As I was sitting down to draft this review of Chris Sanchirico’s paper, I ran a simple search on Google News: “‘U.S. Companies’ and Tax”. Here are some of things I learned skimming through search results returned by major news outlets: “U.S. Companies” now stash over $2 trillion overseas in order to avoid taxes (NBCNews, Nov. 12, 2014); “U.S. Companies” use mergers to shift their legal address to low-tax jurisdictions in a strategy known as “inversion” in order to reduce their U.S. tax bill (Bloomberg, Oct. 28, 2014); and, one of Congress’ top priorities for 2015 is a tax reform aimed at “helping” “U.S. Companies” avoid the U.S.’s “highest-in-the-world corporate tax rates”, in order to grow the economy (CNBC, Nov. 17, 2014).
Clearly, the taxation of “U.S. Companies” plays a major role in public discourse. Roughly speaking, the two sides of the debate can be outlined as follows: U.S. multinational corporations either pay too much (because our tax system is not competitive compared with the rest of the world), or too little (because our tax system is riddled with loopholes). We need to reform our tax system so “U.S. Companies” are at par with their foreign competitors; or, we need to tighten our tax rules so as to make sure that “U.S. Companies” share the burden. While political views differ, the terms of the debate seem clear. Whichever side of the debate one takes, something must be done about how we tax “U.S. companies.”
Sanchirico, however, questions the core terms of the debate: “When we speak of ‘U.S. multinationals,’ what do we mean by ‘U.S.’? More specifically, to what extent are these ‘U.S.’ companies owned by non-U.S. investors?” Sanchirico’s ultimate answer is quite a shocker: we have no idea what we are talking about when we speak of “U.S. Companies,” at least in terms of who owns these companies.
Sanchirico’s argument is especially important if we assume (as most tax scholars do) that corporations are not in-and-of-themselves a target of tax policy-making. Rather, when we debate how to tax “U.S. corporations,” we really debate the effects to tax policy on the ultimate corporate stakeholders, which are in turn often assumed to be the corporate shareholders. It thus makes no sense speaking of “U.S. companies” unless we can establish that such companies are indeed ultimately beneficially owned, at least to a significant extent, by U.S. individuals. The standard academic response to such conundrum is the “home country bias” according to which equity investors tend to disproportionately invest in domestic corporations.
Sanchirico does an excellent job demonstrating the questionable applicability of home country bias effects to corporations that in popular view are perceived to be “U.S. Companies.” His work lays open the empirical possibility that in today’s economic environment, multinationals with a U.S.-incorporated parent should not be viewed as inherently “U.S.” and that the significant presence of U.S. multinationals such as Apple and Microsoft overseas helps overcome home-bias tendency. Perhaps it is now unlikely that a British investor would shy away from Apple (which is very much present in the U.K. market) just because Apple is not “British”.
Following this hypothesis, Sanchirico executes a meticulous research into databases that are used (or could potentially be used) to identify the nationality of ultimate beneficial owners of U.S. equities. He finds that all of the databases suffer from limitations that prevent us from positively identifying the nationality of most beneficial owners in U.S.-traded equities. Most importantly, all datasets inherently suffer from “fund opaqueness” problem. That is, under most reporting requirements, a “fund” (which generally refers to an institutional investor, or an account held with a financial institution) is reported as the owner of equities. Using these datasets, we cannot tell who the beneficial owners are. At best, current data offers us knowledge of companies’ ownership by intermediaries, or equity ownership in U.S. intermediaries (one of my favorite parts in the article is a chart showing 15 major equity owners in Google Inc., all of which are financial intermediaries).
It is difficult to overstate the importance of Sanchirico’s findings to current tax-policy debate. Our tax-policy discourse is very much attached to national identities, with the beneficiaries of so-called U.S. corporations assumed to be U.S. individuals. In our globalized environment, Sanchirico proves such assumption to be, at the minimum, problematic. Would we really care if, say, Pfizer (a “U.S. company”) is outbid by Teva Pharmaceuticals (an “Israeli company”) when competing for an investment opportunity overseas if it turns out that Pfizer is majority-owned by non-U.S. investors? Can the U.S. tax systems be declared “uncompetitive” under such a set of facts? If so, uncompetitive relative to whom? How much should we care about Apple’s tax-avoidance strategies, if it turns out that Apple is beneficially owned by foreign investors? What would be the normative basis, under such circumstance, to force additional U.S. tax burden on Apple’s earnings?
One might challenge the assumption that nationality of companies should derive only from the nationality of their equity owners. To the extent we tax corporations as a backstop for individual taxation of shareholders (a prevalent theory in corporate taxation), Sanchirico’s starting-point assumption makes sense. However, scholars have suggested multiple other theories for taxing corporations. In such contexts, “nationality” of corporations could mean something other than the nationality of shareholders. For example, under one common theory, corporations are taxed in order to regulate managers. If this theory prevails, one might argue that the nationality of corporations should be determined based on the nationality of corporate managers, not shareholders.
Nonetheless, at the end of the day Sanchirico’s article points to a core terminological failure in our tax reform discourse. The outcome ought to be paradigm shifting, as no policy discussion on the taxation of U.S. companies can make sense as long as we fail to recognize the policy targets of the discussion. Sanchirico’s paper should serve as a launching-pad for any future discussion on U.S. international tax reform.