NCPA - National Center for Policy Analysis

Corporate Taxes

August 14, 2003

Reincorporating abroad is called a "corporate inversion." In effect, a U.S.-based company establishes a foreign entity, which then buys the U.S. company. In the process, it becomes a foreign-based company with a U.S. subsidiary, instead of the other way around, says Bruce Bartlett.

Another increasingly common transaction is the acquisition of U.S. companies by foreign corporations, which achieves the same tax reductions as inversions:

  • About two dozen American companies have reincorporated in such tax havens as Bermuda in recent years.
  • According to the U.S. Treasury Department, foreign acquisitions have risen significantly, from $90.9 billion in 1997 to $340 billion in 2000.
  • Finland has a corporate tax rate of 29 percent, 11 percentage points below the top U.S. tax rate.
  • In Norway, the combined corporate and individual top tax rate on dividends is just 28 percent -- less than half the U.S. top rate of 60 percent prior to the recent tax cut.

The spread is likely to increase if European nations follow the lead of Ireland, which reduced its rate to just 12.5 percent from 16 percent in 2002, says Bartlett.

Source: Bruce Bartlett, "Corporate Taxes," Brief Analysis No. 451, August 14, 2003, National Center for Policy Analysis.

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