International tax - a primer for reform proposals

This article examines the basics of the two prevailing international income tax systems: the worldwide tax system and the territorial tax system. The worldwide tax system is used in the US, and the territorial tax system is used in most other countries. In addition, this article examines the value-added tax (VAT), which, while not strictly an income tax system, impacts cross-border transactions and may affect international competitiveness. To illustrate concepts, there are three common fact patterns. In common fact pattern #1, parent and subsidiaries are designated by letters A, B and C. This fact pattern is used to illustrate the worldwide tax system. In common fact pattern #2, parent and subsidiaries are designated by letters X, Y and Z. This fact pattern is used to illustrate the territorial tax system. Common fact pattern #3 illustrates the two methods for calculating VAT. In this article, the terms "profits" and "earnings" are synonymous and interchangeable.