09/02/2014 05:29 EDT | Updated 11/02/2014 05:59 EST

Is Taxation a Migration Driver?

The recent merger of Burger King and Tim Hortons shows how tax policies may affect the movement of companies.

Taxation has always been a way for governments to raise revenue in order to finance their expenses. In an increasingly globalized and interconnected world, tax policies can have important implications on the migration patterns of individuals and companies. Favourable tax policies, which include competitive tax rates, would attract wealthy individuals and overseas companies to move to a country. Again, unfavourable tax policies that include uncompetitive tax rates may induce wealthy individuals and domestic companies to leave a country.

The recent merger of Burger King and Tim Hortons shows how tax policies may affect the movement of companies. Burger King would relocate its headquarters to Canada where it would pay lower corporate tax rates compared to the U.S. While the corporate tax rate is 35 per cent in the U.S., the federal tax rate is only 15 per cent in Canada. The federal government in Canada wants the provincial tax rates to decrease to 10 per cent, yielding a combined tax rate of 25 per cent. Compared to the 35 per cent corporate tax rate in the U.S. which is the highest among OECD countries, the corporate tax rate in Canada is very competitive prompting Burger King to move its headquarters north of the border.

Again, unlike the U.S., Canada does not tax dividends that have already been taxed in other tax jurisdictions. This may also have prompted Burger King to relocate its headquarters to Canada. When a company pays less in taxes, it would have higher level of profits and, consequently, higher rates of return for its shareholders. The relocation may lead to a loss of tax revenue and employment in the U.S. and a gain of tax revenue and employment in Canada. This indicates how tax policies of two countries may induce companies to migrate from one to the other, having important implications on the tax revenues and employment scenarios of both countries.

The decision of the French government to impose 75 per cent tax on income over 1 million euros ($1.4 million) per year have led the rich to explore migrating to countries which are 'wealth-friendly' like the U.K. or Switzerland. The U.K. and Switzerland have competitive income tax rates for the wealthy which attract wealthy individuals and companies from other countries. The 75 per cent 'millionaire's tax' may lead to an outmigration of wealthy individuals and companies from France to other tax jurisdictions that offer lower income and corporate tax rates. This shows the dilemma that national governments encounter when they impose taxes that are higher than other tax jurisdictions.

The tax policies and competitive tax rates in the U.K. certainly help to attract the super-rich from countries all over the world. The U.K. is home to numerous millionaires and billionaires from other countries who have been attracted not only by its stability but also by its competitive income tax rates. Again, favourable corporate tax rates have attracted many financial institutions to set up headquarters and major offices in the U.K.

The same trend is observed in Singapore which has been a magnet for ultra-rich individuals and companies. Competitive tax rates have incentivized many companies and very rich people to set up residence in Singapore. Also, the country does not have capital gains tax which always makes it very attractive for companies and individuals to be based in Singapore. Hong Kong is also a tax jurisdiction that has very competitive tax rates and zero capital gains tax. This has attracted many wealthy individuals to live and work there. However, expatriates have to pay taxes to their countries of citizenship. For some countries, the tax liability would be on the world-wide income of the individual which may be substantial for wealthy individuals. The tax obligations may sometimes induce individuals as well as companies to renounce citizenship of one country and start residence in a tax haven that often offers zero tax rates. This again indicates how tax policies may have impact on migration patterns and citizenship status of wealthy individuals.

According to an UNCTAD report, "Review of Maritime Transport 2013," the five largest fleets by flags of registration and deadweight tonnage accounted for more than half of world total deadweight tonnage in January 2013. The top five flags of registration were Panama (21.5 per cent), Liberia (12.2 per cent), the Marshall Islands (8.6 per cent), Hong Kong, China (8 per cent) and Singapore (5.5 per cent). All these flags of registration are tax havens that offer zero tax rates. Even though the ships are owned by companies of other countries, they fly the flags of these tax havens to take advantage of extremely favorable tax rates.

The different tax policies and tax rates have induced the companies to fly different flags relative to their countries of ownership. The same trend is observed in Ireland. Its status as a tax haven has attracted numerous companies to register there and take advantage of tax loopholes and lower tax rates. Therefore, whether it is ships or companies, tax policies and tax rates have significant impacts on their registration and mode of operation.

U.S. companies have US$2 trillion of profit kept and invested outside the U.S., including in tax havens. The U.S. has a policy of taxing profits of companies that were made overseas. So, if a U.S. company made profits in its overseas operations and paid taxes in that tax jurisdiction, its profits would be liable to U.S. taxes if the profits are remitted back to the U.S. The profits would be subject to double taxation, once in the overseas tax jurisdiction and again in the U.S. once it enters U.S. soil.

In the U.S., the tax liability would be the difference between the 35 per cent corporate tax rate and the tax rate in the overseas tax jurisdiction. However, if the U.S. company does not repatriate the profits to the U.S. and reinvests it outside the U.S., the profits would not be liable to U.S. taxation. This could explain the motivation for U.S. companies to keep their overseas profits outside the U.S. However, if the U.S. companies repatriated the profits, it would lead to employment generation and economic growth in the U.S.. The U.S. tax policy that taxes worldwide income of U.S. companies may lead to this behavior of U.S. companies.

However, if the U.S. tax policy shifts to territorial method of taxation where a company pays taxes only on income earned within that country, this could lead to US companies repatriating their profits to the U.S. Most OECD countries practice the territorial system of taxation and tax profits made overseas at a very low rate. This indicates how tax policies of a country may influence its companies' decisions to repatriate profits or not, which in turn affect employment generation and economic growth in the country.

A study titled, "Tax Flight is a Myth: Higher State Taxes Bring More Revenue, Not More Taxation" by Robert Tannenwald, Jon Shure and Nicholas Johnson found that interstate migration in the U.S. is not significantly influenced by income tax increases in a state. However, tax rates and tax policies do influence international migration of wealthy individuals and companies. It must be mentioned that taxation is not the only reason that wealthy individuals and companies migrate. For wealthy individuals, the other reasons may be access to better education, employment opportunities, law and order condition, and environment. Also, political and economic stability may attract wealthy individuals to any given country. For companies, the attractions may include skilled labor force, competitive wage rates, large customer base, and political and economic stability. However, given comparable socio-economic factors, tax policies and tax rates may motivate wealthy individuals and companies to migrate from one location to another.

A possible solution to the problem of migration of wealthy individuals and companies would be to introduce similar tax policies and tax rates in all countries. However, it would be quite impossible to achieve it as every country would want to have more wealthy people and companies migrating to it. Any country would want to have competitive tax rates and favorable tax policies that would dissuade wealthy citizens and home companies from out-migrating while attracting wealthy foreigners and foreign companies. This would be beneficial for employment generation, tax revenue and economic growth of the country. However, this competition for wealthy individuals and companies may lead to tax wars among countries and a race to the bottom. Lower tax rates may very well lead to lower government revenues and insufficient resources to fund investments in infrastructure, education, law enforcement, healthcare, etc. Therefore, countries have to be careful that they do not engage in tax wars that may be harmful for them in the long run. Overall, tax policies and tax rates do influence migration patterns of wealthy individuals and companies.