This report is an update and expansion of a 2015 EY report that analyzed the cross-border M&A market for OECD countries and the effect of the US corporate income tax on this market over the period from 2004 through 2013. It examines the M&A market between 2004 and 2016, considering the effects of different statutory corporate tax rates on more than 97,500 global cross- border M&A transactions across 68 countries.
The report’s key findings include:
American companies are disadvantaged by US international tax rules: Further analysis and research continues to show that the US international tax system, including the high US corporate income tax rate, clearly disadvantages US businesses in the global market for cross-border M&A. From 2014 through 2016, US companies were the acquirer in 16% of cross-border M&A transactions (by value) and the target of 31% of cross-border M&A transactions (by value). The United States had a net deficit of $510 billion in the global M&A market from 2004 through 2016.
- This report estimates that a lower corporate income tax rate could enable the United States to become a net acquirer, even under the current worldwide system. With a 25% US statutory corporate income tax rate:
- US companies would have acquired, on net, $660 billion in cross-border assets over the 2004 through 2016 period instead of losing, on net, $510 billion in assets — a net shift of $1,170 billion in assets from foreign countries to the United States; and
- The United States would have kept, on net, 3,200 companies.
- With a 20% US statutory corporate income tax rate:
- US companies would have acquired, on net, $1,205 billion in cross-border assets over the 2004 through 2016 period instead of losing, on net, $510 billion in assets — a net shift of $1,715 billion in assets from foreign countries to the United States; and
- The United States would have kept, on net, 4,700 companies.
Although not explicitly analyzed by this report, the adoption of a territorial system in combination with a lower US corporate income tax rate would likely further increase net cross-border acquisitions by US companies.
US tax policies hinder foreign direct investment (FDI): This report expands the 2015 report’s analysis to include the impact of corporate income tax systems on foreign direct investment (FDI), finding that outdated US corporate income tax policies cost the United States billions in foreign investment. Inbound M&A is a component of FDI, which is a measure of investment in a country by foreign businesses or individuals. FDI is widely viewed as an important contributor to a country’s economy, and it has been found to be responsive to statutory corporate income tax rates.
- This report estimates that with a 25% US statutory corporate income tax during the period from 2004 through 2012, inward US FDI would have been $110 billion higher, an increase of 8%.
- If the US statutory corporate income tax rate had been 20% during this period, inward FDI would have been an estimated $195 billion higher, an increase of 14%.
Cross-border M&A provides important benefits to countries’ economies: M&A plays an important role in the United States and around the world by allowing companies to reshape themselves in response to a fast-changing global economy. Divesting some lines of business and acquiring others allows companies to enter new markets, access new distribution channels, develop new technologies, and release capital for reinvestment.
Cross-border M&A and outbound FDI can reinforce and strengthen the significant economic contributions that US-based companies make to local US economies through their US operations. In 2014, US parent companies maintained a strong US supply chain – purchasing 90% of their inputs from other US firms, totaling $7.9 trillion in supplier purchases. As US MNCs grow to meet global demand, they may also increase their activity in the United States. As the typical US MNC expands its foreign operations, it is estimated that for every 100 jobs added abroad, an additional 124 jobs are created by the US parent domestically.
M&A is also a way for innovations to be matched with the resources needed to bringthem to market. Research indicates that the economic benefits created by innovative US companies, including the benefits of research and development, are more likely to stay in the United States when they are acquired by domestic companies, rather than foreign competitors.