By John Lawrence
Corporations are relentless about setting up tax avoidance schemes and finding new and improved ways of getting out of paying taxes.
One method is to set up a corporate subsidiary in the Cayman Islands which doesn’t require any taxes to be paid. This works well for collecting royalties on patents because the patents can just be transferred to the subsidiary, and, voila, no taxes need be paid at all. Other companies which do a great deal of selling abroad have money piling up in foreign jurisdictions.
US law requires them to pay taxes on this money when they bring it back into the US. So these companies like Microsoft, Apple and Qualcomm are always lobbying for a “tax holiday”, which would allow them to bring this poor, lonely money home without paying taxes on it. Corporations are people, remember, and money is their Mother’s Milk.
Other industries like fast food operations make most of their money in the US. They have been stumped until recently as to how to get out of paying taxes on it. But now they have discovered an ingenious new way.
The latest wrinkle is called inversion. A US corporation merges with a corporation in a foreign country and then for tax purposes lets its headquarters be located there. Nothing changes as far as US operations are concerned. Executives continue living in the US and US operations continue as usual. The corporation pays taxes to the foreign government which has a lower tax rate while leaving the US high and dry.
Such a scam is being perpetrated by Burger King, which is merging with a Canadian corporation called Tim Hortons. Burger King will cut its tax obligations in the US, pay a reduced tax bill to Canada and continue in the US with business as usual. No physical change of headquarters is necessary. No executives need move to Canada. As an added bonus, money made in Canada doesn’t require begging for a tax holiday. It moves freely here with no strings attached.
Congress could eliminate the tax loophole which makes this possible, but Congress is in the business of creating loopholes not eliminating them. They are all for expanding loopholes instead of contracting them. Actually, Congress is the “Loopholes R Us” guys. Expect even more not fewer loopholes in the future.
Dick Durbin, Democrat from Illinois, blasted the deal. He said he was disappointed in Burger King’s decision to renounce its US citizenship. They have effectively renounced their US citizenship for the purposes of paying taxes but not for the purposes of making profits. And Wall Street demands that they and all corporations maximize profits. Or else they will be downrated and their stock might lose value.
One of the chief ways they maximize profits is to minimize taxes. So Wall Street, who is their Big Daddy, cheers when corporations get out of paying taxes, and corporations dutifully listen to their Big Daddy and do what he says. Or else they’ll be taken to the woodshed of lower stock values and sell orders. Investors will not be pleased.
Inversions let companies which earn money outside the US transfer money to the US without paying additional monies to the US. No need for a tax holiday. So don’t be too surprised if Qualcomm or Apple decides to merge with a company in southeast Asia which would allow it to bring all the money, that has been sitting there waiting for a tax holiday, back to the US without further ado and with no additional taxes.
So for money generated in the US, taxes are paid to the foreign government and for money generated outside the US that money gets to come home tax free. More and more companies are going to ditch Uncle Sam, and companies that are thought to be quintessentially American are going to be unAmerican when it comes to paying taxes. This means a greater tax burden on the middle class or perhaps it means that the Fed will just print more money.
Inversions could cost the US $20 billion in lost tax revenues over the next decade.
In the last two decades more than 75 American companies have moved their official addresses abroad. The consulting firm Price Waterhouse Coopers moved its corporate address to Bermuda in 2002. Underwear manufacturer Fruit of the Loom moved its corporate address to the Cayman Islands in 1998. Sara Lee merged in 2012 with DE Master Blenders which has corporate headquarters in the Netherlands.
Chiquita Bananas and medical device manufacturer Medtronic will both move their corporate headquarters to Ireland this year which brings up an interesting anomaly. Will the US government continue to pay millions in Medicare and Medicaid money to a corporation which in return pays taxes to a foreign government?
