Burger King Makes Moves to Acquire Tim Horton’s in Tax Inversion Deal

Burger King hadn’t made much of an effort to get involved in the Breakfast Menu wars that have raged mostly between McDonald’s and Taco Bell this year. Maybe it’s because the franchise had a different idea in mind for capturing the breakfast market all along – today is filled with talk that Burger King Worldwide Inc. is moving in to buy iconic Canadian coffee-and-breakfast franchise chain Tim Horton’s. But don’t get too excited – this move isn’t about breakfast. It’s about taxes, and it has the burger chain facing some harsh criticism.

According to reports, the two QSR chains are planning to merge into a single entity worth an estimated $18 billion. In what’s known as a tax inversion, the merger would also move the headquarters of this single entity to Ontario, Canada, despite the larger Burger King being the side making the acquisition.

It’s a move with clear financial benefits for Burger King. According to Forbes, centering the business in Ontario would make it subject to a corporate tax rate of 26.5 percent – Canada’s 15 percent federal tax rate, lowered from 26 percent by current Prime Minister Stephen Harper, plus an additional 11.5 percent rate for the province of Ontario. Compared to the United States’ federal corporate tax rate of 35 percent, picking up and moving to a more business-friendly country can certainly have its appeal.

There are major potential benefits for Tim Horton’s as well. The regional chain is beloved in Canada the way that Dunkin’ Donuts is beloved on the East Coast in the United States – by teaming up with Burger King, Tim Horton’s could get the backing it needs to really expand. It might dilute the brand for diehard fans, but it could also turn into a huge success and formidable rival to other café brands (including the café aspirations of McDonald’s) if BK is able to provide the support and marketing it needs.

But it’s impossible to discuss tax inversions without discussing the question of ethics involved. A tax inversion obviously means that all the corporate tax revenue that would have once gone to support your country of origin’s economy will now be funneled into the economy where your business has relocated. As a nearly $10 billion business all on its own, the taxes lost by Burger King moving to Canada would certainly be felt by the United States economy in one way or another.

Of course it’s within a global company’s rights to move its headquarters anywhere around the globe, but just because it’s legal doesn’t mean that it will be received well by the public. The issue of tax inversion altogether is a minefield right now, with tax inversion opponents calling on businesses to practice “economic patriotism” and on the government to make it more difficult to invert, while others argue this as proof that the United States needs to lower its own corporate tax rate to avoid a further exodus of native businesses who have the chance to go global.

Meanwhile it’s up to individual businesses to decide whether the tax cut is worth a potential dip in domestic public perception – if the public takes notice of the move and its ramifications in the first place, which is also not a sure thing. Earlier this month Walgreens frustrated investors by betting on the American economy and consumers, making the decision to steer clear of a tax inversion and stay headquartered in the United States after merging with European drugstore chain Alliance Boots GmbH. For Burger King, on the other hand, it’s looking like the benefits of a northern relocation are outweighing the costs.

[SOURCE: Forbes; Wall Street Journal via Market Watch]