The United States Fight Against Harmful Tax Competition

The United States taxes its citizens on their worldwide income. Since the U.S. taxpayers are not always very complaisant the government has had to create ways to disclose and control transactions and penalise non-compliant taxpayers. The United States has been, and is one of the world's leading countries in the fight against harmful tax competition, ever since it decided to implement the Controlled Foreign Corporation legislation in 1934. This legislation consists of different sets of legislation that work together to let the IRS tax a shareholder on the income of a foreign company. This is done even though the shareholder has not yet received any dividends from that company. Treaty shopping has been countered with a limitation on benefits clause in every new international income tax treaty. This clause requires a company to fulfil certain requirements to be eligible for treaty protection. The IRS is also very active in the area of inter-company pricing where it allocates gross income, deductions, and credits between related taxpayers to the extent necessary or to clearly reflect the income of related taxpayers. Other recent developments involve trying to create a blacklist of tax havens and a set of regulations about disclosure. Tax shelter promoters are now required to register confidential corporate tax shelters. Promoters also have to maintain a list identifying each investor who has bought an interest in a potentially abusive shelter. Corporate taxpayers who participate in a tax shelter are also required to report their participation to the IRS. The new disclosure requirements have received a lot of criticism from various directions for involving too many transactions in the reporting requirement. The legislation is also unclear and creates uncertainty. This will lead to excessive work for taxpayers as well as the IRS. An Office of Tax Shelter Analysis will be created to handle all information about tax shelters and there will be penalties for both taxpayers and promoters who do not follow the new disclosure regulations. The OECD is an organisation active in the fight against harmful tax competition. Their work involves setting criteria for identifying and listing potentially harmful tax regimes. The criteria they use are not too different from the ones used by the United States. The main difference between the OECD and the United States is the focus by the OECD on countries and their tax systems and the focus by the United States on the individual taxpayer