At the ACA event in Toronto someone asked whether the State of Vermont and its residents were somehow more “pro Canada” than the rest of the United States. I just laughed. Hell no.
Perhaps though Senator Sanders(and former Mayor of Burlington, VT) might enjoy if the one and only natural gas pipeline that services Vermont(running from Montreal to Burlington, VT) were to be “shut off” on the Canadian side on the coldest day of next winter. Senator Sanders might start discovering some new definitions of patriotism.
@Calgary411 – the web site that you referenced re Tim Horton s says “2009 – Tim Hortons Inc. announced on September 28, that it has completed the reorganization of its corporate structure to become a Canadian public company.” If we accept the statement at face value, then it seems that Tim Hortons is a CANADIAN Public (ie not a Private) Company whose shares are Listed on the Toronto and the NY Stock Exchanges.
Let me try to help demystify a bit:
1. Tim Horton’s was merged into Burger King a long time ago – I would guess about 20 years – when Ron Joyce sold the company and took back cash plus shares of BK. He had a fight with BK and sold his shares some time ago (lucky him – I think his timing was pretty good). Subsequently, BK “spun off” shares of Tim Horton’s to its own shareholders co-incident with a re-listing of Tim Horton as a public company with shares on Toronto and NY. I’d be shocked if its legal HQ were not in Canada – its business HQ certainly is as is most of its business.
2. Yes, corporate tax is complex, but the basic building blocks can be grasped. As you might expect, the US has largely followed the Fleetwood Mac “Go Your Own Way” school of tax policy: just because what you are doing doesn’t work, is harming your economy to the tune of billions a year according to every sensible observer and is followed by virtually nobody else in the world doesn’t mean that you shouldn’t keep shooting yourself in the foot if enough lobbyists can make it electorally painful to change. America’s uniqueness stems from the fact that the US taxes corporate groups as a whole vs Canada, for instance, who taxes each corporation separately. As a result, you guessed it, the US tries to tax its corporations on their consolidated worldwide income (parent and all the children, if you will). Canada taxes only the parents and children who are resident in Canada, albeit on their worldwide income as if they were real people). Since most companies incorporate separate companies (or even groups) in every country they do business in, the net result is that we generally only tax on profits earned in Canada. Overseas profits are taxed where they are earned and tax treaties governing the repatriation of dividends and profits from affiliates usually allow those already taxed funds to come “home” with little to no additional tax. In order to stay half-way competitive (and only just) the US stubbornly insists on full taxation of re-patriated overseas profits (with some deductions for foreign taxes paid) but defers payment until the money actually comes into the US. The obvious if perverse and totally counter-productive result is that US companies prefer to borrow money in the US (tax deductible) for their cash needs at home (including dividends – see Apple) and park their money offshore waiting for an amnesty. About every 15 years or so Uncle Sam’s begs for the money to come home and gives a partial amnesty or tax break eventually. The last such amnesty I believe was under Clinton and resulted in a vast windfall of taxes for the government, helping him balance budgets). Apple has something like $100B that it could bring home to the US tomorrow but for punitive taxes that it prefers not to pay (and who wouldn’t, given the choice). Instead, Apple borrows money it has no use for to pay dividends. Insane. Why Apple has not inverted years ago is a mystery to me.
3. The root cause of all of this – both the money parking and the temptation to undertake inversion transactions even where there is a stiff tax penalty to pay up front – is the US having a combination of the highest rates in the world on corporations plus their inflexible insistence on taxing both US and non-US income of US companies at that same high rate. Other countries apply their own rates – high or low – to all companies operating in their country but generally do not punish overseas earnings with double taxation. Apple risks worldwide tax at 35% by being American, Samsung is only required to pay that high rate on its US operations. Apple avoids it by aggressively pushing profit centres off shore and parking the resulting profit outside of the US until it becomes a veritable mountain. The clever reader will note that the high US rate results in US companies doing LESS in the US, investing LESS in the US and paying even LESS tax in the US, not more. Crazy stupid stuff. From a narrow point of view, the high rate is only tangentially important since ALL businesses in the US are subject to it – Apple and Samsung both – as regards their US business. The real difference, in effect, is whether the US gets to impose its high rates, you guessed it, on the rest of the world through its stable of multinationals. Given that nobody else is doing that, the not surprising result is that the US stable of multinationals is inexorably shrinking and the rate of shrinkage is growing. Those that are not actively seeking to leave are doing what Apple does – aggressively pushing all possible profit-centres outside of the US to the maximum extent possible with the best tax advice money can buy and thus employing fewer Americans and paying LESS to the US than a simpler system would doubtless raise The simple fact is that if you look at two identical companies with the same revenues and profits, the one unfortunate enough to be incorporated in the US will pay HIGHER taxes (higher taxes means lower after-tax earnings and thus share price). If you keep hitting people on the head with a bat for as long as they stay in the US, eventually some will get the bright idea of moving. Not rocket science to any but US politicians apparently. As for the idea of punishing all foreign companies who invest and do business in the US – see Great Depression, Smoot Hawley and collapse of world trade for impact on domestic US economy.
