- The Washington Times - Thursday, September 4, 2014

Despite public outcry over businesses such as Burger King moving their headquarters out of the U.S. to take advantage of lower taxes, look for the trend to pick up unless Congress moves to stop it.

U.S. businesses are more profitable than ever before, but the mountains of cash they are accumulating are subject to the world’s highest corporate tax rate of 35 percent.

Burger King is the latest in a long line of corporations that are moving to purchase companies outside the U.S. through “tax inversion” deals so they can move headquarters and reap the benefits of lower tax rates in countries such as Ireland, the Netherlands or, in Burger King’s case, Canada.

“The rate at which tax inversions are occurring is growing extraordinarily quickly,” said John O. Peel of Orange Peel Investments, who noted that businesses are increasingly mindful that rising profits mean higher tax bills.

Americans may consider such deals unethical, but tax inversions have snowballed from three in 2010 to 14 so far this year.

“The problem is a sign that something needs to be fixed within the U.S. tax code,” Mr. Peel said. “It tells us something to begin with, that these types of things are happening. Perhaps it is time to address serious corporate tax reform in this country.”

Last spring, retail drug chain Walgreen Co. proposed to purchase Switzerland’s Alliance-Boosts and move its headquarters overseas, but a fierce backlash by customers and politicians forced the company to abandon its plan. Before that, pharmaceutical firm Pfizer Inc. backed away from a similar move.

High-profile companies such as Burger King may encounter trouble trying to buck public opinion, but a raft of lesser-known corporate giants such as Liberty Global plc, Eaton Corp. Plc and Applied Materials have successfully used inversion deals to lower their tax bills. Tax analysts estimate that American businesses are eyeing as many as 100 such deals today.

Burger King said its acquisition of Tim Hortons Inc. was not motivated by the desire to avoid taxes because it would continue to pay close to its 27 percent U.S. tax rate if it moves its headquarters to Canada.

Still, the Miami-based fast-food chain is under pressure from Democrats who denounce such deals as unpatriotic and are whipping up public sentiment against corporations perceived to be abandoning their U.S. roots.

Democrats have proposed punishing or prohibiting most such inversions, and the Senate may take up legislation before midterm elections. Analysts give such measures little chance of passing the Republican-led House.

All sides agree that the best way to stop the trend would be for Congress to reform the corporate tax code by lowering the top rate while closing egregious loopholes that enable some corporations to pay no taxes at all. That would remove the incentive to leave the U.S.

President Obama and many congressional leaders have said they want to do this. Moreover, Senate Finance Committee Chairman Ron Wyden, Oregon Democrat, recently came out in favor of lowering the top corporate tax rate to 24 percent as the best way to stop the wave of tax inversions. But congressional observers say that even with those top-tier endorsements, partisan gridlock taxes stands in the way of action on Capitol Hill.

Differences remain on critical elements of any reform effort in Congress. Republicans want to include individual taxes as well as corporate taxes in a massive overhaul of the tax code and seek a revenue-neutral deal. The president and a majority of congressional Democrats want to limit the reform effort to corporate taxes and raise revenue for deficit reduction. These differences have blocked any attempt to negotiate tax reform.

“I believe the Democrats are right that we should curtail tax inversions and the Republicans are right that it should be part of an overall tax reform package,” said Jerry Jasinowski, a former president of the National Association of Manufacturers. “Our tax system is a mess of special interest provisions that needs to be cleaned up. Comprehensive reform will be a major challenge, but the tax inversion issue provides an incentive to take it on that should not be missed.”

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