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Index A Accelerated Cost Recovery System, 55 Allocation rules, 2 application, 12 current U.S. law, 66 effects of corporate behavior, 5-6 interest rules, 16, 116-117, 124, 126 rationale, 65 R&D spending, 42-43, 117-118, 124- 125, 126 worldwide fungibility approach, 125- 126 Alternative incremental tax credit, 95 Alternative minimum tax, 7, 90, 115-116 incentive effects, 123-124 objective, 102 Anti-deferral rules, 2, 101-102 international comparison, 90 B Basket limitations, 16-17, 41 10-50 rule, 82 joint ventures, 82 Branch profits tax, 17, 115 151 C Canada, 83-84 Capital-export neutrality, 113, 121, 134 Capital-import neutrality, 113, 121 Capital-labor substitutability, 18, 19 Carryback/carryforward rules, 116 Competitiveness cost of capital and, 121-12 effects of 10-50 basket rule, 82 goals of TRA86, 81 international comparison, 6 production efficiency and, 111-112 for R&D investments, 82-84 as tax regime objective, 88-89, 111, 112 Complexity of tax code, 7, 136 business decision making and, 73 negative effects of, 112 reason for, 19-20, 113 source of, 72-73 Compliance costs current estimates, 123 as disincentives to investment, 112 international comparison, 90 R&D credit rules, 61-62 tax code, 7
152 territorial vs. worldwide tax systems, 34 Constancy of policy, 6, 71, 83 Consumption tax cost of capital and, 24 economic efficiency, 110, 111 legality, 94 location of investment and, 94 R&D investment under, 144-145 reform proposals, 127 response of trading partners, 92, 103- 104 trade effects, 93-94 Corporate welfare, 81-82 Cost of capital in broad-based income tax regime, 110- 111 competitiveness and, 121-122 in consumption tax regime, 24 effectiveness of tax incentives, 118-121 global optimization of production efficiency, 25 income- shifting-adjusted, 20 interest allocation rules, 16 in pure income tax regime, 24 Countervailing duties, rationale for, 23, 29 Cross-crediting, 122 D Debt financing, 16 Deferral of tax current U.S. policy, 41, 81, 114-115 as incentive to delay dividends, 115 rules governing, 2 typesof,ll4-115 Depreciation, 6 calculation of tax base for foreign income, 14 of R&D expenditures, 59 TRA86 provisions, 13 Destination-based taxes, 93, 140, 141 Dividends, 6-7, 35 deferral of tax as incentive to delay, 115 as foreign income, 41 repatriation of income as, 12-13, 115 Domestic production for export, 15-16, 67 INDEX E Eclectic theory of corporate behavior, 18 19 Economic Recovery Tax Act, 44, 55 Effective tax burden, 6-7 Excess credit, 1, 13 domestic production for export and, 15- 16 effects on business location decisions, 18 R&D allocation, 43 TRA86 and, 14-15 U.S. tax policy, 114 Excess limitation considerations under TRA86, 14-15 definition, 13 U.S. tax policy, 114 Exchange rates, 140 Export source rule, 15-16 F Financial services income, 16 Flat tax, 84, 127 Flat Tax proposal effects on R&D, 97-100 major features, 91, 92, 93, 94-95, 96- 97 Follow-on facilities, 5 Foreign direct investment capital movement and, 19 determinants, 118 effects of TRA86, 14, 15-16 elasticity, 18 exports and, 138 home country tax system as decision- making factor, 17-18 interest expense allocation rules and, 16 tax rule effects on, 5, 17-20, 118-121 in U.S. by foreign firms, 5, 18, 94 vs. domestic production for export, 15- 16 Foreign investment in U.S., 5 branch profits tax, 17 response to tax reform proposals, 94 sensitivity to state tax system, 18
