Perhaps the blockbuster corporate deal of the summer was the announcement that U.S. fast food giant Burger King Worldwide Inc. would be acquiring Canada’s Tim Hortons Inc. chain for $12.5 billion. But what could have ended with a light discussion about the merits of enjoying a double-double with your WHOPPER turned into a massive discussion of corporate tax policy thanks to Burger King’s announced intention to move its corporate head office to Oakville, Ont. under the terms of the merger.
This adds fuel to the fire south of the border about corporate tax inversions — a hot topic in the U.S. right now, but one that we have traditionally heard little about in Canada. This is for good reason as it’s simply never been an issue for Canadian companies. An unfamiliar term for most Canadians until this past summer, corporate inversions are a U.S. phenomenon, as some U.S. companies with significant global operations and profits seek to merge with a foreign corporation, and, in so doing, move the headquarters of the merged corporation to that foreign, lower-taxed jurisdiction. This achieves two objectives: a lower corporate tax rate and, more significantly, the avoidance of U.S. taxes on repatriated earnings.
According to KPMG LLP’s recently published Corporate and Indirect Tax Rate Survey 2014, the U.S.’s combined federal and state corporate tax rate of 40% is the highest in the world next to the United Arab Emirates’ corporate tax rate of 55% — although a footnote is quick to add that “having the highest statutory rate does not mean that the tax is actually levied.” Canada’s combined corporate federal and provincial rate stands at 26.5%, making Canada a relative corporate tax haven. To the extent that income can be shifted into Canada (or any other lower taxed jurisdiction) in future years as a result of a foreign merger, there would be an absolute tax savings realized by the former U.S. corporation.
But an even stronger motivation for inversions is the U.S. tax rule that requires U.S. corporations to pay U.S. corporate taxes on global earnings when they are repatriated even though those earnings will most likely already have been taxed abroad in the foreign jurisdiction. Canada, like the other five other G7 countries besides the U.S., taxes on a territorial basis and does not impose its own taxes on income earned abroad.
So, from a corporate tax policy perspective, if the U.S. is worried about more corporate inversions, it could look to Canada as an example of a globally competitive corporate tax rate and move to a territorial based corporate tax system like its G7 partners. As much as we may like to complain about our tax system in Canada, at least as far as corporate tax rates and policy, we seem to being doing a couple of things right.