Valparaiso University Law Review

Volume 47

Number 1 pp.313-355

Fall 2012

Closing International Loopholes: Changing the

Corporate Tax Base to Effectively Combat Tax

Avoidance

John T. VanDenburgh

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Recommended Citation

John T. VanDenburgh, Closing International Loopholes: Changing the Corporate Tax Base to Effectively Combat Tax Avoidance, 47 Val. U.

L. Rev. 313 (2012).

Available at: http://scholar.valpo.edu/vulr/vol47/iss1/8

313

CLOSING INTERNATIONAL LOOPHOLES:

CHANGING THE CORPORATE TAX BASE TO

EFFECTIVELY COMBAT TAX AVOIDANCE

I. INTRODUCTION

NoTax is a publicly traded technology corporation that deals

primarily with internet-based services and products. NoTax is

headquartered in California, incorporated in Delaware, and does the

majority of its business within the United States. In 2010, NoTax

reported three hundred and fifty million dollars in worldwide revenue

to its shareholders and reported a net income of one hundred million

dollars to the IRS. NoTax paid the standard 35% federal tax rate, or

thirty-five million dollars, to the IRS. Subsequently, NoTaxís president

and board of directors decided to hire a group of tax consultants and

attorneys to see if there was a way to reduce their corporate tax. In 2011,

NoTax reported approximately the same level of revenue and business

to its shareholders but reported a much lower net income and only paid

around two million dollars to the IRS. NoTax did not physically move

its headquarters, change its products, or cut any employees. How was it

able to cut its corporate taxes by nearly thirty-three million dollars?

NoTax employed a complex scheme of tax planning strategies to

manipulate its financial records, take advantage of international tax

loopholes, and avoid paying U.S. taxes. Even more remarkable, NoTax

was able to do this primarily with paper transactions that are completely

legal.1

Many U.S. corporations have started using similar tax avoidance

strategies to reduce their corporate tax.2 These strategies have become a

problem in the last few decades because of the globalization of the world

economy, improvements in technology, and increased tax competition.3

1 NoTax is a fictional company. The author of this Note created this hypothetical to

explain the concept of international tax avoidance.

2 ìTax avoidanceî refers to the legal strategies corporations employ to get around

paying taxes, as opposed to ìtax evasion,î which refers to the avoidance of tax obligations

through illegal means. See JANE G. GRAVELLE, MAJOR TAX ISSUES IN THE 111TH CONGRESS,

CONG. RESEARCH SERV. 13 (May 6, 2009), http://royce.house.gov/uploadedfiles/

major_tax_issues_in_the_111th_congress.pdf (explaining the major differences between tax

evasion and tax avoidance techniques); see also Michelle Hirsch, Tax Havens: Offshore

Operations Cost U.S. Billions, FISCAL TIMES, Sept. 7, 2010, http://hsgac.senate.gov/public/_

files/071708PSIReport.pd (noting that eighty-three out of the largest one hundred publicly

traded U.S. companies have subsidiaries in countries with lower corporate tax rates than

the United States).

3 See Reuven S. Avi-Yonah, Globalization, Tax Competition, and the Fiscal Crisis of the

Welfare State, 113 HARV. L. REV. 1573, 1575ñ76 (2000) (discussing the increased mobility of

capital from technology advances, which has led to international tax competition because

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314 VALPARAISO UNIVERSITY LAW REVIEW [Vol. 47

Most of these methods involve setting up a shell corporationóa

corporation with no operations or assetsóas a subsidiary in a lower tax

jurisdiction and then manipulating the parent corporationís financial

records to show that the income was earned by the shell subsidiary

outside of the United States.4 What these corporations are doing is

technically legal, but only because of the difficulty of applying U.S. tax

law to other sovereign countries.5 There have been many attempts to try

to fix this current tax avoidance problem while keeping the same tax

base, but these have all proved to be ineffective, which is evident from

the alarming number of corporations that are employing tax avoidance

schemes.6 Tax avoidance strategies are causing the United States to lose

companies can easily shift capital to low-tax jurisdictions). Tax competition in this context

refers to countries lowering their tax rates to make it more desirable for corporations to do

business in their country. Id. See also Jason Bordoff & Jason Furman, General Essay,

Progressive Tax Reform in the Era of Globalization: Building Consensus for More Broadly Shared

Prosperity, 2 HARV. L. & POLíY REV. 327, 328 (2008) (explaining that tax reform might be

necessary with recent changes in the economy); Timothy V. Addison, Shooting Blanks: The

War on Tax Havens, 16 IND. J. GLOBAL LEGAL STUD. 703, 711 (2009) (discussing several

reasons for why tax havens exist); Diane Ring, Who is Making International Tax Policy?:

International Organizations as Power Players in a High Stakes World, 33 FORDHAM INTíL L.J.

649, 702 (2010) (explaining why some countries lower their tax rates).

4 See Press Release, The White House, Executive Office of the President, Leveling the

Playing Field: Curbing Tax Havens and Removing Tax Incentives for Shifting Jobs

Overseas, May 4, 2009, available at http://www.whitehouse.gov/the_press_office/

LEVELING-THE-PLAYING-FIELD-CURBING-TAX-HAVENS-AND-REMOVING-TAXINCENTIVES-

FOR-SHIFTING-JOBS-OVERSEAS/ [hereinafter Press Release] (providing

examples of several problems that exist under current U.S. law and describing proposals to

fix each problem).

5 See Ilan Benshalom, The Quest to Tax Financial Income in a Global Economy: Emerging to

an Allocation Phase, 28 VA. TAX REV. 165, 166 (2008) (noting how the corporate structure has

changed because of changes in the global economy); Diane M. Ring, Whatís at Stake in the

Sovereignty Debate?: International Tax and the Nation-State, 49 VA. J. INTíL L. 155, 156ñ57

(2008) (explaining the link between sovereignty and international tax laws). Countries are

not able to enforce their tax laws in other sovereign states because those sovereign states

represent the supreme source of the law on internal matters, such as corporate taxation. Id.

at 160. See also David R. Tillinghast, Issues of International Tax Enforcement, in THE CRISIS IN

TAX ADMINISTRATION 38, 38ñ42 (Henry J. Aaron & Joel Slemrod eds., 2004) (discussing a

number of challenges facing the IRS in enforcing U.S. tax laws in foreign jurisdictions, as

well as the complexity of the Tax Code and the difficulty in obtaining financial

information). See generally Nancy Birdsall, Asymmetric Globalization: Global Markets Require

Good Global Politics, (Ctr. for Global Dev., Working Paper No. 12, 2002), available at

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1106282 (explaining how the global

economy has made it more difficult to enforce tax laws).

6 See Ilan Benshalom, Sourcing the ìUnsourceableî: The Cost Sharing Regulations and the

Sourcing of Affiliated Intangible-Related Transactions, 26 VA. TAX REV. 631, 642ñ44 (2007)

(explaining the Armís Length Standard as one attempt to prevent corporate tax avoidance

through the use of subsidiaries); see also Tracy A. Kaye, The Regulation of Corporate Tax

Shelters in the United States, 58 AM. J. COMP. L. 585, 588ñ92 (2010) (describing the judiciaryís

development of different common law doctrines to combat tax avoidance, such as

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2012] Closing International Loopholes 315

billions of annual tax dollars that could be used to pay off the current

budget deficit.7 Allowing corporations to escape paying U.S. taxes when

they actively derive benefits from the U.S. market is unacceptable.8 The

attempts and proposals to fix this problem through legislation have

focused on creating laws to force corporations to stop manipulating their

net income; however, the more effective method to combat this issue

might be changing the tax base altogether.9 This Note proposes that the

United States needs to change the current tax base so that corporations

no longer have the incentive to manipulate their financial information.10

First, Part II of this Note briefly provides a historical context of the

U.S. corporate tax, presenting relevant background information, theories

for and against taxation, and popular techniques used by corporations to

avoid tax.11 Next, Part III offers an analysis of the current tax base and

ìsubstance over form,î ìstep-transaction,î ìbusiness purpose,î and ìeconomic

substanceî); Abrahm W. Smith, Tax Dodgers Beware: New Foreign Account Tax Compliance

Legislation, 84 FLA. B.J., JulyñAug. 2010, at 52ñ53 (explaining legislative attempts by the

Obama Administration to correct the tax avoidance problem); Anthony D. Todero, Note,

The Stop Haven Abuse Act: A Unilateral Solution to a Multilateral Problem, 19 MINN. J. INTL. L.

241, 258ñ60 (2010) (examining the Stop Tax Haven Abuse Act (STHAA), which was another

attempt to prevent corporations from establishing tax havens).

7 See Frederick J. Tansill, Asset Protection Trusts (APTS): Non-Tax Issues, ST012 A.L.I.-

A.B.A., in INTíL TRUST & EST. PLAN. 293, 309 (2011) (noting how President Obamaís

administration had clear plans to crack down on tax avoidance to pay for the U.S. deficit);

see also Lilian V. Faulhaber, Sovereignty, Integration and Tax Avoidance in the European Union:

Striking the Proper Balance, 48 COLUM. J. TRANSNATíL L. 177, 179 (2010) (explaining that tax

avoidance is a problem, not only in the United States, but also in the European Union);

Hirsch, supra note 2 (explaining that U.S. multinational corporations are collectively

avoiding anywhere between $10 billion and $60 billion a year in taxes by shifting their

earnings on paper to overseas subsidiaries); Anup Shah, Tax Havens; Undermining

Democracy, GLOBAL ISSUES, http://www.globalissues.org/article/54/tax-havensundermining-

democracy (last updated July 12, 2009) (explaining some effects that tax

havens are having on the U.S. economy).

8 See infra Part II (discussing the benefits theory of taxation). The U.S. companies that

are using these tax avoidance strategies are taking advantage of the benefits that the U.S.

market provides. Id. See also Jennifer Barton, Comment, Running from the United States

Treasury: The Need to Reform the Taxation of Multinational Corporations, 43 J. MARSHALL L.

REV. 1041, 1051 (2010) (noting the need for reform in the corporate tax structure because of

tax avoidance issues).

9 See I.R.C. ß 11 (2006) (containing the current tax base for corporationsónet income);

Rachelle Y. Holmes, Deconstructing the Rules of Corporate Tax, 25 AKRON TAX J. 1, 2 (2010)

(noting that most proposed solutions to the tax problem are structural, including statutory

changes to stop companies from using loopholes); see also infra Part IV (proposing a change

in the tax base, thus altering the way that companies are taxed altogether, rather than

adding new laws to the already complicated Tax Code).

10 See infra Part IV (explaining how changing the tax base to corporate revenue will

decrease the incentive to shift income abroad and avoid paying U.S. taxes).

11 See infra Part II (providing relevant background information on U.S. corporate

taxation, as well as describing popular tax avoidance methods and previous legislation).

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316 VALPARAISO UNIVERSITY LAW REVIEW [Vol. 47

its weaknesses.12 Further, Part III illustrates the potential effects of

failing to change the tax base in the near future.13 Finally, Part IV

proposes a change of the tax base that will take away corporationsí

incentives to manipulate their financial records and that will fairly tax

corporations based on the benefits they derive from the U.S. market,

which will lead to a much more efficient and profitable U.S. economy.14

II. BACKGROUND

Despite recent legislative changes aimed at stopping U.S. corporate

tax avoidance and President Obamaís full commitment to reforming the

corporate tax system, many corporations continue to use aggressive tax

planning to circumvent much of their corporate tax obligations.15 There

is difficulty in making effective legislative changes, because there are

many problems with the U.S. corporate tax baseóor general pool of

wealth to which tax liability is imposed.16 Currently, the U.S. corporate

tax base consists of net income, which is calculated by taking revenues

and adjusting for (subtracting) expenses, interest, depreciation, taxes,

and amortization. Corporations are presently able to manipulate their

12 See infra Part III (analyzing why the current tax base has led to corporate tax

avoidance).

13 See infra Part III (presenting the possible effects on the U.S. economy of continuing to

allow corporations to legally avoid paying taxes).

14 See infra Part IV (proposing a change to the current tax base that will eliminate the

corporate incentive to transfer income abroad in order to avoid paying U.S. taxes); see also

The Worldís Largest Economies, ECONOMYWATCH.COM (June 30, 2010),

http://www.economywatch.com/economies-in-top/ (noting the profitability of top

economies in the world).

15 See Holmes, supra note 9, at 2 n.3 (explaining some recent prevalent recommendations

for changing the U.S. tax system); Kaye, supra note 6, at 594 (explaining the emergence of

the American Jobs Creation Act of 2004, which enacted new penalties, strengthened

disclosure requirements, and changed substantive law against tax shelters); David J. Lynch,

Does Tax Code Send U.S. Jobs Offshore?, USA TODAY, Mar. 21, 2008,

http://www.usatoday.com/money/perfi/taxes/2008-03-20-corporate-taxoffshoring_

N.htm (ìëBig businesses will always look for ways to skirt the tax code. An

Obama administration will close loopholes and will tighten (IRS) enforcement so

companies cannot go around tax regulations,í says Bill Burton, a spokesman for the Obama

campaign.î).

16 See BLACKíS LAW DICTIONARY 1599 (9th ed. 2009) (defining the tax base as the ìtotal

property, income, or wealth subject to taxation in a given jurisdiction; the aggregate value

of the property being taxed by a particular taxî); Melissa J. Morrow, Comment, Twenty-Five

Years of Debate: Is Acquisition-Value Property Taxation Constitutional? Is It Fair? Is It Good

Policy?, 53 EMORY L.J. 587, 591 (2004) (ìThe tax base is the ëassessed valueí of the taxable

property.î).

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2012] Closing International Loopholes 317

net income, because it is separately reported to the IRS, and there is no

incentive for them to keep this figure high.17

Before analyzing the benefits associated with changing the corporate

tax base, Part II.A of this Note provides the key history of the corporate

tax, highlighting the major theories supporting why corporations should

be taxed.18 Next, Part II.B lays out the basic framework of how

corporations are taxed in the United States.19 Part II.C then examines the

major tax avoidance techniques that corporations use, providing a more

in-depth context of these techniques by looking at what Google does to

reduce its taxes.20 Then, Part II.D briefly mentions four of the most

popular proposals to fix tax avoidance in the United States.21

A. The History of the Corporate Tax

The corporate tax was first enacted in 1909 on corporate income to

provide support for a general individual income tax on citizens.22 The

goals of this tax were: (1) to provide the government with knowledge

about profits in order to prevent the abuse of power; (2) to raise

additional revenue; (3) to supervise corporations; and (4) to discourage

excessive borrowing.23 Many corporations challenged the tax in court,

17 See infra Part III (analyzing the problems with the current tax base); see also MICHAEL

MAZEROV, STATE CORPORATE TAX SHELTERS AND THE NEED FOR ìCOMBINED REPORTINGî 1

(CTR. ON BUDGET & POLíY PRIORITIES 2007), available at http://www.cbpp.org/files/10-26-

07sfp.pdf (advocating for combined reporting); Michael J. McIntyre, Paull Mines & Richard

D. Pomp, Designing a Combined Reporting Regime for a State Corporate Income Tax: A Case

Study of Louisiana, 61 LA. L. REV. 699, 702ñ05 (2001) (examining the benefits of a combined

reporting regime for corporations at the state level).

18 See infra Part II.A (providing the key history of the corporate tax and highlighting the

major theories supporting why corporations should be taxed).

19 See infra Part II.B (laying out the basic framework of how corporations are taxed in the

United States).

20 See infra Part II.C (providing a more in-depth context of the major tax avoidance

techniques by specifically looking at what Google does to reduce its taxes).

21 See infra Part II.D (defining four of the most popular proposals to fix the U.S. tax

avoidance problem).

