Tax Law

'Stateless Income' Is Key to International Reform

Next time you hear multinationals talk about international tax reform -- which they equate to an exemption system that does not deny deductions for expenses allocable to foreign income -- notice that there is no mention of profit shifting. They routinely present a picture of a simple world in which there is no confusion about where income should be sourced. Income from French business is taxed by France. Income from Singaporean business is taxed by Singapore. In this sterilized characterization, because the United States taxes on a worldwide basis, U.S. companies cannot compete with Singaporean companies in Singapore. Moreover, because France has a territorial system, U.S. companies cannot compete with French companies in Singapore. In this world, the only tax advantages companies get are those from the movement of actual capital. This puts U.S. multinational corporations at a disadvantage in competing for investment.

Recent draft law review articles by Edward Kleinbard and Tax Notes columns by Michael Durst challenge this view. The authors observe that profit shifting from high- to low-tax countries is rampant, and rather than assuming it away, they put the phenomenon front and center in their analyses. Kleinbard calls profits shifted to tax havens where little or no business is conducted "stateless income." In the real world with stateless income, firms get tax advantages from the movement of actual capital and from widespread artificial profit shifting.

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