Types of taxes
The impact of taxation on a multinational firm depends on whether or not the tax is considered an income tax, since the tax credit applies to income tax only.In this section the taxes that a multinational firm and its subsidiaries face are discussed briefly.
Corporate income tax
Corporate income tax is a direct tax in the sense that it is paid directly by the taxpayer on whom it is levied.The tax is levied on active income, which results directly from the production of goods and services.Corporate income tax rates range from zero per cent in Bahrain, Bermuda and the Cayman Islands to well over 40 per cent in many countries.
There are two approaches to taxing corporate income: the classic approach to taxation and the integrated approach to taxation.Under the classic approach, the income received by each taxable entity is taxed.Thus, the earnings of a company could be taxed twice: when they are earned and when they are received as dividends by shareholders.The integrated approach aims at eliminating this kind of double taxation by considering both the company and its shareholders, and this can be done in two different ways.The first is to tax undistributed earnings at a higher rate than that used to tax distributed earnings.
The second is the so-called imputation tax system whereby the portion of income tax paid by a company is imputed when shareholders are taxed on their dividends.
Withholding taxes
A withholding tax is levied on passive income earned by a firm within the tax jurisdiction of another country.Passive income includes dividends and interest payments as well as income from royalties, patents and copyrights.A withholding tax is an indirect tax that is borne by a taxpayer who did not directly generate the income that serves as the source of the passive income.Countries levy withholding taxes on payments to non-resident investors.
Indirect taxes
The most important form of indirect tax is the value added tax (VAT), which in Australia is known as the Goods and Services Tax (GST).The basic idea behind VAT is that the tax is applied at each stage of the production process for the value added by a firm to the goods purchased from other firms.
Import duties
Import duties (also called customs duties and tariffs)are imposed on imports.Since goods imported to a country are shipped to specific ports where policing can be intensive, import duties are a good source of revenue when income or sales records are poor.This partly explains why the governments of some developing countries depend on tariffs as a source of revenue.Tariffs also explain why a car can cost five times as much in some countries as in others.Finally, tariffs explain why some firms move production facilities abroad.Tariffs, and even the threat of imposing tariffs, provide one explanation for FDI.
Taxation of foreign exchange gains
When cross-border transactions are conducted, foreign exchange gains and losses will typically be present.The tax treatment of these gains and losses is very complex and varies from one country to another.In many countries, foreign exchange gains and losses are taken into account in the overall trading profit.If these gains and losses relate to capital transactions,they are recognized in some countries but not in others.