22 See Corporate Tax Act of 1909, Pub. L. No. 61-4, ß 38, 36 Stat. 11, 112 (establishing the

corporate tax by creating an excise tax for corporations measured by corporate income); see

also Steven A. Bank, Entity Theory as Myth in the Origins of the Corporate Income Tax, 43 WM.

& MARY L. REV. 447, 464 (2001) (noting that there were several motivations for the first

corporate income tax); Jane G. Gravelle, The Corporate Income Tax: A Persistent Policy

Challenge, 11 FLA. TAX REV. 75, 78 (2011) (explaining that there was support for the income

tax because it taxed the wealthy, reduced the concentration of power, and provided for a

flexible revenue source).

23 See W. ELLIOT BROWNLEE, FEDERAL TAXATION IN AMERICA: A SHORT HISTORY 50ñ52

(1996) (highlighting how corporations originally fit into the U.S. tax policy); SIDNEY

RATNER, TAXATION AND DEMOCRACY IN AMERICA 280ñ83 (1980) (providing a detailed

account of the congressional deliberations that lead up to the Corporate Tax Act of 1909).

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318 VALPARAISO UNIVERSITY LAW REVIEW [Vol. 47

because they thought the government was overstepping its boundaries,

discouraging the corporate form, and killing the profit motive.24 The

Supreme Court upheld the tax, reasoning that it was an appropriate tax

on the privilege of doing business in the corporate capacity.25

Then, in 1918, the taxation of international income began with the

Revenue Act of 1918, which allowed a credit against U.S. income for

taxes paid by a U.S. corporation to any foreign government on income

earned outside the United States.26 In 1928, the League of Nations

created the first model bilateral treaty agreement, giving a corporation

relief from being taxed twice on income earned abroad.27 Subsequently,

in 1934, the Supreme Court decided, in Helvering v. Gregory, that a

corporation could not simply ìreorganizeî for tax purposes and that

24 See Gravelle, supra note 22, at 78ñ79 (noting some general reasons why many people

opposed the 1909 corporate income tax); Marjorie E. Kornhauser, Corporate Regulation and

the Origins of the Corporate Income Tax, 66 IND. L.J. 53, 125 (1990) (illustrating some of the

objections to the corporate income tax in 1909).

25 See Flint v. Stone Tracy Co., 220 U.S. 107, 176 (1911) (upholding the corporate excise

tax in its entirety); see also Kornhauser, supra note 24, at 118 (explaining that the Corporate

Tax Act of 1909 was challenged immediately after it was enacted, but a decision by the

Supreme Court was not rendered until 1911).

26 See Revenue Act of 1918, ch. 18 ßß 222(a)(1), 238(a), 240(c), 40 Stat. 1057, 1073, 1080ñ82

(1919) (providing a foreign tax credit for individuals and a similar credit for domestic

corporations and describing creditable taxes). The Revenue Act of 1921 limited this foreign

tax credit so that it could not exceed the amount of the U.S. tax liability on the taxpayerís

foreign source income. Revenue Act of 1921, ch. 136 ßß 222(a)(5), 238(a), 42 Stat. 227, 249,

258 (1923). This limitation was intended to ensure that U.S. companies and individuals

could not use foreign taxes to reduce or eliminate U.S. taxes on U.S. source income. Id.

27 See Michael J. Graetz & Michael M. OíHear, The ìOriginal Intentî of U.S. International

Taxation, 46 DUKE L.J. 1021, 1023 (1997) (explaining the importance of the League of

Nationsí 1928 model bilateral income tax treaties); C. John Taylor, Twilight of the

Neanderthals, or Are Bilateral Double Taxation Treaty Networks Sustainable?, 34 MELB. U. L.

REV. 268, 270ñ71 (2010) (providing a brief history of bilateral tax treaties as a model to

relieve corporations from double taxation). Double taxation refers to instances where

income is taxed by one jurisdiction and then taxed again by another jurisdiction. Id. For

example, if country A taxes a corporation at a rate of 35% on income because the income

was earned in its county, and then country B taxes the same income by that corporation at a

rate of 30% because that corporation is a resident of country B, then the corporation is

forced to pay an astronomically high total effective tax rate of 65% on that net income. See

infra part II.B (explaining in more depth source income and residence income). One way

that countries eliminate double taxation is by cooperating with each other through bilateral

tax treaties. See also Sunita Jogarajan, Prelude to the International Tax Treaty Network:

1815ñ1914 Early Tax Treaties and the Conditions for Action, 31 OXFORD J. LEGAL STUD. 679, 680

(2011) (noting that there are over three thousand bilateral tax treaties in the world

currently). The common bilateral tax treaties account for double taxation by making it so

that one country agrees unilaterally not to impose tax on income earned in another

country, reducing the amount of tax payable in their country for any tax paid in another

country on the same income, or by allocating taxation rights from different types of

incomes between the different countries. Id. at 683.

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2012] Closing International Loopholes 319

there must be a business purpose for the corporate reorganization

outside of saving on corporate taxes.28 This decision was particularly

important because it was the first decision addressing corporate

techniques to avoid paying taxes.29 The international income tax regime

has remained reasonably intact, despite the growth of the economy,

increases in technology, and the globalization of business.30

Throughout history, the U.S corporate income tax has been based on

the benefit theory of taxation, which indicates that corporations should

be taxed because they take advantage of the benefits that the state

provides.31 The United States taxes corporations under this theory in

28 Gregory v. Helvering, 293 U.S. 465, 469 (1935) (holding that the transfer of the original

corporationís assets to the shareholder did not qualify as reorganization because it was a

ìmere device which put on the form of a corporate reorganization as a disguise for

concealing its real characterî). The Court further held that there had to be a business

purpose for the reorganization and not just the benefit of saving on taxes. Id.

29 Id. Though it was not a decision regarding corporations using international law to

avoid taxes, the decision represented the Courtís stance that business decisions should not

be made for the sole reason of avoiding taxes. Id. These types of decisions affect the

business market and make it less efficient. See Donald C. Lubick, Remarks to the Tax

Executives Institute, reprinted in FOUNDATIONS OF INTERNATIONAL INCOME TAXATION 19ñ21

(Michael J. Graetz ed., 2003) (explaining different policy goals in the area of international

taxation). The goals of having an efficient market, market neutrality, and a competitive

market sometimes conflict, and the goal is to find to what extent taxation can be reduced to

stay competitive internationally while not distorting business decisions based on this

reduced taxation. Id. The author then explains the two major types of efficiency norms

that exist in the market: (1) capital import neutrality (CIN) and (2) capital export neutrality

(CEN). Id. at 21. See also William B. Barker, International Tax Reform Should Begin at Home:

Replace the Corporate Income Tax with a Territorial Expenditure Tax, 30 NW. J. INTíL L. & BUS.

647, 654 (2010) (explaining that an efficient tax is a neutral tax, which does not change the

relative price of goods or services).

30 See Avi-Yonah, supra note 3, at 1575ñ76 (explaining how technological advances have

led to a much more global economy); see also MICHAEL J. GRAETZ, FOUNDATIONS OF

INTERNATIONAL INCOME TAXATION 4 (2003) (noting that the basic framework of the

international structure remains the same as it did in the early 1920s). The author explains

that the basic international tax structure has not changed, because it has never proved to be

a barrier to the international flow of goods, services, or capital. Id. See generally Holmes,

supra note 9, at 3 (noting that the only two major changes in international tax law came in

the form of the Revenue Act of 1962 and the Tax Reform Act of 1986).

31 See Reuven S. Avi-Yonah, International Taxation of Electronic Commerce, 52. TAX L. REV.

507, 521 (1997) (explaining the Benefits Principle, which gives the right to tax active

business income primarily to the source jurisdiction, while the right to tax passive

investment income is assigned primarily to the residence jurisdiction); Jeffrey M. ColÛn,

Changing U.S. Tax Jurisdiction: Expatriates, Immigrants, and the Need for a Coherent Tax Policy,

34 SAN DIEGO L. REV. 1, 11 (1997) (ìThe theoretical basis for source and trade or business

taxation is that the United States has provided the benefits that generated the income.î);

Steven A. Dean, More Cooperation, Less Uniformity: Tax Deharmonization and the Future of the

International Tax Regime, 84 TUL. L. REV. 125, 144 n.79 (2009) (explaining that source income,

or income earned in one country, is based on the notion that the government has the right

to collect tax revenues by providing the services that make the creation of that underlying

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two different ways: (1) on the benefits resulting from being incorporated

in the United States, or residence based tax; and (2) on the benefits that

corporations receive from using the U.S. market to derive their income,

or source based tax.32 Examples of some of the benefits that U.S.

corporations receive include the: transportation facilities, infrastructure,

education system, labor force, financial institutions, customer base, and

stock markets.33 The basic framework of the U.S. tax system follows this

theory and taxes corporations based on their residence and whether their

income is derived within the United States.34

income possible); Edward A. Zelinsky, Citizenship and Worldwide Taxation: Citizenship as an

Administrable Proxy for Domicile, 96 IOWA L. REV. 1289, 1293ñ94 (2011) (maintaining that

source based taxation reflects the notion that a certain tax jurisdiction provides benefits that

protect income and assets maintained in that jurisdiction); see also Peggy B. Musgrave,

Interjurisdictional Equity in Company Taxation: Principles and Applications to the European

Union (2000), reprinted in FOUNDATIONS OF INTERNATIONAL INCOME TAXATION 6 (Michael J.

Graetz ed., 2003) (explaining that a jurisdiction should be able to charge a tax to pay for the

services that it renders).

32 See Deborah A. Geier, Letter to the Editor, Time to Bring Back the ìBenefitî Norm?, 102

TAX NOTES 1155, 1157 (2004) (advocating the benefits theory of taxation because of the

exploitation of the U.S. economic system); Majorie E. Kornhauser, Choosing a Tax Rate

Structure in the Face of Disagreement, 52 UCLA L. REV. 1697, 1708 (2005) (ì[B]enefit taxation

underlies international tax principles that allow both the country of residence and the

source country to tax income.î); Herwig J. Schlunk, Double Taxation: The Unappreciated

Ideal, 102 TAX NOTES 893, 895 (2004) (explaining the two types of taxation and analyzing

them under the benefits theory); see also infra Part II.B (explaining the framework of U.S. tax

policy, specifically residence and source based taxation).

33 See Ruth Mason, Tax Expenditures and Global Labor Mobility, 84 N.Y.U. L. REV. 1540,

1553ñ54 (2009) (explaining some of the benefits conferred on corporations associated with

source based taxation, including human resources, natural resources, infrastructure, and

markets); see also Musgrave, supra note 31, at 6 (explaining the more complicated benefits

that come from source and residence based income). A company may also benefit by

having a lower intermediate goods cost, which in turn lowers the total cost of production.

Id. Benefits also arise when the government contributes capital to the capital of the

corporation in order to generate a profit. Id. But see Nancy H. Kaufman, Fairness and the

Taxation of International Income, 29 LAW & POLíY INTíL BUS. 145, 184ñ85 (1998) (comparing

principles of source based taxation to those of benefit theory taxation).

34 See GRAETZ, supra note 30, at 5 (2003) (distinguishing between residence and source

taxation). There is much difficulty in defining residence and source, which creates

problems in international taxation. Id. See also Stephen E. Shay, J. Clifton Fleming, Jr. &

Robert J. Peroni, ìWhatís Source Got to do With It?î Source Rules and U.S. International

Taxation, 56 TAX L. REV. 81, 90ñ92 (2002) (explaining that source based taxation represents

the price paid for access to state markets, while residence based taxation represents the

benefits associated with being a citizen of that state).

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2012] Closing International Loopholes 321

B. Basic Corporate Taxation Framework

There are two major types of taxation systems for international

corporations: (1) the territorial system and (2) the worldwide system.35

The territorial system, also known as the source system, taxes income

that is derived within a particular country.36 This means that a

corporation is taxed by a country if the corporation earns its income

within the countryís borders, irrespective of the corporationís

residency.37

In a worldwide system, a corporation is taxed on its worldwide

income based on its ìresidence,î regardless of where the income is

actually earned.38 Accordingly, a corporation is taxed only if it is a

ìresidentî of a particular country.39 Some countries deem a corporation

a resident based on where its headquarters are located; however, most

35 See RESTATEMENT (THIRD) OF FOREIGN RELATIONS LAW OF THE UNITED STATES ß 411

(1987) [hereinafter RESTATEMENT (THIRD)] (explaining the main ways that people and

corporations are subject to tax in the United States); id. ß 412(1)(a) (stating that no matter

the source of the income, the United States has authority to tax based on residence);

GRAETZ, supra note 30, at 12ñ13 (outlining the basics of a pure territorial tax system and a

pure worldwide tax system).

36 See HUGH J. AULT & BRIAN J. ARNOLD, COMPARATIVE INCOME TAXATION: A

STRUCTURAL ANALYSIS 347ñ49 (2d ed. 2004) (discussing the positives and negatives of both

the source and residence tax systems); GRAETZ, supra note 30, at 12ñ17 (discussing different

rationales for worldwide and territorial tax systems); Barker, supra note 29, at 664ñ65

(highlighting some factors that connect a nationís tax base to the taxing jurisdiction).

37 See GRAETZ, supra note 30, at 12ñ13 (explaining the importance of the source income

concept in international taxation). The principal right to tax usually lies with the source

country, and the burden of preventing the corporation from being taxed twice on the

incomeófrom the source country and the residence countryóis on the resident country.

Id. at 13. See also J. Clifton Fleming, Jr., Robert J. Peroni & Stephen E. Shay, Fairness in

International Taxation: The Ability-to-Pay Case for Taxing Worldwide Income, 5 FLA. TAX REV.

299, 303 (2001) (illustrating that source based taxation does not take into account the

residence of the corporation); Timothy Hisao Shapiro, Tax First, Ask Questions Later:

Problems Predicting the Effect of President Obamaís International Tax Reforms, 16 STAN. J.L. BUS.

& FIN. 141, 149ñ50 (2010) (explaining the basics of both worldwide and territorial taxation).

38 See Daniel Shaviro, The Case Against Foreign Tax Credits, 3 J. LEGAL ANALYSIS 65, 66

(2011) (maintaining that in a worldwide system, the United States taxes the income of

residents no matter where it arose); see also Reuven S. Avi-Yonah, The Structure of

International Taxation: A Proposal for Simplification, 74 TEX. L. REV. 1301, 1311ñ14 (1996)

(providing several reasons for preferring residency-based taxation over source based

taxation).

39 See I.R.C. ß 7701(a)(30)(C) (2006) (defining the term ìUnited States Personî as ìa

domestic corporationî); Daniel Shaviro, The Rising Tax-Electivity of U.S. Corporate Residence,

64 TAX L. REV. 377, 383 (2011) (ìA corporation is a U.S. resident if and only if it is ëcreated

or organized in the United States or under the law of the United States or of any State.íî).

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countries, including the United States, use place of incorporation as the

test for corporate residence.40

Like most other industrialized countries, the United States employs a

system of taxation that combines both the territorial and the worldwide

tax systems.41 The United States taxes corporations if they are

incorporated in the United States and also taxes foreign corporations if

the income is earned within the United States.42 Thus, the only way that

a corporation will not incur any U.S. tax is if the company is a foreign

40 See Shaviro, supra note 39, at 413 (ìA number of countries base corporate residence on

some version of an inquiry into the location of a given companyís headquarters, or its place

of central management and control.î).

41 See GRAETZ, supra note 30, at 13 (explaining that the United States tax system is

referred to by most as a worldwide system, because the United States taxes foreign source

income even though it is not quite a pure system). The author explains:

Sometimes analysts distinguish systems that tax foreign-source income

from those that do not. They often call the former ìworldwide

systemsî and the latter ìterritorial systems.î No country, however

employs a pure ìworldwide systemî or a pure ìterritorial system.î

International tax regimes throughout the world are hybrid or ìmixedî

systems.

