More U.S. Companies Renounce Citizenship, Maneuver for Greater Global Competitiveness: Shades of Not ‘Made in USA’…

U.S. companies are bailing out, leaving, renouncing U.S. citizenship, reincorporating overseas. According to Roberto Ferdman; nearly twice as many companies have shifted their corporate tax paying duties abroad since 2003, or almost double the amount that did in the twenty years prior, and this trend is only slated to continue

There are several advantages inherent in reincorporating, e.g.; more fluid overseas business acquisitions, lower borrowing rates due to increased cash reserves, more skilled workers… but some would say that the real motivation for companies shifting corporate citizenship is to pay less in taxes…

According to Charles Thorington; there are two underlying issues motivating these maneuvers; the extremely high U.S. corporate tax rates… plus the world-wide tax approach of U.S. government… U.S. corporate rate is 35% and increases to an average of 39.1% when state taxes are included, which is the largest of any industrialized nation and third highest in the world… According to Scott Hodge; only Chad and United Arab Emirates levy higher tax rates on corporations…

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As for  world-wide tax approach, the U.S. is one of only six countries  that taxes foreign corporate profits after they have already been taxed in the country in which they were made… Almost all other countries have adopted ‘territorial approach’ in which a company’s profits are taxed only in the originating country… Having one of the highest corporate tax rates in the world, plus one of the few world-wide tax systems where U.S. corporations are twice cursed…

Hence by staying in U.S. companies lose a great deal of competitiveness. and this is not matter of being ‘unpatriotic’, as some politicians suggest, but it’s a matter of survival… One fact is certain: if U.S. corporate taxes are not reduced to internationally competitive rates, and if U.S. does not adopt a ‘territorial’ tax approach to corporations, then expect U.S. companies to continue to flee to countries that treat them considerably better: Capital tends to travel to those places that treat it the best…

In the article Why Companies Are Leaving the U.S. by Edward Alden writes: A survey of some 10,000 former Harvard Business School (HBS) grads carried out as part of the school’s U.S. Competitiveness Project’ has some telling results. In the 1990s U.S. headquartered multinational companies created 4.4 million jobs in the U.S., even as they were also expanding abroad, creating 2.7 million jobs in their foreign affiliates.

Over the past decade, however, while U.S.-based companies went on adding some 2.4 million jobs abroad, and cut U.S. workforce by 2.9 million… This HBS survey, carried out by Professors Michael Porter and Jan Rivkin offers some interesting observation; they suggest that initially U.S. companies probably bought a bill of goods, believing that the cost savings from off-shoring would be greater than they turned out to be…

Many companies faced unexpected business challenges abroad, including; rising wages, increased transportation costs, and weak intellectual property protection… Hence, buyer’s remorse may account for why some companies are starting to bring work back to U.S… But the survey reveals deep skepticism about the U. S. as a business domicile… The survey responses were grouped into three categories: problems we can do nothing about; problems we could do something about but shouldn’t; problems that we could and should address…

The first category is things like– proximity to customers, proximity to suppliers, faster growing markets abroad– it’s inevitable, desirable that some business activities should move offshore to meet that demand. In many cases those investments also serve to boost U.S. exports…

The second category is lower wages, cited by 70% of those involved in making domicile decisions– it’s virtual impossible for U.S. to offset lower wage advantages of a China, or Mexico, or other developing countries… As Michael Porter suggested; having companies succeed while wages fall is not competitiveness…

The final category is where the game for investment will be won or lost by the U.S– astonishingly 31% of executives cited better access to skilled labor as a rationale for moving overseas, versus 29% who cited it as a reason for staying… Also lower tax rates is big issue, though intriguingly complaints were primarily about the complexity of the U.S. tax code rather than level of corporate taxation. Tax reform and immigration reform (e.g.; H-4, H-1B visas) are one and two on wish list of business leaders, with education a close third…

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KPMG’s 2014 edition of Competitive Alternatives: This report is a guide to international business location (domicile) costs; it assesses the general tax competitiveness of 107 cities in 10 countries with a focus on 51 major international cities. The 10 countries examined are; Australia, Canada, France, Germany, Italy, Japan, Mexico, Netherlands, UK, U.S… The report compares the total tax burden faced by companies in each country and city, e.g.; corporate income taxes, property taxes, capital taxes, sales taxes, miscellaneous local business taxes, statutory labor costs (i.e., statutory plan costs and other payroll-based taxes)…

