Burger King Claim That Move Won't Save Taxes Draws Skepticism

Wednesday, 03 Sep 2014 12:04 PM

 

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Daniel Schwartz, chief executive officer of Burger King Worldwide Inc., said last week he doesn’t expect “meaningful tax savings” when the company adopts a new legal address in Canada through the purchase of a doughnut chain there.

While Schwartz’s statement may have blunted criticism from U.S. politicians who are calling the Miami-based hamburger maker’s address change a tax dodge, it’s hard to square with the reality of the countries’ tax laws, according to experts on both sides of the border.

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“If they don’t see any tax benefits going forward, they are probably not looking very hard,” said Edward Kleinbard, a tax professor at the University of Southern California and a former partner at New York-based Cleary Gottlieb Steen & Hamilton LLP.

Kleinbard and other authorities said in interviews that Burger King will almost certainly reduce its taxes because Canada’s corporate income tax system is simply less expensive for multinational companies. Canadian companies can collect dividends from most foreign subsidiaries without paying more tax in their home country, an advantage over the U.S., which is one of the few countries that apply a second layer of tax on foreign income.

On top of that, companies in British Columbia pay 26 percent corporate income tax, compared with the 35 percent U.S. federal rate. Burger King filed plans last week to form a new parent company in the Canadian province as part of the purchase of Tim Hortons Inc., based in Oakville, Ontario, for $11.2 billion. Burger King declined to comment on its tax plans beyond the statements by Schwartz and other executives last week.

Popular Maneuver

It’s the latest example of a tax inversion, an increasingly popular maneuver in which U.S. companies get foreign tax domiciles. About 43 U.S. companies have reincorporated abroad since 1982, including 13 since 2012. Including Burger King, nine plan to do so in the coming year. Future inversions may cost the U.S. Treasury Department $19.5 billion in forgone tax revenue over the next decade, a congressional panel estimated this year.

President Barack Obama has called the practice an “unpatriotic tax loophole” and ordered a Treasury Department crackdown. While some Democratic lawmakers have proposed legislation to block the moves, most Republicans prefer to address the issue as part of a full revamp of the tax code, which isn’t likely this year.

Canadian Subsidiaries

For Burger King, the tax experts said, a Canadian address would mean that future expansion of the Burger King brand around the world could take place outside of the U.S. tax system, simply by using subsidiaries of the Canadian parent company that don’t have a U.S. connection.

The new address also could help the company get access to $499 million of profits that already have accumulated in foreign Burger King subsidiaries without paying the extra U.S. tax on them that would otherwise be due. And the new Canadian parent could make a loan to the U.S. subsidiary to shift profit north of the border, where it would be taxed at the lower Canadian rate.

“The things that we’re talking about are not particularly complicated or aggressive,” said Reuven Avi-Yonah, a tax professor at the University of Michigan Law School and a former corporate lawyer. If Burger King doesn’t get tax benefits from the Canadian address, he said, “it would make it different from any other inversion that I’ve seen.”

Charging Royalties

Mimicking a practice that’s become routine among pharmaceutical and technology firms, some food-service companies also have shifted profits to low-tax nations by transferring intangible assets, such as brand names, to subsidiaries in those countries and then charging royalties for their use. The U.K. unit of Starbucks Corp., for instance, paid royalties to an affiliate in lower-tax Holland, an arrangement that led to a parliamentary inquiry when it was exposed in 2012.

Getting a foreign address would increase the savings generated by such a maneuver, and it also might allow Burger King to attempt the strategy in the U.S., currently its biggest market, the tax experts said. Burger King already reduces its taxes in countries including Germany through payments to a Swiss affiliate that owns brand rights, Reuters reported Tuesday, citing a 2012 company statement to the news service.

Tax savings were a focus of media coverage of the Tim Hortons acquisition during the days leading up to its announcement last week. Even before the deal was formally unveiled, Senator Sherrod Brown, an Ohio Democrat, was urging consumers to avoid eating at Burger King because of the move. The deal shows that “Congress can’t afford to wait any longer to put a stop to tax dodging,” said Senator Carl Levin, a Michigan Democrat.

