'Tax Expenditure of the Week'


Thanks to Infrogmation for the photo.
  • Thanks to Infrogmation for the photo.

The Center for American Progress is examining the country's biggest tax breaks in a multi-part series called "Tax Expenditure of the Week."

The group's latest post is about rules that allow American corporations to defer their taxes on profits made in other countries.

What is offshore “deferral”?

The United States has a worldwide tax system. That means U.S. citizens and companies generally must pay federal income taxes on all their income, wherever in the world they earn it. The feature of the tax system known as “deferral” allows U.S. multinational companies to delay paying U.S. taxes on overseas profits as long as they keep those profits offshore.

U.S. corporations take advantage of this tax deferral by forming subsidiaries in the countries where they do business. Foreign subsidiaries are not considered U.S. corporations even if wholly owned by a U.S. parent, so their overseas profits aren’t subject to U.S. taxes.

The key feature of deferral is that the U.S. parent need not pay taxes on a subsidiary’s offshore profits unless and until the profits are returned to the United States—for example, when the subsidiary pays dividends to the parent. At that point, the U.S. parent gets a tax credit for foreign taxes paid but it still has to pay the difference between the U.S. tax and the foreign tax.

Deferral provides tax incentives for overseas investments. In fact, it encourages U.S. companies to make job-creating investments off shore even if similar investments in the United States (absent tax considerations) would be more profitable. “U.S. tax law provides a large tax advantage for building and moving factories to low-tax countries,” according to economist Martin Sullivan.

How much does it cost?

The Treasury Department estimates the federal government will forfeit $42 billion in revenue in fiscal year 2012, and $213 billion over the next five years, because of this deferral.

Read the rest of this post, by Seth Hanlon, here.

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