Corporate Taxation -- the Corporate Thesis

Excerpt from Thesis :

(Rahn, 2004)

"German, French, Canadian, or even Swedish company will pay a lower corporate tax rate on profits earned in its home country, and little or no tax to its home government on any foreign income." (Rahn, 2004) In comparison, an Irish company pays twelve percent tax for income in Ireland and nothing on income from abroad. On the other hand a U.S. company doing business in U.S. And Ireland will pay extra 40% of tax for the profit from Ireland.

The Issue:

The Obama administration has taken a stand that a tax break given to corporate makes them outsource American jobs abroad. The issue concerns the U.S. tax code provision that pertains to the profits of foreign subsidiaries of American corporations. While the profits earned by a corporation in the U.S. are subject to a thirty-five percent tax, the multinational corporation can avoid tax on the profits made overseas. One example cited by Lynch (2008) is of General Electric, which had over $62 billion parked out of the U.S., and other companies like Pfizer, Exxon Mobil all have parked money out of the country running to billions. Thus a source of escaping tax in this manner creates jobs to be outsourced and investments to be made abroad.

President Barrack Obama has promised legislation that would provide corporate employers in the U.S. A tax credit of one percent of the taxable income, provided that the U.S. workforce is increased. "Obama's proposal to end tax deferral of profits from American businesses earned abroad" would bring in a total of one hundred billion dollars from aboard. (Carroll, 2009) This will be achieved by compelling companies who till now have deferred payment of tax on profits from overseas. The President's idea is that if the income abroad which is a surplus being raised from low cost operations overseas is taxed these multinationals will be goaded to invest in the U.S. itself thus raising employment level. Unfortunately there are a lot of complications. (Carroll, 2009)

The opinion of experts like Carroll (2009) is that this will curtail the operations of these companies abroad and snatch away the foreign markets to competitors who are from other countries that still enjoy the tax benefits. This move it is criticized will help other "foreign competitors of U.S. companies with the economic rewards" from their own including tax benefits from their countries and thus will also still give away jobs and benefits broad. It is also doubtful if the U.S. multinationals will then turn to the U.S. itself for making their ventures successful. The problem of taxing profits from abroad is still in the speculative stage.

It is pointed out by Carroll (2009) that the other countries like UK, Japan and other countries have announced a "territorial tax system' in which 'only the company profits generated" inside the nation are subject to tax. (Carroll, 2009) Overseas earnings have been exempted. It follows that the overseas operations will then be taxed in the host country. It is only U.S. In the whole globe that has 'a corporate tax rate' which is over 30%. Thus the foreign subsidiary of the United States Company now is taxed by the foreign country for income in that country. Now if the foreign profits are also bound U.S. corporate tax, these companies have to pay over thirty nine percent of the earnings as corporate tax. Now the tax deferral allows the United States "tax to be deferred while the foreign profits are" still abroad and not brought to the U.S. (Carroll, 2009) This keeps the U.S. companies for the time being with the competitors. However if the tax will also be extended to the funds gained and kept abroad without deferral, as proposed by the Obama Administration, there are going to be problems. The current problems are in the assessment of tax.

Compounded Problem:

On top of that the IRS do not permit deduction of taxes being paid to the overseas countries and thus for example if a company from U.S. earned $1,000 from abroad and the foreign country taxed it 12% it has to pay the 12% tax and further will have to pay U.S. government the statutory 35%and another 5% for the state and thus pay 40% more tax. This corporate tax rate and tax on foreign income makes the American companies get a cost disadvantage and become susceptible to foreign takeovers. This is the reason why many U.S. companies reincorporate in tax havens like the Middle East, Bermuda, "and other places without corporate income tax. Under U.S. law, this is perfectly legal because a company need not sell or produce anything in a country that serves as its legal home." (Rahn, 2004) Any U.S. company basically has to make forty percent payment of its earnings by way of tax. (Rahn, 2004)

Thus there is a complex problem and the addition of taxes on deferred income is going to not only make it worse, but also create further finding of methods of overcoming that. Thus investors as it is believed by the government may not actually give up their profits abroad but will find a way not to declare it as profits. They will foster the income on the partners in the alien countries and who after paying lesser taxes may pass on the benefits to the individuals of the company. This round about method of agencies will be played out soon. All the multinational has to do is to get an agreement of franchisee such that the basic profit is made by the franchisee or the agent who is a foreign company or entity beyond the U.S. tax. Then the profit is ploughed back to the company in some other head. This is only a suggestion of a round about that companies will find to avoid tax. Rather than go for such struggle it would be better to make the U.S. tax structure attractive. Obama's Ideas unfortunately does not seem all that attractive. On the other hand it will become limiting and compound the issue. So it is now pertinent to explore some possibilities.


Commentators like Edwards (2003) suggest that corporate income tax must be replaced with a new type of cash-flow tax. It is claimed that the cash-flow tax will remove capital gains taxation, and would be a better step in corporate tax reform. Back in 2003 it was felt that the corporate income tax rates all over the world are being lowered to attract investments from abroad. This turned out to be true with the passage of time. Today belatedly the U.S. finds that most of the major corporations are reincorporating out of the U.S. Instead of addressing this problem as it was suggested back by specialists in 2003 itself, today while the U.S. corporate tax is illogical and is being swamped with tax avoidance techniques, the time of reconsidering the tax itself has come. It is now that the issue of taxing foreign profits has cropped up. The Present governments idea that giving tax incentives to firms that invest in the U.S. while at the same time taxing the gains from abroad will hurt all corporations that have multinational interests and make investors become wary of investing in American ventures.

On the other hand in a general way the simple act of minimizing rate of 'corporate tax' has several advantages. (Rahn, 2004) The lowering of tax will result in the lowering of prices of the commodities sold which will benefit the consumers. There will be increased hiring and thus produce more wages and consumption which will raise the country from the depression. It also will increase the net worth of the company and value of stocks. Thus while the corporate taxes are lowered it will results in individuals incomes rising which will in turn provide individual income tax as revenue in larger volumes. Further the income from dividends and capital gains received from the company by the stock holders can be taxed again as private income. (Rahn, 2004)

There are moves to stop reincorporation of companies rather than salvage the tax structure which is bad, because on one hand it will cost American jobs as U.S. firms would be wiped out by competitors from abroad and therefore there is an urgent need to have a deep thought on this issue. By changing the corporate income tax policy it is possible to reduce the tax complexity, and also create a climate to foster economic efficiency. This can be achieved by making the U.S. compliant with international tax neutrality, thus providing the companies from U.S., the competitive edge on a global scale. The multinational business and the "foreign earned income" and "housing cost amount." (Sheppard, 2004)

Are things that are now cropping up as issues in corporate income tax principles and formulations? Some of the aims in cutting down the scale of tax and taxable items on the corporate income are to avoid the confusing complexity…

Sources Used in Document:


Carroll, Robert. (2009) Obama Corporate Tax Proposal Would Penalize U.S. Businesses

Who Want to Compete in Global Marketplace. The Tax Foundation. Retrieved 25 November, 2009

Edwards, Chris. (2003) Replacing the Corporate Income Tax with a Cash-Flow Tax. The

Cato Journal, vol. 23, no. 2, p. 291. Retrieved 25 November, 2009

Cite This Thesis:

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