Bramwell’s Lunch Beat: Inventory Surfaces as Top Accounting Issue
Anti Burger Kings: Seven US companies shrinking tax the old-fashioned way
Burger King’s decision to combine with Canadian donut shop Tim Hortons is renewing controversy over the lengths some US companies will go to reduce their tax bills. There are a handful of firms that could write the book on other ways to cut taxes, Matt Krantz of the USA Today wrote on Tuesday.
Seven US-based companies in the Standard & Poor’s 500 index, including online ad firm Google, online travel agent TripAdvisor, and pet supply retailer PetSmart, have paid a lower effective tax rate in each and every of the past five years.
To weed out companies that are paying lower tax rates because they’re making less money, in order to make the list, the companies’ net income needed to also be higher in 2013 than it was five years ago. For example, Google has managed to push its effective tax rate to 15.7 percent in 2013 down from 27.8 percent in 2008 despite net income soaring 206 percent. In its 2013 regulatory filing, Google says it was “primarily as a result of proportionately more earnings realized in countries that have lower statutory tax rates.” The company also cited the federal research and development credit that was part of the American Taxpayer Relief Act of 2012, according to the article.
“What’s wrong about companies cutting their tax bill? Absolutely nothing,” Krantz wrote. “But investors are getting increasingly sensitive to the means and methods companies are using to cut their taxes. Lowering taxes is one way to boost profit to shareholders, which is one of the key reasons why companies exist. But investors are wondering which companies could be exposed if tax officials take a closer look at the rules and perhaps consider reform.”
More accounting deficiencies linked to inventory
Maxwell Murphy, senior editor of the Wall Street Journal’s CFO Journal, wrote on Monday that large companies disclosed deficiencies in their procedures to account for inventory, vendors, and cost of sales 38 times last year, putting the category just behind tax. In 2012, inventory ranked third on the list and was sixth as recently as 2011, according to Audit Analytics.
So far this year there have been six disclosures that inventory accounting procedures are inadequate, putting it atop the list of issues. But such disclosures are made in companies’ annual reports, most of which won’t be filed until early next year.
The problem is that companies have broad latitude in calculating inventory on their balance sheets, Murphy wrote. For example, companies must decide whether to value their inventories at replacement cost, retail value, or at a discount.
Inventory accounting has become so complicated that the Financial Accounting Standards Board (FASB) has proposed simplifying procedures. FASB said it has fielded complaints that the process is “unnecessarily complex because there are several potential outcomes,” according to the article.
Deep tax cuts opens northern front for US companies
Canada has become the latest frontier for US companies fleeing the high cost of business, spurred by low corporate taxes and a policy that keeps international earnings out of the clutches of the IRS, Scott Deveau and Eric Lam of Bloomberg wrote on Tuesday.
Burger King Worldwide Inc. agreed to buy coffee-and-doughnut company Tim Hortons Inc. on Tuesday for about C$12.5 billion ($11.4 billion) and move the headquarters of the combined company to Canada. The deal, which is still subject to the standard approvals, for Oakville, Ontario-based Tim Hortons follows Valeant Pharmaceuticals International Inc.’s merger with Canada’s Biovail Corp. in 2010, which sparked the latest so-called tax inversion wave.
Burger King is unlikely to be the last US company to consider moving north even as President Obama and his aides try to curb the practice, tax experts say. In addition to avoiding US taxes on global earnings, companies like Burger King can take advantage of Canadian tax rates that have been cut by about a quarter in the past eight years, Deveau and Lam wrote.
Only income earned within Canada is taxed by the government, said Alex Edwards, assistant professor at the University of Toronto’s Rotman School of Management, noting this territorial system is the more common form of corporate taxation. In the United States, profits from foreign operations in lower-tax regions are topped up to the federal rate when they’re repatriated, he said.
“The real bang for the buck here is potential tax savings on Burger King’s non-US earnings,” Edwards said, according to the article. “It’s not just the earnings in Canada, it’s the earnings everywhere in the world that might be able to escape that second layer of US tax.”
