There is perhaps no meal more synonymous with American cuisine than a hamburger, fries and an ice cold beverage. Fighting for the title of “America’s Burger” since its creation in by 1957, the Whopper has come to rival the Big Mac in American fast food lore. Yet this most American of products will soon be getting a new home, Canada.
That’s because Burger King is merging with Canadian fast food coffee and breakfast chain Tim Hortons – a transaction that would move their corporate headquarters to Canada. While this deal certainly provides tangible benefits to both firms, such as Burger King increasing their coffee quality and Tim Hortons growing its global presence. But there is a motive that goes beyond providing better quality products to the customer, taxes.
By merging with Tim Hortons, Burger King is adopting Canada as its corporate headquarters – and also lowering its tax rate. The United States currently has the highest corporate tax rate in the industrialized world at 35 percent – a number that is even higher when including state and local rates. Canada on the other hand has a corporate tax rate of just 15 percent and ranks a full 4 spots higher on worldwide economic freedom rankings. These economic incentives will make Burger King far more competitive in the world market, as its increased stock price already indicates.
This megamerger is just the latest example of what is known as a “tax inversion” which have become hotter than the coffee at Tim Hortons. Like Burger King, many U.S. companies are exploring the option of purchasing a foreign company to lower their crushing tax burden. Since 2011 there have been 22 such deals, but the frequency of such deals has increased from a paltry 1 percent of U.S. outbound deals in 2011 to 66 percent 2014-- with more deals on the horizon.
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Worried about the loss of tax revenue, President Obama has been making a public relations push against these inversions, calling companies that seek more advantageous tax treatment to remain globally competitive as “unpatriotic”. But what has truly been “unpatriotic” is President Obama's and Congress’ failure to reduce America’s obscenely high corporate tax rate. There has been long standing bipartisan support for modest reform that includes flattening and lowering the overall rate, yet no action has followed. Tired of waiting for unfulfilled promises businesses like Burger King have been reviewing their options – and one of those options is to take their business to climates where they can better compete with their rivals around the world. Given the inherent advantages of these inversions, it’s only a matter of time until iconic brands like Burger King are joined by other well-known American businesses. Walgreens, for example, recently toyed with the idea of relocating to Switzerland before they chose not to close the deal. But how long until McDonald's decides that, like Burger King, it no longer wants to struggle under America’s super-sized corporate tax rate and the beloved Big Mac finds a new home?
The only thing faster than the service at Burger King is the growth of corporate inversions – and that isn’t because American entrepreneurs have suddenly become “unpatriotic.” If America again wants to become a destination for businesses of all sizes the only option on the menu is tax reform. Hopefully Congress and the President have the stomach for it.
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