Id.

42 See I.R.C. ßß 881(a), 882(a) (2010) (imposing tax on foreign corporations that generate

or derive their income within the United States); id. ß 63 (2010) (imposing tax on U.S.

corporations); see also Reuven S. Avi-Yonah, Kimberly A. Clausing & Michael C. Durst,

Allocating Business Profits for Tax Purposes: A Proposal to Adopt a Formulary Profit Split, 9 FLA.

TAX REV. 497, 499ñ500 (2009) (examining some specifics in the U.S. tax system). An

example is provided:

The U.S. government taxes U.S. multinational firms on a

residence basis, and thus U.S. resident firms incur taxation on income

earned abroad as well as income earned in the United States. U.S.

taxation is imposed only when income is repatriated by a foreign

subsidiary to the U.S. parent via a dividend. Thus, a subsidiaryís

income can grow free of U.S. tax prior to repatriation, a process known

as deferral. Deferral provides strong incentives to earn income in lowtax

countries.

As an example, consider a U.S. based multinational firm that

operates a subsidiary in Ireland. Assume that the U.S. corporate

income tax rate is 35% while the Irish corporate income tax rate is

12.5%. The Irish subsidiary earns 800 and decides to repatriate 70 of

the profits to the United States. (Assume, for ease of computation

only, a 1:1 exchange rate.) First, the Irish affiliate pays 100 to the Irish

government on profits of 800. It then repatriates $70 to the United

States, using the remaining profit (630) to reinvest in its Irish

operations. The firm must pay U.S. tax on the repatriated income, but

it is generally eligible for a tax credit of $100 (taxes paid) times 70/700

(the ratio of dividends to after-tax profits), or $10. Owing to deferral,

the remaining profits (630) can grow abroad tax-free prior to

repatriation.

Id. (footnotes omitted).

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2012] Closing International Loopholes 323

corporation and has not earned any income in the United States.43 If the

parent corporation is based in the United States and has foreign

subsidiaries, then the income earned by these subsidiaries is not taxed

until it is repatriated to the U.S. parent via dividends or some other

financial alternative.44 Therefore, the current tax base for U.S.

corporations is net income, and the tax base for foreign corporations is

income earned within the United Statesóboth of which are separately

reported to the IRS, which means that the only reason to report is to

determine tax liability.45 These current tax bases represent the general

pools of wealth that are subject to taxationóthose numbers are then

subject to thousands of pages of complex tax code and Treasury

Regulations, which attempt to resolve a seemingly never-ending amount

of issues, including: regulating certain actors, monitoring specific

transactions, and reconciling U.S. law with other international taxing

jurisdictions by issuing credits.46

43 See GRAETZ, supra note 30, at 40 (explaining how the United States generally does not

have taxing authority over foreign based residents with foreign source income).

44 See I.R.C. ß 881 (2010) (providing for taxation of foreign corporations that repatriate

their income to a U.S. parent corporation); Avi-Yonah et al., supra note 42, at 499

(examining some specifics in the U.S. tax system). The process of companies keeping funds

in their overseas subsidiaries and not repatriating until they need capital is known as

deferral. Id. The reasoning behind this is that the money earned by the subsidiary is

attributed to a foreign corporation until it is repatriated to the U.S. parent. Id. See also

William B. Barker, An International Tax System for Emerging Economies, Tax Sparing, and

Development: It is All About Source!, 29 U. PA. J. INTíL L. 349, 353ñ54 (2007) (ìUnder a

residence-based system like the one used in the United States, as long as home country

[corporations] use the form of foreign corporations to carry out their activities, income is

deferred until repatriated and, upon repatriation of the profits, the enterprise is still

entitled to a credit for foreign taxes previously paid.î); Shapiro, supra note 37, at 150

(noting that U.S. corporations are able to defer recognition of their foreign-source income,

lowering their effective tax rate); supra note 42 (giving an example of repatriation and the

foreign tax credit).

45 See NoÎl B. Cunningham, The Taxation of Capital Income and the Choice of Tax Base, 52

TAX L. REV. 17, 17ñ18 (1996) (explaining the difference between having an income or

consumption tax base); Edward D. Kleinbard, Stateless Income, 11 FLA. TAX REV. 699, 717

(2011) (describing the current U.S. corporate tax base of net income as worldwide, except

for income earned by U.S. subsidiaries and not repatriated); Edward J. McCaffery & James

R. Hines Jr., The Last Best Hope for Progressivity in Tax, 83 S. CAL. L. REV. 1031, 1041 (2010)

(explaining that having a certain tax base affects the particular tax rate a jurisdiction sets);

Robert J. Peroni, Back to the Future: A Path to Progressive Reform of the U.S. International

Income Tax Rules, 51 U. MIAMI L. REV. 975, 976 (1997) (supporting the U.S. tax base of net

income for the foreseeable future); Holmes, supra note 9, at 4 (explaining that the shifting of

income out of the United States has eroded the corporate tax base because it has removed a

large part of potential tax revenue to other countries with lower tax rates); see also Barker,

supra note 29, at 651ñ52 (explaining the three different aspects of the tax base and how they

are all inter-related).

46 See Reuven S. Avi-Yonah & Kimberly A. Clausing, Reforming Corporate Taxation in a

Global Economy: A Proposal to Adopt Formulary Apportionment 5 (Brookings Inst., Discussion

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To prevent double taxation, the United States gives a foreign tax

credit to U.S. corporations if they earn income abroad.47 For example, if

a U.S. corporation earns income in a foreign country and that country

imposes a territorial tax (as most countries do), then that corporation will

receive a credit for the taxes paid.48 The U.S. corporation would only

owe the United States the difference between the U.S. rate and the

foreign territorial taxes paid, unless the foreign rate was higher, at which

point the corporation would not be subject to any U.S. tax.49 The main

Paper, 2007), available at http://www.brookings.edu/~/media/Research/Files/Papers/

2007/6/corporatetaxes%20clausing/200706clausing_aviyonah.PDF (ìThe U.S. system is

also notoriously complex: observers are nearly unanimous in lamenting the heavy

compliance burdens and the impracticality of coherent enforcement.î); Holmes, supra note

9, at 6ñ7 (describing the complexity of the U.S. Tax Code as many bright line rules aimed at

various goals that lack uniformity); see also David A. Weisbach, Formalism in the Tax Law, 66

U. CHI. L. REV. 860, 871 (1999) (explaining that the more tax laws there are, the more

transactional costs there are to ensure that those laws work together and that they do not

allow for any loopholes).

47 See I.R.C. ßß 901ñ08 (2010) (providing the rules governing the foreign tax credit for

U.S. corporations); see also Zelinsky, supra note 31, at 1297 (providing a simplified example

of the foreign tax credit system). That example is provided below:

To see the operation of the foreign income tax credit, suppose a

highly simplified example in which A, a U.S. citizen, is in a 30% federal

income tax bracket and earns $100 from renting his condominium in

Country X. If X has no income tax, A, on her federal return, reports

this rental income as part of her worldwide income and pays $30 of

such income to the federal fisc. If, on the other hand, X also imposes

income taxes on A at a 30% bracket, A pays a $30 income tax to X, the

source jurisdiction, and then credits that $30 paid against the tax A

would otherwise owe to the United States. The result is no net

payment by A to the U.S. Treasury. If, in contrast, X imposes income

taxes on A at a 20% bracket, A pays a $20 tax to X, takes a credit on her

federal tax return for that $20 income tax payment, and thereby pays a

net tax to the United States of $10 on her rental income from her

condominium located in X. The conventional view is that the credit for

foreign income taxes prevents double taxation by giving the source

jurisdiction the priority to tax.

Id. (footnote omitted).

48 See J. Clifton Fleming, Jr., Robert J. Peroni & Stephen E. Shay, Worse than Exemption, 59

EMORY L.J. 79, 81 (2009) (explaining the fundamentals of the foreign tax credit system).

Under the foreign tax credit system, the residence country subtracts

the source-country tax on a residentís foreign income from the

residence-country tax on the residentís foreign income and collects a

so-called residual tax to the extent that the residence-country tax

exceeds the source-country tax. Where a residentís source-country tax

exceeds the residence-country tax, however, the residence country

does not refund the excess to the resident.

Id.

49 Id.; see Jane G. Gravelle, International Corporate Income Tax Reform: Issues and Proposals,

9 FLA. TAX REV. 469, 473 (2009) (ì[I]f foreign taxes exceed the U.S. tax that would be due,

the excess foreign taxes cannot be credited.î).

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2012] Closing International Loopholes 325

policy reasons behind creating the foreign tax credit were to encourage

corporations to continue to form and operate in the United States and to

attract foreign investment in these corporations by eliminating the

negative effect of double taxation.50 However, corporations have found

ways to manipulate their tax credits, shielding their income and paying a

lower overall effective tax rate.51 The foreign tax credit system also

depends, in large part, on accurately identifying the source of the

incomeówhich has proved to be difficult with the globalization of the

economy.52

As the global economy has evolved, most tax rules have become

more complicated and harder to implement.53 The residence rules have

become much easier to manipulate because of how simple it is to

incorporate in another country.54 Even if a corporation decides not to

50 See Raquel Alexander, Stephen W. Mazza & Susan Scholz, Measuring Rates of Return on

Lobbying Expenditures: An Empirical Case Study of Tax Breaks for Multinational Corporations,

25 J.L. & POLíY 401, 411 (2009) (describing how corporations are able to defer U.S. tax on

income derived by a foreign subsidiary until the parent corporation repatriates the

income). See generally Michael S. Kirsch, The Role of Physical Presence in the Taxation of Cross-

Border Personal Services, 51 B.C. L. REV. 993, 1025 (2010) (providing a very broad description

of the foreign tax credit system).

51 See Steven A. Dean, Philosopher Kings and International Tax: A New Approach to Tax

Havens, Tax Flight, and International Tax Cooperation, 58 HASTINGS L.J. 911, 924ñ25 (2007)

(explaining the process of using foreign tax credits to shield income). The shielding

process involves racking up a high amount of foreign tax credits in a low-tax jurisdiction to

shield that income from being taxed at a higher rate in another jurisdiction. Id.

52 See I.R.C. ßß 861, 862, 863, 865 (2006) (providing the statutory rules governing how the

United States determines the source of income); INTíL BUREAU FISCAL DOCUMENTATION,

INTERNATIONAL TAX GLOSSARY 277 (3d ed. 1996) (providing that a source of income is the

ìcountry or countries from which the company derived its profitsî); Reuven S. Avi-Yonah,

International Tax as International Law, 57 TAX L. REV. 483, 490 (2004) (ìThe special problem of

territoriality in the tax area is that the source of income is very difficult to define.î).

53 See Louis Kaplow, Rules Versus Standards: An Economic Analysis, 42 DUKE L.J. 557, 559ñ

60 (1992) (examining the differences between tax standards and tax laws). The problem

with tax laws is that their ideal content is not immediately apparent, and they are

promulgated after the fact. Id. at 569. See also Kenneth W. Gideon, Cutler & Pickering

Wilmer, Tax Law Works Best when the Rules are Clear, 81 TAX NOTES 999, 1001 (1998) (arguing

that tax law problems need to be confronted and solved before they occur so the laws do

not continue to get more complex).

54 See I.R.C. ßß 7701(a)(4)ñ(5) (2006) (explaining that the term ìdomestic,î when applied

to a corporation, means created or organized under the laws of the United States and the

term ìforeign,î when applied to corporations, means one that is not domestic); William M.

Funk, On and over the Horizon: Emerging Issues in U.S. Taxation of Investments, 10 HOUS. BUS.

& TAX L.J. 1, 30ñ31 (2010) (noting that the United States corporate residence test is unusual

because it is based on form rather than substance, which encourages tax avoidance); David

R. Tillinghast, A Matter of Definition: ìForeignî and ìDomesticî Taxpayers, 2 INTíL TAX & BUS.

LAW. 239, 259ñ60 (1984) (explaining the positives and negatives of the United States using

the place of incorporation to determine a corporationís residence). The one advantage of

the place of incorporation test is that it is very easy to apply. Id. It is applied by referring

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326 VALPARAISO UNIVERSITY LAW REVIEW [Vol. 47

change its country of incorporation, it could set up a foreign subsidiary,

incorporate in that foreign jurisdiction, and transfer its income through

financial record manipulation.55

The source rules have been criticized for containing inherent

problems in their application.56 In order to determine the source of the

income, the IRS has developed bright line rules that apply to different

types of income, different parties depending on their residence, and

exemptions. However, these rules are easily manipulated.57 Also, issues

to the jurisdiction in which the charter is filed and by the laws governing the shareholders.

Id. at 260. The major drawback of the place of incorporation test is that it is by nature

androgynous and creates progeny. Id. Once a decision to incorporate in the United States

is made, tax restraints discourage a company from incorporating abroad, but there are not

restraints hindering the subsidiary of a U.S. corporation from incorporating abroad. Id.

55 See Edward Kofi Osei, Transfer Pricing in Comparative Perspective and the Need for

Reforms in Ghana, 19 TRANSNATíL L. & CONTEMP. PROBS. 599, 603 (2010) (identifying a few

major U.S. corporations that set up subsidiaries in lower tax jurisdictions); Jon M. Truby,

Towards Overcoming the Conflict Between Environmental Tax Leakage and Border Tax

Adjustment Concessions for Developing Countries, 12 VT. J. ENVTL. L. 149, 165ñ67 (2010)

(providing four examples of different ways that corporations set up subsidiaries in lower

tax jurisdictions); Jesse Drucker, Forest Laboratoriesí Globe-Trotting Profits, BLOOMBERG

BUSINESSWEEK (May 13, 2010), http://www.businessweek/magazine/content/10_21/

b4179062992003.htm (explaining that thousands of U.S. companies are using subsidiaries in

other countries and describing some of the techniques that they are using).

56 See I.R.C. ßß 861ñ63, 865 (2006) (providing the U.S. source rules); GRAETZ, supra note

30, at 41 (explaining problems associated with the U.S. source rules). An example is

provided:

Suppose a company manufactures and sells bicycles. Its owners

live in Japan; its factory is in Mexico; its main offices are in Canada; its

principle sales office is in the U.S., where most of its bicycles are sold;

and it is incorporated in Bermuda. The geographical source of income

from its bicycle sales is far from clear. On one hand, the Japanese

owners supplied the capital to create the company, and the U.S.

provides its principal market. But Mexico provides the bulk of its

labor, Canada is the locus of its management, and Bermuda provides

the legal arrangements enabling the company to exist.

Id. See also Fred B. Brown, An Equity-Based, Multilateral Approach for Sourcing Income Among

Nations, 11 FLA. TAX REV. 565, 579ñ83 (2011) (pointing out that the two major problems with

the current U.S. source rules are that they lack coherence to achieve a consistent tax policy,

and there is such a variation between the U.S. rules and the rules of other developed

countries).

57 See GRAETZ, supra note 30, at 55ñ56 (explaining source rule manipulation). ìTwo

prevalent types of source rule manipulation are the shifting of source within a particular

category of income and the recharacterization of income into a different source category

altogether.î Id. An example of the former is shifting income between passive and active

because they are taxed differently. Id. An example of the latter is shifting income to capital

gains. Id. See also Avi-Yonah, supra note 38, at 1331 (ì[T]he current [source] rules place an

immense premium on [how] payments are characterized . . . . [T]hese distinctions require

constant policing, and much of the complexity of the inbound rules of the Code stems from

this problem.î); Charles I. Kingson, Taxing the Future, 51 TAX L. REV. 641, 642 (1996)

(explaining how income is sometimes characterized as royalties, service, sales, or interest).

