When a U.S. company owns a subsidiary overseas, it has a big decision to make when it comes to the earnings of that subsidiary. Does it send the money back to the parent company in the U.S. and pay U.S. corporate taxes or does it avoid the U.S. tax by permanently reinvesting the money abroad?
Given that the U.S. has one of the highest corporate tax rates of any country in the world, it’s not surprising that many companies choose not to repatriate the money.
Our current system in the U.S. — known as the worldwide tax system — is one where U.S. companies’ earnings are taxed in the U.S. even if earned overseas. However, companies are not required to pay the U.S. taxes on operating income of foreign subsidiaries until they bring cash home to the U.S. parent company.