How the UK Reversed its Corporate Inversion Trend
Friday, October 17th, 2014
On Monday, the U.S. based Steris Corporation added its name to the list of U.S. corporate inversions when it announced it will relocate its headquarters to the United Kingdom. Less than a decade ago, however, the UK experienced its own share of corporate inversions which stemmed from an uncompetitive tax code that drove companies abroad. Since then, the UK has reversed its corporate inversions trend through bipartisan efforts to reduce the corporate tax rate and reform its worldwide tax system to a territorial system, according to the latest report from the nonpartisan Tax Foundation.
Following cuts to corporate tax rates in the U.S. and the UK in the 1980s, other developed nations began lowering their rates as well, drawing down the average rate among countries in the OECD. However, the U.S. rate stagnated at 35 percent in 1993 and the UK slowed their reductions enough so that by 2008, both the U.S. and the UK levied some of the highest corporate tax rates in the industrialized world. Further, the UK was one of the only countries still maintaining a worldwide tax system which taxes a business’s income from foreign earnings.
The report finds:
- As a result of the high rate and worldwide tax system, many British companies left or announced plans to “invert”; the UK faced what the New York Timescalled an “exodus of British companies fleeing the tax system.”
- In response, the UK government implemented both a territorial tax system which does not double tax foreign earned income and a series of corporate tax reforms that will lower the corporate tax rate from 28 percent in 2010 to 20 percent in 2015.
- After these changes, UK corporate inversions reversed and many American companies have already moved or now aim to move to the UK, including Pfizer, Liberty Global, Rowen, Aon, Ensco, and others. Further, the total number of UK corporations has grown to 1.1 million as of 2012, and it is on track to overtake the U.S. in number of corporations by 2017.
“The UK is a prime example of how lower rates and a territorial tax system can help restore competitiveness to a country’s tax code while ensuring adequate revenue” said Tax Foundation Chief Economist William McBride, PhD. “In fact, the UK now raises more corporate revenue as a percentage of GDP than the U.S., which still maintains a worldwide tax system in addition to the highest corporate tax rate in the industrialized world. Simply put, the UK raises more money better than we do.”
Lawmakers in the U.S. would do well to follow the British example on corporate inversions by lowering our corporate tax rate—the third highest in the entire world—and replacing our worldwide tax system with a modern territorial system.