Et tu, Burger King? Yet another inversion, but this time, one with a big lesson.

August 25, 2014
Jared Bernstein, a former chief economist to Vice President Biden, is a senior fellow at the Center on Budget and Policy Priorities and author of the new book 'The Reconnection Agenda: Reuniting Growth and Prosperity.'

The King is considering a tax move to Canada. (Claude Paris/AP)

Well, I guess we, of all people, should know you can’t trust an American institution that labels itself “King.”

I’m referring, of course, to the breaking news this morning that yet another American corporation — Burger King — is contemplating a tax inversion, a move whereby the company reincorporates in another country to lower its tax bill.

Enough already with the inversions, which look to me to be the loopiest of loopholes, and which seem to be coming fast and furious these days.

The budget chain is considering buying the Canadian donut-and-coffee chain Tim Hortons and then becoming Canadian, where the statutory corporate tax rate is 15 percent compared to our 35 percent. Of course, most American companies, including Burger King, don’t pay the top rate here — they currently pay about 27 percent, according to reports out this morning. Still, that’s a “whopper” of a differential.

So does this mean it’s goodbye to all the Burger Kings that dot the greasy landscape of American fast food? Not at all. These tax inversions are just a mailbox move, which is why they provide such a clear example of the sort of loopholes that plague our corporate code.

The stores will remain where they are and the U.S. profits of the new Canadian firm will still be taxed here (at least for the most part; there are some clever games inverted firms play to get around that, too). So why do it?

For many multinationals, such inversions are a means to an end. By inverting, they open up at least two other ways of cutting their tax bill. One, they can more easily engage in the standard tax avoidance move of international corporations: book your profits where taxes are lowest; book your deductible expenses where taxes are highest. That way you minimize your liability on earnings, and maximize the amount you can deduct from taxes owed.

Second, they can “hopscotch” (don’t you love when these guys come up with cute names for this stuff?). That’s a way that inverted companies can bring cash they’ve been holding abroad back to the U.S. without paying any tax on it (see here for a good description of the machinations involved).

Interestingly, Burger King, while it certainly qualifies as a multinational firm, with stores in almost 100 countries, does not hold a lot of cash abroad, so it may not be that interested in playing hopscotch.

And to be clear, I don’t blame them for considering this move. They’re responding to clear incentives in our tax code — ones that our benighted Congress have been unwilling to do anything about — and, most interestingly in this case, a wrinkle in Canadian law that has a lot to teach us, if we are willing to learn.

According to reports, Burger King’s real motivation is to merge with Tim Hortons for strategic growth reasons, and the only way Canadian authorities will allow the acquisition is if the newly combined firm is Canadian.

From the New York Times:

One potential reason for the move may be to placate Canadian authorities. Deals in the country are governed by the Investment Canada Act, which allows the national government to block a merger if it is deemed to not be in the best interests of the country … Given Tim Hortons’ status as one of the country’s iconic restaurants, a merger structure would allow it to remain Canadian.

What’s striking here — though it shouldn’t be surprising at all — is that the Canadian government has no compunction about making and enforcing rules they deem to be in the nation’s — not necessarily the nation’s firms or their shareholders — best interest.

If we tried that here, and we should, you can imagine the squawking.

In fact, the Obama administration, to its credit, is thinking along those very lines. And good for them. Sometimes what’s good for business is good for America, but in a world of global commerce, that’s not nearly as obvious as it used to be. Other countries get that, and we should too, the sooner the better.

Burger King is in talks to buy Tim Hortons and move headquarters to Canada, which would allow the fast food chain to cut its tax bill. (Reuters)

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Carrington Tarr · August 25, 2014