Burger King, the iconic American fast food joint, may soon be taking its creepy crowned mascot and heading north of the border in a deal to reduce its corporate tax rates. Media reports over the weekend said the Miami-based Burger King is in merger talks with Ontario-based Tim Horton’s, a large Canadian chain of coffee-and-doughnut shops.
Should it go through, the deal would put a new face on so-called corporate inversions, in which an American company seeking a lower tax rate buys another company in a foreign country and “re-domiciles” there.
Until now, the majority of recently announced inversion deals have involved companies that are not exactly household names. The practice has been especially prevalent among pharmaceutical and medical device companies, such as Pennsylvania-based Mylan and Minneapolis-based Medtronic.
But the threat of losing Burger King, a $9.6 billion company founded in 1953, may bring the issue of tax inversions into sharper focus. It also puts additional pressure on the Obama administration to find a way to curtail the practice, which could cost the U.S. Treasury billions in lost tax revenue.
The president has come out forcefully against the practice, and has called on Congress to pass legislation that would make inversions less attractive to U.S. corporations. At this point, however, Congress has shown little inclination to act.
It is unclear, though, just how much the executive branch can do to combat tax inversions without the support of Congress.
In general, the point of a tax inversion is to save money. Currently the U.S. has one of the highest corporate tax rates in the world, at 35 percent. Canada recently lowered its rate to 15 percent. By moving its headquarters to Canada, Burger King would still pay U.S. taxes on earnings from its stores in the United States, but its earnings from non-U.S. holdings would be largely exempt from additional taxation.
Under the U.S. system, any earnings repatriated from overseas are subject to the difference between the 35 percent U.S. rate and whatever rate the corporation has already paid in the host country.
While the administration cannot unilaterally change the tax laws, Treasury Secretary Jack Lew has said publicly that his staff is assessing a range of options that would allow his department to make inversions more expensive, and therefore less attractive.
However, almost anything the administration undertakes on its own is likely to be little more than a temporary roadblock.
The real solution is an overhaul of the U.S. corporate tax system – something that seems unlikely in the near term, given the fractious nature of the U.S. Congress. Ironically, there is broad bipartisan agreement on the need for corporate tax reform.
Unfortunately, as one of the few things members of Congress agree on, it is widely expected to be held back as a sweetener for a larger deal to rewrite the entire tax code.
Top Reads from The Fiscal Times: