“Have It Your Way”

Remember that old jingle Burger King used in it’s advertisements? Well it looks like Burger King is determined to have it “their” way by merging with Canada’s Tim Hortons in a take over of the company. Not that Canadians will be happy with this merger as they were not according to rumor the last time Tim Hortons was taken over by Wendys.

MSN Money News Center Euan Rocha writes: “The companies, whose market values are comparable in size, confirmed late on Sunday that they were discussing a takeover of Tim Hortons by Burger King. They said the new entity would be based in Canada, which has a lower corporate tax rate than the United States, especially for entities with large amounts of earnings from overseas.”

There is a question as to whether it is for lower corporate taxes or other reasons corporations are attempting to avoid the US corporate income tax. As DealBook Blog founder Andrew Sorkin questions the takeover and quotes Southern California Gould School of Law Prof. and former JCT chief of staff Edward D. Kleinbard in his paper ‘Competitiveness’ Has Nothing To Do With It.

“‘Despite the claims of corporate apologists, international business ‘competitiveness’ has nothing to do with the reasons for these deals,’” Edward D. Kleinbard writes. ‘Whether one measures effective marginal or overall tax rates, sophisticated U.S. multinational firms are burdened by tax rates that are the envy of their international peers.’”

Sorkin counters; “What? We’ve been told repeatedly that the United States has the highest corporate tax rate in the developed world — 35 percent — which is higher than the nominal tax rates in places like Ireland (12.5 percent), Britain (21 percent) and the Netherlands (25 percent) and the 24.1 percent average rate of all countries that are part of the Organization for Economic Cooperation and Development.”

Sorkin goes on with Kleinbard’s points. “All that is true,” contends Professor Kleinbard; however, “most United States multinational companies do not pay anywhere near 35 percent. Companies paid an average 12.6 percent, according to the Government Accountability Office, which last measured it in 2010 and avoid taxes by deliberately stashing piles of cash abroad.”

So what is the deal? Are corporations being taxed too high and deliberately keep money out of the US to avoid taxes? The argument by Kleinbard is “lower tax rates are not driving companies to inversions; instead, he contends it is all the money that companies have overseas — some $2 trillion — and don’t want to bring back to the United States despite protestations by many chief executives that they wish they could.”

Companies have become adept at avoiding corporate taxes and take advantage of the US tax code, are more competitive than their foreign counterparts, and do not face the same “anti-abuse” rules which non-US companies face in stricter territorial tax systems. Inside of accepted accounting rules, US firms take full advantage in operations in lower tax jurisdictions in a cash tax matter and also through the U.S GAAP measurement of a company’s performance.

Is the excess $2 trillion in profits trapped overseas due to high US corporate taxes? Kleinbard thinks not and points to one company in particular which has used it to their advantage. In 2013, Apple was borrowing in the US and using its offshore foreign earnings to pay the incurred interest. The burdensome US tax code allows interest earned on offshore cash to be included in the US company’s income offsetting the tax deduction on interest expense from US borrowing. In effect, no harm is done to company’s economic stance from borrowing.

While there is agreement the US tax code is inefficient; Kleinbard states, “one of the few deficiencies it has avoided is imposing an unfair international business tax competitive burden on sophisticated U.S. multinationals.”