House tax proposal could make a lot of foreign companies start buying up US firms

Key Points
  • "Border adjustment" proposal would impose new tax on imports.
  • Foreign firms with U.S. customers may look for ways to get that tax benefit.
Containers loaded onto a freighter at a pier of Tokyo port in Japan.
Toshifumi Kitamura | AFP | Getty Images

A lot of U.S. companies may find themselves with new suitors if Congress gets its way.

In recent years, many U.S. corporations have tried to slash their tax bill by shedding their American citizenship and acquiring foreign companies. The tactic, known as "inversion," has caught the ire of Washington, which has sought creative ways to stop inversions for years, with limited success.

But tax reform now being debated in D.C. may create an opposite situation, giving foreign companies incentive to buy up U.S. firms, according to tax experts and mergers and acquisitions advisors.

Instead of an inversion, it would be a "reversion."

Much of the debate over the House tax plan has focused on the border adjustment tax — its benefit for exporters and the penalty for importers. Border adjustment would avoid taxing U.S. exports, but would put a blanket tax on imports into the country.

Border tax not dead, but wounded: AEI

If the border adjustment tax comes to pass, it could be detrimental to foreign companies with a large customer base inside the U.S., since they would face a higher levy than their U.S. competitors who are producing domestically.

Acquiring a similar company in the United States would help solve that problem, tax experts say, as it could eliminate the need to move goods and services across the U.S. border.

"You would do a mirror image of an inversion," said Robert Willens, an independent tax consultant. "Investment bankers would be pushing that right and left. It would be one of the best things they'd be offering their clients."

Several mergers and acquisitions advisors who requested anonymity said they've already been speaking with clients about a similar strategy.

'Cleanest fix ever'

It's much easier for companies to acquire an already operational peer than to move production into the U.S. Additionally, if companies can expense domestic capital expenditures (another possible element of the border adjustment plan), that may be extended to acquisitions as well, depending on the way the deal is structured. Experts say that would give foreign companies even further impetus to sign deals.

The border adjustment proposal represents a fundamental restructuring of the nation's tax code that would address the long-running problem of corporate inversions.

"That's its primary virtue," said Douglas Holtz-Eakin, an economist and president of the American Action Forum, one of the proposal's chief supporters. "It's the cleanest fix ever."

Not only does the United States have one of the highest corporate tax rates among developed nations, it also taxes business income anywhere it is earned globally. Most countries tax only profits generated inside their borders. As a result, many U.S. companies have sought to shift their headquarters overseas.

How border adjustment works

The House proposal seeks to change that. The headline rate would drop from 35 percent to 20 percent and apply only to sales in the United States. In addition, companies would be able to deduct the cost of goods manufactured in America. Proponents of the plan said the changes would eliminate the incentive from the tax code for businesses to move overseas.

"I think it totally turns things around on inversions," said Alan Cole, an economist at the right-leaning Tax Foundation. "There's no cost anymore to calling yourself an American company."

A report released last week by the nonpartisan Congressional Budget Office found that the nation's corporate tax base is shrinking. It forecast the decline would reduce tax revenue from businesses by 5 percent over the next decade. About half of that is driven by companies shifting profits outside the United States, the CBO found.

"The border adjustability feature eliminates the tax-driven incentives that force American businesses to shift their jobs, profits and headquarters overseas, including attacking the root cause of inversions," House Ways and Means Commitee Chairman Kevin Brady, R-Texas, said in a statement to CNBC. "Our entire tax reform blueprint is designed to make America one of the best places on earth for businesses to create jobs and invest in our communities."