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2012] Closing International Loopholes 327

with determining the source have grown even more with technology, ecommerce,

and intellectual property.58 Difficulties arise when attributing

the source of an Internet transaction and when determining the source of

income produced by an algorithm or some other type of intellectual

property.59 The U.S. corporate tax structure has opened up loopholes for

a few popular tax avoidance methods that corporations like to exploit.60

This Note explains the fundamentals of each popular strategy by using

Google as a structural example.61 Although there are many corporations

that utilize these tax avoidance techniques, each has its own specific

version.62 Googleís tax avoidance process illuminates the basics of

several different methods employed to take advantage of multiple

international tax loopholes simultaneously.63

58 See Avi-Yonah, supra note 31, at 527 (explaining how easy it is for corporations to

establish their business and income in tax havens); Yariv Brauner, An International Tax

Regime in Crystallization, 56 TAX L. REV. 259, 312 (2003) (explaining that the source and

resident rules are ìfairly easy to exploit in the e-commerce contextî); Thomas C. Pearson,

Proposed International Legal Reforms for Reducing Transfer Pricing Manipulation of Intellectual

Property, 40 N.Y.U. J. INTíL L. & POL. 541, 562ñ63 (2008) (describing the problem with

intellectual property and abusing tax avoidance); Kyrie E. Thorpe, Comment, International

Taxation of Electronic Commerce: Is the Internet Age Rendering the Concept of Permanent

Establishment Obsolete?, 11 EMORY INTíL L. REV. 633, 639ñ40 (1997) (describing how

corporations earning money through e-commerce transactions can avoid source taxes by

locating their servers in countries with a lower tax rate); see also 26 C.F.R. ß 1.482-4(b)(1) (as

amended in 2006) (providing the regulations governing the transfer of intellectual

property, such as inventions, formula, processes, designs, and patterns).

59 See Susan C. Morse, Revisiting Global Formulary Apportionment, 29 VA. TAX REV. 593,

599 (2010) (ìCommon transfer pricing strategies include the location of valuable intellectual

property in low-tax offshore corporations . . . .î). The I.R.S. has tried to fix this problem by

changing regulations to require the sharing of a larger pool of costs and to attribute a

higher value to intellectual property originating with the parent company. Id. at 627.

There have also been proposals to tax U.S. corporations on excess returns from intangibles

placed in low-tax jurisdictions. Id. The problem with this proposal is that it is very hard to

put a value on intellectual property to properly determine what is in excess. Id.

60 See Colin P. Marks, Jiminy Cricket for the Corporation: Understanding the Corporate

ìConscienceî, 42 VAL. U. L. REV. 1129, 1154ñ55 (2008) (stating that the use of loopholes

allows corporations to comply with the letter, but not necessarily the spirit, of a law, which

in turn gives them the ability to manipulate and exploit the legal system); see also infra Part

II.C (explaining four major tax avoidance techniques used by corporations); Gary Clyde

Hufbauer & Jisun Kim, U.S. Taxation of Multinational Corporations: What Makes Sense, What

Doesnít 4 (Peterson Inst. Intíl Econ., Policy Brief No. PB09-7, 2009), available at

http://www.iie.com/publications/interstitial.cfm?ResearchID=1152 (noting the loopholes

in the U.S. tax system).

61 See infra Part II.C (using Google as the example in each section to provide an example

of the type of tax avoidance structures that corporations employ).

62 See, e.g., Kleinbard, supra note 45, at 763 (explaining Ciscoís strategies for tax

avoidance).

63 See Gravelle, supra note 22, at 76 (discussing why Google uses so many different types

of loopholes in its tax avoidance scheme).

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C. Major Tax Avoidance Techniques

Recent technological innovations, as well as a movement towards a

global economy, have enabled corporations to take advantage of the U.S.

tax system, avoiding taxation.64 Part II.C.1 explains the use of shell

companies; Part II.C.2 examines the earnings stripping technique; Part

II.C.3 provides details about transfer pricing; and Part II.C.4 combines

the three strategies to show how Google is manipulating the U.S. tax

system.65

1. Shell Companies

One major technique being used by U.S. corporations occurs when a

company sets up shell companies, companies with little or no assets, as

subsidiaries in tax shelters or countries with low tax rates.66 This usually

involves establishing an office or even just a mailbox in a low-tax

country and then either incorporating in that country or claiming that its

office in that country is its central place of management.67 Corporations

64 See supra note 3 (describing how technology has made it easier for corporations to get

around tax laws); see also Arthur E. Wilmarth, Jr., The Transformation of the U.S. Financial

Services Industry, 1975ñ2000: Competition, Consolidation, and Increased Risks, 2002 U. ILL. L.

REV. 215, 467 (2002) (explaining how technological improvements made it easier for

corporations to get around financial services requirements).

65 See infra Part II.C.1 (discussing the use of shell companies); infra Part II.C.2 (explaining

the use of earnings stripping); infra Part II.C.3 (examining the practice of transfer pricing);

infra Part II.C.4 (defining and explaining the ìDouble Dutch Irish Sandwichî).

66 See 17 C.F.R. ß 240.12b-2(3)(iv) (2010) (providing a definition of a shell company);

Simone M. Haug, The United States Policy of Stringent Anti-Treaty-Shopping Provisions: A

Comparative Analysis, 29 VAND. J. TRANSNATíL L. 191, 250 (1996) (maintaining that shell

corporations follow the sham doctrine in which no real business or activity is going on in

them); Piroska Soos, Self-Employed Evasion and Tax Withholding: A Comparative Study and

Analysis of the Issues, 24 U.C. DAVIS L. REV. 107, 160 (1990) (explaining the basic strategy of

filtering money through a shell company); Press Release, supra note 4 (noting that shell

companies are created for the sole reason of saving money on taxes); see also John Hasnas,

Between Scylla and Charybdis: Ethical Dilemmas of Corporate Counsel in the World of the Holder

Memorandum, 44 VAL. U. L. REV. 1199, 1211ñ12 (2010) (explaining that tax shelters are

designed to allow wealthy investors to avoid paying taxes); David E. Spencer & Jason C.

Sharman, OECD Proposals on Harmful Tax Practices, 13 N.Z. J. TAXíN L. & POLíY 129, 148

(2007) (giving details on how criminals use shell companies to house funds derived from

criminal activity).

67 See 60 minutes Special Report: A Look at the Worldís New Corporate Tax Havens,

CBSNEWS.COM (Mar. 25, 2011), http://www.cbsnews.com/stories/2011/03/25/

60minutes/main20046867.shtml?tag=contentMain;contentBody (describing certain

companies that employ these techniques in Switzerland). Central place of management is

another test that countries use for establishing whether a corporation is a resident for tax

purposes. See Aldo Forgione, Weaving the Continental Web: Exploring Free trade, Taxation,

and the Internet, 9 L. & BUS. REV. AM. 513, 534 (2003) (exploring the different ways countries

define a corporation). Forgione provides a brief summary:

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2012] Closing International Loopholes 329

do this because they can take advantage of the lower tax rates,

repatriating just enough money in order to keep their U.S. parent

companies running.68 For example, Google, Inc., a U.S. based

corporation, created a subsidiary in the Netherlands, Google

Netherlands Holdings, which has no employees or assets but filters

through 99.8% of Googleís income for tax reasons.69

One preventive measure that the IRS employed to stop this type of

behavior was the subpart F rules, or the Controlled Foreign Corporations

(ìCFCî) regulations, as part of the 1962 Tax Revenue Act.70 These

regulations identified corporate forms that were more prone to tax

avoidance and specified several categories of income that would be

subject to U.S. income tax, because certain types of income could easily

While many nations define a resident corporation, for tax purposes, as

a company incorporated in the state, a significant number of countries

have also enacted laws that purport to deem a corporation to be a

resident of the country if the companyís place of central management

is located domestically or, more rarely, if the corporationís principal

economic activities are conducted locally.

Id. The central place of management test looks more to the substance rather than the form

of the corporation. See Avi-Yonah, supra note 52, at 486 (explaining the advantages and

disadvantages of the central place of management test used in the United Kingdom).

68 See Andrew Brady Spalding, The Irony of International Business Law: U.S. Progressivism

and Chinaís New Laissez-Faire, 59 UCLA L. REV. 354, 386 (2011) (ìWhen a foreign-chartered

corporation is owned by a U.S. corporation, the result is that profits attributable to U.S.

shareholders escape U.S. tax as long as they are reinvested in foreign tax jurisdictions;

hence the frequent establishment of subsidiaries in low-tax foreign jurisdictions.î); Avi-

Yonah et al., supra note 42, at 499ñ500 (examining some specifics in the U.S. tax system and

noting how the U.S. system creates an incentive for corporations to earn profits in countries

with lower tax rates). The process of companies keeping funds in their overseas

subsidiaries and not repatriating them until they need capital is known as deferral. Id.

Companies employ this tactic because the money earned by the subsidiary is deemed to be

of a foreign corporation until it is attributed to the U.S. parent. Id.

69 See Gravelle, supra note 22, at 76 (describing the scheme that Google uses, which is

commonly referred to as the ìDouble Irishî with a ìDutch Sandwichî); Jesse Drucker, The

Tax Haven Thatís Saving Google Billions, BLOOMBERG BUSINESSWEEK (Oct. 21, 2010),

http://www.businessweek.com/magazine/content/10_44/b4201043146825.htm

(explaining the entire process that Google goes through in order to cut their effective

corporate tax rate from 35% to 2.4%).

70 Revenue Act of 1962, Pub. L. No. 87-834, ß 956(d), 76 Stat. 960 (codified as amended in

scattered sections of 26 I.R.C.); see I.R.C. ß 957 (2006) (defining a controlled foreign

corporation in the Tax Code); GRAETZ, supra note 30, at 218 (defining a ìcontrolled foreign

corporationî or ìCFCî as a ìforeign corporation that is majority owned by U.S. individuals

or corporations, counting only those U.S. shareholders who hold 10% or more of the

stockî); Keith Engel, Tax Neutrality to the Left, International Competitiveness to the Right, Stuck

in the Middle with Subpart F, 79 TEX. L. REV. 1525, 1538ñ40 (2001) (explaining the history of

subpart F and how President Kennedyís administration worked to enact it); Adam H.

Rosenzweig, Why Are There Tax Havens?, 52 WM. & MARY L. REV. 923, 974ñ76 (2010)

(examining the history of the subpart F regulations and why they were enacted).

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be shifted to low-tax jurisdictions.71 Under these rules, specific U.S.

corporations are taxed to the extent that their foreign subsidiaries

received disfavored forms of income, which were most likely aimed at

shifting income.72 Corporations, such as Google, are still finding ways to

manipulate their form, circumventing the controlled foreign corporation

label.73 These rules are objective, mechanical, and designed to isolate

income typically associated with tax avoidance.74 This has led to layers

upon layers of technical rules aimed at retroactively fixing a specific

problem; however, these rules simultaneously create another loophole.75

2. Earnings Stripping

Earnings Stripping is a tax avoidance technique in which a U.S.

corporation sets up a subsidiary in a low-tax country, and then the U.S.

corporation uses its U.S. earnings and makes deductible payments to the

71 See Charles E. McLure Jr., Legislative, Judicial, Soft Law, and Cooperative Approaches to

Harmonizing Corporate Income Taxes in the U.S. and the E.U., 14 COLUM. J. EUR. L. 377, 389

(2008) (explaining how CFC regulations target certain corporations that are prone to shift

their income); GRAETZ, supra note 30, at 218 (noting that most controlled foreign

corporations were formed for the sole reason of moving their passive income); see also

I.R.C. ß 954(c)(1)ñ(2) (2006) (codifying the different types of income that the subpart F

regulations apply to); Engel, supra note 70, at 1542ñ48 (examining the major categories of

income targeted under Subpart F including: passive income, diversionary sales income,

diversionary services income, and miscellaneous provisions). The biggest category that

companies abuse is passive income, which includes dividends, interest, rents, royalties,

stocks, and securities. Id. at 1542.

72 See GRAETZ, supra note 30, at 220 (maintaining that the disfavored forms of business

income include income involving structures that shift income outside a foreign subsidiaryís

place of incorporation with little or no economic cost); see also supra note 71 (naming types

of income to which controlled foreign corporation regulations are aimed).

73 See I.R.C. ß 957 (2006) (providing that a corporation is considered a ìcontrolled foreign

corporationî when a certain percentage of stock is owned by U.S. shareholders). If

subsidiaries are owned by means other than stock, then these controlled foreign

corporation regulations can be avoided. Id. See also GRAETZ, supra note 30, at 236

(explaining a few other ways that controlled foreign corporation regulations can be

avoided). Corporations avoid these regulations by becoming a hybrid entity and

transferring income inter-branch. Id. Another way to avoid these regulations is contracting

out the actual processing or manufacturing into a low-tax jurisdiction. Id. at 236ñ37.

74 See sources cited supra note 50 (explaining why tax laws in the United States appear to

be so complicated); see also Ilya A. Lipin, Uncertain Tax Positions and the New Tax Policy of

Disclosure Through the Schedule UTP, 30 VA. TAX REV. 663, 665ñ67 (2011) (explaining that

U.S. tax laws contain ambiguities, obscurities, and perplexities, which make their

interaction and application to specific situations incoherent and complex).

75 See Lipin, supra note 74, at 665ñ67 (explaining that there are over seventy thousand

pages of tax code that have been changed over fifteen thousand times, with each new

change creating an opportunity for exploitation); see also sources cited supra note 50

(providing an explanation for why the U.S. Tax Code is so difficult to apply).

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subsidiary in the form of interest, royalties, or fees. 76 This ìstripsî the

earnings from the U.S. corporation and transfers the majority of the

income to the country with the low tax rate.77 For example, the foreign

subsidiary could make a loan to the U.S. parent, and in return the parent

would make extremely high interest payments back to the subsidiary.78

In 2006, Google, Inc. (U.S.) implemented a form of earnings stripping

when it licensed the rights of its intellectual property to its subsidiary in

Bermuda for ìundisclosedî fees.79 These fees are ongoing and are set

very low in order to capture as much profit as possible in Bermuda,

which does not have a corporate income tax.80

76 See Press Release, supra note 4 (describing the process that corporations go through in

order to shift their income to subsidiaries in countries with lower tax rates). Traditionally,

if a U.S. company sets up a foreign subsidiary in a tax haven and one in another country,

income shifted between the two subsidiariesófor example, through interest on loansó

would be considered ìpassive incomeî for the U.S. company and subject to U.S. tax. Id.

Over the last decade, it has become easier for U.S. firms to make these subsidiaries

disappear for U.S. tax purposes. Id. With the separate subsidiaries disregarded, the firm

can shift income among them without reporting any passive income or paying any U.S. tax.

Id. As a result, U.S. firms that invest overseas are able to shift their income to tax havens.

Id. ìIt is clear that this loophole, while legal, has become a reason to shift billions of dollars

in investments from the United States to other counties.î Id. See also Ilan Benshalom,

Taxing the Financial Income of Multinational Enterprises by Employing a Hybrid Formulary and

Armís Length Allocation Method, 28 VA. TAX REV. 619, 641ñ42 (2009) (acknowledging that the

traditional earnings stripping technique involved debt, but also maintaining that it could

be replicated using other types of related transactions); Robert E. Culbertson & Jaime E.

King, U.S. Rules on Earnings Stripping: Background, Structure, and Treaty Interaction, 29 TAX

NOTES INTíL 1161, 1161ñ62, 1166ñ68 (2003) (explaining the background of earnings

stripping); Kleinbard, supra note 45, at 703 (defining earnings stripping as ìthe extraction of

pretax earnings from a source country through tax-deductible payments to offshore

affiliatesî).

