U.S. Corporations Pay $100B in Taxes on Foreign Profits
IRS Data Contradict Accusations of Tax Evasion on International Earnings
April 25, 2011 (SmartPros) Amid widespread accusations of major U.S. corporations not paying taxes on international profits, a new analysis from the Tax Foundation finds that American companies paid nearly $100 billion in corporate income taxes to foreign governments in 2007, the most recent year for which IRS data is available.
"The truth is U.S. companies pay plenty of income taxes on international profits—they pay them to the host countries where that income is earned and where the benefits of those taxes are received." said Tax Foundation President Scott A. Hodge. "Washington simply wants another bite at the apple with our worldwide tax system."
American companies pay income taxes to the country in which their profits were earned, and then also pay additional U.S. taxes on any profits they return to this country. If a subsidiary of a U.S. firm earns $100 in profits in the UK, it pays the British income tax rate of 26 percent, or $26. 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 26 percent British rate—or $9. Between the two nations, the U.S. firm will pay a total of 35 percent in taxes on those foreign profits.
"While it is undoubtedly true that U.S. multinational firms use numerous tax planning techniques to minimize their taxes on foreign earnings, IRS data shows that the subsidiaries of U.S. multinationals paid nearly $100 billion in income taxes to foreign tax authorities on roughly $392 billion in taxable income." said Hodge. "Averaged across some 90 countries, U.S. companies paid an effective tax rate of 25 percent on that income."
Lawmakers and activists who criticize U.S. companies for "avoiding" taxes on their foreign earnings need to be more careful with their language and acknowledge that our worldwide tax system requires U.S. firms to pay taxes twice on their foreign profits-once to the host country and a second time to the IRS-before they try to reinvest those profits back home.
Tax Foundation Fiscal Fact No. 267, "U.S. Multinationals Paid $100 Billion in Foreign Income Taxes According to Most Recent IRS Data," is available online.2011 SmartPros Ltd. All rights reserved. Source: Tax Foundation