CFC, controlled foreign corporation, transition tax, untaxed foreign earnings, untaxed foreign profits, subpart F

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In connection with any transition to a new international tax system, we need an approach that effectively deals with the trillions of dollars of previously untaxed foreign income held by CFCs. There is logic and fairness in applying a rate on those earnings that is less than the 35 percent home country rate because the rules of the game are being changed significantly.

Many U.S. multinationals have had legitimate commercial reasons for retaining their earnings overseas. For these, I can happily accept whatever rate Congress chooses, whether it is at the lower 3.5 percent level of TRA 2014, the 14 percent level in the Administration's Green Book, or the 20 percent level in the Baucus discussion draft.

However, for those U.S. multinationals that have aggressively pushed the envelope to maximize their stateless income over the past decade and longer through convoluted tax structuring, we as a country cannot be rewarding such behavior with favorable lower-than-35 percent rates.

In this article, I suggests two approaches to identifying CFC earnings that should be subject to the full 35 percent corporate tax rate when transitioning to a new tax system, with the remainder subject to whatever favorable transition rate Congress might choose.

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