The tax legislation now before Congress would fundamentally change the way that foreign profits of US multinationals are taxed, from a worldwide to a territorial approach. But the design of the new approach would encourage the offshoring of US jobs and factories.
Under the current worldwide approach, all profits earned by foreign subsidiaries of US companies are subject to tax by the US at a 35 per cent rate, but only if and when they are repatriated to the country. By contrast, the Republicans are proposing to adopt a territorial system, under which the US would generally not tax profits of US companies earned in any foreign country. These profits would still be taxed by that foreign country at whatever rate it chooses.
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