February 14, 2005 - Phil Hodgen

Territorial tax system for the United States?

Will wonders never cease?

Tax Analysts reports that the Senate Finance Committee is looking at a territorial tax system to replace the current international tax rules.

What’s the “territorial tax system?”

The United States taxes its businesses (and humans, for that matter) on their worldwide income. You’re a U.S. citizen? You pay tax on every penny of income you make, from anywhere in the world. You’re a U.S. business? You pay tax on every penny of profit you make, everywhere in the world.

With a system like that, of course, we tax lawyers have constant employment, devising methods to defeat that “tax everything, everywhere, now” mentality.

Most other countries have a system called the “territorial tax system.” As commonly understood, this means that a country will tax income earned within its borders, but not income earned outside its borders.

But it’s only talk . . . .

The day this happens will be the day the tide is low enough to walk to Avalon. Such an abrupt change faces a hoard of opponents. Government, business, and practitioners are all familiar with the status quo. Any abrupt, enormous change introduces uncertainty and uncertainty is bad, isn’t it? “It might spell the end of my career. I’ll oppose it.” (Whatever “it” is.)

The other thing this would do is change the tax revenue flow to Washington dramatically. Whether it is for better or worse (and remember to choose your perspective correctly) is an unknown.

What will it look like?

And what the system will look like, if and when proposed, remains to be seen. Will it be the bastard offspring of our existing international tax laws and selected pieces of territorial systems, all munged together?

Here’s your answer: “Yes.” Proof, quoted from the Tax Analysts piece:

Gregory S. Nickerson, who was a majority tax counsel for the House Ways and Means Committee before leaving for the private sector earlier this month, said the provision would “not be received with the greatest of affection.” According to Nickerson, the territorial system proposed by the JCT is unlike any other system in the world and would effectively raise taxes by $55 billion.

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