Businesses leaders have been urging a movement toward a territorial tax, which would generally eliminate U.S. income taxes on active foreign source income. Such a proposal (presumably based on one developed by Grubert and Mutti) was included in the President's Advisory Panel on Tax Reform in 2005, more recently in a draft proposal by Ways and Means Committee Chairman Dave Camp, and in a bill, S. 2091 , introduced by Senator Enzi. The National Commission on Fiscal Responsibility and Reform (referred to as the Fiscal Commission) also proposed a territorial tax in general terms. Deferral

Deferral allows a firm to delay taxation of its earnings in foreign subsidiaries until the income is paid as a dividend to the U.S. parent company. Although a territorial tax is often focused on exempting foreign source income that under current law is taxed when repatriated, there are four basic categories of foreign source income, three of which are not eligible for deferral. This foreign tax credit is designed to prevent double taxation of income earned by foreign subsidiaries of U.S. corporations from facing a combined U.S. and foreign tax in excess of the U.S. tax due if the income was earned in the United States. If applied overall or in a way that can combine income subject to high taxes with income subject to low taxes, unused credits in high-tax countries (or associated with highly taxed income) can be used to offset U.S. tax due in low-tax countries or income subject to low taxes. They may have also been delaying repatriations in anticipation of another holiday. Aside from the issue of the effect of a territorial tax (and of its particular design features) on profit shifting, other reforms might be considered that might address profit shifting either in the current system or in a system revised in ways other than moving to a territorial tax. Transition

An important issue in moving to a territorial tax is how to treat accumulated unrepatriated earnings, which were generated under a worldwide system. As will be discussed subsequently, the proposals have included a variety of approaches. Hybrid approaches such as taxing a share of income currently would also eliminate the scope for tax planning around repatriation. Revenue Issues

A shift to a territorial system could potentially gain revenue, in part because relatively little tax is collected on foreign operations. Because transitional gains are temporary, this approach results in a long-run revenue loss. The Grubert Mutti Proposal

This proposal has been circulating for some time as a general proto-type of a move to a territorial tax, and has been estimated to raise revenue, primarily due to increased taxes on royalties and allocation of parent company expenses between taxable and exempt income. The proposal does not address the treatment of existing accumulated earnings abroad or profit shifting via intangible assets, although one of the proposal's authors has indicated that their plan should probably include a tax on accumulated earnings, but at a lower rate. No actual repatriation is necessary. Some elements that increase the tax burden on foreign source income (offsetting the loss from exempting dividends and in some cases branch income) are the allocation of deductions and taxation of royalties in the Grubert-Mutti proposal and the 5% inclusion of dividends in the other two proposals. The Ways and Means Discussion Draft indicates that these issues will be considered separately and S. 2091 would make the look-through rules (as well as the exclusion of active financing income), currently part of extenders and having expired after 2011, permanent One comment suggested that tax reform should address the leakage in Subpart F including check-the-box and the look-through rules At the same time, one of the concerns about check the box and look through rules is that the result would not be greater U.S. tax collections but an increase in taxes paid to other countries. This change would, however, permit the elimination of Subpart F. 

		Ending Deferral and Ending Cross-Crediting Via a Per Country Limit

A greater level of taxation and a more effective provision to discourage artificial profit shifting, which would also eliminate disincentives to repatriate, is to combine ending deferral with a per country limit on foreign tax credits, preventing tax haven income from being shielded by foreign tax credits. Measures to Modify the Current System: the President's Proposals

The President has made several proposals that address international tax issues. A minimum tax that could be imposed in the framework of an effective territorial system is discussed below.
Among potential tax reforms under discussion by Congress is revising the tax treatment of foreign source income of U.S. multinational corporations. Some business leaders have been urging a movement toward a territorial tax, which would eliminate some U.S. income taxes on active foreign source income. Under a territorial tax, only the country where the income is earned imposes a tax. Territorial proposals include the Grubert-Mutti proposal (included in President Bush's Advisory Panel on Tax Reform proposal in 2005) and, more recently, a draft Ways and Means Committee proposal and a Senate bill, S. 2091. The Fiscal Commission also proposed a territorial tax. Proposals have, however, also been made to increase the taxation of foreign source income, including S. 727, and proposals by President Obama.
Although the United States has a worldwide system that includes foreign earnings in U.S. taxable income, two provisions cause the current system to resemble a territorial tax in that very little tax is collected. Deferral delays paying taxes until income is repatriated (paid as a dividend by the foreign subsidiary to its U.S. parent). When income is repatriated, credits for foreign taxes paid offset the U.S. tax due. Under cross-crediting, unused foreign tax credits from high tax countries or on highly taxed income can be used to offset U.S. tax on income in low tax countries.
Some proponents of a territorial tax urge such a system on the grounds that the current system discourages repatriations. Economic evidence suggests that effect is small, in part because in normal circumstances a large share of income is retained for permanent reinvestment. Amounts held abroad may have increased, however, as firms lobbied for another repatriation holiday (similar to that adopted in 2004) that allowed firms to exempt most dividends from income on a one-time basis. Opponents are concerned about encouraging investment abroad. A territorial tax is generally not viewed as efficient because it favors foreign investment, but that increased outflow of investment is likely to have a small effect relative to the U.S. economy. Artificial shifting of profits into tax havens or low tax countries is a current problem that could be worsened under some territorial tax designs, and proposals have included measures to address this problem.
Proposals also address the transitional issue of the treatment of the existing stock of unrepatriated earnings. The Ways and Means proposal would tax this stock of earnings, but at a lower rate, and use the revenues to offset losses from other parts of the plan, which would lead to a long-run revenue loss. S. 2091 has a similar approach. The Grubert-Mutti proposal does not have a specific transitional tax, but would raise revenue largely due to its disallowance of parent overhead expenses aimed at reducing profit shifting. The other two proposals also contain provisions to address profit shifting.
In addition there are complicated issues in the design of a territorial tax, such as how to treat branches and dividends of firms in which the corporation is only partially owned. A number of issues arise from the ending of foreign tax credits, with perhaps the most significant one being the increased tax on royalties, which are currently subject to tax, have low or no foreign taxes, and would lose the shield of excess credits.
The final section of the report briefly discusses some alternative options, including those in S. 727 and in the Administration proposals. It also discusses hybrid approaches that combine territorial and worldwide systems in a more efficient way, including eliminating the disincentive to repatriate. One such approach is a minimum tax on foreign source income, which is proposed by the President in the context of current rules, but could be combined with a territorial system.