Income Tax Fundamentals - Term Paper Example

? How the United s Corporate Tax Affects International Business February 22, How the United s Corporate Tax Affects International Business Introduction Governments collect taxes, especially corporate taxes, to ensure viable international business transactions are profitably maintained. The research delves into corporate tax effects on international business. The research looks at some corporations’ tax reduction schemes. United States corporate tax rates significantly affect international business. Discussion The United States corporate tax affects international business International business includes one country selling its products and services to the global marketplace. The United Kingdom corporations can export its products to the United States marketplace. German corporations can sell products and services to the Saudi Arabian marketplace. The Canada corporations can sell products to the current and future customers in California or New York. The United States corporations may import raw materials from China. The United States corporations can convert the imported raw materials into a new saleable product. The United States corporations can sell the new saleable products to two markets. The first market is the local United States marketplace, and the second market is the international marketplace. All countries form part of the United States companies’ international business environment. Consequently, importing countries pay tariffs and duties for the imported goods. In the United States, Section 482 of the United States Tax Code shows the different importing liabilities (Paul 239). Further, the United States corporate tax affects international business. With higher tax rates, there is lesser cash inflow percentages applied to selling the United States companies’ products in the global marketplace. With the tax rate at 38 percent, The United States corporations can only allocate 62 percent of the total annual taxable income to selling the company’s products and services in the global marketplace. With the tax rate at 34 percent, the United States corporations can only allocate 66 percent of the total annual taxable income to selling the company’s products and services in the global marketplace. With the tax rate at 15 percent, the United States corporations can only allocate 85 percent of the total annual taxable income to producing and selling the companies’ products and services in the global marketplace (Whittenburg and Altus (2010) 35). Higher United States taxes discourage imports into the United States market With the high tax rates, companies located in other countries may be discouraged from selling their products in the United States market. Some corporations located in United Kingdom will prefer to sell their products locally because the local corporate tax rate (30 percent) is lower than the United States corporate tax rate (39 percent), reducing United States imports. Likewise, several corporations located in Canada will prefer to sell their goods within Canada because the local corporate tax rate (36 percent) is lower than the United States corporate tax rate (39 percent), lessening United States imports. Some corporations located in Ireland are persuaded to sell their products within Ireland because exporting their products into the United States marketplace with unfavorably higher 39 percent corporate tax profits is less profitable (Whittenburg and Altus (2010) 35). With higher tax rates, the exporting countries will receive lesser after tax cash inflows from selling their products current to future customers in the United States (Whittenburg and Altus (2010) 453). Tax rate adjustments will increase United States imports To increase the United States imports, the United States government must institute better tax rates. The United States government must lower the United States tax rates to more allowable levels. The United States government can lower the tax rates to a figure that will be near to the 30 tax rate level. This level will encourage the United Kingdom corporations to sell their products in the United States marketplace. Further, the United States government can lower the tax rates to near Ireland’s 13 percent tax rate level. This level will persuade the Irish corporations to export their products into the United States stores. The United States government can lower the tax rates to a rate closer to the 36 tax rate level. This level will entice the Canadian corporations to market their export quality products to Canada’s next door neighbor, the United States (Czinkota 453). Examples of how some companies operate overseas to avoid the United States Corporate tax There are several companies benefitting from the diversity in each country’s corporation tax rates. With higher tax rates, the United States companies pay higher income taxes. Consequently, the corporations’ cash inflow equals the total yearly taxable income amount minus the tax amount collected. For Example, the annual net income is $400,000. The corporate tax amount collectible is $ 113,500 plus (34 percent x [$400,000 -335,000]). Consequently, the corporate tax amount is $135,600 or ($221,000 + $113,500). The United States Corporation will only keep in its coffers the net after tax amount of $264,400. Consequently, the United States Corporation can only use the $264,400 for its global marketing strategies, not the entire $400,000. United States government uses taxes to ensure conducive international marketing In turn, the United States government uses the taxes collected by the United States Corporations to enhance the global business environment. Better business environment includes better roads. With better roads, the United States Corporations can easily transfer the goods from the manufacturing sites abroad into the United States stores, customer’s homes, and other strategic marketing locations. Additionally, the United States government pays its police forces to keep the United States territories safe for business transactions. Some companies operate overseas to avoid the payment of the United States taxes. The rates range from the lowest to the highest percentage tax rates. The lowest tax rate is 15 percent. The highest tax rate is 39 percent. One tax rate bracket requires the United States corporations to pay 34 percent tax plus an additional $113,500 when the annual taxable income is more than $335,000 and not more than $10,000,000. Another tax bracket shows that the United States corporations must pay 15 percent tax if the annual taxable income is $50,000 or less. Lastly, the corporation should pay 35 percent tax on the annual taxable income plus $3,400,000 if the annual taxable income is more than $10,000,000 