Sample Essay

The multinational companies operating from the United States with subsidiaries in foreign countries can be subject to double taxation in case of repatriation of earnings to the U.S. The tax system allows these companies to defer this repatriation to a later date. When the amount is eventually transferred to the U.S it comes under the tax net. Multinational companies use this as a tool for tax savings for a certain period of time as the tax system restricts the companies from retaining this amount abroad. The tax relaxation for a certain period of time is also significant as the cash flows generated could be utilized in the business till the income is kept in the low tax country (Giovannini, Hubbard, & Slemrod, 1996).

The dividends, interest income on portfolio investment and the distributed earnings which are also dividends but on direct investment in affiliates of a parent company operating in the U.S enable companies to gain more an investments. The receipts of these earnings are also deferred to a date in the future to lower the tax burden and again take advantage of the free cash flows. The companies shift their profits to the foreign countries and take advantage of the lower tax rates and by doing so the earnings from business in the U.S is understated and the earnings from subsidiaries in foreign countries is overstated (Hung & Mascaro, 2004).

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