Content area
Full Text
NANCY H. KAUFMAN*
I. INTRODUCTION
Politicians devote a sometimes surprising amount of attention to the arcane rules of international taxation. In his 1992 presidential campaign, President Clinton made an issue of whether foreign investors in the United States pay their fair share of U.S. income taxes. The President promised to raise as much as $45 billion each year in revenue simply by enforcing existing law.1 In 1995, Senator Brian Dorgan became incensed about what he perceived as the failure of foreign investors to pay their fair share of U.S. income tax.2 The Department of the Treasury went so far as to call a conference to discuss Senator Dorgan's proposed solution.3 When it comes to U.S.-based multinational corporations, members of Congress have been equally attentive, questioning whether U.S.-based multinationals pay their fair share of taxes on the income they earn through foreign subsidiaries.4 President Clinton's first use of the line-item veto struck down three provisions of the Taxpayer Relief Act of 1997,5 including one that dealt with income earned through the foreign subsidiaries of U.S.-based multinationals.6 Regarding individual taxpayers, President Clinton and members of Congress have taken steps to prevent wealthy U.S. taxpayers from escaping federal income tax by the simple expedient of giving up their U.S. citizenship.7
When U.S. politicians talk about foreign investors paying their fair shares of U.S. income taxes, they allude to the imposition of tax on the basis of source. Source taxation applies to income arising within the geographic borders of the country levying the tax. Virtually every country imposing an income tax today does so on the basis of source.8 The United States asserts its source jurisdiction to tax the income earned in the United States by residents9 of other countries.10 Othercountries assert their source jurisdiction to tax the income arising within their borders that belongs to nonresidents, including residents of the United States.11
An issue closely related to source is that of the division of the profits of a multinational group of enterprises among the countries in which the group does business. Most countries follow the general rule of treating each member of a multinational group of enterprises as a separate entity for income tax purposes.12 This separate entity approach generally requires the individual members of a multinational group...