Paul L. Caron

Friday, June 7, 2013

Fleischer: Why Do Multinational Companies Incorporate in the U.S.?

NY Times DealBookNew York Times DealBook:  Despite Tax Rules, Companies Stick With U.S., by Victor Fleischer (Colorado; moving to San Diego):

The tactics that multinational companies like Apple, Microsoft and Hewlett-Packard use to avoid paying corporate income taxes might make one wonder why they incorporate in the United States in the first place. Why not Ireland? ...

Because corporate residence is, in effect, elective, it is surprising that nearly all new companies with headquarters here elect to incorporate in the United States and pay tax here.

Two new papers by a University of Texas law professor, Susan Morse, help explain why. The first, Tax Haven Incorporation for U.S.-Headquartered Firms: No Exodus Yet, [66 Nat'l Tax J. ___ (2013),] with Eric Allen of the University of Southern California, confirms that new companies are not avoiding the United States in favor of tax havens. Among 918 new companies identified as multinationals with headquarters in the United States, just 27 were legally incorporated in tax havens.

Why no exodus yet? In a second paper [Startup, Ltd.: Tax Planning and Initial Incorporation, 13 Fla. Tax Rev. ___ (2013)], Professor Morse takes the perspective of a new company with global ambitions and interviews founders, lawyers and investors in Silicon Valley about how they make the decision about where to incorporate.

The first reason is hiding in plain sight. Because the United States corporate income tax is so leaky, the benefits of avoiding it are smaller than they would appear to be in theory. For technology companies in particular, multinationals based here can obtain low effective tax rates on foreign income. Professor Morse reports estimates of effective tax rates of 3 percent to 6 percent a year on this foreign income. And, as Apple and others have demonstrated, it is often possible to shift economic income from the United States to tax havens abroad, further reducing tax liability here.

The second reason is that there continue to be significant nontax advantages to incorporating in the United States. Incorporating in Delaware is fast, easy and cheap. Venture capitalists and other investors like the security and predictability of Delaware law, and companies can rely on United States courts to enforce intellectual property rights. Minority investors might be nervous about enforcing their contractual and shareholder rights in a court in Bermuda, British Virgin Islands or Ireland. ...

Silicon Valley start-ups, known for being nimble and innovative, are remarkably stodgy when it comes to legal matters. Professor Morse points out that start-up founders rarely have more than a few thousand dollars to spend on legal fees, and it would cost thousands more to set up a parent company in a foreign tax haven. It is only a matter of time, however, before the global legal marketplace makes it easier, faster and cheaper for start-ups to incorporate abroad. Our best hope is that if patching our international tax rules makes incorporating abroad more attractive, founders and venture capitalists continue to focus on the short-term costs of legal innovation instead of the long-term benefits of tax avoidance.

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