Tim Hortons, Burger King reaction: U.S. cracks down on tax inversions

The Obama administration cracked down on American companies trying to relocate overseas to shirk paying U.S. taxes, a practice known as a "tax inversion" and a common complaint after the Burger King deal with Tim Hortons and others.

Officials don't comment specifically on Burger King-Tim Hortons deal

U.S. President Barack Obama demands what he calls 'economic patriotism' from American corporations that seek overseas mergers to avoid U.S. taxes. (Associated Press)

The Obama administration cracked down on American companies trying to relocate overseas to shirk paying U.S. taxes, a practice known as a "tax inversion" and a common complaint after the Burger King deal with Tim Hortons and others.

The Treasury Department outlined new rules Tuesday aimed at making those co-called corporate inversions less lucrative by barring creative techniques that companies use to lower their tax bill. Beyond tax reasons, Uncle Sam is also making it harder for U.S. companies to make themselves "foreign" in the first place by tightening ownership requirements.

"This action will significantly diminish the ability of inverted companies to escape U.S. taxation," Treasury Secretary Jacob Lew said. The moves would mean inverting would "no longer make economic sense" for some companies considering a move.

'I don't care it it's legal … it's wrong'

No one in the administration mentioned Burger King or Tim Hortons by name on Tuesday, even though it's the latest and arguably most high profile everyday business to have the term associated with it.

For its part, Burger King's owners have gone to great pains to dispel the notion that their Tim Hortons move is a tax inversion, pointing out that the two companies paid virtually identical tax rates last year.

Regardless, a tax inversion works when a U.S. business merges with or is acquired by a foreign company in a country with a lower tax rate. The new company then pays most of its global taxes in the jurisdiction with the lower rate, thereby shielding profits from taxation they used to have to pay.

Companies in Ireland are particularly attractive from tax purposes. The pharmaceutical company AbbVie, based in Chicago, reached an agreement to buy Dublin-based Shire in July for $54 billion. And Minneapolis-based Medtronic Inc. is currently trying to buy Dublin-based Covidien Plc.

Shares in all those companies were lower on Tuesday as markets digested the news.

Obama applauded the Treasury for taking steps to reverse the trend of companies seeking to "exploit this loophole" to avoid paying their fair share in taxes. Yet he said he was still calling on Congress to pursue broader tax reform that would reduce the corporate tax rate, close loopholes and make the tax code simpler.

"While there's no substitute for congressional action, my administration will act wherever we can to protect the progress the American people have worked so hard to bring about," Obama said in a statement.

Both Tim Hortons and Burger King say they don't expect their proposed deal to be impacted by the new rules — again, because they insist the move is not prompted by tax advantages.

The announcement puts companies on notice that Treasury will be drafting regulations to clamp down, but the new measures will take effect immediately even while those regulations are pending. That means any transactions from Tuesday onward will be subject to the tougher restrictions.

'Hopscotch' loans among the methods targeted

Three new measures will seek to stop companies from finding ways to access earnings from a foreign subsidiary without paying U.S. taxes, including "hopscotch" loans, in which companies shift earnings by lending money to the new foreign parent company while skipping over the U.S.-based company.

Another rule change would make it harder for merged or acquired companies to benefit from lower foreign taxes by tightening the application of a law that says the American company's shareholders must own less than 80 per cent of the new, combined company. The administration would like to reduce that percentage to 50 per cent, but that will require legislation. In the absence of legislation, the administration says its new rules will make it harder for companies to get around the 80 per cent requirement by prohibiting certain arrangements, such as a firm making large dividend payments ahead of the acquisition to reduce its size on paper.

About 50 U.S. companies have carried out inversions in the past decade, and more are considering it, according to the nonpartisan Congressional Research Service. The recent wave of inversions has been dominated by health care companies, including drugmaker AbbVie, which has announced plans to merge with a drug company incorporated in Britain.

Treasury called the new rules a "targeted action" aimed at ensuring that the U.S. tax system only provides incentives to genuine cross-border mergers that strengthen the economy.

President Barack Obama has denounced inversions as unpatriotic and has urged Congress to stop them.

Obama elevated the issue in July, demanding "economic patriotism" from U.S. corporations that use legal means to avoid U.S. taxes through overseas mergers. "I don't care if it's legal," Obama declared at the time. "It's wrong."

With files from The Associated Press