One of the hot topics of the moment is "tax inversion", a move in which an American company merges with a foreign company and locates the resulting company outside the USA to save on taxes. The latest example of this move is the proposed merger between Burger King and Canadian company Tim Horton's which will result in a new, big Canadian company. Much has been said about tax inversions, but few people actually understand what is happening. Here is a short explanation:
1. Under American tax law, an American company pays tax on its profits earned from operations in the USA. Profits on foreign operations are taxed by the country where the profits were earned unless those profits are transferred back into the USA, after which the company must also pay tax on those foreign profits.
2. No other large industrial country taxes profits of its companies that are earned in another country.
3. The rate of taxation in the USA on corporate profits is by far the highest in the world.
Think of what that means for the average American company and the average foreign company. Let's use Burger King and Tim Hortons. Both companies do business in both the USA and Canada (and elsewhere). Right now, Tim Hortons and Burger King both pay taxes of 35% of the profits earned in the USA. Both Tim Horton's and Burger King pay 15% of the profits they earn in Canada to the Canadian government. If Burger King and Tim Horton's then each send one million dollars of Canadian profits to the USA to invest in some new stores, Burger King has to pay American taxes on that money but Time Horton's does not. After a tax inversion, everything would be the same, but if Burger King then sent money into the US for a new store, no American tax would be due.
The truth is that the example shows how the American corporate tax system makes it harder for American companies to compete with foreign companies. Another good example comes in the auto industry. Ford and Toyota both sell cars worldwide. If each of these two companies want to build a plant in Tennessee to assemble trucks, American taxes may give Toyota a big advantage. Toyota can bring cash earned from operations in South America into the USA and invest it in the new plant. If Ford does exactly the same thing, when it brings the cash from South America to the USA, Ford suddenly owes the US government up to 35% of the money in taxes. Toyota might spend ten million dollars of the cash on the new plant. To get the same result, Ford might have to bring in close to 14 million dollars.
According to president Obama, it is unpatriotic for a company to use a tax inversion to save on taxes in this way. The truth is really something quite different. The real truth is that it is moronic for the federal government to penalize American companies by taxing foreign operations. This tax law keeps literally trillions of dollars from being invested in America. This tax law reduces economic growth in a meaningful way. This tax law keeps the number of new, good jobs from growing as quickly as possible. The real truth is that the current tax law that hurts American businesses and American job seekers is what is actually unpatriotic. It is time to change the law.
1. Under American tax law, an American company pays tax on its profits earned from operations in the USA. Profits on foreign operations are taxed by the country where the profits were earned unless those profits are transferred back into the USA, after which the company must also pay tax on those foreign profits.
2. No other large industrial country taxes profits of its companies that are earned in another country.
3. The rate of taxation in the USA on corporate profits is by far the highest in the world.
Think of what that means for the average American company and the average foreign company. Let's use Burger King and Tim Hortons. Both companies do business in both the USA and Canada (and elsewhere). Right now, Tim Hortons and Burger King both pay taxes of 35% of the profits earned in the USA. Both Tim Horton's and Burger King pay 15% of the profits they earn in Canada to the Canadian government. If Burger King and Tim Horton's then each send one million dollars of Canadian profits to the USA to invest in some new stores, Burger King has to pay American taxes on that money but Time Horton's does not. After a tax inversion, everything would be the same, but if Burger King then sent money into the US for a new store, no American tax would be due.
The truth is that the example shows how the American corporate tax system makes it harder for American companies to compete with foreign companies. Another good example comes in the auto industry. Ford and Toyota both sell cars worldwide. If each of these two companies want to build a plant in Tennessee to assemble trucks, American taxes may give Toyota a big advantage. Toyota can bring cash earned from operations in South America into the USA and invest it in the new plant. If Ford does exactly the same thing, when it brings the cash from South America to the USA, Ford suddenly owes the US government up to 35% of the money in taxes. Toyota might spend ten million dollars of the cash on the new plant. To get the same result, Ford might have to bring in close to 14 million dollars.
According to president Obama, it is unpatriotic for a company to use a tax inversion to save on taxes in this way. The truth is really something quite different. The real truth is that it is moronic for the federal government to penalize American companies by taxing foreign operations. This tax law keeps literally trillions of dollars from being invested in America. This tax law reduces economic growth in a meaningful way. This tax law keeps the number of new, good jobs from growing as quickly as possible. The real truth is that the current tax law that hurts American businesses and American job seekers is what is actually unpatriotic. It is time to change the law.
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