Revenues
Modify the Rules for the Sourcing of Income From Exports
CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.
| Billions of dollars | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2015-2019 | 2015-2024 |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Change in Revenues | 0.2 | 0.4 | 0.5 | 0.5 | 0.4 | 0.4 | 0.4 | 0.4 | 0.4 | 0.4 | 2.0 | 3.9 |
Source: Staff of the Joint Committee on Taxation.
Note: This option would take effect in January 2015. Estimates are relative to CBO’s April 2014 baseline projections.
To prevent the income that U.S. corporations earn abroad from being subject to both foreign and U.S. taxation, the federal government provides a credit for taxes paid to foreign governments. Under the rules governing that tax credit, it cannot exceed the amount of U.S. tax those businesses otherwise would have owed on their foreign income.
To calculate the limit on foreign taxes, a firm’s income must be allocated between foreign and domestic sources. For the purposes of determining the foreign tax credit, the U.S. tax code distinguishes between two categories of income derived from the sale of goods: Income resulting from the sale of goods that a U.S. firm buys from another business and then resells abroad; and income resulting from the sale of goods that a U.S. firm manufactures and then sells directly to buyers in other countries. Income in the first category is governed by the U.S. tax code’s “title passage rule,” which specifies that such earnings be “sourced” in the country where the sale occurs. However, for the second category of income, a special rule applies: When the goods are produced in the United States and then sold by that firm to foreign buyers, half of the resulting income is sourced in the United States; the rest of the income is subject to the title passage rule and allocated to the country where the sale took place.
Under this option, the title passage rule would no longer apply to income from the sale of goods manufactured in the United States and then sold abroad. Instead, all income from such transactions would be sourced to the United States.