Burger King, the second largest hamburger restaurant chain, recently announced that it has agreed to purchase the Canadian restaurant chain Tim Hortons for $11 billion.
As a part of the announcement, Burger King also made it known that it intended to move its corporate headquarters from the United States to Canada. This news has received varying reactions from both sides of the border. Some U.S. politicians are actually calling for a boycott of the burger chain. Canadians, however, are lamenting what they consider to be the loss of a uniquely Canadian brand.
While Burger King is denying it, many tax experts believe the company's primary reason for moving its headquarters to Canada is tax savings. The United States has a significantly higher corporate tax rate (35% vs. 26.5%) as well as a higher effective tax rate (27.5% vs. 22% or lower). Moreover, if Burger King indeed wants to expand into foreign markets, the move to Canada will help it to protect foreign profits. This is because the U.S. taxes companies on both domestic and foreign profits (less taxes paid on the same profits to foreign taxing authorities). This 'worldwide' tax system puts the United States in the minority of economically developed countries, including Canada, which use a "territorial" tax system. Simply put, in a territorial system companies do not owe any tax to their country of incorporation on earnings made abroad.
It seems that the ability to increase profits to shareholders by as much as 9.5% by simply moving would be difficult to ignore. Perhaps it is time for the United States to give serious consideration to corporate tax reform in order to remain competitive in an ever-increasing global economy.