I explained what I wanted to backwards in error. From what I know if the money is brought back to the US, they have to pay tax. However if the money stays foreign and locked up in whatever country and never comes, they delay paying taxes(meaning they don't have to pay).
(Bear with me a moment) There are basically two systems of taxation (Edit: After reading the entirety of your post I see you're likely familiar with this):
1. A country will tax any income/profit earned within it's borders, or
2. A country will tax all income/profits of it's citizens (including their corporations, partnership etc) where ever earned (world-wide income).
Most countries, except the USA, do only number 1 (IIRC, Austrailia is the only real exception, even so it's not as onerous as the USA).
Now if the USA followed everyone else and taxed on #1 we wouldn't have near the problems we do now (I'm speaking of so-called 'loopholes'). So, the USA is a freakin 'tax pig'.
OK, with that as background, the repatriated earnings you are speaking of (bringing the money back to the US) is
foreign earned income. So that US companies can better remain competitive with other companies (put on the same level for taxes, at least temporarily), they are allowed to defer tax on their foreign profits so it can be reinvested in the foreign business. But when they bring it back to the USA, the tax will then hit (they aren't using the money to build their business in the foreign country any longer). Other countries that don't necessarily tax foreign source income of their compnaies will do the same - foreign profits will only get taxed if they bring them home; so the USA is following along with everybody else here.
Check out below for the full details and click on each picture. Can you explain why 83 of the 100 biggest US corporations have foreign tax heavens?
http://www.bloomberg.com/insight/lexapro.html
Every Fortune 500 company does this from Microsoft, General Electric, Johnson and Johnson, Pfizer, and many others(especially tech and health care companies.
"Asset transfer pricing" and creating subsidiaries in Ireland, Bermuda, or Cayman Islands is nothing new.
Also, you missed a "possibly"(I'm saying possibly here because you're the accountant expert and not me) important fact.
American companies(and citizens) are taxed on their "worldwide" income.
That's not the case in many developed countries.
Does BP and Shell pay US taxes on income earned from oil wells in Africa, Europe, and Asia? Exxon on the other hand has to pay taxes on *all* oil wells worldwide since they're incorporated here unless they use the strategy above used by many US Fortune 500 corporations of delaying taxes(which they do) by not bringing the money home and leaving it at a subsidiary.
In this case, the Ireland division of Microsoft pays 35% tax on US sales and 12% Ireland tax everywhere else(Europe, Asia, etc...) vs. paying a 35% tax on "worldwide" sales.
Like the "Lexapro" example shown in the link above, if they went even further and created a Bermuda division, they only have to pay a 35% tax on US sales, and 0% everywhere else...Until they decide to bring the money back that is.
More information of how corporations delay having to pay taxes below:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a6qcwZCtO0_w
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=avJFFjW9I5Ag
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=axF8.RHSF9IM
Firstly, in these and other articles, as well as peoples' comments here, transfer pricing is said to be abused. So let me say a couple of things (1) I believe in every case for these large companies the IRS has examined the 'price' and agreed it is proper. I.e., it has been pre-approved by the IRS. The stakes are simply too high if a company sets the price too low/high and gets caught, so decades ago we worked out a process to obtain pre-approval from the IRS. (2) These large companies are under continuous IRS audit; the IRS agents have a permanent office in these companies are working there every day auditing them. People here, and Congresspersons seeking publicity would have us believe that these companies are 'running wild' without government/IRS supervision and that's simply not the case.
Now, also note that the US has about the highest corporate tax rates in the world; this is important.
And as you've noted we tax our companies on worldwide income; IMO this generates many of our problems and complexities in taxation.
Now, to avoid double taxation (companies taxed by the foreign country where the profits are earned and again in teh USA) we have created what is called the 'foreign tax credit'. So, if the foreign country has a tax rate of 20% the US will grant the company a credit against US taxes of 20% and then collect the remaining 15%.
Now what would happen if foreign countries increased their rate of tax to 35%; the same as ours? (Or we lowered our rate to match theirs)
The answer is that most of this tax BS would disappear because the US would not get any additional revenue from the companies' income/profit generated abroad; the foreign tax credit would equal the US tax leaving a balance of zero for Uncle Sam.
In short, our world-wide tax scheme and higher rates cause all this crap. And the IRS monitors this stuff non-stop for large corporations.
Now we do have serious problems with tax evasion. I've seen it, and I've turned people in. IMO, much of it caused by attorneys who know just enough to be dangerous. They get wealthy people into schemes that rely upon nothing other than 'hiding' transactions. I.e., once discovered their clients have
zero chance of prevailing in court. IMO, that's flat out wrong, any good plan relies upon a decent change of winning in court and not merely making it hard for the IRS to find out what's going on. Pro Tip - when you hear 'foreign trust' run away as fast as you can.
Fern
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