Corporations Moving Abroad for Tax Reasons

May 2, 2014

American companies are increasingly merging with foreign companies in order to move abroad where tax rates are lower, says William McBride, chief economist at the Tax Foundation.

A number of factors are encouraging U.S. companies to merge with, or acquire, foreign companies and move their headquarters outside of the United States.

  • Corporate tax rates are much lower outside of the United States, where the top federal tax rate is 35 percent.
  • Nearly all foreign countries use territorial tax systems, meaning that a company's foreign earnings are exempt from domestic taxation, and taxes are only due on profits earned in the taxing country. This is not the situation in the United States, which taxes foreign earnings if they are brought back into the country, a process known as repatriation.
  • Pfizer and AstraZeneca (a U.K. company) have been discussing a merger that would put the new company in the United Kingdom, subject to a 20 percent corporate tax rate. This is half the rate that the company would pay in the United States.
  • Similarly, Valeant Pharmaceuticals, a Canadian company, intends to purchase Allergan, a California company. The new business will be based in Canada and will face a 26 percent corporate tax rate, lower than the 35 percent federal rate in the United States and the 9 percent state corporate rate in California.

And it is not just corporate executive jobs that are lost when companies move overseas. When Alexion Pharmaceuticals shifted its manufacturing to Ireland, it was able to lower its tax liabilities to just 11 percent. Similarly, when Eaton Corporation Plc -- an industrial equipment maker -- acquired Irish-based Cooper Industries and became domiciled in Ireland, the company was able to lower its effective tax rate from 12.9 percent to 2.5 percent. Eaton's income tax liability dropped from $201 million in 2011 to $31 million in 2012. That is, these companies leaving is not just a tax revenue problem for the U.S. government, it is a jobs problem for the U.S. economy. That is, these companies leaving is not just a tax revenue problem for the U.S. government, it is a jobs problem for the U.S. economy.

The United States needs to cut its corporate tax rate significantly and change from a worldwide tax system to a territorial one in order to stop this shift of companies and jobs overseas. The United States cannot be competitive without tax reform, and firms will continue heading abroad, taking jobs with them.

Source: William McBride, "Corporate Exits Accelerating, Taking Jobs with Them," Tax Foundation, April 25, 2014.

 

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