Monday, August 25, 2014

Burger King Inversion - Dealbook Misses the Mark

In addition to that disappointing op-ed from Greg Mankiw, The New York Times missed the facts on the Burger King merger with Tim Horton:
Though the two companies are expected to argue that a merger would bring a host of strategic benefits, it would nevertheless count as a so-called corporate inversion. Many American companies have looked toward taking over foreign companies, and then moving their headquarters abroad, to lower their overall tax bill … The American corporate tax rate is about 35 percent, while Canada’s is about 15 percent. But people briefed on the deal negotiations said that the main driver in the talks was not taxes. Burger King already pays a tax rate of roughly 27 percent, and would shave off only a couple of percentage points by moving to Canada, according to the people briefed on the matter. And Burger King does not have a significant amount of cash held abroad, these people said. Companies often pursue inversions to gain access to their overseas cash without being hit by a big American tax bill.
Canada’s corporate tax rate is 26.5% not 15%. But if one takes a look at Burger King’s 10-K, you’ll see that foreign taxes relative to foreign sourced income is around 15%. You’ll also see that about 80% of its income is sourced abroad even though half of its stores are in the U.S. This screams out transfer pricing abuse, which of course Greg Mankiw ignored in his op-ed. Burger King has reported an effective tax rate near 27% precisely because they have been paying the repatriation tax, which is likely why they don’t have a lot of cash abroad. But without the repatriation tax, their effective tax rate would have been less than 20%. So when the NY Times says this “would shave off only a couple of percentage points”, they are incredibly wrong.


Ernie said...

Not following your argument. Are you agreeing with the bottom line characterization of the Dealbook piece that taxes were not a major consideration here? If their effective rate was already 27% -- and even then, as you point out, this may be higher than normal due to a repatriation premium -- what would they gain tax-wise by redomiciling to Canada?

Bud Meyers said...

The executives of a corporation say it is their "fiduciary duty" to avoid taxes whenever possible, because they have a responsibility to their shareholders — which are mostly large institutional investors — such as the banks, private equity firms and hedge funds (and the corporate executives themselves, who hold stock-option grants.

It is the members of Congress who write the tax code (with help from lobbyists) and the tax code has over 73,000 pages which has to be constantly amended with due diligence, because otherwise, corporations have an army of tax attorneys sifting throw the tax code to find loopholes.

The argument is being always made by the GOP and libertarians that the U.S. has the highest statutory corporate tax rate in the world (at 35%); but what corporate shills (such as Stephen Moore) never publicly say is that the actual "effective" corporate tax rate that many large U.S.-based multinational corporations pay is closer to 20% (and in some cases, much less — sometimes 0%).

As a percent of GDP, corporate tax revenues have fallen well below what they used to be back in the 1950s, and no major corporation has ever went bankrupt just because they paid too much in corporate tax.

If they want the corporate tax "rate" to be lower (say 20%), then make that an "absolute" tax rate (with no deductions, exemptions or write-offs), and apply that to repatriated overseas earnings as well (for their profits earned in "emerging markets" -- like when domestic jobs that had been going to Asia will begin to go to Africa.)

American citizens who sit on the boards of U.S.-based multinational corporations, should also forgo (renounce) their U.S. citizenships when moving their headquarters to another country.

Bud Meyers said...

And Warren Buffett (who pays a lower tax rate than his secretary) will invest $3 billion to help finance $11.4 billion deal.

ProGrowthLiberal said...

Ernie - it is precisely the fact that Canadian parent corporations don't face repatriation taxes that one can safely say that this merger (which is an inversion) will reduce BK's taxes by 7% of its worldwide income. That is a huge tax savings.

Bud - you are right. We can't depend on the alleged patriotism of corporate executives to override their desire to increase shareholder value even if this means shifting profits to low tax jurisdictions. And you are right that shrills like Stephen Moore ignore what Professor Kleinbard is noting with his "stateless income" papers. On your "American citizens who sit on the boards of U.S.-based multinational corporations, should also forgo (renounce) their U.S. citizenships when moving their headquarters to another country" - think Marc Rich. He moved to Switzerland after he was prosecuted here (and then pardoned by Clinton) and now he runs an empire called Glencore. Glencore parks a lot of profits generated by African mining operations in low tax Switzerland. This is the issue that Kofi Annan is currently discussing.

Ernie said...

But that doesn't comport with the assertion (which I'm open to see refuted with numbers) that BK doesn't have much foreign cash.

The tax inversion part of the deal seems more geared towards protecting Tim Horton's rather than significantly benefiting BK.

J. Edgar Mihelic said...

Even better than the 35%, the Journal and other right-leaning orgs like to use the 39.1% average of state and federal taxes on a reason to leave. Look how high it is, how is it possible for a company in America to ever succeed? Oh, my, I'm getting the vapours!

ProGrowthLiberal said...

Ernie - you missed the point. BK does not have a lot of cash trapped abroad as it paid a lot in repatriation taxes each year. Likely because of subpart F. It is identified in the income tax portion of their 10-K filing, which of course the NY Times did not read.

Edgar - to be fair US sourced income does have a state income component. For BK - it is around 1% per their 10K. And that is only on US sourced income which for BK is less than 22% of worldwide income. Which is odd since over half their stores are in the US.

ProGrowthLiberal said...

Burger King's Facebook has a Whopper of a lie:

We hear you. We’re not moving, we’re just growing and finding ways to serve you better. As part of the announcement made today, both Burger King Corp. and Tim Hortons will continue to operate as independent brands. We’ll just be under common ownership. Our headquarters will remain in Miami where we were founded more than 60 years ago and business will continue as usual at our restaurants around the world. The decision to create a new global QSR leader with Tim Hortons is not tax-driven – it’s about global growth for both brands. BKC will continue to pay all of our federal, state and local U.S. taxes. We’re proud of the heritage of Burger King and will maintain our long-standing commitment to our employees, franchisees and the local communities we serve. The WHOPPER isn’t going anywhere.