High corporate tax rates were not the driving force behind U.S. companies moving their headquarters overseas, and lowering them likely won’t stop other firms from doing so in the future, according to a study of half a dozen so-called “corporate inversions” initiated last year.
The prevailing wisdom is that the U.S. federal corporate tax rate which, with a top bracket of 35 percent, is the largest in the developed world, was driving companies overseas. In a typical corporate inversion, a U.S. firm buys a smaller company in a country whose tax laws it finds favorable. Then, the merged companies announce that they are moving their headquarters to the second country, which allows profits earned outside the U.S to be repatriated at the lower rate.
However, when Reuters analyzed the tax liability of half a dozen U.S. firms that entered inversion deals, the results undercut the general consensus. The study looked at Medtronic, Applied Materials, Steris, Mylan, C&J Energy Services, and Burger King, and found that most of them weren’t paying anything near the 35 percent top rate.
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The companies’ average effective tax rate, at 20.3 percent, was nearly 15 percentage points lower than the top U.S. rate. And some of the companies relocated to countries with rates higher than those they had been paying in the U.S. The Pharmaceuticals firm Mylan, for instance, moved its headquarters to the Netherlands, where companies pay a 25 percent rate, despite that fact that its U.S. tax liability had not topped 20 percent for the past several years.
The study did not look companies’ total tax liability when state and local taxes were added to federal rates.
The study highlights a fact about the U.S. tax system that is often lost in debates about tax rates – its complexity. Chock full of loopholes, deductions, exclusions and refunds, the U.S. corporate tax code is susceptible to exploitation by smart tax planners and accountants, who are typically able to reduce firms’ liability substantially.
Famously, some large U.S. firms often have a negative tax liability – meaning that the government pays them at tax time.
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Both President Obama and Republican leaders in Congress have called for an overhaul of the U.S. tax code, which hasn’t been substantially overhauled since 1986, and the prevalence of inversions in the past few years is often cited as evidence for the need.
While the findings won’t likely sink the chances of tax reform getting done, they do take away one of the most high profile arguments made by those arguing that the need is urgent.
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