About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline
LOG IN
LOG IN

98 IRET Byline 1 (1991)

handle is hein.taxfoundation/iretbyln0098 and id is 1 raw text is: July 2, 1991 No. 98 The IRS's Unlegislated Tax on Foreign-Source Income Government officials regularly exhort American businesses to compete more vigorously in foreign markets. Yet when U.S. companies venture abroad, one of their biggest handicaps is the U.S. tax system. Uncle Sam's tax treatment of foreign-source income is capricious, stacked against U.S. taxpayers, and incredibly complex. Before criticizing U.S. businesses for not competing more effectively, government policy makers should realize that many of the most severe competitive ...an IRS regulad difficulties are made in U.S. businesses Washington. income to alloca An example of income and fran government-made barriers to foreign-source h, effective competition by U.S. regulation is an businesses in the world door increase in marketplace is an IRS tax on the foreig regulation, recently finalized companies. and applying retroactively, that forces many U.S. businesses with foreign-source income to allocate part of their state income and franchise taxes to foreign-source income. Specifically, the IRS regulation requires U.S. corporations paying taxes to states that base their business taxes on the unified business theory (hence do not clearly exclude foreign-source income from tax) to allocate a pro rata amount of their state taxes against their foreign-source income. The regulation is an unlegislated, back-door increase in io Vi te ch U' tA ;n IRET BylJ- ie Institute for Research on the Economics of Taxation the federal income tax on the foreign earnings of these companies. States that reach beyond their borders to tax the foreign-source income of U.S. companies do so illegally. The states are constitutionally restricted to taxing income attributable to in-state activities. Although many business people believe that states often violate this prohibition, the courts have generally rejected business challenges and ruled in favor of the states. The IRS's regulation says, in effect, that irrespective of whether the states are overstepping their legal boundaries when they tax foreign-source income, the federal government not only will not contest their behavior but will punish taxpayers further. The part of the state's tax that is attributable to foreign-source income, the IRS holds, should not be deductible against the domestic income of the company, but should be deducted from the income the company, or its subsidiary, produces abroad. This subjects the company to a double tax whammy. For one thing, the state imposes an unconstitutional n...forces many tax on the company's foreign th foreign-source earnings. For another, the part of their state federal government artificially ise taxes to increases the company's q~me... The income subject to U.S. tax. ilegislated, back- Instead of hitting U.S. e federal income businesses already under earnings of these intense pressure from tough foreign rivals with this you lose-I win rule, the federal government should accept either of two theories. If states are operating legally and only taxing income from in-state sources, federal authorities should let taxpayers allocate all of their state taxes to domestic income. If states are casting their tax nets too widely, federal legislation should rein in the states and end their abusive practice. Under no circumstances should federal authorities use overtaxation at the state level to justify higher taxes at the federal level. IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1331 Pennsylvania Ave., N.W., Suite 515, Washington, D.C. 20004 Phone: (202) 347-9570

What Is HeinOnline?

HeinOnline is a subscription-based resource containing thousands of academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Contact us for annual subscription options:

Contact Us

Already a HeinOnline Subscriber?

Log In

profiles profiles most