Global Organizations and Taxes: An Analysis of the Dividend, Interest, Royalty, and Management Fee Payments Between U.S. Multinationals’ Foreign Affiliates
Special Academic Report
Executive Summary Taxes are a fundamental determinant in company decision making. Just as taxes can influence the structure and location of a business’ activities in the U.S., global organizations coordinate a plethora of tax and non-tax factors in structuring their world-wide activities [Scholes and Wolfson (1992) and Wilson (1993)]. Companies naturally seek to maximize their international competitiveness, in part by minimizing their total tax burden by every legal means possible. This paper considers the extent and structuring of dividend, interest, royalty, and management fee payments between commonly owned businesses, (“affiliates”) in different countries to assess the extent to which U.S. multinational corporations engage in such foreign tax mitigating activity.
This paper is concerned with legal practices involving inter-affiliate capital payments and management fees that would mitigate the foreign tax liability of U.S. multinational companies. This paper does not consider the (illegal) manipulation of transfer pricing on cross-border sales and services between related parties. Nor does it consider the effect of U.S. multinational corporations’ organizational choices on their U.S. tax liability.
The U.S. imposes tax on the worldwide income of its citizens. To the extent U.S. companies are able to reduce their foreign tax liability, they risk increasing their ultimate U.S. tax liability if the resulting foreign tax rate is less than the prevailing U.S. rate. Moreover, the existence of the U.S. tax itself weakens the incentive to organize foreign activities to minimize foreign tax in those cases where the U.S. has the higher tax rate.