Modeling Changes in U.S. International Tax Rules

This paper sets forth a simple, but potentially infinitely expandable, model through which the consequences of changes in U.S. international tax rules can be explored. The question it poses is straightforward: Assume that our task is to aggregate funds from taxable U.S. or foreign individual shareholders and invest them in U.S. or foreign business operations through a U.S.-parented or foreign-parented multinational corporate group (“MNE”). What U.S. rate of tax will apply to income generated by those operations? Obviously, the answer will depend on, among other things, whether earnings are distributed currently and, in the case of the new GILTI tax, the mix of assets deployed in offshore operations. Nevertheless, we can establish the endpoints of ranges of possibilities and draw useful policy implications from our results.Part I describes the proposed model, applying it to pre-TCJA law. The model suggests that pre-TCJA law created at least four major economic distortions: (1) a structural U.S.-law bias in favor of offshore operations, (2) incentives to shift income to foreign members of the same multinational group – in effect, to treat such income as income from offshore operations, (3) a structural U.S.-law bias in favor of foreign-parented MNEs, and (4) barriers to repatriating foreign profits to U.S. parents and their shareholders.Part II then applies the model to post-TCJA U.S. law. It concludes that the structural bias in favor of offshore operations has been reduced but not eliminated. Opportunities and incentives to shift income to foreign corporate members have been significantly reduced for U.S.-parented groups, less so for foreign-parented groups – exacerbating the advantage U.S. law gives to foreign-parented MNEs. The pre-TCJA structural bias in favor of foreign-parented MNEs has been reduced in some contexts but increased in others. Finally, repeal of the repatriation tax has eliminated the pre-TCJA U.S. tax barrier to repatriation of foreign profits but, at the same time, made it more likely that capital will flee permanently out of U.S.-parented corporate solution and into foreign-parented corporate solution