This is the second, and last, installment on the economic and political consequences of tax inversion, when a US based company can use its foreign holdings and move its headquarters offshore, and save on corporate taxes here.
Up till now, tax inversions have primarily been seen in the pharmaceutical companies, but now Monday’s news is that hamburger chain Burger King may acquire Canada’s doughnut and coffee business Tim Horton’s, and save on the US corporate tax rate which is 35 percent, versus the 15 percent that Canada offers, is putting increasing pressure on lawmakers to do something to prevent the loss of federal revenue, especially since last week US Treasury secretary Jacob Lew was tasked with finding ways to plug the money drain.
Unlike the United States, Canada has actively made efforts to reduce its corporate tax rate to attract, and retain business. And, The Los Angles Times reported that “like many countries, Canada has lowered its rate in recent years to be more business-friendly, and the rate was 22.1% in 2006, when the Canadian government began a gradual reduction that ended in 2012 with the lowest corporate rate of any of the so-called Group of Seven advanced Western economies.”
While the news has investors pleased with the potential of greater dividends, US politicians are beginning to cringe at the thought of the iconic burger company and its hefty flame-broiled burgers moving to Canada.
The menu of savings is attractive because as the Times noted, “Combined with local and state taxes, Canada's corporate tax rate is 26.3%, according to the Organization for Economic Cooperation and Development. The combined U.S. corporate rate is 39.1%.”
With an effective tax rate of 27.5 percent in its 2013 financial reports the math seems simple enough for the burger giant.
In a joint statement from Burger King, and Tim Horton’s, it was revealed that the new headquarters would definitely move to Canada, almost in the US backyard, an affront some lawmaker’s state. In fact, one Democratic congressman, on deep background, told us that “under no conditions, are we going to let this one pass, especially with the mid-term elections coming up.”
Moving down the grid, the numbers show that “Burger King has more than 13,000 locations in 98 countries. Tim Horton’s has 4,546 restaurants, with 3,630 in Canada. It has 866 U.S. locations.”
Illinois, already beset by pension problems and a moribund economy, faced another loss when “last month, Illinois drug maker AbbVie Inc. announced it agreed to buy European rival Shire and locate the new company on the British island of Jersey, a well-known tax haven that has a 0% standard corporate tax rate.”
Of course, the elephant in the room is the revision of the US tax code, which has not seen a redo since 1986, and now is showing signs of wear, and even misuse. While both Republicans and Democrats would like to see movement begin on this issue, the matter becomes testy when the later want reform now, and the former see it as an increasing risk for the nation’s business to become even more vulnerable.
President Obama who called such moves unpatriotic took pains to propose that foreign holdings shift to 50 percent foreign ownership instead of the current 20 percent for the label of foreign to avoid companies having to pay the higher US corporate tax rate.
But, “a House bill, sponsored by Rep. Sander M. Levin (D-Mich.), would generate an additional $19.5 billion in tax revenue over the next 10 years by making inversions more difficult, noted the Times.
As Crain’s Chicago Business reported during the Walgreen proposals, “The congressional Joint Committee on Taxation estimates the Treasury stands to lose $19.5 billion in potential revenue over the next decade if corporate America continues to decamp for cheaper digs. Undercutting the financial stability of the U.S. government undercuts the American economy—and that is bad for all of us . . . and the rest of us who will have to make up for taxes that deserters no longer pay.”
On the consumer level it might result in public demonstrations, against the burger colossus, as was done successfully with Walgreens, especially in Chicago.
The stock market itself demonstrated its confidence when “Burger King's stock jumped $5.29, or 19.5% to close at $32.40 on Monday. Tim Hortons' stock gained $11.88, or 18.9%, to close trading in New York at $74.72.,” said USA TODAY, on their website.
If the shockwaves in the fast-food industry continue, as they may well, after the Burger King deal, it may be worthwhile to take a look in the rearview mirror, back to April of this year, when Internal Revenue chief, Richard Rubin reported in Bloomberg News: “The last few weeks have presented a textbook for why tax reform is so important,” Senator Ron Wyden, an Oregon Democrat and chairman of the tax-writing Finance Committee, told reporters yesterday. “The fact that the headlines are being dominated by how you can game the American tax code with these overseas deals ought to be the wake-up to anybody.”
But, the Canadian company wins more than on a punt, because “the deal could allow Tim Horton’s to accelerate its growth in international markets. The company had 4,546 restaurants as of June 29, with 3,630 in Canada, 866 in the U.S. and 50 in the Persian Gulf area, also reported by USA TODAY.
Stateside, the gains are also high because the merger “would give Burger King access to popular coffee products that it could add to its 7,400-plus restaurants across North America, along with a doughnut and coffee chain brand that is growing in the United States in its own right, said the Chicago Tribune, on Monday.
The appeal for Burger King is to get some of Horton’s business, which ,”is well-known for its coffee, a high-margin business line in which U.S. fast-food giants have raced to grab market share,” said the Wall Street Journal in its online edition.
The coffee wars are on, and Burger King, wants to win the battle of the beans against its main competitor McDonald’s whose premium coffees have gained them significant profits.
But, while the dime has moved from pharmaceuticals to burgers, and now doughnuts and coffee, the real game change should be the US tax code, and the loopholes that are serving as the means to ensure that the tax burden is shifted squarely to the shoulders of the individual Americans.