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Title: INTERNATIONAL TAX SEMINAR for Congressional Staff

  • International Tax Policy Forum
  • Finance Committee Hearing Room
  • U.S. Senate
  • February 15, 2002

International Tax Seminar
  • Contents
  • Introduction
  • Economic background
  • US International tax system Overview
  • Current International tax policy issues
  • Extra-territorial income (ETI) regime
  • Dividend exemption (territorial) tax systems
  • US International tax system Primer
  • Anti-deferral regime (subpart F)
  • The foreign tax credit

  • International Tax Policy Forum (
  • Founded in 1992, the International Tax Policy
    Forum is an independent group of over 30 US MNCs
    with a diverse industry representation. The
    primary purpose of the Forum is to promote
    research and education on taxation of income from
    cross-border investment. To this end, the Forum
    sponsors research and conferences on
    international tax issues and meets periodically
    with academic and government experts. As a
    matter of policy, the Forum does not take
    positions on legislative or regulatory proposals.
  • Mr. John Samuels (General Electric Co.) serves
    as Chairman of the Forum and Prof. James Hines,
    Jr. (University of Michigan) is the Forum's
    research director. PricewaterhouseCoopers is a
    consultant to the Forum.

For more information contact Margery Sweat
  • Presenters
  • Alan Fischl, PwC International Tax Services
  • (202.414.1030)
  • Carl Dubert, PwC International Tax Services
  • (202.414.1718)
  • Peter Merrill, PwC National Economic Consulting
  • (202.414.1666)

  • Some current international tax policy issues
  • Response to WTO decision on FSC/ETI
  • Dividend exemption (territorial) tax systems
  • Other changes in structure of US international
    tax rules
  • Active financing extension
  • Simplification
  • JCT study
  • Treasury study announced in budget short- and
    long-term parts
  • Other simplification initiatives

Economic background
  • Global economic trends
  • Foreign direct investment
  • Foreign portfolio investment
  • Cross-border mergers and acquisitions

Global economic trends
  • The U.S. share of the world economy has declined
    due to faster economic growth abroad since World
    War II
  • A domestic company that limited itself to the
    U.S. market in 1945 would have foreclosed half
    the world market, today it would lose 80 percent

Source Mathew J. Slaughter, Global Investments
American Returns, 1998, p. 6.
Global economic trends International trade
  • US economy has become more open trade is now
    over 24 of GDP
  • US now runs a large trade deficit in goods (3.7
    of GDP)
  • US now runs a trade surplus in services (1.0 of

Global economic trends US FDI in the world economy
  • Cross-border Foreign Direct Investment (FDI) has
  • U.S. MNCs share of world FDI has fallen
  • In 1960, 18 of the worlds 20 largest companies
    (ranked by sales) were US headquartered. In
    1996, 8 were.

Global economic trends Market integration
  • GATT WTO rounds have substantially reduced
    global tariff levels
  • Regional trade agreements have proliferated
  • Euro Econ Area, NAFTA, ASEAN, Mercosur, etc.
  • Half of the 153 FTAs created since 1990
  • MNCs view their business regionally

U.S. foreign direct investment
Foreign receipts as a percent of corporate
profits in GNP
  • U.S. MNCs and U.S. economy are far more dependent
    on FDI abroad

U.S. foreign direct investment Location
  • U.S. FDI primarily is located in developed
  • In 1998, 73 of foreign affiliate assets and
    sales were in developed countries, and 58 of
    foreign affiliate employment
  • U.S. FDI overwhelmingly supplies foreign, not US
  • In 1998, less than 11 of sales of
    U.S.-controlled foreign corporations were back to
    US (less than 7 if Canada excluded)
  • Foreign affiliates of U.S. companies are
    primarily in the services sector
  • 56 of U.S. MNC affiliate abroad are classified
    in the services sector, including
    wholesale/retail trade (compared to 27 of U.S.
  • According to the UN … accessing markets will
    remain the principal motive for investing abroad

Developed countries defined as Canada, Europe
and Japan.
U.S. foreign direct investment Exports
  • In 1998, U.S. MNCs accounted for 64 of all U.S.
  • According to the OECD
  • Each dollar of outward FDI is associated with
    2 of additional exports and with a bilateral
    trade surplus of 1.701
  • 1OECD, Open Markets Matter The Benefits of
    Trade and Investment Liberalization, 1998, p. 5p

