Burger King mascot. Germany, 2012.

You’ve probably heard of Burger King’s plan to buy Canadian restaurant chain Tim Hortons. News of the $11 billion “King Hortons” merger has caused stocks to soar, with analysts excitedly reporting that it will form the world’s third largest fast-food company. It isn’t exactly innovative for an American company to buy Tim Hortons: Wendy’s did it previously. What is new is the brazenness of its intent.

For all the talk of global expansion, and Tim Hortons is certainly a lucrative purchase for Burger King, stocks also surged for a different reason. The deal, which is occurring with Warren Buffet’s involvement, is basically going to allow Burger King to minimize its tax burden through a practice called “inversion.” We need to understand that Burger King is using Tim Hortons to evade taxes through a loophole that is not officially illegal.

The corporate tax rate is tiny in the United States: 39.1%. However, it is still not the lowest in the world. For instance, Ireland has a tax rate of 12.5%, which is why it is a popular spot for inversion as well. Canada’s corporate tax rate of 26.3% means that corporations which want to cut costs are naturally inclined to pay that amount rather than the American one. Their plan then becomes to buy a foreign company, merge with it, and then move operations to the cheaper jurisdiction (while still being managed in the US.) This is very similar to using a tax shelter. Except that it’s a massive corporation, and governments can’t really do anything about it by themselves.

The most that can be done is to block the merger. That is a tall order when it basically involves the Canadian government saying “no” to a huge amount of King Hortons tax dollars. That doesn’t make it impossible, it just makes it unlikely. This is the sort of thing that is only prevented when corporations fear the material consequences of massive backlash. American annoyance, and Canadian economic nationalism (“will Tim Hortons lose its Canadian-ness?”) isn’t enough.

Inversions are increasingly the new normal. There have been more than 70 since the 1980s, and they are occurring at an accelerated rate. Beyond the chase of greater profits at any cost, there is also a philosophical conflict that is driving this capital flight. Burger King wouldn’t be minimizing costs by inverting itself if its leadership believed that it has any social responsibility to the country that made it wealthy in the first place. It’s still worth saying, though. King Hortons is partially (if not mostly) a scheme by which Burger King is able to drain its customers of their purchasing power, which are turned into its profits, and then taken to a completely different location.

The fascinating, if morally bankrupt, thing about this is that Burger King is seeing its relationship to its customers themselves in remarkably 19th century terms. After all, the model of huge enterprises siphoning off money and power away from huge populations, and then taking them abroad, is an imperialistic one. The United States, and any place with customers, becomes seen as a carved-up area of land with resources that need to be extracted (replace “oil” or “spices” with “consumer buying power”) and nothing else. Burger King is seeing its restaurants in an almost colonial way. There are obvious differences, of course, but this is is the type of world that deregulated globalization has made possible. The fact that it is happening in highly developed states is what makes it so stark.

It is difficult to say where this trend ends. Sure, inversion isn’t illegal, but that doesn’t mean that Congress will never act on it. That is incredibly unlikely though, given that it also doesn’t feel much obligation to the American people. In any case, Americans¬† are clearly aware that this move is morally and ethically void. It’s fair to say that the vast majority of them are probably enraged by this deal. The same goes for Canada. Neither may feel like they can translate that anger into firm action, but the core questions are still there.

Why are corporations able to separate themselves from the country that built them into billion-dollar mammoths in the first place?  Why are moves like this even legal? These are all difficult things to grapple with, and answer. What is clear though is that as long as there are discrepancies in tax rates between different jurisdictions, we are going to have some variation of this problem. There will always be a creative way to minimize tax burdens in another location, and avoid local tax rates. It may even be impossible to overcome without massive systemic change.

 

Photograph courtesy of Gerald Stock. Published under a Creative Commons License.