch

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.

Suggested Citation

  • Daniel J. Frisch, 1981. "Issues in the Taxation of Foreign Source Income," NBER Working Papers 0798, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0798
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    File URL: http://www.nber.org/papers/w0798.pdf
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    References listed on IDEAS

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    1. Philippe Evrard & Claude Viau & Daniel Hassan, 1977. "Introduction," Cahiers d'Économie Politique, Programme National Persée, vol. 4(1), pages 10-12.
    2. repec:cai:popine:popu_p1977_32n1_0130 is not listed on IDEAS
    3. repec:cai:popine:popu_p1977_32n1_0034 is not listed on IDEAS
    4. repec:cai:popine:popu_p1977_32n1_0298 is not listed on IDEAS
    5. Claude Viau & Daniel Hassan & Philippe Evrard, 1977. "Introduction," Cahiers d'Économie Politique, Programme National Persée, vol. 4(1), pages 42-43.
    6. Thomas Horst, 1980. "A Note on the Optimal Taxation of International Investment Income," The Quarterly Journal of Economics, Oxford University Press, vol. 94(4), pages 793-798.
    7. Martin Feldstein & David Hartman, 1979. "The Optimal Taxation of Foreign Source Investment Income," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 613-629.
    8. Stiglitz, Joseph E., 1973. "Taxation, corporate financial policy, and the cost of capital," Journal of Public Economics, Elsevier, vol. 2(1), pages 1-34, February.
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    Cited by:

    1. 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.
    2. Martin Feldstein, 1991. "Domestic Saving and International Capital Movements in the Long Run and the Short Run," NBER Chapters,in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 331-353 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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