Taxable Income And International Transfer Pricing Essay

However, the companies only have to pay the U.S. tax for foreign revenues once they bring the profits back to the United States. As a result of these current tax laws, U.S. companies that seek to avoid high corporate tax rates hold their foreign earned profits overseas. “It just makes no sense to pay a substantial tax on it,” said Joseph Kennedy, a senior fellow at the Information Technology and Innovation Foundation (Rubin, R.). It is far too easy for an IT corporation to create a patent in a foreign country and direct revenue to a corporation within that country, thus avoiding the much higher U.S. tax rates. According to Joint Committee on Taxation estimates, the lost revenue is increasing over time as corporations find even more creative ways to make their U.S. profits look like offshore income (Richards, K., & Craig, J.). As result, multinational American corporations have as much as $2 trillion held in overseas subsidiaries and if brought into the United States with the current tax laws, the federal government could benefit by nearly $50 billion per year.

The main objective of many companies is to minimize their tax obligations. Jeffers (2014) discussed the reason of why companies adopt tax inversion strategies. The researcher indicated that the income maximization is a major reason of companies attempting to reduce their tax liability (pp. 100-101). Tax inversion strategies provide companies an advantage to lower income tax rate. Today, U.S. corporations renounce its U.S. citizenship and move to low-tax countries. Companies that reincorporate oversees are not obligated to pay U.S. taxes on earning income (p. 99). Many countries implement tax competition strategies to attract and retain businesses. Well-known companies, such as Exxon Mobil, Hewlett Packard, Tyco, General Electric, PepsiCo, etc. take benefits of tax shelter opportunities overseas (p. 102). Other benefits of the jurisdiction abroad are flexible banking laws and simplified litigation processes.

2. The primary means in which a corporation is able to do so is to qualify for benefits in the 1996 U.S. Model Treaty. There are actually a couple of different ways in which corporations can access these benefits in international transactions. One of the ways is if that corporation is regarded as a fiscally transparent partnership in another

Per the text, a U.S. parent company does not include the income of a foreign

The United States has income tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. income taxes on certain items of income they receive from sources within the United States (IRS, 2015). These reduced rates and exemptions vary among countries and specific items of income. The US has bilateral income tax treaties with many global trading partners. Under the terms of those treaties, a company that establishes a taxable presence in a foreign country is understood to have created a permanent establishment. With few exceptions, a treaty must exist between the US and the foreign country for the concept to apply. If you are treated as a resident of a foreign country under a tax treaty, you are treated as a nonresident alien in figuring your U.S. income tax. For purposes other than figuring your tax, you will be treated as a U.S. resident. If you are a resident of both the United States and another country under each country 's tax laws, you are a dual resident taxpayer. If you are a dual resident taxpayer, you can still claim the benefits under an income tax treaty. The income tax treaty between the two countries must contain a provision that provides for resolution of conflicting claims of residence.

The underlying cause of the great exodus of American businesses leaving the United States to open their headquarters abroad is the existing US tax codes. The United States is taxing our businesses to death, Burger King has even left the US to set up their headquarters in Canada. Numerous pharmaceutical companies have also left the US to open its doors abroad. In the last ten years 47, companies have left the US for lower taxes, also known as inversion or offshoring. (CNN)

If it is included, then profit will be decreased. The Fifth and Eighth Circuits have taken an approach that foreign taxes are not economic costs and should not be deducted from pretax profit. However, in the Second Circuit, the court in BNY concluded that the objective prong of the economic substance test requires the inclusion of foreign taxes in both a calculation of pre-tax profit and a consideration of the transaction’s overall economic effect. The court supports its decision with the congressional intent that foreign tax credits are to “facilitate global commerce by making the IRS indifferent as to whether a business transaction occurs in this country or in another, not to facilitate international tax arbitrage.” Taking into consideration the tax spread, the Bx payment, and the U.K. taxes paid by the trust, the transaction does not generate profit and thus fails the objective prong of the

