As their long-time slogan states, Burger King wants you to "have it your way." Well, Burger King also wants it their way, according to some critics of the American fast food company's move to relocate their headquarters to Canada in order to take advantage of lower corporate tax rates.
On August 24, Burger King confirmed that it is in talks to merge with Tim Hortons, the Canadian coffee and donut chain, and move their headquarters across the border (Yahoo Finance, 8/24/14). Such deals, referred to as "tax inversions," consist of American companies buying foreign firms in order to move their headquarters to a lower-taxed country.
Burger King is not the first company to consider this kind of deal; so far in 2014, nine tax inversion transactions have taken place, the most in any one year (Reuters, 8/25/14). But the Burger King merger is unique. Most past deals have involved companies buying much smaller foreign corporations. However, the iconic American chain and Tim Hortons are similarly sized; Burger King has a market capitalization of $9.6 billion while the Canadian company has $8.4 billion (Forbes, 8/24/14). Additionally, most companies that have struck deals are medical device companies like AbbVie or MedTronic, not an American household name seen on street corners all over the country (The New York Times, 8/24/14).
America has one of the highest corporate tax rates in the industrialized world at 35%, and when combined with state taxes, that number reaches 39% (Forbes, 8/25/14). If Burger King moves their headquarters to Canada, they'd benefit from the second-lowest tax rate in the G-7 at 15% (Forbes, 8/24/14). Ireland, which has a tax rate of 12.5%, has also become a common country for American companies to relocate to in tax inversion deals.
Businesses also consider tax inversions because it allows them to bypass paying taxes to the United States on their worldwide profits. Most nations employ a territorial tax system, which means that income is only taxed when it's earned domestically. However, America's tax structure is a mix of both a territorial and worldwide system, meaning all income is taxed, regardless of whether or not it was earned inside the country. For instance, if a U.S.-based company sold products or services abroad, they would pay the taxes of the foreign country as well as taxes from domestic sales.
Tax inversions have started a heated debate between proponents and critics. Supporters insist that tax inversions allow American companies to stay competitive and profitable in the American worldwide system and amid high corporate tax rates. Contrary to accusations, proponents claim there is nothing "unpatriotic" or "unethical" about cutting costs to run your business. Rather than shaming companies that are trying to increase profits, America should focus on revising the tax system and lowering the statutory corporate tax rate to help companies remain competitive.
Meanwhile, opponents blast the deals, saying they are motivated by unveiled greed that passes on costs to individuals and small businesses. While those businesses are technically based in a foreign country with more attractive corporate tax rates, they can still take advantage of the conditions that make America a positive environment to conduct business, such as the American educational system, R&D capabilities, innovative culture, and a skilled workforce. Critics also argue that tax inverted corporations put a greater burden on small businesses and individuals to maintain the country's infrastructure, national defense, and education, all of which corporations benefit from and depend on (The Washington Post, 7/27/14). Finally, while acknowledging that the nation does have one of the highest corporate taxes of industrialized countries, opponents claim that most companies avoid paying the full tax rate by applying tax credits, subsidies, loopholes, offshore tax havens, and a long list of other accounting tricks that reduce many multinationals' tax rate considerably, sometimes to as low as 10% (Citizens for Tax Justice, 5/19/14). President Obama himself called these companies "corporate deserters."
Meanwhile, the Joint Commission on Taxation estimates that the United States could lose about $19.5 billion in corporate taxes over a decade from tax inversions (The Wall Street Journal, 7/14/14). Time will tell whether this practice will help or hurt American business and the economy.
Readers, what do you think? Are tax inversions just good business tactics or a shady strategy for profit? Comment and let us know!