Under the current U.S. tax structure, income not sourced or connected with the United States, and earned by foreign subsidiaries, will generally not be subject to U.S. taxation until if and when the earnings are distributed back to the United States. Many, if not most U.S. based multinationals, refrain from distributing overseas income to the United States unless most if not all the tax on the dividend is offset with foreign tax credits. Thus earnings from foreign subsidiaries operating in zero or low-taxed countries are generally kept offshore. This is referred to as the lockout effect and in some cases results in the income never being subject to U.S. or foreign tax.

There is an exception to deferral for certain types of income and activities. When this exception applies, there is immediate U.S. taxation. The latter treatment is generally reserved for passive income, highly mobile activities, as well as investment of earnings in United States property, including most loans to related U.S. companies. If anything, over the last 10-15 years, Subpart F, the part of the Internal Revenue Code that provides for immediate U.S. taxation of certain offshore earnings, has been weakened with provisions enacted including “look-thru” and the “active financing” exception coupled with the wide utilization of foreign entities that are disregarded for U.S. tax purposes. Even aside from the foregoing, there are many other techniques available under current law, like short-term loans, to legally avoid Subpart F’s impact.

Many U.S. based multinationals are concentrating their lobbying efforts to using tax reform to implement territorial taxation. Moving toward territorial taxation has a plethora of advocates. Even the National Commission on Fiscal Responsibility and Reform, the so-called Simpson-Bowles Commission, whose mission was deficit reduction supported territorial taxation and Erskine Bowles and Alan Simpson continue to do so. Chairman Camp of the House Ways and Means Committee is also a proponent of territorial taxation albeit with some limits. One argument for territorial taxation is that companies based outside the U.S. generally do not face worldwide taxation on active income, putting companies incorporated in the U.S. at a competitive disadvantage with their foreign-based rivals. The second argument for territorial taxation is that it will eliminate the lockout effect of having hundreds of billions of dollars of earnings trapped offshore.

What does loophole expansion have to do with either tax reform or deficit reduction? There is an existing loophole for offshore earnings. The Internal Revenue Code today taxes income earned by a foreign subsidiary differently than if earned in the U.S. because taxation of the former is generally deferred. Hundreds of billions of dollars of profits are being shifted from the United States tax base, to abroad, where it’s deferred until if and when repatriated. It is difficult for the IRS to police this area.

A territorial tax system would serve to encourage the shifting of activities offshore, and, with it, taxable profits and jobs. Congress attempted to address the lockout effect in 2004, with the enactment of Internal Revenue Code section 965 which permitted for a limited time, U.S. based multinationals to repatriate billions of dollars kept in foreign subsidiaries at a tax rate of 5.25 percent compared to the general corporate tax rate of 35 percent. This provision, which was part of The American Jobs Creation Act of 2004, was also heavily lobbied for by many of the same companies behind the push for territorial taxation. It didn’t create many U.S. jobs if you don’t include K Street lobbyists.

Charlie Wilson, who headed General Motors, and became secretary of Defense under President Eisenhower has been misquoted as testifying that “what’s good for General Motors is good for the country.” There is no doubt that expanding the deferral loophole to full-blown adoption of territorial taxation would benefit many U.S. based multinationals. There are well-funded efforts to influence lawmakers of both parties in this effort.

Congress and the administration however have a fiduciary obligation to look beyond whether such tax reform would benefit these companies and inquire how such a migration would impact jobs in the United States and the U.S. tax base. Is widening the barnyard door even further good for America? I submit that under such criteria the case for expanding the deferral loophole is dubious.

Philip G. Cohen is a tax professor at Pace University Lubin School of Business and a retired Vice President-Tax & General Tax Counsel for Unilever United States, Inc. The opinion expressed here is his personal views.