Why do the U.S. tax authorities tax passive income generated offshore differently from active income?
What will be an ideal response?
Answer: One type of passive income would simply be the distributed profits of another company, dividends, if the foreign company owned it. Without the differential treatment, it would only make sense for most U.S. multinationals to create a holding company in a tax haven, which would then own all the foreign subsidiaries of the company. Then, all the profits earned by the Holding Company would be retained in a low tax environment without incurring any U.S. tax liabilities.
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