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International Tax Scenarios

International Tax Scenarios

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Published by oberini
A spreadsheet demonstrating different international tax scenarios for US multinational corporations
A spreadsheet demonstrating different international tax scenarios for US multinational corporations

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Categories:Business/Law
Published by: oberini on Jan 11, 2011
Copyright:Attribution Non-commercial

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01/12/2011

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USAco, a domestic corporation, plans to locate a new factory in either country L or country H. USAcoas a wholly owned foreign subsidiary, FORco, and finance FORco solely with an equity investment. Ufirst year of operations, it will generate 10 million of taxable income, all from active foreign manufacturiU.S. corporation tax rate is 35%. To simplify the analysis, further assume that USAco's only item of incderived from FORco.The total tax rate on FORco earnings will vary significantly, depending on a number of factors includin1Whether FORco is located in a low tax or high tax foreign country2The extent to which USAco repatriates FORco's earnings3Whether USAco repatriates FORco's earnings through dividend distributions, as opposed to interest, r 4The availability of favorable tax treaty withholding rates on dividends, interest, and other payments ma
 
ill structure new facilityAco projects that in FORco'sg activities. Assume that theome during the year is that:ntal, or royalty payments, andde by FORco to USAco
 
Case 1Low-Tax Country with No Dividends
Country L has corporate tax rate of 25%, which is 10 percentage points lower than the US rate.If USAco locates FORco in country L and FORco pays no dividends, the total tax rete on its earnin25%, computed as follows;Foreign Income TaxFORco's taxable income$10,000,000Country L income tax rate0.25Country L income tax $2,500,000Foreign withholding taxes on repatriated earnings$0US tax on repatriated earnings$0Total taxes $2,500,000Worldwide tax rate25%This example illustrates that USAco can reduce the current year worldwide tax rate on the new mathe U.S. tax rate of 35% by locating the factory in L, a low tax foreign country
Case 2 Low-Tax Country that Pays Dividend with Tax Treaty
Assume that country L has a tax treaty with the United States that provides a 10% withholding taxUSAco locates FORco in country L and repatriates half of FORco's after tax earnings through a ditotal tax rate on its repatriate and unrepatriated earnings will be 30%, computed as followsForeign Income TaxFORco's taxable income$10,000,000Country L income tax rate25%Country L income tax $2,500,000Foreign withholding taxes on repatriated earningsFORco's after-tax earnings$7,500,000Percentage repatriated through dividend50%Dividend distribution$3,750,000Withholding tax rate (per treaty)10%

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