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U.S. Burger Giant Buys Canadian Doughnut Giant
CNN- Burger King announced that it has reached a deal to buy Canadian doughnut chain Tim Hortons and base itself in Canada, a controversial transaction that raises questions about business taxes and corporate patriotism.
The deal is the latest example of a U.S. company buying a foreign company and moving its legal home to that of the company it is acquiring. Typically that move allows a company to pay corporate taxes at a lower rate, though Burger King officials insist that's not the case here.
Burger King said Canada is where it will have 80% of its outlets once the deal to add Tim Hortons (THI) is complete. Overall, it expects about two-thirds of its revenue to come from Canada, one-fifth from the United States and the rest from overseas locations.
Burger King executives denied that lower tax rates were the motivation behind the deal. They said Burger King already pays a tax rate in the mid- to high-20% range, which they said is largely consistent with Canadian tax rates.
"We don't expect there to be meaningful tax savings," said Daniel Schwartz, CEO of Burger King Worldwide. "This transaction is not about tax rates, but about growth."
Schwartz said that the deal would technically count as a so-called "inversion deal" in which the holding company will become a Canadian company for tax purposes, even though Burger King's current owners will hold a majority of shares. But he said that, unlike other controversial inversion deals, this deal is not lowering its tax bill.
But Lee Sheppard, contributing editor of the publisher Tax Analysts, said she expects Burger King will end up using its new Canadian home to cut its tax bill.
For instance, she said Burger King can lower its overall tax bill if its Canadian parent makes large loans to its U.S. subsidiary. The resulting loan interest deduction would then offset much of the company's U.S. income.
The Burger King stores will continue to be run out of the current headquarters in Miami, while Tim Hortons stores will continue to be run out of Canada.
Burger King (BKW) has arranged for $12.5 billion in financing to complete the deal, with $3 billion of that coming from Warren Buffett's Berkshire Hathaway (BRKA). Berkshire is only providing financing and will have no management role in the combined company.
Berkshire will have to pay a tax rate more than twice as high on the preferred dividends it receives as payment of that debt because it is coming from a foreign company, rather than a U.S. company, a source with knowledge of the deal told CNN. That raises the cost of financing.