What’s All The Buzz About Tax Inversions?

ABRAHAM GEAN — Considering all of the advantages that come with living and doing business in Florida, one might wonder why some corporations are looking to leave. The recent news of Burger King’s acquisition of the Canadian chain Tim Hortons comes with an interesting twist. After the deal is completed, Burger King plans to move its legal address from Miami to Ontario.

Burger King is not ditching Florida entirely. The company is merely swapping out its legal address for a foreign one while maintaining all of its operations as they currently stand. But this still raises the question: Why would a U.S. corporation want to make this move?

Burger King is the latest in a series of corporate inversions that have caught the attention of the Obama administration. The practice typically involves a U.S. corporation acquiring a smaller corporation that is based in country with more favorable tax policies. The U.S. corporation is then able to switch it’s headquarter address from it’s original U.S. address to the address of the smaller foreign corporation, thereby “inverting” the corporation and enabling it to take advantage of the foreign tax policies.

Inversion does not authorize a corporation to avoid paying taxes on income earned within the United States. However, a tax inversion may present significant tax savings on income earned outside of U.S. borders. This is because the U.S., unlike some other countries that only tax on domestic income, employs a worldwide tax method that taxes its citizens on all income. Therefore a company that is incorporated in the U.S. pays a “double” tax on income earned abroad – once to the country in which the money was earned and a second time to the U.S. Simply put, an inverted corporation would only pay the tax of the foreign country for as long as the money stays offshore. Some estimate that the U.S. stands to lose nearly $20 billion in tax revenue over the next decade because of inversions.

Recall the crucial distinction between tax avoidance and tax evasion. Tax avoidance, or minimizing your tax bill by planning and recording your financial transactions in a strategic manner, is a legal and encouraged practice.  Tax evasion, or the deliberate misrepresentation of a company’s financials in order to pay fewer taxes, is a crime. It seems that until the government can come up with a way to further discourage inversions, the method is fair game.  President Obama has recently called inversions an “unpatriotic tax loophole” and the Treasury Department has already begun to crack down on the practice.

Given that tax inversions are currently a legitimate method of reducing taxes, a corporate executive may view things differently than the government does. They may argue that not only may tax avoidance be a wise financial decision, but that they also have an obligation to their shareholders to run the business in a responsible manner and to cut unnecessary costs wherever possible. This principle would apply whether the unnecessary costs are superfluous business costs or if they are taxes owed to the government.

In light of the competing interests of the government to maintain its revenue and corporate executives to maximize profits, it will be interesting to see if future tax inversions are curtailed by the recent revisions made by the Treasury.