Treasury Department Blocks Corporate Inversions

When it was announced in August that fast food giant Burger King had purchased Tim Horton’s, a Canadian coffee and doughnut chain, for $8.4 billion and was moving its headquarters from the U.S. to Canada, it surprised some, but shocked no one. What it did do was irritate lots of people in Congress. Some called the plan of America’s second-largest fast food chain to move out of the country unpatriotic, but beneath all the bluster, the outrage was all about lost tax revenue.

The idea of a national corporation moving its main offices out of the country isn’t new, and it’s happened quite often in the past. Now, however, it’s Burger King’s size and notoriety that is drawing attention to what’s known as tax inversion. Simply put, when a company acquires another business located in a foreign country, it can move its headquarters to that location. Because the new entity is now a corporate “resident” of the other nation, it can avoid huge amounts of corporate tax. Just to give you an idea, the American corporate tax rate tops out at 39.6 percent (federal and state). When an American company merges with a Canadian target company, it can avoid U.S. residency tax as long as shareholders of the target company end up owning 20 percent of the shares in the new entity immediately after the merger. Once it’s stationed in Ontario, Burger King can enjoy a tax rate of 26.5 percent (15 percent federal tax and 11.5 percent Ontario provincial corporate tax). This is significantly lower, even when compared to just the American federal corporate tax rate of 35 percent. This windfall of savings comes as part of Canadian Prime Minister Stephen Harper’s plan to reduce the federal tax rate from 28 percent to 15 percent since he took office in 2006.

Now, the U.S. Treasury Department has revised five sections of the tax code to make it more difficult for companies to perform tax inversion deals. Many argue that reforms should instead be focused on making revisions to tax laws that currently make it difficult for corporations to do business in the U.S. and provide jobs for Americans, not simply making inversions more difficult and keeping them trapped here. According to Forbes.com, some of the Treasury Department’s changes include:

• Banning “hopscotch” loans—loans where companies avoid U.S. taxes on repatriated foreign earnings by making loans to a new foreign parent company created as part of an inversion deal.
• Closing a loophole that allows for a tax-free transfer of cash or property from a foreign subsidiary to a new foreign parent and stopping companies from restructuring foreign units to access deferred earnings without paying taxes.
• Eliminating the option for U.S. companies to invert only if the shareholder ownership of the foreign “acquirer” is above 20 percent. Companies will no longer be able to “skinny down” by issuing large dividends before completing a deal.

While the Obama administration is still incensed over the flight of Burger King, most people don’t know that one of President Obama’s close friends, Warren Buffet, had a hand in the venture. For the full story, visit Forbes.com and for an interesting personal analysis, check out analyst Allen West’s take on the situation.