International Taxation: Study Countries That Exempt Foreign-Source Income Face Compliance Risks and Burdens Similar to Those in the United States
Highlights
A debate is underway about how the United States should tax foreign-source, corporate income. Currently, the United States allows domestic corporations to defer tax on the earnings of their foreign subsidiaries and also gives credits for foreign taxes paid, while most other developed countries exempt the active earnings of their multinational corporations' foreign subsidiaries from domestic tax. The debate has focused on economic issues with little attention to tax administration. GAO was asked to describe for a group of study countries with exemption systems: (1) the rules for exempting foreign-source income, and (2) the compliance risk and taxpayer compliance burden, such as recordkeeping, of the rules. The study countries, selected to provide a range of exemption systems, are Australia, Canada, France, Germany, and the Netherlands. For these countries GAO reviewed documents; interviewed government officials, academic experts, and business representatives; and compared tax policies, compliance activities and taxpayer reporting requirements.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of the Treasury | The Secretary of the Treasury should use currently collected information to report annually on the revenue to the United States Treasury from taxing foreign-source corporate income. To enhance usefulness, such reports should describe the methodology and important limitations. |
Closed – Implemented
After agreeing with our recommendation, the U.S. Department of the Treasury (through the Internal Revenue Service) began in the Summer of 2010 to report an annual measure of the U.S. corporate taxes owed on foreign-source income. A chief in IRS's Statistics of Income Division confirmed that new information reported in IRS's annual article in the Statistics of Income Bulletin on the corporate foreign tax credit was included in response to our recommendation.
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