Fast-food chain Burger King is one of the most visible symbols of corporate America. The firm's new plans to shift its headquarters to Canada, however, have rekindled the heated debate about the US tax system.
"When companies cherry pick their taxes, it damages the country's finances, it adds to the deficit, it makes it harder to invest in the things that will keep America strong." US president Barack Obama seems angry. In a speech to the American public only a month ago, he attacked companies trying to escape taxes, calling the practice "unpatriotic." It was a verbal bludgeoning of American corporate morale and an attempt to increase solidarity to "rise and fall together, as one nation and one people." But it was no use.
Burger King has just added flames to the grill of the heated debate on corporate taxes in the US. The company confirmed on Tuesday its intentions to merge with Canadian coffee and doughnut chain Tim Hortons and move its headquarters to Canada. This structural move, for most experts at Wall Street, is trying to pull a tax trick, called inversion.
Daniel Shaviro is a tax law professor at New York University and knows the tricks. "If a US individual wants to cease to be a US citizen or resident, that's pretty hard, but for a company it's a lot easier," he explains. "You simply have to be acquired by a foreign company and become a subsidiary."
So for official purposes, it will not be the larger "mother" Burger King acquiring Tim Hortons, but vice versa. The companies switch roles, hence the calling inversion. "When two companies merge or one acquires the other, it is really only a matter of paperwork, which one is the acquirer," says Daniel Shaviro at New York University.
After the merger all the shareholders become shareholders of the combined company, "no matter which one they put on top," he explains. "The Burger King shareholders would still own the majority of what's going on."
Burger King is only the most recent example of large American corporations trying to dodge high US corporate tax rates. This year alone, the medical companies Pfizer, Abbvie and Medtronic and others such as Chiquita or Walgreens have joined the party and declared plans to move their headquarters abroad, mostly to European countries. Some have later pulled back, such as Walgreens, but most mergers are still pending.
Tax rates for businesses in the US are among the highest worldwide, the taxation law professor Shaviro admits, "but in addition, companies have a lot of abilities to put money in tax havens, where the tax rate is zero or very low." When US companies keep their money abroad, the taxes are being "deferred" – they don't become due as long as the money stays abroad. "That's a unique US rule at this point," Shaviro adds. The incentive to hold the profits as long as possible, or infinitive, outside the country is strong.
Even billionaire investor Warren Buffet, owner of Berkshire Hathaway Inc., has become involved in the Burger King tax inversion and wants to finance part of the deal. Buffet has previously been outspoken on business taxation, advocating an easier and a fairer tax code. However, he sees no reasons to pay more taxes than required. "I'm working for other people here," Buffet said in an interview about taxation on CNN this spring, "I'm not hired to make contributions to the government."
The recent wave of large corporations trying to escape US taxes is not the first. More than 10 years ago, US corporations for example the cosmetics company Helen of Troy, created affiliates in tax havens such as the Bermudas or Cayman Islands and used those affiliates as parent companies. "They were trying to do inversions that were pretty much complete shams," tax law professor Daniel Shaviro says. To crack down on these inversions, Congress passed an "anti-inversion statute" that eliminated their tax benefits.
Today's system requires an actual deal that makes economic sense beyond tax reasons, but the current wave of inversions causes outrage nonetheless and also makes Shaviro uncomfortable: "These deals have bad effects on the US," he says. "If the companies are finding that it benefits them to do things that are bad for the rest of us, then we should stop them." One solution he proposes: "When a company inverts, maybe that should automatically trigger the deferred tax on foreign earnings."
Washington has not commented on tax inversions since Burger King announced its move. However, Republican and Democrat representatives from Indiana and Nevada said on CNBC, they would work together on the issue of tax inversions across the aisle. The inversions were a "warning signal" that showed the necessity of reforming the corporate tax rate.