US Corps Pay Billions in Taxes to Overseas Authorities

April 27, 2011 International Tax CooperationTaxation in USA

US international taxNew research shows that US companies operating internationally pay out nearly a quarter of their profits to overseas tax authorities, before being taxed for the second time by the Internal Revenue Service.

The US Tax Foundation has stood up to speak out against the currently common media sentiment that US corporations are not paying enough taxes on their foreign profits. In its latest Fiscal Fact report, published on April 26th, the Tax Foundation explained that the US has in place an effective system of taxing corporate profits in the US and abroad, requiring US companies with foreign operations to effectively pay 35 percent tax on their profits regardless of where they are earned.

Currently, a US firm operating overseas is required to pay the corporate profit tax rate in the country where they conducted business. On a US level the company may receive a credit for taxes paid internationally, and will be required to make further payments to meet the US federal corporate rate of 35 percent. The new Tax Foundation’s research indicates that in 2007, US companies paid approximately USD 99 billion to foreign tax authorities, at an effective average tax rate of 25 percent.

Scott Hodge, president of the Tax Foundation, commented on the finding, saying, “…the truth is US 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.” Offering a suggestion to explain the commonly debated idea that companies are paying too little on their international earnings, Scott Hodge said, “…Washington simply wants another bite at the apple with our worldwide tax system.”

The research showed that in 2007, US corporations had total taxable foreign incomes of approximately USD 392 billion. The largest portion of the earnings was garnered in Europe, where companies received USD 167 billion in incomes, and faced an effective tax rate of 24 percent. Across Asia, US corporations gathered USD 75 billion, and paid an effective rate of 30 percent. The highest tax rates were seen by companies operating in the African continent, at 38 percent of the incomes earned cumulatively across the respective countries.

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