It's a Whopper of a Double Double

The latest "inversion" of Tim Horton's and Burger King was expected--as a tax planning concept.  What wasn't expected is that it took so long for a major company to opt for Canada rather than, say, Ireland as a place to do an "inversion".  The differential in corporate taxation between Canada and the US, about 10 points is significant enough.  However, the greater benefit--and one that is just beginning to percolate with US tax planners---is that foreign profits can largely be repatriated to Canada tax free as against a 35% tax for US corporations.  Accordingly, corporations can incorporate offshore active business affiliates in low-no tax jurisdictions and repatriate after tax (usually 2.5% or, in the case of Nevis or Cayman no tax) profits tax free to Canada as exempt surplus.  This is a huge benefit not only in tax savings but in the mobility of capital.  While there are still some hurdles (e.g. transfer pricing between the Canadian parent and its offshore trading company) these issues are no less important than relationships between a US parent and its offshore subsidiary.

It is important to note that the methodology for doing this "inversion" is that of merger between a US and Canadian (or Irish) company.  Establishing a Canadian subsidiary does not work because the subsidiary will be classified as a Controlled Foreign Corporation (or CFC) and taxed as if it were a US corporation.  US companies have tried several mechanisms to avoid having a CFC in Canada (the usual mechanism is to have a trust formed in Canada hold the controlling shares in the Canadian sub) but the better alternative is to merge with a Canadian company.

A question arises concerning the treatment of dividends to US taxpayers from a Canadian company.  Usually there is a withholding tax levied on the dividend paid to foreign taxpayers.  This dividend is usually creditable by the US taxpayer against tax normally paid in the US.  Regard should be had for the Canada-US tax treaty. Canadian shareholders in Burger King will benefit significantly.  Canadian shareholders receiving dividends from a Canadian corporation will get the benefit of the dividend tax credit.  This reduces the tax on Canadian based dividends.  This was not available to Canadian taxpayers of Burger King when Burger King was a US company.

US tax policy regarding the repatriation of foreign after tax profits is plainly wrong headed.  This policy has kept much needed capital outside the US and has driven companies to find unlikely partners in low-no tax jurisdictions.

The current hubbub illustrates how far we have strayed from the general tax principle that people can arrange their affairs so that they pay the least amount of tax.  Tax, as I have always said, is not a moral issue; its a commercial issue.  Corporations will migrate to jurisdictions with the lowest tax rate.  Tax is, almost always, the biggest expenditure that a company makes.  A company's treasury will demand that tax rates be kept as low as possible.