Lowering the top corporate tax rate and replacing the current U.S. global tax system with a territorial tax system should be among the top priorities of federal tax reform, two pro-business studies released this week suggest.
For instance, dropping the current maximum U.S. corporate income tax rate from 35% to 25% would have significantly curbed the “disadvantages” U.S. companies have faced abroad from 2004 to 2013 and “would likely have resulted in the United States being a net acquirer in the cross-border M&A market,” according to a report on the tax effects of cross-border mergers prepared by Ernst & Young for The Business Roundtable.
With a 25% tax rate, U.S. companies would have gained $590 billion in cross-border assets over the period studied instead of losing $179 billion in assets, according to the study. The analysis looked at differences in statutory corporate income tax rates and more than 25,000 cross-border M&A deals done among the 34 countries in the Organisation for Economic Co-operation and Development, of which the United States is a member.
A 25% tax rate, which is the average rate charge by OECD countries, also would have kept about 1,300 companies in the United States during the decade studied, according to the pro-tax-cut report, which seeks to show how the U.S. corporate income tax disadvantages U.S. companies in this market.
Although the study doesn’t offer estimates of the effects on cross-border M&A of a U.S. move to a territorial system, “such a shift is likely to have a significant impact” on tipping the balance of M&A assets toward the United States, according to the report. In contrast to the current U.S. system of worldwide taxation, under which U.S. based multinationals are taxed in this country when they “repatriate” income that they’ve earned abroad, under a territorial system U.S. MNCs wouldn’t be taxed by the federal government on foreign-earned income.
If the United States adopted a territorial system, advocates contend, U.S. MNC’s would have incentives to repatriate much of the $2 trillion in cash they currently hold in other countries. In particular, it could provide such corporations with the freedom to use the cash more efficiently, rather than deploying it overseas in a round-about way simply to make use of the tax advantages. (For an in-depth look at the case for a territorial tax system in the United States, see the March issue of CFO.)
High tax rates and the lack of a territorial tax system also loom large in the minds of a 146 business tax executives surveyed by the Miller & Chevalier law firm and the National Foreign Trade Council. Asked what aspect of the current U.S. tax system is most harmful to the global competitiveness of U.S. businesses, 47% answered that it was the high tax rates here and 26% said it was the use of a worldwide rather than a territorial system.