Here's Why Legislation Aimed At Tax Inversions Might Not Have Any Effect On Burger King
Even as lawmakers played up the talks as a potential wake-up call to the American public, it's unclear whether legislation proposed by Democrats in both the House and Senate would address this specific merger.
So-called tax "inversions" have become a corporate trend over the past year, as companies have either acquired rivals or merged with them to relocate their headquarters to a foreign country with lower corporate tax rates. At 35%, the U.S. has the highest corporate tax rate in the industrialized world. In this case, Canada's corporate tax rate is just 15%.
Legislation introduced in the House by Ways and Means Committee Ranking Member Sander Levin (D-Michigan) would attempt to stop the flow of corporate inversions in a few different ways. (Sen. Carl Levin, also a Democrat from Michigan, has introduced companion legislation in the Senate that could get a vote in September.)
Levin's legislation would change the tax code so that the stakeholders of U.S. companies who reincorporate overseas through an inversion would have maintain at least 50% of the combined foreign corporation. But the Burger King-Tim Hortons merger could be granted an exception under the legislation.
The bill would continue to provide an exception for the companies if "the affiliated group has substantial business activities" in the foreign country where the combined entity is permanently located - specifically, if 25% of employees by number, employees by compensation, assets, and income are held in the foreign country.
Because the two companies are similar in terms of market cap, the thinking is that a significant chunk of the combined entity's assets, income, and employees would remain in Canada. A House Democratic aide familiar with the legislation told Business Insider that their "hunch" is that the legislation would allow for an exception. The aide cautioned, though, that they didn't have any more information than what had been reported about the possible deal in the press.
However, Rep. Chris Van Hollen (D-Maryland), the ranking member on the House Budget Committee and a co-sponsor of the legislation, told Business Insider in an interview on Monday he believes the bill would still apply to the potential Burger King-Tim Hortons.
AP ImagesA sign welcoming President Barack Obama is seen at a Burger King in Orefield, Pa., near where President Barack Obama gave a speech, at Lehigh Carbon Community College on Friday, Dec. 4, 2009.
Burger King, he explained, would still control more than 50% of the combined foreign corporation and there are other provisions in the legislation dealing with where "most of the operations would reside."
"Based on the facts as I understand them, our legislation would still apply," he said.
Van Hollen said he hoped the fact an corporation as visible and quintessentially American as Burger King would spur congressional Republicans to act on inversion legislation. In an interview with Business Insider over the weekend, Rep. Paul Ryan (R-Wisconsin), the chair of the House Budget Committee, agreed that inversions represent a "dangerous trend."
But Ryan, like many other congressional Republicans, favor a fix to inversions as part of broad, overall tax reform. But that's a big project that likely won't even begin to be tackled until next year.
"I think this is going to create a huge backlash in the country and, I hope, in the Congress," Van Hollen said. And I hope this will spur congressional Republicans to act on an immediate basis. We're all in favor of tax reform, but we need to address this particular piece immediately."
Later, he added: "If I were McDonald's, I'd launch a 'Buy America' campaign the day after" the potential deal is completed.