77 See Culbertson & King, supra note 76, at 1161ñ68 (explaining that foreign investors can

take advantage of debt structuring to strip their earnings to a low-tax jurisdiction);

Kleinbard, supra note 45, at 706 (noting that earnings stripping is a type of leveraging

technique that strips countries of attributable tax revenue).

78 See Ilan Benshalom, How to Live with a Tax Code with Which You Disagree: Doctrine,

Optimal Tax, Common Sense, and the Debt-Equity Distinction, 88 N.C. L. REV. 1217, 1218 (2010)

(ìRemarkably, the current rules are ineffective even in preventing tax revenue loss because

they fail to recognize the weakest link in terms of tax erosionóinterest payments made to

foreign investors.î); Kleinbard, supra note 45, at 705 (explaining that earnings stripping

usually occurs through the creation of an item of income inclusion, such as intercompany

interest, rents, or royalties).

79 See Drucker, supra note 69 (explaining Googleís entire tax avoidance strategy); see

Gravelle, supra note 22, at 76 (giving a brief summary of Googleís tax avoidance process);

Kleinbard, supra note 45, at 711ñ12 (explaining that the earnings stripping step in Googleís

tax avoidance process is the last step after which most of its income comes to rest in

Bermuda).

80 Drucker, supra note 69. Drucker goes on to explain:

The subsidiary is supposed to pay an ìarmís lengthî price for the

rights, or the same amount an unrelated company would. Yet because

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One way that Congress tried to stop this type of behavior was by

passing the Revenue Reconciliation Act of 1989, which codified the

earnings stripping rule as section 163(j) of the Tax Code.81 Under this

regulation, certain rules applied to corporations with debt/equity ratios

greater than 1.5 to 1.82 In other words, if the company was structured so

that it paid out more than half of its cash flow as interest expenses, then

the interest payments would be treated as excess interest and not interest

income for taxing purposes.83 Corporations are still able to manipulate

and restructure to make their ratios appear lower than they actually

are.84 This rule is also aimed specifically at earnings stripping involving

debt and does not consider earnings stripping involving other forms of

intercompany payments, such as Googleís use of fees.85

3. Transfer Pricing

Transfer pricing is probably the most used tax avoidance strategy,

which involves the setting of prices in transactions between related

entities.86 A common example occurs when a U.S. parent corporation

licensing fees from the Irish subsidiary generate income that is taxed at

35 percent, one of the highest corporate rates in the world, Google has

an incentive to set the licensing price as low as possible.

Id.

81 Revenue Reconciliation Act of 1989, Pub. L. No. 101ñ239, ß 7210(a), 103 Stat. 2106,

2339; I.R.C. ß 163(j)(2)(A)ñ(C) (2006) (describing the earnings stripping rules for

corporations); Julie A. Roin, Adding Insult to Injury: The ìEnhancementî of S 163(J) and the

Tax Treatment of Foreign Investors in the United States, 49 TAX L. REV. 269, 270 (1994)

(commenting that section 163(J) is known as the ìearnings stripping ruleî because it

prevents shareholders from using interest payments to strip corporations of their earnings).

82 See I.R.C. ß 163(j)(2)(A)ñ(C) (2006) (providing the statutory rules designed to prevent

corporations from abusing the debt to equity form in order to avoid paying taxes).

83 See Culbertson & King, supra note 76, at 1167ñ68 (explaining section 163(J) represents

the principle that a corporation should not be able to filter its income through interest or

any other kind of intra-company payments to reduce its tax liability).

84 See Claire A. Hill, Why Financial Appearances Might Matter: An Explanation for ìDirty

Poolingî and Some Other Types of Financial Cosmetics, 22 DEL. J. CORP. L. 141, 168ñ70 (1997)

(explaining that companies use debt/equity swaps and other transactions to manipulate

their ratio for a purely cosmetic effect). Not only will the company be able to bypass the

earnings stripping rules, but it also will look more attractive to future investors. Id.

85 See I.R.C. ß 163(j)(2)(A)ñ(C) (giving the rules associated with stopping earnings

stripping). These rules do not contain any regulations for fees, rents, or royalties and only

relate to earnings stripping by debt. Id. See also Benshalom, supra note 76, at 641

(mentioning how earnings stripping could also be accomplished by manipulating a variety

of different financial transactions).

86 See GRAETZ, supra note 30, at 400 (explaining that the common transfer pricing strategy

involves income that is earned by a high tax rate entity being somehow realized by a

subsidiary that pays tax at a lower rate). Corporations that own subsidiaries in low-tax

jurisdictions usually engage in transfer pricing to shift income through the manufacturing

process without lowering the overall economic profit per transaction. Id. at 401. See About

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2012] Closing International Loopholes 333

interacts with a foreign subsidiary, and that subsidiary sells either goods

or services abroad.87 The U.S. corporation can then ìsell,î on paper, the

product to its foreign subsidiary for a minimum price so that most of the

profit is captured in the foreign country with the lower tax rate.88

Transfer pricing is a problem because there is not one globally

recognized tax code, and corporations are always searching for ways to

maximize profit.89 Google, Inc. (U.S.) also employs a form of transfer

pricing, in which it licenses its search and advertising technology to

Google Ireland in return for licensing payments.90 The licensing

Transfer Pricing, OECD CTR. TAX POLíY & ADMIN. (last updated July 2010),

http://www.oecd.org/ctp/transferpricing/abouttransferpricing.htm (explaining the

process of transfer pricing generally); see also Eduardo Baistrocchi, The Transfer Pricing

Problem: A Global Proposal for Simplification, 59 TAX LAW. 941, 949 (2006) (defining transfer

price as ìthe unit price assigned to goods and services between the parent company and

subsidiaries or between divisions within the same firmî).

87 See John Sokatch, Transfer-Pricing with Software Allows for Effective Circumvention of Sub-

Part F Income: Googleís ìSandwichî Costs Taxpayers Millions, 45 INTíL LAW. 725, 739 (2011)

(ìTransfer-pricing is the practice of making payments from one business entity to another

affiliated business entity for the receipt of goods or services.î).

88 See GRAETZ, supra note 30, at 400 (explaining transfer pricing and the allocation of

income among related parties). An example is provided:

Suppose that Company A, a U.S. corporation, manufactures

contact lenses. Most of Company Aís product is sold abroad through a

wholly owned subsidiary, Company B. Each lens costs $5 to

manufacture and is sold to the public abroad for $9 by Company B.

Suppose that Company B is a wholly-owned subsidiary of Company

A, then Company A may, by controlling the sales price of the lenses, be

able to choose in which jurisdiction its taxable income is realized.

Company A may attempt to realize the bulk of its income in the

foreign jurisdiction by selling contact lenses to Company B for say,

$5.25, resulting in a token profit of $0.25 per lens in the U.S. Company

B will realize profit of $3.75 per lens ($9.00 minus the $5.25 it paid for

each lens from Company A). Absent a challenge by the IRS, for the

purpose of allocating income from the sales of each lens for

determining income tax owed, the profit will be split between

Companies A and B, with only 25 cents of profit realized in the U.S.

and $3.75 in Company Bís low-tax jurisdiction for each lens produced

and sold.

Id.

89 See Miguel Gonz·lez Marcos, Seclusion in (Fiscal) Paradise is Not an Option: The OECD

Harmful Tax Practices Initiative and Offshore Financial Centers, 24 N.Y. INTíL L. REV. 1, 22ñ23

(2011) (explaining that tax policies are efficient if they minimize tax considerations in

corporationsí decision making); Sokatch, supra note 87, at 739 (noting that corporations and

consumers always search for ways to ìre-captureî profits that would normally be

attributed to taxes); see also Ian B. Lee, Corporate Law, Profit Maximization, and the

ìResponsibleî Shareholder, 10 STAN. J.L. BUS. & FIN. 31, 31ñ32 (2005) (explaining the main

goals of a corporation).

90 See Kleinbard, supra note 45, at 707 (noting that Google Ireland Holdings operated

with five total employees in 2003); Sokatch, supra note 87, at 740 (explaining that Google

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agreement allows Google to attribute its overseas profits to its Irish

operations, instead of the United States where most of the technology

was developed.91

One way that the IRS tried to combat transfer pricing was through

the Armís Length Standard.92 This standard states that ìin determining

the true taxable income of a controlled taxpayer, the standard to be

applied in every case is that of a taxpayer dealing at armís length with an

uncontrolled taxpayer.î93 This standard is met if uncontrolled taxpayers

would have engaged in the same transactions under the same

circumstances.94 However, this standard creates uncertainty because

neither the taxpayer nor the market can predict in advance what a

reasonable outcome should be in a transfer pricing case, especially for

unique goods.95

4. Putting It All TogetheróGoogleís ìDouble Irish Dutch Sandwichî

These three techniques all involve methods of manipulating financial

statements to lower income, but Google has combined these three

methods, creating what has become known as the ìDouble Irish Dutch

Ireland Holdings is in control of Googleís ìsearch engine software, advertising banners,

and the Android platformî).

91 See Drucker, supra note 69 (explaining that although Googleís money filters through

its Irish subsidiary, the money still has another step in Googleís tax avoidance scheme); see

supra note 55 (explaining the problem that arises with attributing the source of e-commerce,

intellectual property, formulas, and designs).

92 See I.R.C. ß 482 (2006) (codifying the Armís Length Standard); see also supra note 80

(explaining the meaning of the Armís Length Standard).

93 Treas. Reg. ß 1.482(b)(1) (1994); see REUVEN S. AVI-YONAH, INTERNATIONAL TAX AS

INTERNATIONAL LAW: AN ANALYSIS OF THE INTERNATIONAL TAX REGIME 6ñ7 (2007)

(maintaining that one is only engaged in the Armís Length Standard as long as he or she is

looking for comparable prices); see also GRAETZ, supra note 30, at 407 (explaining that the

Armís Length Standard requires that parties to a transaction not only calculate their

respective profits separately, but also that related parties treat transactions as if unrelated

parties had entered into them).

94 See Yehonatan Givati, Resolving Legal Uncertainty: The Unfulfilled Promise of Advance

Tax Ruling, 29 VA. TAX REV. 137, 170 n.113 (2009) (explaining that the applicable standard in

every case is that of a taxpayer dealing at armís length with an uncontrolled taxpayer).

95 See Reuven S. Avi-Yonah, The Rise and Fall of Armís Length: A Study in the Evolution of

U.S. International Taxation, 15 VA. TAX REV. 89, 137 (1995) (explaining that the Armís Length

Standard leads to uncertainty because ìneither the taxpayer nor the IRS can know in

advance the likely revenue outcome in a transfer pricing caseî); Wayne M. Gazur, An Armís

Length Solution to the Shareholder Loan Tax Puzzle, 40 SETON HALL L. REV. 407, 428ñ29 (2010)

(establishing that an Armís Length Standard might be hard to prove in the majority of

markets); see also Benshalom, supra note 76, at 621 (noting that another flaw in the Armís

Length Standard is that it requires unrealistic levels of government monitoring and can be

easily abused).

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2012] Closing International Loopholes 335

Sandwich.î96 Google has created four separate subsidiaries and has used

conflicting tax codes, as well as bilateral tax agreements to avoid paying

almost any U.S. taxes.97 Google licenses to Google Ireland Holdings, a

shell company with only two thousand employees, the offshore rights to

its intellectual property for undisclosed fees so that the United States has

an incentive to set a very low price.98 Next, while Google Ireland

Holdings is an Irish company, it reports that its place of management

(Irish residence rule) is centered in Bermuda, exempting it from Irish

taxes.99 Google Ireland Holdings gets credit for about 88% of the

companyís overseas sales, yet reported a pre-tax profit of less than 1% of

sales in 2008, in large part because of the $5.4 billion in royalties it paid,

indirectly, to the Bermuda managed company.100 Finally, the royalty

payments from Google Ireland Holdings in Dublin take a quick detour to

the Netherlands to avoid triggering an Irish withholding tax.101 In

Amsterdam, Google Netherlands Holdings BV paid out 99.8% of the $5.4

billion it received from Dublin to the unit managed in Bermuda.102 The

Dutch company has no employees, meeting the definition of a shell

corporation.103 Other corporations have now engaged in similar

practices, which costs the United States billions of dollars in tax revenue

annually.104 Now that this Note has described the tax avoidance

problem, it will define a few popular proposals to fix this problem.105

D. Popular Proposals

The four most popular proposals to fix the corporate tax avoidance

problem in the United States include: (1) lowering the corporate tax rate,

96 See Sokatch, supra note 87, at 741 (explaining how this scheme received its name).

97 See id. at 740 (explaining how Google developed its tax avoidance scheme).

98 See id. at 740ñ42 (describing the first step of Googleís process); Drucker, supra note 69

(explaining how Google uses the strategy of earnings stripping in the Netherlands).

99 See Drucker, supra note 69 (explaining how Google manipulates the residence rules

and filters their income through a complicated system of shell companies); see also supra

Part II.B (providing a background for the U.S. corporate residence rules).

100 See Jesse Drucker, Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes,

BLOOMBERG BUSINESSWEEK (Oct. 21, 2010), http://www.bloomberg.com/news/2010-10-

21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html

(explaining how Google uses the transfer pricing method of tax avoidance).

101 Id. (explaining the final step in Googleís tax avoidance scheme).

102 Id. (describing Googleís use of Bermudaís tax haven).

103 See Sokatch, supra note 87, at 742 (evaluating the final numbers after Google has

utilized several tax avoidance techniques.)

104 See id. (explaining how other corporations are using the same type of techniques); see

also supra note 7 (describing the widespread use of tax avoidance techniques by

corporations all over the world).

105 See infra Part II.D (defining a few popular proposals to fix the tax avoidance problem

in the United States); infra Part IV (proposing a change to the tax base).

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(2) shifting the U.S. tax system to a pure territorial tax, (3) continuing to

add provisions to the Tax Code to address specific problems, and (4)

using a formulary apportionment to tax corporations.106 Lowering the

corporate rate refers to lowering the 35% corporate rate to a rate

comparable to tax havens and other low-tax jurisdictions.107 This has

become especially popular since President Obama made a proposal to

lower the standard corporate tax rate from 35% to 28%.108 This plan

focuses on attracting investment to the United States while reducing one

of the highest tax rates in the world.109 Shifting to a pure territorial tax

implies that the United States would no longer tax U.S. corporations on

the basis of residency, taxing corporations based only on their U.S.

source income.110 This is the way that most industrialized countries

currently tax corporations.111 There has been much support for this

106 See infra text accompanying notes 106ñ18 (explaining generally these four proposals).

107 See Kathryn J. Kennedy, The IRSís Recent Uncertain Tax Positions Initiative: A Tangle of

Accounting, Tax and Privilege Issues, 9 DEPAUL BUS. & COM. L.J. 401, 406 (2011)

(acknowledging that lower tax rates could cause businesses to stay in the United States);

Robert T. Kudrle & Lorraine Eden, The Campaign Against Tax Havens: Will it Last? Will it

Work?, 9 STAN. J.L. BUS. & FIN. 37, 41 (2003) (mentioning that firms invest in countries with

low tax rates to give them a tax advantage); Richard T. Page, The International and

Comparative Tax War: A Strategic Tax Cut Recommendation for the Obama Administration, 18

TUL. J. INTíL & COMP. L. 287, 289ñ90 (2009) (listing other countries that have recently

lowered their corporate tax); Meg Shreve, Sessions Open to Paying for Corporate Tax Cut, 130

TAX NOTES 632, 632 (2011) (arguing for lowering the corporate tax rate in the United

States); Martin Feldstein, Want to Boost the Economy? Lower Corporate Tax Rates, WALL ST. J.,

Feb. 15, 2011, http://online.wsj.com/article/SB1000142405274870358480457614413153907

2472.html (explaining how lowering a countryís tax rate can attract investors). But see

Robert A. Green, The Future of Source-Based Taxation of the Income of Multinational Enterprises,

79 CORNELL L. REV. 18, 21 (1993) (asserting that a corporate tax rate war would threaten the

U.S. economy).

