May 2008 Vol. 106 No. 7 THE REVIEW

Corporate Taxation and International Charter Competition

Mitchell A. Kane & Edward B. Rock

Corporate charter competition has become an increasingly international phenomenon. The thesis of this Article is that this development in corporate law requires a greater focus on corporate tax law. We first demonstrate how a tax system’s capacity to distort the international charter market depends both upon its approach to determining corporate location and upon the extent to which it taxes foreign source corporate profits. We also show, however, that it is not possible to remove all distortions through modifications to the tax system alone. We present instead two alternative methods for preserving an international charter market. The first-best solution involves severing the markets for corporate law and corporate tax law through coordination of locational rules under each regime, with a “place of incorporation” rule for corporate law and a “real seat” rule for corporate tax. The second-best solution relies on a properly designed federal structure. The crucial design elements for such a federal system are the allocation of substantive law between the federal and subfederal levels, corporate and corporate tax locational rules, and the taxation of corporate migration and foreign source corporate profits. With due attention to these details, an international charter market can avoid the potentially distorting effects of corporate taxation. In the final part of the Article we apply our analysis to the United States, Canada, the European Union, and Israel, and show how difficult it is, in the real world, to separate corporate charter and corporate tax competition.

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