Introduction
International taxation is best defined as collecting national law rules that govern the tax consequences of cross-border transactions. International tax differs on whether the tax is levied on individuals or corporates (Turley et al., 2017). It deals with both direct and indirect taxes.
Corporate tax is a government-imposed tax applied by the host government on the revenue or capital of a foreign and local corporation operating within the country’s borders (DS Choi, 2017). In addition, governments impose international taxation on firms operating abroad but have their roots in the local region. in comparison, personal income tax is the tax imposed on income received by an individual, such as wages and salaries. Corporate taxes are a complicated area and difficult to administer, and the regulations governing them vary significantly between countries. Some nations are tax havens and are very attractive to companies because of their favorable corporate tax rules. Corporate taxes are deducted from profits before taxes on a company’s income statement to determine net income (net profit) for a given period.
Corporate taxes are levied on the following entities:
- All companies operating around the globe but have their origins in the country (small, medium, and large)
- Corporations that conduct business within the nation include local and foreign firms.
- Foreign firms with a permanent presence in the nation
- Corporations that are tax residents inside the nation
Personal income tax is a government-imposed tax on an individual’s income. It is income tax levied on the earnings and salaries of employees. Due to tax exemptions, deductions, and credits in many countries, most individuals do not pay individual income tax on their entire income (Turley et al., 2017). Due to varied legislation and government structures, personal income tax rates vary per nation. However, most countries have a so-called progressive income tax system, implying that people with higher incomes pay a greater tax rate than those with lower incomes.
The differences between international tax concerns on corporate tax and individual tax
International Corporate taxation is significant different to individual taxation. Corporate tax expenditures are significantly less than personal tax expenditures. Nonetheless, some of them are relatively large (Marples, 2018). Certain corporate tax expenditures attempt to maintain the tax code’s neutrality over time. On the other hand, others try to promote one type of economic activity over another buy taxing more the economic activities they aim at discouraging and taxing less on the activities they aim at promoting.
The United States’ global corporate tax system forces multinational businesses to pay double taxes: once to the country where they are located and conduct business and again to the IRS when they send back their earnings (Arel-Bundock, 2017). The United States offers some subsidies to international corporates, and higher tax rates are applied to corporates operating in low taxation countries. Double taxation affects the corporates and reduces their profit. In the long run, it results in the closure of those businesses causing a double loss to the government, as the tax revenue collected from the corporates reduces and the employees also lose their jobs, causing a further decrease in individual taxation.
The United States applies individual tax rules on all its citizens, whether living within its borders or overseas (Gravelle, 2019). All citizens of the United States and foreigners living in the US have to file for income, estate, and gift tax returns. The estimated tax is essentially the same whether the individual is residing in the United States or abroad. For all income a US citizen receives as an individual, they are obliged by law to record taxable income and pay the taxes as per the Internal Revenue Code. However, numerous Americans residing overseas are eligible for specific tax subsidies, including the foreign earned income exclusion and foreign tax credit. Still, they can only enjoy the benefits by making an application. Taxpayers in the United States who possess overseas financial accounts must declare them to the relevant department, even if the accounts do not generate taxable income.
Another corporate international tax concern is on tax treaties. The United States gets into tax treaties with other nations on corporate taxes. When a foreign corporation is entitled to the advantages of a tax treaty negotiated between the United States and the government in which the foreign corporation is a tax resident, the application of US domestic tax rules may alter (Kysar, 2019). For instance, if a foreign corporation is liable to income tax in the United States under the provisions of the Internal Revenue Code, the rules of the applicable tax treaty may delegate the power to tax the IRC-taxable operations to another taxing country.
For individual taxes, there are no treaties that apply to foreigners or residents working abroad, and total income tax is applied to individuals. However, Americans working abroad are taxed at a rate less by the tax applied in the jurisdiction they work at. For example, if a US citizen working in a foreign country is taxed at 25% on their income, and the rate at the United States is at 35%, then the individual will be subject to 10% income tax (Kysar, 2019).
Every foreign corporation operating in the United States is obliged to file a United States tax return, even if the foreign firm has no revenue from the United States or if all of its income is tax-free under the provisions of a tax treaty. Additionally, even if a foreign business asserts that it does not have a permanent establishment in the United States, it may be obliged to file a tax return (Bartik, 2017). Foreign corporations that do not have a permanent presence in the United States but receive revenue from sources in the United States on which tax was withheld are required to submit a tax return to obtain a refund of (part of) the tax withheld. Failure to timely file a truthful and correct tax return may result in the disallowance of deductions and the imposition of fines.
