You're ignoring the fact that a double tax doesn't exist. The corporation isn't paying tax to both Taiwan and the USA. Here's how the WSJ lays it out:
Quote:
The tax code is written in a way that allows companies not to pay the full 35% U.S. corporate tax rate on foreign income when that money remains invested overseas.
Backing up a step, here's how it works before the loophole:
A company earns $100 million abroad in Lowtaxistan where the corporate tax rate is 20%. The foreign subsidiary pays that money to the U.S. parent. The parent then pays $35 million to the U.S. government and takes a credit for the 20% (or $20 million) payment to the Lowtaxistan government. So the net to the U.S. Internal Revenue Service is $15 million.
But here's how it works with the loophole: The U.S. subsidiary simply keeps the money offshore and certifies to its accountants that the money is invested overseas. It never remits the money to the parent and so never pays the
$15 million extra to Uncle Sam.
Do the math yourself. Which is better?
a) A factory in Lowell, Mass., that will generate $100 million in pre-tax profit that nets $65 million, or
b) A factory in Lowtaxistan that will generate $100 million in pretax profit that nets $80 million.
All things being equal, most people would pick "b." (And they aren't equal because Lowtaxistan has 750 gazillion people who will work for two gonzolees a day -- and the
gonzolee is fixed to the U.S. dollar at a rate of 8.65.)
These are called "unrepatriated earnings" and they are increasingly commonplace. Just go into Free Edgar (www.freeedgar.com4) or some other SEC search engine (I like 10K Wizard5) and plug in the term "unremitted earnings" or
"undistributed earnings" and search 10-K forms to see how many annual statements come up.
What you'll find is something like this from Pfizer.
"As of December 31, 2003, we have not made a U.S. tax provision on approximately $38 billion of unremitted earnings of our international subsidiaries. These earnings
are expected, for the most part, to be reinvested overseas.
It is not practical to compute the estimated deferred tax liability on these earnings."
|