How Do International Tax Rates Affect Investment Decisions?

International tax rates are some of the most important things investors should consider before they choose to invest outside United States. As international investors, they would be earning profit, and the countries where they earn it will tax them accordingly. Ultimately, though, they should not base their decisions on international tax rates alone. Rather, they should weigh them against other aspects of the nation's economic, cultural and political landscape and see how the positives and negatives add up.

Understanding International Tax Rate

United States' tax rates fall into the medium of the international tax spectrum - some are higher, many are lower and more than a few are about the same. There is no consistent correlation between the country's economy and its tax rates. Developed and developing countries are equally likely to high and low tax rates. Many investors prefer to invest in countries with lower tax rates because they assume that it would allow them to earn bigger profits. However, that isn't necessarily the case.

Different countries take different approaches to taxing international investors. Generally speaking, they can be divided into three categories:

  • Territorial taxation - taxes income earned inside a particular country, regardless of the residential status of the taxpayer.
  • Residency taxation - taxes all income of citizens and permanent residents and some sources of income for non-residents.  income of residents and/or citizens
  • Exclusionary taxation - under this system, investors can avoid paying certain types of taxes, so long as they meet certain requirements

Together, those systems have both pluses and minuses. Depending on the country, investor can wind up not paying any taxes or paying their taxes while still being taxed in their home country. Investors should make sure that they consider the nation's approach to international taxing along with the value of its taxes.


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