Understanding
IP Industrial Property Tax planning

U.S. Corporations Act Responsibly in
Reducing Foreign Taxes

The U.S. is indisputably number one in one category – it imposes the highest tax rate on corporate income of any industrialized country.

The combined U.S. federal and state corporate income tax rate is approximately 40%.  This rate may be compared with 33% in Germany, 26% in Canada, 25% in China, 20% in the U.K. and 12.5% in Ireland.  The take-away is that earning income from conducting business operations in any other country will reduce a company’s tax costs, even in Japan, which recently reduced its corporate tax rate to 38%.

Additionally, the effective tax rate in many countries can be significantly lower than the nominal rate.  For example, China provides tax holidays or rulings reducing the effective tax rate on certain corporate income to 15% or 20%.

Some countries, such as the Netherlands and the UK (effective in 2013), provide favorable “patent box” regimes that tax certain intellectual property income at lower rates (e.g., 10%).

 Moreover, a number of countries permit intra-group structures generating large local deductions for interest and royalties, thereby significantly lowering the tax costs of business operations in their countries.

Several articles in the press have criticised structures used by U.S. multinationals to lower the tax costs on their foreign business operations as if these structures were somehow bad.  But the “offending” structures reduce foreign taxes, not U.S. taxes.  And count on it—foreign based multinationals are using the same techniques to minimize their foreign tax costs.

Indeed, discouraging U.S. companies from reducing foreign taxes can cost the U.S. government money.  Every dollar a company pays to a foreign government will ultimately cost the U.S. treasury a dollar because the U.S. must provide a dollar-for-dollar credit for foreign taxes paid on foreign income, under both the U.S. tax code and bilateral U.S. treaties with most of our major trade and investment partners.  Forcing U.S. corporations to pay more foreign tax will only increase its already huge deficit.

Despite suggestions by some, there is no clear evidence that lower foreign taxes on income earned outside the U.S. causes jobs to leave the U.S.  Indeed, the structures criticised in the press accounts typically have the effect of lowering a company’s overall effective tax rate without requiring the migration of jobs to other countries.  The greater threat to U.S. jobs may actually lie in the legislative proposals to attack these structures, some of which would have the perverse effect of encouraging the migration of jobs to foreign countries by penalizing the performance of high-value activities (like R&D) in the U.S.

A U.S. corporation acts responsibly when it seeks to minimize its foreign taxes to the extent permitted under foreign law, and this is good for America.