Tuesday, August 26, 2014

INVERSIONS | Burger King Won't Have It Their Way (Comment)

Can Burger King Have It Their Way and move its HQ to
Canada to avoid paying U.S. taxes?
August 26, 2014–Burger King is pursuing the inversion approach to avoiding taxes through moving its headquarters to the home of a Canadian company.

The Congressional Research Service reports that 47 American companies have pursued inversions in the last ten years to escape American taxes.

Burger King is merging with Tim Horton's (a fine very-Canadian company, by the way - I have eaten there a few times).

But I don't think BK is going to have it their way.

Consumer-brand-driven companies can't get away with moving their headquarters to avoid (evade?) taxes. It isn't clear that pharma companies can either, when the dust settles and policy-makers figure out how to address the issue.

It seems to me the tax benefits of a Canadian takeover cannot possibly match the economic impact of a #BoycottBurgerKing (or #BoycottBK) campaign. There are too many competitors and their margin is too low.
The announcement met an immediate backlash on Burger King’s Facebook page. “If you attempt to buy Tim Horton’s for the purposes of evading US Taxes, I will NEVER step foot in another Burger King again,”wrote Facebook user Gabe Gibbons. By 10:30am ET more than 1,400 other users liked the comment, and hundreds replied. On Twitter, users expressed their distaste for the company going abroad with hashtags.
The company that is paying the highest percentage of its net income is Exxon Mobil, 42 percent. It sounds like a lot, $24.3 billion, and Uncle Sam and its other taxpayers are grateful. But this is on revenue of $394 billion. If you earned $394,000 last year, you surely would not begrudge the U.S. Government $24,300 in taxes. Would you?

The food industry has lower margins. But it is also much more vulnerable to the charge of deserting its own customers... I don't think this flag will fly. I am sorry for the investors, who will find out the implications of the consumer being king.

Effective Tax Rates for the 15 Most Profitable U.S. Companies, FY 2013

1. Apple Computer 26.2%Revenue: $174 billion Net income: $37 billion
Provision for income taxes: $13.2 billion
2. Exxon Mobil 42%Revenue: $394 billion Net income: $32.6 billion
Provision for income taxes: $24.3 billion
3. Microsoft 18.6%Revenue: $83 billion

 Net income: $22.8 billion
Provision for income taxes: $5.2 billion
4. Pfizer 27.4%Revenue: $52.7 billion Net income: $22 billion
Provision for income taxes: $4.36 billion
5. Wells Fargo 32%Revenue: $89 billion Net income: $21.9 billion
Provision for income taxes: $10.4 billion
6. Chevron 40%Revenue: $212 billion Net income: $21.4 billion


Provision for income taxes: $14.3 billion
7.Berkshire Hathaway 31%Revenue: $179 billion Net income: $19.5 billion
Provision for income taxes: $8.95 billion
8. AT&T 33%Revenue: $129 billion Net income: $18.2 billion
Provision for income taxes: $9.2 billion
9. JP Morgan Chase 31%Revenue: $106 billion Net income: $17.3 billion
Provision for income taxes: $8 billion


10. IBM 15.6%Revenue: $100 billion Net income: $16.5 billion
Provision for income taxes: $3 billion
11.Wal-Mart 33%Revenue: $477 billion  Net income: $16 billion
Provision for income taxes: $8.1 billion
12. Johnson & Johnson 10.6%Revenue: $71 billion  Net income: $13.8 billion
Provision for income taxes: $1.6 billion
13. Citigroup 30%Revenue: $94 billion Net income: $13.4 billion
Provision for income taxes: $5.9 billion
14. General Electric 4.2%Revenue: $143 billion Net income: $13 billion
Provision for income taxes: $676 million
15. Google 15.7%Revenue: $60 billion Net income: $13 billion
Provision for income taxes: $2.3 billion

The above information on Effective Tax Rates (ETRs) are for the 15 most profitable U.S. companies (profit = net income).  Data from FactSet Research Systems.

Comment

Mark Thoma has a radical thought - the avoidance of corporate income taxes takes up so much of the time of skilled workers that it represents a huge diversion of productivity away from work that might be more useful to the public. He wonders whether we wouldn't be better off if we just dropped the corporate income tax to zero. This would allow the IRS to tax capital gains and dividends as ordinary income - the double taxation argument would disappear.

I think he is onto something. It would certainly be very satisfying to put some people out of business who generate huge fees but don't seem to add social value.

But I'm not sure about some of Thoma's assumptions. I don't think we can count on any particular percentage of the tax savings going to worker salaries. Also, a lot of the people who earn large fees for helping companies avoid taxes may not be able to do anything else. They will have stranded skills. Stranded human capital...