For individual taxpayers, the taxation applies based on their citizenship, not residence, and all individuals are obliged to pay taxes no matter where they reside. The tax is applied to all individuals no matter the source of income and taxed using progressive rates (Foley et al.,2017). On the other hand, corporate taxes are applied depending on the type of the firm and the number of items included in the taxable income.
All corporate is subject to deduction for domestic manufacturing activities in the United States. It is a 3% deduction for businesses that engage in eligible manufacturing activity in the United States (Bartik, 2017). While the deduction is undoubtedly an incentive to attract firms to base their activities in the United States, and most sectors embrace it, it leaves specific sectors out in the cold, such as retail food preparation. Such a tax system that disproportionately benefits some sectors while leaving others behind should be rectified to be more accommodative.
American citizens enjoy employer Contributions to Medical Insurance Premiums deductions. This structure benefits all employees working abroad or in America since they receive compensation that is not taxable (Adhikari and Alm, 2018). This tax deduction is the highest and is more than all the corporate tax deductions combined. In recent times, congress debated how to harmonize the preferences to ensure all individuals are taxed equally, even those who do not enjoy the medical insurance premiums from their employers.
US Corporations operating overseas can enjoy deferred income tax payments. This expense results from an ill-advised endeavor to maintain a global corporate taxation system, even though other nations are putting in place superior tax systems that exempt most overseas revenues from local taxation (Foley et al., 2017). The few surviving countries with a global tax system, particularly the United States, use deferral to maintain multinational corporations competitive with domestic firms. Deferral here refers to the ability to delay the additional domestic tax on overseas profits that are payable and the tax that the corporates pay to the countries they are operating in. Indefinite deferral approaches a system that exempts all foreign revenues from taxation completely, but it entails enormous tax planning and administrative expenditures and creates the problem of locked-in profits.
Individual’s tax excludes Net Imputed Rental Income. This category includes owner-occupied dwellings. According to United States tax legislation, if a foreigner living in the United States is a homeowner and rents the home to another person, they must pay income taxes on the rental revenue (Adhikari and Alm, 2018). However, if they live in the house and “rent” the home to themselves, there is no market income to taxation. Their “revenue” is derived from their house’s personal advantage. This is referred to as imputed rent due to the tax code’s definition of income. On the other hand, this spending marks a step toward investment-consumption neutrality. Under a neutral tax base, rental income would not be taxed if market or imputed.
Corporates are subject to Machinery and Equipment Accelerated Depreciation. This expense is also indicative of a convoluted corporation tax regime. When a physical asset, such as a manufacturing plant, is bought, the buying cost is written off over years or decades and is not included in the asset’s price. While depreciation is a valuable accounting concept for determining a corporation’s book value, the economic costs of an investment should be recognized through expensing; the cost of the plant should be deductible in the year in which the money is spent (Pignataro, 2018). This would be a more accurate representation of the time worth of cash. The absence of fully deductible expenses creates a tax disadvantage for businesses that pay extensively in physical assets. Recently, various tax laws relating to depreciation, such as bonus depreciation, have been incorporated into the extenders.
Mortgage Interest Deductibility on Owner-Occupied Housing. This is the most significant tax deduction available to individuals, both locals and foreigners. If mortgage interest income is taxable, the income reduced from paying that interest should be exempted from taxation. Otherwise, both the individual who has taken the mortgage and the one giving the mortgage are taxed on the same revenue, resulting in a double tax (Poterba and Sinai, 2019). This, however, would be best handled through a more comprehensive approach of interest than through a separate one for owner-occupied dwellings.
Another concern on international corporate taxation is double taxation on corporates from corporate income taxation and shareholders taxes. The US government applies taxes on capital invested and taxes individuals on the income they receive from the investment (Zucman, 2020). This causes double taxation on the investor. And could probably discourage investors from investing in the United States. The US government can achieve a neutral base tax on international corporate taxation by enacting the reduced Capital Gains Tax. This can be done through either taxing the capital gain or the income received but not both.
Conclusion
The United States applies high taxation on its citizens whether residing in the country or not. The tax rate remains the same, and all individuals are combined and subjected to progressive taxation (Doerrenberg, 2018). All United States citizens are required to file returns and pay tax according to US taxation rates, whether they are residing in the United States or not. The same applies to corporates carrying out business in the United States or abroad but have roots in the US. All corporates are subjected to taxation as per the taxation rates in the United States. The government tries to compensate through the Reduced international tax expenditures on both individuals and corporates; however, the reductions do not always indicate a more balanced tax structure. Indeed, some are the polar opposite. The credits for Empowerment Zones, the DC Enterprise Zone, and Renewal Communities are all apparent non-neutral tax expenditures. These credits are ostensibly intended to provide tax benefits to some country’s geographic regions.
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