Burger King is in talks to acquire Tim Horton’s, the iconic Canadian donut shop, a merger which would result in one of the world’s largest fast-food companies. However, upon buying Tim Horton’s, Burger King would move its offices to Canada, taking its place in a growing line of corporations leaving the country in search of tax savings. The Obama administration has voiced concern over this trend and has intimated that it is considering measures to block corporate flight.
Perhaps the President and Congress could learn from the states, which are constantly tweaking their tax codes to attract and retain businesses, and thwarting efforts to shift profits outside their taxing jurisdictions. Lessons abound in the treatment of Delaware holding companies, economic development credits, throwback rules, and manipulation of apportionment formulas, and may serve as blueprints for federal strategies.
Like states such as California or New York, the U.S. federal tax system has been taking a beating because it is among the highest in the world at 35 percent. It seems to make sense that companies are fleeing to other countries to remain competitive in the business environment.
But are high tax rates the sole driver behind these corporate migrations? A recent study by Edward D. Kleinbard of the USC Gould School of Law suggests that the U.S. tax code does not create an “anti-competitive” environment, because the rates most companies actually pay are much lower than 35 percent.
Kleinbard also suggests that the recent influx of tax inversions is not due to companies seeking a better tax rate, but due to large amounts of foreign capital that they don’t wish to bring back to the United States.
Furthermore, Kleinbard argues, the current U.S. tax system has such few anti-abuse provisions that corporations are able to develop sophisticated strategies to avoid taxation, making our system easier to game than those in other countries.
Despite his argument that the current tax system is not anti-competitive, Kleinbard admits that the system is not perfect, and that there is plenty of room for improvement. Indeed, he notes that the tax inversion trend is occurring on a “backdrop of corporate existential despair over the political prospects for tax reform.”
Perhaps this is where the biggest difference lies between the states and the U.S. federal government. In the race to remain competitive states such as New York, North Carolina and Rhode Island have all recently substantially revised their tax codes. Meanwhile, the U.S. Tax Code remains stuck in neutral as companies head for greener pastures.
By Melissa Fernley
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn.
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Follow Melissa on Twitter: @mafernley
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