Posted by Joseph Y. Calhoun, III

Muti-national companies, especially those who make a majority of their profits outside the US, are moving their headquarters to Switzerland. Congress is likely to pass a new bill making their current incorporations in places like the Cayman Islands or Bermuda difficult. The US has a tax treaty with Switzerland so it is seen as a safer option (via the WSJ):

Several big U.S. companies are reincorporating from Bermuda to Switzerland, helping them avoid expected legislation aimed at corporations located in tax havens.

Conglomerate Tyco International Ltd. and oil-industry contractors Foster Wheeler Ltd. and Weatherford International Ltd. announced their moves Wednesday. Transocean Inc., a big offshore driller, received shareholder approval Monday for a similar move. The board of Bermuda-based insurer ACE Ltd. earlier this year approved a “redomestication” from the Cayman Islands to Zurich.

The move to Switzerland will help the companies preserve the tax benefits they had in Bermuda and the Cayman Islands, while using Switzerland’s tax treaty with the U.S. to shield them from possible adverse legislation from the incoming administration and next Congress. Bermuda imposes no corporate income tax. Switzerland has a corporate income tax, but doesn’t levy it on profit earned by subsidiaries overseas.

It’s no wonder the oil service industry is relocating to a place that lowers their tax bill. With the restrictions on drilling in the US and the impossibility of building a refinery here, these companies earn the vast majority of their profits outside the US. From their viewpoint, it makes sense to incorporate in Switzerland where their profits from outside that country will not be taxed. They may face taxes in the country in which they do work, but they won’t face another round of taxes in Switzerland.

I blogged about this problem the other day. The US practices worldwide taxation where a company incorporated in the US pays tax on their worldwide income. The tax is deferred on foreign profits until they are repatriated, but eventually the company has to pay. That’s why US companies have lots of cash parked outside the US. Switzerland practices territorial taxation where the only profit they tax is what is actually earned in Switzerland.

For many multinationals who earn the majority of their profits outside the US, Switzerland is an attractive option. Depending on which canton they locate their headquarters, they could pay a corporate tax rate less than 10% in Switzerland. And a lot of companies earn a majority of their profits outside the US including McDonald’s, Coca Cola and Proctor and Gamble.

Basically the US has two choices. We can attempt to get Switzerland and a lot of other countries to raise their corporate tax rate or we can keep these companies here by cutting the corporate tax rate. I’d say the second option is a more reasonable and potentially successful approach.

The official US corporate tax rate is the second highest in the world at 35%. The effective rate is somewhat lower at around 20%, but there are hidden costs to getting it that low. The only way to get it that low is to do a number of things. First, multinationals can keep profits from foreign subsidiaries outside the US, which they do. That capital, that could come back to the US and create jobs here, is kept out by the tax law. Second, they lobby Congress for loopholes. They make campaign contributions. The tax code is the source of much of our political corruption. Lower and simplify the tax and a lot of the corruption goes away. Which is why it hasn’t been lowered and simplified. How in the world would politicians raise campaign funds if they didn’t have favors to sell?

We need capital and jobs in the US. Lowering the corporate tax is a way to accomplish both of those things. Corporations, contrary to populist rhetoric, are not the enemy. They are the providers of jobs. If we continue to tell them, literally and figuratively, that we don’t want them here, we shouldn’t be surprised when they oblige us by moving their headquarters to Switzerland and other low tax locales.