Document Type


Publication Date



The purpose of this Article is to analyze the consequences of taxing active foreign business income,1 and in particular, to compare a regime in which a home country taxes foreign income to a regime in which it does not. In practice, countries typically do not adopt such extreme policy positions. For example, a country such as France, which largely exempts foreign business income from taxation, nevertheless taxes small pieces of foreign income;2 and a country such as the United States, which attempts to tax the foreign incomes of U.S. corporations, permits taxpayers to defer home country taxation in some circumstances, claim foreign tax credits in most situations,3 and in other ways avoid the consequences of full home country taxation. It is nevertheless useful to consider stylized and somewhat extreme versions of territoriality and residence taxation, in part because the older theory that forms the basis of much U.S. policy advocates in favor of an extreme position of taxing worldwide income, and in part because insights drawn from considering extreme examples prove useful in understanding the murky middle to which tax policies naturally tend in practice.