Where The Taxes Are Less Of A Whopper

by Dish Staff

Inversions

Burger King wants to become Canadian:

Under the deal, America’s least-favorite burger makers would form a new company with Tim Hortons based in Canada. The two could reach a deal soon as this week.  Like a lot of American corporations, Burger King is considering casting off its U.S. citizenship because it’s really easy. Under current U.S. law, a company just has to buy 20 percent of a foreign corporation to transfer its base, through a process called a corporate inversion. Once the headquarters have moved, U.S. profits are subject to the 35 percent U.S. tax, but profits abroad are only subject to the lower rate. Canada lowered its corporate tax rate to 15 percent in 2012. And though that rate climbs to about 26 percent when you factor in provincial corporate taxes, that’s still lower than America’s 35 percent tax.

Vinik adds, “If it sounds ridiculous that an American company can purchase a foreign firm and suddenly avoid the U.S. corporate tax system, that’s because it is”:

It doesn’t matter that the vast majority of the shareholders are still American. Or that the management and control of the company remains in the U.S. Or that in making the deal, nothing about the company actually changes. You would still be able to grab a Whopper for lunch. Its thousands of American workers will all still have their jobs. But Burger King will have opted out of the U.S. corporate tax system.

But Matt Levine argues that “this merger, if it happens, is a real merger with real business and capital markets purposes”:

The merger is not mainly about taxes; in fact, Tim Hortons and Burger King’s effective tax rates are basically the same.

Tim Hortons, I am given to understand, sells a lot of coffee and donuts, most of them in Canada. (Out of 4,485 stores at the end of 2013, 3,588 were in Canada.) I don’t know, you could probably sell the coffee in the burger stores, or the burgers in the coffee stores, or good lord you could put a burger on a donut, that will probably win you cool points with millennials; millennials love things that are part donut and part thing that is not a donut. So there are business reasons for the deal. But if Burger King acquired Tim Hortons, the tax rate on all those Tim Hortons stores would go up: Instead of the regular 15 percent Canadian rate that they’re currently paying, they’d have to pay 35 percent combined to U.S. and Canadian authorities. From a Canadian company’s perspective, that hardly seems fair. Thus the inversion.

One more thing: This inversion is not all that inverted. Tim Hortons is actually bigger than Burger King, on revenue and net income though not on stock market capitalization. This is not just an aesthetic point.

But Daniel Gross suspects taxes are part of the rationale:

Sure, there may be valid business reasons for a combination. Tim Horton’s has a huge breakfast business, which Burger King lacks. But it’s easy to suspect that tax avoidance is a driving factor. (Burger King isn’t pursuing a U.S. doughnut chain like Dunkin’ Donuts.) That hedge fund sharpie William Ackman, who is backing Canada-based Valeant’s effort to acquire Allergan—another potential giant inversion—is one of Burger King’s biggest shareholders doesn’t help matters.

Yevgeniy Feyman uses the news to argue for tax reform:

Long-term tax reform should focus as much as possible on not just lowering, but replacing the corporate income tax (and perhaps the individual income tax as well) – with a progressive consumption tax. Short-run “fixes” that predicated on economic nationalism are likely to do more harm than good, and ultimately fail to actually address the problems with our tax system.

Mankiw made a similar argument over the weekend:

Let’s repeal the corporate income tax entirely, and scale back the personal income tax as well. We can replace them with a broad-based tax on consumption. The consumption tax could take the form of a value-added tax, which in other countries has proved to be a remarkably efficient way to raise government revenue.

But Jared Bernstein highlights the downside of eliminating the corporate income tax:

Those who would get rid of the corporate tax basically argue that the smart move is to go with this flow: As long as so many more businesses are setting themselves up to avoid the corporate tax, don’t fight ′em, join ′em. The problem is that to do so risks turning the corporate structure itself into a big tax shelter: If income generated and retained by incorporated businesses should become tax-free, then guess what type of income everybody will suddenly start making? Taxes delayed are taxes saved, and with no corporate tax, anyone who could do so would structure their earnings and investments to be “corporate earnings,” untaxed until they’re distributed.

Finally, Roberto A. Ferdman, who posts the above chart, points out that corporate inversion is something of a trend:

Burger King would hardly be the first large American corporation to move its headquarters—more than 70 U.S. companies have reincorporated overseas since the early 1980s. The practice has been especially popular lately—more than half of those inversions have come since 2003, or almost double the amount that did in the twenty years prior, according to data from Congressional Research Service (CRS).