The New Tax Dodge
Reem Chamseddine, Dartmouth Business Journal
In today’s global economy, every million counts. American corporations spend, or “lose”, hundreds of millions of dollars due to taxation– in the United States, 35 percent of corporate income is taxed. The quick fix for U.S. companies seems to be tax inversions. A tax inversion involves a U.S. company buying a foreign company and using its newly acquired tax nationality to reduce tax costs globally. While such a procedure is legal, it has been deemed as unpatriotic by many in the American political sphere.
Burger King may be one of the most famous American companies to seek corporate tax haven. Fast food chain Burger King is in the process of completing its buyout of Canadian coffee chain, Tim Hortons. Burger King’s headquarters would be relocated from Florida to Canada and the company would pay far less taxes to Uncle Sam.
According to a critical report by the non-profit “Americans for Tax Fairness”, Burger King’s estimated savings are $117 million from the merger. Both Burger King and Tim Hortons will continue their operations separately; both will continue to use their respective brand names and serve the same products. The inversion changes the nationality of Burger King for tax purposes, and nothing else. The merged company would also have a shared official name, but that is a mere symbolic change.
Tax inversion only works for companies that have significant revenues overseas. There are three main caveats to tax inversion as a quick fix. First, the United States has a policy of taxing foreign income, not just stateside profit. This is referred to as a “worldwide” system of taxation according to The Economist, and is a unique taxation system among the developed economies of the world. This worldwide tax essentially makes it so that U.S.-based companies pay 35 percent tax on money made anywhere in the world. Therefore, whatever Burger King makes from restaurants in Mexico, France, Lebanon or Bermuda would be under the same 35 percent tax rate. However, once Burger King finalizes the tax inversion process, it will be subject to the 35 percent rate for profit made within the US, 15 percent for the profit made in Canada, 0 percent for profit from Bermuda, and so on for any other country. For companies that make significant profit domestically, the tax inversion might not save much money.
Secondly, the Treasury Department has plans to make inversions less attractive going forward. Treasury Secretary, Jacob Lew, has added regulations to ensure that inversions are more difficult to accomplish. One example is preventing inverted companies from transferring cash or property from a controlled foreign corporation (CFC) to the new parent directly, in order to completely avoid U.S. tax. Another example is reinforcing the 80 percent rule, which requires that a U.S. company be worth less than 80 percent of the new company that will be merged abroad. The merger must happen between the U.S. company and a foreign company that owns at least 20 percent of the new total value. While the rule was in effect before the new regulations are set, companies with a different distribution of shares were usually able to change the proportions to meet the rule. This will become more difficult now. Of course, many on Capitol Hill have argued that the onerous tax code, and not the lack of regulations, is the source of the inversion phenomenon. While lawmakers are divided on how to improve the tax code, most have proposed to cut the highest corporate rate. Republicans have proposed changing the worldwide tax to a stateside tax, also known as territorial tax, which would mean that corporates have to pay the U.S. rate of 35 percent for domestic profit only.
Thirdly, and perhaps most importantly, is the public perception of tax inversion. Are U.S. companies unpatriotic for reducing some of the millions in taxes that go into the treasury? For some, the answer is clear. In 2014, Walgreens had plans to merge with a Swiss company; which would have saved Walgreens an estimated $783 million per year. However, this move was called off because of the controversy and backlash it created. Still, companies need to compete in the global market, and U.S. companies are at a disadvantage relative to overseas companies with significantly lower tax rates. But some companies may decide that the negative publicity that comes with the tax inversion may be more costly than the potential tax savings.