The Taxation of Corporations and Shareholders

Size: px

Start display at page:

Download "The Taxation of Corporations and Shareholders"

Linda Burke
5 years ago
Views:

1 The Taxation of Corporations and Shareholders

2 International Tax Program Harvard Law School Cambridge, Massachusetts

3 The Taxation of Corporations and Shareholders Martin Norr Springer-Science+Business Media, B.V

4 Typographical Design: Pieter J. van der Sman Cover Design: Bert Arts Copyright Springer Science+Business Media Dordrecht 1982 Originally published by Kluwer Law and Taxation Publishers, Deventer, Netherlands in 1982 Softcover reprint of the hardcover 1st edition 1982 By the President and Fellows of Harvard College All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, mechanical, photocopying, recording, or otherwise, without the prior written permission of the copyright owner. First published by Kluwer Law and Taxation Publishers, Deventer, Netherlands D/1981/2664/38 (Belgium) ISBN DOI / ISBN (ebook) Library of Congress Cataloging in Publication Data Norr, Martin. The taxation of corporations and shareholders. On page opposite t.p.: International Tax Program, Harvard Law School. Bibliography: p. 199 Includes index. 1. Corporations Taxation. 2. Dividends Taxation. I. Harvard University. International Tax Program. II. Title. K4544.N ' AACR2

5 Contents Foreword 1. Purpose, Scope, and Definitions XI 1 11 A. Introduction I 1 1/ A. 1. In General I t l/a.2. The Political Factor 3 lib. Scope and Organization I 4 1/C. Definitions I 5 l/c.1. Corporation and Shareholder: In General I 5 1/C.2. The Widely Held Versus the Closely Held Corporation I 9 l/c.3. Quasi Corporations I The Corporation Income Tax: Arguments For and Against 15 2/A. The Need To Tax Corporate Profits I 15 2/B. Disregard of the Corporate Entity for Tax Purposes I 16 2/B.1. In General I 16 2/B.2. Taxation of Corporate Profits Directly to Shareholders: The Partnership Method I 17 2/C. Compulsory Distribution of Corporate Profits to Shareholders I 22 v

6 CONTENTS lid. Taxation of Corporate Profits to the Corporation as an Entity I 23 2/D.1. In General I 23 2/D.2. Imposition of the Individual Income Tax I 24 2/D.3. Imposition of a General Business Income Tax I 26 2/D.4. Imposition of a Corporation Income Tax I 28 a. In General I 28 b. Arguments for the Corporation Income Tax I 28 c. Arguments Against the Corporation Income Tax I 33 2/E. Conclusion I Integration of Corporation and Individual Income Taxes: Arguments For and Against 41 3/A. Integration Defined I 41 3/B. Measuring the Additional Burden of the Corporation Income Tax I 43 3/C. Analysis of the Etlect on Dividend Distribution I 46 3/C.1. In General I 46 3/C.2. Analysis I 46 3/C.3. Summary I 52 3/D. Arguments for Integration I S3 3/D.1. Equity and Redistribution I 53 3/D.2. Economic Efficiency I 55 a. Neutrality Among Forms of Business Organization I 55 b. Efficient Allocation of Capital Funds I 56 3/D.3. Transitional Measures for Developing Countries 58 3/E. Arguments Against Integration I S8 3/E.1. The Problem of Shifting I 58 3/E.2. Economic Growth I 59 a. Encouragement of Retention I 59 b. Discrimination Against New and Expanding Corporations I 62 3/E.3. Other Policy Arguments I 63 a. Transitional Measures for Developing Countries 63 b. Preferential Treatment of Capital Gains I 63 3/E.4. Revenue and Administrative Considerations I 64 a. Revenue Considerations I 64 b. Administrative Difficulties of Integration and Its Alternatives I 65 VI

