An Introduction to Inversion

When Burger King announced their plans to buy Tim Hortons late last month, questions arose about the motives behind the deal. Is the American fast food icon joining forces with the Canadian chain to expand their fast-food empire and global footprint? Or is it just a move to lower their tax bill?

We’ll leave you to debate the details of the Burger King-Tim Hortons merger. The purpose of this post is to briefly explain a little about inversion and why it’s become such a hot economic topic recently.

Inversion is a strategy used by companies to reduce their tax burden. It occurs when a business buys or merges with a foreign entity in a country with lower corporate taxes – and then shifts its corporate headquarters to that country while retaining operations in its high-tax nation of origin. It is a legal move – but one that often has certain public stigma attached to it.

But fear of negative public perception hasn’t stopped a rising number of businesses (especially pharmaceutical and health care companies) from taking advantage of the benefits from moving overseas – and away from high U.S. tax rates. According to the Washington Post, in 2014 alone more than a dozen U.S. companies merged and shifted their headquarters to other countries. And dozens of more deals are in the works.

For U.S. restaurant franchises – like Burger King – inversion can be a tempting way to reduce tax liabilities. Franchise fees can be reassigned to a company headquartered in a lower tax jurisdiction. And many companies already rely on the international market for growth.

But there are also complicated tax issues associated with the move that should be considered. Your business may be subject to an exit tax in the U.S. or to the immediate recognition of foreign income which was previously deferred. On top of that, for the process to be successful, both the U.S. and foreign companies that are being combined must be similarly sized and share business synergies – among many other things.

Inversion is a tricky topic and the Burger King deal has only added fire to the discussion. We’ll stay on top of any developments and keep you up-to-date.