The $11.5 billion Burger King Worldwide (BKW) deal to buy coffee-and-doughnut chain Tim Hortons and reincorporate in Canada will proceed, despite an Obama administration crackdown on corporate inversions, the firms said Tuesday.
The response came after Monday night’s Department of the Treasury announcement of new rules that could make it more difficult and less profitable for U.S. firms to pursue inversions — move their official addresses overseas in a bid to lower future taxes and gain freer use of cash held in foreign subsidiaries.
“We are moving forward as planned. As we’ve said previously, this deal has always been driven by long-term growth and not by tax benefits,” Burger King and Tim Hortons said in a joint statement.
Medtronic (MDT) said it was studying the Treasury action to assess potential impact on its planned $42.9 billion inversion acquisition of Ireland-based Covidien. Several other U.S. firms with pending inversion plans did not immediately respond to messages seeking comment Tuesday.
Corporate inversions mean tax hit for shareholders
Treasury Secretary Jacob Lew said the crackdown is aimed at halting a wave of planned or announced inversions that could erode the nation’s corporate tax base and shift more of the tax burden to small businesses and average American taxpayers. Lew stressed, however, that the rules were not designed to thwart strategic deals not exclusively based on corporate tax-cutting.
“I think that companies will continue to invert,” said Charles Kolstad, a counsel in the Los Angeles office of Venable LLP whose practice focuses on international tax issues. “The downside risk” that deals could be blocked by the new rules “may not outweigh the upside benefits. I don’t think you’d end up in a worse position.”
But stocks of several U.S. firms pursuing inversions fell Tuesday, potentially signaling investor uncertainty following the crackdown. Burger King shares closed down nearly 2.7% at $30.23, while Medtronic shares closed down nearly 3% at $64.08.
Treasury to crack down on corporate tax ‘inversions’
Corporate America, meanwhile, fired back at the the Obama administration action. Martin Regalia, chief economist for the U.S. Chamber of Commerce, said U.S. companies that pursue inversions would still be able to use the overseas cash — but not in ways that would directly benefit the national economy.
“In fact, the administration just assured that deferred income in the once foreign subsidiary will never come back to the U.S. to help create income, jobs and economic growth here,” said Regalia. “Bad public policy produces bad economic results.”
Regalia and other critics of the Treasury rules said inversions should be addressed as part of a comprehensive revamping of the nation’s tax policy, including a reduction of the 35% U.S. top tax rate on businesses, the highest among major world economies, plus a revision of the U.S. policy of taxing firms on overseas as well as domestic income.
Many major U.S. firms employ tax-saving strategies that keep their payment rates below the U.S. maximum. But companies contend that lower business tax rates overseas remain a powerful draw as they vie against corporate competitors.
“The continued approach of the U.S. on this issue is yet another example of antiquated tax policy which fails to create a pro-business environment,” said Frederic Donnedieu, chairman of Taxand a global organization of tax advisers to multinational businesses.
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