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News Coverage: How the Tax Code Leads to Foreign Acquisitions of U.S. Companies

Mar 12, 2015

Business Roundtable on Wednesday released a study that documents an underappreciated consequence of the antiquated, anti-competitive U.S. tax code: It encourages companies based outside the United States to acquire U.S.-headquartered operations.

The report, Buying and Selling: Cross-border mergers and acquisitions and the U.S. corporate income taxdocuments how the tax system contributed to a $179 billion net loss of U.S. companies and business assets to foreign buyers from 2003-2013. Had the U.S. corporate tax rate been set at about the OECD average -- 25 percent -- instead of the developed world's highest 35 percent, more than 1,300 U.S. companies could have avoided foreign purchase during that 10-year period.

“Debates around how to effectively tax U.S. companies’ foreign earnings miss the point that if American companies can’t compete and win globally, there will be no earnings to bring home," said Mark Weinberger, EY Global Chairman & CEO, who chairs BRT's Tax and Fiscal Policy Committee. EY conducted the study for BRT.

"The current U.S. tax system puts companies at a disadvantage in a global economy and results in assets, technology and tax dollars leaving the United States at a disproportionally high rate," Weinberger said.

Markets, not market distortions caused by a broken tax code, should be driving these kind of business decisions.

The study represents an important contribution to the public debate as Congress turns serious attention to tax reform. This week, Sen. Orrin Hatch (R-UT), chairman of the Senate Finance Committee, and Ranking Member Ron Wyden (D-OR) announced they were soliciting ideas from the public and affected parties on how to reform the tax code. (news release) On Tuesday, March 17, the committee will hold a hearing, "Building a Competitive U.S. International Tax System," part of series of hearings on reform.

Many in the news media recognized the significant findings of the BRT/EY study. Coverage ...

Wall Street Journal (blog), "U.S. Tax System Encourages Foreign Takeovers, Business Roundtable Study Says":

Big businesses are gearing up to make the case for overhauling the U.S. tax system, armed with a new study arguing that it is encouraging foreign takeovers of American firms.

The trend could lead to job losses and other harms, according to the study prepared for the Business Roundtable, a group of big-firm CEOs.

The findings ... are likely to fuel business demands that Congress rewrite U.S. tax rules. Businesses want Congress to lower the U.S. corporate tax rate, now the highest among developed countries at 35%. They also want to loosen the U.S. system’s unusual global reach.

The Hill, "Business study: Tax system spurs foreign takeovers":

[If] Washington slashed that [35 percent] corporate rate to 25 percent, the U.S. would have actually gained $590 billion in assets, according to the study conducted by Ernst and Young – a net shift of some $769 billion. In all, some 1,300 companies would have kept stayed in the U.S. with the lower rate, the study added.

“American business investment and job creation are hamstrung by policymakers’ failure to fix our broken tax code,” said John Engler, the president of the Business Roundtable, which represents top corporate chief executives.

“Our failed policies have turned the United States into a net exporter of headquarters, valuable assets and startup technologies. We’ve got to reverse this trend.”

And, although not reacting to the Business Roundtable study, this March 5 article from The Wall Street Journal reinforces the point, "Foreign Takeovers See U.S. Losing Tax Revenue":

Just months after the Obama administration cracked down on mergers that helped U.S. companies skirt domestic taxes, a wave of foreign takeovers is steering more tax revenue away from Uncle Sam.

In deals known as “tax inversions,” which spiked in 2014, U.S. companies acquired foreign rivals and redomiciled in low-tax countries, reducing the taxes paid back home. The moves sparked an outcry from lawmakers and others that prompted the Treasury Department in September to make such tie-ups more difficult and less lucrative.

But the policy doesn’t deal with foreign takeovers of U.S. companies, which have surged in dollar volume in recent months. As a result, the U.S. still loses tax revenue, but this time U.S. companies are being purchased. Once a cross-border takeover is complete, companies can apply their new, lower tax rates to the overseas income and use internal loans and other strategies to further reduce U.S. taxes.

A striking assessment follows: 

“If you make inversions more difficult, more U.S. companies may simply be acquired,” said Robert Scarborough, a partner at law firm Freshfields Bruckhaus Deringer LLP.

 

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