Section of Taxation Publications
The Tax Lawyer, Winter 2000
 ttlogo.gifVOL. 53
NO. 2
Abstract | Contents | TTL Home

 Foreign Base Company Sales Income: A Primer and an Update
Mary F. Voce*


*Co-Chair of the Tax Department at Coudert Brothers, New York, New York. University of Michigan, B.A., 1966; University of Virginia, LL.B., 1969; New York University, LL.M. in Taxation, 1975.

1 References herein to section numbers are, unless otherwise indicated, references to the Internal Revenue Code of 1986 (the “Code”) and to proposed, temporary, or permanent treasury regulations issued thereunder.

2 See I.R.C. § 957(a).

3 I.R.C. § 951(b)

4 See I.R.C. § 954(a)

5 Pub. L. No. 87-834, 76 Stat. 960.

6 In the President’s Tax Recommendations, the issue was framed as follows:

Changing the economic conditions at home and abroad, the desire to achieve greater equity in taxation and to the strains which have developed in our balance of payments of our payments position in the last few years, compel us to examine critically certain features of our tax system which, in conjunction with the tax system of other countries, consistently favor U.S. private investment abroad compared with investment in our own economy.

...Profits earned abroad by American firms operating through foreign subsidiaries are, under present tax laws, subject to U.S. tax only when they are returned to the parent company in the form of dividends. In some cases, this tax deferral has made possible indefinite postponement of the U.S. tax, and, in those countries where income taxes are lower than those in the United States, the ability to defer the payment of the U.S. tax by retaining income in the subsidiary companies provides a tax advantage for companies operating through overseas subsidiaries that is not available to companies operating solely in the United States.

The Undesirability of continuing deferral is underscored where the deferral has served as a shelter for tax escape through the unjustifiable use of tax havens such as Switzerland...

To the extent that these tax havens and other tax deferral privileges result in U.S. firms investing or locating abroad largely for tax reasons, the efficient allocation of international resources is upset, the initial drain on our already adverse balance of payment is never fully compensated, and profits are retained and reinvested abroad which would otherwise be invested in the United States...

If we are seeking to curb tax havens, if we recognize that the stimulus of tax deferral is no longer needed for investment in the developed countries, and if we are to emphasize investing in this country in order to stimulate our economy and our plant modernization, as well as ease our balance of payments deficit, we can no longer afford existing tax treatment of foreign income.

President’s Message to Congress, President’s Tax Recommendations, 1961 Pub. Papers 290, 294-97 (Apr. 20, 1961); see also President’s 1961 Tax Recommendations, 1961: Hearings before Committee on Ways and Means on the Tax Recommendations of the President Contained in His Message Transmitted to Congress, April 20, 1961, 87th Cong., 1st Sess. (1961).

7 See H.R. Rep. No. 1447, 87th Cong., 2d Sess. 62 (1962), reprinted in 1962-3 C.B. 405, 466 (“The sales income with which your committee is primarily concerned is income of a selling subsidiary (whether acting as a principal or agent) which has been separated from manufacturing activities of a related corporation merely to obtain a lower rate of tax for the sales income.”); S. Rep. No. 1881,. 87th Cong., 2d Sess. 84 (1962), reprinted in 1962-3 C.B. 707, 790.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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