Once More, with Feeling: The 'Tax Cuts and Jobs' Act and the Original Intent of Subpart F

Abstract

For the first time since 1913, Congress is considering abandoning the principle that US residents should be subject to tax on all income “from whatever source derived.” Specifically, the House proposed tax reform legislation, the so-called “Tax Cuts and Jobs Act”, would completely exempt from US taxation dividends from “Controlled Foreign Corporations”. This is therefore a good occasion for considering the reasons we tax such dividends in the first place. In the course of investigating the Stanley Surrey papers at the Harvard Law School Library, we discovered a remarkable report that support the view that the main impetus behind Subpart F was to protect the U.S. corporate tax base. The report explains some of the problems encountered by the IRS in the international arena, and goes on to recommend limits on deferral. By doing so, it sheds some light on the “original intent” of Subpart F and its relation to territoriality. Finally, the paper explains why the Tax Cuts and Jobs Act international provisions would do little to prevent the kind of profit shifting that Subpart F was enacted to prevent and recommends to return to the original intent of Subpart F and subject foreign income to the same rate as domestic income.