International tax developments

According to an article in yesterday's New York Times, what I call U.S. corporate residence electivity may be declining.  U.S. companies are apparently finding it increasingly easy to shed their status as such through merger with foreign companies.  This route has always been legally effective (so long as it isn't just a paper-shuffling sham transaction, like "inverting" to create a new Caymans-incorporated parent), but apparently it's becoming more practically available.

Two very different possible legal responses would be:

(a) Broadening the statutory definition of resident U.S. companies to include those that are incorporated OR headquartered here, rather than just those that are incorporated here, and/or

(b) Reducing the relative tax burdens that are associated with being defined as a U.S. corporation.  But a few further points about that:

       (i) While rising U.S. corporate residence electivity clearly lowers the optimal relative tax burdens associated with residence, it's a separate question whether current law burdens should be lowered.  Suppose they were previously much too low.  Then rising electivity might merely mean that they were closer to the optimum, but still too low.

      (ii) One key reason why companies like to avoid being classified as U.S. residents is that such a status impedes playing games to shift profits earned in the U.S. so that they can be reported as having been earned abroad.  One way to reduce the relative tax burdens that are associated with U.S. corporate residence is to increase our rules' effectiveness in combating profit-shifting by foreign resident companies.  This would probably require a "unitary business" approach - that is, looking at the entire global corporate group even if the U.S. affiliate isn't formally the common parent.

      (iii) Responses (a) and (b) above are definitely not a case of either-or.  Indeed, one could do both.  Note also that they are substantively interrelated.  For example, successfully using (a) to reduce U.S. corporate tax residence electivity would weaken the case for (b), or more precisely it would raise the optimal relative tax burden that was associated with U.S. corporate residence.