Originally Posted by dcsimages
Actually this is untrue.
The US has reciprocal tax agreements with almost every country including Australia.
If Apple leaves it's earnings in Australia it pays taxes to Australia.
If Apple brings those earning to the US it pays taxes to the US and doesn't pay Australian taxes.
No, this is not how it works. The foreign tax paid is deductible up to the US tax rate, Australia still collects their taxes, and the company by treaty does not have to pay the same tax to the US as well, they only pay the difference.
The following is from a Harvard business professor (Mihir A. Desai) who knows what he is talking about
Q: Rhetoric aside, how do the U.S. tax rules for corporations work? And how do U.S. rules compare to how other countries tax their corporations on foreign profits?
A: While the overall picture is somewhat complex, there are several underlying principles that help explain it.
First, every country must decide whether it wants to tax its citizens, including its corporations, on their domestic or worldwide income. The United States taxes its citizens and corporations on worldwide income. As a result, when engine maker Cummins, for example, makes profits in Germany, its subsidiary pays German taxes, and the U.S. government retains the right to tax those profits as well.
Second, when the United States imposes its taxes on Cummins's German activity, the government provides some relief for the foreign taxes paid by Cummins to avoid double taxation of overseas profits. In particular, Cummins would receive credits for foreign income taxes paid, up to the U.S. statutory rate. In effect, this means that Cummins will ultimately pay a total of the U.S. statutory rate on its overseas activities in lower tax countries and pay the local rate in higher tax countries. One way to understand this is to say that the United States tries to top up the tax bill on lower tax country profits to the U.S. statutory rate and doesn't do this for profits earned in higher tax countries. This system is known as the foreign tax credit system.
Third, the United States only imposes this additional tax on foreign profits when those profits are returned to the United States, not when those profits are earned. This resembles the treatment of capital gains for individuals where capital gains taxes are only due when gains are realized rather than when they're accrued. As with individual capital gains, there is value in this ability to defer taxes, and this effectively reduces the tax burden on foreign profits. But, to receive the benefits of deferral, Cummins must reinvest the profits in active businesses as opposed to passive portfolio assets.
Finally, a number of significant corporate expenses that Cummins undertakes in the United States and that might otherwise offset its U.S. tax liabilitysuch as interest expenses and some HQ expenseare allocated abroad so that they cannot be used to lower the firm's U.S. taxes. Because foreign governments, unsurprisingly, don't recognize these expenses, these deductions are effectively lost to Cummins. One way to analogize this is to imagine if a fraction of your mortgage interest deduction was disallowed, and that fraction reflected the number of days you spent abroad. Such a disallowance would increase your taxes and effectively puts a tax on you going abroad.
So, in effect, the United States operates a mishmash of a system that taxes worldwide income, provides partial relief for foreign taxes paid, imposes those taxes only upon repatriation, and forces firms to allocate expenses on a worldwide basis.
The major other alternative out there is to simply exempt foreign income from taxation or, said another way, simply tax corporations on their domestic income. Interestingly, the United States is increasingly an outlier in the way it tries to tax overseas income of corporations. The United Kingdom was the only really other significant country that tried so hard to impose taxes on foreign income; it is undertaking a serious reexamination of that now.
In terms of the political debate, the ability to defer U.S. taxation until profits are repatriated is often framed as providing an incentive to ship jobs overseas. On the other hand, the current worldwide system is often derided as making American firms uncompetitive relative to their foreign competition. So, there are easy ways to take political potshots at the current system from both sides.