With only two weeks left before the November 4, 2014 midterm elections, the Democrats have evoked a populist riff to bolster the votes to retain majority senate control. Any companies that seek legal ways to invest their previously taxed foreign earnings in the U.S. without penalities, the CEO is branded as a "corporate deserter" by Obama. So let's go after the big bad boogyman, the greedy bloodsucking huge corporate behemoths stealing the milk out of babies' bottles who are left to starve!
Every year, there are news stories outlining how much multinational corporations are paying in taxes. Many of the more sensational stories lead people to believe that U.S. companies pay little or nothing in taxes on their foreign earnings.
Source: KPMG LLP, U.S. audit, tax and advisory services firm,
Some politicians suggest implementing a “minimum tax” on corporate foreign earnings to prevent tax avoidance. Unfortunately, legislation that would impose these types of taxes on multinational corporations is based on a misunderstanding of how U.S. international tax rules work.
In any discussion of U.S. corporate tax policy and tax reform, it is important to understand how and to what extent multinational firms’ foreign earnings are taxed. Let's look at official U.S. IRS Tax Tables Key Findings:
- The United States’ worldwide system of corporate taxation requires multinational corporations to pay taxes twice, first to the foreign country in which they do business and then to the IRS after they repatriate their profits.
- Petroleum and coal products manufacturing corporations paid $42.7 billion in foreign taxes on $118.2 billion in taxable income. Remarkably, this industry accounted for a quarter of all foreign earned income and 33 percent of all foreign taxes paid by U.S. multinationals. The average effective tax rate paid by petroleum and coal products manufacturers was 36.1 percent.
- While there are undoubtedly U.S. multinationals that paid low effective rates on their foreign earned income in some countries, a majority of foreign taxable income reported by U.S. corporations was taxed at effective rates between 20 and 30 percent overseas.
Source: IRS Form 1118 (2010).
Note: Includes only repatriated income and income subject to current taxation. Does not include income currently held abroad.
Conclusions
While it is undoubtedly true that U.S. multinational firms use numerous tax planning techniques to minimize the taxes, they pay on their foreign earnings.
IRS data shows that the subsidiaries of U.S. multinationals reported paying more than $128 billion in corporate income taxes to foreign tax authorities on roughly $470 billion in foreign taxable income in 2010.
"Averaged across some ninety countries, U.S. companies paid an effective tax rate of 27.2 percent on that income. While many corporations paid less than that on foreign earned income, a majority of foreign income in 2010 faced effective tax rates of 20 percent or higher in foreign countries. Furthermore, most corporate income was earned, and most corporate income taxes paid overseas were paid, by manufacturers, especially those engaged in petroleum and coal products manufacturing."
NOTE: Reporters and lawmakers who criticize U.S. companies for “avoiding” taxes on their foreign earnings need to be more careful with their language and acknowledge that our U.S. worldwide tax system requires U.S. firms to pay taxes twice on their foreign profits:
- First time to the host country
- Second time to the U.S. IRS
A major point is that before U.S. companies can retain earnings to reinvest their profits back home that they pay the applicable foreign country's taxes. Then, the residual income can be repatriated to the shareholders' dividends for income distribution; company operating expenses for payroll. R&D or inventory; and cash reserves.
Have you ever asked yourself what 401K programs, Union profit sharing programs and company retirement programs are about? Hint: It's to grow tax-free investment monies to pay out for your future program benefits; it's not to reduce overall principle earnings power by paying extra income taxes to support government waste or for more debt bailouts. When you withdraw future benefits as income, the IRS then taxes you.
Any discussion about reforming the U.S. corporate tax code must keep these facts in mind.
