Lecture 3: Understanding U.S. International Tax Policy

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The Tax Cuts and Jobs Act (TCJA) reformed the way foreign profits of U.S. multinationals are taxed.

The new tax law moved away from what is called a “worldwide” tax system towards what is a called a “territorial” tax system while also redefining what corporate income is taxable and when.

This session will provide an overview of the principles behind international tax policy, how other countries structure their international tax policy, and how to think about the new system that was passed as part of the TCJA.

Lecture Highlights

  1. International corporate tax rules are used by countries to define their “tax borders,” or what corporate income is taxable and when.
  2. Over the past decade, there have been three major approaches to defining how the foreign profits of U.S. multinationals are taxed: residence (worldwide), source (territorial), and destination.
  3. Most systems throughout the world borrow from each of these approaches. There is no pure “worldwide,” “territorial,” or “destination-based” corporate income tax.
  4. The TCJA moved towards a territorial tax system, but also maintained aspects of a worldwide tax system and added aspects of a destination-based system.

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