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Burger King’s statement that its planned merger with the Canadian donut and coffee chain Tim Hortons is not about avoiding taxes might be one of the biggest whoppers we’ve heard about corporate inversions.
The merger will allow Burger King to claim for tax purposes that it is owned and controlled by a smaller Canada-based company. We’ve heard this song before — several times in the last three months (Medtronic, Mylan, Walgreen and Pfizer) and 13 so far this year. Corporate bosses and their lobbyists continue to claim that they are doing nothing wrong. Gaping loopholes in the law allow them to do this, and without action from Congress or the administration, there is no incentive for corporations to stop exploiting those loopholes.
Corporate inversions have made so many headlines lately that even people outside the tax world know how big businesses are using the practice to game the system: Buy a smaller foreign corporation, maintain the same executives, continue managing the firm from an office in the United States, maintain most of the same shareholders, but file a bit of paperwork and claim the company is based in a foreign county. In the case of Burger King, that country is Canada. The most likely motivation for this sleight of hand is tax avoidance.
Inversions are confusing partly because corporations pursue them for different reasons. For example, some corporations invert to avoid paying U.S. taxes on the profits they have already earned (or claimed to have earned) offshore. After inverting, corporations can get this offshore cash to their shareholders without paying the U.S. tax that would normally be due. This may not be relevant for Burger King, which has little offshore cash compared to other corporations.
But another reason corporations invert is to avoid paying U.S. taxes on profits earned in America in the future, and this is relevant for a company like Walgreen’s (which was considering inversion until recently) or Burger King. This can be accomplished through earnings stripping, a practice that effectively shifts profits earned in the United States to another country where they will be taxed less. So for Burger King, this means it could continue to earn profits off the burgers and fries its sells to Americans yet use accounting tricks to shift those profits to Canada so they will not be subject to U.S. taxes.
Looking past the technical details, the bottom line is this: It’s insulting that the company intends to continue profiting by selling a quintessentially American product to U.S. consumers but then pretend to be Canadian when the time comes to pay taxes.
Of course, the real insult is that a majority of our elected members of Congress have so far not closed the loopholes in our tax laws that allow this nonsense to continue. Several proposals, which have been described by Citizens for Tax Justice, would accomplish this.
Sadly, our lawmakers’ motto regarding big, powerful corporations seems to be “Have it their way.”