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

U.S. companies entering the global arena for the first time as well as those expanding into new markets abroad face several major decisions. First, they must select a geographical region or country to use as a foreign base or entry point. Second, domestic companies must decide on the contractual arrangement or entity type for exploiting the foreign market. Third, if the other decisions require the transfer of U.S. personnel, the firm must arrange the transfer and adequate compensation of such employees. Fourth, the domestic enterprise must decide on the best means and time for remitting profits back to the United States. These four issues involve significant U.S. tax consequences. The decision to go global or expand into new foreign markets, though not usually driven by the tax consequences, nonetheless should not ignore them. One means tax professionals can use to quantify the tax impact involves calculating a marginal tax rate (MTR). The MTR related to any decision, such as investing abroad, equals the present value of incremental taxes incurred divided by incremental profits. The incremental taxes can include foreign income taxes (national and sub-national), foreign withholding taxes, and U.S. income taxes. This article provides guidance to the tax professional in computing the MTR from a decision to conduct business abroad. Examples illustrate the calculations, and tables provide MTR estimates from conducting business abroad in both low- and high-tax countries