Corporate income tax reform could help U.S. companies prosper, report finds

merger and acquisition
The US had a net deficit of $510 billion in the global M&A market from 2004 through 2016. (istocksdaily)

The United States’ high statutory corporate income tax rate puts U.S. businesses at a disadvantage, a new report states.

EY’s report “Buying and selling: Cross-border mergers and acquisitions, and the US corporate income tax” report [.pdf] updates a 2015 report on the same topic, and comes to largely the same conclusions: “[T]he US international tax system, including the high US corporate income tax rate, clearly disadvantages US businesses in the global market for cross-border M&A.”

The United States has the highest statutory corporate income tax rate among developed nations and is the only developed country with a worldwide system that also taxes business income that U.S. companies earn in foreign countries, the report states.

“Together, these outdated features of the US corporate income tax system present a fundamental structural challenge for US companies, putting them at a disadvantage in the global market for mergers and acquisitions (M&A) and hindering US investment by foreign-headquartered companies,” it adds.

The report, which examines the M&A market from 2004 to 2016 and considers the effect of tax rates on more than 97,500 global cross-border M&A transactions across 68 countries, found that between 2014 and 2016, U.S. companies were the acquirer in 16% of cross-border M&A transactions and the target in 31%. What’s more, the country had a net deficit of $510 billion in the global M&A market from 2004 through 2016.

That’s because foreign companies that don’t have the tax burden U.S. companies face are at an advantage when it comes to M&A. A lower corporate income tax rate could allow the United States to become a net acquirer even with the worldwide system, the report adds. For instance, with a 25% income tax rate, U.S. companies would have acquired, on net, $650 billion on cross-border assets in those 12 years, and the country would have kept about 3,200 companies. With a 20% rate, however, U.S. companies would have acquired, on net, $1,205 billion in cross-border assets, and about 4,700 companies would have remained here, the report found.

This report also looked at tax policies’ effect on foreign direct investment, or the measure of investment in a country by a foreign business or individuals, and found that such investments would have been 8% higher with a 25% statutory corporate income tax rate, and 14% higher at a 20% rate.

EY makes the case for supporting cross-border M&A in the United States by highlighting several benefits:

  • “Companies from different countries may have access to different stocks of local know-how, product types, specialized suppliers, workforces, and capital markets, all of which can have an important influence on companies’ competitive capabilities.”
  • “The economic benefits created by innovative companies, including the benefits of R&D, are more likely to stay in the United States when they are acquired by US-incorporated companies.”
  • “Divesting some lines of business and acquiring others allows companies to enter new markets, access new distribution channels, develop new technologies, and release capital for reinvestment.”

The gap between the U.S. corporate income tax rate and the weighted global average rate has grown from 4% to 13%, the report adds, and keeping the United States at a continued disadvantage in this area threatens to have lasting negative effects on the U.S. economy.