What Do U.S. Companies Pay in Foreign Taxes?

May 21, 2014

American companies paid $128 billion in taxes to foreign governments, according to Kyle Pomerleau, economist at the Tax Foundation.

The United States uses a "worldwide" system of taxation. Only six of the 34 nations in the Organization for Economic Cooperation and Development use a worldwide taxing system. Distinct from "territorial" systems, the U.S. scheme requires all American businesses to pay a corporate tax rate of 35 percent, whether that income is earned domestically or abroad:

  • U.S. companies that operate overseas first pay income taxes to the country in which they earned their overseas profits. For example, an American firm pays the United Kingdom a 21 percent corporate income tax.
  • When those profits are brought back into the U.S., the United States taxes those profits at the 35 percent American rate. However, it gives corporations operating abroad a foreign tax credit equal to the amount paid to foreign governments.
  • If American firms reinvest their foreign earnings in the activities of their foreign subsidiaries, they can delay paying the U.S. tax on the profits. This process is known as deferral. However, tax is eventually due if those profits are brought back into the U.S.

What are U.S. companies paying in overseas taxes?

  • According to the most recent IRS data, U.S. companies paid $128 billion in taxes to foreign governments on $470 billion in foreign taxable income in 2010 -- a record high over the previous 18 years. That is an effective tax rate of 27.2 percent.
  • From 1992 to 2010, foreign earnings of U.S. companies grew by 248 percent, and foreign taxes paid grew by 265 percent.
  • The effective tax rate on foreign taxable earnings has been stable for the last two decades, at an average of 26.4 percent across 90 countries.
  • Most foreign income was earned in Europe (44 percent) and Asia (18 percent), and 20 percent of all foreign income was earned in three countries: the United Kingdom, Canada, and the Netherlands.
  • The average effective tax rate paid by U.S. companies abroad varied depending upon the taxing country. Of the top 10 countries in which American companies earned money, the rate ranged from 10.5 percent in Ireland to 66 percent in Norway.
  • In 2010, the majority of foreign income was taxed at rates of 20 percent or higher.

Tax code reformers should keep in mind, Pomerleau says, that U.S. firms must pay taxes twice on their foreign profits if they want to invest them in the United States.

Source: Kyle Pomerleau, "How Much Do U.S. Multinational Corporations Pay in Foreign Income Taxes?" Tax Foundation, May 19, 2014.

 

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