International Business Tax | How It Works

International business tax laws are administered by governments around the world to outline how business is conducted for foreign companies. These decisions can include job creation, plant locations, and other long-term transactions.

All countries can tax any income that is brought in by corporations that operate in multiple countries. The United States has a specific tax on all income that companies based in the United States earn in foreign countries. They also provide a tax credit of up to 80% of the total taxes they paid to another country.

Foreign income taxes

There are different rules based on multiple types of multinational income earned by firms.

  • The first type of income is that which is a normal return of physical assets. This type is determined to be taxed 10% each year based on the amount of depreciation of the assets but is usually exempt from the United States corporate income taxes.
  • Any income that is above 10% return is called a Global Intangible Low Tax Income (GILTI) and is taxed each year at only half of the typical corporate rate of 21% on any domestic income, along with a credit of up to 80% of the foreign taxes paid.
  • Income that comes from mostly passive assets like, bonds or other assets that are shiftable, is taxed at the full 21% corporate tax rate, along with credits for up to 100% of the foreign income taxes on those specific categories of income.

Worldwide taxes vs territorial taxes

Worldwide taxes are an aggregation of domestic and foreign income made by any taxpayer. It is income that comes from anywhere in the world that is considered to be taxable.

Territorial taxes do not include any profits that were made by multinational companies from foreign countries.

Generally speaking, the United States typically taxes companies who make any income at the rate of 35% whether it was earned in the country or abroad. See the graphic below for an example on Europe’s international tax rates:

And here is a global view here:

 

Foreign subsidiaries in the United States pay taxes to their host countries. The United States avoids double taxation by allowing firms to take out a credit against their income tax that was paid to another country.

  • Suppose that a company in the United States makes $100 million in profits inside the country and another $100 million in profits from its subsidiary in Sweden.
  • Under a worldwide tax system, the computer company would owe $35 million in taxes at a 35% tax rate on both the United States earnings and the Swedish earnings.
  • In this case, to avoid double-taxation, the United States would offer the company a $28 million foreign tax credit for the income tax that they already paid to Sweden. This way, the computer company would only need to pay the remaining $7 million to the United States instead of the full $35 million.

Under a territorial tax, the United States doesn’t tax any profits earned overseas by corporations that reside in the United States.

Read more here from the IRS.

And here is an excellent Wikipedia entry here.

Tax minimization strategies

Some techniques and strategies can be used by multinational firms to reduce the amount of worldwide taxes they pay.

One of the most popular methods is the use of transfer pricing. This is the price that a parent company will charge overseas affiliates for a product or trademark.

Another method of tax minimization is to shift the balance of tax-deductible debt and royalty payments between low-tax and high-tax countries.

Tax codes for most countries, including the United States, give tax advantages to expansions financed by debt. This allows companies to deduct interest from their loans on their taxes.

Summing up

International business taxes are any tax that a company pays on income that they earn from countries other than the United States.

The tax rate of 35% still applies to foreign income, unless the company has already paid taxes to the other country. The United States offers a tax credit to avoid double-taxation, so a business won’t pay the same tax twice.

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