During the slow growth economic times, the near reality of a potential domestic fiscal cliff and the circular uncertain in Europe, if you were the CEO of a Fortune 500 company, how would you manage to survive and thrive during the tough times? With quality talent hard to come by, more and more big U.S. companies are reincorporating abroad in efforts of revitalizing corporate profits.
Revitalizing profits?
Back in June of 2012, corporate profits were at a record high. Companies were making more per dollar of sales than they ever had before. (And some people are still saying that companies are suffering from “too much regulation” and “too many taxes.” Maybe little companies are, but big ones certainly aren’t). So what would drive domestic companies with record-breaking profits want to incorporate their operations overseas? One-word sums it up, TAXES! Despite a 2004 federal law curbing this practice, companies today find their competitiveness slipping domestically and globally because of the high corporate tax rate here at home which are ultimately hurting companies profitability. “Since 2009, at least 10 U.S. public companies have moved their incorporation address abroad or announced plans to do so, including six in the last year or so, according to a Wall Street Journal analysis of company filings and statements”. That’s up from just a handful from 2004 through 2008. The practice for corporations to leave majority of the manufacturing and operations in the US but move its place of incorporation to outside countries, has been on the minds of many politicians and regulators trying to create legislation that would prohibit this act.
In my opinion — in an attempt to argue both sides, companies can be more competitive with a lower tax rate by using savings to invest in human capital, R&D and innovation, but if the corporate tax rate is the deciding factor for whether a company can compete in this global market then I say the bulk of the organization’s problems are ahead them. Singling out the tax code seems to be more of an escape route for companies relying on legislation and business friendly regulatory environment to bring this economy by the hay days (early 2000s). “Too much regulatory reform and government oversight”, aren’t these the very concerns businesses have been expressing on Capitol Hill for the pass decade? Help from the so-called “Big Government” is what saved some of these companies during the Great Recession while taxpayers were the main life supporters. In Q1 of 2012, companies’ profits as a percentage of GDP was near 15% and 14% just a year before that. Two main reasons for this are: decreasing wages and lower workforce participation, yet there is still an outcry about the business tax environment in the United States, making it hard for companies to grow businesses and attract more talent. What if there was a world where executive management turns their attention away from big government and financial legislation but concentrate on finding new and innovative ways to increase productivity, optimize output, and decrease inefficiency. I believe part of this “dream” is actually taking place. Today given the uncertainly in Europe and gridlock in Washington, companies are becoming better efficient in their operations, trying to find more innovative ways to lower cost and increase revenue. These factors are the main drivers for margin expansion that could be achieved without even touching corporate tax policy but yet leadership still see fiscal policy and financial regulation (example Dodd-Frank) in our country as a hindering factor to the employment rate, consumer confidence, and most importantly to them, profits. I am not suggesting CEO’s to stop voicing their opinions about what goes on in Washington, but relying on policies from dysfunctional government, as they are called now days, will not help your company achieve its full potential but yet slow competitive progress, stagnate growth, and decrease value to society.
Last year, a current client of mine tightened a tax exception that allowed companies to move to countries in which they have substantial business activities but would not prevent moves through merger. On Capitol Hill, lawmakers of both parties have said the U.S. corporate tax code needs a rewrite in which they are aiming to try next year. In political talk “next year” probably means 3 to 5 years from now, surely after the 2014 election. The United States current tax rate is 35% – the highest among developed countries. By comparison, our northern neighbor, Canada, corporate rate is 11.03%. Maybe I should incorporate my firm in Canada, what do you think? In 2012 the Obama administration had proposed lowering the rate to 28%, while Republican rival and Presidential nominee Mitt Romney at the time had proposed 25%. While executives would welcome a lower tax rate and an end to global taxation, some worry their tax bills could rise under other measures that could be included in a tax-overhaul package, pretty much a double edge sword. U.S. multinationals often pay far less than 35% because of various breaks, including the option of deferring the payment of U.S. taxes on foreign earnings until they are brought to the U.S. Those companies could pay higher taxes under Obama administration proposals to limit the benefits of deferral. In his 2012 State of the Union speech, President Barack Obama stated “it’s time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right here in America.” Some companies worry that lowering the general corporate tax rate would require eliminating tax breaks for specific firms or industries. Even without a tax-code overhaul, Congress could eliminate some tax breaks to reduce the deficit. Senator Max Baucus (D. Mont.), the Senate Finance Committee chairman said it best in a 2012 statement that “U.S Tax reform needs to put American business in the best position to compete in the global economy while adding U.S jobs”. I agree with Sen. Baucus but to address his last point…will tax reform really decrease the unemployment rate over time or will companies just use these extra profits to reinvest it in other ways such as compensation, M&A, hiring overseas? House Ways and Means Chairman Dave Camp (R., Mich.) said “comprehensive tax reform that lowers rates and transitions the U.S. to a territorial approach that is used by our global competitors is critical to making America a more attractive place to invest and hire.” Again will this actually encourage companies to hire within the U.S. and investment more in domestic products and services?
