IE 11 is not supported. For an optimal experience visit our site on another browser.

Burger King Deal Could Be a Tax-Dodge Whopper

The deal would be the latest in a once-obscure tax dodge known as a corporate "inversion" that is turning the debate over U.S. tax reform upside down.
Get more newsLiveonNBC News Now

Burger King's move to acquire the Canadian restaurant chain Tim Hortons would give the U.S. fast food giant a major presence north of the border.

It would also save the company a whopper of a tax bill.

The deal would be the latest in a once-obscure tax dodge known as a corporate "inversion" that is turning the debate over U.S. tax reform upside down.

As the pace of these deals picks up, the White House is scrambling to find a way to close this corporate tax loophole, which the Treasury estimates could eventually take a $20 billion bite out of corporate tax receipts. But unless, and until, Congress gets down to a long-overdue overhaul of the tax code, companies like Burger King with big overseas profits will likely continue to pursue these deals.

In an inversion, a U.S. company sets up or buys another company in a country with a lower corporate tax rate and then calls the new country home—thereby dodging U.S. taxes it would otherwise have had to pay.

The trick is more than three decades old, but a wave of inversions this year has prompted the Obama administration to call on Congress to slam the loophole shut.

"They're ... basically renouncing their citizenship and declaring that they're based somewhere else, just to avoid paying their fair share," Obama said in a weekend radio address last month.

How does it work?

When a company undertakes an inversion, it buys or mergers with a company based outside the U.S. That lets it move its legal address outside the country for tax purposes—and pay less in taxes to the U.S. Treasury. Nothing else moves; it's business as usual for the American operations, employees and customers.

With the Treasury facing a tax bite of as much as $20 billion over the next decade, the administration wants to require companies that claim they're no longer American to be more than 50 percent owned by foreigners. That would make new inversions much more difficult to pull off.

But aren't corporate taxes higher in the U.S than most developed countries?

It's true that the statutory tax rate—including state and local taxes—is close to 40 percent, the highest among the developed world. But U.S. companies apply a long list of tax credits, subsidies, loopholes and other giveaways, so most of them pay much less than the top rate. Some, according to an analysis by Citizens for Tax Justice, have figured out how to pay no tax at all.

Total corporate federal taxes fell to about 12 percent of profits from U.S.-based activity in 2011, according to a Congressional Budget Office report. In a separate study, the CBO found that the average tax rate in 2011 among developed countries was 3 percent of gross domestic product—compared with 2.3 percent of GDP in the U.S.

Canada, which could become Burger King's new tax home if the deal goes through, just cut its federal corporate tax rate to 15 percent—the lowest of the so-called Group of Seven leading industrial nations, according to the Tax Foundation. Last year, the company reported profit of $234 million—double the year before.

So how much money is Uncle Sam losing from these corporate tax dodgers?

So far this year, fewer than a dozen companies have flipped their corporate tax base upside down, including banana distributor Chiquita Brands International and drug maker AbbVie. But those moves have drawn lots of attention—and prompted other U.S. multinationals with large overseas holdings to consider heading for the corporate tax exit.

We apologize, this video has expired.

Some companies have already stashed assets and accumulated earnings outside the country—hoping that Congress will eventually lower the tax rate and allow them to pay less when they bring that money home. By some estimates, as much as $2 trillion in corporate cash is sitting outside the U.S.—money that could otherwise be reinvested at home to expand domestic operations and create more jobs.

Why doesn't Congress just clean up the corporate tax code?

Corporations have been lobbying Congress for years to lower the corporate tax rate—which would mean paring back a thicket of tax credits, subsidies and complex rules that everyone agrees needs an overhaul. But each of those loopholes has a company or industry lobbying to protect it.

A wave of inversions could make it even harder for Congress to pull off a "revenue neutral" tax reform package. To offset the money lost by lowering the top rate, Congress would have to close loopholes and subsidies. But if more companies dodge the American tax code altogether, those added revenues will be harder to find. The more companies shrink the overall pipe of corporate tax revenues, the harder it will be to make tax reform "pay for itself."

In any case, the tax reform debate has become mired in the ongoing political dysfunction that has already pushed the country near a debt default, temporarily shut down the government and, most recently, exhausted the highway fund that's needed to fix a national pothole epidemic.

Given that track record, it's hard to see how Congress will ever be able to tackle an issue as complex and divisive as tax reform.

So some companies aren't waiting. With inversions, they can have it their way today.