Corporate Tax Rates Aren’t The Reason American Companies Flee To Tax Havens

CREDIT: AP/LM OTERO
CREDIT: AP/LM OTERO

Cutting the corporate tax rate in the U.S. would do little to discourage companies from moving overseas to dodge American taxes, according to a new Reuters analysis of the half-dozen largest companies to launch so-called inversion mergers last year.

The list of six companies includes both Medtronic and Burger King, household names whose inversion plans drew significant press attention to the growth of the business practice in recent years. An inversion allows an American company to merge with a foreign entity then set the corporate headquarters of the merged firm in that other company’s home country, shifting the U.S. firm’s tax residence overseas without requiring any actual realignment of where and how the company does business. The maneuver is entirely legal and “mainly driven by efforts to shift profits out of the U.S. and to access overseas earnings at little or not cost in U.S. tax,” Reuters explains.

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While proponents of a corporate tax cut or repatriation tax holiday often argue that companies undertake these elaborate schemes specifically because of the 35 percent statutory income tax rate that corporations face in the U.S. But that argument ignores the often huge gap between that on-paper tax rate and the effective rate that companies actually pay. Reuters reports that Medtronic, Burger King, and four other large companies plotting inversions actually paid an average federal tax rate of 20.3 percent from 2011 to 2013. That finding corresponds with other research on effective corporate tax rates, such as a 2014 report from Citizens for Tax Justice that found an effective tax rate of just below 20 percent for the 288 largest profitable companies in America.

Some analyses have found that a significant number of profitable companies even pay zero percent income tax rates in the U.S. thanks to creative accounting. Complex international corporate structures have let giant tech companies like Apple and Google protect hundreds of billions of dollars in revenue from taxation, and there is so much money to be made from gaming the rules of the international business tax system that even an old-guard manufacturer like Caterpillar decided to spend $50 million setting up a scheme to route profits through Switzerland and away from Internal Revenue Service hands. About $2 trillion in U.S. corporate profits is currently stashed offshore under one or another such scheme, and the Wall Street firms that help set up inversion mergers made about a billion dollars facilitating the deals in recent years.

If American companies are expatriating even though they already manage to avoid roughly half of the statutory tax burden they face, that suggests that cutting statutory rates would not produce a surge of patriotism from these firms. Burger King took significant heat from customers over its tax inversion merger with Canadian brand Tim Horton’s, but is pressing ahead anyway because the financial returns from the deal are too good to pass up.

Rather than racing to the bottom on corporate tax rates, the U.S. and other global powers need to make a sea change on tax policy if they are to stop being exploited by savvy, thrifty corporate tax lawyers. European tax avoidance deals are receiving new scrutiny these days, but there is still no sign of the kind of dramatic shift in thinking that some experts say is needed to put a stop to legal tax avoidance.