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A study by the Tax Foundation (TF) has found that, "while it is undoubtedly true that United States multinational companies (MNCs) use numerous tax planning techniques to minimize the taxes they pay on their foreign earnings," Internal Revenue Service (IRS) data shows that the effective tax rate on their foreign income was 27.2 percent in 2010.
It was calculated that, in around ninety countries, subsidiaries of US MNCs reported paying more than USD128bn in corporate income taxes to foreign tax authorities on around USD470bn in foreign taxable income in that year.
The TF concluded that, "while many corporations paid less than that on foreign earned income, a majority of foreign income in 2010 faced effective tax rates of 20 percent or higher in foreign countries." In fact, over the past eighteen years foreign corporate taxable income has grown by about 250 percent, and foreign corporate taxes by about 265 percent, while the effective tax rate (on repatriated income and income subject to current taxation) has remained around 26 percent.
More than 60 percent of all reported foreign taxable income was earned in Europe and Asia in 2010. MNCs reported USD206.8bn in income originating in Europe and paid USD63.6bn in corporate income taxes to European Governments – representing 44 percent of all foreign taxable income, and 50 percent of foreign taxes paid. In Asia – the second-largest concentration of reported foreign taxable income in 2010 – US MNCs reported USD83.4bn in taxable income and paid USD21.6bn in taxes.
About one-fifth of all reported foreign taxable income and foreign taxes paid was concentrated in three countries and about half was concentrated in ten countries in 2010. The country that accounted for the most reported taxable income and taxes paid by US MNCs was the Netherlands with USD35.5bn in taxable income and an average effective tax rate of 34.75 percent, followed by the United Kingdom with USD33.5bn (35.73 percent), and Canada with USD31.3bn (29.63 percent).
In addition, the effective tax rate faced by US MNCs abroad also varied substantially by country. Of just those top ten countries from which US MNCs reported taxable income in 2010, the effective rates ranged from 10.5 percent in Ireland to 66 percent in Norway.
The TF also found that, across all ninety countries, "some of the lowest effective tax rates were in countries with low or no corporate income tax. Of the countries with more than USD1bn in reported taxable income, Singapore (6.92 percent), Bahamas (5.5 percent), and the British Virgin Islands (4.5 percent) had effective tax rates below ten percent," and those countries with particularly high effective tax rates – Norway (66 percent), Nigeria (77.4 percent) and Saudi Arabia (59.7 percent) – "are all countries known for high corporate taxes on oil companies," the TF pointed out.
It was noted that most of the MNCs' corporate income abroad was earned, with most corporate income taxes being paid overseas by manufacturers, especially those engaged in petroleum and coal products manufacturing, who paid an average effective tax rate of 36 percent.
34.7 percent of all reported foreign income faced effective tax rates between 20 and 30 percent, and nearly 75 percent of all reported taxable income was taxed at 20 percent or higher. Only 8.2 percent of foreign taxable income reported in 2010 faced an effective rate below 10 percent.
The TF also pointed out that, under the US worldwide system of corporate taxation, the tax rates paid by US MNCs to foreign countries is prior to paying additional taxes to the IRS (to bring their effective corporate tax rate up to the higher 35 percent US tax rate), if those profits are then repatriated.
It is suggested that "reporters and lawmakers who criticize US companies for 'avoiding' taxes on their foreign earnings need to be more careful with their language and acknowledge that our worldwide tax system requires US firms to pay taxes twice on their foreign profits – once to the host country and a second time to the IRS – before they try to reinvest those profits back home. Any discussion about reforming the corporate tax code must keep these facts in mind."
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