As you might have heard, Burger King just merged with our beloved (for people living in Canada at least) Tim Hortons. I’m not an accountant, nor a tax specialist, so take this as it is: A far away armchair opinion of the events. Naturally, feel free to correct any wrong statement. That being said …
The reason Burger King merged with Tim Hortons is to apply an inversion. Long history short, by doing this, Burger King will change its headquarters to Canada. What do they gain by doing this? Lowering their corporate taxes. Of course, now the new company becomes Canadian, it won’t be no longer American. Naturally many US citizens have called the move
unpatriotic, understandably so.
What’s causing all this?
Well, is no secret, the US tax code is becoming obsolete, specially compared with other OECD economies. You see, once in the history of humanity (just up until about 30 years ago), countries did everything. What I mean is, an advanced country was a self reliant one. Everything was tried to built within the country, all supplies, food, manufacturing, services, etc. Exporting was a byproduct of the national production, not a priority. As such, for the US case, there’s a
characteristic on their tax code that determines all this, it says:
Citizens and residents are taxed on worldwide income and allowed a credit for foreign taxes
Keyword here “worldwide”. Before, that word didn’t meant much, with globalization, it starts to weight in. With globalization being in full force today, US corporations took advantage of their large scale and were the firsts to capitalize on this *new* way of doing business. Today, many of the Fortune 500 companies, based in the US, have the majority of their revenue coming from outside of the US. As a consequence, today these corporations find themselves with the burden of paying taxes from a geography that it doesn’t apply. They’re being taxed for their profits in Germany (for example), also paying local taxes in Germany (when it applies). Where as, other countries tax code, allows the separation of taxing operation according to geography. Of course, the US corporate profit gained outside the US it’s not taxed until its brought into the USA. So you have monstrosities like Apple having 206$ billion (with a b) in reserves outside the US, because if they dare to repatriate, it will be taxed in a very high rate (~35%), one of the highest corporate tax rates (if not the highest) of the OECD countries. On the other hand you also have corporations having to do Dutch sandwich, double Irish and weird stuff to lower their taxes.
Now, I’m not saying this is right or wrong, I’m just saying this is happening.
With the inversion, now the new formed company, since it’s based in Canada, will pay worldwide taxes accordingly. Meaning, that the tax payed in the US will only be the tax that country generated, there will be no relation with the worldwide profits generated elsewhere from the company.
For Burger King, 60% of their operations comes from outside the US, even at the current tax rate of 27% they’re paying locally in the US, is still 27% of worldwide, not US only. What can Burger King possibly do?
A) Lobby for changing the tax code. Doing such thing might involve a public backlash for bending the law towards corporate benefits. Besides, such a change is pretty difficult to do.
B) Do nothing and wait for things to change, yeah right!
C) Move their operations elsewhere and deal with the backlash. Even if the US people decides to boycott their operation and indeed domestic sales go down, is quite possible the offset of having access to those parked profits overseas, levels the loss.
D) Do a bunch a complicated accounting stuff to lower your tax rate, and join the group of America’s questioned corporations.
They chose to execute option C, among many other possibilities ignored by us.
The thing is, until the US doesn’t change their tax code (not an easy feat), inversion, Dutch sandwich, Double Irish, etc. is going to continue, one way or another. In a globalized economy, the current method the US is applying taxes on their corporations makes little sense.