Burger King’s plan to scurry across the Canadian border to avoid U.S. taxes could be seen as the corporate equivalent of flipping President Barack Obama the bird.
The White House vowed earlier this month to use an executive order to curb tax inversions -- deals in which U.S. companies buy smaller foreign firms in countries with lower taxes, then renounce their U.S. corporate citizenship and re-incorporate in that country.
Still, Burger King said late Sunday night that it was in talks to merge with Tim Hortons, Canada’s popular bakery and coffee chain. The new, combined company would be headquartered in Canada.
In a research note, Potomac Research Group political strategist Greg Valliere said Burger King’s move challenges regulators at the White House and Treasury to back up threats to crack down on inversions.
“So much for the theory that Treasury could chill future inversion deals by hinting of possible action,” Valliere wrote in the note. “We still don’t expect regulations to be finalized until early next year, after a deliberative comment period, but we think there’s a good chance that Treasury will get a phone call today from the White House, urging quicker action.”
The White House did not immediately respond to a request for comment. A Treasury spokesperson and Radina Russell, a Burger King spokeswoman, both declined to comment.
Though the timing of the deal suggests a disregard for the Obama administration’s ability limit tax inversions, some say the company could be heading north before political pressure to close the tax loophole gives way to tangible legal changes.
“My sense is this is Burger King trying to dodge paying its taxes. I don’t know that I’d attribute it to their making a move like this to directly challenge Obama,” Frank Clemente, executive director of the nonprofit Americans for Tax Fairness, told The Huffington Post. “I can’t say what’s on the company’s mind here, whether they’re trying to beat the clock on this and do something before Congress passes legislation or do something before Obama signs an executive order.”
The past few years have seen American companies practically stampede to the border in an effort take advantage of lower rates elsewhere. The top U.S. corporate rate is 35 percent. In Ireland, for example, it is just 12.5 percent.
At least 21 U.S. companies have announced plans to invert since the start of 2012, according to a tally kept Bloomberg News. Among the brands planning to pull up stakes are Chiquita, the banana giant, and Mylan, which makes generic drugs.
One company, the drugstore giant Walgreen, considered and then abandoned a planned inversion earlier this month as part of its takeover of the Swiss company Alliance Boots, after it faced significant public backlash.
The chief executive of Mylan recently told a New York Times columnist that she had no choice but to invert as part of a buyout of a company in the Netherlands. But this argument isn't especially convincing. That's because the U.S. tax code is so riddled with loopholes that very few companies pay anything near 35 percent. Companies like General Electric, Google and Apple have whiz-bang tax departments that have mastered the art of tax avoidance, often by routing income through low- or no-tax jurisdictions, like Bermuda.
In 2010, profitable U.S. corporations paid an effective rate of less than 13 percent, according to the Government Accountability Office, a nonpartisan arm of Congress.
But in the world of tax avoidance, as in life, there are haves and have-nots. Tech and drug companies have all sorts of ways to shift earnings abroad and make tax bills lower. Companies that sell a lot of physical things in the U.S. -- such as hamburgers -- typically pay a much higher rate, because it is harder to disguise those sales as foreign income. Inversions won't solve this tax problem altogether, but they do give businesses a basket of new tax avoidance options.
The Walgreen inversion, for example, could have allowed the company to slash its tax rate by as much as 15 percent, equating to savings of billions of dollars. Burger King's projected tax savings, according to initial news reports, would be smaller, though it is too early to say for sure how much.
In 2013 the company deposited $88 million in government coffers, at an effective tax rate of about 27 percent, according to filings. (That's lower than the top rate because the company doesn't pay domestic taxes on burgers sold abroad. Burger King is huge in Germany, as it turns out).
But even if Burger King's tax savings add up to no more than a few million dollars a year, by corporate standards, it is easy money. Completing an inversion is primarily a function of filing the right paperwork. Company executives can stay put at headquarters in Miami. They can become Canadian without even buying a winter coat.