Benedict Arnold Strikes Great Britain
April 29, 2008
For the second time this month, a major British firm announced that it will reincorporate in Ireland to lower its tax bill. United Business Media (UBM) joined the pharmaceutical company Shire in the exodus of UK firms seeking relief from the country’s 28 percent corporate tax rate—which is low compared to the 39.4 percent overall rate in the U.S., but is high by E.U. standards. Ireland’s corporate tax rate is currently the lowest in Europe at 12.5 percent.
The common trait among the companies that reincorporate in low-tax jurisdictions is that they have grown beyond their home country’s borders and become predominantly global in nature. According to the Guardian, more than 85 percent of UBM’s profits are generated from foreign operations. Since Great Britain, like the U.S., has a worldwide tax system, the vast majority of the company’s profits are exposed to British tax even though only its U.K. presence is quite small. By creating a parent holding company in Ireland, UBM will lower the tax rate on those foreign profits by 15.5 percentage points (28 minus 12.5). It will still pay the 28 percent rate on its U.K. profits.
While these news reports have prompted a heated debate among British lawmakers over how to make their tax system more competitive and attractive to business, they should prompt a similar debate in this country. After all, the U.S. has the second highest overall corporate tax rate among industrialized countries and 11 percentage points higher than Great Britain’s rate. See: http://www.taxfoundation.org/legacy/show/22917.html Moreover, a growing number of U.S. multinational firms are, like UBM and Shire, are generating more profits abroad than domestically. As a result, some may face pressure from shareholders to reduce the exposure of those profits to U.S. tax.
Four years ago, then-presidential candidate John Kerry tarred U.S. companies that reincorporated in low-tax jurisdictions with the treasonous label of “Benedict Arnold companies.” That unpleasant label has probably stopped many American firms from reincorporating abroad since 2004. But as corporate tax rates continue to fall across the globe, U.S. firms may find that survival is more important than stigma.