A major tax advantage of using a CFC to conduct foreign operations is income tax deferral. Generally, U.S. tax on the income of a CFC is deferred until the income is distributed as a dividend or otherwise repatriated by the foreign corporation to its U.S. shareholders. Before any rules were put in place, many companies with U.S. shareholders would take advantage of this tax treatment by deferring U.S. tax on certain kinds of income (primarily passive income). More specifically, U.S. companies would keep income earned by a CFC with the CFC as opposed to bringing it back (or repatriating it back) to the U.S. to defer any type of U.S. tax on the income. In addition, by placing these CFCs in low- or no-tax jurisdictions, U.S. taxpayers were able to ensure the income was taxed at a very low rate (until it was repatriated to the U.S.) significantly reducing their overall tax liability.

One concept the CFC regime implements to stop the deferral of taxation is Subpart F. Under the Subpart F provision, certain types of income (also referred to as Subpart F income) earned by a CFC are taxable to the CFC's U.S. shareholders in the year earned even if the CFC does not distribute the income to its shareholders in that year. Subpart F operates by treating the shareholders as if they had actually received the income from the CFC.

Assume that you work for the U.S. House Ways and Means Committee, and the Committee is revising the anti-deferral concept discussed above. The Committee wants ideas for a new concept that would replace the existing one. Please come up with a new concept that is different than the existing one, and explain why that concept would be a good one to replace the existing one.