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June 2012
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O CANADA Bad tax policy drives another U.S. firm out

Ohio Sen. Sherrod Brown wants Americans to boycott the home of the Whopper. No, we're not referring to Congress, although the term aptly describes it. We're referring to Burger King.

Brown is upset that Miami-based Burger King is buying Canadian donut chain Tim Horton's and relocating its headquarters to Canada in a so-called "inversion" that allows Burger King to escape the punitive U.S. corporate tax rate.

It is fair to note that Brown has a rooting interest here. Ohio is home to two Burger King competitors - Wendy's, based in Dublin, Ohio, and White Castle, based in Columbus.

"Burger King's decision to abandon the United States means consumers should turn to Wendy's Old Fashioned Hamburgers or White Castle sliders," Brown said.

Well, first, Burger King has hardly abandoned the country. In fact, even as a Canadian company it will continue to pay U.S. taxes on its U.S. sales. What will change however is that the U.S. will not be able to tax Burger King on its foreign profits. The U.S. is one of the very few developed countries that taxes domestic companies' foreign earnings. That and a 35 percent corporate tax rate - highest in the developed world - has led to a growing exodus of American firms via the inversion process.

The solution of course is for Sen. Brown and other Democrats to agree to a corporate tax reform program that lowers U.S. corporate rates (which were once among the world's lowest) to levels more consistent with nations like Canada, the UK and Ireland, which have become prime destinations for U.S. firms doing inversions. As part of that the U.S. needs to end its ill-considered practice of taxing foreign profits when U.S. companies attempt to bring them home. That practice has resulted in the hording of trillions of dollars abroad by U.S. companies.

It is also interesting that investor Warren Buffett is in the middle of the Burger King-Tim Horton's deal. He is putting $3 billion into the buyout, getting dividend-paying preferred shares in return.

Buffett is renowned for an essay he wrote in 2011 contending that the wealthy should pay more taxes. His position was the impetus for the so-called "Buffett rule'' touted by President Obama, which would minimize tax breaks for the highest-income individuals.

However, Buffett also is on record as saying his investment arm, Berkshire Hathaway Inc., will not voluntarily pay any more U.S. taxes than it owes. The Wall Street Journal reports that Buffett has on a number of occasions pursued business deal structures that minimize tax payments.

It is an interesting aside, as Buffett has generally been seen as an ally of the administration on tax issues.

Meanwhile, Fox News notes that a report by accounting firm KPMG finds total corporate tax costs are 46.4 percent lower in Canada than the United States. And while there is bipartisan support for corporate tax reform in Congress, some Democrats, President Obama chief among them, prefer things as they are. In fact the president is looking for ways through the regulatory process to strip away the tax benefits of inversions. He prefers that to adjusting rates to a level that is competitive with the rest of the world, reflecting the president's antipathy toward business and capitalism generally.

Against this backdrop, it appears that the parade of inversions could continue for the remainder of the president's term. True corporate tax reform seems unlikely to be possible until there is a new person with a different mindset in the White House.

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