Reforming the Branch Profits Tax to Advance Neutrality‪.‬

I. INTRODUCTION In several respects, the U.S. tax system strives for neutral taxation. Neutrality is often concerned with similarly taxing different types of income that are economically equivalent. (1) For example, the Internal Revenue Code (Code) taxes interest income in the form of original issue discount prior to its receipt, regardless of whether the taxpayer uses the accrual or cash method, (2) because the instrument can be viewed as economically equivalent to earning interest on a bank account from which there are no withdrawals. (3) There is also the view that the law should be neutral in taxing different forms of conducting business, so that business, rather than tax, considerations determine the form of business operations. (4) While the double taxation of C corporations (5) is inconsistent with this view, (6) the treatment of S corporations (7) and provisions aimed at equalizing the taxation of branches and subsidiaries in the cross-border context (8) promote tax neutrality with respect to the form of conducting business. (9)