Burger King has purchased Tim Hortons Canadian coffee-and-doughnut chain for $11 billion and will relocate its headquarters up north. Critics have panned the relocation as an unpatriotic tax inversion, creating renewed debate over corporate governance in America. One critic, Democratic Senator Sherrod Brown of Ohio, has even called for a boycott.
Tax inversion is when a company buys a smaller company in a foreign country, then says the new firm is really in charge and uses its headquarters as the newly merged company’s tax base. The foreign country will always have a lower tax rate than the U.S., since America is home to the highest rate in the world. So the company saves money, while at the same time benefiting from its presence in the U.S.
Now Burger King is following the tax inversion formula by purchasing Tim Hortons. The move prompted a quick angry response. Senator Brown said of the incident,
“Burger King’s decision to abandon the United States means consumers should turn to Wendy’s Old Fashioned Hamburgers or White Castle sliders. Burger King has always said ‘Have it Your Way’; well my way is to support two Ohio companies that haven’t abandoned their country or customers.”
Other’s have turned the anger around on the Senator, instead blaming Congress for not lowering the corporate tax rate or offering more incentives for companies to stay. Saying its the duty of a company to maximize profits for its shareholders, and tax avoidance is part of that game. Then there are those who say Burger King’s move to Canada has little to do with taxes at all.
There is one problem with the inversion narrative, it assumes that U.S. companies are paying the full 35% corporate tax rate (39.1 by some sources). That would mean that companies are not taking any credits or deductions at all, and that is almost never the case. Some very large companies, like General Electric, pay no corporate taxes at all.
For its part Burger King pays about 27%. When they move to Canada they’ll pay a tax rate of about 26%, but once again, that’s assuming they can’t find any deductions or credits up north. It would seem that Burger King will save money on its tax bill, but it seems questionable if it that is the only motivation.
Bloomberg floated the idea that Burger King’s true intentions are set on expansion. 3G is the Brazilian private equity firm that owns Burger King, needs to keep Wall Street happy with fast-paced growth fueled by acquisitions. Basing Burger King in Canada may help to secure regulatory approval of the deal, and Tim Hortons promises to capitalize in an area that Burger King isn’t particularly strong in, breakfast.
Whether or not Burger King’s move up north is about tax avoidance, the company has raised a valuable debate about taxes in America.
[Image Credit: Makaristos/Wikimedia Commons]