Metlife, Inc. (“Metlife”, ”Company”) is a multinational insurance company which carries operations both in the U.S. and in various other foreign jurisdictions. The taxable income that Metlife generates abroad through its subsidiaries is subject to income tax under the laws of those foreign jurisdictions within which the income is derived from. Under the U.S. worldwide taxation system, that same income is also subject to U.S. tax upon (deemed) repatriation to Metlife. The apparent result of the above is the double taxation of the income earned abroad. In order to alleviate this issue, the U.S. makes available to the taxpayer a Foreign Tax Credit (“FTC”) for foreign income taxes paid, subject to certain limitations. The calculation of the FTC is a complex process which is comprised of many steps, most of which are beyond the scope of this memorandum. The only step that this memorandum is concerned with is the allocation/apportionment of expenses to

and the foreign distributor, often ensure an extensive portion of the financial costs are absorbed by

These net operating loss carryforwards of $265.5 million were entirely from the foreign market, outside of the United States. These losses, mainly related to the operating loss in Brazil, China, Netherlands and Russia. AGCO could reduce their effective tax rate to 34.8% by taking advantage of these unrecognized tax benefit. At December 31, 2014, AGCO had $130.6 million unrecognized income tax benefit, which will all affect company’s effective tax rate even more when these benefits

The foreign tax credit limit is there to ensure that the foreign tax credit does not exceed U.S tax on foreign taxable income. Generally there will be foreign taxes that the corporation will have to pay for their exports abroad. The foreign tax credit is there to stop double taxation, which occurs when foreign countries tax the same income that the U.S. will tax. It is also key to look at tax treaties that the U.S has with various countries in Europe. There might be tax treaties that are very favorable to companies that export from the U.S to certain European countries. Once the income is determined either foreign or domestically sourced, the corporation can then source their deductions. Deductions are allocated based to the particular class of income it generates and then they’re apportioned based on whether the income is foreign or domestically sourced. In this case Hall Oakes Inc. could have some deductions related to their income from export operations.

This is done by deviating profits away from the original location where the activities took place; this process is known as Base erosion and profit shifting (BEPS). By having segregation in activities and its location, it can abundantly reduce the amount of corporate tax to be paid. This is due to the fact that in those countries, in the case of Starbucks Switzerland, the company would be subject to a highly favourable tax treatment than in England, because of repositioning profits through internal trade (Base erosion and profit shifting, 2014, p.52). In United Kingdom companies are taxed on their profit at a rate of 25%. When the profits are tied to an international trade with comedies such as coffee beans the tax rate can be low as 5% in Switzerland. This is where one of Starbucks supply chain subsidiary is located; therefore working at the company’s advantage when coming towards transfer of pricing, hence this method reduces the organisations taxable profit greatly. Multinational firms such as Starbucks, Apple and Google have been playing the corporate tax system by moving their intangible assets from countries such as the United Kingdom to countries which has low tax rates.

The key point of this research paper is to illustrate that taxes are a major drivers that push MNC to relocate abroad. I will consult various literature to explain and illustrate my research question. Subsequently I’m going to use the tax home relocation case of FIAT to demonstrate what is happening nowadays to many Multinational Companies all over the world.

For multinationals, tax planning can be a complex but a vital aspect of its operations. The primary objective of these corporations is to minimize their worldwide tax burden. With globalization expanding, opportunities for corporate tax avoidance expanded with it. Technological advances made it easier for taxpayers to hold offshore investments, increasing the opportunity for them to evade their domestic tax obligations. Tax avoidance can be done in a number of ways. Loopholes such as using dividend or capital gains to avoid taxation are only a few examples. Across the European Union and as of Jan. 28, the European Commission proposed a scheme to tackle some of the most common tax avoidance measures used by multinationals to reduce their tax bills. The Globe and Mail published an article highlighting the Commission’s proposal and a few possible methods corporations use to evade paying taxes across Europe.

The source method of tax collection generally involves the primary right of a country a business is using as its main location of trading to tax this business according to its income. This is a general international state practice, which is also anchored in double taxation agreements. The source system means that income is taxed in the country where the income originates, regardless of factors such as physical or legal residence of the person or entity receiving the income.