International Tax Policy International Tax Policy

Presented By

Kuon Phou

Nintendo of AmericaNintendo of America

• Nintendo of America Inc is a wholly owned subsidiary., based in Redmond, Washington.

• Currently Serves as headquarters for Nintendo’s operations in the Western Hemisphere, where more than 40% of American Households own Nintendo game systems.

• Contributes 14% of Nintendo Sales

InternationalInternational Tax PolicyTax Policy

Definition:

International tax policy is the taxes a country levies on companies who do business worldwide

- Chris Atkins, Staff Attorney

Tax FoundationWashington, DC

OverviewOverview

• International tax policy is determined through complex interactions between host and home governments.

• Host government acts first and then the home government determines policies vis-à-vis the host government.

Debt/Equity Taxation PolicyDebt/Equity Taxation Policy

• International tax policy deals separately with debt and equity – Equity taxation policy is more complex than

debt taxation policy

• Focus of international tax policy is on taxation of equity.

(r* is the foreign rate of return & r*f is the foreign tax rate)

Host Govt. Tax PoliciesHost Govt. Tax Policies

• Host Govt. gets the first opportunity to tax. This is called the “first crack”.

Home country investor of DFI has an after-tax rate of return of r*(1 - t*) where profits aren’t repatriated.

(r* is the foreign rate of return, t* is the foreign tax rate & r*w is the withholding tax rate)

Host Govt. Tax PoliciesHost Govt. Tax Policies(cont.)(cont.)• Withholding Taxes

– Taxes imposed on capital paid to parent as they are taken out of the country.

• After-tax rate of return– r* (1 – t*).

• After-tax rate of return if profits are repatriated– r*(1 – t*) (1 – t*w).

Home Govt. Tax PoliciesHome Govt. Tax Policies

• Home Government determines its tax policy with respect to two factors:

– Treatment of foreign income and foreign taxes paid.

– The timing of taxation.

Treatment of Foreign Income Treatment of Foreign Income and Foreign Taxes Paidand Foreign Taxes Paid• Exemption

- Allow the funds being repatriated, tax exemption

• Credit- Have the company pay the full host or home tax rate whichever is higher.

• Deduction- Tax foreign income at the domestic rate than give a deduction for taxes paid to the host country.

• Double Tax-Tax the foreign income at the domestic tax rate ignoring any taxes paid to the host country

(r* is the foreign rate of return, t is the domestic tax rate & t* is the foreign tax rate)

Treatment of Foreign Income Treatment of Foreign Income and Foreign Taxes Paidand Foreign Taxes Paid• Foreign income is exempted from domestic tax.

i.e. r*(1-t*). The foreign tax rate governs payable tax.

• Foreign tax is credited to domestic tax. Consequently company pays the higher of the domestic or foreign tax rate. i.e. [ r*(1-[t*+{t-t*, where > 0}]) ]. The home tax rate governs payable tax.

(r* is the foreign rate of return, t is the domestic tax rate & t* is the foreign tax rate)

Treatment of Foreign Income Treatment of Foreign Income and Foreign Taxes paid and Foreign Taxes paid (Contd.)(Contd.)• Foreign profits are taxed at the domestic

rate and given a deduction for foreign tax paid, i.e. r*(1-t*)(1-t).

• Foreign profits taxed without recognizing foreign taxes paid. i.e. r*(1-t*-t). Complete double taxation of foreign income and hence almost never used.

Nintendo Co. Ltd. Nintendo Co. Ltd.

* *Nintendo Co. Ltd. Annual Reports Fiscal Year 2004

Example of Nintendo Tax Example of Nintendo Tax TreatmentTreatment

Exemption Credit Deduction Double TaxForeign Income $149,253 $149,253 $149,253 $149,253Foreign Taxes Paid $52,239 $52,239 $52,239 $52,239Home Taxes Paid 0 $10,448 $40,746 $62,686Net Income $97,014 $86,567 $56,268 $34,328

Foreign Income $149,253Host Government Tax 35%Home Government Tax 42%

Given *$ Billions*

Timing of TaxationTiming of Taxation

The Home Country’s tax policy on foreign income is determined largely by the timing of the home government taxation. Two main policies possible:

• Contemporaneous taxation: Foreign equity returns taxed same year as earned. Applies to branches of multinationals in most countries (including the U.S). A branch is considered an extension of its parent and is taxed with it.

Timing of Taxation (Contd.)Timing of Taxation (Contd.)

• Tax Deferral: Taxation occurs at the time profits are repatriated as dividends. Applies to subsidiaries of multinationals in most countries (including the U.S). A subsidiary is an affiliate of the multinational company in the country it operates. It is a separate legal entity and its profits are taxed only when it comes home.

This policy believes that tax deferral encourages profits to be reinvested abroad rather than repatriated.

Questions?Questions?