Burger King Worldwide Inc. confirmed Tuesday that it will pay about $11 billion to buy Canadian coffee-and-doughnut-chain Tim Hortons Inc.
Adding a twist to the deal, legendary investor Warren Buffett’s Berkshire Hathaway Inc. is providing $3 billion in preferred equity financing. Mr. Buffett has been an advocate of President Obama’s policies and the increase of personal income taxes, factors that are leading to the decline of the American economy.
The deal would merge America’s second-largest burger chain, which is valued at nearly $10 billion, with the Canadian equivalent to Dunkin’ Donuts, which is valued at more than $8 billion. Burger King would also move its headquarters to Canada.
Why?
It has to do with the effective tax rate. Don’t let your eyes glaze over, this a big deal.
The newly merged company would become the world’s third-biggest “quick service restaurant company,” with more than 18,000 restaurants in 100 countries. It would rival Yum Brands, owner of Taco Bell and Pizza Hut.
When a company reincorporates abroad, as the practice is known, what it’s really doing is shifting its corporate citizenship; and when a company shifts its corporate citizenship, what it’s really doing is trying to pay less in taxes.
The effective corporate tax rate in the U.S., which combines national, state, and city-level tax rates, is nearly 40 percent—the highest across all 34 Organization for Economic Cooperation and Development (OECD) member countries. Canada’s, by comparison, is just over 26 percent.
Miami-based Burger King, founded in 1954, operates in about 14,000 locations in nearly 100 countries. The chain, which 3G Capital acquired in 2010, has become a franchiser that collects royalty fees from its franchisees—not an operator of restaurants. Since the 3G Capital acquisition, Burger King has significantly increased its presence in Europe, the Middle East, Asia and Latin America.
In an inversion, a U.S. firm relocates—usually through a merger with a smaller company—to a country where tax rates and rules are perceived to be friendlier, but it typically continues to be managed from the U.S.
The increasing popularity of tax inversions has prompted discussions about how to close–or at the very least thwart–the sort of loopholes that allow tax flight in the first place. President Barack Obama has expressed concerns about the practice and its imminent growth. “We don’t want to see this trend grow,” he said earlier this month.
Like most progressives, Mr. Obama does not want to loose the taxes but he fails to grasp the fundamentals of business. Of course, I don’t think he wants to do so. Oppressive taxes and regulations have always led to companies and individuals to find ways to avoid them. If you want to collect more taxes it is better to take a smaller cut but grow the pie so that the cut is actually larger.
It has always worked.
