What tax reforms do franchisors want?

The franchise industry has played a pivotal role in the debate over taxes this election cycle, notably in the proposed merger of Burger King and Tim Hortons, which would include a reincorporation of the combined company in Canada, where the latter is based. But the new regulations against so-called tax inversions handed down in September by the Obama administration and verbal sparring between Democrats and Republicans on the issue heighten the need for comprehensive tax reform, supported by the International Franchise Association and other advocates. What would comprehensive tax reform from franchising’s point of view entail? In the IFA’s 2014 Policy Platform, the organization wrote that lowering corporate-tax rates in the United States from the top threshold of 35 percent would “make America more competitive globally and drive job creation.” But the IFA also noted that tax policy should be constructed with more than just the largest corporations in mind. “The administration and Congress should not ignore the fact that many businesses, including 80 percent of franchisees, file business income on individual tax returns,” the IFA wrote. “Given that small businesses create nearly two-thirds of net new jobs in the U.S., any tax reform package must address both corporate and individual rates to empower franchise small businesses as they drive the American economic recovery.” The group added that any reform removing tax deductions upon which franchisors and franchisees rely should also lower the overall rates, for both individuals and corporations. The last draft at the Tax Reform Act of 2014 in the House of Representatives, written principally by Rep. Dave Camp, R-Mich., who chairs the House Ways and Means Committee, attempted to address these issues, but has stalled for lack of bipartisan support or cooperation. The bill included provisions such as reducing the tax code to two rates of 10 percent and 25 percent for individuals and a corporate rate of 25 percent, as well as increasing the size of the standard deduction, meant to benefit franchisees filing their business income on individual tax returns. The legislation also proposed making the Research & Development Tax Credit permanent and repealing two parts of the Affordable Care Act heavily opposed by the business community: the medical-device tax and the “medicine cabinet tax.” At the time the bill was released, IFA chief executive Steve Caldeira praised the legislation as “a welcome step toward achieving the IFA’s goal to revenue-neutral, comprehensive tax reform.” “Aimed at creating a fairer and simpler tax code for America’s 825,000 Main Street franchise small-business owners, Chairman Camp’s proposal would spur greater job creation and higher wages for small-business owners by reducing the burden the current tax code imposes on franchise businesses.” With meaningful action on tax reform stalled this year, companies considering the tax inversion strategy came under scrutiny from lawmakers and consumers, including Illinois-based Walgreen Co., which in July abandoned a plan to merge with a Swiss company and reincorporate overseas. The Obama administration’s new restrictions against tax inversion strategies did not apply to deals announced before Sept. 22, exempting Burger King, but since that date, one major American company to decide a tax inversion was not worth the hassle was Illinois-based pharmaceutical giant AbbVie. Camp has responded publicly that comprehensive tax reform is the only way to put these issues and possible moves to rest. “Until the White House gets serious about tax reform, we are going to keep losing good companies and jobs to countries that have or are actively reforming their tax laws,” Camp said in a statement. “It is time for the administration to put forward a serious, detailed, credible plan to reform our tax code.” The IFA contended that policymakers should address tax reform through the lens of effective tax rates rather than statutory rates. For their part, Burger King and Tim Hortons said the rates of corporate tax in the United States and Canada were mostly a wash for the two companies. During the conference call announcing the Burger King-Tim Hortons merger, Burger King chief executive Daniel Schwartz said taxes did not drive the companies’ decision, as Burger King’s effective tax rate in the United States for the prior year fell in the mid-20-percent range, “consistent with the statutory tax rates in Canada, which is what Tim Hortons pays.” “Burger King has and will continue to pay taxes in the United States; Tim Hortons has and will continue to pay taxes in Canada,” he said. “When you look at why we get so excited about this transaction, it’s about the growth that’s to come for Tim Hortons internationally.”