BEHIND THE HEADLINES: A battle over corporate taxes
At first glance, the recent multi billion dollar deal between America’s Burger King and Tim Horton, the Canadian restaurant behemoth, should be of little interest to Barbados.
After all, the two fast food giants aren’t planning to come to Barbados and go head-to-head with Chefette, the well-run chain whose dishes Rihanna once told a news organisation in the United States were high on her list of meals.
But a second look would show why it is important for the Government in Bridgetown and the person it plans to send to Ottawa to succeed Evelyn Greaves as Barbados’ next top diplomat in Ottawa recognise the deal’s implications for Barbados.
The reason for their interest would be straightforward: “tax inversion”, meaning corporations trying to lower the corporate taxes they owe to their home countries by going offshore to places like Barbados, Ireland and Bermuda.
That explains why Burger King’s key announcement about the Tim Horton deal was to indicate it would switch its headquarters from the US to Canada.
How come? “By reducing business taxes we are creating jobs and boosting investment, making Canada one of the best countries in the world to do business,” said Jake Enwright, a spokesman for Canada’s Ministry of Industry.
“Canada’s total business tax costs are now 46 per cent lower than those of the United States.”
Some numbers tell the story. Add provincial tax rates to the Canadian government’s tax slice and the result is 27 per cent rate on profits.
That’s slightly higher than Britain’s 21 per cent but far below the 40 per cent in the US.
Little wonder that Jack Mintz, director of Calgary University’s School of Public Policy, said the other day that by lowering corporate taxes Canada has “made it a lot more attractive for companies to say Canada is a good place to set up shop.”
Elizabeth Chorvat, a visiting professor at the University of Illinois College of Business, put it differently
“Corporate executives have a fiduciary responsibility to do the best for their shareholders that they can,” asserted Chorvat.
“Under these circumstances, it’s reasonable to expect them to explore whether their shareholders would benefit.”
By why would all of this be on Barbados’ radar screen?
Stated simply, the Burger King-Tim Horton tax manoeuvre mirrors what a long list of Canadian firms have been doing for decades.
Canada’s double taxation agreement with Barbados reduces corporate taxes for Canadian firms that are in Barbados and contributes to the island’s attractiveness to Canadian investors and rich individuals.
Hundreds of billions of dollars in corporate profits pass through Barbados largely because of the tax-saving provisions of tax treaty.
However, millions of Canadians who previously abhored the tax treaty and were quick to criticise Barbados for being what they describe as a “tax haven” corporations are now cheering Burger King for doing exactly the same thing.
But is there more to the plan than meets the eye?
Some experts and analysts are asking that question. Art Cockfield, a professor and international law expert at Queens University in Ontario, told Canada’s Financial Post that most firms have “flipped their head office to a tax haven that often doesn’t have any income taxes.
“So, this is a bit curious in that they (Burger King) are flipping their head office to Canada.
“It’s a bit of a mystery to me as to why they’re not flipping to The Bahamas or Barbados, or places like that because you generate an even greater savings there,” he said.
Perhaps, the next chapter may turn out to be a story about a new corporation being established in Barbados, Bermuda, the Cayman Islands, The Bahamas or Ireland, which offers Canadians considerable ease on their corporate taxes.
One thing to remember is that tax inversions aren’t new.
Companies, their attorneys and accountants have been doing them for years to save on taxes.
Ingersoll-Rand, the company founded almost 150 years ago to make drills capable of cutting through rock and whose tools were in the hands of Barbadians when they were helping to build the Panama Canal is not, at least on paper, an American company.
It shifted its headquarters from the US to Bermuda in 2001. Tyco International and Accenture have done the same thing. They too have a Bermuda address.
The trouble is, though, while investors and corporate executives embrace love inversions, citizens on the streets routinely voice opposition to them because they feel corporations are getting away with tax murder.
Next door in the US, the Obama Administration is gearing up to fight inversions and the companies that use them.
It’s going to be a dog fight on Capitol Hill and it’s one Barbados can’t afford to ignore.