Finance

Burger King: Merger is not a tax dodge

Burger King confirmed Tuesday that it was merging with the Canadian doughnut chain Tim Hortons, a move certain to put even more scrutiny on the corporate tax deals known as inversions.

Under the roughly $11 billion deal, the new global company overseeing both brands will be based in Canada, allowing Burger King to cut its tax bill.

The two chains will continue to be run separately, with Burger King managed in Miami and Tim Hortons outside of Toronto.

{mosads}With the deal, Burger King becomes the most prominent U.S. company yet to clinch a deal to reincorporate abroad — a maneuver known as an inversion that has drawn the ire of President Obama and other leading Democrats.

Obama has hammered companies that have considered shifting their legal address abroad as unpatriotic, a message that Democrats have incorporated in their broader election-year strategy on economic fairness. Sen. Sherrod Brown (D-Ohio) even called for a boycott of Burger King on Monday, after the company confirmed it was in merger talks.

On Tuesday, Burger King and Tim Hortons sought to defend themselves against the charge that the merger was a tax dodge, noting that Canada will be the largest market for the new company.

Burger King executives also stressed that, while the parent company for the two brands will be in Canada, the fast food giant will continue to pay federal, state and local taxes on its operations in the U.S.

“This is not a tax-driven deal,” Alex Behring, Burger King’s executive chairman said on the same call. “This transaction is fundamentally about growth.”

Daniel Schwartz, Burger King’s chief executive, said the chain has an effective tax rate of roughly 27 percent, a rate he said was similar to Tim Hortons.

Canada has a national corporate rate of 15 percent, but its overall rate is in the 26 percent range. The top U.S. corporate rate is 35 percent, with the average inching closer to 40 percent once state and local taxes are included.

“We don’t expect there to be meaningful tax savings, nor do we expect there to be a meaningful change in our effective tax rate,” Schwartz said.

Warren Buffett’s Berkshire Hathaway will also be providing $3 billion of financing for the merger, a backing first reported by The Wall Street Journal.

Buffett has been a key figure in Obama’s tax fairness message, as the namesake of the rule that states that wealthy individuals shouldn’t pay less in taxes than their secretaries. His involvement in the Burger King deal could complicate the Democrats’ efforts to criticize the merger.

Democrats are seeking legislation that would essentially make it impossible for a U.S. company to reincorporate abroad if it swallows up a smaller foreign business.

But with the gridlock on Capitol Hill, it’s unlikely that lawmakers will agree on such a measure. Obama has suggested that he’ll take executive actions to limit the appeal of inversions if Congress doesn’t act, and Treasury Department officials are currently mulling the best approach.

While it involves more prominent brands, the Burger King and Tim Hortons merger is also smaller than some recent inversion deals involving U.S. pharmaceutical companies.

But like Walgreen, Burger King has also found that the public backlash to cross-border deals is more intense for brand-name companies. Walgreen decided this month to keep its headquarters in the U.S., even after merging with a European competitor that would have allowed it to reincorporate in Switzerland.

Executives for the pharmacy chain acknowledged that the consumer response played a role in that decision.

On Tuesday, Burger King found itself responding to dozens of posters terming it a tax dodger on its Facebook page.

“We hear you. We’re not moving, we’re just growing and finding ways to serve you better,” Burger King said. “The WHOPPER isn’t going anywhere.”

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