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Good Question: Why Can Companies Use Tax Inversion?

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(credit: CBS) Heather Brown
Heather Brown loves to put her innate curiosity to work to answer yo...
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MINNEAPOLIS (WCCO) – Burger King’s stock jumped 21 percent Monday on the news the company is in talks to merge with Canadian-based Tim Horton’s.

The move is called tax inversion, a change in the location of its headquarters that would let the fast-food company pay fewer taxes in the U.S.

So, why can companies change their address to reduce their taxes?

Good Question.

It can happen through a merger or acquisition.

“American companies have moved to foreign countries since 1982, 11 of them since 2012,” University of Minnesota law professor Claire Hill said.

And can cut a tax bill by hundreds of millions of dollars.

Forbes says the Medtronic-Covidient deal would save the merged company $850 million by the end of 2018.

“The inversion doesn’t mean ‘Oh they won’t pay U.S tax’, it just means that they will pay U.S. tax on what they do in the U.S.,” Hill said.

ClaireHill teaches business law at the University of Minnesota.

“It’s not as though any company can just pick up and go somewhere. There’s various rules and procedures,” Hill said.

Under U.S. tax law, it’s a currently legal move, and some powerful people want it changed.

“Some people are calling these companies corporate deserters,” Obama has said.

At least 20 percent of the new company must be owned by the foreign shareholders.

Some lawmakers want to bump that requirement to half.

“If you had 100 percent of activities here, you couldn’t just have a registered office in Canada and say ‘Haha guess what? Burger King isn’t American anymore,'” Hill said.

The U.S. corporate tax rate is 35 percent, even though many corporations pay much less.

In Canada, it’s 26.5 percent.

Ireland is 12 and a half percent.

It’s not as if we can just up and change our address to pay lower taxes.

Our expert says, people are treated differently than corporation.

But, she says people and companies try to avoid taxes all the time — for example, all of the people that come to the Mall of America from other states and don’t pay any sales tax on clothes.

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