Since the beginning of the tax code, foreign corporations have not paid U.S. tax unless they are doing business here or earn U.S. source income. If a U.S. corporation owns a foreign corporation, same rule. The foreign corporation is a separate legal entity, and the U.S. corporation pays no tax until the foreign corporation distributes a dividend to it. Congress back in the 60s put in place an exception that says if the foreign corporation earns passive income, the U.S. corporation has to pay tax on that now, to prevent people from stashing money abroad in foreign corporations. Congress in the 1986 Act added another exception to attack the same problem. But otherwise the foreign corporation gets to defer its U.S. tax.

If this is a loophole, it’s a 45-year-old loophole reported on by Congress in the legislative history of every major tax bill and taught in every introductory international tax class since the 1960s.

But I guess we are second-guessing everything now that MNCs have become the stock villain in every feeble Hollywood offering and every speech by the teleprompter-in-chief. MNCs are not stockholders like teacher pension funds or employees trying to make a buck. No, they are evil robots bent upon our destruction! They must be punished! Or taken over by the White House! Or given to a local union where they can be slowly suffocated.

Just remember, if you do not pay your parents’ taxes, you are a tax cheat taking advantage of a loophole!

Colman,
You can also read several articles in mainstream press @ the proposal. Here is one from CNN: http://money.cnn.com/2009/05/04/news/economy/obama_corporate_tax_proposals/index.htm?cnn=yes

As someone who works in international tax consulting, I look forward to the new work this will generate for tax advisors everywhere. Thank you, Mr. President.