The U.S. tax system is premised on the assumption that it can levy taxes on economic activity in other nations. This simple premise applies to both corporations and to individuals.
In the case of individuals: The taxation of economic activity in other nations takes place at the time that the money is earned.
In the case of corporations: The taxation of the economic activity, the taxation takes place when the money is returned to America.
In any case, the United States discriminates very strongly and punitively against all things American. The views of Apple CEO Tim Cook has some interesting comments on this issue.
”This is a tax code, Charlie, that was made for the industrial age, not the digital age,” he said. “It’s backwards. It’s awful for America. It should have been fixed many years ago. It’s past time to get it done.”
In an article titled:
Forbes writer Todd Ganos answers as follows:
If the rest of the world operates under the territorial regime, how did we end up with such a messed up tax system? Just about 100 years ago, a business owner in Texas had a separate business in Mexico. He paid income tax to Mexico on Mexican-sourced profits. The IRS asserted a U.S. tax liability on the Mexican-sourced profits. It went to court.
I’ve been a legal researcher at an appellate court and I must say that this particular court in this particular case pulled a holding out of its . . . ear. It is one thing for a court to issue a holding based on a rule of law from an established string of cases. This is when you see “it is well settled that . . . “ in a court’s opinion. It is a completely different thing for a U.S. court to issue a holding that directly quotes an English court case in the 16th century (with no string of cases in the middle). And, that is exactly what happened in the case of the Texas business owner.
If you are a subject of the King and the King’s protections extend to you anywhere in the world, then the King may tax you anywhere in the world. That’s the gist of it. Okay, fine. That was 400 years ago (at the time of the Texas business owner’s case) but how is the King taxing income today? The King is taxing income under the territorial regime. (Perhaps this case defines “activist court.”) The upshot is that the mess we are dealing with stems from this initial court case on foreign-sourced business profits.
The OECD has been complaining to the U.S. for years about this practice. Why does the OECD care? The OECD seeks to harmonize policies among governments – including trade and taxation – in an effort to level the world’s business playing field. (In prior articles, we’ve discussed all of the global economic problems that the Bretton Woods conference was attempting to solve. In essence, to prevent wars, all countries need to play on a level field. The OECD’s existence ultimate stems from the intentions of the Bretton Woods conference.)
There is no doubt that Mr. Ganos is referring to the case of Cook v. Tait. There is no doubt that Cook v. Tait is now creating problems for the world. Mr. Ganos explains this by saying:
The vast majority of countries in the world operate under the territorial regime. The United States is one of a handful of countries that operate under the domiciliary regime. But, it is not that simple. The U.S. applies the domicile rules to U.S. companies only. It applies the territorial rules to non-U.S. companies. The result is to tax U.S. companies on their worldwide income and to tax non-U.S. companies on their U.S.-earned profits. In essence, the U.S. is playing on both sides of the street.
Both U.S. Companies and U.S. citizens are “renouncing U.S. citizenship” …