US Corporate Income Tax Policy Isn't That Bad

US Corporate Income Tax Policy Isn't That Bad

The US corporate income tax policy is less stringent than its opponents contend, according to a recent New York Times opinion piece written by economic expert Josh Barro.

Some have claimed that the US Corporate Income Tax Policy levies a tax on all the profits that an America-based company earns throughout the world.

These policies have been at the center of much debate, as many lawmakers have floated their corporate income tax proposals over the last several months. President Barack Obama – and also republican lawmakers – have both suggested more territorial policies, meaning that corporations only pay taxes on their profits in the jurisdictions where those earnings are generated.

Currently, the U.S. uses a system whereby companies incorporated in the United States can generate profits from an active business overseas, paying taxes on these earnings before transferring or repatriating them back to the U.S. and paying taxes once again. While many object to these corporate tax systems, the author notes that they always incorporate some essence of territoriality. Income from passive sources known as Subpart F income, is subject to immediate inclusion in income. Foreign corporations are subject to taxation on the income earned in the United States.

Barro emphasized that when companies based in the U.S. pay taxes for active income generated overseas, they receive credits, and they do not have to pay any domestic earnings on products until they bring them back to the U.S. It is also worth noting that many companies based in the world’s largest economy benefit from foreign tax credits. In some instances, America-based companies can generate robust profits and pay little or no taxes in their home country if they properly manage their foreign income and tax credit position.

Other nations use differing policies, for example, levy a minimum tax on a company’s worldwide profits, tax passive foreign income without exception and limit the freedom companies have to allocate their profits across different countries by rigid transfer pricing, the author emphasized.

Because of all these considerations, the corporate income tax policy used by the U.S. and other large economies – namely its major trading partners – might not be as different as some would think