Corporate Tax Reform: Emerson Case Study and Economic Impact

This case study examines the need for corporate tax reform in the United States, using Emerson, a global manufacturing company, as a central example. It highlights how the current U.S. tax system, with its high corporate tax rate and worldwide tax system, disadvantages U.S.-based multinational companies in the global market. The case study details how Emerson lost a bid to acquire American Power Conversion (APC) to a French company, Schneider Electric, due to the more favorable tax treatment of repatriated profits in France. The author argues that the U.S. must transition to a territorial tax system and reduce its corporate tax rate to remain competitive, preventing the outflow of capital and jobs to foreign countries. The study concludes with a call for action, emphasizing the importance of a level playing field for American businesses to compete and succeed globally.

Case study in corporate tax reform
By Walter Galvin - 07/30/15 11:00 AM EDT 1
Millions 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 was
due 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.

These takeovers reflect thousands of U.S. companies leaving American shores. Every time a
company moves its headquarters overseas, there is a real community impact. In addition to
losing American jobs, there is a decline in state and local tax revenue and a loss of corporate
philanthropy.
If the United States is serious about slowing this unprecedented outflow of capital and jobs to
foreign countries, we must permanently restore the competitiveness of U.S.-based multinational
companies. We need to do this sooner rather than later, chiefly through transitioning to a
territorial tax system and reducing our 35 percent corporate tax rate to a more competitive level
of around 25 percent. Fortunately, thoughtful efforts like the bipartisan Portman-Schumer
international reform framework are moving the conversation forward and offer hope that
Congress will do what is necessary to stem this outflow.
We cannot expect to create more jobs at home if we continue punishing businesses that want to
remain headquartered in America. Our businesses and workers are the best in the world, and all
we’re asking for is a level playing field. With that, we can compete anywhere in the world. We
can win and we can keep American companies in America.
Galvin is the former vice-chairman and CFO of Emerson.