INDEX tax policy disincentives, 73 technology transfer, 50 TRA86 provisions, 17 . ~ . . . ~orelgn-source earmngs allocation rules, 2 anti-deferral, 2 calculation of tax base, 14 domestic production for export as, 15- 16, 67 incentives to shift location, 15 income location issues, 12 incremental tax reform, 100-101 interest expense allocation, 16 net income measurement, 65 principles of taxation, 11-13 R&D expenses and, 42-43 residual U.S. tax rate, 67 tax reform proposals, 7 types of, 41 U.S. tax system, 12-13, 28, 29, 40, 81, 114-115 Foreign tax credit limitation, 1 current U.S. policy, 40, 114 rationale, 65 France, 12 Free trade appropriate unilateral tax policy for, 27-29 compatible tax structures, 25-27 current tax regimes, 35-36 evaluation of tax policies for consistency with, 29-35 strategies for implementation, 23, 36 tax regimes and, 23-24 theoretical basis, 21-23 G Germany, 66, 78 Global economy corporate trends, 1 globalization of corporations, 75-76 implications for tax reform, 109 joint venture alliances, 77 pressures for corporations, 143 tax structure for, 77-78 trends, 75, 135-136 153 Incentives alternative minimum tax as, 116, 123 124 effects on cost of capital, 118-121 R&D, 4-5, 83-84 in U.S. tax rules, 113-114 Income shifting, 15, 20 incentives, 32 mechanisms, 32 tax haven countries, 32-34 Income-shifting-adjusted cost of capital, 20 Incremental research and experimentation tax credit, 5 effectiveness in stimulating R&D, 59 effects on R&D cost structure, 55-59 legislation, 55 long-term implementation, 6 Interest allocation rules, 6-7, 124, 125 in business decision making, 5 country of origin, 116-117 R&D spending and, 116-117 reform, 125, 126 tax reform proposals, 100-101 under TRA86, 16 International comparison anti-deferral rules, 102 competitiveness, 6, 125 compliance burden, 90 effective tax burden, 7 principles of taxation for international firms, 11-12 R&D tax credits, 83-84 tax rate, 78 tax rules, 89-90 Investment business decision making, 3-5, 7, 13 disincentives in international tax provisions, 2, 3 effects of tax reform, 5-6 effects of TRA86, 13-14 facility placement decisions, 4 impact of R&D tax rules, 47-49, 54 international joint venture alliances, 77 social rate of return, 53
154 tax systems compatible with free trade in capital, 25-27 trends, 87 unilateral free trade taxation of capital income, 27-29 See also R&D J Japan, 11 Joint venture alliances, 77 10-50 basket rule, 82 L Labor supply capital-labor substitutability, 18, 19 elasticities, 18 R&D substitutability, 58 of technological future, 77 Loans, 90 Local content rules, 33 Location of business/facilities follow-on facilities, 5 mobility of operations, 68, 72 for R&D activities, 5, 71-72 residence-based taxation, 31-32 tax system influences on decision making, 4, 5, 18, 67-68, 71, 138-139 Location of income, 12 incentives to shift, 15 taxation for global efficiency, 30-31 theoretical modeling of incentives to shift, 20 treaty objectives, 134 Look-through rules, 95-96 M Manufacturing sector economic modeling, 54 impact of R&D tax policy on cost structure, 55-59 impact of R&D tax policy on investment, 54 technological future, 76 INDEX effect of R&D tax rules on cost structure, 55-59 effectiveness of R&D tax policy, 59- 60, 62 effects of R&D allocation rules, 48-49 effects of tax reform proposals, 97-100 empirical research needs, 20 incremental research and experimentation tax credit, 55-59 manufacturing sector price-demand, 54 public finance economics, 144 tax rule effects on foreign direct investment, 118-121 tax system effects on firm behavior, 18-19 Monopoly, 22 Monopsony, 22 Multinational corporations decision-making environment, 3-5 decision-making models, 18-20 earnings repatriation patterns, U.S., 35 eclectic theory of behavior, 18-19 foreign investment in U.S., 5 foreign tax credit basket limitations, 16-17 interest expense allocation rules, 16 location of income, 12 obstacles to modeling behavior of, 18 R&D allocation patterns, 3, 47-49, 66- 67 residence-based taxation, 31-32 response elasticities, 18 trends, 1, 87 U.S. tax system, 1-2, 40-42 N National Retail Sales Tax, 91, 92, 93, 94 95 Netherlands, 12 o Oligopolistic markets, 22 Omnibus Budget Reconciliation Act of 1989, 45
