What’s Driving American Firms Overseas
American companies face the highest statutory corporate income tax rate in the world — 39.1 percent. According to the Tax Foundation, this overall rate of 39.1 percent is a combination of the 35 percent federal rate plus the average rate levied by U.S. This puts the United States at a major competitive disadvantage in global trade. Even corporations in high-tax European countries such as Belgium (34 percent), France (34.4 percent) and Sweden (22 percent) face much lower rates than those in the United States. Canada, Japan and the United Kingdom have each cut their corporate tax rates over the past few years to become more competitive.
For more than 30 years companies, especially American ones, have been merging with foreign firms or acquiring them outright in order to shift their tax bases abroad. It started in 1982, when McDermott, a construction company moved its base from New Orleans to Panama, where it had a subsidiary. Ever since, this kind of move, called a “corporate inversion”, has been an attractive way for American companies with overseas earnings to reduce their tax bills. Corporate mergers and takeovers have reached their highest levels since 2007, driven in part by companies’ desire to leave the U.S. to save tax dollars.
On the other hand, technology trendsetters Apple Inc., Google Inc., Facebook Inc. and Netflix Inc. all mined foreign countries to produce earnings or revenue. Prodded by the steadily rising demand for Internet access and online services in developing countries, these technology companies will likely be wading even deeper into overseas markets for years to come. Google generated 58 percent of its revenue outside the U.S. in its second quarter, Facebook already gets 55 percent of its revenue overseas, and the growth in those markets is outpacing by what’s happening in the U.S. The social networking service has attracted 1.1 billion users in foreign markets versus 200 million in the U.S. and Canada.
Netflix’s Internet video service added 1.1 million international subscribers, nearly doubling the number it gained in the U.S during the April-June quarter. The company expects the trend to continue as Netflix enters Japan in September. The philosophy is to start your growth in the states and then take your fight overseas.