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1. INTRODUCTION
A student of U.S. international tax law today encounters a body of complex statutory and treaty rules informed by a battery of economic and political choices. The predominant theory has held that the system should promote worldwide efficiency and growth by removing tax rates from the factors determining the country in which to locate business operations or other investments. If tax rates are immaterial, a U.S. business enterprise will locate where the returns to capital are greatest. The formal term for this policy objective is "capital export neutrality," which is believed to "maximize[ ] world welfare."1 The U.S. system taxes the worldwide income of domestic business enterprises,2 but avoids double taxation by allowing a credit against U.S. tax liability for foreign taxes paid.3
Over the past forty years the executive and legislative branches of government have become increasingly concerned that business enterprises may position themselves to avoid paying any U.S. tax on income earned abroad. The failure to tax income of U.S.-owned foreign affiliates that only operate abroad, based on the corporate and tax law rule that a corporate entity is taxed separately from its owners,4 has sanctioned a form of tax avoidance known as "deferral." Because deferral of U.S. tax on income of foreign subsidiaries signaled a departure from the capital export neutrality principle,5 Congress enacted the subpart F provisions of the Internal Revenue Code in the 1960s.6 These provisions eliminate deferral only in situations deemed to indicate use of a foreign business or investment vehicle to avoid U.S. tax.7
Congress, in recent years, has acted to restrain tax avoidance by strengthening the subpart F and other anti-deferral provisions, rehabilitating transfer pricing rules,8 and eliminating the benefits of ownership structures designed to exploit loopholes.9 Continued tinkering with a structure built largely on principles appropriate for the 1960s economy, however, is not likely to produce a system capable of meeting the challenges to tax administration posed by enterprises operating across borders in the new millennium.10 This is an appropriate moment for reevaluation of policies and goals of the U.S. system of taxing income derived abroad.
To that end, tax policy analysts have advocated significant change, and their proposals have ranged from a call for the complete elimination of deferral of U.S. tax on...