Alexander Consulting EnterpriseAlexander Consulting Enterprise 04/22/2304/22/23

Saving Taxes by Going Global?

Alexander Consulting EnterpriseAlexander Consulting Enterprise 04/22/2304/22/23

Saving Taxes by Going Global?

- U.S. multinational corporations are required to pay corporate taxes twice, first to the foreign country in which they do business and then to the IRS after they repatriate their profits.

- The U.S. corporate tax rate is comparatively very high. List of Countries by Corporate Tax Rate

- The U.S. corporate tax code is based on the principle of tax neutrality:- Corporate decisions should not be driven by tax

considerations. No matter where a U.S. company does business, it should always pay the U.S. tax rate.

Alexander Consulting EnterpriseAlexander Consulting Enterprise 04/22/2304/22/23

Saving Taxes by Going Global?

- How does tax neutrality work (it really does not)?- U.S. companies get a foreign tax credit for the taxes

their foreign subsidiary paid in the foreign country. - If the tax rate in the foreign country is lower than the

U.S rate (= the received tax credit is lower than the taxes they would have to pay in the U.S.), the company has to pay the difference to the U.S. rate when repatriating profits

- If the tax rate in the foreign country is higher (= the received tax credit is higher than the taxes they would have to pay in the U.S.) than the U.S rate, the company can use the excess foreign tax credit.

Alexander Consulting EnterpriseAlexander Consulting Enterprise 04/22/2304/22/23

Saving Taxes by Going Global?

- Limitations on the excess foreign tax credit:- Excess foreign tax credit is hard to come by since

most countries have lower tax rates.- Applicable only to tax on foreign source income- Applicable only to income of the same type- Carry-forward 5 years; Carry-back 2 years

- Tax neutrality often does not hold

- U.S. companies pay comparatively high taxes

Alexander Consulting EnterpriseAlexander Consulting Enterprise 04/22/2304/22/23

Saving Taxes by Going Global?

- What are potential consequences of the high U.S. taxes?- U.S. companies don’t repatriate profits

U.S. Companies Are Stashing $2.1 Trillion Overseas to Avoid Taxes

- U.S. companies are “moving” to foreign countries:- M&A that that allow to effectively become a

foreign corporation (examples: Anheuser Bush, Burger King, IGT, Valeant Pharma)

Was Burger King Right for Ditching the U.S.?

Burger King and Tim Hortons Form Restaurant Brands International

- Disincentive for foreign companies to “move” to the U.S.

Alexander Consulting EnterpriseAlexander Consulting Enterprise 04/22/2304/22/23

Saving Taxes by Going Global?

- Saving taxes through Transfer Pricing?- Transfer prices are internal prices used for transfers of

goods and services within the international corporation- Transfer prices can be used to shift profits- Transfer prices can be used to lower tariffs and

customs- Limitation of Transfer Pricing:

- Will not hold up in audit if transfer price differs significantly from market price.

- Might collide with management incentive systemOil contractor Schlumberger to pay $51m to settle ATO 'transfer pricing' claim