Why Do Companies Incorporate and Locate their Headquarters Internationally?
What drives companies’ decisions? There are countless strategies a company can implement to give themselves an edge. I have noticed many companies incorporate in the state of Delaware and many companies that locate their headquarters in countries where they do not regularly operate. For example, a handful of companies including: McDonald’s, Procter & Gamble, Kraft Foods, and Yahoo! all have their European headquarters located in Switzerland. What are the reasons that companies make these kinds of decisions?
“International companies account for 82 percent of non-Delaware businesses incorporated within the state” (Mordock, 2015). This is certainly not a coincidence. There are two major reasons why companies choose to incorporate in Delaware and taxes is not one of them. The first reason is the, “bi-partisan political consensus in Delaware to keep the Delaware corporation statute modern and up-to-date, and to rely on Delaware's corporate law specialists for advice in how to do this” (Ting, 2011). The benefit for corporations here is that there are clearly defined rules on what corporations can and cannot do. This alone is not enough to attract all the corporate incorporations. The second and more important reason is, “…the quality of Delaware courts and judges. Delaware has a special court, the Court of Chancery, to rule on corporate law disputes without juries” (Ting, 2011). A specialized court like the Court of Chancery can evaluate corporate cases more effectively and reasonably. It should be mentioned that any other state is free to implement the same structure. However, Delaware has certainly made a name for itself in regards to corporate law, one can expect the amount of incorporations in Delaware to continue increasing.
I was surprised to find that the major reason companies choose to incorporate in Delaware is not because of tax purposes. I expect taxes to be a critical factor in many business decisions, which it is. The primary reason international companies locate their headquarters in specific countries is for taxes. Switzerland is an attractive headquarter location because of their corporate tax rate of 17.92% (in 2015). To put it into perspective, the United States corporate tax rate in 2015 was a whopping 40%. The global average corporate tax rate was 23.87% in 2015. Relocating headquarters from the United States to Switzerland would cut corporate taxes by more than half. The question now is, why aren’t all corporations relocating to these countries with minimal corporate taxation?
Author Richard Rubin talks about a few companies that have recently relocated their headquarters away from the United States in his article titled “Firms That Left U.S. Still Enjoy Perks --- Some lawmakers say the U.S. should penalize companies that move offshore”. I was shocked to find that currently there is no real punishment for companies who make this move. Rubin mentions, “U.S. lawmakers, particularly Democrats, say the government should penalize companies that move offshore with punitive taxes and limits on government contracts” (Rubin, 2016). Although penalizing companies that do move offshore is a possible solution, Rubin also suggests, “If there are competing companies that have maintained their U.S. tax status, that are acting responsibly in their taxpaying behavior, then policy makers should be asking questions about why these companies aren't being promoted instead of the inverters” (Rubin, 2016). There are numerous solutions to this ongoing problem, yet nothing has been done about it in recent years. However, the varying corporate tax rates among countries in a way promotes globalization. The benefits offered by various countries encourages global interaction.
International companies can incorporate and locate their headquarters in places that benefit them, with virtually no drastic consequences. Delaware has become an attractive place to incorporate for its quality courts and modern laws. No other state can compete with its’ experience and efficiency in corporate law. There is no added cost for incorporating in Delaware as opposed to incorporating in any other state. Incorporating in Delaware seems to be the obvious choice. The location of headquarters is strongly influenced by corporate tax rates. Again, there is no real additional cost for locating in a low corporate tax country. I am still left with the question, why doesn’t every company incorporate in Delaware and locate their headquarters in a low corporate tax rate country?
Corporate tax rates table. Retrieved November 05, 2016, from https://home.kpmg.com/xx/en/home/services/tax/tax-tools-and-resources/tax-rates- online/corporate-tax-rates-table.html
Egger, P., Radulescu, D., & Strecker, N. (2013). Effective Labor Taxation and the International Location of Headquarters. International Tax And Public Finance, 20(4), 631-652.
Mordock, J. (2015, June 1). Majority of Delaware corporations are based overseas. Retrieved October 13, 2016, from www.delawareonline.com
Rubin, R. (2016, Jun 14). Firms that left U.S. still enjoy perks --- some lawmakers say the U.S. should penalize companies that move offshore. Wall Street Journal
Ting, J. C. (2011, April 27). Why do so many corporations choose to incorporate in Delaware? Retrieved October 14, 2016, from www.newsworks.org