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U.S. Companies Continue to Flee Uncompetitive U.S. Tax System

2 min readBy: William McBride

Yesterday, another U.S. company announced plans to leave the U.S. via inversion in order to reduce their taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. burden, according to Bloomberg:

The U.S. government’s attempt to prevent companies from seeking a tax address outside the country hasn’t stopped Steris Corp. (STE)

The Mentor, Ohio-based provider of hospital sterilization products and services announced today that it will buy the smaller Synergy Health Plc (SYR) and establish the combined company’s tax address to the U.K., even as senior executives remain in the U.S.

Steris’s effective tax rate will reach 25 percent, potentially saving the company about $13 million a year, according to calculations based on the two companies’ annual reports.

Bloomberg correctly points out the massive tax savings of moving to the UK, or just about anywhere else in the world. The U.S. has the third highest corporate tax rate in the world, at 39 percent, and an outmoded system of worldwide taxation.

The Treasury Department last month adopted new rules to make inversions, such as this one, less attractive, but the rules do nothing to address the fundamental problem, which is that the U.S. relies far too heavily on business taxation, particularly corporate taxation. The rest of the world has realized it is self-defeating to excessively tax highly mobile multinational corporations, which is why the average developed country has reduced its corporate tax rate from 48 percent in 1985 to 25 percent today.

It is an interesting turn of events that the UK now attracts U.S. companies, because back in 2008 the UK was losing companies to lower tax locals, such as Ireland. Back then, the UK had a 28 percent corporate tax rate, compared to Ireland’s 12.5 percent, and also a worldwide tax systemA worldwide tax system for corporations, as opposed to a territorial tax system, includes foreign-earned income in the domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. like ours. When about a dozen companies announced plans to leave, the UK promptly switched to a territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. that largely exempts foreign profits from UK taxation. That one move stemmed the tide of UK corporate inversions.

But the UK didn’t stop there. In 2010, they began lowering the corporate tax rate from 28 percent to 21 percent this year and 20 percent next year. These major reforms, along with a few more minor changes, dramatically improved the competitiveness of the UK, particularly as a location for the headquarters of multinational corporations. The whole story is spelled out in our report released today: Tax Reform in the UK Reversed the Tide of Corporate Tax Inversions.

The following chart from that report shows the decline of corporations in the U.S., and the rise of corporations in the UK. The U.S. loses about 50,000 corporations a year, not all to inversions of course, while the UK gains about 50,000 corporations a year.

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