US Taxation of Multinational Enterprise: Part VI

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!

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8 Responses to US Taxation of Multinational Enterprise: Part VI

  1. Tom says:

    Are you suggesting that the Internal Revenue Code should encourage the repatriation of earnings from low tax foreign jurisdictions? Stated differently, are you suggesting that the re-investment of a U.S. person’s foreign source earnings in the low tax foreign jurisdiction should be discouraged? Finally, are you trying to make some sort of a “Mr. Ed” joke? I aks that last question only because I did not know that tax attorneys have a sense of humor! (Bad humor, perhaps, but humor nonetheless.)

  2. GeorgeMundstock says:

    Tom, I’m saying that, without good reason, a tax system should not interfere with economic decisions. An unfortunate consequence of our current regfime for taxing income earned through foreign corporations is that it discourages (compared to a world with no taxes) bringing earnings home. This probably is acceptable in context, but, in isolation, is not a good thing.

    Yes, It’s a Mr. Ed joke, Wilbur.

  3. pgl says:

    The fatal flaws in section 1.482 (U.S. transfer pricing regulations)are something I truly look forward to. Incidentally – despite some blogging problems that I had yesterday, I finally put up my version of transfer pricing for ETI/FSC over at I wish I had been able to link to the Financial Times article lst Thursday as some of my colleagues were having great fun critiquing what was otherwise an interesting read.

  4. Tom says:


    However, the annual repatriation of foreign source earnings of U.S. persons, even with a foreign tax credit, would also interfere with economic decisions. In particular, forced repatriation could place U.S. investors at a competitive disadvantage when investing in low tax jurisdictions outside the U.S. The U.S. investor would probably end up paying more income tax than a competitor from a low tax home country on the identical income. I doubt there is clearly any right answer. Like squeezing a balloon, each attempt to force changes through the tax system merely pushes the air to bulge elsewhere.

    A joke is supposed to be funny, isn’t it, Wilburrrr?

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  6. GeorgeMundstock says:

    Tom, I agree (i) that current law, by creating an artificial tax on dividends, has problems and (i) that a joke should be funny. I don’t agree (a) that taxing US persons at US rates distorts the decisions of US persons and (b) that my joke isn’t funny. My dog howled….

  7. Tom says:

    You have the last word, for now. But I will call you on this issue later. By the way, my dog also howled. . . but in pain.


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