Would you like a tax loophole with that? It may make perfect business sense for Burger King to place an order to buy Tim Hortons, the Canadian coffee-and-doughnut chain, for $11 billion. But by moving the combined corporate headquarters north, Burger King can also lower its U.S. tax bill.
This latest "tax inversion" deal should break the logjam on corporate tax reform.
Burger King says that the two chains will continue to operate independently and that it will keep offices in Miami. Florida is considered a low-tax state because it charges no state income taxes. So why put Burger King's headquarters in Canada?
The U.S. corporate tax rate is 35%, while the Canadian rate is 15%. Foreign-based companies do not have to pay U.S. taxes on their earnings outside our borders until they bring that money back here, and can do some slick accounting to further reduce payments to the federal treasury.
Consequently, a growing number of U.S. companies are reincorporating abroad by merging or purchasing a foreign firm, including two major pharmaceutical companies last month. And it's all entirely legal.
President Barack Obama made headlines by calling these companies "corporate deserters." In a speech in Los Angeles last month, he accused them of "renouncing their U.S. citizenship" and sticking taxpayers with "the tab."
"You shouldn't get to call yourself an American company only when you want a handout from the American taxpayer," the president declared. Those are fighting words. Now Obama must back them up.
He is supporting a proposal by some congressional Democrats to redefine a foreign company under tax law as one with at least 50% foreign ownership, rather than the current 20%. If Congress won't act — and there's little hope given the partisan gridlock in an election year — the president is right to act on his own. The administration is studying ways to wipe out the tax benefits of moving overseas.
That would be helpful, but what's really needed is a more comprehensive overhaul of federal corporate taxes. Taxpayers have every right to be upset that companies are gaming the system. Obama needs to use that populist anger and move toward a tax system that helps hardworking families – and doesn't reward corporations for sending their money and headquarters overseas.