7 CONTENTS 1. The Alternative of Rate Reduction I The Alternative of Special Rules for Closely Held Corporations I 66 3/F. Conclusion: The Prevalence of Partial Integration I Choice of the Level (Corporate or Shareholder) at Which Integration Is To Be Provided A. In General I 71 4/B. Ease of Administration I 72 4/C. Ellects on Tax Revenue and Compliance 73 4/D. Ellect on Business and Investment Behavior I 75 4/E. Shifting and Incidence I 77 4/F. Equity and Political Factors I 78 4/G. International Aspects: ElIect on Nonresidents I 78 4/G.1. In General I 78 4/G.2. Possible Effect of New French Tax Treaty Pattern I 80 4/H. Conclusion 1 82 s. Integration at the Corporate Level 83 S/A. Introduction 1 83 SIB. Ditlerential Rate Structures: The "Split-Rate" System I 84 5/B.1. In General I 84 51B.2. Equity I 84 5/B.3. Differential Between the Rates of Tax on Retained and Distributed Profits I 85 a. In General I 85 b. The Undistributed Profits Tax I 88 c. Portion of Profits Used To Pay Tax I 90 d. Consent Dividends I 91 e. Ceiling on the Proportion of Earnings Entitled to the Preferential Rate I 91 f. Current Versus Past Earnings I 92 5/B.4. Qualifying Shareholders I 93 a. In General I 93 VII

8 CONTENTS b. Intercorporate Dividends I 94 c. Nonresident Shareholders / 95 51B.5. Treatment of Small Corporations / 95 5/C. Deduction of Dividend Disbursement by Corporations I 96 51C.1. In General / 96 5/C.2. Equity I 100 5/C.3. Amount of Deduction / 100 a. Normal Versus Excess Dividends / 100 b. Determining the Amount of a "Normal" Dividend / Limitation to a rate related to the interest rate / Limitation to a proportion of dividends paid / Deduction of the imputed cost of equity capital / No limitation; The undistributed profits tax / Deduction of sums set aside for future dividends / Use of a dividends-paid credit in lieu of a dividend deduction I 105 5IC.4. Temporary Use of the Dividend Deduction As a Tax Incentive I 106 a. In General; New Shares I 106 b. Limitation of Deductibility to a Period of Years I 109 c. Miscellaneous Policy Goals I 110 5/C.5. Qualifying Distributions I 111 5/C.6. Qualifying Shareholders / 111 a. In General/Ill b. Intercorporate Dividends / 112 5IC.7. Treatment of Small Corporations I Integration at the Shareholder Level A. Introduction I 115 6/B. Exemption or Exclusion of Dividends From the Individual Income Tax Base I 117 6/B.1. Total Exemption or Exclusion / 117 6/B.2. Methods of Correcting Inequity I 118 6/B.3. Partial Exemption or Exclusion /B.4. Integration Through the Individual Rate Mechanism / 121 6/C. The Dividends-Received Credit to the Shareholder I 123 6/C.1. In General / 123 6/C.2. The Credit and "Gross-Up" / 125 a. "Gross-Up" Defined I 125 b. Arguments For and Against Gross-Up / In general: Administrative complexity and taxpayer confusion / 126 VIII

9 CONTENTS 2. Impact on tax revenues and on size of dividend distribution Refunds Equity /C.3. Rate and Base of the Credit a. Rate b. Base /CA. Qualifying Distributions a. In General b. Previously Taxed Profits and Rate of Tax Paid c. Distributions Other Than Cash d. Dividends From Foreign Corporations /C.5. Qualifying Shareholders a. Resident and Nonresident Shareholders b. Corporate Shareholders /C.6. Special Treatment for Small Corporations /C.7. Effect on Compliance /C.8. The Political Impact of Integration at the Shareholder Level I 148 6/D. Mixed or Dual-Level Integration Systems I International Aspects 151 7/A. Introduction I 151 7/A.1. In General /A.2. International Double Taxation and National Two-Tier Taxation A.3. Tax Treaties lb. Unintegrated Tax Structures I /B.1. Corporate Level /B.2. Shareholder Level /B.3. International Implications /C. Integration at the Corporate Level I 162 7/C.1. In General /C.2. Direct Investment: Dividends From Resident Subsidiaries to Nonresident Parent Corporations /C.3. Portfolio Investment: Dividends From Resident Corporations to Nonresident Portfolio Investors /CA. Dividends From Nonresident Corporations to Resident Shareholders /C.5. Income of Resident Corporations From Foreign Sources /C.6. Branches of Foreign Corporations IX

