Jurisdiction to Tax Corporations

IntroductionCorporate tax residence is a foundational legal construct. Determining a corporation's tax residence (namely, whether the corporation is "foreign" or "domestic" for tax purposes) is necessary to calculate the tax liabilities of the corporation and its affiliates,1 and sometimes, its shareholders.2 Unfortunately, tax scholars seem to agree that corporate tax residence is a meaningless concept.3 This Article disputes this common perception. This Article argues that the defining normative criteria commonly used to assess the "meaningfulness" of corporate tax residence are irrelevant. Instead, this Article suggests alternative criteria that are based on functional, rather than normative, considerations.There are two reasons for the perceived "meaninglessness" of corporate tax residence. Some scholars argue that corporate tax residence lacks a convincing normative basis to justify treating a corporation as "domestic" in one jurisdiction rather than another.4 Alternatively, some scholars propose that corporate tax residence is too vulnerable to taxpayer manipulation.5 Effectively, these scholars argue that corporate tax residence is elective.6 Taxpayers can arrange the tax residence of corporations as they see fit, and avoid taxes.7Responses to this acute problem march along two fronts.8 One response is a continued debate on the "best" normative justification for the determination of corporate tax residence.9 This approach will hereinafter be referred to as the "normative approach." The second response doubts that a normative foundation for corporate tax residence can be found.10 Accordingly, this response suggests that we should minimize the importance of corporate tax residence in the calculation of tax liabilities. This second approach will hereinafter be referred to as the "pragmatic approach." Part I of this Article suggests that both the normative approach and the pragmatic approach are inadequate.11Under the normative approach, corporate tax residence tests are independently justified in normative terms. For example, a normative justification for a particular residence test may be that the test is more efficient than another. A proponent of an "efficient" tax residence model takes the position that a model is desirable because it possesses an inherently positive quality-efficiency-regardless of whether the reason for taxing corporations has anything to do with efficiency.Under an alternative normative stance, a corporate tax residence test could be justified if it captures a meaningful "nexus" of the corporation to a particular jurisdiction. Because the corporation benefits from the public goods created by the jurisdiction, it is justified to tax the corporation in that jurisdiction. The debate between the two nor- mative standards for corporate tax residence tests can be described as a dichotomy of formal and substantive tests.12Part I, Section A argues that the normative dichotomy does not make sense in the context of theories that justify the taxation of corporate entities. Specifically, the polarized normative arguments are advanced under the assumption that either efficiency is a desirable goal, or that corporations are "real entities" capable of benefiting from public goods.Scholars agree, however, that corporate tax itself is an inefficient model of revenue collection,13 and that for tax purposes, corporations are not real beings.14 Rather, corporations are instruments for the taxation of individuals.15 Accordingly, the debate about corporate tax residence is advanced under assumptions that have been rejected in the context of a bigger, first-order question: Why tax corporations to begin with? It makes little sense to construct the jurisdictional threshold test of a tax regime (i.e., the question of tax residence) under assumptions that have been rejected for purposes of constructing the tax regime itself (i.e., the regime of corporate taxation).Part I, Section B discusses the pragmatic approach and shows that the pragmatic approach does not offer a remedy to the theoretical gridlock described above. …