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Forget what the fast food combo of Burger King and Canadian donut chain Tim Hortons might mean for the North American diet, consider the hit on American tax collections. Certainly that’s what stuck in the craw of Chris Matthews, host of Hardball on MSNBC.
When the dust settles, the new company will be Canadian, a move that would change Burger King’s American tax status. On his show Aug. 27, as Matthews turned to his guests, it was crystal clear what he thought of this deal.
"Your thoughts now on this stinking idea to sneak out of the United States, sell all the hamburgers you can here, and skip your responsibilities to the American people," Matthews asked.
Matthews said this was all a "tax avoidance tactic." And he told his guest his antipathy for it was shared by a most unexpected party, the editorial board of the Wall Street Journal.
"The lead editorial today surprisingly attacked this tax scheme," Matthews said.
That would be interesting if it were accurate. But it isn’t.
The newspaper’s target was the American tax code. It said the Burger King deal provides "a valuable public education on the need to reform America's noncompetitive tax system." It praised Canada for lowering corporate taxes, and in case anyone missed the point, the editorial wrapped up with the word "dumb."
"That word also applies to America's corporate tax code, the reigning world champion in punishing investment and discouraging job creation," the editorial said.
We wonder if the editorial’s headline sent Matthews down the wrong path. It chided President Barack Obama for losing his "business front man," Warren Buffett, who put $3 billion into the acquisition. The Wall Street Journal referred to Buffett helping "corporate deserters," but the goal was to further tweak the president. That is Obama’s term for companies that do what Burger King has done.
We reached out to Matthews and his producers and did not hear back.
Edward Kleinbard, professor of law at the University of Southern California and former chief of staff for Congress’s Joint Committee on Taxation, said contrary to attacking the deal, the Journal was saying, "Whaddaya expect, when you put such high tax rates on earnest US companies?"
What made Matthews mad goes by the name of a tax inversion. This is when an American firm buys a foreign company and then says it is based in that other country. The American company becomes a subsidiary of the foreign one. While the U.S. operation pays taxes on its profits in America, overseas profits are subject to the tax rates in the new home base.
As for where the Wall Street Journal stands on inversions, Gary McGill, director of the Fisher School of Accounting at the University of Florida, said the paper’s view is clear.
The Journal "is not attacking inversions," McGill said. "They are pointing out that inversions, in fact, may be a reasonable, practical answer to solving the ongoing inability of the United States to rationalize its business tax system to catch up with the rest of the world."
Inversions happen because, at least on paper, the U.S. corporate tax rate is higher than in Canada and Europe. The actual rates companies pay will vary, but nominally, the combined federal and provincial tax rate in Canada is about 27 percent, while in the United States, the federal rate alone is 35 percent.
For multinational firms based in America, this means that if they brought their overseas profits home, they would see a higher tax bill. McGill said an inversion makes it easier for the new foreign company to move that money around.
McGill added that it also becomes easier for the new overseas company to charge royalties and licensing fees to what is now considered an American subsidiary.
"This will reduce U.S. income while increasing the foreign corporation’s income. But that foreign corporation will likely be in a low-tax jurisdiction," McGill said.
Reuven Avi-Yonah, director of the international tax program at the University of Michigan Law School, said inversion offers another way to reduce the American tax bill.
"The advantages from a tax perspective are the ability to load the U.S. company with debt that generates interest deductions that reduce its tax on its U.S. operations," Avi-Yonah said.
We should note that while the nominal U.S. corporate tax rate is 35 percent, companies with foreign operations rarely pay that much today.
The Government Accountability Office, the auditing arm of Congress, found that in 2010, profitable companies paid about 13 percent in federal taxes.
Even without inversions, Kleinbard at the University of Southern California, wrote in a recent article that the fearsome U.S. tax rate is not what it purports to be. There are simply too many ways that multinational American firms can trim their tax bills.
"Effective marginal tax rates and overall effective tax rates reach the level of the U.S. headline rate only when firms studiously ignore the feast of tax planning opportunities laid out before them on the groaning board of corporate tax expenditures," Kleinbard wrote.
Matthews said the Wall Street Journal attacked a "tax scheme" known as inversion. We asked many tax experts to interpret the Wall Street Journal’s editorial and not a single one agreed with Matthews. They said the newspaper was criticizing the U.S. corporate tax code and if anything, it cast the Burger King deal as a sensible response to a dysfunctional tax system.
We rate the claim False.
MSNBC, Hardball, Aug. 27, 2014
Wall Street Journal, Warren Buffett's Tax Whopper: Obama's business front man finances 'corporate deserters.', Aug. 27, 2014
Fortune, Is Burger King’s move to Canada a raw deal for U.S. taxpayers?, Aug. 28, 2014
NewsBusters, In Rush to Condemn Burger King, 'Hardball' Host Makes Whopper of a Factual Error, Aug. 27, 2014
Edward Kleinbard, 'Competitiveness' Has Nothing to Do With It, Aug. 5, 2014
Elizabeth Chorvat, 'Looking Through' Corporate Expatriations for Buried Intangibles, Nov. 17, 2013
New York Times, Tax Burden in U.S. Not as Heavy as It Looks, Report Says, Aug. 18, 2014
Government Accountability Office, CORPORATE INCOME TAX: Effective Tax Rates Can Differ Significantly from the Statutory Rate, May 30, 2014
Financial Times, Tax inversion definition
Bloomberg, Tax Inversion: How U.S. Companies Buy Tax Breaks, Aug. 27, 2014
Bureau of Economic Analysis, New Statistics on the Activities of U.S. Multinational Enterprises are Now Available, Aug. 27, 2014
Email interview, Gary McGill, director, Fisher School of Accounting, University of Florida, Aug. 28, 2014
Email interview, Richard Harvey, professor of practice, Villanova University School of Law and Graduate Tax Program, Aug. 28, 2014
Email interview, Daniel Shaviro, professor of taxation, New York University School of Law, Aug. 28, 2014
Email interview, Edward Kleinbard, a professor of law at the University of Southern California, Aug. 28, 2014
Email interview, Reuven Avi-Yonah, director of the international tax LLM program at the University of Michigan Law School, Aug. 28, 2014
Email interview, Elizabeth Chorvat, visiting assistant professor, Department of Accountancy, University of Illinois College of Business, Aug. 28, 2014
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