index

Recently we have seen numerous U.S. companies purchase foreign companies and reincorporate outside of the United States to avoid paying higher taxes. The most recent example is Burger King’s effort to buy Canada’s Tim Horton Donut chain and move its headquarters to Canada to pay the much lower tax rate.

It’s interesting to note that Burger King’s corporate inversion is being financed by billionaire investor Warren Buffet, ironically a strong supporter of President Obama’s economic policies.

Forbes magazine reported President Barack Obama has denounced inversion deals, calling for “economic patriotism” and saying that companies that do enter into such transactions are “corporate deserters.” It will be interesting to see how Obama reacts to Buffett’s involvement with the Burger King deal. The White House declined to comment on the deal on Monday before Buffett’s involvement became public.  Over the years, Buffett has been a vocal advocate for Obama, particularly backing Obama’s effort to increase taxes on the rich and close tax loopholes.

Many companies are doing these inversion deals as a way to pay lower taxes. The LA Times reported that the combined federal, state and local corporate tax rate in Canada is 26.3%, according to the Organization for Economic Cooperation and Development. The combined U.S. corporate rate is 39.1%.

On Monday, Yevgeniy Feyman writing in Forbes Magazine reported that inversion has two elements of the U.S. tax code.

First, the U.S. has the highest statutory corporate tax rate in the OECD, a combined rate of about 39 percent when taking into account federal and state taxes. Effective tax rates are harder to come by, but a report from the Tax Foundation found that the U.S. had the highest marginal effective corporate tax rate among developed country groups. It can be profitable then for U.S. firms to move offshore to reduce tax liabilities.

Feyman mentions the other segment of the U.S. tax code.   Most developed economies use what’s known as a “territorial” tax system. Under such an approach, income is only taxed when it’s earned domestically. So a U.K.-headquartered company will only pay U.K. taxes on its British income. The United States, however, employs a hybrid between a territorial and worldwide system. U.S. citizens and corporations are required to pay U.S. taxes on all income – even if that income is earned outside of the country. (The tax system provides credits for foreign taxes paid, which reduce or eliminate double taxation of income.) But foreign income is only taxed upon repatriation – when it is brought back to American shores. At this point the incentives should be fairly clear – companies have every reason to avoid bringing their earnings back to the U.S. if they were earned in a lower corporate tax rate country. So it’s not hard to see why firms hold somewhere around $2 trillion abroad in unremitted earnings, according to the Center for Budget and Policy Priorities.

Feyman co-authored a report with Diana Furchtgott-Roth at the Manhattan Institute titled; “The Merits of Territorial Tax System” mentioned it this way.

“If an American company operates in the United States and Switzerland, its domestic affiliate pays U.S. taxes at 35 percent. But its foreign affiliate pays U.S. taxes at 35 percent and Swiss taxes at 8.5 percent, putting it at a disadvantage vis-à-vis its foreign competitors. America allows companies to deduct the taxes paid to foreign governments from U.S. taxes owed to the Internal Revenue Service, but corporations always pay the full U.S. rate and are unable to take advantage of low-tax jurisdictions.”

President Obama has called out companies as being unpatriotic who engage in this economic inversion practice.

“The best way to level the playing field is through tax reform that lowers the corporate tax rate, closes wasteful loopholes, and simplifies the tax code for everybody. But stopping companies from renouncing their citizenship just to get out of paying their fair share of taxes is something that cannot wait. That’s why, in my budget earlier this year, I proposed closing this unpatriotic tax loophole for good.”

Forbes Magazine mentions the White House’s proposals for reform have focused on moving the country closer to a pure worldwide tax system, by limiting deferrals on taxation of foreign income. An even more short-sighted approach came from the Senate – the “Stop Corporation Inversions Act of 2014” would, for two years, increase the threshold allowing companies to move overseas. Currently, 20 percent of a company’s shareholders have to be foreign – the bill would increase that to 50 percent temporarily.

Back in February, House Ways and Means Committee Chair Republican Dave Camp, unveiled a tax reform proposal which was a step in the right direction, but it would not fully address this inversion practice.

Neither the president nor Republicans are interested in overhauling the chaotic U.S. tax code with something that would benefit the economy; they would just rather attack each other than solve the nation’s problems.

We deserve better than this!