I love a good burger, and happen to know a couple good places in Toronto that can really deliver the goods. Having said that, Burger King isn't on my list. Not that Burger King doesn't make a good burger… as fast food restaurants go.
But Burger King is in Toronto. Well, they're just about everywhere, aren't they? But they're headquartered in Toronto, in the Toronto suburb Oakville, at least legally. In truth, almost all Burger King's executives are still based in the state where the company started, in Florida.
However, as everyone knows because it made news headlines, Burger King merged with Toronto-based Tim Hortons (the doughnut chain) in 2014 so as to be able to legally claim Canada as the combined company's headquarters—and thereby pay (lower) Canadian corporate taxes.
Outraged American politicians howled, and the concept of tax inversion entered the public vocabulary as yet another example of corporate greed. Since then many stories have surfaced of American companies acquiring smaller foreign companies to be able to claim their acquisition targets' home country as the new corporate domicile—and pay local taxes instead of US taxes. Ireland, Luxembourg and the Caymans have carefully crafted their tax laws to attract just such entities.
Now, pulling off a tax inversion is a complicated and tricky business. In the business world, that means consultants. Tax advisory is a big growth area for risk, assurance and auditing firms. In the case of a tax inversion, it isn't just the usual due diligence footwork and messy post-merger integration associated with mergers, but the fundamental tax strategy foundation that must be laid out first, with all the new operational tax, regulatory and business impact implications studied and addressed.
Many US politicians have condemned tax inversion as an offshoring of American jobs and American investments to foreigners— but they're wrong. The (functional) head-quarters and any associated investments usually stay put here in the US; it's just the legal domicile that goes abroad.
My problem with tax inversion is that it is a misapplication of tax advisory services. Consultants are supposed to help their corporate clients be more efficient and develop strategies (tax and otherwise) that support the company's growth goals. Now don't get me wrong: the tax advisors and other consultants involved with tax inversion strategies are just doing their jobs. The problem is that these consultants are being paid to fix a symptom of a larger issue, rather than a real business problem.
At the heart of the issue making tax inversions attractive is the US tax code, which not only hits US-domiciled companies with the highest tax rate in the world but as well, is comprehensive—it taxes their overseas profits as well as domestic. FATCA is exhibit A in how far the US government is willing to go to chase those tax dollars. Politicians from both major US parties have targeted the practice with new regulations, but for many U.S. companies it is still a profitable (and legal) option. Investments are not lost, but tax revenues to the Federal government are.
The consultants are just helping their clients deal with a bad situation, one brought about by the current tax and regulatory environment in the US. Indeed, bad situations are good for consultants. So far politicians—including some currently running for president—have tried to stop tax inversion by fiat but they are avoiding the real problem. Fix the tax code, and tax inversion will likely go away. Not that there's anything wrong with a good Canadian burger.
Tomek Jankowski is a Senior Analyst, Lead for Financial Consulting Research.
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