U.S. foreign direct investment US wages
  • US plants of companies without foreign operations
    pay lower wages than domestic plants of US MNCs,
    controlling for industry, firm size, age of firm,
    and state location

Source Mark Doms and Brad Jensen, 1996
Foreign direct investment US employment
  • Foreign and domestic employment of US MCS are
    complements not substitutes.1
  • According to the Council of Economic Advisers
  • On a net basis, it is highly doubtful that US
    direct investment abroad reduces US exports or
    displaces US jobs. Indeed, US direct investment
    abroad stimulates US companies to be more
    competitive internationally … and to allocate
    their resources more efficiently, thus creating
    healthier domestic operations, which, in turn,
    tend to create jobs.2
  • 1D. A. Riker and S. L. Brainard, U.S.
    Multinationals and Competition from Low Wage
    Countries, NBER, WP no. 5959, March 1997
  • 2US Council of Economic Advisers, Economic
    Report of the President, 1991, p. 259

U.S. foreign direct investment Foreign share of
US MNC operations
Foreign share of gross output
Foreign share of employment
Employment in US CFCs remained at 5.0 of US
civilian employment over the 1982-1998 period.
Gross output of US-controlled foreign
corporations has declined from 6.9 percent of US
GDP in 1982 to 5.8 percent in 1998. (Source
PricewaterhouseCoopers calculations based on US
Department of Commerce data.)
U.S. foreign direct investment Financing
  • IRS data shows that foreign subs of US parents
    distributed 69 billion or 63 of net foreign
    earnings and profits (1996 tax returns)
  • 76 of U.S.-controlled foreign corporation
    financing is from foreign sources (1995 data)

US foreign direct investment Financing of CFCs
76 of the financing of US-controlled foreign
corporations comes from foreign sources -- not US
parents. Debt and equity from US parents
financed less than 24 of total assets in 1995.
Foreign direct investment Comparative tax burdens
  • Over the 1992-97 period, US MNCs paid 7.4 more
    of net income in taxes than US domestics
    (controlling for industry and other factors), up
    from a 4.4 multinational tax penalty during
    the 1982-91 period.1
  • 1J. Collins and D. Shackelford, Taxes and
    Cross-Border Investments The Empirical
    Evidence, American Enterprise Institute, Seminar
    Series in Tax Policy (February 19, 1999).

Foreign direct investment Comparative tax burdens
  • The effective tax rate on cross-border
    investment is higher for US MNCs than EU MNCs
    according to European Commission

U.S. foreign portfolio investment
  • I n 1999, two-thirds of U.S. investment abroad
    was portfolio investment, compared to less
    one-seventh in 1980

Cross-border mergers and acquisitions
Does location of headquarters matter?
  • US MNCs ...
  • locate over 70 of assets jobs in US
  • Invest and pay more per job at home than abroad
    (including in developed countries)
  • perform 88 of RD in US (vs. 67 of sales)
  • overwhelmingly have US leadership
  • supply foreign subs much more heavily from US

1 Source L. DAndrea Tyson, They are not us
why American ownership still matters, The
American Prospect, Winter 1991, pp. 37-49
The US International Tax System Overview
  • Income from cross-border investment may be
    subject to income tax in both source and
    residence countries
  • Residence countries use various mechanisms to
    avoid double tax
  • Worldwide system
  • Residents are taxed on their worldwide income
    with a credit (or, in some cases, a deduction)
    for foreign taxes
  • Dividend exemption (territorial) system
  • In a pure territorial tax system, residents are
    taxed only on domestic source income with all
    foreign source income exempt
  • Most territorial systems are hybrids, with
    exemption for non-portfolio dividends and
    worldwide taxation for most other income
  • Since 2000, the US technically has had a
    territorial income tax system with an exception
    (i.e., worldwide taxation) for all income other
    than income qualifying for the ETI regime

Overview International Income Taxation, OECD
Countries, 1990
1 For non-treaty countries, worldwide tax with
credit. 2 For non-treaty countries, worldwide
tax with deduction. 3 Exemption of 90 of gross
dividend. 4 Treaty countries with tax system
similar to Australia's. 5 25 ownership
requirement and tax system similar to
Denmark's. 6 Credit for Swiss tax on foreign
dividends effectively exempts these dividends
from Swiss tax. Source OECD, Taxing Profits
in a Global Economy Domestic and International
Issues, 1991, pp. 63-64.
Overview Role of tax treaties
  • Bilateral income tax treaties are used, inter
    alia, to
  • Coordinate income tax systems to prevent double
  • Reduce or eliminate source based taxes (e.g.,
    withholding taxes on interest, dividends, rents
  • Provide non-discrimination in the application of
    domestic taxes to foreign residents
  • Establish procedures to resolve double taxation
  • Provide mutual assistance in tax administration,
    such as sharing of taxpayer information
  • Model income tax treaties
  • OECD Model (including transfer pricing
  • US Model
  • UN Model

