Fifty Years of Subpart F Revisited In the Light of Modified Economic Conditions

Abstract

With the enactment of the subpart F rules in 1962, it was the major concern of the US legislator to construct a precisely fitting concept against tax haven deferral consistent with economic conditions of that time. However, the world economy went through enormous changes since the enactment of subpart F in 1962. Local incorporation matters little today and products and services may be divorced from a specific location. In addition, the check-the-box regulations revolutionized entity qualification. All these changes are not considered within the subpart F regulations. These may be the main reasons why the following analysis shows a striking inefficiency of subpart F provisions based on data regarding the example of Bermuda, Switzerland and Germany. Thereby, Bermuda and Switzerland as well-governed low-tax countries were chosen as representatives of typical tax havens, whereas Germany was chosen because it is one of the biggest industrialized countries and among the United States' major trading partners. Examined data substantiate alleged inefficiency of subpart F within surrounding economic conditions of the now globalized world. A major conclusion, therefore, is that the controlled foreign corporation (CFC) regime today has lost its original rationale and, thereby, most of its justification. Significant modifications and modernizations appear to be indispensable in order to adjust the CFC set of rules to the modern economic framework and to align it with the goal to curb tax haven deferral effectively.