108 See Zachary A. Goldfarb, Obama Proposes Lowering Corporate Tax Rate to 28 Percent,

WASH. POST, Feb. 22, 2012, http://www.washingtonpost.com/business/economy/obamato-

propose-lowering-corporate-tax-rate-to-28-percent/2012/02/22/gIQA1sjdSR_story.html

(explaining Obamaís proposal to cut the corporate tax to 28% in order to be competitive

with other countries).

109 Id.

110 See David L. Cameron & Phillip F. Postlewaite, Incremental International Tax Reform: A

Review of Selected Proposals, 30 NW. J. INTíL L. & BUS. 565, 566ñ79 (2010) (describing a few

proposals to fix the international tax avoidance problem in the United States); Michael S.

Knoll, The Corporate Income Tax and the Competitiveness of U.S. Industries, 63 TAX L. REV. 771,

772 (2010) (evaluating the advantages and disadvantages of the United States moving to a

territorial tax); Gravelle, supra note 49, at 491ñ92 (analyzing the territorial and worldwide

tax systems). But see Alex Khachaturian, Reforming the United States Export Tax Policy: An

Alternative to the American Trade War with the European Union, 14 U.C. DAVIS J. INTíL L. &

POLíY 185, 195ñ97 (2008) (supporting the idea of a territorial tax in the United States).

111 See GRAETZ, supra note 30, at 12ñ13 (explaining how most European nations have

territorial systems and do not have a residence tax).

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2012] Closing International Loopholes 337

proposal because of its relative success in European countries.112 The

third proposalóadding specific provisions to the Tax Codeóis how the

United States currently handles tax issues.113 When a problem arises, a

provision is added to the Tax Code to retroactively address it.114

Keeping the corporate tax system this way is the least popular of the

current proposals because of its well documented failures in the past.115

Formulary apportionment is a rather new proposal that suggests using a

formula and basing a corporationís income on a variety of factors.116

This proposal is more modern in that it recognizes the abuse that results

from corporations reporting their own income to the IRS.117 These

proposals have advantages and disadvantages that can be best

understood by first analyzing why these tax avoidance problems are

occurring in the United States.118

III. ANALYSIS

The IRS has struggled in its attempts to create regulations that

prevent U.S. corporations from using tax avoidance techniques.119 Part

III of this Note discusses the various reasons why the IRS has struggled

to combat tax avoidance techniques and the continued effects that

corporate tax avoidance is having on the U.S. economy as a whole.120

More specifically, Part III.A explains the inherent problems contained

within the current U.S. tax base, which make it difficult for the IRS to

112 Id.

113 See, e.g., Stop Tax Haven Abuse Act, ß 681, 111th Cong. ß 7492, Subchapter F (as

introduced by Senator Levin, Mar. 2, 2009) (providing an example of retroactive rules

proposed to the Tax Code); see also Gravelle, supra note 49, at 488ñ89 (explaining some

specific provisions that could be added to the Tax Code); supra note 52 (discussing the

complexity of tax code rules).

114 See Holmes, supra note 9, at 23ñ26 (highlighting the complexities of the Tax Code,

which explains why making tax laws after the fact do not work).

115 See Bordoff & Furman, supra note 3, at 353ñ54 (illustrating the brokenness of the U.S.

corporate tax system).

116 See Avi-Yonah et al., supra note 42, at 498 (advocating for the United States to switch

its tax system to formulary apportionment); Morse, supra note 59, at 599ñ600 (examining

the benefits of formulary apportionment). But see Edward D. Kleinbard, The Lessons of

Stateless Income, 65 TAX L. REV. 99, 149 (2011) (explaining formulary apportionment of

income methodology as ìthe mechanism for allocating a multinational enterpriseís global

income to source countriesî).

117 See Avi-Yonah et al., supra note 42, at 498ñ99 (explaining some benefits of formulary

apportionment).

118 See infra Part III.A (analyzing why these loopholes in the U.S. Tax Code exist).

119 See supra note 7 (noting how much revenue the United States is losing because of tax

avoidance).

120 See infra Part III (discussing various reasons why tax avoidance is a problem in U.S.

tax law).

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create regulations that effectively combat tax avoidance strategies.121

Part III.B examines the continued negative effects that corporate tax

avoidance has on the U.S. economy and some public policy reasons that

support changing the Tax Code to better eliminate these tax loopholes.122

Part III.C evaluates the shortcomings of some popular proposals that

have been offered as solutions to the corporate tax avoidance problem.123

Ultimately, Part III concludes that the existing regulations designed to

address tax avoidance strategies fail to resolve this problem adequately

because of the current structure of the U.S. tax base and that the best

solution to this problem is to change the tax base altogether.124

A. Inherent Problems with Current U.S. Tax Base

ìMore effective taxation internationally is primarily a question of the

tax base.î125 One inherent problem with the current tax base for

corporations is that it promotes manipulation.126 One way it does this is

exemplified in the fact that corporations separately report their income

to the IRS.127 This means that corporations have the added incentive to

report their income as low as possible, pay as little taxes as possible, and

121 See infra Part III.A (explaining the problems that the United States faces from using net

income as the corporate tax base).

122 See infra Part III.B (examining the negative effects that tax avoidance is having on the

U.S. economy).

123 See infra Part III.C (evaluating the advantages and disadvantages of some popular

proposals to fix the tax avoidance problem).

124 See infra Part IV (proposing to fix the corporate tax avoidance problem by changing

the tax base).

125 See Barker, supra note 29, at 651 (explaining generally the importance of having a good

tax base); McCaffery & Hines, supra note 45, at 1041 (stating that the tax structure and rate

depend on the tax base).

126 See Holmes, supra note 9, at 10 (examining some of the shortcomings of the United

Statesí prescriptive corporate tax regime). Holmes explains:

[T]he U.S corporate tax system represents the worst of both worlds: (i)

a high statutory tax rate with relatively low, declining effective rates

(and thus corporate tax revenue); and (ii) complex rules that fail to

protect the corporate tax base, but can be manipulated, with significant

social costs, by sophisticated MNCs to lower their effective rates.

Id.

127 See McIntyre et al., supra note 17, at 706ñ07 (explaining that separate reporting opens

up the opportunity for corporations to employ tax minimization strategies). The article

explains transfer pricing and asserts that combined reporting ìdirectly blocks these

techniques and other similar tax-minimization strategies.î Id. See Mazerov, supra note 17,

at 4 (ìIn combined-reporting states, however, corporate manipulation of transfer prices

does not affect state corporate tax revenues. Since the profits of a corporationís

components are added together to determine the corporationís taxable base, the allocation

of those profits within the corporation is irrelevant.î).

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thus maximize their after tax profits.128 Because there is a lack of

cooperation between countries on how high or low to set the tax rate for

corporations, countries tend to undercut one another with lower tax

rates so they can attract foreign investment.129 If corporations can

manipulate their income so that it looks as though it was earned in a

low-tax jurisdiction, then they can lower their tax liability.130 Former IRS

Commissioner Mark Everson noted that large multinational corporations

will ìutilize every available resource to explore opportunities to reduce

their tax liability by using the most intricate and complicated Code

provisions . . . .î131 Corporations do not have an incentive to keep the

income figure that they report to the IRS high, and the IRS cannot make

laws forcing them to pay because of state sovereignty.132

Since these rules were enacted, the U.S. economy has changed

dramatically.133 Increases in technology have led to globalization, which

has made it easier for capital and resources to be shifted

internationally.134 The current tax base was created without this new

128 See McIntyre et al., supra note 17, at 708 (explaining that when income is separately

reported, there is a higher likelihood of tax avoidance); see also Holmes, supra note 9, at 8

(asserting that taxes tend to be a very critical part in a large corporationís decision making

processes because it is focused on maximizing its after-tax profits); Marcos, supra note 89, at

22ñ23 (explaining the goals of efficient tax policies).

129 See Rosenzweig, supra note 70, at 955 (explaining that tax havens exist because

countries that cannot compete in a competitive market can attract investors by offering a

minimal tax rate); Ring, supra note 5, at 184 (explaining that countries lower their tax rates

to attract business); Addison, supra note 3, at 711 (ìA state becomes a tax haven for one

undeniable reason: to attract capital to help promote growth in its financial industry.î).

130 See, e.g., GRAETZ, supra note 30, at 400 (providing one method whereby corporations

can shift the origin of their earned income); Kleinbard, supra note 45, at 735 (identifying

cost sharing agreements as another popular way that corporations like to shift their

profits).

131 Senate Committee on Homeland Security and Governmental Affairsí Permanent

Subcommittee on Investigations Hearing on Offshore Abuses: The Enablers, the Tools and Offshore

Secrecy, 109th Cong. 2 (2006) (statement of Mark Everson, Commír, Internal Revenue),

available at www.hsgac.senate.gov/download/stmt-8-1-06-everson-mark-irs. See Weisbach,

supra note 46, at 867 (explaining that nations assert tax sovereignty because they want to

control revenue and fiscal policy); Kaplow, supra note 53, at 571ñ72 (explaining the

complexity of tax rules compared to that of tax standards).

132 See Ring, supra note 5, at 160, 170 (explaining that countries are the supreme source of

control over their respective tax laws); supra note 44 and accompanying text (explaining

that the United States cannot enforce a tax regulation on a foreign corporation that derived

its income outside of the United States).

133 See Bordoff & Furman, supra note 3, at 341 (ìThe U.S. economy has become

increasingly integrated with the rest of the world over the past twenty years, due to

advances in technology and transportation. The result has been greater flows across

borders of goods, services, capital, people, and ideas.î).

134 See Benshalom, supra note 5, at 166 (noting the change in the corporate structure due

to globalization); Holmes, supra note 9, at 7 (ìGlobalization has both magnified the

competitive pressures that MNCs feel from their foreign competitors and increased the

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technology in mind, and the United States cannot easily account for this

change because the problem extends internationally.135 The IRS is not

able to hold these corporations liable for their tax avoidance, because

their behavior is completely legal in the United States.136

Another problem with the current tax base is that it was enacted, for

the most part, in 1962 and 1986.137 As technology and the U.S. economy

changed, the IRS addressed the changing needs of the corporate tax

system by adding patchwork rules to the framework, instead of

reviewing and reformulating the tax base as a whole.138 This created a

very complex set of rules to compensate for the outdated tax base.139

Corporations have found ways around most of these rules, because the

rules lack coherence and uniformity, often working to counteract each

other.140

ability of jurisdictions around the world to effectively compete for their resources.î). See

generally Birdsall, supra note 5 (describing the globalization of the last few decades).

135 See Avi-Yonah, supra note 3, at 1575ñ76 (discussing how the increased mobility of

capital due to technological advances has led to international tax competition, because

companies can easily shift capital to low-tax jurisdictions).

136 See Tillinghast, supra note 5, at 38ñ39 (explaining how the IRS has certain powers in

enforcing tax laws within the United States that it lacks in other jurisdictions). The IRS

does not have a practical way to enforce U.S. tax liabilities on foreign corporations. Id. See

also supra note 5 (explaining the limits on the U.S. taxing authority).

137 Revenue Act of 1962, Pub. L. No. 87-834, ß 12(a), 76 Stat. 1009 (codified as amended at

26 U.S.C. ß 954 (2006)). The most significant changes to the international tax system since

the 1960s occurred in the Tax Reform Act of 1986, which adopted changes to the income

source, expense allocation, and foreign tax credit rules; however, these changes did not

alter the fundamental system. See generally Peter H. Blessing et al., Report of the Task Force

on International Tax Reform, 59 TAX LAW. 649 (2006).

138 See Holmes, supra note 9, at 11ñ12 (summarizing the American Bar Associationís

findings regarding the U.S. tax system). Holmes provides the following conclusions:

As a result, the United States has gone ìfrom a complex to a supercomplex

regime . . . .î Indeed, the American Bar Association, in its

recent report evaluating various tax reform proposals, recognized that

the ìaccretion of tax rules without periodic thorough reviews of the

needs of the systemî is a key source of complexity in the corporate tax

regime.

Id. (footnotes omitted). The enormous complexity of the tax system creates efficiency,

administrative, and equity problems. Id. This includes the increased compliance costs to

taxpayers, challenging administrative enforcement, and proliferation of high cost tax

planning. Id. See also note 46 (noting the complexity of the U.S. Tax Code).

139 See Barker, supra note 29, at 649ñ50 (noting that Congress adds patches to the existing

system to close loopholes and raise additional revenue); see also Holmes, supra note 9, at 11

(recommending a fundamental review of the outdated tax system); Weisbach, supra note

46, at 882 (explaining the downfalls of putting rules on top of rules); supra note 46

(explaining the intricacies and complexities of U.S. tax laws).

140 See Barton, supra note 8, at 1050 (ìThe IRS attempts to close the loopholes that allow

MNCs to avoid paying taxes on money that the U.S. Treasury should be entitled to tax. Yet

these practices have essentially created a game of cat and mouse, and companies always

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B. Negative Effects

These tax avoidance strategies are continuing to have negative

effects on the U.S. economy by unfairly draining significant tax revenue

away from the U.S. government.141 This is harmful because the U.S.

government then has to raise revenue in other ways (like raising taxes on

individuals) to make up for the large U.S. deficit, instead of using these

corporate funds.142 The first function of taxation is to raise revenue to

pay for the benefits associated with being a U.S. citizen or business.143 If

the larger corporations are not paying their corporate income tax, then

they are, in effect, passing these costs onto someone else while still

utilizing the same U.S. economy, infrastructure, and other benefits that

the United States provides.144

Another negative effect that these tax avoidance strategies have on

the United States is the long-term loss of jobs and capital to other

countries.145 U.S. corporations that employ these tax avoidance

strategies end up attributing most of their money to these low-tax

jurisdictions in order to pay less.146 The money is not taxed until it is

brought back, or repatriated, to the United States.147 This creates the fear

that the United States will permanently lose jobs, assets, and production

seem one step ahead of the government.î); see also Lynch, supra note 15 (explaining that big

corporations will always try to find ways to save money on taxes).

141 See Hirsch, supra note 2 (explaining that U.S. multinational corporations are

collectively avoiding anywhere between $10 billion and $60 billion a year in taxes by

shifting their earnings on paper to overseas subsidiaries); Bill McGuire, U.S. Debt Tops $15

Trillion Mark Today, ABC NEWS (Nov. 16, 2011), http://abcnews.go.com/blogs/

business/2011/11/u-s-debt-will-top-15-trillion-mark-today/ (noting the record breaking

debt in the United States); see also Tansill, supra note 7, at 294 (describing how President

Obamaís administration planned to make laws stopping tax avoidance techniques so that

money could be put towards the U.S. deficit).

142 See Sokatch, supra note 87, at 747 (explaining that the United States will try to find

ways to stop tax avoidance so it can pay for its historically high national deficit); Shah,

supra note 7 (explaining that most governments tax the population to compensate for the

lost revenue from corporate tax avoidance).

143 See sources cited supra note 32 (providing a variety of sources that explain the benefits

theory of taxation).

144 See Hirsch, supra note 2 (providing a study of the largest U.S. corporations); see also

Shah, supra note 7 (explaining that individual taxes are raised as a result of corporate tax

avoidance).

145 See Press Release, supra note 4 (explaining how the United States has lost jobs to

foreign countries because these countries offer tax incentives, encouraging corporations to

move their operations overseas); Rosenzweig, supra note 70, at 956 (describing how low-tax

jurisdictions attract investment).

146 See supra Part II.C (stating that the goal of avoidance techniques is to make the IRS

attribute earnings to a country with lower taxes).