INDEX Omnibus Budget Reconciliation Act of 1993, 46 One-taxpayer rule, 16 Optional gross income, 66 Origin-principle taxation, 141 p Passive income residual tax rate on foreign income, 67 TRA86 rules, 16 worldwide taxation, 34 Policy formulation conversion to territorial taxation, 103, 126-127 free trade taxation, 23-24 international trade theory and, 21 mechanisms for stimulating R&D spending, 53-54, 55, 63 objectives, 21 rationale for free trade, 21-22 rationale for trade intervention, 22-23 R&D taxation, 50 strategies for encouraging free trade, 23, 29 theoretical modeling for, 20 unilateral free trade taxation, 27-29 Production efficiency compatible tax regimes, 110-111 competitiveness and, 111-112 global optimality, 24-25 tax regime for, 24 as tax regime objective, 88, 110, 112, 121 tax structures for global optimality, 25- 27, 111 Public finance, 144 Puerto Rico, 71 R&D 155 depreciation of expenditures vs. immediate deductibility, 59 effect of tax rules on cost structure, 55 59 effect of tax rules on investment, 47 49, 54 effectiveness of tax policy, 59-60, 62, 63 employment and, 84 externalities, 53 facility location decisions, 5, 72 foreign investment in U.S., 50 foreign spending by U.S. firms, 49, 50 global collaboration, 76-77 global competition for investments, 82 84 historical development in U.S., 43-47 interest allocation rules and, 116-117 international distribution of benefits, 39-40 international technology transfer, 49-50 legally mandated, 66 opportunities for improving tax policy, 61-62 policy mechanisms for encouraging, 53-54, 55, 63 price demand elasticity, 47-48, 57-58 rationale for favored tax treatment, 39 royalty withholding policy and, 50 social rate of return, 53 stability of tax policy, 83 substitutability, 58 tax incentives, 4-5 tax reform, effects of, 5-6, 94-95, 96 100 tax reform proposals, 96-97 technological future, 76 U.S. tax policy, 39, 66, 95-96 Reform proposals R allocation patterns among multinationals, 3, 66-67 allocation rules, 2, 42-43, 117-118, 124-125, 126 business decision making, 3, 4-5, 7, 50 allocation rules, 126 anti-deferral rules, 101-102 common features, 91 conceptual basis, 137-139 destination principle taxation, 141 duration, 6, 71 effects on R&D, 94-95, 97-100 effects on withholding, 97 evaluation of, 90-91, 103
56 flat-rate consumption tax, 127 flat tax, 84 foreign-source earnings, 7 foreign tax credit, 100-101 impact on business decision making, 5- 6 implications for capital markets, 127 incremental, 100, 104 interest allocation rules, 125, 126 international context, 87, 139-141 move to territorial system, 103, 126- 127 need for, 78 objectives, 139 opportunities for improving R&D credit rules, 61-62 proposed legislation, 91 prospects, 6, 145 R&D provisions, 48-49, 84, 96-97 response of trading partners, 91-94 royalties, 97 statutory corporate tax rate, 6 for technological future, 78 trade effects, 93-94, 140-141 Repatriation of earnings, 2, 11-12, 115 after TRA86, 122 cross-crediting practices, 122 forms of, 115 practice among U.S. multinationals, 35, 41 Residence-based taxation, 1 definition, 40 for optimal global production efficiency, 25-27 U.S. policy, 40 Residual tax rate, 67 Royalty income, 5-6, 35 as foreign income, 41, 42 foreign-source income of U.S. firms, 49 R&D expense allocations, 42, 45-46, 66 tax reform proposals, 97 U.S. tax rules, 95-96 S Sales tax, 91 Saving-Exempt Income tax, 127 INDEX Section 1.861-8, 43-45, 72 Section 1.861-17, 72 Section 904(g), 72-75 Section 956A, 72 Sections 951-964, 78 Social rate of return, 53 Source-based taxation, 