Total tax costs are compared between countries and cities using a Total Tax Index (TTI) for each location. The TTI is a measure of the total taxes paid by corporations in a particular location, expressed as a percentage of total taxes paid by corporations in the U.S. Thus, the U.S. has a TTI of 100.0, which represents the benchmark against which the other countries and cities are scored…

The overall results for all locations are based on average results from 7 different business-to-business service sector operations and 12 different manufacturing sector operations… Among the countries studied, Canada had the lowest Total Tax Index at 53.6. In other words, total tax costs in Canada are 46.4% lower than in the U.S... The UK, Mexico, Netherlands also had a TTI score below the U.S., while at the other end of the spectrum, France’s TTI of 163.3 signifies that total tax costs in France are 63.3% higher than in the U.S.

The TTI rankings of countries in 2014 are broadly consistent with the 2012 rankings among the 10 countries. The UK  moved ahead of Mexico and Australia moved ahead of Germany, but all other countries rank consistently between the 2012 and 2014 standings. Even among the countries whose rankings have not changed, Japan, Italy, and France had seen significant improvements in their TTI scores. The changes in ranking relate to both changes in tax policy since 2012 and other sundry changes…

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In the article Business Leaders Are Blowing Smoke on Corporate Taxes by Richard C. Longworth writes: U.S. corporate leaders love to complain about the nation’s high corporate tax rate as one of the highest in the world. This rate, they say, is stifling business investment and encouraging U.S. corporations to move headquarters to other countries… It sounds logical, but it may not be true.

A scholarly look at global tax payments, coupled with an on-the-ground look at the effect of taxes on business investment, suggests that these corporate leaders not only are crying wolf but may be blowing smoke… Corporate leaders are always beating drums for corporate tax reform by which they mean corporate tax cuts… The U.S. rate is 35%, which is one of the highest in developed world, Japan is highest at 38%, which are both above the average 24% for the 34 advanced countries that make up the OECD. The rate in France is 33%, Germany 30%, UK 21%…

Many of these differences aren’t huge but corporate leaders are right when they say– U.S. nominal tax rate is higher than most global rivals…

However, according to Edward D. Kleinbard; the reality is very different and big U.S. corporations, i.e., the global corporations that are threatening to pick-up and move… actually make out like bandits at tax time… One of their biggest practices is to keep much of their income overseas and out of reach of the IRS. Altogether U.S. corporations paid, on the average, an effective tax rate of 12.6%…

According to Mr. Kleinbard; it isn’t tax rates that are tempting U.S.-based companies to move headquarters or operations to relatively low-tax venues… Instead, they want to be able to use that money parked abroad without having to pay taxes on it. He estimates this hoard of over $2 trillion when taxed at 35% would bring in about $700 billion to the U.S. government treasury… This is a very good reason to move to a more friendly domicile…

In the article U.S. Companies Leaving by IBDEditorials writes: Companies headquartered in U.S. are at a major competitive disadvantage… A recent OECD study says; ‘integrated tax rate’– taxes on capital and income– for U.S. companies is a nightmarish 67.8% Vs. 43.7% for the OECD… Many companies facing steep tax rates and insane regulations in the U.S. have had enough, hence they’re keeping profits overseas…

According to Ron Wyden; U.S. corporations hold $2.1 trillion in earnings in overseas accounts– a massive amount, roughly equal to 12% of U.S. gross domestic product… A total of about 547 companies, including; Apple, GE, Microsoft, Pfizer… have dramatically expanded the so-called– foreign indefinitely reinvested earnings overseas, which let them avoid the punishing tax rates in the U.S…

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Not only are taxes too high but also new laws, such as; Dodd-Frank and ObamaCare, expansion of business regulation, debt and size of government, bullying Wall Street, demonizing CEOs, forced CO2 cuts, abandoning the coal industry, tax on oil production, and many other unfriendly business policies… have made U.S. one of the least desirable and unfriendly corporate domiciles in the world…

According to Laura Tyson; the facts, not perceptions, should guide policymaking where multinationals are concerned, and facts indicate U.S. multinationals continue to make significant contributions to the U.S. and they locate most of their economic activity in the U.S. not abroad…

However, as long as other countries have lower tax rates and lax income-shifting rules, there are incentives for companies to move headquarters to those countries. Corporate tax reform vastly improve U.S. position relative to other developed nations… and it’s one of best things government can do to improve its competitiveness as domicile for multinational corporation…