U.S. Multinational Corporations Pay More Taxes Than We Think

May 31, 2013

In recent years, President Obama has argued that multinational companies are avoiding taxes so the United States should establish a minimum tax on business income. 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, says Kyle Pomerleau, an economist for the Tax Foundation's Center for Federal Tax Policy.

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 pay income taxes not once but twice.

  • According to the most recent IRS data for 2009, U.S. companies paid more than $104 billion in income taxes to foreign governments on foreign taxable income of $416 billion.
  • The largest concentration of foreign earnings for U.S. firms was in the European Union, at $164.5 billion. U.S. companies paid nearly $38 billion in income taxes on those profits to European tax authorities for an average effective tax rate of 24 percent. This is a more than $10 billion increase over 2007.
  • Asia comprised the second largest concentration of taxable earnings at $60.8 billion. U.S. firms paid more than $18 billion in taxes to Asian tax authorities for an average effective tax rate of 31 percent.

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.
  • 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.

While it is undoubtedly true that U.S. multinational firms use tax planning techniques to minimize the taxes they pay on their foreign earnings, IRS data shows that the subsidiaries of U.S. multinationals paid more than $100 billion in income taxes to foreign tax authorities on roughly $413 billion in taxable income. Averaged across some 90 countries, U.S. companies paid an effective tax rate of 25 percent on that income.

Source: Kyle Pomerleau, "U.S. Multinationals Paid More Than $100 Billion in Foreign Income Taxes," Tax Foundation, May 21, 2013.

 

Browse more articles on Tax and Spending Issues