U.S. Companies Pay Income Taxes Twice on Foreign Profits

May 11, 2011

The United States 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 do pay income taxes -- not once, but twice, says Scott A. Hodge, president of the Tax Foundation.        

  • Companies pay income taxes to the country in which their profits were earned, and then they pay additional U.S. taxes on any profits they return to this country.        
  • For example, if a subsidiary of a U.S. firm earns $100 in profits in England, 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.

According to the most recent IRS data for 2007, American companies paid nearly $100 billion in income taxes to foreign governments on foreign taxable income of $392 billion.  Averaged across some 90 countries, U.S. companies paid an effective tax rate of 25 percent on that income, says Hodge.

Source: Scott A. Hodge, "U.S. Multinationals Paid $100 Billion in Foreign Income Taxes According to Most Recent IRS Data," Tax Foundation, April 26, 2011.

 

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