Tax rules are crazy... (deferrals for multinationals)

[agamemnus]

(A bit different than the idea behind Lewk's recent post, or GGT's post...)

So, lately, I've been reading a little on tax deferrals given to foreign subsidiaries of US based corporations.

How it works, as I understand it, is that the US government taxes a (foreign) subsidiary owned by a US corporation based on its own tax rate minus the tax rate of the foreign country. So, if the tax rate was 35%, and the foreign country rate was 30%, the US would expect an extra 5%.

For a while, though, this tax only applies when the parent company asks the subsidiary to transfer the funds back to the US. Until then, the tax is not applied: it is deferred.

Recently, Obamarama has tried to remove tax deferral so that the tax rate is instantly applied, based on the argument that the deferral punishes US companies from re-investing their foreign subsidiaries' earnings back at home. (ie: the US)

It was voted down by all the Republicans and 5 Democrats in the Senate, I believe, on the basis that removing the deferral would effectively lower the competitiveness of these subsidiaries. (because their locally owned competitors would have a lower rate) The scale of the negative effect of the removal is not entirely clear, though, because (1) the US does have many various tax treaties with other countries (and could issue new ones) that might effectively standardize the rates now or in the future and (2)... read on.


So, the interesting/odd/ridiculous thing I see here is that actually the current state gives really big/huge corporations with foreign subsidiaries an immense advantage over smaller corporations with foreign subsidiaries, and effectively doesn't just defer the tax rate difference, but eliminates it!


The reasoning goes like this... Corporations can borrow and lend based on their credit rating. Foreign subsidiaries, owned and often controlled (via 51%+ shares or similar) by the same corporation, would logically inherit the same credit rating. Thus, transferring money between the parent and subsidiary is simply a matter of taking out loans in one country and providing them in another, perhaps through the same very reliable intermediary. The credit rating here would not be affected, since the corporation and subsidiary in total still has the same level of debt...

I don't doubt that there are many other ways that a well-funded corporation can transfer funds and not pay "extra" taxes, or pay low "extra" taxes...

[wiggin]

The reasoning goes like this... Corporations can borrow and lend based on their credit rating. Foreign subsidiaries, owned and often controlled (via 51%+ shares or similar) by the same corporation, would logically inherit the same credit rating. Thus, transferring money between the parent and subsidiary is simply a matter of taking out loans in one country and providing them in another, perhaps through the same very reliable intermediary. The credit rating here would not be affected, since the corporation and subsidiary in total still has the same level of debt...

Do you have a source for this practice?

[agamemnus]

Do you have a source for this practice?

No, I'm giving a hypothetical... I do see companies (like ATARI) play with stocks and bonds all the time, though, to seemingly no purpose. Is there something unrealistic in this "practice"?