Multinational corporate tax management and "localness"
Recently there were Congressional hearings about how Caterpillar Corporation negotiated a special tax relationship with Switzerland, and created a paper company domiciled there for the purpose of managing transactions for the sale of replacement parts ("Caterpillar Escaped $2.4 Billion Tax With Swiss Maneuver ," Bloomberg). While the transactions were mostly conducted in the US, for the purpose of taxes, they ran through Switzerland, at a tax rate less than one-fifth of the rate that would be in the US.
And a few weeks ago, it was suggested that Walgreen's, the nation's largest pharmacy chain, which a couple years ago merged with a British company, Boots, should relocate its corporate headquarters to Europe, to reduce its taxes. See "Should Walgreen Move to Europe for Leaner Taxes?" from Businessweek Magazine and "If Walgreen Co. moves its HQ to Europe, blame Washington's tax failure" from the Chicago Tribune (Walgreen's is based in Greater Chicago). From the Tribune article:
A group of shareholders reportedly is pressuring the giant retail chain for a move to the land of cuckoo clocks. The reason: lower taxes. Much lower taxes:
If Walgreen changes its legal domicile to Switzerland, where it recently acquired a stake in European drugstore chain Alliance Boots, the company could save big bucks on its corporate income-tax bill. The effective U.S. income-tax rate for Walgreen, according to analysts at Swiss Bank UBS: 37 percent. For Alliance Boots: about 20 percent.This week, Pfizer, a pharmaceutical firm based in New Jersey, announced that it will merge with a British corporation and will move its domicile to the UK, to reduce its corporate taxes ("Pfizer's Move Poses Challenge. Here's a Solution," New York Times) while last week Starbucks announced it will move its European headquarters to the UK, because of new lower corporate tax rates ("Starbucks moves Europe HQ to London," Financial Times).
We hope Walgreen doesn't relocate. Would company executives be smart to do so in order to best serve their shareholders? Hmm. We'd rather not say. So we'll respond to that question with another, broader but similarly urgent question:
How many companies have to turn refugee before Congress and the White House stop their bipartisan talking — but only talking — about the need to reform the federal tax code in general, and the corporate income tax in particular?
Apparently the effective US corporate tax rate is about 27% while in Europe it is 21% and the UK has just announced a tax cut so that the UK corporate tax rate will be about 20%.
The NYT article suggests shifting taxes from corporations to shareholders. From the article:
It’s counterintuitive, but Congress could avoid this problem by abolishing the tax on corporations’ profits and much more aggressively taxing their American shareholders — who are unlikely to flee to London along with Pfizer’s incorporation documents.I don't know what is a "fair" corporate tax rate, but as long as corporations can play one nation against another, the likely scenario is a race to the bottom.
It's a long way from the "good corporate citizen" discussed in the recent Urbanophile post ("Portrait of a Change Agent") about J. Irwin Miller, a banker and leader of Cummins Engine, which is still based in the comparatively small town of Columbus, Indiana and the various "corporate citizenship" initiatives he undertook which have made the city a great success or how SC Johnson in Racine, Wisconsin is restoring its old research center, designed by Frank Lloyd Wright, and how it has exhibit facilities and gives tours of its campus ("A Corporate Paean to Frank Lloyd Wright," New York Times).