« back to the Tax Facts
March 27. 2014

ACT Tax Facts: U.S. Tax Code Encourages Foreign Takeovers of U.S. Companies

As leaders in Washington examine ideas to grow our economy and create more jobs, it’s time they reform our nation’s outdated tax system so that U.S. companies can compete in the global economy. One consequence of today’s noncompetitive tax system is that it encourages foreign acquisitions of U.S. companies, causing headquarters jobs that should be here in America to move overseas. In 2014, Actavis, an Ireland-based pharmaceutical company, acquired U.S.-based Forest Laboratories, moving the headquarters of another U.S. company to a country with a more competitive tax system. While most acquisition and merger decisions are based on the efficiency and profitability of the post-deal company, there are some deals where tax laws play a strong role in the decision to reincorporate outside of the U.S.

Robert Willens, a corporate tax adviser, said the following regarding the Actavis acquisition:

“The inversion probably was the factor that made the acquisition possible. By offering the benefits of a lower tax rate, Actavis made itself a very attractive suitor, and one that has a huge advantage over U.S. suitors.”

In recent years, American companies have become prime targets for takeover by foreign corporations because of the tax benefits of being headquartered outside the United States. In fact, over the 1990-2011 period cross-border mergers in which American companies were the target were 38 percent greater in value than those in which American companies were the acquirer.1 It is time for the U.S. to reform its tax code so that multinational companies with headquarters in the United States are not at a tax disadvantage.

Of the non-US OECD Global Fortune 500 companies, 93 percent are headquartered in countries that have “territorial” tax systems. The United States, by contrast, still taxes global American businesses under a worldwide system and has the highest corporate tax rate among OECD countries. The outdated U.S. tax system makes it difficult for U.S.-based global companies to compete abroad because their competitors are subject to much more advantageous tax systems. In 2011, Walter Galvin, former Vice Chairman of Emerson Electric Company testified before Congress, saying:

“In 2006, Emerson sought to buy APC, a Rhode Island-based company that produces high-tech electronic equipment. Over 50 percent of APC’s earnings came from outside the United States. We competed against Schneider Electric, a French company, to buy APC. Emerson offered $5 billion, but Schneider ultimately acquired the company by offering $6 billion. Why was Schneider willing to offer more? Quite simply, APC’s profits were worth more to Schneider because, as part of a French company, APC’s dividends sent to France would be taxed at under 2 percent.”2

To remove obstacles to global competitiveness imposed by the outdated U.S. international tax system, some U.S. multinationals have intentionally moved their headquarters abroad. Often times, when two companies are deciding where to put their combined headquarters and how to structure the deal, the tax systems can have a strong influence over where the company reincorporates. Examples include Applied Materials, which merged with a Japanese firm and then reincorporated in the Netherlands, and the Cleveland-based Eaton Corporation, which merged with an Irish firm, Cooper Industries, and reincorporated in Ireland.

In an article from October 2013, The New York Times looked at the tax savings that result from foreign acquisitions of U.S. companies.

“When Applied Materials announced its deal for Tokyo Electron, it said that its effective tax rate would drop to 17 percent from 22 percent as a result. For a company that had nearly $2 billion in profit in 2011, that amounts to savings of about $100 million a year.

“Last year, the Eaton Corporation, a power management company from Cleveland, acquired Cooper Industries, based in Ireland, for $13 billion, and reincorporated there. The company expects to save $160 million a year as a result of the move.”

Perrigo Pharmaceuticals is another company that has overtly discussed their tax motivations for reincorporating in Ireland. In an August 2013 article, Marty Sullivan from Tax Notes reports on a statement by CFO Judy Brown where she laid out the strategic importance for the company to move its headquarters to Ireland, which has a significantly lower corporate tax rate than the U.S.:

“The modus operandi in Perrigo is to grow through adding new legs to the stool. . . . We would like to continue on that path, doing transactions. And we’ll be able to do that from a base domiciled in Ireland, which would then therefore give us the opportunity, as we grow internationally, to lower the rate over time.”

A 2013 WSJ op-ed by Mieko Nakabayashi and James Carter noted that when the U.S. last cut its corporate tax rate in 1986, 218 of the world’s 500 largest corporations measured by revenue were in the U.S. By 2013, that number had dwindled to 137.

The U.S. tax code desperately needs to be reformed to level the playing field so American companies can compete in today’s global economy and businesses are encouraged to stay in the U.S., rather than reincorporate abroad. We can no longer sit by and watch as we lose U.S. jobs and tax revenue to foreign countries because of our uncompetitive tax system.

Former Senate Finance Committee Chairman Baucus discussed the motivations and reason for why American companies are reincorporating overseas in a statement on the Senate floor, saying:

“It would be easy for us to attack these companies by calling them immoral and unpatriotic. But it’s more constructive to step back and ask, ‘What’s motivating these companies to move their headquarters abroad?  How can we keep them in the United States? How can we adapt to the world and fix the problem?’ This is a simple issue. Globalization has made America’s tax code out of date.”

It’s time leaders in Washington embrace tax reform as a way to strengthen our economy, create American jobs and strengthen American businesses as they grow at home and compete abroad.

——

[1]  Business Roundtable, Comprehensive Tax Reform:  The Time is Now, July 2013, p. 23.

[2] As a French-owned company, APC’s future foreign investments would be structured directly underneath the French parent company and income from these investments when repatriated to France would bear less than a 2% tax rate. By contrast, if APC remains a US company, income from its current and future foreign investments would be taxed at a 35% rate when repatriated, with a credit for foreign taxes, which generally are considerably lower than the 35-percent US rate.

Get this Tax Facts as a PDF