TAXES & BUSINESS STRATEGY
The United States Tax code is long and confusing. As of 2010 it had 3.8 million words and
continues to grow year after year. The task of comprehending the tax code is all the more
impossible because the laws constantly change. In 2001 the tax code contained ??tionly” 1.4
million words but since then there has been over 5,000 changes to tax laws.[1] There’s
even an advocacy group dedicated to helping taxpayers understand the code; The National
Taxpayer Advocacy. Regardless, there is an encyclopedia’s worth of exclusions and
workarounds that favor the nation’s largest and most wealthy corporations that are able and
very willing to hire the very best tax professionals. The Government Accountability Office
recently released a report showing that big corporations paid federal taxes at an average
rate of about 13% in 2010, even though the federal tax rate is 35%! With this in mind, I
would like to discuss five ways in which I would correct the current tax code as it
presently applies to businesses.
Indirect Foreign Tax Credits
Today, U.S. based multinational corporations have devised all sorts of ways to shift profits
overseas to shield their earnings from U.S. taxes and to take advantage of lower foreign tax
rates. Under the current tax code Section 902, a domestic corporation may be deemed to
have paid, for purposes of the Section 901 foreign tax credit, foreign income taxes paid by
a corporation from which the domestic corporate shareholder receives a dividend.[2]
Indirect foreign tax credits apply where the U.S. corporation owns at least 10% of the
voting shares of a foreign corporation. When the U.S. corporation either receives a
dividend from the foreign corporation or currently recognizes income earned by the
foreign corporation, the U.S. corporation is allowed a foreign tax credit for its share of
foreign taxes paid.[3] In effect, the United States cedes primary taxing jurisdiction to the
source country. The foreign tax credit is subject to a limitation, which is calculated as the
amount of foreign tax paid multiplied by the amount of foreign source taxable income
divided by worldwide taxable income. Foreign taxes that are greater than the limitation for
the year can be carried back one year or carried forward ten years.[4]
Some foreign countries impose income taxes that are creditable in the U.S., on income
arising within their borders at effective tax rates in excess of the U.S. effective tax rates.
