The American Jobs Creation Act of 2004 ( P.L. 108-357 ; the Jobs Act) contained a number of provisions related to the taxation of multi-national corporations. The implementation was, subsequently, delayed until tax years beginning after December 31, 2010, by P.L. 110-289 . In the 111 th Congress, the Worker, Homeownership, and Business Assistance Act of 2009, P.L. 111-92 , delayed implementation of the worldwide allocation rules to 2018, while the Hiring Incentives To Restore Employment Act, P.L. 111-147 , further delayed implementation to 2021. Another proposal in the 111 th Congress, H.R. 3962 , the Affordable Healthcare for America Act of 2009, would repeal the worldwide allocation rule. To calculate the limit, firms are required to separate interest and other expenses according to source—foreign or domestic. The analysis here indicates that worldwide allocation rules, while losing revenue, would likely be better aligned with the objective of the foreign tax credit. Tax planning techniques could undermine this objective—and lead to increased revenue loss and efficiency costs. The foreign tax credit provisions generally permit U.S. taxpayers to credit foreign taxes they pay against U.S. taxes they would otherwise owe—on a dollar-for-dollar basis. Foreign Tax Credit Limitation

As noted above, the U.S. concedes that the country where income is earned has the primary right to tax that income and collect the tax revenue that it generates. The U.S. retains, however, the primary right to tax U.S. source-income. For example, if a firm pays U.S. tax at a 35% rate and the foreign tax rate is 10%, its total tax on foreign income would consist of the 10% foreign tax plus the 25% of U.S. tax that remains after the 10% offset by the foreign tax credit. As mentioned above, the Jobs Act contains a number of rules intended to limit the extent to which the expansion of the bank group election can be used to avoid interest allocation. Conclusion

The analysis in this report suggests that there are benefits and disadvantages to worldwide allocation of interest enacted by the Jobs Act. If debt is fungible, worldwide allocation is the most accurate method of ensuring that the U.S. foreign tax credit is used for its intended purpose: allowing the foreign tax credit to offset the full share of U.S. pre-credit tax that falls on foreign source income. Finally, the subgroup election provision in the Jobs Act does not appear consistent with the general objective of the foreign tax credit limit or the act's own worldwide allocation regime. This subgroup election may permit firms to reduce the current domestic interest allocation costs, while achieving foreign interest allocation benefits. Effects of Alternative Allocation Rules

This appendix derives the allocation rules that most accurately support the foreign tax credit limitation—the rules that most accurately limit creditable foreign taxes to U.S. tax on foreign-source income. The Basic Limitation without Allocation of Interest
Assume a multinational's U.S. tax liability can be expressed as:
(1) U.S. Tax = t(Y + D/(1 - t f ) - iB d ) - tD/(1 - t f );
where t is the U.S. tax rate, Y is U.S.-source income before interest deductions, D is dividends from a foreign subsidiary, t f is the foreign tax rate, i is the interest rate, and B d is domestic borrowing. Adjusting for the Fungibility of Borrowing: Current Law and the Jobs Act
As noted in the text, current law requires part of domestic borrowing to be allocated to foreign sources. In this case, however, the worldwide allocation rule will further discourage investment abroad because of a more powerful effect on the allocation rule.
The foreign tax credit alleviates the double-taxation that would result if U.S. investors' overseas income were to be taxed by both the United States and a foreign country. U.S. taxpayers credit foreign taxes paid against U.S. taxes they would otherwise owe, and in doing so concede that the country where income is earned has the primary right to tax that income. But the United States retains the primary right to tax U.S.-source income, placing a limit on the foreign tax credit: foreign taxes can only offset the part of a U.S. taxpayer's U.S. tax that falls on foreign source income. It is this limit to which the American Jobs Creation Act of 2004 (P.L. 108-357, Jobs Act) applied. To calculate the limit, a firm separates its revenue and costs, for tax purposes, into those having a foreign source and those having a U.S. source. Foreign taxes can offset U.S. tax on revenue "sourced" abroad; in effect, foreign-source income is exempt from U.S. tax for firms whose foreign tax credits exceed the limit (firms with "excess credits"). But because deductions allocated abroad reduce U.S. tax, the effect is the same as if deductions allocated to foreign sources cannot be claimed for U.S. tax purposes.
If a U.S. firm has foreign investments, current law requires at least part of the U.S. interest to be allocated to foreign sources based on the theory that debt is fungible—that regardless of where funds are borrowed, they support a firm's worldwide investment. But multinational firms have argued that if part of domestic interest is allocated abroad, part of foreign interest should be allocated to the United States, which would reduce U.S. tax. (Some critics have suggested, however, that granting multinationals tax benefits through interest allocation revisions should be accompanied by restrictions on the benefit of deferral, which allows taxes.)
This worldwide allocation rule was adopted in the Jobs Act, but has not yet been implemented. The Jobs Act called for implementation starting in 2009, while P.L. 110-289 subsequently delayed implementation until 2011.
In the 111th Congress, the Worker, Homeownership, and Business Assistance Act of 2009, P.L. 111-92, delayed implementation of the worldwide allocation rules to 2018, while the Hiring Incentives To Restore Employment Act, P.L. 111-147, further delayed implementation to 2021. Another proposal in the 111th Congress, H.R. 3962, the Affordable Healthcare for America Act of 2009, would repeal the worldwide allocation rule.
The current law's interest allocation rules are likely imperfectly structured to achieve the objective of the foreign tax credit limit and worldwide allocation of interest as enacted by the Jobs Act, while losing revenue, would probably be more consistent with the basic objective of the foreign tax credit limit. Tax planning techniques, however, could undermine this objective and cause further revenue loss. And, like the foreign tax credit limit itself, allocation rules contribute to tax distortions which may be heightened with worldwide allocation. Further, an expansion of the bank "subgroup" elections contained in the Jobs Act may not be consistent with the general objective of worldwide allocation of interest. Although the Jobs Act contains anti-abuse rules, these subgroup elections may permit firms to avoid the impact of the interest allocation rules. This report will be updated as legislative events warrant.