It has been reported with increasing frequency that American corporations are engaging in profit shifting. That is, they are using tax planning strategies to avoid, delay, or reduce their U.S. tax on income earned overseas. Included among the companies that have been mentioned are Amazon, Apple, Caterpillar, Cisco, Google, Pfizer, and Starbucks, along with a number of other well and not-so-well known businesses. To curb profit shifting, some have argued for disallowing the sophisticated techniques companies use, as either part of a broader tax reform plan, or as separate legislation; presumably the separate legislation would be a stop-gap measure put in place until potential tax reform takes place. Others have argued that it is the current U.S. corporate tax rate and general approach to taxing American multinational corporations (MNCs) that is encouraging companies to shift profits and keep money abroad. The best remedy, it is argued, is to reduce the corporate rate and consider excluding most foreign earned income from taxation. This approach has also been offered as a broader tax reform package. Thus far, there is no consensus on the best way to reduce profit shifting. Profit shifting is not exclusively a U.S. problem. Foreign policymakers have also voiced concern over the tax strategies employed by U.S. corporations operating in their markets, as well as their own domestically based corporations. For example, in 2012, the Public Accounts Committee of the British House of Commons called upon executives from Amazon, Google, and Starbucks to explain their companies' U.K. tax strategies. German Chancellor Angela Merkel urged action to curb corporate profit shifting in a speech at the Organisation for Economic Co-operation and Development (OECD) on February 19, 2014. Similarly, French President François Hollande has called for some form of global tax harmonization. In response to the growing international concern, the OECD was asked by the G20 finance ministers to develop an Action Plan on Base Erosion and Profit Shifting (BEPS). The goal is to develop 15 detailed actions governments can take to reduce tax avoidance by multinational corporations (as well as individuals) worldwide. The Action Plan is scheduled to be completed in three phases: September 2014, September 2015, and December 2015. Some of the actions will require coordination and information sharing between governments, and potentially the amendment of existing tax treaties. As a result, the Action Plan relies heavily on the participation of all major economies. A number of G20 countries that are not part of the OECD (Argentina, Brazil, China, India, Indonesia, Russia, Saudi Arabia, and South Africa) participated in the meetings that led to the eventual adoption of the Action Plan by all G20 finance ministers. This report is intended to assist Congress as it considers what, if any, action to curb profit shifting. Data on the operation of U.S. and foreign corporations are analyzed to understand where profit may be being shifted to and to what extent. There are indications that profits are being shifted to "tax-preferred" or "tax-haven" countries, and that the amount of profits involved (and therefore the tax revenue lost) could be considerable. This report discusses the methods used for shifting profits only to the extent that it is necessary for interpreting the data or discussing policy options. For a detailed discussion of the profit-shifting mechanisms used by corporations, see CRS Report R40623, Tax Havens: International Tax Avoidance and Evasion , by [author name scrubbed]. The United States, in theory, taxes American corporations on their worldwide income. This approach to taxation is referred to as a worldwide (or resident-based) tax system. In contrast, a territorial (or source-based) system would tax American corporations only on income earned within the physical borders of the United States. In reality, no major economy has a pure worldwide or a pure territorial tax system. Although the U.S. taxes the worldwide income of American corporations, current law allows taxes to be deferred on income earned abroad until that income is repatriated (returned) to the United States. Deferral is a benefit to American corporations because delayed taxes are a reduced tax expense to firms due to the time value of money. In the extreme, deferral could allow an American corporation to completely avoid U.S. taxation on foreign source income if they never repatriate their overseas income, either because the income is being held abroad in financial assets or because it is permanently reinvested (e.g., in plant and equipment). The income earned by foreign branches of American corporations, however, cannot be deferred. A particular type of income which does not qualify for deferral is known as "subpart F income." Named for the location in the Internal Revenue Code (IRC) where its tax treatment is defined, subpart F income generally includes passive types of income such as interest, dividends, annuities, rents, and royalties. The highly fungible nature of subpart F income is such that corporations can use overseas subsidiaries to transfer taxable income from high-tax countries to low-tax countries with the ultimate goal of reducing their U.S. income tax liability. To prevent this, corporations must pay taxes on subpart F income in the year it is generated, regardless of whether it is actually repatriated to the United States. A temporary exception to the subpart F income tax rules for "active financing income" existed for income earned between 1997 and 2014. The active financing exception relates to the income earned by American corporations that operate banking, financing, and insurance lines of business abroad. Although some of the income derived from these lines of business (e.g., interest, dividends, and annuities) could be labeled as passive, active financing income was excepted from subpart F, and thus qualified for deferral and was only taxed when it was repatriated to the United States. The exception was last extended retroactively through 2014 by P.L. 113-295 in the 113 th Congress, and has regularly been extended in recent years as part of "tax extenders" legislation. When American corporations repatriate income from subsidiaries operating abroad, that income may have already been taxed by a foreign country. If it has, corporations are generally allowed to claim a dollar-for-dollar tax credit (up to a limit) for foreign taxes paid. The credit, formally known as the foreign tax credit, is intended to alleviate the double taxation of corporate income. The credit is generally limited to the amount of taxes a corporation would pay in the credit's absence, which is effectively just the U.S. corporate tax rate multiplied by the amount of income earned abroad. In other words, an American corporation may claim the foreign tax credit up to the point that reduces its U.S. tax on foreign-earned income to zero, but no further. Additionally, a separate credit must be calculated for two types of income "baskets"—passive and non-passive income. As long as the U.S. corporate tax rate is higher than the foreign country's rate, the foreign tax credit should—in principle—result in the corporation owing the same amount in total taxes (U.S. plus foreign) as it would if it earned the income in the Unites States. When the foreign tax rate is higher than the U.S. tax rate, a corporation should end up paying total world taxes (U.S. plus foreign) at a tax rate higher than the U.S. rate. There are instances when a corporation could end up with "excess" foreign credits because of the limits that restrict the credit from reducing U.S. taxes owed below zero. Excess foreign tax credits generated in a high-tax country can potentially be used to reduce U.S. tax owed on income generated in a low-tax country via a process known as "cross crediting." This is possible because deferral allows corporations to selectively decide when to repatriate income and therefore when to use excess credits. The tax returns of American corporations are private, which makes it difficult to study profit shifting directly. Several publically available datasets, however, do allow for an indirect examination into the extent that profit shifting may be occurring. The U.S. Bureau of Economic Analysis (BEA) collects data on the financial operations of American MNCs, including information on where they report profits, employ workers, make investments, conduct research and development, and carry out various other activities. The BEA also collects country-level data on the foreign direct investment (FDI) positions of U.S firms. The following sections discuss these data in turn. American companies reported earning profits of just over $1.2 trillion abroad in 2012 according to the BEA. Table 1 shows that the 10 most popular places to report profits were responsible for approximately 65% (or $789 billion) of the total $1.2 trillion in overseas earnings. Seven of the 10 reporting jurisdictions are considered "tax havens" or "tax-preferred" countries, including the four most popular destinations: the Netherlands, Ireland, Luxembourg, and Bermuda. The other three tax-preferred countries are Switzerland, Singapore, and the U.K. Caribbean Islands. Among the non-tax-preferred countries, the United Kingdom and Canada are major industrialized nations that are historically close trading partners with the United States. Norway is the biggest oil producer in Europe and the third largest exporter of natural gas in the world, which explains its placement on the list. Figure 1 shows the distribution of profits reported abroad in the same 10 jurisdictions displayed in Table 1 . The distribution is divided into two groups—one that includes the seven tax-preferred jurisdictions and another that is comprised of the three non-tax-preferred jurisdictions.