publication . Preprint . 2012

Stateless Income

Edward D Kleinbard;
Open Access
  • Published: 01 Jan 2012
Abstract
This paper and its companion, The Lessons of Stateless Income, together comprehensively analyze the tax consequences and policy implications of the phenomenon of “stateless income.” Stateless income comprises income derived for tax purposes by a multinational group from business activities in a country other than the domicile of the group’s ultimate parent company, but which is subject to tax only in a jurisdiction that is not the location of the customers or the factors of production through which the income was derived, and is not the domicile of the group’s parent company. Google Inc.’s “Double Irish Dutch Sandwich” structure is one example of stateless incom...
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REGIME ...................................................................................................... 715 A. Worldwide and Territorial Tax Paradigms .............................. 715 B. The Current U.S. Tax System .................................................... 717 C. Revenue Collections Under the Current System ....................... 722 D. Arbitrage and Domestic Base Erosion...................................... 724 E. The Tax Distillery ...................................................................... 725

III. STATELESS INCOME IN OPERATION.................................................. 727 A. The Value of Stateless Income Tax Planning .......................... 727 B. Mechanics of Stateless Income Tax Planning ......................... 728 1. Business Earnings Stripping ......................................... 728 2. Transfer Pricing............................................................ 733 3. Legal System Arbitrage................................................. 737 C. How Large is Stateless Income? .............................................. 737 1. Cash Tax Liabilities ...................................................... 737 2. Accounting Evidence..................................................... 744

IV. IMPLICATIONS OF STATELESS INCOME............................................. 750 A. The Fruitless Search for Source ............................................... 750 B. Capture of “Tax Rents”............................................................. 752 C. Domestic Base Erosion Through Tax Arbitrage ....................... 757 D. Competiveness of U.S. Firms: Statutory and Effective Tax Rates........................................................................................ 758 E. Competitiveness of U.S. Firms: Lock-Out ................................. 762 F. Summary of Implications ........................................................... 768

V. RESPONDING TO A WORLD IMBUED WITH STATELESS INCOME ...... 770 16. Treas. Reg. § 301.7701-3(b)(2). That is the structure proposed in Darby

and Lemaster, Double Irish, supra note 11. Like all federal income tax return

materials, “check-the-box” filings are not publicly available. 17. In a 2008 video interview, John Herlihy, the manager of Google Ireland,

At the time, Google Ireland employed 1350 employees, of whom 900 worked in the

“online [sales] team,” 250 “on the technology side,” and 200 apparently in corporate

xM&NR=1&feature=fvwp (last visited May 19, 2011). Google describes its Irish

Google Dublin, http://www.google.ie/intl/en/jobs/dublin/ (last visited May 20,

2011). 133. See, e.g., Mihir Desai, C. Fritz Foley & James R. Hines Jr., Domestic

Effects of the Foreign Activities of U.S. Multinationals, 1 AM. ECON. J. ECON. POL'Y

181 (2009) (10 percent greater foreign investment is associated with 2.6 percent

greater domestic investment). 134. See I.R.C. § 163(j). 142. The author counts himself as a seasoned, if now superannuated,

practitioner, having practiced in the field for 30 years before graduating to a more

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