The Function of Corporate Tax-Residence in Territorial Systems


In this symposium Essay, I explore the instrumentality of corporate tax-residence determination in territorial tax systems. Using the United States as a case study, I show that tax-residence determination had a historic “positive functionality”. Namely, tax-residence positively pointed to the source of income earned, and distributed by, a corporation. However, in current economic environment the positive functionality is obsolete. Instead, the modern functionality of corporate tax residence is a “negative” one. That is, to assure that income is not sourced at a jurisdiction in which income could not have possibly been produced. Under such a view, corporate tax-residence should be constructed as an anti-income-shifting mechanism. One way to achieve such result is to base corporate tax-residence determination on formulary apportionment that takes into account the corporation's real economic attributes, as well as the proportional part of corporation’s contribution to the control-group earnings. The functionality of formulary apportionment in this context is not to allocate tax jurisdiction (the traditional use of formulary apportionment), but rather to assure that a corporation is not a resident where it has no economic existence. Current territorial reform proposals in the United States ignore the important function of tax-residence in supporting source-taxation. I therefore conclude with a call to incorporate a reform of corporate-tax residence determination in any territorial reform legislation.

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