econscius

US Tax Code Driving Employers Overseas

In Job Creation on August 29, 2012 at 10:26 am

Europe as tax haven?  It is true for some companies.  Certain nations such as the United Kingdom, Switzerland and Ireland are more attractive than the United States for corporate taxes.  Big name companies are reincorporating, moving headquarters from places like Chicago to London, which is exactly what Chicago-bred AON is doing.  Employers fear the Byzantine, high marginal tax rate code will worsen in 2013 and beyond.  Wall Street Journal articles today and in recent months discuss the problem.

“More big U.S. companies are reincorporating abroad despite a 2004 federal law that sought to curb the practice. One big reason: Taxes.

 

Companies cite various reasons for moving, including expanding their operations and their geographic reach. But tax bills remain a primary concern. A few cite worries that U.S. taxes will rise in the future, especially if Washington revamps the tax code next year to shrink the federal budget deficit….

 

The moves by Ensco and Rowan, which operate offshore oil rigs, show how one company’s effort to lower its tax rate can spur other shifts.

 

In moving from Dallas to the U.K. in 2009, Ensco followed rivals such as Transocean Ltd., Noble Corp. and Weatherford International Ltd. that had relocated outside the U.S. The company said the move would help it achieve “a tax rate comparable to that of some of Ensco’s global competitors.”

 

In fact, Ensco’s tax rate has declined. In the second quarter, the company said its “effective tax rate” was 10.5%, down from 19% in 2009. The savings: more than $100 million a year.

 

Around the time of Ensco’s move, Rowan executives fielded questions from investors and analysts about their own tax rate. In February, Rowan answered the questions, announcing plans to move to the U.K. from Houston. “We’re able to be competitive, with a low effective rate,” says Suzanne Spera, the firm’s director of investor relations. [1]

The off-shore moves include not only mature companies but IPO’s and even start-ups.

“When Austin, Texas-based Freescale Semiconductor Holdings, Ltd. went public last month in the U.S., the company followed the footsteps of generations of American high-tech companies… But unlike its predecessors, Freescale wasn’t going public as a U.S. company. As part of a private-equity buyout that took the chip maker private in 2006, it became a Bermuda incorporated company, according to securities filings. Freescale retained its incorporation in Bermuda, a tax haven, as the company returned to public trading.

 

As savvy investors and entrepreneurs search for ways to minimize the impact of the U.S. tax system, with its relatively high rates and global reach, they are increasingly incorporating overseas, tax experts say….”

 

 “U.S. start-ups are even beginning life offshore.”[2]

The Obama Administration supports making the US Tax Code even less friendly by extending taxation to overseas profits which are not yet repatriated (“tax deferral”).  Virtually no developed nations tax overseas profits.

Terming deferral “very, very important” to multinationals’ competitiveness, IBM Chief Executive Sam Palmisano questioned Mr. Obama about the issue during a televised meeting in mid-March. [3]
 
I think many on the American political Left do not look at tax issues as a matter of optimizing American business success, which leads to more jobs, or even maximizing tax revenues.  I fear they instead see corporate taxes as an issue of “fairness”, a subjective desire to increase taxes on so-called “big corporations”.  In reality, corporations will do what they need to do to be competitive in the global economy, which increasingly means moving to Switzerland or the United Kingdom.

[1] http://online.wsj.com/article/SB10000872396390444230504577615232602107536.html?mod=WSJ_hppMIDDLENexttoWhatsNewsSecond

 
Picture of Aon Center, Chicago, USA, former HQ site, and London, UK, new HQ, from Wikipedia Commons.
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