Inversion critics and investors may be misjudging Burger King deal
Steven Davidoff Solomon, a professor of law at the University of California, Berkeley, wrote in an article for New York Times DealBook on Tuesday that Burger King seems to be moving to Canada for other reasons besides tax savings.
He wrote that the first piece of evidence is that Burger King has had chances before to move abroad but passed. Burger King went public again in 2012, through a merger with Justice Holdings, a British Virgin Islands company listed on the London Stock Exchange. The British Virgin Islands has no tax on corporations. Burger King could have reincorporated there but decided not to, as it did when it was acquired by 3G in 2006.
Also, Ontario has a tax rate – 11.5 percent – that is higher than the one in Florida, where Burger King is based now. Canada’s combined rate is still lower than the rate Burger King is paying now, but only by a percentage point or two. US taxes are unlikely to rise for companies, but the same cannot be said of taxes in Canada, where the population seems much more open to increases.
“So why now?” he asked. “Well, one reason may be bigger than any tax gain. Burger King had roughly the same market value as Tim Hortons before word of the deal leaked. But Tim Hortons is the bigger company. It had roughly $3 billion in revenue last year compared with $1.1 billion for Burger King. Canada will also be the biggest market for the combined company. Canada is thus a natural choice to put the new company. Combining companies will often move their headquarters to the place where the biggest part of their business is. The reason is natural: It is often the best place to run the business from.”
Companies are running the numbers on potential tax inversions
Emily Chasan, senior editor of the Wall Street Journal’s CFO Journal, wrote on Tuesday that many finance chiefs already know exactly how much they would save on their tax bills by moving their headquarters overseas.
Accounting firm Grant Thornton International Ltd., for example, has seen an uptick in companies asking for consulting advice on tax inversions in the past year, particularly large global corporations with at least half their revenues outside the United States.
“A lot of companies are running the numbers to see what the impact is, what the benefit would be, and what the cost would be,” said Ed Nusbaum, Grant Thornton’s global chief executive, according to the article. “When companies look at these inversions they are considering the political and ethical components, as well as the impact on their brand.”
Analysis of a tax inversion also includes the cost of moving some management overseas, reorganizing the company, sustainability of a move, and the potential political consequences, he added.
Ralph Lauren Corp. CFO Chris Peterson said his firm has done the math, but isn’t considering the option.
“Financially, it is compelling,” Peterson acknowledged, according to the article, but explained, “We are an iconic luxury company with the American flag is embedded in some of our clothing. We designed the US Olympic team uniforms.”
GOP Senate candidate wants gas tax reduction
Keith Laing of The Hill wrote on Tuesday that Michigan Senate candidate Terri Lynn Land is calling in a new television ad for a drastic reduction in the 18.4 cents per gallon gas tax that is used to pay for federal road and transit projects.
Land, a Republican who is running against Rep. Gary Peters (D-MI) in Michigan's open seat race, is pushing to cut back the gas tax to about 4 cents per gallon. Land says reducing the federal government's take on driver's gasoline purchases will allow states to take greater responsibility for US roads that are currently maintained by the federal government, Laing wrote.
“Instead of sending our money off to Washington, let's gradually reduce the 18.4 cents per gallon federal gas tax to around 4 cents and allow states to decide how to best pay for the transportation infrastructure they need,” the campaign video said, according to the article. “This is not about cuts: it's about keeping our money here in the first place and letting Michigan decide how to spend it. It's time to get Washington out of our way, fix our roads, and put Michigan first.”
Peters’s campaign responded to the attack by accusing her campaign of trying to “hide the fact that Land has been previously silent on roads and now wants to hike up the state gas tax while liquidating the Highway Trust Fund,” Laing wrote. Peters voted in favor of the $10.8 billion bill to extend federal transportation funding until May 2015 that was approved by Congress in late July.
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