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Study: High Corporate Tax Rates Hinder M&A Activity by U.S. Companies

Oct 2nd 2017
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The high U.S. corporate tax rate and taxation of international business income of American companies hinder mergers and acquisitions of U.S. companies and investment in them by foreign companies, putting U.S. companies at a global competitive disadvantage, according to a recent study by EY.

At the same time, the report — which was conducted on behalf of the Business Roundtable, a lobbying group whose members include chief executives of major corporations — suggests that foreign companies that face little or no additional tax on the foreign income of multinational companies have the advantage in the global market for mergers and acquisitions, and they can bid more for U.S. companies.

The study looked at the mergers and acquisitions market from 2004 to 2016, and the effects of different corporate tax rates on more than 97,500 global mergers and acquisitions in 68 countries.

Here are the key takeaways from Buying and selling: Cross-border mergers and acquisitions, and the U.S. corporate income tax:

  • From 2014 through 2016, U.S. companies were the buyers in 16 percent of foreign companies. But U.S. companies were acquired in 31 percent of merger deals.
  • The U.S. had a net deficit of $510 billion in the global mergers and acquisition market from 2004 to 2016.
  • At a 25 percent corporate income tax rate, U.S. companies would have acquired $660 billion in cross-border assets during the 2004-2016 period instead of losing $510 billion in assets. And, the U.S. would have retained 3,200 companies.
  • At a corporate income tax rate of 20 percent, U.S. companies could have acquired $1.205 billion in cross-border assets during the same time period rather than losing $510 billion in assets – and kept 4,700 companies.

The report, which expands upon a 2015 report on foreign direct investment, indicates that such investment is widely considered to contribute to a country’s economy – and it responds to statutory corporate income tax rates.

The current study estimates that a 25 percent corporate income tax rate during the 2004-2012 period would have provided 8 percent more in foreign direct investment in the U.S. — or $110 billion more.

At a 20 percent corporate income tax rate, foreign investment would have increased 14 percent — or $195 billion more.

The benefits of international mergers and acquisitions are many, according to the study. Ridding themselves of certain types of business and acquiring others would allow companies to enter new markets, access new distribution channels, develop new technologies and release more money for reinvestment.

What’s more, foreign investments by U.S. companies can bolster their economic contributions to local economies in the U.S. In fact, U.S. companies in 2014 bought 90 percent of their inputs from other U.S. firms for a total of $7.9 trillion in purchases.

And, as U.S. multinational companies grow, they could also increase their U.S. activity. It’s estimated that for every 100 jobs added overseas, an additional 124 jobs are created in the U.S.

Further, mergers and acquisitions by domestic companies retain the benefits of research and development in the U.S. 

According to the study, “if the significant disadvantages in the U.S. corporate income tax system persist, they could have long-lasting effects on U.S. productivity, wages, living standards and economic growth.”

The study comes as the Trump Administration and Congressional leaders call for changes in taxes for households and businesses, including reducing the corporate tax rate to 20 percent from 35 percent, which in 2016 EY says was far above the worldwide average of 22 percent among 68 countries.