Tuesday, June 30, 2009

Come home, little donut 

Tim Horton's is returning to its roots, and it's taxes that done it:
In a clear indication that Canada is starting to be considered a low-tax place to do business, Tim Hortons Inc. announced yesterday plans to shift its base of operations from Delaware to Canada for tax purposes.

Further, analysts indicate this is also a sign of unease among corporations regarding the U. S. business environment, where taxes are likely heading upward to deal with trillion-dollar deficits and proposed health-care reforms and the White House is looking to crack down on companies that invest abroad.

The move by Tim Hortons makes good on a promise contained in the company's filing with U. S. securities regulators earlier this year, in which it said it was exploring such a reorganization because it could potentially drive down its effective tax rate closer to Canadian statutory levels.

In Canada, the federal corporate tax rate is headed to 15% in 2012, and the federal Conservative government has called on the provinces to get to a 10% business levy by the same time frame--for a combined 25% rate on corporate income. Alberta is already at 10%. British Columbia will be there in 2011, Ontario by 2013, and New Brunswick will go down further, to 8%, in 2012.

In the United States, the top corporate tax rate is in the mid-30% range. As a result, the United States now has about the highest combined corporate tax rate, second only to Japan, among industrialized countries.
And note that, thanks to outsized budget deficits, we're probably heading higher. The Canadians are noticing:
The retailer said in recent filings it expects its effective tax rate to be in the 32%-to-34% range in 2009. In 2008, it paid US$139.2-million in income taxes.

With the reorganization, Tim Hortons could generate "quite a bit" of savings on taxes paid because the income earned in Canada would be taxed at the lower Canadian rate, said John Wonfor, national tax partner at BDO Dunwoody. Its income from U. S. operations would still be taxed at U. S. rates.

Plus, Mr. Wonfor said Canada's fiscal framework looks much healthier compared with the United States, which means the country's policy-makers can likely maintain its lower tax rates. Meanwhile, U. S. taxes are bound to climb, he added.

Finally, there is the current White House proposal to remove the incentives for U. S. companies to invest overseas, and curb the use of offshore jurisdictions by companies and investors.

"If the U. S. tightens up on the tax treatment on foreign income, many Canadian companies -- as well as other foreign entities operating in the U. S. -- might look to put headquarters and holding company functions in Canada since dividends from foreign affiliates are not taxed by Canada," said Jack Mintz, a public-policy expert from the University of Calgary and a renowned tax expert.
Rust never sleeps, and capital is quicksilver. It's not going to wait around for our rapacious Washington elite to feast upon it.

UPDATE: Ed posted the article this morning and comments:
Eventually, American companies will either have to withdraw from global competition and compete solely at home, or they will have to move out of the US in order to return to an equal tax position as their competition, whose governments only tax them on domestic earnings.
The more I think of this, the less I think it's the tax rate that matters as much as the Obama Administration's spending plans. Suppose they cut the corporate tax rate but leave the spending alone. Does anyone think it wouldn't lead to an increase in individual income taxes? An increase in the tax on dividends would hurt corporations as much as an increase in their corporate income tax. A VAT without a cut in income taxes would kill US businesses. So too would increasing interest rates through more government borrowing, or inflation if they print money to pay deficits. What matters is spending. Pawlenty is right: They need to stop.

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