Co-author of “Wall Street Secrets for Tax-Efficient Investing: From Tax Pain to Investment Gain”
Washington DC -- (ReleaseWire) -- 09/15/2014 --Nationally Syndicated Financial Myth Busting Radio Show with Host Dawn Bennett, CEO of Bennett Group Financial Services, LLC, on September 7, 2014, interviewed Bob Gordon, President of 21st Securities and Co-author of “Wall Street Secrets for Tax-Efficient Investing: From Tax Pain to Investment Gain” on tax inversions.
“These tax inversions are going to be an impetus to move us to a new place in the United States. Part of me says they should close the tax loop and not allow companies to do this. However it's very difficult to be a CEO and not take advantage of this because it does benefit the shareholder if the merger makes sense.
“Tax rates are so low in certain countries and some companies, particularly dealing with intellectual property, where they can set up a rationale for the earnings really taking place in Ireland or Bermuda, when really they’re originating in large part in the U.S. Those companies pile up huge cash balances and then say they can't bring it back to the U.S. because they'd have to pay a tax.
“Companies then want a tax-free period in order to repatriate the money. That would just start a cycle of this. That part of the tax code really needs to be looked at hard.
“Warren Buffett played a huge role in Burger King's purchase of Tim Horton's, a Canadian company. Some call him a hypocrite for regularly complaining that he doesn't pay enough in taxes while, helping a major U.S. company flee the America corporate tax system altogether,” concludes Ms. Bennett, who has been a money manager for 30 years.
Here is the interview with Bob Gordon:
Q: When Buffett's Burger King tax inversion deal was announced, do you think somewhere on a golf course, you could hear a presidential putter being snapped over a presidential knee?
A: Funny. Probably. Mr. Buffett talks about things like derivatives just being weapons of mass destruction but then he’s a large player and has some innate naked put options on the Nikkei index, which he shouldn't be doing, or the insurance companies shouldn't be doing that, but to be the biggest supporter against derivatives and being up against player derivatives is sort of like business as usual.
Q: Yes, it's contradictory. We know the Obama administration is upset about tax inversions, a practice by which an American corporation acquires a foreign company and moves its headquarters out of the U.S. to benefit from lower tax rates abroad.
Please explain how companies are able to effectively renounce their American citizenship and why they actually would want to do that?
A: In the case of Burger King and Tim Horton's, at the end of the day, it's that Tim Horton's, the Canadian company, is going to be the surviving tax-paying entity, that's going to own a subsidiary that's doing business in the United States.
That's really the key, is that after this combination, the headquarters is in Ireland or Canada or someplace outside the U.S. So it's really just an acquisition merger, but it's being spurred not by the acquirer, but by the target. That's what's sort of odd, is that Burger King's the one that's starting this, but Burger King's really asking to be taken over by a Canadian company called Tim Horton's. After they combine together, Burger King might very well control the entity or bring in the bulk of the revenues.
Q: So President Obama said he was considering an executive action to curtail the abilities of companies to invert themselves abroad like Burger King. What do you think about that, and is this the smartest way to stop inversions? What about lowering our corporate tax rate?
A: Let's say there's a Coopers Industries that leaves for Bermuda nd Arthur Andersen does the same and the government changed that after you actually left the country and reincorporated in another country, that there was a special tax to that.
This inversion wave is sort of a second way of getting there, a company has to do a merger with a foreign company that's in the same business.
As far as the corporate tax rate, I don't think that's really what drives us. I think it has more to do with the way that we compute the taxes. It's computing the taxes on worldwide income. A lot of countries don't do that. We have different ways that we allow companies to play with sticking their intellectual property in tax-sheltered countries. I think it has more to do with the way our taxes are computed than the actual tax rate. I believe Burger King paid a 27 percent tax rate in the U.S. and will pay a 27 percent tax rate in Canada. That's what they're pointing to as to why this shouldn't be looked at as being tax driven. In the end, Burger King has around $500 million of unrepatriated funds outside the U.S. that they can't touch, that they will be able to touch once this becomes a Canadian company.
Q: In America we have a 35 percent corporate tax rate. It's just absurdly uncompetitive versus, let's say, Ireland, that's at 12.5 percent. You really don't think that they're going over there for better taxes? Burger King is one issue, but what about the other companies that are doing this?
A: It’s my opinion they're not doing it for better taxes, but it's not a lower tax rate, I don't believe. I believe it's the way the tax base is calculates and what the tax is levied on that's the real savings that they're going to get. This has been going on for quite some time.