Overview Timing of tax on foreign income
  • Most countries respect foreign subsidiaries as
    separate legal entities and tax income from such
    subsidiaries only when received by a resident
  • The United States and about half of the OECD
    countries have controlled-foreign corporation
    (CFC) rules that accelerate tax on certain types
    of CFC income (deemed dividend)
  • CFC regimes typically apply to passive income and
    certain low-taxed mobile income
  • US CFC regime (subpart F) applies to other
    categories of active income as well as
    investments in US property made with untaxed
    foreign income

Overview Domestic double taxation
  • Double taxation also may occur when US corporate
    income is distributed to US shareholders
  • Most countries provide some form of relief from
    domestic double taxation of corporate dividends
  • Shareholder imputation credit for all or a part
    of the corporate tax
  • Partial shareholder exclusion
  • Reduced individual tax rate for corporate
  • Corporate deduction for dividends paid

Overview Corporate Taxation in OECD Member
Countries, 1990
/ Hybrid tax system (relief from double
taxation at both corporate and shareholder
levels). / Deduction for dividends paid may
offset fully the corporate and personal income
tax for dividends up to 15 of capital value.
Dividends in excess of this limit are fully taxed
at both levels. Sources Sijbren Cnossen, Reform
and Harmonization of Company Tax Systems in the
European Union, Research Memorandum 9604.
Erasmus University, Rotterdam. OECD, Taxing
Profits in a Global Economy Domestic and
International Issues, 1991, p. 57.
Current International Tax Policy Issues
  • Extraterritorial Income (ETI) regime
  • Dividend exemption (territorial) tax systems

Extraterritorial Income (ETI) Regime
History of Export Incentives
  • China Trade Corporations (1922)
  • Exemption method
  • Western Hemisphere Trade Corporations (1942)
  • Exemption Method
  • Export Trade Corporations (1962)
  • Deferral Method (as a limitation on Subpart F)

History of Export Incentives (cont.)
  • Domestic International Sales Corporations (1971)
  • Deferral Method
  • Foreign Sales Corporations (1984)
  • Exemption Method (partial)
  • Extraterritorial Income (2000)
  • Exemption Method (partial)

Justification for Export Incentives
  • Tax incentives used by competitor countries that
    are allowed under WTO rules
  • WTO permits both FTC and exemption to mitigate
    double taxation as part of normal tax system
  • Most territorial tax system exempt base company
    sales income
  • WTO permits border tax adjustments for indirect
    but not direct taxes
  • All OECD countries except US have VAT system
  • Economic effects are uncertain

Origins of ETI Regime
  • 1998 EU filed a complaint with the WTO regarding
    the FSC regime.
  • 1999 WTO dispute panel found the FSC regime to
    be a prohibited export subsidy.
  • Benefits contingent upon exports
  • Revenue foregone is otherwise due
  • Exception from base company rules
  • Exception from effectively connected income rule
  • Dividend-received deduction for FSC dividends
  • 2000 The Administration and Congress worked
    together to develop bi-partisan legislation to
    repeal the FSC regime and replace it with a new
    regime designed to satisfy WTO rules
  • 2002 US loses appeal of WTO dispute panel
    decision on ETI

Mechanics of ETI Regime
  • Gross income does not include extraterritorial
    income that constitutes Qualifying Foreign Trade
  • QFTI is a percentage of Foreign Trading Gross
  • FTGR generated from sale or lease of Qualifying
    Foreign Trade Property
  • QFTP consists of property
  • Manufactured within or outside the United States,
  • Sold or leased for use outside the United States,
  • Not more than 50 of the value of which is
    attributable to foreign components and foreign
    labor (Foreign Content Test)

WTO decision on ETI Regime
  • EU filed a complaint with the WTO regarding the
    ETI regime.
  • Despite U.S. efforts to design a regime to
    satisfy WTO rules, WTO dispute panel found the
    ETI regime nonetheless to be a prohibited export
  • Benefits still found to be contingent upon
  • Revenue foregone is still found to be otherwise
  • In January 2002, WTO appellate panel upheld
    dispute panels findings

