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Thursday, August 28, 2014

It’s our own fault: BK moving north

Telegraph Editorial

Burger King executives stress that the fast-food chain’s deal to merge with Tim Hortons, Canada’s version of Dunkin’ Donuts, isn’t motivated by a desire to lower its tax bills. In fact, Burger King CEO Daniel Schwartz said, the company does not anticipate achieving any “meaningful tax savings.”

We guess that depends on one’s definition of “meaningful.” While lowering its tax burden wasn’t the principal motivation for Burger King’s strategic restructuring, it certainly wasn’t left out of the discussion. Only a fool would suggest that once the deal is done, Burger King won’t squeeze out every penny of tax avoidance possible. ...

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Burger King executives stress that the fast-food chain’s deal to merge with Tim Hortons, Canada’s version of Dunkin’ Donuts, isn’t motivated by a desire to lower its tax bills. In fact, Burger King CEO Daniel Schwartz said, the company does not anticipate achieving any “meaningful tax savings.”

We guess that depends on one’s definition of “meaningful.” While lowering its tax burden wasn’t the principal motivation for Burger King’s strategic restructuring, it certainly wasn’t left out of the discussion. Only a fool would suggest that once the deal is done, Burger King won’t squeeze out every penny of tax avoidance possible.

And that’s exactly why the merger announcement has once again inflamed the political discussion over “tax inversion” – the practice of U.S. companies lowering their domestic tax obligations by combining with foreign firms and then basing the new company in the foreign country for tax purposes.

Although the new company still must pay U.S. corporate tax on domestic profits, the foreign operations can lend money to the U.S. portion, which can then deduct the interest charges against its U.S. tax obligations. Also, because the new company is technically foreign-owned – even though the bulk of its operations and management works in the U.S. – all foreign profits are shielded from the U.S. taxes. If the company were domestically based, that would not be true.

With 14,000 restaurants around the world – compared to more than 35,000 for McDonald’s – Burger King has struggled in recent years to stand out in a crowded fast-food marketplace. It has also foundered to gain a foothold in the hottest market segment – breakfast.

By merging with Canada’s breakfast giant Tim Hortons, Burger King is poised to expand each brand into untapped markets. That’s a sound business decision, regardless of the tax consequences.

Still, however defensible, the merger should serve as motivation for Congress to address some very serious problems with the nation’s corporate tax code, not the least of which is that, at 35 percent, the United States has the highest corporate tax rate in the industrialized world. Throw in state and local taxes, and the rate hits 40 percent.

Is it any wonder, then, that the code is riddled with credits, deductions, exemptions and a host of other loopholes employed by businesses to lower their obligations? How can you blame companies for shielding profits in foreign countries that have lower, fairer tax laws? Too many politicians are too quick to point the blame at corporations, but they are only acting in self-defense – much as any individual would do.

In the past 10 years, more than 50 U.S. companies have “inverted.” In the past three years, five Fortune 500 companies have sought foreign domicile at a cost of nearly $40 billion in annual taxable revenue.

To stem the tide, Congress has blown a lot of smoke, but accomplished little except to make it marginally more difficult for companies to merge with foreign firms. Invoking more restrictions only attacks the symptom. The cause remains untreated.

What’s needed is true corporate tax reform that lowers rates and encourages domestic investment. For example, most nations only tax domestic profits. The United States, however, taxes domestic and foreign profits – but foreign profits aren’t taxed until they are returned to the U.S. That’s why American companies are sitting on an estimated $2 trillion in foreign profits they aren’t returning here, where they could be put to better use.

The time has come to stop painting corporations as greedy tax cheats and realize that facilitating a healthy business climate with a fair code benefits not only businesses, but creates a foundation for greater prosperity.