Burger King is in talks to buy Tim Hortons — the Canadian version of Dunkin' Donuts — to help the company skirt paying the U.S. corporate tax rate on overseas income, The Wall Street Journal reported Sunday. Under the deal, America's least-favorite burger makers would form a new company with Tim Hortons based in Canada. The two could reach a deal soon as this week.
Like a lot of American corporations, Burger King is considering casting off its U.S. citizenship because it's really easy. Under current U.S. law, a company just has to buy 20 percent of a foreign corporation to transfer its base, through a process called a corporate inversion. Once the headquarters have moved, U.S. profits are subject to the 35 percent U.S. tax, but profits abroad are only subject to the lower rate. Canada lowered its corporate tax rate to 15 percent in 2012. And though that rate climbs to about 26 percent when you factor in provincial corporate taxes, that's still lower than America's 35 percent tax.
Aware of the political backlash inversions cause, Burger King and Tim Hortons are trying to downplay the tax benefits of the move. The two argue that the main goal is to help the them compete against McDonalds and Yum Brands (Taco Bell and KFC), according to The New York Times. "People briefed on the matter" told The Times that taxes weren't the main allure for Burger King, which would only cut its tax rate by a few percentage points.
Congress and the Obama administration agree this is a big problem that is only getting more and more popular among companies. Earlier this month the Treasury Department said it was considering executive actions the administration could take to curb the rise of inversions. That unilateral action — whenever the department figures out what it can do legally — would limit the tax benefits corporations get from inversions, or prevent companies involved in inversions from getting federal contracts. But it wouldn't change the law.
For that, we need Congress. Democrats and Republicans agree that 35 percent is too high, but can't agree on how to fix the system. Meanwhile, companies are increasing the pace of their inversions in anticipation of that government reform.