Future of ETI regime
  • WTO arbitrator has 90 days to decide amount of
    retaliatory tariffs the EU may impose on U.S.
  • Commission must decide whether and how to
    distribute tariff increases among categories of
    US exports
  • US Options
  • Repeal ETI regime immediately
  • Replacement?
  • Postpone repeal of ETI regime within a negotiated
  • This would likely require some trade concessions
    by the US and/or limited retaliation
  • Do nothing
  • European Commission has said it will impose
    retaliatory tariffs
  • Note other WTO member countries may exercise
    right to file a complaint against US ETI regime

Dividend exemption (territorial) tax systems
Territorial tax systems
  • Worldwide tax systems tax all foreign source
    income - most when repatriated and some
    currently through anti-deferral regimes
  • Territorial systems differ from worldwide systems
    by treating some or all of the income that is not
    taxed currently as exempt

Taxed on repatriation (with FTC)
Taxable currently (with FTC)
Taxed on repatriation (with FTC)
Taxable currently (with FTC)
Territorial tax systems
  • Taxation of exempt bucket
  • Taxes directly and indirectly attributable to
    exempt dividends are not creditable or deductible
  • Expenses allocated or apportioned to exempt
    income are not deductible
  • Income typically assigned to the exempt bucket
  • Non-portfolio dividends
  • Active branch income (net of imputed royalty)
  • Income typically assigned to the currently
    taxable bucket
  • Portfolio and passive income
  • Royalty income
  • Export income not attributable to foreign
    economic activities
  • Income typically assigned to the deferred bucket
  • Low or no-tax active income
  • Active income earned in non-treaty countries

Territorial tax systems
  • If a territorial tax system has three buckets of
    income (e.g., Canada), little or no
    simplification is achieved
  • Income, expense, and foreign taxes must be
    allocated among three rather than two buckets
  • Ordering rules are necessary to determine whether
    dividends are paid out of exempt, previously
    taxed, or deferred income.
  • A two bucket territorial tax system is possible,
    however many countries are not willing to allow
    all types of low-taxed active income to be
    exempt, but do not wish to impose current
    taxation for competitive or diplomatic reasons
  • Income from ocean and space activities
  • Income earned in low or no tax jurisdictions
  • Income earned in non-treaty countries

Territorial tax systems Revenue effect
  • Adopting a territorial system in US could raise
    revenue, depending on design
  • Putting dividends in the exempt bucket limits the
    ability to average foreign tax credits
  • Under present law, excess foreign tax credits
    attributable to high-tax dividends can be used to
    reduce US tax on currently includible low-tax
    income such as royalties and foreign income
    attributable to exports
  • Expenses allocated to exempt income are
  • Under present law, taxpayers without excess FTCs
    receive full benefit of deduction
  • Territorial tax system might raise revenue even
    if worldwide rather than waters-edge fungibility
    approach to interest allocation were adopted
  • Transition rules for accumulated deferred foreign

Territorial tax system Economic impacts
  • Increased pressure on transfer pricing rules?
  • No evidence found in Treasury study
  • Increased incentive to invest in low tax
  • Data are inconclusive
  • Increased incentive to shift debt to high-tax
  • Beneficial to US revenues
  • Incentive to increase dividend repatriations
    provided that exempt income is stacked first
  • Incentive to suppress royalties in countries with
    tax rates less than US
  • Adverse to US revenues

Simplification possible under either system
  • Reduce number of anti-deferral regimes, limit
    scope of rules, and provide meaningful de minimis
  • Use GAAP for EP calculations
  • Reduce number of foreign tax credit baskets
  • Eliminate high-tax kick-out from passive foreign
    tax credit basket
  • Eliminate AMT foreign tax credit limitation

Complexity inherent under either system
  • Application of foreign tax credit rules for
    non-exempt income, including sourcing of income
    and allocation and apportionment of expenses
  • Operation of anti-deferral regime
  • Application of transfer pricing rules
  • Definition of active business income (e.g.,
    active financial services)
  • Taxation of outbound transfers of property

The US International Tax System Primer
  • Anti-deferral regime
  • Foreign Tax Credit

The US International Tax System Anti-Deferral
Deferral as general rule
  • US generally defers its tax on foreign earnings
    of foreign subs until they are remitted.
  • US tax is imposed on foreign earnings when they
    are earned (or deemed earned) by a US person
    (i.e., US corporation, citizen or resident
  • Fundamental TIMING principle of US tax law
  • Issue is not WHETHER but WHEN US shareholder is
    taxed on income earned by foreign corporations

