Much has been made about the merger of Burger King and Tim Horton’s being solely a tax inversion strategy. It may turn out to be much, much more than that.
NASDAQ is reporting that with the acquisition of Tim Horton’s, Burger King now gets a chance to look into international expansion. Before the merger, Burger King was lagging far behind McDonald’s for the last few quarters. Then, fast-casual restaurants such as Chipotle, Qdoba, Panera, and Baja Fresh started chewing into the market share. Finally, McDonald’s, Starbucks, Dunkin’ Donuts and Taco Bell began eating into the burgeoning breakfast market. Burger King needed to jumpstart their efforts with a major purchase. Now, here comes Tim Horton’s.
Tim Horton’s is well-established in Canada, with a breakfast menu that is both innovative and good. Their efforts to expand into the U.S., however, are slow. Now, with the merger, Burger King and Tim Horton’s will have corporate headquarters in Ontario. This means that when Burger King goes to pay taxes, they will ship their earnings to the Ontario head office. The thinking here is that taxes will be lower paying Canadian taxes and not American taxes.
So, there will be money saved with paying less taxes. While people have become upset with Burger King’s plan, to the point of organizing boycotts and such, it’s what Burger King will do with the savings. And it’s looking like Burger King will begin looking into expanding their brand internationally.
Forbes is reporting that Burger King may be just opening the floodgates to tax inversion. Companies such as Medtronic’s $46.2 billion buy of Ireland-based Covidien and Pfizer’s unsuccessful $73 billion pursuit of AstraZeneca, based in Mexico, are looking into tax inversion, as well.
There is much conflict within business and government concerning tax inversion. President Barack Obama has called companies that decide to follow tax inversion “corporate deserters.” There is even a bill in Congress that would alter the tax inversion, but the Democratic-backed bill is stuck in a Republican-controlled Congress and is not expected to even go to the floor to vote.
Coupled with the words and actions of those like business magnate Warren Buffet, Americans are indeed getting mixed signals. Buffett for years has railed against the amount of tax loopholes that businesses have afforded to them. Buffett’s Berkshire Hathaway then does an about face and provides some of the funding for the Burger King-Tim Horton’s merger.
In short, business are looking for a way to improve profits, and tax inversion is a perfectly legal way to do so. In the long run, however, it may send a lot of businesses, and a lot of tax money, out of the United States. Where the government recoups that lost tax income is anyone guess.
Or, is it?