MULTINATIONALS, TAXES AND COMPETITIVENESS

Here is a report from Financial Times:

"Multinational companies with US subsidiaries could face huge new tax bills under a law passing through the US Congress. The new measure, known as the Doggett law after the Texas Democrat who proposed it, aims to prevent international companies avoiding US tax when they transfer funds from the US to parent groups via countries with favourable tax treaties, such as the UK and the Netherlands. At present, companies with headquarters in countries that have no US tax treaty, such as Taiwan and Singapore, can avoid a 30 per cent tax on funds transferred from US subsidiaries by setting up a unit in countries with favourable treaties. Congressional Democrats say the legislation is focused on “tax haven hideaways”."

Source: US tax bill set to hit multinationals, Financial Times, August 19 2007 (link)

A new tax hike on multinationals introduced by the U.S. Congressman could seriously hurt job creation and force multinationals to leave the U.S. despite some of the particular competitive advantages of the business environment in the U.S. such as sound access to venture capital. The performance of multinational companies in areas such as value-added and venture formation crucially depends on tax rates hiking capital gains, corporate income and savings. In fact, net direct investment and capital inflows into low-tax and offshore jurisdictions reflect the attractiveness of particular locations to invest and transfer investment funds into the most favorable place with regard to corporate strategies undertaken by multinational companies.

Penalities levied on setting up business units in jurisdictions with non-punitive tax regime, would certainly force capital and investment managers to avoid taxes through unfavorable results such as less job creation as a measure to fight resisting cost pressures caused by the introducing particular tax bills on companies seeking to maximize growth and output in jurisdictions with lower statutory rates on corporate income and private equity.

Nevertheless, taxation of private equity has distorting effects on decision-making where and how to allocate investment resources in particular to maximize the output and return on equity. In fact, there is a numerous evidence that outsourcing benefits outward company performance and provides opportunities to investors and offshore/onshore service supply. Obviously politicians do not know that multinational companies frequently run several business units and that particular domestic markets do not neccessarily offer suitable or attractive access to particular capital and investment funds and that restricting access to international markets could result in a lack-luster performance of multinationals and consequently, in the loss of gains from competitiveness and access to provide liqudity and additional funds to fuel growth and perform the business strategy.