Exceptions to deferral
  • General rule always has been to defer US tax on
    foreign earnings of foreign subs until dividends
    are paid to a US person.
  • However, various exceptions have been enacted
    over the years.
  • Where an exception applies, a US shareholder may
    be subject to current US tax (or an interest

Anti-deferral regimes
  • Personal Holding Company (1934)
  • Foreign Personal Holding Company (1937)
  • Foreign Investment Company (1962)
  • Controlled Foreign Corporation (Subpart F) (1962)
  • Passive Foreign Investment Company (1986)
  • Overlap with CFC regime eliminated in 1997
  • Excess passive asset regime (1993-96)

Anti-deferral regimes
  • Application of exceptions to deferral typically
    has depended on two factors
  • Level of US ownership
  • Type of income involved
  • Present law is complex because there are many
    sets of potentially overlapping exceptions, each
    with its own detailed set of rules and

Subpart F
  • Foreign Personal Holding Company Income
  • passive income (e.g., dividends and interest)
  • active finance exception (expired)
  • Foreign Base Company Sales Income
  • income from related party purchases/sales
  • Foreign Base Company Service Income
  • income from related party services

Subpart F (cont.)
  • Subpart F insurance income
  • Subpart F shipping income
  • Foreign oil related income
  • Illegal payments
  • Section 956 (Investments in US Property)

Rules of Canada, France, Germany, Japan, the
Netherlands and the United Kingdom1
  • Half have transaction-based systems (like Subpart
    F), while half have jurisdiction-based systems
  • Other transaction-based systems generally exempt
    active business income
  • Foreign base company sales and service income
  • Active financial income
  • Other active business income
  • Jurisdiction-based systems generally tax all
    income of subsidiaries in low-tax countries, but
    generally exempt active business income that has
    some local connection

1 Based on National Foreign Trade Council, Inc.,
International Tax Policy for the 21st Century,
Volume 1, 67-92 (2001).
Recent JCT staff recommendations1
  • Eliminate FIC and FPHC anti-deferral regimes
  • Exclude foreign corporations from PHC regime
  • Increase Subpart F de minimis threshold for
    active foreign subsidiaries with relatively small
    amounts of Subpart F income (also recommended in
    1987 ALI report)

1 Staff of the Joint Comm. on Taxation, Study of
the Overall State of the Federal Tax System and
Recommendations for Simplification, Pursuant to
Section 8022(3)(B) of the Internal Revenue Code
of 1986, Volume II, 398-420 (2001).
The US International Tax System The Foreign Tax
The foreign tax credit Background
  • The US was the first country to provide a foreign
    tax credit, enacted in 1918
  • A foreign tax credit has been allowed in some
    form under US law ever since
  • FTC is a dollar-for-dollar offset of foreign tax
    against US tax
  • Purpose of FTC is to eliminate double tax on
    foreign source income. Not listed as a federal
    tax expenditure.
  • FTC is allowed for foreign income taxes paid
    directly or indirectly with respect to foreign
    source income

The foreign tax credit Computation
  • FTC Limitation, enacted in 1921, is intended to
    prevent FTC from reducing US tax on US source
  • A formula is used to determine the FTC Limitation
    (i.e., the share of US tax (before FTC)
    attributable to foreign source income)
  • FTC Limit Foreign source income X US
    tax on worldwide income
  • Worldwide income
  • (Note US and foreign income measured under US
  • FTC lesser of FTC Limit and foreign taxes
  • Excess FTCs may be carried back 2 years and
    carried forward 5 years

The foreign tax credit Computation
  • This FTC Limitation computation must be done
    separately for each basket of foreign source
  • The purpose of the basket rules is to prevent
    averaging of taxes among different types of
  • Losses
  • Overall foreign losses are recaptured in
    subsequent years
  • Domestic losses that reduce foreign source income
    are not recaptured

Some foreign tax credit baskets
  • General Limitation Income
  • Passive Income
  • Financial Services Income
  • 10-50 Dividends (until 2002)
  • High Withholding Tax Income
  • Shipping Income
  • DISC Dividends
  • FSC Distributions
  • Foreign Trade Income

Steps to compute FTC Limitation
  • 1. Determine source of gross income
  • Gross Receipts (minus cost of goods sold)
  • Other Gross Income
  • 2. Determine deductions allocable to US and
    foreign income
  • 3. Determine net US and foreign source income

