An article behind the pay wall of Tax Notes this month explains how a little noticed technical provision in 1997, Code section 1297(d), allowed U.S. multinationals to keep over a Trillion Dollars (say $1,700,000,000,000) overseas untaxed. It’s “Can a Piece of Paper Earn Billions?” by Charles I. Kingson. The answer is yes.
There are several ways to stop these shenanigans, but Kingson (whose Columbia Law Review article, “The Coherence of International Taxation,” was handed to me on my first day on the job at Joint Tax in 1982) points out that one simple way would be to repeal the 1997 change and thus reapply the Passive Foreign Investment Company rules to U.S. shareholders of Controlled Foreign Corporations. Reinstating those rules would create a fix that would apply only to foreign subsidiaries that are mainly passive. Then those U.S. shareholders would have to pay an interest charge to make up for the deferral of tax. Close enough.