The Truth about Corporate Inversion

Corporate inversion as strategy is used by companies who receive a significant portion of their income from foreign sources, since income is taxed both abroad and in the country of incorporation. Companies undertaking this strategy are likely to select a country that has lower tax rates and less stringent corporate governance requirements.

One example is the current deal to merge Burger King with Canadian-based Tim Horton’s Cafe and Bake Shop. Horton’s is a Canadian multinational fast food franchise known primarily for its coffee and doughnuts. Founded by Canadian hockey player Tim Horton, it is also Canada’s largest fast food service. At the end of 2013, it had 4,592 restaurants in Canada and another 1,000+ restaurants in the US and Persian Gulf.

On August 26, 2014, Burger King agreed to purchase Tim Horton’s for US $12.5 billion. Burger King’s stock jumped 21 percent the next day on the news the company is in talks to merge. Most people fail to see the irony in Burger King fleeing to Canada. Canada is where American Tories fled because they supported the tax on tea.

But, can companies simply change their address to reduce their taxes? Originally, this happened only through a merger or acquisition. In this maneuver, which breaks no laws, a US company buys a foreign competitor in a lower-tax nation and shifts its headquarters to that country. The Obama administration and some congressional Democrats have been pushing to limit tax inversions.

American companies have moved to foreign countries since 1982, 11 of them since 2012. The move can cut a tax bill substantially. The recent acquisition of Ireland-based Covidient by medical manufacturer Medtronic, projects an estimated savings of $850 million by the end of 2018.

inversion doesn’t mean the company will no longer pay taxes in the US, it just means that they will pay US tax only on what they do in the US. Companies cannot simply pick up and go somewhere. There are various rules and procedures, and some powerful people want it changed. President Obama has referred to these companies as “corporate deserters”.

At least 20 percent of the new company must be owned by the foreign shareholders, but a growing number of lawmakers want to raise the requirement to 50 percent. The U.S. corporate tax rate is 35 percent, even though many corporations pay much less. In Canada, it’s 26.5 percent. In Ireland, the effective corporate tax rate is 12 and a half percent.

The Burger King merger is further complicated by the fact that Warren Buffet’s Berkshire Hathaway company would receive preferred shares in the new organization in return for its $3-billion investment in the acquisition.

Buffet, who has backed an Obama administration plan named after him to force millionaires to pay the same share of their income in taxes as middle-class families, also came under fire.

But unless Congress changes the law, corporations can continue to simply change their nationality and lower their taxes.

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By |2014-08-26T20:07:31+00:00August 26th, 2014|Blog|0 Comments

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