147 See supra notes 42, 44ñ45, 50 (analyzing tax deferral and explaining that corporations

are not taxed until they repatriate the money back into the United States).

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to foreign jurisdictions, because it is much cheaper for corporations to

operate abroad.148 On the other hand, the United States arguably has the

most attractive market when it comes to investment and, no matter how

cheap investment is in other jurisdictions, corporations will still invest in

the United States because of the how much it imports.149

The policy arguments heavily favor the need to change the corporate

tax system to account for these tax avoidance strategies.150 The United

States never intended for these corporations to avoid paying corporate

income tax.151 According to the benefit theory of taxation and other

equity theories, these corporations should be required to pay their

corporate taxes even if they have the resources to find loopholes in the

system.152 The question is not whether it should be done, but rather

what is the most effective way to remedy the problem.153 Next, this Note

analyzes some common proposals to fix this problem before ultimately

concluding that, instead of adding another regulation to the current

complex Tax Code, the United States should change its tax base

altogether.154

C. Popular Proposals

As the tax avoidance problem has persisted, the public has opposed

the corporate use of tax avoidance techniques and supported corporate

148 See Hufbauer & Kim, supra note 60, at 2 n.6 (discussing the United Statesí downward

trend in the world economy and how the United States is losing its competitive advantage

against the emerging economies of Brazil, Russia, India, China, and Korea).

149 See The Worldís Largest Economies, supra note 14 (identifying the top economies in the

world). The U.S. is the largest economy in the world, thus the largest consumer of goods

and services in the world. Id.

150 See Gravelle, supra note 22, at 89ñ90 (explaining some policy arguments for the need

for corporate tax reform in the United States). See generally JOINT REP. WHITE HOUSE &

DEPíT TREASURY, THE PRESIDENTíS FRAMEWORK FOR BUSINESS TAX REFORM (Feb. 2012),

http://www.treasury.gov/resource-center/tax-policy/Documents/The-Presidents-

Framework-for-Business-Tax-Reform-02-22-2012.pdf (explaining the push towards closing

loopholes, broadening the tax base, and cutting corporate tax rates).

151 See GRAVELLE, supra note 2, at 13 (explaining the definition of tax avoidance). There

are a variety of factors that give corporations the ability to avoid taxes, none of which are

because the United States wanted it. See generally Part II (explaining the background of the

U.S. tax structure and how tax avoidance came to be).

152 See supra note 32 (describing the benefit theory of taxation); see also Holmes, supra note

9, at 13 (explaining that when corporations spend dollars on tax planning it creates an

extraordinary amount of social waste and can result in lower profits, higher prices for

goods and services for customers, and decreased capital available for domestic and foreign

investment).

153 See THE PRESIDENTíS FRAMEWORK FOR BUSINESS TAX REFORM, supra note 150, at 1

(noting that Americaís system of business taxation is in need of reform).

154 See infra Part III.C (examining the disadvantages of some popular proposals to fix the

tax avoidance problem).

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2012] Closing International Loopholes 343

tax reform.155 Part III.C.1 evaluates what would happen if the United

States tried lowering its tax rate; Part III.C.2 examines the possibility of

shifting to a territorial tax; Part III.C.3 looks at the option of continuing

with the same strategy; and Part III.C.4 assesses the option of formulary

apportionment.156

1. Lowering the Corporate Tax Rate

One common proposal is for the United States to lower its corporate

tax rate to be more competitive with other countries.157 In theory, this

would solve the tax avoidance problem because if the United States

lowers the rate, there will no longer be an incentive for corporations to

shift their income abroad.158 Some positives of this approach are that it

would attract more foreign investment and keep domestic corporations

from shifting their earnings abroad.159 The major reason why this would

not work is that corporations are greedy and even if the United States

lowers its corporate rate, there will always be lower tax jurisdictions to

which corporations will try to shift their earnings.160 For example, if

President Obamaís proposal to cut corporate tax rates to 28% passes,

corporations, such as Google, that use tax avoidance strategies to cut

their effective tax rate to around 3% will still be saving a substantial

amount of money by using these strategies.161 The fact that the rate is

lower will not matter because another country will probably have a

lower rate.162

2. Shifting to a Pure Territorial Tax

Another common proposal is to stop taxing corporations based on

incorporation and only tax them based on where income is earned, like

155 See Faulhaber, supra note 7, at 178ñ79 (explaining that public opposition grew on a

global scale as the issue of tax avoidance become more well-known).

156 See infra Part III.C.1 (discussing the possibility of lowering the tax rate); infra Part

III.C.2 (describing the territorial tax); infra Part III.C.3 (listing specific provisions of the

current Tax Code); infra Part III.C.4 (evaluating formulary apportionment).

157 See Kennedy, supra note 107, at 406 (discussing lowering the corporate tax rate as a

means of competing with low-tax jurisdictions).

158 Id.; see also supra Part II.C (explaining four popular tax avoidance techniques and

noting that the goal is for corporations to filter their money into a country with a lower tax

rate).

159 See supra note 107 (describing how countries with lower tax rates attract investment

because it costs less to do business there).

160 See Lynch, supra note 15 (explaining that no matter how low the tax rate is,

corporations will try to find new ways around them).

161 Id.

162 Id.

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most other developed countries.163 There would no longer be a foreign

tax credit, which would lead to a more efficient and a more simplified

system.164 This approach would also ensure that the United States

remains an attractive location for multinational corporation

headquarters.165 This proposal is likely to fail, because it would still

incentivize corporations to manipulate their income.166 Corporations

could continue to transfer income into jurisdictions with a lower source

tax rate; thus, unless the United States had the lowest tax rate in the

world, there would still be the incentive to shift income.167 Although this

approach would simplify the tax system, the same worries about income

manipulation would exist as they do now.168

3. Specific Provisions to Address Tax Avoidance

Another popular proposal is to keep the U.S. tax system as is and

continue adding provisions to the Tax Code when specific problems

163 See Rosenzweig, supra note 70, at 964ñ66 (explaining how a country would go about

imposing a territorial tax); see also Barker, supra note 29, at 715 (advocating a territorial

approach to corporate taxation); Gravelle, supra note 49, at 491 (offering analyses of these

proposals and indicating that switching to a territorial tax would raise tax revenues in the

United States by $10 billion); Kleinbard, supra note 45, at 701 (noting that there is pressure

on the United States to change to a territorial tax system); Shaviro, supra note 39, at 378

(explaining that all of the other world industrial powers use a territorial tax system). See

generally supra Part II (explaining the territorial tax system).

164 See Brown, supra note 56, at 589ñ90 (explaining that countries using a foreign tax credit

give primary taxing authority to the source country); see also Fleming, Jr. et al., supra note

48, at 82 (discussing the complexity and heavy administrative costs of the foreign tax credit

system); supra Part II (laying out the basics of the territorial tax system).

165 See Knoll, supra note 110, at 782ñ83 (noting that if the United States adopted a

territorial tax, it would remove the unduly tax burden of being a U.S. corporation and

attract more investors); Rosenzweig, supra note 70, at 965 (explaining that a territorial tax

leads to tax competition among countries); Shaviro, supra note 39, at 378 (asserting that as

long as the territorial tax rate is comparable to other industrialized countries, corporations

will not shy away from investing in the United States).

166 See Rosenzweig, supra note 70, at 965 (noting that manipulation can still occur under a

pure territorial tax system).

167 Gravelle, supra note 49, at 492. Outlining several criticisms with the territorial tax, the

author explains:

The main reservation with an explicit territorial approach is that it

increases the pressure to shift profits into active business enterprises in

low-tax jurisdictions. The increased pressures on transfer pricing,

including shifting of intangibles and the income from those intangibles

into low-tax jurisdictions, were cited by the Joint Committee on

Taxation and others as a problem with a territorial approach.

Id.

168 Id.

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arise.169 These new provisions would be narrow and technical,

addressing very specific problems and attempting to cut down tax

avoidance strategies.170 An example of this might be an alteration that

changes the Arms Length Standard or cracks down on specific tax

havens.171 Provisions like this are beneficial because they are goal

oriented and are not as difficult to implement, as they are only minor

changes.172 The reason why these types of regulations have failed is that

they add more complexity to the Tax Code and do not act with

uniformity. Regulations like this are also known to address certain

problems with the effect of creating new problems.173 Since the main

formulation of the Tax Code, all the changes have been small regulations

that build on one another.174

4. Formulary Apportionment

Under formulary apportionment, a corporationís worldwide income

is calculated using a mathematical formula that reflects the distribution

of economic activity and divides the income of the business among the

jurisdictions in which it operates.175 The formula treats a parent and a

subsidiary as the same unit and uses factors such as sales, assets, or

payroll to determine the tax rate in a certain jurisdiction.176 Essentially, a

169 See id. at 487ñ88 (providing some examples of provisions that could be added to the

Tax Code).

170 See Holmes, supra note 9, at 20ñ21 (describing the current prescriptive rules that the

United States has in its Tax Code); Kaplow, supra note 53, at 588ñ89 (assessing the

complexity of U.S. Tax Code while analyzing the alternatives to tax standards).

171 See, e.g., I.R.C. ß 482 (2006) (defining and codifying the Armís Length Standard); see

also Lipin, supra note 74, at 665ñ67 (explaining that there are thousands of pages in the Tax

Code that have been changed numerous times).

172 See Barker, supra note 29, at 649ñ50 (explaining how the government sometimes adds

patchwork rules).

173 See Holmes, supra note 9, at 12ñ13 (explaining that the enormous complexity of the tax

system creates inefficiency, as well as administrative and equity problems). This includes

the increased compliance costs to taxpayers, challenges to administrative enforcement, and

proliferation of high cost tax planning. Id.

174 See Lipin, supra note 74, at 666ñ67 (explaining how each rule adds to the depth and

makes matters worse instead of better).

175 See Morse, supra note 59, at 601ñ02 (providing a general explanation of formulary

apportionment).

Under formulary apportionment, the existence of an

apportionment factor such as sales into the jurisdictionórather than

residence or sourceócould constitute taxing nexus. Accordingly,

formulary apportionment would have no need for the current rules

determining corporate residence or corporate income source. It is a

wholly different way of allocating jurisdiction to tax.

Id. (footnotes omitted).

176 Id. at 600.

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corporation would only pay U.S. taxes on the share of worldwide income

that was apportioned to the United States using the formula.177 A major

strength of formulary apportionment is that it would eliminate most of a

corporationís incentive to shift its earnings into a low-tax jurisdiction,

because it would base a corporationís tax liability on measures of its real

economic activity as established by the formula, rather than its legal

residence or form.178 Another strength of this system is that it simplifies

the tax system for corporations into one formula.179 However, formulary

apportionment is likely to fail, because it would require the cooperation

of foreign countries in order to properly implement the system.180 This

would be extremely difficult as most countries have existing tax treaties

or are trying to attract investment by offering a lower tax rate.181

Although there are some strengths associated with the common

proposals, none of them adequately address the corporate tax avoidance

problem. Thus, this Note proposes to fix the problem by changing the

U.S. corporate tax base to either (1) revenue reported to a U.S. public

stock exchange or (2) revenue reported to a U.S bank to obtain a loan.182

IV. CONTRIBUTION

The current tax base allows many corporations to use international

loopholes to take advantage of the U.S. tax system, costing the United

States billions annually in lost tax revenue.183 Societyís ever increasing

obsession with maximizing profits has encouraged corporations to cheat

the United States out of tax revenue, even though the United States has

provided these corporations with many resources that contribute to their

177 See, e.g., Avi-Yonah et al., supra note 42, at 498 (proposing a particular formulary

apportionment in which the fraction of that corporationís worldwide income would be ìthe

sum of (1) a fixed return on their expenses in the United States and (2) the share of their

worldwide sales that occur in the United Statesî).

178 See id. at 510ñ16 (examining the advantages and disadvantages of formulary

apportionment). Formulary apportionment removes the incentive for companies to use

accounting devices to shift income on paper because it does not matter where the income is

attributed. Id. The formula takes a percentage of the corporationís worldwide income. Id.

179 Id.

180 See Kleinbard, supra note 116, at 150ñ51 (explaining that formulary apportionment can

bring about its own harm). There would still be an incentive for smaller countries to

remain as tax havens and not cooperate. Id. Unless cooperation is full among the

international community, corporations will just flee to the countries that are not

participating and that still have very little or no corporate tax. Id.

181 Id.

182 See infra Part IV (proposing a change to the tax base as a solution to the corporate tax

avoidance problem).

183 See supra Part II.B (explaining the current U.S. tax structure); supra Part II.C

(examining some popular tax avoidance techniques that corporations use).

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2012] Closing International Loopholes 347

success.184 The current outdated tax structure has proved that it is

impossible to reconcile this tax problem by making new laws that fit into

the structure.185 Every new law opens up another loophole in the system

and makes it more complicated.186 However, tax avoidance creates such

great harm to the economy that something must be done to capture this

tax revenue.187 Unlike all other unsuccessful attempts, this proposal

attempts to fix the problem by changing the initial tax base, instead of

merely adding another law to an already complicated tax structure.188

First, Part IV.A proposes a new tax base in statutory form and

explains why it is a superior method of taxing corporations.189 More

specifically, Part IV.A.1 explains the first part of the new tax baseó

taxing corporations on revenue reported to a U.S. public stock

exchange.190 Then, Part IV.A.2 examines the second part of the new tax

baseótaxing corporations on revenue reported to a U.S. bank to obtain a

loan.191 Lastly, Part IV.B examines the potential problems associated

with such a big change in the tax structure.192

A. Proposed Tax Base

To address tax avoidance strategies, the tax base for publicly traded

corporations and corporations that apply for a bank loan should be

changed to revenue. Accordingly, a corporation would be taxed on its

revenue if that corporation (1) is traded publicly on a U.S. public stock

exchange, or (2) applies for a loan from a U.S. bank. If a corporation

does not do either of these things, then its tax base will not change, and it

will continue to pay tax on its net income reported to the IRS. The

proposed amendment appears as follows:

184 See supra note 32 and accompanying text (explaining the theory that corporations

should pay taxes if they take advantage of the benefits a country provides).

185 See supra Part III.A (discussing the problems with the current tax base, which make it

difficult for the United States to prevent tax avoidance); see also supra notes 3, 7 (discussing

the prevalence of corporations using tax avoidance methods).

186 See supra notes 113ñ18 and accompanying text (explaining how the complexity and

lack of uniformity of the Tax Code leads to loopholes, which corporations are able to

exploit).

187 See supra Part III.B (discussing the continued negative effects that tax avoidance is

having on the U.S. economy).

188 See supra Part II.B (identifying and explaining some of the failed reform measures); see

also Part III.C (examining some popular proposals to fix the U.S. tax avoidance problem).

189 See infra IV.A (proposing an amended tax base that decreases incentives for

corporations to manipulate financial records).

190 See infra Part IV.A.1 (explaining how a corporation would be taxed on a percentage of

its total revenue reported to a U.S. public stock exchange).

191 See infra Part IV.A.2 (discussing how a corporation would be taxed on a percentage of

its total revenue reported to a U.S. bank).

192 See infra Part IV.B (noting the potential problems in implementing this new tax base).

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348 VALPARAISO UNIVERSITY LAW REVIEW [Vol. 47

Proposed Amendment to I.R.C. ß 11(a)(1)(2)193

(a) Corporations in GeneralóA tax is hereby imposed for each

taxable year on the total revenue of a corporationóU.S. resident or

notóif:

(1) The corporation is publicly traded on a U.S. public stock exchange;

or

(2) The corporation applied for a bank loan from a U.S. bank.

(b) If a corporation does not fall into ß 11(a)(1) or ß 11(a)(2), then a tax is

hereby imposed on the taxable income reported by that corporation to

the IRS.

