Corporate Tax Reform Case Study
Added on 2019-10-09
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Case study in corporate tax reformBy Walter Galvin - 07/30/15 11:00 AM EDT 1Millions of words have been written about tax reform in the United States; why we need it, how to do it, the risks of not doing it and so forth. After a while, the concept of tax reform blurs into an abstraction, making it more difficult to grasp the issue and properly address it. But very often a case study can cut through the clutter by illuminating a problem and clearing a path toward fixing it.Consider the case of Emerson, a $25 billion global manufacturing company, It was founded in the United States 125 years ago, employs more than 110,000 people and operates in more than 150 countries. In each of the last three years, Emerson paid $1.3 billion in taxes worldwide with more than half paid in the U.S. at an effective tax rate of approximately 35 percent.One means of growing the business involves Emerson engaging in strategic acquisitions, a process in which I was intimately engaged when I served as the company’s chief financial officer. Acquisitions augment existing businesses, add technologies and engineering capabilities,and penetrate faster-growing markets. In 2006, Emerson wanted to buy a company called American Power Conversion, a Rhode Island-based producer of high-tech electronic equipment.At the time, over half of APC’s earnings were earned outside the U.S.Emerson found itself competing against the French company Schneider Electric to buy APC, which was valued by Emerson at just under $5 billion. But Schneider ultimately acquired the company by offering about $5.5 billion. How and why did this happen? The principal reason wasdue to French tax law.Headquartered in France, 95 percent of Schneider’s repatriated profits are exempt from French taxes, so APC’s profits are worth more to Schneider because they can be brought home at a tax rate of about 2 percent. By contrast, if Emerson repatriated those same earnings to the U.S., they would be subject to a tax rate of approximately 17 percent, which represents the difference between the 35 percent corporate rate in the U.S. and foreign taxes paid elsewhere.The spread between the French tax of 2 percent and the U.S. tax of 17 percent resulted in APC being worth about $800 million more to Schneider than Emerson, which allowed Schneider to outbid Emerson and acquire APC. Just like that, what had once been an American company became a French domiciled company.This is by no means a rare phenomenon. A recent analysis by Ernst & Young found that, from 2004 through 2013, foreign buyers acquired $179 billion more of U.S. companies than we acquired of theirs. According to data provider Dealogic, the gross value of foreign takeovers of U.S. companies doubled last year to $275 billion and, at the current rate, will surpass $400 billion this year.
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