International model steps

[codykallen]

The international model should receive 3 types of improvements:

1. Improve data collection in code so it can be done by industry.

2. Add profit-shifting response. From issue Profit shifting response #141:

With the international tax model built, we should consider a profit shifting response, in which earnings and profits booked in CFCs respond to the tax shield from doing so. Use Dowd et al. (2017) (https://www.sciencedirect.com/science/article/abs/pii/S004727271730018X) for the semi-elasticities. Changes in profits booked in CFCs would come from profits booked in foreign branches, and perhaps from profits booked domestically.

3. Add FDII calculation. From issue FDII computation #128:

• DEI = Gross income excluding subpart F, GILTI income, financial services income, dividends from 10% owned foreign corporations, domestic oil and gas extraction income, foreign branch income, and any deductions allocable to those excluded income categories.
  In the actual model, this is income less constructive taxable income, dividends from foreign corporations and foreign branch income and deductions.
• FDDEI: Similar to DEI, except only the portion of activities from selling goods, services or property to foreign unrelated parties or for foreign use by related parties.
• DII = DEI - 0.1 * QBAI
  FDII = DII * FDDEI / DEI
• Deduction = FDII * 0.375
  We don't actually have sufficient information to accurately calculate DEI and FDDEI separately, but we can approximate the ratio FDDEI / DEI using the share of sales by US MNE parent companies to foreign parties. Essentially, we would compute this using:
• DEI = Net income (pre-tax) of US parents - Net income (pre-tax) of foreign affiliates of US MNEs
• DII = DEI - 0.1 * Net PPE of US parents
• FDDEI / DEI = Sales of US parents to foreign affliates and persons / Total sales of US parents

For balance sheet of parents, use the file PartI-L1-M2, sheet Table I.L 1. This has asset information on US parents by industry. For balance sheet of affiliates, use the file Part II-B1-B12, sheet Table II.B 11. This has asset information on majority-owned foreign affiliates by industry of US parent. For all foreign affiliates, the balance sheet information is not provided by industry of the parent company.

For income of parents, use the file Part I-N1-P1, sheet Table I.N 1 for the income statement and sheet Table I.O1 for sales to domestic and foreign recipients. For income of majority-owned foreign affiliates, use file Part II-D1-D13, sheet Table II.D 11. For income of all foreign affiliates, use the file Part 1-D1-D12, sheet Table I.D 10.

[codykallen]

A suggested approach for handling the data on corporations claiming foreign tax credits:

The IRS tables provide income by the following categories:

• Dividends (including dividends from foreign corporations and deemed dividends from subpart F)
• Gross up
• Interest
• Rent, etc
• Service income
• Other income
• Branch income

We can then subtract off the deductions and adjustments to get taxable income from foreign sources.

For foreign taxes paid, we have

• Taxes deemed paid by gross up (80% of this under the TCJA)
• Tax on interest
• Tax on rent, etc
• Tax on branch income
• Tax on service income
• Tax on other income

Eligible foreign taxes are the greater of actual taxes and the relevant income multiplied by the US corporate tax rate. The limitation is computed by taking US taxes before credits (including AMT), multiplying by foreign taxable income and dividing by total taxable income; this will require some adjustment to recognize that MNE domestic income is only part of total corporate domestic income.

Once all of that is done, we can feed the data into the model and compute constructive taxable income from related foreign corporations. We can then rescale CFC data to match this (which may require reconciling an incomplete dividend payout process). Running the model again, we can compute the FTC, and rescale the rest of the DMNE data to match.

We should also adjust the process of accumulating earnings to reflect distributions not to US parents.