"Foreign Income and Domestic Deductions"

Michigan Law Authors
Areas of Interest
Publish Date
2008
Publication
National Tax Journal
Publication Type
Journal Article
Abstract

To what extent should taxpayers deduct expenses incurred domestically that contribute to foreign income production? It is widely believed that if the home country does not tax foreign income, then it also should not permit deductions for that portion of domestic expenses attributable to earning foreign income. This prescription is, however, inconsistent with the decision to exempt foreign income from taxation in the first place. The paper shows that, for any system of taxing foreign income, the consistent and efficient treatment is to permit domestic expense deductions for all expenses incurred domestically. This differs from the current U.S. regime, under which American firms were required to allocate more than $110 billion of domestic expenses against foreign income in 2004.

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