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The United States currently has a worldwide system of taxation where all income of residents is taxed, including foreign income. Because foreign income is often taxed where it is earned as well, this creates a double layer of taxation and subjects businesses to complex rules. Also, because the foreign income is not taxed by the U.S. until repatriated, trillions of dollars of foreign income is stranded overseas and not invested in the U.S.

The majority of countries have fixed these problems, particularly in recent years, by switching to a territorial system where income is taxed in the country it is earned. The U.S. should follow their lead and switch to a territorial system in order to modernize its uncompetitive and outdated system.

However, in transitioning to a territorial system, the U.S. should consider base erosion rules. These rules help determine what income should be taxed, especially with passive income, because international tax is complex with frequent cross-border transactions between multinational corporations and their foreign subsidiaries.

These rules need to be carefully considered though because overly burdensome rules would hurt U.S. businesses and make them less competitive. Other countries have rules on transactions with controlled foreign corporations (typically subsidiaries), dividend exemption systems and limitations on the tax deductibility of interest.

Another approach that some have suggested is a broad based minimum tax on foreign profits, but this might undercut the change to a territorial system.

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