Fast food… greasy cheeseburgers, salty fries, and Diet Cokes in Styrofoam cups so large you could wash your feet in them. What could be more American?
Well, maybe not so much anymore. You see, one of the biggest fast food giants – Burger King – is trying to "divorce" America and re-establish its business in Canada.
Don't worry, BK lovers. You'll still be able to get your Whopper at the neighborhood franchise. And you won't have to worry about cheese curds and gravy, rather than ketchup, on your french fries.
Instead, the Burger King corporation is looking to save itself a ton of money on taxes.
And Congress is doing all it can to stop it.
Since 2008, a US law has slapped a punitive exit tax on certain unrealized capital gains of those whom the Tax Code calls "covered expatriates" – US citizens and permanent residents of even moderate wealth looking to "divorce" Uncle Sam.
The only reason the exit tax exists is to deter these individuals from severing their relationship with their not-so-benevolent uncle. Rather than addressing the unfair and nearly unique problem of taxation on citizens living beyond US borders (besides the totalitarian dictatorship Eritrea, the US is the only country to do so), Congress chose to penalize those individuals who have exercised their completely legal choice to give up their US status.
Now Congress wants to repeat this law – only this time, for corporations. Over the last few years, a handful of large corporations have opted out of worldwide taxation using a type of cross-border merger called an "inversion."
And Burger King is the latest corporation to announce its plans to do so. The restaurant chain wants to relocate its base of operations to Canada – hardly a low-tax jurisdiction, by the way. Combining provincial and federal taxes, the top corporate tax rate in Canada is about 31%.
Burger King and other corporations have taken this step once again in response to the US Tax Code, which imposes income tax on corporations at a 35% rate – one of the highest in the world.
Unlike most other countries, the US also forces corporations to pay tax on profits they generate in other countries – although corporations can defer this tax until they repatriate the profits to the US. Many multinational corporations are loath to pay US income tax on profits generated through non-US business units managed outside the US. In many cases, these profits remain outside the US, permanently.
The combination of these factors gives the US one of the least competitive corporate tax regimes in the world. It would seem obvious that the best way to stop companies from leaving the country for lower tax rates is to lower tax rates at home. But that's not how the Obama administration sees the problem.
Treasury Secretary Jack Lew says, "We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes."
Now, Mr. Lew is one smart guy. He graduated from the Georgetown University School of Law, after all. But unfortunately, he doesn't understand what an inversion really is.
An inversion doesn't shift profits at all. US profits remain US profits and non-US profits remain non-US profits. What an inversion does accomplish is removing future overseas profits (and in some cases a portion of current overseas profits) from US corporate tax. US profits aren't shifted anywhere – and are still taxed at a top rate of 35%.
But Mr. Lew's message – and the overwhelming pushback from the mainstream media – has certainly gotten through to John Q. Public. Take a look at some of the comments on Burger King's Facebook page:
Burger King would like to move their headquarters to Canada to avoid paying US taxes. I hope they take Justin Beiber with them. I urge everyone not to purchase any items from this chain, save money and be healthier at the same time.
Keep your HQ in USA! Pay your fair share of taxes. I won't eat here again!
I won't be purchasing anything at BK unless your corporate HQ stays here and contributes to the tax structure that pays welfare to your underpaid employees.
You greedy, seditious traitors! I was a lifelong BK customer and I will NEVER support your businesses again! You should lose the right to conduct business in the country that made you such a successful restaurant. Enjoy Canada, you greedy Traitors!
Given this fair and balanced expression of opinions, it was inevitable that Congress would eventually rouse itself to take action against inversions. So what do the Wise Men and Women in Congress have planned for us? A few days ago, Senators Sherrod Brown and Dick Durbin introduced a bill that would tax the untaxed non-US earnings of US corporations that invert. In other words, the bill would impose an exit tax on corporations, in addition to the one that exists for individuals.
When I consult with wealthy foreigners seeking US residence, or to set up a business in the US, I sometimes compare the US tax system to a carnivorous plant called the Venus flytrap. This plant produces a sweet sap that attracts insects. But when an insect lands on the inner portion of one of the plant's leaves, the leaf snaps shut, trapping it inside – eventually digesting it.
The US tax system isn't that different. The US rolls out the welcome mat to foreign investors with an EB-5 visa that leads to a green card and permanent residence in exchange for an investment of as little as $500,000. Most new US residents have no idea that once they've lived in the US for eight years – or acquired US citizenship – a large portion of their wealth could, in effect, be digested by the US if they attempt to leave.
It's even easier to set up a US business. You can create a Delaware corporation or other US corporate entity over the Internet in just a few minutes and, in some cases, for under $300. But if that business starts generating substantial non-US profits, the only way it can legally avoid paying the world's highest tax rates on those earnings is to "invert." And now a very large, hungry, and powerful Venus flytrap in Washington, D.C., wants to end that option.
I'm not optimistic that Congress will make the fundamental reforms necessary to make the US tax system competitive – much less compatible – with the rest of the world. In the meantime, if you're a US citizen or permanent resident, or own a US business poised for overseas expansion, is this the legal framework under which you wish to live and do business?
Perhaps it's time to look at a "Plan B."