Wednesday, September 10, 2014

Need a primer on "Tax Inversions"? Link to a nice one here.

Confused by the issue of "Tax Inversions" as brought to prominence by the Burger King/Tim Horton's merger?

This document HERE from the Congressional Research Service (HT: The Conversable Economist) is the best explanation, without the politics/inflammatory language, as I have seen.  I thought I understood the issue but this relatively short read pointed out MANY things I did not know.  Worth a read if you are interested in the topic.

Here is an excerpt:
The United States uses a system that taxes both the worldwide income of U.S. corporations and the income of foreign firms earned within U.S. borders. All income earned within U.S. borders is taxed the same—in the year earned and at statutory tax rates up to 35%.  
U.S. corporate income earned outside the United States is also subject to U.S. taxation, though not necessarily in the year earned. This occurs because U.S. corporations can defer U.S. tax on active income earned abroad in foreign subsidiaries until it is paid, or repatriated, to the U.S. parent company as a dividend. To mitigate double taxation, tax due on repatriated income is reduced by the amount of foreign taxes already paid. 
The second paragraph is the important one to get a grasp of the issue.  The US (apparently) is the only country that taxes a company on its foreign profits in addition to the domestic profits.

Because BK is based in the US, profits from its restaurants in Boise AND Beijing (Paris, London, Mexico City, on and on...) are subject to the US Federal income tax.

Now that the corporate headquarters is officially in Canada, BK will only have to pay US Federal taxes on profits in Boise (meaning all its US operations).

Do you see the incentive?
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