Tax techniques

A well-known U.S. company, which we won’t name, has gotten some bad publicity about its tax bill.  Apparently, it has been paying taxes in foreign countries at a much lower rate than if the taxes had been paid in the U.S. What’s this all about? N.C. State University economist Mike Walden responds.

“Well, many companies — and this is very common today — have locations in various parts of the world. Every country in the world does not tax corporate profits at the same rates. Some tax them more. Some tax them less. And the rule is, if you are a company — we’ll say Company X, and you have a factory, let’s say in Ireland, and you have a factory in the U.S. — for those profits you make from your factory in Ireland you’re going to pay the corporate income tax rate that Ireland has.

It just so happens that’s much lower than the rate here in the U.S.  And if you have or bring those profits after you pay Irish taxes back to the U.S. you’ll make up the difference. That is, you won’t pay total U.S. corporate tax rates, but you’ll pay the amount by which they’re higher than the Irish rate.

So companies don’t get off scot-free in this. If they do bring the money back to the U.S., again, they’ll have to make up the difference.

Now the problem is or the issue is that a lot of companies don’t do that. They keep those profits in foreign countries. They re-invest them, etcetera. And there’s one company that’s been doing this and had gotten a lot of bad publicity recently. Some tax experts say that the way to resolve this is to change the corporate tax structure of the U.S. If we do have high corporate income tax rates, and our rates are higher than many countries, bring them down. That will reduce the incentive for a company to have operations in foreign countries. They’ll be more likely to have them here in the U.S. So, my notion is that these companies that are doing this have not done anything illegal. They’re playing by the rules. The question is, Should the rules be changed?”