Bugger King says that Tim Hortons offers a real good business synergy since Tim Hortons is breakfast oriented while Bigger King specializes in lunch and dinner, but that’s no reason why the corporate structure needs to be such that Buegher king is the subsidiary of Tim Horton. Bugger King is making itself subservient to Tim Horton to get out of paying US taxes pure and simple. The US loss is Canada’s gain. Wow, Canada has free health care and what used to be US tax revenues. What’s wrong with this picture?
The US stands alone among major nations in taxing on a residence basis instead of letting taxes be collected where the money is made. If your corporate headquarters are in the US, then you must pay corporate taxes on all the money you earn anywhere in the world to the US. Tim Hortons is resident in Canada so it pays taxes in whatever jurisdictions its money is earned. If they make money, for instance, in Britain, they pay taxes on that money to Britain not to Canada.
So it’s not just the fact that the US corporate tax rate is higher than Canada’s. It’s the fact that other modern industrialized nations pay taxes in whatever jurisdictions they operate in to those jurisdictions while US based companies pay taxes to the US wherever they make money anywhere in the world.
Burger King is not the first corporation to pull this stunt. Walgreen’s, the largest US drugstore chain, thought about it too. While pondering the move, Walgreens came under pressure from Democratic lawmakers and activists to remain headquartered in the United States. Senator Dick Durbin of Illinois, took a shot at Walgreens’ folksy motto, writing, “Is ‘the corner of happy and healthy’ somewhere in the Swiss Alps?”
Such a move might have cost U.S. taxpayers $4 billion over five years. There were calls for a national boycott. After announcing that it would not locate its corporate headquarters in Switzerland, Walgreen’s stock went down. Shareholders were not amused that Walgreen’s was giving money away by not locating there.
At the same time, Walgreen is currently considering merging with European drugstore chain Alliance Boots and move to Switzerland as part of a plan to dodge up to $4 billion in U.S taxes. The company that gets almost a quarter of its $72 billion in revenue directly from the government through Medicare and Medicaid is trying to reap even more profits while leaving taxpayers holding the bag.
Walgreen isn’t the only one. Pfizer, the pharmaceutical company, tried merging with the smaller U.K.-based AstraZeneca earlier this year and switch its address, where the tax rate is lower. It was estimated the move would save them at least $1 billion a year in tax obligations to the U.S. (the deal ultimately didn’t go through). Medtronic, a medical device company, plans to move its corporate address to Ireland, a tax haven, to avoid paying U.S. taxes on $14 billion. Chiquita, the banana distributor, is also heading to Ireland after acquiring Fyffes. These tax dodges, as Fortune magazine calls them in this week’s issue, are “positively un-American.”
Huffington Post reported:
In May, Senate Democrats introduced the Stop Corporate Inversions Act of 2014, which recommends, among other things, forcing a large portion of a merged company’s management and workforce to relocate to the new overseas location if the company wants to dodge U.S. taxes.
The bill “allows corporations to renounce their corporate citizenship only if they truly give up control of their company to a foreign corporation and truly move their operations overseas,” Massachusetts Sen. Elizabeth Warren, who backed the bill, said last month.
Congress has the power to solve this problem. They merely need to change the rules so that the level of foreign partnership changes from the current 20% to 50% which would effectively make the corporation a foreign owned entity. But since our American method of governance is by corporate lobbyists, Congress will do the right thing only if it benefits corporations and right now that would be the status quo which allows corporations to do most of their business in and extract most of their propfits from the US while paying taxes to a foreign government.
President Obama and other Democrats have proposed that any corporation moving its headquarters abroad to avoid paying taxes should not receive any government contracts. “They’re technically renouncing their U.S. citizenship,” Obama said of the companies. “They’re declaring they are based someplace else even though most of their operations are here. You know, some people are calling these companies corporate deserters.” But Democrats do not control Congress so anything they want to do is moot.
The American way of governance is ineffectual and dysfunctional as long as corporate interests supersede the interests of citizens and taxpayers. That is why a parliamentary democracy would better serve the US citizenry. In that form of government the winning party can get its agenda accomplished with far less interference from other parties.