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Tax Study Explains US Corporate Exodus

by Mike Godfrey, Tax-News.com, Washington

13 March 2015


A study has found that the competitive disadvantage caused by the present United States tax code led to a USD179bn net loss of American companies and business assets to foreign buyers between 2003 and 2013.

The study, prepared by accounting firm Ernst & Young (EY) LLP and released by the Business Roundtable (BRT), also suggested that a 25 percent US corporate tax rate (rather than the present headline federal rate of 35 percent) would have prevented foreign purchases of 1,300 companies during that same period.

Having looked at more than 25,000 cross-border merger and acquisition (M&A) transactions among the 34 OECD countries between 2004 and 2013, EY found that American companies had been the target in 23 percent of transactions by value and the acquirer in just 20 percent, resulting in the USD179bn mergers and acquisitions "deficit." In addition, technology-intensive sectors accounted for a significant portion of the transactions by value.

It was pointed out that, over those 10 years, the US statutory corporate income tax rate remained steady while rates in many other countries fell. As a result, the gap between the US statutory corporate income tax rate and the simple-average OECD rate has increased from two percent to 10 percent, heightening the disadvantage in the M&A market for US companies.

"In a hyper-competitive global marketplace, America's outdated tax structure has made US companies a net target in the cross-border M&A market," it said. "The US has the highest statutory corporate income tax rate among developed nations and is the only developed country with both a high statutory corporate income tax rate and a worldwide system of taxation."

"American business investment and job creation are hamstrung by policymakers' failure to fix our broken tax code," said BRT President John Engler. "Our failed policies have turned the US into a net exporter of headquarters, valuable assets, and startup technologies. We've got to reverse this trend."

The study, Buying and Selling: Cross-Border M&A and the US Corporate Income Tax, also calculated that, with a 25 percent corporate tax rate, US companies would have acquired USD590bn in cross-border assets over the past 10 years instead of losing USD179bn in assets (a net shift of USD769bn in assets from foreign countries to the US).

It was noted that the economic value of US-based multinational companies in 2012 accounted for nearly a quarter of US gross domestic product; USD584bn in capital investments in US property, plant and equipment; and more than three-quarters of all research and development spending in the US. These American companies employed one in five workers with wages 25 percent higher than the private-sector average.

"Over 50 percent of US multinationals' revenue and most of their growth comes from outside the US," Mark Weinberger, EY Global Chairman & CEO, and Chair of the BRT Tax and Fiscal Policy Committee. "Reform efforts should focus on how to increase American competitiveness through pro-growth tax reform. Debates around how to effectively tax US companies' foreign earnings miss the point that if American companies can't compete and win globally, there will be no earnings to bring home."

TAGS: tax | investment | business | accounting | mergers and acquisitions (M&A) | corporation tax | multinationals | transfer pricing | tax rates | United States | tax reform | research and development | business investment | Tax

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