Steps to compute FTC Limitation
  • 4. Characterize gross income (for baskets)
  • 5. Allocate and apportion deductions among FTC
    categories of gross income
  • 6. Determine amount of creditable foreign taxes
    within each category

Source of income rules
Different Source Rules for Different Types of
  • Income from the Sale of Purchased Inventory
  • Income from the Sale of Manufactured Inventory
  • Dividends
  • Interest
  • Rents
  • Royalties
  • Sale of stock
  • Sale of Intangibles
  • Sale of other personal property
  • Sale of real property
  • Personal services
  • Maintain source of US source income earned
    through foreign corporation
  • Underwriting income

Expense allocation rules
Different Allocation Rules for Different
  • Interest
  • Research Development
  • General Administrative
  • State and local income tax
  • Other

Example 1
  • USCO has a foreign subsidiary XCO that earns
    1,000 on which it pays Country X income tax at a
    rate of 35 (350)
  • USCO earns 1,000 taxable income in US
  • If all XCO foreign earnings are distributed as a
    650 dividend to USCO, USCO would be allowed a
    foreign tax credit of 350.
  • Foreign tax credit limit 350

Example 2
Allocating and apportioning expenses reduces the
maximum amount of foreign tax credit a US company
may receive
  • Same as Example 1, except
  • 200 of US expenses are allocable against foreign
    income which are not deductible by XCO in
    calculating Country X tax

Example 2 (cont.)
  • If all XCO earnings are distributed as a 650
    dividend to USCO, USCO would be allowed a foreign
    tax credit of 280, leaving 70 of foreign taxes
    paid for which USCO would receive no credit.
  • Thus 420 of total income tax would be paid on
    1000 of income earned by XCO (42 rate) even
    though US and Country X have the same 35 tax
  • Foreign tax credit limitation 280

Other rules
  • Foreign tax must be considered to be paid
  • Overall Foreign Losses/Recapture
  • Look-thru Rules
  • AMT--90 Limitation
  • No FTC allowed for taxes paid/accrued to certain
    foreign countries
  • FTC only for income tax or in lieu of income
  • FTC is elective
  • FTC allowed when tax is paid or accrued
  • Person allowed to claim FTC
  • Holding period
  • Six tier limit

Typical obstacles to FTC utilization
  • Foreign tax rates higher than US tax rate
  • Separate basket limitations
  • Required allocation and apportionment of
    deductions (not recognized as deductions by
    source country)
  • Overall foreign loss recapture
  • AMT

Foreign Tax Credit Rules of Canada, France,
Germany, Japan, the Netherlands and UK1
  • Half have partial exemption (territorial)
  • Per country, per item (avoidable for foreign
    dividends), and overall basket systems all in use
  • Detailed interest expense allocation rules
    generally do not exist
  • Most have no equivalent to overall foreign loss
  • The Netherlands has domestic and foreign loss
    recapture and Canada offers domestic loss relief.
  • Credit carryforward and carryback range from none
    to unlimited carryforward

1 Based on National Foreign Trade Council, Inc.,
International Tax Policy for the 21st Century,
Volume 1 274-75 (2001).
Recent Joint Committee on Taxation Staff
recommendations on foreign tax credit1
  • Accelerate repeal of 10-50 dividend baskets and
    characterize these dividends instead under
    look-thru rules regardless of year the
    distributed earnings arose
  • Clarify that indirect credits are available to a
    US corporation that holds a 10 voting interest
    in a foreign corporation indirectly through a
    foreign or US partnership

1 Staff of the Joint Comm. On Taxation, Study of
the Overall State of the Federal Tax System and
Recommendations for Simplification, Pursuant to
Section 8022(3)(B) of the Internal Revenue Code
of 1986, Volume II 421-27 (2001).
1987 Recommendations of American Law Institute on
foreign tax credit1
  • Recommendations included
  • General basket system with smaller number of
    separate baskets than today, the most important
    for passive income
  • Adopt domestic loss recapture
  • David Tillinghast2, reporter for the ALI study
  • Recommended elimination of passive basket
    high-tax kick-out
  • Recommended elimination of separate basket for
    high-withholding tax interest
  • Questioned need for section 907 limitation

1 American Law Institute, Federal Income Tax
Project, Proposals of the American Law Institute
on United States Taxation of Foreign Persons and
of the Foreign Income of United States Persons,
307-421 (1987). 2 David Tillinghast,
International Tax Simplification, 8 American J.
Tax Policy, 187-215 (1990).