By Kyle Pomerleau (Tax Foundation):
As Congress moves closer to debating fundamental tax reform, the amount U.S. multinational firms pay in taxes on their foreign income has become a common topic for the press and among politicians. Some of the more sensational press stories and claims by politicians lead people to believe that U.S. companies pay little or nothing in taxes on their foreign earnings. Last year, even the president suggested the U.S. needs a “minimum tax” on corporate foreign earnings to prevent tax avoidance.[1] Unfortunately, such claims are either based upon a misunderstanding of how U.S. international tax rules work or are simply careless portrayals of the way in which U.S. companies pay taxes on their foreign profits. Thus, in any discussion of tax reform it is important to get the facts straight regarding the taxation of multinational firms’ foreign earnings.
The U.S. has a complicated “worldwide” system of taxation that requires American businesses to pay the 35 percent federal corporate tax rate on their income no matter where it is earned—domestically or abroad. When it comes to foreign profits, companies pay income taxes not once but twice.[2]
Companies first pay income taxes to the countries in which profits were earned. Then they pay additional U.S. taxes on any profits they return home (repatriate). For example, if a subsidiary of a U.S. firm earns $100 in profits in England, it pays the British income tax rate of 23 percent (or $23) on those profits.[3] Since our system gives companies a credit for the taxes they pay to other countries, the additional U.S. tax the firm is required to pay is equal to the difference between the U.S. rate of 35 percent and the British rate of 23 percent—$12. Between the two nations, the U.S. firm will have paid a total of 35 percent in taxes on those foreign profits.
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