Discourse of the Day, It's the Economy Stupid

Its the Economy Stupid-Corporate Inversion

Stop. Before you read any further I need you to ask yourself which you love more, Burger King or America. Because if your answer is America them by the end of this post you may not want to eat at Burger King ever again. So if you don’t want to be put into that kind of a Sophie’s Choice scenario your only option is to stop reading now. Okay, you’ve been warned. In this edition of Its the Economy Stupid we’re going to take a look at the most unpatriotic of all tax dodges: Corporate Inversion.
What’s that you ask? Good question. Corporate Inversion occurs when a U. S. based multinational corporation restructures itself so it becomes a subsidiary of a foreign company. By doing this the corporation becomes subject of that company’s foreign tax laws instead of the tax laws of the United States. The first instance of corporate inversion in America occurred in 1982. McDermott Inc, a construction company based in New Orleans, had a subsidiary in Panama that served as a holding company for the company’s foreign profits. Not wanting to pay taxes on these foreign gains, McDermott’s lawyers came up with the workaround of switching the roles of McDermott Inc and the subsidiary, McDermott International. Obviously, the IRS was not overly thrilled about this and came after McDermott and its shareholders but after a few years of court battle, McDermott prevailed. The floodgates were open. Well almost, surprisingly it took almost ten years for corporate inversion to catch on but once it did in the mid-nineties it seemed like every American multi-national was looking for a way to move themselves overseas.
Since then there has been a tug of war between the Federal Government and companies looking to invert. The government has issued guidances, rulings, and new laws in an effort to curb inversions and corporations have simply found newer, more creative workarounds. For instance, when a congressional act dictated that inverted companies would still count as domestic if eighty percent of shareholders were American these corporations simply sold of more shares to foreign proxies.
The real advantage of corporate inversion isn’t that it allows them to avoid taxes on non-U.S. profits but that it allows them to claim a substantial portion of their U.S. profits to their foreign parent and thus avoid paying taxes on those earnings as well. This is called earnings stripping. By disguising their profits and capital investments as loans made between different divisions of the same company theses inverted corporations are able to shift profits out of high-tax jurisdictions and into lower-tax ones.
What does this have to do with Burger King? Well, Burger King’s acquisition of famed Canadian restaurant chain Tim Horton’s in 2015 led to them inverting their profits to Canada saving them hundreds of millions of dollars a year in US taxes. Remember that the next time they wave an American flag in the background of one of their commercials.

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