Have it Your Way: Corporate Inversion
Unless you have been hiding under a large rock, you’ve probably heard the term “corporate inversion” bandied about recently. You’ll probably hear it even more, given today’s big news that Burger King is planning to merge into the the Canadian donut shop Tim Horton’s. Even more newsworthy – Berkshire Hathaway (of Warren Buffet renown) is said to be providing financing of 25% of the transaction.
What is a Corporate Inversion?
Simply put, a corporate inversion, aka a “tax inversion,” is the process of moving a US based company overseas with the goal of reducing the company’s tax burden. A quick rundown on Wikipedia notes some significant inversions:
- McDermott International to Panama, 1982
- Tyco International to Bermuda, 1997
- Fruit of the Loom to the Cayman Islands, 1998
- Ingersoll Rand to Bermuda, 2001
- Transocean to Switzerland, 2008
- Chiquita to Ireland, 2014 (pending)
- Applied Materials to the Netherlands, 2014 (pending)
- Abbvie to Ireland, 2014 (pending)
- Medtronic to Ireland, 2014 (pending)
- Walgreens to Switzerland, 2014 (cancelled, 8/5/2014)
- Mylan to the Netherlands, 2014 (pending)
- Burger King to Canada, 2014 (pending)
With the Burger King transaction, the US company is fleeing an estimated 40% tax rate for an estimated 26% tax rate in Canada. I’d posit that if most business owners had the ability to make a similar move we’d see a lot of “Sorry, gone to Canada” signs in windows.
From the Washington Post:
The Buffet Conundrum
The Berkshire Hathaway connection is interesting for sure. I mean Mr. Buffet has been quite vocal about his support of higher tax rates for the “rich.” In fact he wrote a NYT Op-Ed piece entitled “A Minimum Tax for the Wealthy.” Buffet states:
Our government’s goal should be to bring in revenues of 18.5 percent of G.D.P. and spend about 21 percent of G.D.P. — levels that have been attained over extended periods in the past and can clearly be reached again.”
While it’s a different sort of tax (individual vs. corporate) that he advocates, his premise is tied to balancing the federal budget and maintaining an ample tax base. It’s hard to reconcile his position on individual taxes while funding the exit of a large US corporate tax payer.
What Happens to the Tax Savings?
We typically play in the private market world. If you, as a business owner, were suddenly have a windfall of tax savings, where would those savings go? Easy, right? Either reinvest capital into the company, or distribute as dividends. But how does that work for Burger King? Will they turn those savings into dividends, which then enter the US tax base? Or will capital accumulate in the corporate kitty, out of reach of the US tax base? Hard to say.
Maybe one option would be to revisit the tax code structure rather than inducing corporate citizens to depart.