Cite as: 505 U. S. 71 (1992)
Opinion of the Court
Federal Government generally taxes the income that a foreign corporation earns in the United States.17 To avoid multiple taxation, the Government allows a deduction for foreign subsidiary dividends that reflect such domestic earnings.18
In adopting the federal pattern, Iowa also allows a deduction for dividends received from a foreign subsidiary if the dividends reflect business activity in the United States. Accordingly, while the dividends of all domestic subsidiaries are excluded from the Iowa tax base, the dividends of foreign subsidiaries are excluded only to the extent they reflect domestic earnings.19 In sum, the only subsidiary dividend payments taxed by Iowa are those reflecting the foreign business activity of foreign subsidiaries. We do not think that this discriminatory treatment can be justified on the ground that some of the (untaxed) dividend payments from domestic subsidiaries also reflect foreign earnings.
In a related argument, Iowa and amicus United States assert that Kraft could conduct its foreign business through domestic subsidiaries instead of foreign subsidiaries or, alternatively, could set up a domestic company to hold the stock of the foreign subsidiaries and receive the foreign dividend payments. In either case, Kraft, itself, would receive no dividends from foreign subsidiaries and would thus avoid paying Iowa tax on income attributable to the foreign operations. Iowa and the United States contend that these alternatives further demonstrate that it is not foreign commerce,
17 See 26 U. S. C. § 882.
18 See § 245.
19 The dissent presents the example of a subsidiary incorporated in a foreign country, but engaged in business exclusively in the United States. The dissent doubts whether a dividend payment from such a subsidiary is properly characterized as "foreign commerce." Post, at 85. As discussed above, however, a dividend payment from such a subsidiary would not be taxed by Iowa. Iowa taxes foreign subsidiary dividends only to the extent that they reflect foreign earnings. The dissent does not dispute that this kind of dividend payment does constitute "foreign commerce." Post, at 84.
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