Burger King deal gives Dems appetite to tackle tax gambit

Congressional Democrats will intensify their efforts to stop corporations from fleeing offshore to slash their tax bill when lawmakers return next month.

Democrats argue that that the pounding Burger King, the most prominent U.S. company yet to announce plans to reincorporate abroad, has taken on social media illustrates that the normally obscure tax maneuver known as an inversion can fuel voter outrage ahead of November’s midterm elections.

ADVERTISEMENT
Burger King’s decision to merge with the Canadian doughnut chain Tim Hortons “only adds fuel to the fire,” one Democratic aide said this week, even if the burger giant swears that tax considerations were not a central factor in the deal.

“It’s a well-known company engaging in this, whether that’s the sole reason for the deal or not,” the aide said.

ADVERTISEMENT

Democratic lawmakers are increasingly eager to respond to the recent wave of cross-border tax deals, and ready to amplify the rhetoric on an issue they think will help sway voters. They believe they have found a populist argument that will resonate: Corporations are getting away with tax dodges that regular taxpayers never could.

But there are serious questions about how much time will be available for lawmakers to deal with the issue in September — even putting aside the fact that Republicans have shown little interest in joining Democrats on a legislative fix.

Members, who will have one eye on the exits with just weeks to go before the midterm elections, face a Sept. 30 deadline to enact a stopgap funding measure to avoid a government shutdown.

GOP leaders would like to get the government funded with as little rancor as possible, so as to avoid disturbing a favorable political climate. But that will not necessarily be easy given that rank-and-file conservatives are already up in arms that President Obama might take further executive actions on immigration.

Put all those factors together, and Democrats could be left with little time to make a legislative push on the recent corporate tax deals.

Senate Finance Chairman Ron Wyden (D-Ore.) has said he is working with colleagues like Sen. Orrin Hatch (Utah), the panel’s top Republican, on a possible bipartisan measure.

In recent inversions, U.S. companies have generally merged with smaller foreign businesses, allowing them to set up shop in other countries with friendlier tax climates.

Top Democrats are seeking legislation that would essentially only allow an American company to shift its legal address abroad if it merged with a larger foreign company.

One Democratic aide predicted that the Senate Finance Committee would consider a package seeking to curb inversions in September – and would have done so even without Burger King’s announcement this month.

Still, not all Democratic tax writers have fully embraced a targeted inversions measure, and Hatch’s conditions for legislation appear to leave little common ground for a bipartisan deal.

Lawmakers on both sides have said that a broader revamp of the tax code is the best way to limit the cross-border deals, but efforts on that front have stalled in recent months.

With no breakthroughs expected on Capitol Hill, President Obama has said he is willing to take administrative actions to limit the appeal of inversions.

The Treasury Department has yet to say when those actions could be announced. A spokeswoman said Friday that Treasury Secretary Jack Lew is hoping to “have recommendations from his team in the near future,” but wouldn’t be making any “major announcements” when he pushes for broader tax reform in a Sept. 8 speech.

Burger King moved forward on its efforts to merge with Tim Hortons despite the president’s warning on possible executive action. The burger chain has repeatedly insisted that the deal was driven far more by strategic desires to expand than any tax savings.

Even Democrats sounded sympathetic to those statements this week, with some aides acknowledging that leading legislative proposals to curb inversions could easily have little effect on the Burger King deal. 

“I think we need to be careful that we don’t overapply inversions, and make everyone the bad guy,” one Democratic aide said.

The Democratic proposals would allow U.S. companies to leave if the new merged company had a certain amount of sales, employees and assets wherever it was based. The parent company for Burger King and Tim Hortons is expected to be in Canada, where Tim Hortons already has a strong presence.

Still, Marty Sullivan, a former Treasury economist, said that Burger King could get plenty of tax benefits from merging with Tim Hortons. The two companies say their effective tax rates are roughly similar now, even though Canada has a lower corporate rate.

But Sullivan, now a contributing editor to Tax Notes, pointed out that having a Canadian parent would make it easier for Burger King to move its cash from country to country. The Treasury taxes corporations’ offshore profits, but allows companies to defer paying until the money is brought to the United States.

The deal would also allow Burger King to engage in a practice called “earnings stripping,” in which U.S. subsidiaries get loans from their foreign parent and then take a tax deduction on interest payments.

Sen. Chuck Schumer (D-N.Y.) is pushing legislation targeting earnings stripping that could limit some of those tax benefits.

“There certainly seems to be a lot of business purpose behind this, and so it doesn’t have the aroma of a tax loophole-driven deal,” Sullivan said. “But the benefits to Burger King are the same. What you couldn’t do before, you can now.”