Research report 2009 - Max Planck Institute for Intellectual Property, Competition and Tax Law
Reforming the System of Foreign Profit Taxation
MPI für Geistiges Eigentum, Wettbewerbs- und Steuerrecht, München
SummaryTax reform considerations in the United Kingdom and the United States have renewed the debate on the optimal taxation of foreign business income. The standard theory states that dividends paid by foreign affiliates should be taxed according to the tax credit system. However, recent empirical research has challenged the main assumption of this theory and suggested the introduction of the tax exemption system. In models accounting for these new findings it can be shown, though, that the tax credit system dominates the exemption system in welfare terms.