So they’re technically renouncing their U.S. citizenship. They’re declaring they’re based someplace else even though most of their operations are here. Some people are calling these companies “corporate deserters.”
And it’s only a few big corporations so far. …
— Barack Obama (24 July 2014) White House Transcript
Post Tim Horton’s, Obama looks like he’s thinking about (1) Canada as haven (2) the individual lives worldwide that the U.S. has willfully been driving into the desperations of financial ruin, severe psychic stress, marital breakup, contemplation of suicide — and skyrocketing rates of renunciation.
What really ticks Obama off is those big corporations. He talks about them just like they were individuals. Oopsie. Category mistake!
Usually what happens is that the foreign owner will find a way to “charge” the American client for something that is a deduction under US tax law.
One way is for the foreign parent to loan the American company millions of dollars at inflated interest rates. The interest payment is sent out of country and appears on the foreign books as profits, the American company deducts the interest from their profits and doesnt pay any tax on it. The net result is that the American company makes little profit and the foreign one makes lots.
Another method that companies like Microsoft use is that the product that they sell is actually owned by the foreign company and Microsoft USA has to pay a significant licencing fee to Microsoft Ireland for every product sold. The end result is the same, Microsoft Ireland makes a very large profit and pays a small percentage in corporate tax whild Microsoft USA makes a small profit but payes a larger percentage of tax.
There are very complicated transfer pricing rules that are supposed to limit these kinds of things but if you throw enough money at some clever laywers then it is possible to minimize their effect.
If a German company buys Hortons and remains headquartered in Germany, it pays 26% taxes to Canada for Hortons. Period. If a US company buys Hortons and remains headquartered in US, it pays 40% in taxes to USA for Horton’s profits.
What is at issue is that Obama’s rhetoric was one barrel on US corporations and one barrel on US persons.
Just a Canadian is spot on about the impact to the US of the inversions. Without question a significant amount of debt will be pushed down on the US subsidiary so they can strip the profits out of a high tax environment into a lower tax environment. They will also permanently lose the ability to tax the difference between locally incurred taxes and the US corporate tax rate on profits remitted to the US.
These strategies are pursued very aggressively by corporations. Apparently one of the reasons why Starbucks pays so little tax in the UK is because the “intellectual property” for roasting coffee beans resides within their corporate structure in Switzerland. As a result, Starbucks UK purchases its roasted coffee from Starbucks Switzerland at vastly inflated prices allowing the profits to be shifted from the UK to Switzerland. Who knew that applying heat to a coffee bean was classed as “intellectual property”.
The actual consumer reaction in the US to Burger King will be interesting. The prospect of a backlash (whether from consumers or the government) already forced Walgreens into a u-turn. Many of the recent inversions have been in industries that are not as directly consumer facing as pharmacies or fast food.
Pharmaceuticals has been fertile territory for inversions but what the consumer buys is largely dictated to them by the prescribing doctor or the health insurance company or, in the case of generics, by the pharmacy’s selection of generic supplier. US pharmaceutical companies also face huge competition from international companies situated in friendlier tax jurisdictions (Roche and Novartis in Switzerland, AZN and GSK in the UK).
From a valuation perspective, Wall Street analysts really shouldn’t be giving full credit to US companies with offshore “trapped” cash when calculating enterprise value if the companies would lose 10-30% of that cash if they ever attempted to use it for share buybacks or dividends. US tax policy might also explain, in part, why dividends in the US market tend to be pretty low relative to other markets. US companies pay dividends out of US profits (because it would cost too much to pay dividends on international profits that would have to be repatriated to the US) while international companies pay dividends on worldwide profits.
A refreshing article on inversions that draws the connection between citizens and corporations, FATCA, and includes a twitter link to another outspoken McGill professor with American roots:
‘The whopper about global taxation
Corporate flight is telling us something about the U.S. tax system — if we would only listen.’
Article by: Megan McArdle , Bloomberg News
Updated: August 27, 2014 – 11:09 AM
“Jacob Levy, an American professor living in Montreal, made a point on Twitter this week that I wish more journalists would take to heart: If you’re writing about inversions, and you don’t prominently mention global taxation in the first few paragraphs, then your article is not serious and anyone with even a smidgen of actual interest in the issue should stop reading….”
