Burger King’s Tax Inversion and Canada’s Favorable Corporate Tax Rates

Forbes – by Jon Hartley

In an unexpected and interesting move, Burger King is in talks to buy Canadian coffee-and-doughnut chain Tim Horton’s Inc., a merger that would be structured as a “tax inversion” which would effectively move Burger King’s headquarters to Canada (more specifically, my hometown of Oakville, Ontario). For those who are unfamiliar with Tim Horton’s, the brand is tantamount to Canada’s version of Dunkin Donuts that could just as easily adopt its own version of the tagline “America Runs on Dunkin” (think “Canada Runs on Tim Horton’s”). Tim Horton’s is no small coffee-shop chain. Tim Horton’s, Canada’s largest coffee-shop chain, has a market capitalization of about $8.4 billion, while Burger King’s market capitalization is about $9.6 billion; the proposed merger would form a new entity worth about $18 billion.  

Canada’s Corporate Tax Rates Are Now More Favorable To U.S. Corporate Tax Rates

The really interesting part to the story however is not the pure fact that an American burger giant is buying up a Canadian national treasure (Wendy’s has previously owned Tim Horton’s for some time), but rather that Canadian corporate tax rates are favorable relative to American corporate tax rates enough to justify a “tax inversion”. A tax inversion occurs when an American company merges with a foreign one and, in the process, reincorporates abroad, effectively entering the foreign country’s tax domicile. An American company that merges with a Canadian target company for share consideration can avoid U.S. residency for tax purposes as long as the shareholders of the Canadian target end up owning at least 20% of the shares of the new parent immediately after the acquisition.

Canada’s corporate tax rate in Ontario of 26.5% (the federal rate of 15% plus Ontario’s provincial corporate tax rate of 11.5%) is considerably favorable to the American corporate tax rate of 35% thanks in large part to the conservative Canadian government led by Stephen Harper. The Harper government lowered the federal tax rate to 15% in 2012 down originally from 28% since it took office in 2006.

In fact, a recent KPMG Report, Focus on Tax, ranked Canada as the #1 country with the most business-friendly tax structure among developed countries when adding up a wide range of tax costs to businesses from statutory labor costs to harmonized sales tax. When comparing developed countries to what companies pay in the U.S.; Canada came in at 53.6%, the U.K. came in at 66.6%, and the Netherlands at 74.5% of the U.S. corporate tax burden.

KPMG Focus on Tax 2014 Report

Source: KPMG LLP

The additional tax revenue put into Canadian coffers from Burger King goes against the warnings of critics who argued that the lower Canadian corporate tax rates would threaten Canadian federal government revenues. Burger King Worldwide BKW +23.57% Inc. paid a tax bill of $88.5 million in 2013 according to their 2013 10-K filing, which after some reduction under the new tax rate would be deposited in the Canadian Finance Ministry rather than the U.S. Treasury.

Burger King is not the only American company to consider merging with a Canadian company to gain a more favorable tax rate. Valeant Pharmaceuticals International VRX -1.07% Inc., which had been based in California, combined with Canada’s Biovail Corp. in 2010 and redomiciled in Canada.

Canadian Prime Minister Stephen Harper. (Photo Credit: Henry Romero/Reuters)

White House and Treasury Looks To Curb Tax Inversions, Calling Tax Inverting Companies “Corporate Deserters”

Burger King’s possible merger to obtain the favorable Canadian corporate tax rate is a true reflection of the American corporate tax rate being the highest in the OECD. However, rather than taking the same stance on outright cutting the corporate tax rate as the Harper government did to keep the U.S. a competitive place to do business, President Obama calls tax inverting companies like Burger King “corporate deserters who renounce their citizenship to shield profits”. At the urging of President Obama, Congress is considering a bill to make it harder for companies to change addresses abroad. Treasury Secretary Jacob Lew called for a “new sense of economic patriotism,” asking Congress to pass curbs to inversions. The Treasury Department currently is also preparing options to deter or prevent corporate tax inversions potentially on its own.

Interestingly, according to MarketWatch, Burger King does not plan to have a provision in a merger agreement that would allow it to walk away from a deal if laws are passed that diminish the benefits of inverting. For consumers who enjoy to “Have It Your Way”, Burger King would operate more efficiently under a lower corporate tax rate and partner with a great Canadian brand, should the merger take place without interference.

http://www.forbes.com/sites/jonhartley/2014/08/25/burger-kings-tax-inversion-and-canadas-favorable-corporate-tax-rates/