The multinationals discussion thus far has felt a bit like a trip down memory lane. Today, however, we have a topic, foreign subsidiaries, that is so topical that there is news today! (My source is today's The Wall Street Journal Online.)
Part IV noted that the US' foreign tax credit regime represented altruism in the interests of encouraging trade and helping developing countries. Well, once one takes foreign subsidiaries into account, one realizes that we have done less.
The US does not tax foreign corporations, per se. (As to be discussed in a couple of days, we do tax US income of foreign corporations.) Thus, a US multinational can park foreign income in a low-tax foreign subsidiary with no current US tax. Also, as a number of posts have noted, the US multinational can manipulate the prices charged and paid to the low-tax subsidiary so as to park even more profits in low-tax countries. The US has some rules that limit such price manipulation, but they are fatally flawed, as to be discussed tomorrow. Also, the US has rules that impose an immediate US tax on certain passive and other easily movable income “earned” in tax havens. Of course, the pending ETI bills cut this current-law immediate tax back.
Dividends from foreign subsidiaries are subject to a full US tax (with a credit for any foreign corporate taxes on the earnings underlying the dividends). Thus, a full US tax is preserved, sort of. Deferring the US tax, so that the offshore money can grow subject only to a low foreign tax, is a real benefit.
Deferring the US tax on foreign earnings until the earnings are repatriated as dividends poses a problem, however: It discourages US multinationals from bringing their low-tax profits home to use in the US. (There are easy ways to get the money out of the tax haven and use it someplace else offshore.) Thus, in the questionable spirit of tax amnesties, the pending ETI bills provide for a temporary reduced tax on such dividends.
Which gets us to today's news. The staff of the Financial Accounting Standards Board (the trade association that the SEC lets set accounting rules) recommended that multinationals be required, as foreign income is earned, to show a current expense for the ultimate US tax when the foreign earnings are repatriated. No additional expense would be recorded when dividends are paid, which is the current rule. Thus, repatriation would be encouraged, as there is no associated tax hit to reported financial statement earnings. Don't hold your breath for this staff recommendation to be adopted any time soon.
Tomorrow: A source is a source, of course, of course? NOT!