Tax System Spurs Overseas Purchases of U.S. Firms, Report Says

The tax system encourages foreign companies to purchase U.S. companies, according to a study released Wednesday by the Business Roundtable, a group of chief executive officers.

Had the U.S. cut its corporate tax rate to 25 percent from 35 percent, U.S. companies would have acquired $590 billion in cross-border assets over the past decade rather than losing $179 billion, according to the study. It was conducted by Ernst & Young LLP.

The report cites “small-scale daily transactions” that shift headquarters out of the U.S.

Larger deals have occurred, too, including the creation of Anheuser-Busch InBev NV from what was the U.S.-based beer maker.

“Our failed policies have turned the United States into a net exporter of headquarters, valuable assets and startup technologies,” said John Engler, president of the Roundtable, whose board of directors includes executives from MetLife Inc. and General Mills Inc. “We’ve got to reverse this trend.”

Unlike most industrialized nations, the U.S. taxes its companies on their worldwide income. Companies receive tax credits for payments to foreign governments and don’t have to pay the residual U.S. tax until they bring the money back to the U.S.

That system gives U.S.-based companies an incentive to earn profits overseas and leave them there.

Reducing Rate

Having a foreign headquarters can reduce a company’s tax rate and create opportunities to load up U.S. subsidiaries with deductions so they earn very little income in the U.S. for tax purposes.

In addition to encouraging takeovers, these dynamics are driving the trend of inversions, in which U.S. companies change their addresses for tax purposes. Companies that have inverted include Medtronic Plc and Mylan NV.

Business groups have been lobbying Congress to lighten the tax burden on foreign income. They haven’t succeeded, though the Obama administration has moved in their direction.

President Barack Obama is proposing a 19 percent minimum tax on U.S. companies’ foreign income. Once they pay that, the companies would be able to bring money home without an additional layer of taxation.

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