Data Centers as Engines of Corporate Tax Base Restructuring

Authors

• Reuven S. Avi-Yonah, University of Michigan Law SchoolFollow
• Domenico Imparato, University of California, Berkeley
• Karen Sam, Committee on Taxation of Business Entities

Document Type

Article

Publication Date

8-2026

Abstract

Globalization has eroded the corporate income tax by undermining both source-and residence-based taxation. Before the 1980s, large capital-exporting countries could impose relatively high tax rates on multinationals and extend taxation to low-taxed foreign income earned through controlled foreign corporations, as exemplified by the U.S. adoption of subpart F in the Revenue Act of 1962. That regime supported corporate tax revenues that reached roughly 25 percent of total U.S. receipts in the mid-20th century.

Globalization changed that equilibrium. Multinational corporations gained the ability to arbitrage national tax systems by relocating and reporting profits in low-tax jurisdictions. Active income largely escaped source taxation because of auctions among countries vying for investment; this type of income fell outside traditional CFC rules, while countries reduced taxes on foreign-source income to preserve competitiveness and discourage corporate migration. In the United States, subpart F was progressively weakened and effectively neutralized by the 1997 check-the-box regulations, facilitating large-scale profit shifting and, by 2017, the accumulation of approximately $3 trillion in low-tax jurisdictions. The digital revolution of the 1990s further eroded source taxation by enabling firms to generate substantial revenues in market jurisdictions without establishing a physical presence.

Comments

Reprinted with the permission of Tax Analysts.

Recommended Citation

Avi-Yonah, Reuven S., Domenico Imparato, and Karen Sam. "Data Centers as Engines of Corporate Tax Base Restructuring." Tax Notes Federal 192, no. 5 (2026): 823-835.