International Taxation and Foreign Tax Credits

International taxation and foreign tax credits Name: Institution: Date: The American tax code gives tax concessions to foreign business ventures through tax deferrals. Similarly, other incentives seek to maximize profits and increase competitiveness for such foreign ventures. For instance, there are no taxes on profits for money held abroad from profits of foreign subsidiaries, if the money does not find its way back in America. However, the taxation features on their own have different effects on investment abroad. The foreign tax credit system may allow neutrality, but may be either an incentive or disincentive depending on the circumstances. Even though, the corporation tax rate of the US is one of the highest in the industrialized world, investment abroad may prove beneficial to many businesspersons and organizations. Thus, it is necessary to look into the establishment of S corporations, and corporations that have subsidiaries in foreign countries that allow investors to take advantage of tax credits. There are stark differences between the taxation structures of many countries, but the main difference with the American taxation code is that it considers taxation on income earned in any country. The American tax system requires one to pay tax regardless of the income’s origin (Hufbauer & Assa, 2007). Thus, even for corporations, payment of taxes takes place regardless of the location, but there are rules on whether such earnings are earned or repatriated. At the same time, there are different rules whereby S corporations, partnerships and corporations pay taxes through the owners who have to file annual returns. In the case of corporations, there are payments on earnings on one side and different payments to shareholders in the form of dividends. A subsidiary is a separate entity from the parent company in the US, and the main advantage of this program is that subsidiaries of multinationals do not suffer taxation in the US. At the same time the high rate of corporation tax in America, means that there are more tax savings through foreign operations. Similarly, this strategy endures that there is no double taxation, which helps to increase the competitiveness of American corporations (Eickle & Eucomax, 2009). However, repatriation taxes occur when the foreign subsidiary distributes dividends to the parent company. To avoid repatriation tax while circumventing the issuing of dividends, them the subsidiary can result to obtaining third party obligation rather than directly loaning funds to the parent company. This notion follows the principle that loaning funds to a parent company is similar to distribution of taxes, and hence results in payment of repatriation taxes. Other than repatriation of taxes, it is also possible to defer the taxes of foreign held subsidiaries through shifting profits to other countries (Hines, 2001). In essence, the shifting occurs in low taxed nations when then the company can ask for tax credits. The tax credits in turn ensure that the amount of tax paid is minimal and repatriation can then take place. Alternatively taking advantage of differences in taxation systems through transfer pricing would also be beneficial. Through transfer pricing high tax countries have he biggest share of costs, while low tax rate countries have the biggest share of profits. The US worldwide taxations system may lead to double taxation as the foreign country also taxes income. However, there are numerous double tax agreements with various countries that allow people and corporations to deduct foreign income tax from their tentative US income tax (Eickle & Eucomax, 2009). Claiming foreign tax credit occurs where there has been tax paid in foreign countries, but there ought not to be exclusion from American taxation. Opening a branch or corporation in a foreign country warrants the tax credits even if a person does not reside in a foreign country. The credits are preferable for foreign held businesses as they reduce the tax liability considerably than foreign tax deductions, which merely reduce the taxable income. However, any income earned from the foreign operations cannot fall under foreign tax credit. One cannot also claim foreign tax credit and foreign earned inclusion on the same income, but the control of partnerships or corporations does not qualify for foreign tax credit. The US tax code indicates that credit, incomes, losses, and deductions pass through shareholders. Equally, for S corporations any foreign taxes paid pass through shareholders by use of a pro rata basis in their owners...