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Buying & Selling: Cross-Border Mergers and Acquisitions and the U.S. Corporate Income Tax [2015 REPORT]

This study was updated in 2017 and can be found here.

The United States has the highest statutory corporate income tax rate among developed nations and is the only developed country with both a high statutory corporate income tax rate and a worldwide system of taxation. These features of the US corporate income tax have disadvantaged US businesses in the global market for cross-border M&A.

Most developed countries impose little or no additional tax on the active foreign income of multinational companies. Today the United States is the only developed country with a worldwide system and a corporate income tax rate above 30%. Consequently, foreign companies can afford to bid more for acquisitions in the United States and abroad as compared to US companies.

This report analyzes the cross-border M&A market and how the US corporate income tax has disadvantaged US companies in this market. Differences in statutory corporate income tax rates and the over 25,000 cross-border M&A transactions among the 34 OECD countries are examined in a statistical model over the 2004-2013 period. Transactions with both US and non-US targets and US or non-US acquirers are included.

The EY report finds that a US corporate income tax rate of 25% would have significantly reduced the disadvantages of US companies and would likely have resulted in the United States being a net acquirer in the cross-border M&A market.

With a 25% tax rate, US companies would have acquired $590 billion in cross-border assets over the past 10-years instead of losing $179 billion in assets (a net shift of $769 billion in assets from foreign countries to the United States). The report also estimates that a 25% tax rate (the OECD average) would have kept 1300 companies in the U.S. over the last 10 years.

  • The $24.5 trillion global cross-border M&A market over the past decade was characterized by a large number of small transactions. 
  • The United States is regularly losing business assets through relatively small-scale, daily transactions. One half of the cross-border transactions were valued at $29 million or less. 
  • The economic benefits created by innovative start-ups are more likely to stay in the United States when these businesses are acquired by domestic companies, rather than foreign companies, because they are more likely to conduct more of their R&D activities in the United States.

M&A plays an important role in both the US and global economies by allowing companies to reshape themselves in response to a changing economy. Divesting some lines of business and acquiring others allows companies to enter new markets, access distribution channels, develop new technologies, and release capital for reinvestment. For small, innovative companies in particular, M&A is a way to match their new ideas with the resources needed to bring them to market. As an indication of the importance of this market for start-ups, this report finds that the cross-border M&A market is dominated by small transactions with 50% less than $29 million.

The impact of the US corporate income tax on the cross-border M&A market is a complex but crucial component of the ongoing US tax reform debate. Corporate income tax rates affect not only the competitiveness of global US companies, but also the ownership and management of global capital. If the disadvantages in our system persist, they could have long-lasting effects on productivity, wages, and living standards.

In the last 10 years, the US statutory corporate income tax rate has remained steady while rates in many other countries have fallen. As a result, the gap between the US statutory corporate income tax rate and the simple-average OECD rate has increased from 2 percentage points to 10 percentage points, heightening the disadvantage in the M&A market for US companies.

In a hyper-competitive global marketplace, America’s outdated tax structure has made US companies a net target in the cross-border M&A market.

Click here to read the full report.