Why is Burger King merging with Tim Horton’s?
The American fast-food restaurant Burger King and the Canadian doughnut shop Tim Horton’s are discussing a merger in which Burger King would shift its headquarters to Canada. In doing so, Burger King would save a lot in taxes. They’ll still pay 35% on US-source income; but if global growth is their goal, Canada’s territorial system and 15% Federal tax rate will allow them to sell burgers and coffee from Berlin to Beijing and not have to worry about Washington claiming its share.
The companies say that the deal isn’t about taxes, it’s about the synergies of merging two sister food companies. And that’s true, too. But this deal is a double-whopper. They can save money on taxes and improve operations as they seek to capitalize on the growth potential of the emerging middle class in the developing world. Neither company currently gets much of its income globally. The market certainly likes the concept: both companies closed about 20% higher after announcing their intentions.
But Washington doesn’t like inversions. Besides costing the Federal Government money, they call attention to the fact that only Chad and the United Arab Emirates have higher corporate tax rates than us. While corporate taxes in the rest of the world have been falling, they’ve been static here. Even with lower marginal rates, however, corporate taxes are a bigger percent of GDP up north.
Like it or not, though, there’s not much the authorities can do to stop two equal-sized companies from combining operations. The new headquarters have to go somewhere. We have extensive trade and finance treaties with our northern neighbor. Global competition means that companies are free to choose where to locate.
Douglas R. Tengdin, CFA
Chief Investment Officer
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