The U.S. Department of the Treasury in October announced new rules to limit tax benefits for U.S. companies merging with foreign corporations or moving their global headquarters overseas to avoid U.S. double taxation of profits.
The motivation for an inversion is often the massive savings on corporate taxes. Businesses face a 35 percent tax rate in the United States, but other countries, such as Canada and Ireland, have significantly less-punitive tax rates and structures, prompting some economists to suggest the inversions are simply rational economic decisions.
The United States is also the only industrialized nation that taxes profits made from overseas sales, as soon as the money is brought home, or “repatriated.”
In August, fast-food restaurant chain Burger King announced a merger with Canadian chain restaurant Tim Horton’s. Company executives claimed the merger and relocation was prompted by Canada’s corporate tax system, which does not tax profits received elsewhere in the world.
Burger King will keep its headquarters in Miami, and Tim Horton’s will remain in Oakville, Ontario.
However, according to Burger King executive chairman Alex Behring, each division will be owned by a new, merged parent company, based in Canada. Canadian law allows Burger King to continue paying all national and state taxes on sales in the United States, while avoiding the additional tax on foreign sales.
The new Treasury rules, however, mean U.S. corporations no longer can lower their tax obligations by transferring stock between the U.S. division and the foreign division, using a foreign subsidiary’s earnings as a “loan” without paying taxes.
In his remarks about the new de facto tax rule, Treasury Secretary Jacob L. Lew said , “For some companies considering deals, today’s actions will mean that inversions no longer make economic sense.”
Sen. Charles Schumer (D-NY) introduced a bill to restrict inversions in September, which has since been referred to the U.S. Senate Commission on Finance for consideration, but President Barack Obama expressed his full support for the Treasury Department’s regulatory action.
“We’ve recently seen a few large corporations announce plans to exploit this loophole, undercutting businesses that act responsibly and leaving the middle class to pay the bill, and I’m glad that Secretary Lew is exploring additional actions to help reverse this trend,” Obama said in a statement to reporters.
However, in an interview with the New York Times, Schumer said the president was constrained by certain limits on his and the Treasury’s legal authority.
Speaking for Sen. Orrin Hatch (R-Utah), the senior ranking Republican on the U.S. Senate Committee on Finance, spokeswoman Julia Lawless, said in an August 2014 statement , “Burger King’s pursuit of an inversion only further underscores the arcane, anti-competitive nature of the U.S. tax code. Short of a tax overhaul that will make it easier for American companies to invest and create more jobs at home, Sen. Hatch has advocated for an interim proposal to address the disturbing recent uptick in inversions.”
While Hatch has not released details of his short-term proposal, a July 2014 letter to Treasury Secretary Lew suggested that the short-term fixes may include preventing companies from changing “their corporate tax domicile without a change in a control itself.”