Question

Many global companies have evolved to or are evolving to, a ‘stateless corporation’.  The US and most OECD countries have legal authority to tax a domiciled corporation on its worldwide revenue.  However, as of 2019, most countries tax these corporations based on territorial tax (revenue within that country's borders).  However, the US continues to tax these corporations based on global revenues.  Is this a good choice for the US?  Why or why not?.

Answer 1

WORLDWIDE TAXATION is the current norm of taxation system being followed in the USA. However it is not the optimal choice to empower business to perform competitively in the global market.Ideally the US Government should follow the TERRITORIAL TAXATION scheme.

WHAT IS WORLDWIDE TAXATION?

A corporation having its headquarters in the USA is required by law to pay corporate income tax on all its income both within the American boundaries as well as abroad in other countries.The tax is paid when the proceeds are “repatriated”, that is, brought back to the USA.

WHAT IS TERRITORIAL TAXATION?

A corporation having its headquarters in the USA would be exempted from being taxed on all of its foreign income. Only the U.S. portion of the income of an organization would be taxed by the USA Government. This policy levels the playing field of US based organizations in the global markets. Many OECD nations like Australia,Japan and United Kingdom, follow the territorial system of taxation.

BENEFITS OF TERRITORIAL TAXATION - (WHY TERRITORIAL TAXATION)

• Implementing a territorial system would match USA with many of the world’s developed economies.This would enable US businesses to compete with foreign competitors.
• Allow businesses to bring back overseas income to the U.S: As the companies do not have to pay tax on foreign incomes, they would be able to invest the funds generated from abroad to strengthen USA's Economy.
• Boost the production, investment, and employment in the USA.

DISADVANTAGES OF WORLDWIDE TAXATION - (WHY NOT WORLDWIDE TAXATION)

• Extremely high corporate tax rates: As the tax is paid on the net income generated from all over the world, firms have to pay a hefty amount to the Government which significantly reduces its profit margins.
• High compliance cost: As the firms have to convert and update their balance sheets with respect to US Standards significant costs are involved in this unnecessary transformation process.
• Bad economics: The U.S. worldwide tax system fails all the basic principles of tax systems - equality, rule clarity, convenience and efficiency. As the laws are scientifically and economically proven, non adherence to the laws cause significant long term damage to the US based firms and the Economy as a whole.