Estimating Marginal Tax Rates When Entering
Foreign Markets (Part I) — footnotes

¹ See Rolfe and White, “Investors’ Assessment of the Importance of Tax Incentives in Locating Foreign Export-Oriented Investment: An Exploratory Study,” 14 J. of the American Tax’n Ass’n 39 (Spring 1992); Porcano, “Factors Affecting the Foreign Direct Investment Decision of Firms from and into Major Industrialized Countries,” 1 Multinat’l Bus. Rev. 26 (Fall 1993); and Wunder, “The Effect of International Tax Policy on Business Location Decisions,” 24 Tax Notes Int’l 1331 (12/24/01).

² Although not this article’s focus, indirect taxes (e.g., value-added and goods and services taxes) and customs duties can also be substantial costs of doing business. For example, New Zealand imposes a 12.5% tax on most supplies (i.e., transfers) of goods and services; see PricewaterhouseCoopers, Corporate Taxes: Worldwide Summaries 2002–2003 (John Wiley & Sons, 2002), p. 595 (hereinafter cited as “PWC”).

³ Tax reform is not an activity unique to the U.S. Some countries amend their income tax laws frequently in response to political shifts, economic trends and new policy initiatives. Tax advisers should consult the most current laws and expected changes before making investment decisions based on MTRs.

⁴ See PWC, note 2 supra, p. 79–80.

⁵ See PWC, note 2 supra, p. 269, 278.

⁶ See PWC, note 2 supra, p. 426.

⁷ This first component also includes, under Sec. 903, any tax paid in lieu of foreign income tax and, under Sec. 902(a), deemed-paid taxes of U.S. corporations with qualifying foreign subsidiaries. Only foreign levies that are “creditable” qualify for the FTC. To be creditable, Regs. Sec. 1.901-2(a)(1) specifies that a levy must be a tax whose predominant character is that of an income tax under U.S. law. Alternatively, Regs. Sec. 1.903-1(a) allows a tax substituting for an income tax (e.g., withholding taxes and certain industry-based income taxes) to be creditable.

⁸ These concepts provide a basis for the MTR discussion that follows. However, an underlying assumption is that the “foreign source income” appearing in the two components is identical. For a variety of reasons, this assumption may not always hold. For example, some foreign-source income taxable under U.S. principles may be exempt from host country tax, perhaps due to a tax holiday. Also, expenses apportioned to foreign-source income under U.S. law may be nondeductible under the host country’s law.

⁹ See PWC, note 2 supra, p. 13.

¹⁰ The U.S. and Australia signed a protocol to their existing treaty on Sept. 27, 2001, which entered into force on May 12, 2003, and, for withholding taxes, was effective July 1, 2003. The protocol exempts dividends from withholding tax when a corporation receives dividends from an 80%-owned subsidiary, and taxes dividends from a 10%–80%-owned entity at 5%. In a protocol signed Nov. 26, 2002, the U.S. and Mexico agreed to exempt dividends from withholding tax when received from an 80%-owned subsidiary; the U.S. and U.K. signed a similar agreement on July 22, 2002. These agreements must be ratified before they become effective.

¹¹ For a detailed discussion of treaties, see Larkins, “U.S. Income Tax Treaties in Research and Planning: A Primer,” 18 Va. Tax Rev. 133 (Summer 1998).

¹² Profits do not always result (and are not always expected) from export sales. For example, U.S. companies may be willing to bear short-term losses from exporting if needed to establish or maintain foreign markets. If losses result, they can offset domestic profits.

¹³ See Larkins, “WTO Appellate Body Denounces ETI Exclusion: Anatomy of an Export Subsidy,” 13 J. of Int’l Tax’n 10 (May 2002).

¹⁴ Rev. Rul. 2003-111, IRB 2003-45, 1009.