US Dollars to Canadian Donuts

Tim Hortons has long been a regular stop whenever I visit Canada.

For one thing, you couldn’t avoid Tim Hortons outlets if you wanted to; they are everywhere. However, I really like their donuts. The chain is Canada’s largest coffee and donut seller and turned 50 this spring.

Given the ubiquity and popularity of Tim Hortons, it’s no surprise that US dollars are chasing Canadian donuts.

News recently broke that Burger King Worldwide Inc. is in talks to buy Tim Hortons. If the deal goes through, the combined businesses would collectively have about $22 billion in sales, making the fast-food startup the third-largest in the world.

However, Burger King wouldn’t just be securing a Canadian institution with habit-forming baked goods. It would also get a more favorable tax situation, courtesy of a move north of the border. In the proposed version of the merger, Burger King would create a new Canadian-based parent company, which would house both independently operating chains. This structure would give Burger King its domicile in Canada and preserve Tim Hortons’ domicile there.

While unknown sources briefed on the deal told The New York Times that taxes were not the main motivation behind the talks (1), Burger King is obviously aware of the tax implications. Canada lowered its national corporate tax rate to its current level of 15 percent several years ago. (Businesses there must also pay provincial taxes, meaning Ontario-based corporations like Tim Hortons currently pay a full 26.5 percent.) Meanwhile, the US is insisting not just on a 35 percent federal corporate tax rate, but on taxing corporations on profits around the world. Burger King is currently short on cash outside the country, the Times reported, but it can certainly keep an eye on future expansion, both in Canada and elsewhere. (1)

Although Burger King is an American company, it is controlled by a Brazilian investment firm, 3G Capital, which owns about 70 percent of the company’s shares. Why would Brazilians want to continue paying US taxes on profits from the hamburgers they sell in Buenos Aires or Hong Kong? There is no reason why they would. Under the tax systems in place almost everywhere outside the United States, there’s no reason why they should either.

As for Burger King’s US shareholders, like all corporate shareholders here, they pay two taxes: once on corporate profits and again when the corporation pays dividends. This makes tax reversal (relocating a company’s headquarters to a lower-tax nation like Burger King) an attractive prospect, even for US shareholders. It’s worth noting, too, that the strongest critics of investing are almost always people whose income is only taxed once, and often that income is a salary paid by taxpayers.

The current president has made no secret of his discontent with the practice. Obama and the Democrats have complained about unpatriotic American corporations, as if there is an inherent patriotic duty that income earned abroad be taxed in the United States at least once. Following at least five major US companies announcing investment plans between mid-June and late July, Obama criticized the herd mentality at play in decisions, calling companies “corporate defectors who give up their citizenship to protect the earnings”. (2) This characterization imagines that corporations are not owned by anyone, or by Martians, who otherwise lack citizenship elsewhere on Earth.

The administration is said to be looking for a way to make investments difficult or impossible in the future. Treasury Secretary Jacob Lew has acknowledged that his agency is looking for ways to stymie or stop investment without needing legislative support from Congress.

However, unlike government-regulated banks, which under duress have shelled out billions of dollars in fines for real and imagined crimes, most private corporations have legal teams that are well used to challenging the Service’s decisions. of Internal Taxes. We have an active and independent Tax Court in this country. The IRS is a frequent litigant and a frequent loser, especially when faced with adversaries with technical knowledge and financial resources, such as those available to large corporations. If the administration wants to challenge investments using, say, novel interpretations of tax law, it shouldn’t expect most corporate America to change the way banks have done.

Even if the government succeeds in making the investments impractical for American business, it is unlikely to be satisfied with the outcome. Blocking investment here will only make US companies takeover targets for foreign companies. The acquirers will simply buy US companies and relocate the headquarters, or their assets, once the deal is complete. In the process, even more American jobs will be lost.

When Canada lowered its corporate tax rate, critics warned that the move would be disastrous for Canadian federal government revenues. If Burger King’s investment is any indication, an attractive tax structure may more than make up for a lower rate by attracting new and existing businesses to set up headquarters in Canada.

The sensible thing is to acknowledge once again that neither Martians nor corporations pay taxes. Shareholders and customers, in other words, people, do it. If those people have no connection to the US beyond a corporation’s legal domicile, they will find ways to sever their ties rather than fund a foreign government at exorbitant rates.

Sources:

1) The New York Times, “Burger King in talks to buy Tim Hortons and move to Canada”

2) Bloomberg, “Obama Says Tax Law Must Stop ‘Corporate Defectors'”