How the U.K. Halted Corporate Inversions

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Just ten years ago, companies were fleeing the United Kingdom to escape its high tax rates and worldwide tax system. Today, the opposite is true; companies are fleeing high-tax countries like the United States and relocating in the United Kingdom. Why the reversal? The Tax Foundation has released a new study by William McBride detailing what the U.K. did to stop the inversion trend.

Margaret Thatcher’s administration cut the U.K.’s 52 percent corporate tax rate in 1980 down to 35 percent in 1986, doing much to improve Britain’s business climate. But so did other countries, reducing their tax rates even lower and leaving the United Kingdom (and the United States) with some of the highest corporate tax rates in the world. In 2008, the U.K.’s tax rate was at 28 percent, while countries like Ireland boasted a rate of just 12.5 percent.

Moreover, McBride points out another negative aspect of Britain’s tax system: it used a worldwide, rather than territorial, system, meaning that British companies had to pay the United Kingdom’s tax rate on their foreign earnings. As a result of the unfriendly tax climate, companies flocked elsewhere, leaving the U.K. for Ireland, Switzerland, Luxembourg and the Netherlands, among others.

To deal with the corporate flight, lawmakers instituted a number of reforms. The corporate tax rate dropped to 21 percent in 2014 and will fall to 20 percent by April 2015. Moreover, the U.K. imposed a territorial tax system. What happened?

– Companies that had left or threatened to leave Great Britain returned or remained.
– According to a study from Ernst & Young, there are 60 multinational companies currently considering relocating to the United Kingdom “as a result of the Chancellor’s reducing corporation tax policy.”
– The number of U.K. corporations is growing steadily, at 8 percent per year.

McBride encourages American lawmakers to follow the U.K.’s example and reform the corporate tax rate.

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