The attractiveness of the United States as a jurisdiction in which to locate the headquarters of a global company is markedly declining. Since 2000, the number of US-headquartered companies in the Forbes 500 list of global companies has declined by over 25 percent, from 202 in 2000 to 147 in 2016.1 And, foreign acquisitions of US companies were over three times greater than US acquisitions of foreign companies measured by deal value in 2015.2
Uncompetitive U.S. tax policy is an important reason why the share of U.S. headquartered companies is dwindling. The Administration and Members of Congress on both sides of the aisle recognize the need to align the US corporate income tax system with the rest of the world by reducing the corporate income tax rate and adopting a modern international tax system that removes the repatriation tax barrier for US-headquartered companies to invest their foreign earnings at home (so-called territorial taxation).
The House GOP Tax Reform Blueprint3 provides for a territorial tax system that would allow US-headquartered companies to invest their future foreign earnings in the US without a repatriation tax. The Blueprint addresses concerns about profit shifting by imposing tax based on the place of consumption.
Alternative approaches to tax reform would adopt a territorial tax system, like 29 of the other 34 OECD member countries, but unlike these countries would couple adoption of a territorial tax system with a minimum tax on foreign business income to address concerns that US income would be shifted abroad (i.e., US tax base erosion). For example, President Obama's FY 2017 budget included a 19-percent per-country minimum tax on foreign income.
Imposing a current tax on the active foreign business income of US-headquartered companies unless they pay a minimum amount of tax to foreign governments (a form of US headquarters tax) would put US companies at a significant competitive disadvantage in today's global economy.
In summary. The US needs pro-growth tax reform. Unfortunately, a US headquarters tax misses the mark: it would increase foreign takeovers of innovative American companies, encourage foreign governments to raise taxes on US-based companies, and increase the cost of tax compliance for US-based companies.
1 Forbes 500, Forbes International 500, and Forbes Global 2000 lists.
2 Thomson Reuters SDC M&A Data for 2015. Deals limited to those in which at least 20% of the shares of the target were acquired. Includes asset sales and divestitures.
3 House Republicans, A Better Way (June 24, 2016).
4 Congressional Research Service, Patent Boxes: A Primer, (May 1, 2017).
5 Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions Contained in the President's Fiscal Year 2016 Budget Proposal. JCX-50-15, (March 6, 2015).