4. The subject matter of “loopholes”, corporate welfare, give-aways, lobbyist perqs etc.: none of this is unique to the US although they are arguably most afflicted by the disease. An ideal tax system is one that is “neutral” – in a perfect world it raises the desired amount of revenue from the economy while distorting the economy (impairing its efficiency at creating wealth and growing the collective pie) as little as possible. That ideal is shared by left and right, Liberal and Conservative etc While they all disagree about how to get there, few are foolish enough to imagine they have created tax utopia anywhere on earth today. In the matter of international corporate tax, the biggest issue is called “transfer pricing”. If Ireland has lower taxes than New York State, why not locate a call centre there? Why not put the international accounting department there? Any multinational business will have dozens if not hundreds of discrete segments of its business that can be located wherever seems most opportune. The issue then becomes what price does one affiliate charge the other for providing the service to them? What price does the US business pay the Irish business for running the call centre to take warranty calls for Maytag dishwashers (an invented example – I don’t know where theirs is!). Clearly the prices are not set at arm’s length. If the price is set too high, of course, the impact is to shift profit from high tax USA to low tax Ireland. This problem exists EVERYWHERE and all governments everywhere employ armies of auditors and play a game of regulatory whack-a-mole trying to stay up to date with the latest “technology” in the area developed by imaginative tax lawyers and accountants. At the end of the day, the higher the tax rate gap, the greater the incentive to engage in such profit-shifting games. Many countries have concluded that more investment, more jobs and more taxes are to be had by making that incentive as low as possible (hopefully inducing a response of “it’s not worth it” from the CFO when the next scheme is proposed). The US is not, needless to say, one of those countries. It prefers to hemorrhage head offices (and associated high-value jobs, etc to say nothing of investments and tax revenue) and to complain about lack of patriotism.
When I hear the name Bernie Sanders, all I hear is THIS:
http://www.prosebeforehos.com/wordpress/wp-content/uploads/2013/09/bernie-sanders-patriotism.jpg
What a crock of unadulterated bullshit!
@AnneFrank – Excellent analysis.
Thanks for that, Anne Frank. So US taxation of corporations is as bizarre and disfunctional as that of individuals? Quelle surprise.
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Federal corporate income tax in the US is 35% (Canadian tax rate is 15%). The question is, who actually pays that much tax? In 2011 General Electric famously paid $0 in US corporate income tax. The US tax code now runs to nearly 74,000 pages. Much of that represents means by which individuals or corporations may avoid or defer taxes.
Accounting tax and actual tax eventually iron out in the long run, but seldom are the same in any given year. What you read in annual reports re average tax rates bears no relationship (or very little) to how much US tax is paid by any individual company. GE’s famous year of paying zero tax was because it had lost BILLIONS the year before and was able to carry those massive losses forward. I’m pretty sure not many are going to take “advantage” of a loophole that requires them to lose billions the old fashioned way (by buying high and selling low) in order to qualify. However, the path remains wide open for those inclined to take it.
Apple’s average tax rate reflects tax across the board and across multiple countries. They very likely show a deferred tax liability for tax payable if they re-patriate cash held abroad unless they have concluded they will never bring the funds home in the foreseeable future – that’s beyond my limited accounting pay grade! None of that impacts the very real and crazily negative impact of a broken tax system on ordinary investment decisions. If Apple is paying a low average tax rate and storing barge loads of cash just beyond the 3 mile limit, it hardly argues for taxes being too low. The reason that the barge doesn’t land and off-load the cash in San Francisco is because 35% of it would disappear on arrival and that cash was already taxed once when it was earned in another country. If Apple were to land the money and distribute to its shareholders, more than 50% would end up in Federal hands (more if you count the various states) since the dividends paid would get taxed all over again. The system creates perverse incentives (to store money where it is not needed; to borrow money in one country when cash is stored in another, to out-source jobs, etc) that simply harm the economy that imposes the stupid rules and fails to raise anywhere near as much revenue as a simpler and perceived fair system would (witness Apple’s low average tax rate). Instead of paying the high rates and grumble, businesses that can vote with their feet and transfer whole functions abroad (Apple) or invert (Abbevie). That’s two bullets delivered right through the Government’s right foot for the price of one.
From Forbes, 2010:
“Over the last two years, GE Capital has displayed an uncanny ability to lose lots of money in the U.S. (posting a $6.5 billion loss in 2009), and make lots of money overseas (a $4.3 billion gain). Not only do the U.S. losses balance out the overseas gains, but GE can defer taxes on that overseas income indefinitely.”
So “losses” may be the result of creative accounting.
Source: http://www.forbes.com/2010/04/01/ge-exxon-walmart-business-washington-corporate-taxes.html
The GE example was only meant to illustrate that major corporations do not necessarily pay the 35 percent marginal corporate income tax rate.