10 CONTENTS 7/D. Integration at the Shareholder Level I 176 7/D.1. In General I 176 7/D.2. Direct Investment: Dividends From Resident Subsidiaries to Nonresident Parent Corporations I 178 7/D.3. Portfolio Investment: Dividends From Resident Corporations to Nonresident Portfolio Investors I 179 a. In General I 179 b. Methods of Treaty Relief I French treaty with Germany I French treaties with the United States and Switzerland I 183 c. Treatment of Additional Tax for Dividends Paid to Nonresident Shareholders I 186 7/D.4. Dividends From Nonresident Corporations to Resident Shareholders I 187 7/D.5. Dividends to Resident Shareholders Paid by Resident Corporations out of Foreign Income I 187 7/D.6. Branches of Foreign Corporations I 191 7/E. Conclusion I 192 Appendix: German System Etfective in 1977 I 193 Bibliography I 199 x

11 Foreword This monograph is principally the work of the late Martin Norr. He completed a draft of the entire monograph but had not yet revised it when he died in late At that time, the integration of corporate and shareholder taxation was just beginning to become of widespread interest in the United States. With the increasing interest thereafter, the International Tax Program began to revise his manuscript, making as few changes as possible in the original draft. We had the benefit of criticism and analysis from Professor Richard M. Bird of the University of Toronto, now Director of the Institute of Policy Analysis there. In addition, Mr. Mitsuo Sato of the Ministry of Finance in Japan gave freely of his time in carefully suggesting changes throughout the manuscript. The present version of Chapter 3 owes a great deal to his additions and suggestions. Thanks are also due to Professor Hugh J. Ault of Boston College Law School for the Appendix, containing his description of the German integration system that became effective in 1977, which was first published in Law & Policy in International Business. Mr. Norr's interest in the subject of corporate and shareholder taxation developed while he was writing the International Tax Program's World Tax Series volume Taxation in France, published in The integration of French taxes on corporations and shareholders took place just after that volume was finished, but had been under discussion in France for some time before then. Despite the large amount of literature generated on the topic in the United States during the past ten years, Mr. Norr's insights into the practicality of integration still remain fresh and useful. In particular, Chapter 7, which deals with international aspects of the subject, highlights a series of difficulties that continue to confound experts today. Those who are particularly concerned that the problems of integration in the international context are the most important ones to solve before the United States again considers adopting integration will find support for that view in this volume. When Mr. N orr wrote the first draft of this monograph, it was intended to be part of the Tax Technique Handbook series that the International Tax Program publishes. It outgrew that format, however, and is being issued as a separate monograph. Although some of the features of the handbook format are present, the 100-page limit has been exceeded. In addition, an extensive research bibliography has been added which XI

12 FOREWORD covers not only the works cited in the monograph, but also other English-language materials on integration published through early That this monograph now becomes available is principally the result of the efforts of Professor Elisabeth A. Owens, Director of Research at the International Tax Program. Under her direction, Christopher A. Klem updated the manuscript to 1977 during his third year at Harvard Law School and the succeeding months when he began law practice with the firm of Ropes & Gray in Boston. Special credit is due to Martha S. Cooley, Editorial Assistant, and Gretchen A. Hovemeyer, Editorial and Publishing Director, who copyedited the manuscript and prepared it for publication. The International Tax Program was founded in 1952 in response to a resolution of the United Nations Economic and Social Council and with the aid of a substantial grant from the Ford Foundation. Mter the first dozen years, the Ford Foundation grant steadily decreased. At the present time, the largest source of foundation support is the Lincoln Institute of Land Policy at Cambridge, Massachusetts. Other direct financial support for the Program's research activity dealing with the developed countries or relations between the developed and the developing countries is provided by the international business community through the Program's Liaison Committee. Indirect support is provided by foreign governments, the United Nations Development Program, and the United States Agency for International Development, all of which grant scholarship and fellowship aid to the foreign officials who study at the Program each year. For further information about the International Tax Program, its current publications, and its training activities, please write to the International Tax Program, Pound Hall, Harvard Law School, Cambridge, Massachusetts 02138, USA. Oliver Oldman Learned Hand Professor of Law and Director of the International Tax Program, Harvard Law School XII

The valuation of goods for customs purposes

The valuation of goods for customs purposes 'Anything to declare?' 'Only my genius.' Oscar Wilde versus US customs. The valuation of goods for customs purposes by HENK DE PAGTER and RICHARD VAN RAAN 1981