The Comparative Analysis of Tax Incentives Provided by the United States, the United Kingdom, and Russia to Domestic and Foreign Businesses
Havard, Nadia, Albany Law Review
Tax is a powerful tool in the hands of lawmakers. It is probably one of the most complex and, at the same time, most flexible devices available to legislators for shaping national investment policies. Vigorous competition for investments among countries led to the creation of so-called "tax haven" regimes--national tax systems that impose minimal or no tax liability. (1) Other nations responded to the proliferation of tax havens by lowering their own tax rates. (2) For instance, although retaining taxation in place, both Russia and the United Kingdom have adopted tax laws equally attractive to foreign investors. (3)
As the world economy is expanding, issues of tax competition among nations are becoming highly controversial. A number of organizations, including the United Nations, the World Trade Organization ("WTO"), and the Organization for Economic Co-Operation and Development ("OECD"), have established special dispute resolution procedures inviting nations to air their grievances and resolve them amicably. (4) Most of the disputes focus on reaching international consensus as to where income should be taxed. (5) Historically, active income has been taxed at its source and passive income at a taxpayer's place of residence. (6) Thus, the country where the income originated has the primary right to levy taxes and the country where the recipient of the income resides has a residual right to tax passive income. (7) In fact, international tax treaties are based on the presumption that the country in which the income recipient resides is in a better position to prevent double taxation. (8)
Mindful of national differences at all levels, and in particular, in the area of taxation, this paper will focus on corporate tax laws of the United States, Russia, and the United Kingdom. The analysis will attempt to identify those explicit and implicit tax incentives that are likely to attract inbound investments in a particular economic environment.
The first part of the analysis will explore tax incentives available to domestic businesses. The second part of the analysis will look into tax incentives promulgated for the purpose of attracting foreign businesses. Finally, the conclusion will summarize the findings and tax policy implications.
II. DOMESTIC TAXPAYERS
A. Explicit Tax Incentives
This analysis of explicit tax incentives will begin with the United States. "Domestic taxpayers" are defined to include "United States citizens, residents, domestic corporations, partnerships, and trusts." (9) Although any group of domestic taxpayers is far from being homogeneous, Congress gave preference to those who are engaged in export. In fact, by adopting the Foreign Sales Corporations Act ("FSC") in the early 1980s, Congress enabled American corporations to substantially increase their export operations. (10) Under the FSC regime, foreign sales corporations paid no tax on their income as received from a foreign income source. (11) Although American companies still paid state sales taxes, the relief from federal tax enabled them to lower sales prices and, thus, come ahead of their European competitors. (12) As could have been anticipated, the FSC tax regime was challenged by the European Union ("EU") before the WTO and on October 8, 1999, a WTO panel found the FSC to be in violation of global trading rules. (13) Even though the FSC Repeal Act repealed the original FSC law in November 2000, the FSC benefits have arguably survived. (14)
Under the current Tax Code, as well as the 1993 Tax Act, U.S. domestic taxpayers are taxed not only on their income earned in the United States, but also on their worldwide active and passive income. (15) This heavy burden of taxation, however, is lightened by credits. For example, a foreign tax credit is available in an amount equal to the United States tax rate. It allows taxpayers to offset the taxes paid in a foreign jurisdiction, and thus, reduce their tax liability in the United States. …