Has President Obama's tough talk on corporate inversions started a mad rush by companies to do these deals before they're outlawed?
The latest headline-grabbing inversion involves Miami-based fast-food chain Burger King, which confirmed Sunday that it is negotiating just such a move with smaller Canadian restaurant chain Tim Hortons. BK would buy Hortons, but the combined company would be owned by a newly created corporation headquartered on our northern neighbor's turf.
There's some evidence that some companies in the pharmaceutical industry, which has been the biggest user of corporate inversions, have been daunted by Obama's harsh comments about the practice. But the move by BK confirms that the maneuver is spreading to more corners of the business world as the administration and Congress look for ways to stop it.
Inversions happen because the United States has the highest corporate tax rate in the developed world — 35% — and is the only country to tax income earned outside its borders. An inversion reduces the tax a U.S. company faces not only on foreign profits but also on U.S. profits through an accounting maneuver called "earnings stripping."
In the latter technique, revenue is shifted from the U.S. unit to its corporate siblings in lower-tax countries by having the former borrow heavily to pay the latter. A 2007 report from the Treasury Department stated that the data gathered from inverted companies "strongly suggest that these corporations are stripping substantially all of their income out of the United States, primarily through interest payments." Not coincidentally, the interest payments on the loans may be tax deductible in the United States.
Although the total number of inversions is still small — fewer than 80 in 31 years, according to the Congressional Research Service — the pace has quickened substantially in the last two years. The maneuver appeals mainly to companies that generate a lot of revenue overseas, which they can't put to work in the United States without it being taxed here. As the BK deal illustrates, inversion-tempting overseas revenue can come just as easily from burgers and fries as from prescription drugs.
Lawmakers from both parties have denounced inversions as they've gained steam, but Democrats and Republicans disagree sharply over what to do about them.
Obama and several Democrats in Congress have proposed a change in tax law that would effectively ban inversions. Current law allows a U.S. company to shift its ownership when it acquires a foreign company but gives the latter at least 20% of the stock in the new, combined company. The Democrats' proposal would raise the threshold to more than 50%, as in any pure takeover of a U.S. company by a foreign corporation.
Republicans prefer to address inversions in the context of reforming the U.S. tax code to make it more competitive with other countries' laws. That would require lowering the rates, which most Democrats are willing to do only if corporate tax breaks are reduced enough to offset any loss of revenue.
Obama has said his administration will act unilaterally if Congress does not, which is the same thing as saying he's about to act unilaterally. One option being considered would be to make it harder for inverted companies to strip U.S. earnings, possibly by changing the rules governing the tax deductibility of debt held by U.S. subsidiaries of multinational companies. Sen. Charles Schumer (D-N.Y.) has proposed a more exhaustive approach to earnings stripping, but his would require congressional action.