Lower-Tax Shores Draw U.S. Firms

One step forward, two steps back is the way I would describe what has been happening to the United States on the international economic development front. On one hand, U.S. exports have been picking up steam, with companies rallying behind President Obama’s call to double exports in five years. On the other hand, we have been losing tax revenue as companies seek to escape high rates and incorporate in offshore jurisdictions. It is a disturbing trend, as John McKinnon points out in his Wall Street Journal Article below.

At a time when our country is facing record debt levels, we can ill afford to lose badly needed tax revenue. Yet the only way to attract capital back is not through government enforcement actions, but through adjustment of the tax code, which reduces the corporate tax rates and stimulates incorporation and economic development within American borders.

I hope you enjoy the article below and as always welcome your comments.

By JOHN D. MCKINNON The Wall Street Journal, Friday June 24, 2011

When Austin, Texas-based Freescale Semiconductor Holdings I Ltd. went public last month in the U.S., the company followed the footsteps of generations of American high-tech companies, including its former parent, Motorola Inc.

But unlike its predecessors, Freescale wasn’t going public as a U.S. company. As part of a private-equity buyout that took the chip maker private in 2006, it became a Bermuda incorporated company, according to securities filings. Freescale retained its incorporation in Bermuda, a tax haven, as the company returned to public trading.

Associated PressRich Beyer, right, Chairman and CEO of Freescale Semiconductor, watches trader activity before his company’s IPO begins trading on the floor of the New York Stock Exchange, May 26, 2011.

As savvy investors and entrepreneurs search for ways to minimize the impact of the U.S. tax system, with its relatively high rates and global reach, they are increasingly incorporating overseas, tax experts say. Some private-equity firms have relocated U.S. companies or divisions to tax-haven countries. U.S. multinational companies have spun off foreign subsidiaries in tax havens. U.S. start-ups are even beginning life offshore.

“It’s certainly a growing trend, and managers and firms are getting smart about it,” said Mihir Desai, a Harvard business professor. Mr. Desai calculated that in 2008, there were three U.S. initial public offerings of stock by tax-haven-incorporated companies for every 10 U.S.-incorporated IPOs. There has been no similar uptick in European markets.

U.S. IPOs by companies incorporated in two tax havens—the Cayman Islands and Bermuda—have grown steadily in recent years, according to research firm Dealogic, from about 1% of the total a decade ago to 26% in 2010 and more than 21% so far this year. Most of those IPO companies are headquartered in Asia, but a substantial minority—18—have been U.S.-based. Other U.S. companies that already were publicly traded have moved to lower-tax countries through reincorporations.

As other countries have reduced corporate taxes, the U.S. has one of the world’s highest top rates, at 35%, although effective rates everywhere can be substantially lower depending on tax breaks and other incentives. The U.S. also is one of the few developed countries that still seek to tax their companies’ global earnings; most countries tax only profit earned inside their borders.

“If you’re going to take a privatized company public, why wouldn’t you say, ‘What are the pluses and minuses of being incorporated in the U.S. versus somewhere else?’ ” said Willard Taylor, a tax lawyer with Sullivan & Cromwell LLP. “Very often, depending on what the business is, you’ll conclude there are no pluses to being in the U.S.”

A decade ago, a handful of U.S. companies sought to move to offshore havens such as Bermuda to reduce their tax bills. An outcry led Congress in 2004 to bolt the door. But the law left exceptions for U.S. companies that undergo a substantial change of ownership, such as being acquired by a private-equity firm. The Internal Revenue Service in 2009 tightened the rules but left some exit doors open, for example in the case of a complete buyout.

Luggage maker Samsonite, founded in Denver a century ago and more recently based in Massachusetts, is now incorporated in Luxembourg, the consequence of a 2007 takeover by private-equity firm CVC Capital Partners. With Asia now its largest market, the company went public last week in Hong Kong. It is expected to keep its tax-haven address in Luxembourg, which has a corporate-tax rate of about 22% and exempts some holding companies.

Avago Technologies Ltd. began life as the semiconductor arm of Hewlett- Packard and later was part of U.S.-based Agilent Technologies Inc., an H-P spinoff. Avago retains a headquarters in San Jose, Calif. But as part of a buyout by Kohlberg Kravis Roberts & Co. and others, Avago was incorporated in low-tax Singapore a few years ago, where the company has manufacturing and other operations, as well as a headquarters. Most of its employees are in Asia. It went public in the U.S. in 2009.

Freescale declined to comment. It was bought in 2006 by a consortium led by Blackstone Group, which declined to comment. Samsonite, CVC, Avago and KKR also declined to comment.

The move toward offshore incorporation is likely contributing to an explosion in U.S. investment in securities of offshore-incorporated companies. Treasury data show that U.S. holdings of securities of Cayman Islands companies have grown nearly twenty-fold since 1997. U.S. holdings of Cayman securities totaled $373 billion in 2009, the latest year available, the fourth-highest total for any foreign country. It also is likely contributing to erosion of the U.S. tax base, although it is difficult to say how much.

The basic outlines of the U.S. corporate-tax system are little-changed since the Kennedy years, when America didn’t have to worry about attracting and keeping business. Today, its relatively uncompetitive position is helping drive efforts in Washington to revamp corporate taxes, and these corporate-tax relocations are likely to figure prominently in the discussion.

“It is troubling that today’s tax code has become so complex and the current rates so high that some businesses are making the determination that it’s more of a disincentive than an incentive for business growth,” said Michelle Dimarob, a spokeswoman for the House Ways and Means Committee, which writes U.S. tax law.

Some Democrats disagree, saying tax havens are the real problem, not the U.S. tax system.

“Simply lowering our statutory rate or moving to a territorial system will not end these transactions,” said Rep. Sander Levin (D., Mich.), the committee’s top Democrat. “As we discuss corporate-tax reform, tax havens are yet another problem that is going to require careful thinking and detailed investigation.”

President Barack Obama and lawmakers of both parties expressed interest in a corporate-tax overhaul earlier this year, but action has been delayed, particularly by the debate over reducing federal spending.

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About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton, NBC.com, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

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