Recent Developments in the Debate on Deferral

In this paper, I attempt to bring the debate over deferral up to date. The paper is divided into three sections. The first starts with a review of traditional models of international tax systems to provide a basic understanding of the efficiency consequences of deferral. This section then proceeds to evaluate some of the theoretical arguments for deferral that have appeared in the most recent economic literature. The second section provides a brief overview of current U.S. tax policy toward foreign source income. This review provides the background necessary to evaluate results from the empirical economic literature on the impact of taxes on multinational firms. The third section explores how firms' economic behavior is affected by the availability of deferral on active profits. Understanding the behavioral responses of firms to home and host country taxation is necessary to evaluate the efficiency and revenue aspects of changes to the current deferral regime. As in the first section, the focus is on the most recent evidence available in the economic literature.