A Japan-United States Comparison of Recent Corporate Tax Reform Debates and Taxing Multinationals

Abstract

Globalization and the rapid increase of international capital movements made the issue of how to tax the income of multinationals very important. Because taxation of multinational corporations (MNCs) has become more difficult than before, governments have attempted to overcome such difficulties through tax reforms, introducing new rules, and correcting tax law defects. However, the problems have worsened. The issue of taxing MNCs is crucially important because it has a decisive impact on the future of corporate tax systems. To investigate this issue, a comparative study between the United States and Japan could be very useful. This paper compares the corporate tax reforms in Japan and the United States on the following two points: (1) revenueneutral tax reforms with rate reductions and base broadening and (2) shifts from worldwide to territorial taxation. This paper identified the reasons why Japan succeeded in implementing a revenue-neutral corporate tax reform, whereas the United States stagnated on this point. Regarding the U.S. debate around worldwide or territorial taxation, this paper conducted a comparative analysis from the perspective of the economic effects of a transition to territoriality by regarding both the U.S. 2004 tax holiday and Japan's move to territoriality in 2009 as a type of policy experiment. This comparison made it clear that both policy changes succeeded in significantly increasing dividend repatriation; however, we found no evidence that they increased domestic investments and employment. Finally, we concluded that a controlled foreign corporation (CFC) rule should play a central role in preventing tax avoidance even after a move to territoriality. On this point, a necessary condition for the successful move to territoriality was that Japan closed the loophole by reforming the CFC rule in 2010, immediately after its move to territoriality in 2009.