27, 111 State tax systems, 18 Subsidiaries, foreign, 2 T Tariffs free trade theory, 21-22 rationale, 22-23, 31-32 Tax havens, 19-20 global costs, 33 policy mechanisms, 32-33 rationale, 32 rationale for intervention, 33-34, 36 Tax policy capital-export/-import neutrality, 113, 121 competitiveness goals, 88-89, 111-112 conceptual evolution, 134-137 conflicts among objectives of, 113 constancy and consistency, 6, 71, 83 depreciation of R&D expenditures vs. immediate deductibility, 59 economic efficiency goals, 88, 110 111, 121 effectiveness of R&D rules, 59-60, 62, 63 evaluation of free trade compatibility, 29-36 for global production efficiency, 25-27, 111 impact on foreign direct investment, 17-20 impact on R&D cost structure, 55-59 impact on R&D investment, 54 investment location decisions affected by, 67-68, 71 motivation for reform, 137-139 objectives, 39, 88, 110 opportunities for improving R&D rules, 61-62
INDEX as ownership protectionism, 29-32 protection against tax haven countries, 33-35 rationale for free trade, 21-23 R&D location decisions, 71-72 simplicity as goal of, 112 of tax haven countries, 32-33 technological future and, 76, 77-78 territorial vs. worldwide taxation, 34- 35, 36 trade policy theory and, 21, 29-30, 32 unilateral free trade taxation, 27-29 Tax Reform Act of 1986, 6, 11, 109, 136 basket limitations, 16-17 cross-crediting under, 122 domestic production for export under, 15-16 effective foreign income tax rate, 14 excess credit/excess limitation considerations, 14-15 global economy and, 78 interest allocation rules, 16, 117, 125 net effect on investment, 13-14 objectives, 81 outward investment provisions, 13 provisions for foreign firms in U.S., 17 R&D allocation rules, 44 repatriation patterns under, 122 residual rate on foreign income, 67 statutory rate provisions, 13, 14 Tax treaties effect of domestic reforms, 92-93 goals, 133-134 nondiscrimination, 29 tax sparing provisions, 89 two-way capital flows, 28-29 Taxpayer Relief Act, 83 Technical and Miscellaneous Revenue Act of 1988, 44-45 Technology transfer international flows, 49-50 in technological future, 77 Telecommunications, 76, 77 Territorial taxation, 114 disadvantages, 123 dividend and royalty income, 122-123 free trade compatibility, 34-35, 36 157 prospects for global optimal efficiency, 111 rationale, 103 U.S. conversion to, 103, 104, 126-127 TRA86. See Tax Reform Act of 1986 Transfer pricing, 12 in destination-based tax system, 93 U United Kingdom, 11 Unlimited Savings Allowance (USA) tax, 91, 92, 93, 94-95 effects on R&D, 97-100 major provisions, 96-97 U.S. international tax system 10-50 basket rule, 82 anti-deferral rules, 101-102 basic provisions, 1-2, 12-13, 40-42, 81, 114-115 complexity, 7, 72-73, 90 compliance costs, 7, 90 conceptual evolution, 134-137 concerns, 2-3 as corporate welfare, 81-82 credit for foreign tax payment, 1, 13, 16-17, 28, 29 disincentives for foreign firms, 73 distinctive features, 89-90 economic doctrine, 134-135 economic efficiency, 88, 121 effective tax burden, 6-7 effects on business decision making, 3 6,7 free trade compatibility, 28, 29, 36 historical development of R&D rules, 43-47 international comparison, 6, 7, 77 international joint venture alliances, 77 international response to reforms, 91 92 investment incentives, 113-114 near-term obsolescence, 75 policy formulation, 21 R&D rules, 39, 42-43, 66, 95-96, 117 reform proposals, 91 residual tax rate on foreign income, 67
158 revenue sources, 137 stability, 6 statutory corporate rate, 6 See also specific legislation or statute V Value-added tax, 94 Virtual corporations, 1, 76-77, 78 INDEX W Withholding tax foreign, in U.S. tax policy, 41-42 interest, 16-17 reform proposals, 97 rules for foreign corporations in U.S., 17
