There is no way to tell whether America’s largest multinational companies – the Googles, Apples and Ciscos of the world – are in fact American-owned, a surprising gap in financial reporting that has important implications for U.S. international tax policy, according to new research by a University of Pennsylvania Law School professor.
The research by Chris William Sanchirico suggests that the extent of foreign ownership of U.S. multinationals is unknown even to the companies themselves, due to the way many shares of stock are purchased and registered.
Sanchirico, the Samuel A. Blank Professor of Law, is co-director of the Center for Tax Law & Policy. His research paper As American As Apple Inc. was recently issued by the Penn Law Institute for Law & Economics.
While it is well accepted that investors tend to purchase stock disproportionately in domestic rather than foreign companies, Sanchirico argues that the explanations economists offer for such “home country bias” don’t apply to multinational companies. In particular, he questions the relevance of the claim that domestic companies are better known and have more information available to investors than foreign ones.
“That may be true of a purely domestic company somewhere in Iowa, operating solely in Iowa,” he told Penn Law Communications. “It’s hard to imagine that’s true of Apple. Multinational enterprises are, after all, multinational. Apple has stores throughout the world, and most of its sales are not in the U.S.”
For that reason, he argues, large multinationals like Apple are exceptions to the “home country bias” rule, and majority domestic ownership cannot be assumed. What’s more, he maintains, it’s impossible to answer empirically the question of who owns these companies.
While various government agencies, including the Treasury Department and the Securities and Exchange Commission, collect data on foreign holdings of U.S. stocks, Sanchirico demonstrates that the manner in which the information is gathered and reported makes it nearly impossible to answer the national ownership question. The complex reporting regimes, designed for other purposes, are simply too opaque to break out the relevant information for big multinational companies.
“The existing constellation of disclosures and reports about the ownership of US equity – though in some respects surprisingly detailed – reveals almost nothing about the foreign ownership share of large US multinationals,” he writes. “This is true not only of what is publicly disclosed, but also of what is confidentially collected.”
Compounding this problem, the companies themselves do not know their foreign ownership share, because not all shareholders are registered directly with the company. Sanchirico notes that when an investor purchases stock through a brokerage firm, the company most often has a record only of the name of the brokerage firm, not the actual shareholder: “They know some of the direct owners of Apple who register directly with Apple, but they don’t know the people who purchased shares through brokerage houses, and that’s most of Apple.”
All of this opacity has large implications for debates about international taxation, especially the use by large U.S. multinationals of provisions in the U.S. tax code that permit them to reduce their tax bills by shifting profitable aspects of their businesses to low-tax countries.
Reformers charge that the “loopholes” available to large technology-intensive multinationals are inefficient and unfair to other U.S. businesses that must pay full freight.
The multinationals and their defenders maintain that foreign-based companies often operate under tax rules that are more favorable than our own, damaging U.S. competitiveness.
“If the argument is that the competiveness of these companies should guide US international tax policy, it would seem to be a fair question who owns these companies,” Sanchirico argues. “If the proposal is to sacrifice precious revenue to help someone ‘win,’ it seems worth knowing who that someone is.”
Lately the dispute in Washington has focused on the merit of a second “tax holiday” that would permit multinationals to repatriate profits that have been shifted overseas, as they were allowed to do in 2005. Sanchirico notes that in 2005 a substantial portion of those earnings were distributed to stockholders, rather than used to hire American workers and suppliers. Consequently, he observes, the nationality of shareholders is critically important to the debate:
“Suppose that foreign shareholders are more likely than US shareholders to reinvest in foreign rather than US businesses, which are in turn more likely to engage foreign rather than US suppliers and workers. Then the positive impact of the holiday on US economic activity would be attenuated.… A foreign shareholder receiving a distribution from a large US multinational and sprinkling it over her full portfolio might well return less to the US economy than would a US investor.”
So what should be done?
Sanchirico suggests that we beef up our reporting regimes in a way that allows us to zoom in on large U.S. multinationals. Is that feasible? Sanchirico is cautiously optimistic: “We won’t know until we try,” he says, “and we haven’t really tried to date.”
“In the meantime,” Sanchirico continues, “we should probably change the way we think about how large U.S. multinationals are taxed. However valid home country bias may be in the general case, we need to account for the possibility that tax breaks conferred on this special subset of companies are tax breaks conferred to a substantial extent on foreign investors.”