It was the tax director of Intel 30 years ago who testified to Congress that if he was in private practice when he was setting up Intel that it would be malpractice for him to set it up as a U.S. company. He then explained to Congress why that was. We're dealing now with exactly what he was trying to warn Congress about 30 years ago.
Q: President Obama has accused these companies of being unpatriotic. What do you make of that allegation? Do you think the barometer of patriotism and how much a company pays in taxes is actually fair?
A: I don't necessarily see a connection between those, but think it’s just a political football that he's trying to deal with as best he can. This has been going on for a long time. Weyerhaeuser turned itself from a corporation to an REIT. It doesn't pay tax anymore. The government is giving rulings to REITs so cell towers and server farms are real estate and can be turned into REITs. So the government just keeps releasing the corporations from these burdens.
If you look at MLPs, Master Limited Partnerships, they are supposed to be indistinct of the energy business. The government has allowed people to just drive fracking water around to be called MLPs and avoid the corporate tax. So the government's giving rulings in REITs and MLPs, letting corporations out of the corporate base. So your point is that if it's so high that everybody's trying to do everything they can to get out of it, then maybe there's something to lowering the rate which would change the impetus to do this tax arbitrage. I think people will always want to pay less in taxes, so I don't know that these issues are ever going away.
Well using a term like unpatriotic is extremely powerful. However if you're a CEO or a chairman of a company, and you found a law that could save you hundreds of millions of dollars that you could actually use to build out the bottom line or to give back to your shareholders, what's wrong with that?
Q: That's exactly the point. That's what they're supposed to be doing. I think the only issue here is that, in many of these inversions, the U.S. individual taxpayer is sort of paying a toll for this to happen. This is great for the tax-exempt investors and great for people that own these shares in their IRAs and 401ks, but for people that hold them in their own name, they're actually paying a tax in order to get the benefit of lower taxes in the future. From the individual investor's perspective, why are inversions taxable to shareholders?
A: It’s really not that Burger King's taking over Tim Horton, it's that Tim Horton's taking over Burger King. If someone owns Burger King stock, and it was taken over for cash or by another company, it could be a taxable event. If it was a U.S. company, and they could've traded shares of another company, maybe it could've been a tax-free event.
But it was not meant to do that and not that it's the exact same thing, but something's happened like this at Kinder Morgan, where people have owned this Kinder Morgan MLP for a long time, and now, they're going to pay a giant tax bill just to be able to start deducting taxes again. So taxes and tax arbitrage are driving a lot of the corporate finance that's going on out there. It's always been a factor, but it's what's driving the business completely at this point.
Q: How does the capital gain from an inversion merger actually affect a taxpayer's adjusted gross income? Could it raise the tax rate on ordinary income?
A: Well, we have various tax brackets, and as you go into a higher tax bracket, it doesn't bring the earlier income up to be taxes at the higher level, but the income that you make is taxed at that higher level. So if someone had an income of $249,000 and then had an inversion capital gains tax of 100,000, it's going to increase their income to $349,000, but the amount that's going to be taxed at the higher level is only the amount above $250,000. So, it's not that it's driving everything up into a higher tax rate, but that the income they're being forced to take is taxed at the highest possible rate.
Q: In my mind, Obama hasn't done anything in six years regarding tax reform. I would think that a real political leader would have addressed corporate tax reform with some type of revenue-neutral proposal to Congress. Could we end up with some type of bipartisan tax reform like we did in 1986 that helped to launch two decades of nearly uninterrupted growth? Do you think we'll get there with this? Will this be the impetus to get us there or to get Obama there?
A: I think you're going to have to get past the gridlock. I think that Obama's had budgets that have dealt with these things every year since he's been around, and Congress doesn't pick up the ideas he has, not that the ideas he has would balance the budget, but he certainly had this whole issue about hedge funds getting carried interest, and there's estate issues with things like grants. I think that Obama's proposals have been to close down those loopholes. I guess that hasn't gone anywhere. Representative Camp has come up with a whole tax reform proposal, but everybody at this point thinks it may just die when he leaves Congress. It isn't that people aren't talking about this, it's just that they're not talking to each other.
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included Rock Legend Ted Nugent, as well as Steve Forbes and Grover Norquist. The show is a great complement to Dawn’s monthly investing seminars that take place at Tysons Corner in McLean, VA, where she discusses investing.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or firstname.lastname@example.org