As American as Apple Inc.
Are large U.S. multinationals largely U.S. owned? To hear some of the arguments for retaining or enhancing the tax benefits that these companies enjoy, you’d think this was a given. Think again.
Quirks in the tax laws essentially provide large U.S. multinationals like Apple, Google, and Cisco with a kind of turbo-charged Individual Retirement Account (IRA).
The companies bottle up profitable aspects of their businesses in foreign subsidiaries located in no or low-tax jurisdictions. They pay little or no tax on the profits as earned, or on the build-up from reinvesting those profits within the subsidiary. Tax is imposed only when the subsidiary returns the built-up earnings to the U.S. parent in the form of a dividend. This much is just like an IRA: no tax as earned, no tax on build-up, tax upon withdrawal.
Better than an IRA is that the tax “upon withdrawal” has in the past been, and may again be, significantly reduced. In 2005, Congress granted a “repatriation tax holiday” on dividends from foreign subsidiaries and lowered the tax from 35% to 5¼% . Several tax reform plans floating around Washington today would provide yet another holiday on these repatriated earnings.
Whether providing tax benefits of this kind is good policy is a complicated issue—perhaps more complicated than it seems. Any serious consideration of the issue quickly gets bogged down in long-running debates regarding the “double taxation” of corporation income, the propriety of specially encouraging business investment, and the proper taxation of foreign source income.
But this much can be said: Some of the most common arguments for retaining or enhancing these tax benefits stand on very shaky ground. They rest, at least in part, on the premise that the multinational companies that enjoy these benefit are largely U.S. owned.
In fact, we have very little idea who owns these companies. I explain why in a new paper “As American as Apple Inc: International Tax and Ownership Nationality”.
Consider the claim that the tax benefits enjoyed by large U.S. multinationals are crucial for “U.S. competitiveness”. If the idea is that we should sacrifice precious revenue to help someone “win”, it seems worth knowing who that someone is.
To be sure, proponents of the competitiveness argument generally focus on helping U.S. workers—and that is certainly part of the story. But on the other hand, there is little doubt that some of the benefit of reduced taxation of corporate profits goes to those who own those profits, namely shareholders. Based on a careful review of the literature, the Tax Policy Center itself allocates a substantial portion of corporate tax incidence to corporate shareholders, as opposed to workers, consumers, and owners of other forms of capital. Who then are these shareholders?
U.S. multinationals and their supporters also make the claim that a second “repatriation tax holiday” would induce them to “bring the money home” and create jobs. We know that the 2005 repatriation holiday caused these companies to pass at least some portion of the dividends to their own shareholders. This doesn’t rule out job creation. But it raises the question of whether and to what extent these shareholders would plow the funds back into the U.S. economy. To answer this we’d also want to know who these shareholders are and where they live.
As I discuss in the paper, a well-known economics literature identifies and attempts to explain the phenomenon of “home country bias” in stock portfolios. This research points toward the largely U.S. ownership of U.S. companies in general. Yet it has little to say about the special case of large U.S. multinationals.
The data analysis in the home bias literature doesn’t distinguish large multinationals from other kinds of U.S. companies. Moreover, commonly-accepted explanations for home bias—information asymmetries and cognitive biases based on “familiarity”—suggest that large U.S. multinationals are exceptional. After all, if a French citizen wanted to learn about home country bias, she might well Google it on her iPhone. Multinational companies are, well, multinational.
The next step then is go back to the original data to try to zoom in on these companies. But that turns out to be largely fruitless exercise.
The federal government has several overlapping reporting regimes regarding equity ownership in U.S. companies. These include the Treasury International Capital system used to compile the balance of payments, IRS data on the withholding tax on dividends paid to foreign shareholders, and three separate regimes administered by the SEC: reporting by “institutional investment managers” on Form 13F, by mutual funds on Forms N-Q and N-CSR, and by “registered investment advisers” on Forms ADV and PF.
Several of these reporting regimes are ingeniously designed. Some require surprisingly detailed responses. But none were designed to reveal the foreign ownership share of large U.S. multinationals. And none of them supply this information serendipitously.
Nothing should prevent large U.S. multinationals from making the “what’s good for us is good for America” argument. There’s a lot to be said for that approach. But in weighing such arguments, we should lend a critical eye to any claim–however implicit, however rhetorical–that the “us” are themselves U.S. Certainly, the fact that a firm files its corporate documents in Delaware rather than Düsseldorf shouldn’t matter. And if we’ve been thinking of these companies as U.S. firms based on the presumption that their owners are largely U.S. persons, we will need to reevaluate.