and not more than $15,000,000 (Whittenburg and Altus (2009) 11). Demonstrate how the United States tax compares to other countries Corporate Tax rates of different countries Table 1 Tax Rates of Different Countries Country Tax Rates United States 39 percent Spain 35 percent United Kingdom 30 Percent Canada 36 percent Ireland 13 Percent Table 1 clearly shows that the tax rates of different countries will persuade the United States corporations to set up their stores in London, France, or any other global city. The corporations will pay corporate taxes at a lesser amount when the production and sales facilities are set up in Spain (4 percent tax savings). Spain’s tax rate is four percent lower than the United States tax rate. The United States corporations can save nine percent on corporate taxes when the production and sales facilities are strategically located in the United Kingdom. The United Kingdom’s tax rate is nine percent lower than the United States’ tax rate. Lastly, The United States corporations can save four percent on corporate taxes when the production and sales facilities are sited in Ireland. Ireland’s tax rate is 26 percent lower than the 39 percent United States tax rate (The Chairman of the Council of Economic Advisers 167). Effects of Corporation Tax on the United States Gross Domestic Production (GDP) The changes in the Corporation Tax rates affects the United States Gross Domestic Production (GDP) with higher taxes; the company has lesser cash inflow percentages allocated to United States Gross Domestic Production. For example, when the United States companies’ tax rate is 25 percent, the United States corporations can use 75 percent of the total taxable income to produce goods. When the United States companies’ tax rate is 34 percent, the United States corporations can only use the lower 66 percent of the total taxable income to produce goods. Lastly, when the United States companies’ tax rate is 39 percent, the United States corporations can use 63 percent of the total taxable income to produce saleable products (Palan 65). Funds are needed to promote international trade Further, business corporations, such as the international company Step Two Toy Company, use funds to sell more products and sell in more locations. The business entities pay salespersons to sell the corporations’ products and services. The salesperson needs funds to advertise the company’s international selling products and services. The same marketing personnel need money to entertain high value prospective customers. High tax rates reduce funds needed to fund the United States business corporations (Czinkota 454). In terms of production expenses, the corporations need cash to set up a new production plant. The corporations need to purchase raw materials. The corporations pay the factory workers to convert the raw materials into saleable product. The corporations must allocate funds to pay for the electricity expenses, water expenses, and telephone expenses. The same corporations need funds to pay for the production department’s repair and maintenance needs. Higher tax rates will reduce cash on hand percentages needed to operate a new production facility (Hansen 30). Some companies operate overseas avoid payment of US corporate taxes. Some companies operate overseas to avoid the payment of the United States taxes. If the corporations operate within the United States territories, the corporations must pay graduated taxes. Graduated rates means the tax rate increases as the business corporations’ taxable income increases. The United States corporate tax rates range from the lowest to the highest percentage tax rates. The lowest tax rate is 15 percent. The highest tax rate is 39 percent. Sample tax computation Several examples will clarify the tax rate explanation. One tax rate bracket requires the United States corporations to pay 34 percent tax plus additional $113,500 when the annual taxable income is more than $ 335,000 and not more than $10,000,000. Another tax bracket shows that the United States Corporation must pay 15 percent tax if the annual taxable income is $50,000 or less. Lastly, the corporation should pay 35 percent tax on the annual taxable income plus $3,400,000 if the annual taxable income is more than $10,000,000 and not more than $15,000,000 (Whittenburg and Altus (2009) 11). The relationship between the United States tax rates and the United States Gross Domestic Production is shown in Table 2. Tax rate in relation to United States Gross Domestic Production (GDP) For the United States business corporation, Table 2 shows that the tax rate increase is not directly proportional to the United States Gross Domestic Production (GDP). The September 2011 percentage, 9.7 percent, is favorably lower than the December 2010 percentage, 9.97 percent. The December 2011 percentage, 10.2 percent, is unfavorably higher than the December-September 2011 percentage. The September 2012 percentage, 11.0 percent, is unfavorably higher than the September 2011 percentage. Table 2 Percentage of US Corporate After tax Profit based on corresponding monthly GDP Month Percent September 2012 11.0 percent December 2011 10.2 percent September 2011 9.7 percent December 2010 9.97 Percent Source: YCharts Conclusion Summarizing the above discussion, it is normal for governments to collect taxes, including corporate taxes. The taxes are used to maintain an environment that is conducive to engaging in business transactions. Business transactions include both local business activities and global marketing activities. The research delves into tax effects on international business. Some corporations engage in tax reduction schemes in international trading. Evidently, the United States corporate tax rates materially affect both local and international business transactions. Works Cited Czinkota, Michael. International Marketing. New York: Cengage Learning, 2007. Print. Hansen, Don. Cost Management. New York: Cengage Learning, 2009. Print. Paul, Justin. International Marketing . New York: McGraw-Hill, 2008.Print. Palan, Ronen. Tax Havens: How Globalization Really Works. New York: Cornell University Press, 2010. Print.  The Chairman of the Council of Economic Advisers. “The Economic Report of the President (2009).” U.S. Government Printing Office, The U.S., Government Printing Office, 2009. Web. 22 Feb. 2013. < http://www.gpo.gov/fdsys/pkg/ERP-2009/pdf/ERP-2009.pdf> Whittenburg, Gerald E., and Martha Altus. Income Tax Fundamentals. New York: Cengage Learning, 2009. Print. Whittenburg, Gerald E., and Martha Altus. Income Tax Fundamentals . New York: Cengage Learning, 2010. Print. YCharts. United States Corporate Profits After Tax a Percentage of GDP, n.d. Web. 22 Feb. 2013. Read More