Downplaying the Deal

On conference calls discussing the deal, Burger King executives downplayed the tax angle.

“This is not a tax-driven deal,” said Alexandre Behring, the executive chairman. Combined with Tim Hortons, the company’s biggest market would be Canada, making it logical to place the new headquarters there, he said.

Company officials haven’t said where in Canada the combined company’s headquarters will be. Right now, the merger agreement with Tim Hortons contemplates combining the restaurant chains under a new British Columbia entity called 1011773 B.C. Unlimited Liability Co. The executives said the Tim Hortons business will continue to be run from the Toronto suburb of Oakville and the Burger King unit from Miami.

Effective Rate

Schwartz, the CEO, said on the same conference call that Burger King’s effective tax rate is currently in the mid to high 20s percentage range and is unlikely to change much because it’s similar to the rate under Canadian law and to Tim Hortons’s effective rate.

“We don’t expect there to be meaningful tax savings, nor do we expect there to be a meaningful change in our tax rate,” he said. “All the same taxes we were paying in the past in the U.S., we’re going to continue to pay in the future in the U.S.”

Burger King’s effective tax rate is lower than the 35 percent U.S. rate mainly because it earned most of its profits in recent years in lower-tax countries and hasn’t yet paid the taxes that would be due if it returned the profits to the U.S. in the form of dividends, company filings show.

By becoming a Canadian company, Burger King would probably be able to get access to future foreign profits without paying U.S. tax. And it might be able to tap the $499 million in foreign profits that it’s already accumulated without paying an additional tax bill, said Richard Harvey, a professor at Villanova University School of Law and former tax partner at PricewaterhouseCoopers LLP.

‘Cute’ Language

The result is that Burger King could save taxes without lowering its effective rate, Harvey said.

“They may have been being cute with their language,” he said. “I think they get a benefit from the inversion, it’s just that the benefit is not going to reduce their effective tax rate.”

Still, some of the options available to Burger King could lower the rate. A standard part of an inverting company’s tax playbook is for the new foreign parent company to make a high-interest loan to its U.S. subsidiary. That allows the U.S. unit to deduct interest payments from its taxable income, essentially shifting profits from the U.S. to the lower-tax jurisdiction.

Such a loan should be “a fairly easy and straightforward opportunity for them,” said Bret Wells, a former treasurer and tax director for a multinational oilfield-services company who’s now a law professor at University of Houston. He called it “not very plausible” that the company’s Canadian address wouldn’t lead to tax savings.

Not Possible

Robert Willens, a New York-based independent consultant on corporate taxes, said, “I don’t think that it’s possible, quite frankly, that a company would ever do a deal like that and not get tax benefits.”

Although Ireland is the most popular domicile for U.S. companies inverting during the current wave of such deals, at least four U.S. companies have shifted their tax domiciles to Canada since 1999. Burger King isn’t the only one planning to join them. Chesterbrook, Pennsylvania-based Auxilium Pharmaceuticals Inc. announced a deal to become Canadian earlier this year.

Tim Hortons itself inverted back to Canada in 2009 after a previous union with Wendy’s International Inc. left it with a U.S. tax home. At the time, Tim Hortons said one reason for the switch was to “to take advantage of lower Canadian tax rates.” The company’s effective tax rate dropped following the transaction.

Last week, after the Burger King plan was announced, the office of Canadian Prime Minister Stephen Harper said in a statement that “while we can’t comment on the specifics of a private transaction, we are proud that our low tax environment in Canada attracts businesses.”

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The reincorporation in Canada “is clearly a tax benefit” for Burger King, said Jack Mintz, a top Canadian tax-law expert and director of the University of Calgary School of Public Policy. “I don’t believe them.”

© Copyright 2014 Bloomberg News. All rights reserved.

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