Diary

I *Told* Everyone That This Would Start Happening....

Tucked deep inside Mark Steyn’s excellent (as usual) weekend column is this bit of shocking news:

Last week, the donut chain Tim Horton’s, which operates on both sides of the border but is incorporated in the state of Delaware, announced that it was reorganizing itself as a Canadian corporation to take advantage of Canadian tax rates.

I’ve been sending up warning flares about this sort of thing for some time, and perhaps the only surprise is that it’s taken so long for things like this to actually start happening.

Let’s review a few facts below the fold….

Let’s just review a few facts.

o Tim Horton’s is mostly a Canadian-based operation (bit of an icon up there, particularly in Ontario); they may own some other brands, but I’m not sure and that might have changed.

o Canada’s corporate tax rate (now 21%) is lower than the U.S. rate (35%) – Prime Minister Harper, sensing an opportunity (particularly given the increased idiocy in Washington), has talked about reducing it further.

o Any profits earned in Canada but “repatriated” (sic?) to the U.S face that nutty double-taxation game that I’ve written about multiple times; Canada (like the rest of the world) doesn’t do double taxation.

So this just makes sense from a business point of view.

What is most mind-boggling about people who have spent their whole lives 100% marinated in politics and with 0% contact with business is that they can delude themselves into believing that shifting like this simply won’t happen for…. whatever…. reasons….

At some point, I’ll have to get Tim Horton’s financials and look at the overall effective corporate tax rate that the firm pays. But in general, one thing that just screams off such pages at you is that the more business you do outside the United States, the lower your net overall effective corporate tax rate. If you’re something like a domestic retailer, your corporate tax rate is pretty close to the U.S. rate (mid-upper 30s) – whereas if you’re a “multinational” it’s typically down in the low-mid 20s.

More than a decade ago, I had lunch in Seattle with a veteran investment banker. I got an incredible number of gems of wisdom out of that hour – but one of the best was, “Make sure that you’re supporting a business – not a lifestyle.” That was stated as advice for investors when looking at potential business-building investments; however, in reality that advice applies more widely.

If disconnected mandarins in Washington DC and the various state capitols think that they can ignore these inter-jurisdictional tax competition issues because the numbers simply can’t possibly matter…. then they are basically insisting that commerce exists to support lifestyles (especially theirs). And Tim Horton’s sensible and responsible fiduciary decision will be just the beginning….