Paul L. Caron

Thursday, June 9, 2011

Morse Presents Firm Incorporation Outside the U.S. at UC-Hastings

Morse Susan C. Morse (UC-Hastings) presented Firm Incorporation Outside the U.S.: No Exodus Yet (with Eric Allen, Ph.D. candidate, UC-Berkeley, Haas Business School) Tuesday at UC-Hastings as part of the Roger J. Traynor Summer Professor Workshop Program.  Here is the abstract:

As one tax director told the Senate Finance Committee in 1999, the U.S. tax rules for multinationals with a U.S.-incorporated parent are onerous enough that even a U.S.-based company like Intel might sensibly choose to incorporate its parent outside the U.S, presumably in a tax haven jurisdiction. Is the recent positive trend in the proportion of U.S.-listed initial public offering firms incorporating outside the U.S. enough evidence to suggest that corporations are heeding the substance of that tax director’s advice? Our results indicate that it is not. Only 178 firms, or about 2.3% of our sample of 7583 IPO firms from 1980 to 2009, incorporated outside their headquarters jurisdiction, and of these firms only 28 were headquartered in the U.S. While there is a noticeable recent increase in the proportion of issuers conducting U.S.-listed IPOs that incorporated in tax havens, our results indicate that firms headquartered in China and Hong Kong drive this trend. We do not observe a mass exodus of U.S.-headquartered firms incorporating in tax haven jurisdictions. However, we examine the few that do make that decision and describe some of their distinguishing characteristics.

Amanda Rose (Vanderbilt) blogs the workshop on Conglomerate:

Eric and Susie’s study suggests that overwhelmingly US companies conducting US-based IPOs do not view the tax benefits of incorporating outside the US to be the worth the costs.  Whether that is because these companies perceive the benefits to be low (maybe because they have found other effective ways to minimize their tax burden, or fear that incorporation outside the US may not successfully prevent the long arm of Uncle Sam from reaching them), or because they perceive the costs to be high (for example, losing Delaware corporate law and the institutions that accompany it, or attracting negative media attention), or perhaps both, are intriguing questions that their study calls into focus.

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Most IPO companies are not focusing on taxes when they incorporate. In fact, they are a bunch of computer programmers sitting in CA.

In addition, the tax penalty falls primarily on income from foriegn operations. Most IPOs of US companies are focused on the US markets and don't focus on a later stage foriegn expansion.

Any company anticipating substantial foriegn revenue intitially who talks to a tax advisor would incorporate overseas. (How many domestic reinsurers have cropped up in the past 10 years).

Every company which starts having substantial foriegn revenues wants to redomesticate, but the costs and issues are too high.

Posted by: John | Jun 10, 2011 5:13:57 AM