…….”Practically speaking, global taxation is hard to enforce and loaded with bad incentives, which is why our fellow members of the Organization for Economic Cooperation and Development have moved away from global taxation of corporate income, and abandoned global taxation of personal income. If anything, the U.S. has gone in the other direction – by insisting, for instance, that foreign companies report various financial transactions with U.S. citizens to the Internal Revenue Service, and taxing foreign cost of living allowances, which makes it more expensive for companies to employ expats….”……
“………..If we’re worried about inversion, then the U.S. government should follow the lead of other developed countries, and move to territorial taxation. Otherwise, we should stop complaining when people and corporations decide that they’d rather be a citizen of some more sane system somewhere else.”
@badger The Bloombergview article lets you comment.
This is a significant article and should be highlighted on IBS.
Re: if the inversion article does not mention international tax in the first few paragraphs it is not serious.
Taxation is one part of it for USP abroad. Compliance is the other significant part. The compliance may be thousands of dollars and serious time yet the tax owed could be nil. Then how do we get the definition of tax to also include the compliance burden?
Please check media where I have posted a new link to another article on inversions- a scathing one.
Obama’s big buddy Warren Buffet is behind the Burger King merger:
Prime time swiss news just had a report on Burger King. They showed Lewin and Bama wanting to initiate a 2 year stop to inversions. Forbidden! Usual talk about “unpatriotic” and “wrong”!
Then talk about very high 39.1% corporate tax- and last but not least – Swiss commentator said that USA has to reform their tax code.
Update from Forbes (Aug 25, 2014): Warren Buffett’s Berkshire Hathaway Inc. is expected to provide about 25% of financing of the Burger King-Tim Horton’s deal, thrusting Mr. Buffett, who has been vocal about individual income tax rates in the past, into the corporate tax inversion debate.
Anyone want to write to Warren Buffett and ask if he’d like to financially support ADCS???????
I have to agree with Obama to a certain degree. It has been a big problem, especially in the EU. There is a lot of money involved. The counter argument about the competitiveness of the business is flawed. Its just the greed that drives international corporations to exploit the current state of affairs, especially after 4 decades of harsh neoliberalism all around the world. I believe that US should become more involved in the support of domestic production before it is taken over by other countries. Even in industries, where it is dominant – Hollywood for example.
Yeah- lots of movies being made in other countries. Cars too. So what you are saying is that instead of becoming more adaptive and competitive, America should nip the competition in the bud by FORBIDDING it?
No, I’m not trying to advocate this. What I want to say is that America needs to protect its own industries by subsidizing them. It has the power and the means to do so. And to make myself clear, I don’t consider big corporate businesses to be “American”. I’m rather talking about middle to small companies.
Sounds like we are talking apples and oranges here…
“People have choices,” he said. “They are going to vote with their feet.”
US tax professor comes up with scheme to turn foreign multinationals into US tax residents:
Yin: Stopping Corporate Inversions Sensibly and Legally
So, for example, if BMW sells more cars in the USA than any other country, they become US tax resident and liable to pay US taxes on their worldwide profits.
Oh man Johnson- things are getting worse and worse. I can just imagine what BMW would think about paying taxes to America on the cars it sells in Germany or France or China. That could only mean closing the american market- I can’t imagine anything else. I dont know if it would be worth it.
@Johnson, I don’t think that’s quite what he meant; the article is badly written. What he proposes I think is for those US companies that move their headquarters abroad for more favourable tax reasons would still be considered US tax resident if they sell more products in the US than elsewhere. I don’t think any major non-US HQ based company would wear being considered a US resident for tax purposes. It could also have a very detrimental affect on jobs in the US if companies like BMW decided to move their current US facilities out of the country due to the tax position if the US introduced such a proposal.
Frankly I see nothing legal about the proposal should they try and extend it to non-US companies. You sell more products here than anywhere else so we’re going to tax you as a US resident, even though you have no physical presence in our country. But then we all know the US laws are a law unto themselves.
So basically, it would be a giant Rube Goldberg tariff.