(c) If a corporation operates at a loss, then it will not be subject to any tax

on its revenue.

(d) Revenue will be determined by:

(1) The total revenue the corporation reports to the public stock

exchange in ß 11(a)(1) on its Form 10-k or equivalent reporting

procedure; or

(2) By the total revenue the corporation reports to the U.S. bank in

ß 11(a)(2).

(3) If a corporation falls into both ß 11(a)(1) and ß 11(a)(2), the

revenue figure used will be the higher of the two reported.

(e) Definitions

(1) U.S. public stock exchangeóany stock exchange registered as a

U.S public exchange with the Securities and Exchange

Commission. This includes but is not limited to: Arizona Stock

Exchange (AZX), BATS Exchange, Chicago Board Options

Exchange (CBOE), Chicago Board of Trade (CBOT), Chicago

Mercantile Exchange (CME), Chicago Stock Exchange (CHX),

Direct Edge, International Securities Exchange (ISE), NASDAQ

Stock Market, National Stock Exchange (NSE), and the New York

Stock Exchange (NYSE).

(2) U.S. bankóany bank registered under the laws of the United

States.

Commentary

The above provisions change the corporate tax base for publicly

traded corporations and corporations that apply for a bank loan from

income reported to the IRS to total revenue reported to a U.S. public

stock exchange or U.S. bank. If a corporation is not traded on a U.S.

193 The proposals are the contribution of the author. Specifically, proposed additions are

italicized while the unitalicized portions are taken from I.R.C. ß 11(a)ñ(b). See generally

I.R.C. ß 11(a)ñ(b) (2006).

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2012] Closing International Loopholes 349

public stock exchange and it does not obtain a loan from a U.S. bank,

then its tax base does not change, and it is taxed the same way that

corporations are currently taxed. This means that the tax base for small,

private corporations will not change, and the tax base for corporations

who apply for loans through foreign banks will also remain the same.

The two main reasons why this proposal does not focus on private

corporations are (1) because the majority of the U.S. corporate tax

revenue comes from publicly traded corporations, and (2) because most

private corporations do not have the resources to shift their income into

countries with lower tax rates. This proposal does not change the tax

base for corporations that apply for loans through foreign banks because

that information would not be easily obtained.

To continue, this proposal treats corporations that operate at a loss as

they are currently treatedónot making them pay any taxes, because

corporations should not have to pay taxes on what they do not have.

This proposal also does not deal with any other specific provisionsó

such as the exact rate that corporations would be taxedójust the initial

corporate tax base. Addressing these specific provisions in a tax code

that is over 70,000 pages long would be overly complicated and

ultimately outside the scope of this Note, especially since it is evident

that changing the tax base in this manner would greatly reduce

corporate tax avoidance and significantly increase U.S. tax revenue.

Most corporate tax rules, like the foreign tax credit system, are focused

on fairly taxing corporations while at the same time keeping businesses

from moving abroad. However, corporations have found ways to

manipulate these rules to their benefit to pay a lesser tax rate. Since this

was not the original purpose or design of most U.S. international tax

laws, the tax base should be changed to account for the fact that certain

laws, like the foreign tax credit, might be subject to manipulation.

Making the tax base a higher revenue figure will help ensure that the

total tax revenue does not decrease. Part IV.A.1 examines the first part

of the proposed statute and Part IV.A.2 analyzes the second part.194

1. Revenue Reported to a U.S. Stock Exchange

This section of the proposed tax suggests that corporations be taxed

if they are publicly traded on a U.S. stock exchange. Corporations are

taxed on revenue previously reported to a stock exchange on their Form

194 See infra Part IV.A.1 (explaining why taxing total revenue reported to a public stock

exchange is a good alternative tax base); infra Part IV.A.2 (discussing why taxing total

revenue reported to banks is superior to taxing income).

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350 VALPARAISO UNIVERSITY LAW REVIEW [Vol. 47

10-k.195 The Form 10-k is an annual report that each publicly traded

corporation must file with the SEC giving a comprehensive summary of

the corporationís performance. This ensures that the tax base is not a

separately reported figure to the IRS and takes away corporationsí

incentive to report the lowest possible figure so that their taxes are

lower.196 Additionally, there is no longer an incentive for a corporation

to manipulate financial records for tax purposes because there is already

the motivation to keep the figure as high as possible.197 When a

corporation is traded on a U.S. public stock exchange, like NASDAQ,

NYSE, or AMEX, the corporationís main goal is to maximize shareholder

value by either increasing the stock price or paying out dividends to

shareholders.198 The best way to maximize shareholder value is by

attracting investors so that the stock price of that company will

increase.199 One of the main components of determining shareholder

value is the corporationís total revenue.200 Therefore, a corporation will

want to report a high revenue figure so that it can increase its

shareholder value and thus attract investors.

Although the ultimate goal of a corporation is to maximize income, a

corporationís revenue is often a good determinate of its growth. Taxing

corporations on their reported revenue is also more effective than taxing

corporations on their reported income because net income can be

distorted by manipulating expenses, interest, taxes, depreciation, and

amortization, all of which are subtracted from revenue. Also, as

mentioned above, using a higher tax base figure, such as revenue, takes

into account the fact that there are some U.S. tax laws, like the foreign tax

credit system, that will always be subject to manipulation. Therefore, by

using revenue, the tax base will be larger, a more true representation of a

corporationís tax liability, and immune from manipulation. The United

States does not need any extra cooperation with other nations to impose

this tax base because the reported revenue comes straight from the U.S.

stock exchange.201 Also, this provision is easily applied to U.S. public

195 See supra Part II.C (noting the dilemma created when companies must report their tax

base separately, as illustrated by Google).

196 See supra note 17 and accompanying text (discussing the benefits of combined

reporting).

197 See supra Part II.C (describing some popular tax avoidance techniques and notiing

how corporations have an incentive to manipulate financial records in all of them).

198 See supra note 89 (explaining how the main goal of corporations is to maximize profit).

199 See Lee, supra note 89, at 36ñ37 (explaining how stock price is a direct reflection of

shareholder value).

200 Id. at 35.

201 See supra Part III.C.4 (determining that formulary apportionment would be too

difficult to implement because it would call for a great deal of international cooperation

between countries).

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2012] Closing International Loopholes 351

stock exchanges and does not contain any intricate provisions that could

open up loopholes.202

2. Revenue Reported to a U.S. Bank

In the second section of the proposed tax base, a corporation is taxed

when it applies for a loan at a U.S. bank. When a corporation applies for

a loan with a bank, it presents financial data to the bank so that it can

evaluate the merits of the corporationís ability to pay the loan back.203

Like in the first section, this takes away the separate reporting aspect

because the total revenue number comes from the bank.204 This also

eliminates the incentive to manipulate records and lower total revenue,

because one of the main components that banks look at when evaluating

corporate loans is revenue. The higher the revenue figure, the more

likely the corporation will be able to pay back the loan, and thus the

higher loan amount that the corporation can obtain. Inherent, then, is

the notion that a corporation will not distort this revenue amount but

will keep it as high as possible so it is able to secure a larger loan. In

addition, there would not be any international cooperation neededó

only cooperation with U.S. banksóand the concept is fairly

straightforward with a limited set of rules.205

Instead of merely adding another law to an already complicated tax

structure that combats tax avoidance and attempts to reconcile an

outdated tax base, the proposed solution updates the tax base to

eliminate the incentive for corporations to manipulate financial

figures.206 Of course, as with any change to the tax structure of this

magnitude, there are potential problems that must be analyzed.207

202 See supra note 46 (detailing the complexity of the tax and how every new intricacy

opens up another loophole); see also supra Part III.C.4 (explaining the difficulty in

implementing a tax structure like formulary apportionment).

203 See Wilmarth, supra note 64, at 230ñ31 (listing the requirements for obtaining a loan

since 1975).

204 See supra note 127 (asserting that manipulation becomes an issue when things are

separately reported); supra note 17 (describing how combined reporting eliminates the

incentive to manipulate).

205 See supra Part III.C.4 (noting how international cooperation is not an easy thing in this

economy); see also supra note 47 (explaining how complexity negatively affects the Tax

Code).

206 See supra Part III.A (explaining that one of the problems with the tax base is that it

does not account for the changes in technology and the global economy).

207 See infra Part IV.B (analyzing the possible problems that could occur when

implementing this new tax base).

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352 VALPARAISO UNIVERSITY LAW REVIEW [Vol. 47

B. Potential Problems

Since changing the tax base would be a complete revamp of the

current tax structure, there are possible problems that could arise.208

First, because the proposed tax base is calculated from a corporationís

total revenue, there are potential issues in determining an applicable rate

because not all of the money was earned in the United States.209 Most

likely, the rate would have to take into account the fact that not all of the

revenue was produced in the United States and would have to be much

lower than the current tax rate of 35%. Second, there could be issues

with double taxation.210 The rate would have to be low enough to

account for the fact that corporations might be taxed in other countries

on the same revenue.211

Third, this type of tax could cause corporations to invest in public

stock exchanges overseas or obtain loans overseas, causing the United

States to lose businesses and jobs permanently.212 Considering the size

and dominance of the U.S. stock exchanges, this would probably not be a

smart option for many of the larger corporations that are currently using

tax avoidance strategies. The advantages of being a member of a U.S.

stock exchange, being able to obtain loans from U.S. banks, and being in

the U.S. market are so great that most corporations would not be willing

to pass up the U.S. market permanently.

Fourth, there could be execution problems if the U.S. banks or stock

exchanges are not able to report this information efficiently.213 However,

the proposed process should be simple enough to avoid significant

barriers. Last, because corporations will continue to avoid taxation if

they operate at a loss, there could be a potential issue with corporations

manipulating their financial statements to show a loss. This problem

could easily be solved by additional legislation monitoring whether a

corporation reported income on their Form 10-k. Although these

potential problems exist, the advantages of having a tax base that

208 See Holmes, supra note 9, at 3 (discussing how there have been only two major

structural changes in the U.S. Tax Code); see also supra Part II.A (explaining how the

fundamental tax structure from the 1920ís remains today).

209 See supra Part II.B (comparing territorial taxation and worldwide taxation); see also

supra note 113 (asserting that some countries base their rate on competitiveness

internationally).

210 See supra note 27 (exploring the issue of double taxation).

211 See supra Part II.A (noting the benefits theory of taxation). Following this theory, if

income is earned in more than one country, then both countries have the right to tax. Id.

212 See supra note 107 (asserting that countries lower their rates so that they can attract

investment).

213 See supra Part III.C (examining the implementation problems contained within these

four popular proposals).

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2012] Closing International Loopholes 353

eliminates the incentive for tax avoidance greatly outweighs these

potential problems.

V. CONCLUSION

The United States, along with most industrialized nations, follows

the benefit theory of taxation.214 As a result, the United States enforces a

tax because of the benefits that corporations receive from the U.S. market

and economy.215 Since the establishment of the corporate tax,

corporations have been taxed on the basis of the income that they

reported separately to the IRS.216 The income is then subjected to many

rules, regulations, and provisions designed to ensure that companies are

paying their share of taxes.217 For example, there are laws establishing

that a corporation owes tax if it earns the income in the United States, or

if it is a U.S. resident corporation.218

As the global economy has progressed over time, it has become

much easier for corporations to circumvent the rules and manipulate the

income they report through financial records.219 This allows

corporations to escape tax liability by reporting that income was earned

in other countries with lower tax rates.220 It is difficult for the United

States to enforce its tax laws because of national sovereignty.221 Today,

large corporations, such as Google, employ a wide variety of tax

avoidance techniques to avoid billions in taxes annually.222

Most proposals to fix the U.S tax avoidance problem contain new

regulations, which are designed to ensure that companies pay a fair

amount of taxes.223 However, every time a new law is passed to fix a

part of the Tax Code, corporations discover new loopholes. This has

resulted in a very complicated U.S. Tax Code that does not effectively

combat the tax avoidance problem.224

214 See supra Part II.A (detailing the history of the U.S. corporate tax).

215 Id.

216 Id.

217 See supra Part II.B (explaining the basic U.S. tax structure); supra note 47 (noting the

complexity of the U.S. Tax Code).

218 See supra Part II.B (discussing the basic tax framework and establishing when the

United States has tax jurisdiction).

219 See supra Part II.C (exploring a few major tax avoidance techniques that corporations

use to bypass tax law).

220 Id.

221 See supra note 5 and accompanying text (explaining why sovereignty prevents the

United States from enforcing its tax laws in other countries).

222 See supra Part II.C.4 (outlining the entire tax avoidance process that Google uses).

223 See supra Part III.C (analyzing some of the popular proposals to fix the tax avoidance

problem).

224 See supra note 46 (explaining the intricacies of the U.S. Tax Code).

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354 VALPARAISO UNIVERSITY LAW REVIEW [Vol. 47

This Noteís proposed solution is to change the U.S. tax base,

imposing taxes on a corporation if it (1) is traded publicly on a U.S.

public stock exchange or (2) applies for a loan from a U.S. bank.225 The

new tax base would tax a corporationís total income as reported to either

the stock exchange or bank. Altering the tax base in this way would

eliminate the incentive for corporations to manipulate their financial

records.226 The corporate tax would be based on something that has

already been reported and that corporations have an incentive to keep

high.227 Corporations have an incentive to keep their revenue figure

high when reporting to the public stock exchange so that they maximize

shareholder wealth. Likewise, they have the incentive to keep their

revenue figure high when obtaining a bank loan so that they can obtain a

larger loan. The proposed tax base is also beneficial because it lacks

complexity, requires very minimal international cooperation, and is

fairly easy to implement.

However, with any tax structure change of this magnitude, there

might be problems in the execution.228 Nevertheless, the advantages of

the new tax base greatly outweigh any potential problems. The change

will reduce tax avoidance, increase tax revenue, and eliminate many

harmful effects that tax avoidance is having on the United States.

Therefore, enacting this proposed solution would not only restore equity

back to the corporate tax but also give rise to a much more stable

economy.

Using this new tax base would change the situation for NoTax.

Instead of owing taxes on its relatively small net income reported to the

IRS, NoTax would owe tax on the three hundred and fifty million dollars

of worldwide revenue. The fact that NoTax reduced its reported net

income to the IRS by thirty-three million dollars is irrelevant because

NoTax would pay corporate tax as a percentage of its worldwide

income. Since NoTax reported around the same worldwide revenue to

225 See supra Part IV (proposing a change in the tax base to combat the tax avoidance

problem in the United States).

226 Id.

227 Id.

228 See supra Part IV.B (discussing the possible problems with implementing a new tax

base).

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2012] Closing International Loopholes 355

its shareholders, it would not be able to escape tax liability by

manipulating its net income, thus rendering its tax avoidance methods

ineffective.

John T. VanDenburgh*

* J.D. Candidate, Valparaiso University Law School (2013); B.S., Accounting,

Management, Purdue University (2009). I would like to thank Professor David Herzig and

Executive Editor of Student Writing (2011ñ2012) Jessica Levitt for their comments and

advice on prior drafts of this Note. Also, I sincerely thank my parents for their constant

support and guidance. I would also like to thank my siblings, Mark and Lisa, for

encouraging me to pursue a legal career and for providing me with the realization that we

will need a lawyer in the family. A special thanks to Taryn Baker who believes in me and

has been there for me every step of the way throughout our law school career. Lastly, I

would like to thank my friends and family who not only encourage me but have made my

law school journey bearable.

VanDenburgh: Closing International Loopholes: Changing the Corporate Tax Base

Produced by The Berkeley Electronic Press, 2012

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Title page

Abstract

Introduction

Body

Literature review

Hypothesis development

Research design

Empirical analysis 

Summary and conclusions

List of References

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