Some Differences and Similarities in Exemption and Worldwide/Deferral/Credit Systems Brookings Institution and The International Tax Policy Forum Washington DC, April 30, 2001 Hugh J. Ault, Boston College Law School and OECD

Exemption/Worldwide Comparisons No system is pure credit or pure exemption In many important situations, the results of the two systems are the same If the foreign tax rate is equal to the domestic tax rate, no residual tax is collected in the credit system making it effectively an exemption system If deferral is long enough, the present value of the tax to be paid approaches zero and the income is effectively exempt

Exemption v. Worldwide: Common Structural Issues The distinction between types of income subject to current tax/deferral or current tax/exemption is common to both systems Exemption systems must have rules dealing with otherwise currently taxable income which is earned in foreign entities which is functionally the same as Subpart F

Exemption v. Worldwide: Common Structural Issues Source rules are necessary in both systems (and more crucial and subject to pressure in an exemption systems as they can lead to double non-taxation) Allocation of deductions are necessary in both systems (and in practice lacking in most existing exemptions systems) Foreign losses raise similar issues

Exemption v. Worldwide: Common Structural Issues If the exemption system is limited to foreign income which is “adequately taxed” in the foreign jurisdiction, there needs to be some definition of the relevant taxes and level of taxes which is parallel to the need in an worldwide/credit system for a definition of creditable tax

Exemption v. Worldwide: Common Structural Issues Special rules are necessary to deal with the transfer of assets from the domestic system of current taxation into the system of deferral or exemption