Burger King has made a big splash in the news of late with its offer to buy Tim Horton’s, Inc. The King will be moving his base of operations from Miami to Canada. Needless to say, this has created quite a stir as some commentators have characterized the deal as a tax dodge. Burger King has indicated that the primary motivation for the move is not to avoid U.S. corporate income taxes, but to expand markets for their burgers and Tim Horton’s donuts and coffee.
There are an increasing number of companies who are incorporating abroad in a maneuver known as a corporate inversion. What happens is that a domestic company buys a foreign company and recapitalizes shares of the new company in the foreign country. While all U.S. revenue will continue to be subject to U.S. corporate income taxes, the benefit of an inversion is that a corporation’s global income will not be subject to higher U.S. corporate tax rates.
The concept of corporate inversions — moving to a more tax-friendly environ — is nothing new to Buffalonians. As a border town, we have been the primary beneficiary of very high consumption-based taxes in Canada. Our airport has expanded much more rapidly than anyone imagined due to the lower cost for Canadian travelers. This has created a lucrative and booming hotel business on Genesee St. to service our Canadian friends. At the massive Galleria Mall, a very significant number of license plates are routinely from Ontario.
Congress and President Obama need look no further than the Buffalo, NY economy as a laboratory for why corporate tax inversions are becoming increasingly popular for domestic corporations. I have yet to hear any Canadian politicians declare that their cross border shopping citizens are unpatriotic. The best way to prevent the flight of tax revenues is to pass a globally competitive tax code. Given the chance, citizens and corporations will always choose legal strategies to reduce their tax burden. You would think politicians would get that by now.