Bret Wells (Houston; Google Scholar), US International Taxation: A Matter of Taxpayer Election?, 61 San Diego L. Rev. __ (2024):

The United States provides broad taxpayer choice to choose the classification of foreign entities. The result of this elective entity classification regime is that taxpayers can elect to create mismatches in classification treatment of foreign entities that in turn results in income escaping taxation everywhere. Given today’s global effort to harmonize international taxation among the G-20 countries to assure that multinational enterprises pay a minimum tax, the continuation of an elective US entity classification regime hinders the policy goals of both the United States and its treaty partners. In order to minimize the utilization of entity classification mismatches as a means to create income that escapes taxation everywhere, this article argues that the United States should conform its classification of a foreign entity to that of the foreign entity’s situs jurisdiction.

If the foreign situs jurisdiction treats its own juridical entity as a separate and distinct corporate taxpayer, then the US should classify that foreign entity as a foreign corporation. If the foreign situs jurisdiction treats its juridical entity as a flow-through entity such that the owners of the entity are responsible for paying tax on the entity’s income on a flow-through basis, then the entity should be treated as a foreign partnership if owned by two or more owners and as a disregarded entity if owned by single owner. The article argues that this conformity in entity classification better promotes the design goals of the United States and its treaty partners in this this era. The article works through the complexity created under Treasury regulations to address the entity mismatch issues created by the elective US entity classification regime and the resulting mismatches that the elective classification regime fosters.