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10 things to know about corporate inversions

By Stephen Ohlemacher

Associated Press

Published: Thursday, Aug. 28 2014 9:54 p.m. MDT

A Burger King restaurant is seen on W. 26th Street in Millcreek Township, Pa., Tuesday, Aug. 26, 2014. Burger King struck an $11 billion deal to buy Tim Hortons that would create the world's third largest fast-food company and could make the Canadian coffee-and-doughnut chain more of a household name around the world.

Erie Times-News, Christopher Millette, Associated Press

WASHINGTON — Burger King plans to become the latest U.S. company to shift its legal address out of the country by merging with a foreign company. Burger King has announced plans to buy Tim Hortons, the Canadian coffee-and-doughnut chain.

Burger King's operations will stay in Miami. But the corporate headquarters of the new company will be in Canada.

The transaction is called a corporate inversion, a maneuver that is becoming popular among companies looking to lower their tax bills.

Burger King stressed that the deal is being driven by the international growth possibilities of Tim Hortons, not a desire to take advantage of Canada's lower tax rates.

Still, at least one senator — Democrat Sherrod Brown of Ohio — is urging fast-food patrons to take their business elsewhere, to Wendy's or White Castle, two fast-food chains that happen to be based in Ohio.

Ten things to know about corporate inversions:

1. WHAT IS A CORPORATE INVERSION?

An inversion happens when a U.S. corporation and a foreign company merge, with the new parent company based in the foreign country. For tax purposes, the U.S. company becomes foreign-owned, even if all the executives and operations stay in the U.S.

2. WHY INVERT?

There can be many business reasons for two companies to merge. The decision to incorporate the new parent company in a foreign country can generate significant tax savings over time.

The U.S. has the highest corporate income tax rate in the industrialized world, at 35 percent. The U.S. is also the only developed country that taxes corporate profits earned abroad. Foreign profits are subject to U.S. taxes once they are brought to the U.S., though corporations can deduct any foreign taxes paid.

Companies that become foreign-owned don't have to worry about the Internal Revenue Service trying to tax the profits they make abroad.

Most U.S. corporations pay federal income taxes at rates much lower than 35 percent because the tax code is filled with breaks for businesses. Inversions open the door for even more.

3. 'STRIPPING'

Inverted corporations must still pay U.S. taxes on the profits they earn in the U.S. However, they can lower their U.S. tax bills through a maneuver called "earnings stripping."

Here is how it works: The new foreign parent company "lends" money to the U.S. firm, which must pay it back. The U.S. firm then deducts the interest payments it makes to the parent company, reducing its taxable profits — "stripping" them from its balance sheet.

"You haven't raised any new money," said Robert Willen, a New York-based tax adviser. "All you've done is literally out of thin air, you've created a debt obligation on which the U.S. company is the debtor and the foreign parent is the creditor."

4. 'HOPSCOTCHING'

Many U.S.-based corporations are hoarding money overseas, either to invest abroad or to shield it from U.S. taxes. Experts say the total amount could exceed $2 trillion.

If a foreign subsidiary sends profits directly to a U.S. corporation, the U.S. firm must pay taxes on it. However, if those profits are funneled through a foreign parent company that was formed through an inversion, the money can be invested in the U.S. without paying U.S. taxes.

The technique is called "hopscotching" because the money — at least on paper — bounces from country to country while avoiding U.S. taxes.

5. HOW BIG IS THE ISSUE?

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