The Silver Lining : The International Tax Provisions of the American Jobs Creation Act – A Reconsideration

This article discusses three positive elements of the American Jobs Creation Act. First, the Act contains the most far-reaching simplification of the US international tax regime in many decades. Specifically, the Act finally (after many failed attempts over the course of the last two decades) reduces the number of anti-deferral regimes from six to three. More controversially, but in this author’s opinion correctly, the Act also reduces the number of foreign tax credit “baskets” from nine to two. These two steps by themselves will go a long way to reduce the complexity and transaction costs of the US international tax regime.Second, the Act also resolves several problems that go back to the 1986 Tax Reform Act and which, for revenue reasons, involved blatant unfairness towards US resident individuals and corporations. The Act eliminates the exclusion of foreign debt and assets in calculating the allocation of worldwide interest expense, which frequently leads to double taxation. The Act also addresses the onesided application of the overall foreign loss rule to reduce the foreign tax credit limitation. In addition, the Act eliminates the double taxation resulting from reducing the foreign tax credit for alternative minimum tax purposes. Finally, the Act addresses several notorious loopholes in the US international tax legislation. The Act erects a barrier against “inversion” transactions in which a US corporation becomes a subsidiary of a foreign corporation in order to escape the reach of Subpart F. The Act also finally gives some teeth to the expatriation rule for individuals, which is also the culmination of a legislative battle lasting for over a decade.The Act does not address the most controversial issue in US international taxation, namely, the appropriate scope of the anti-deferral rules. The Act does take one step forward towards territoriality by enacting a temporary lower rate for repatriations of the deferred profits of US multinationals. While this move is controversial, its ultimate meaning will only be known over time, and it can be interpreted as consistent with a move both towards limiting deferral and towards expanding it