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[28 comments]

BK says Tim Hortons' deal isn't a tax dodge

August 27, 2014

Much of the reporting around Burger King's deal to acquire Tim Hortons for $11.4 billion has been about plans for the combined company to establish its headquarters in Canada in order to take advantage of that country's lower corporate tax rate in a so-called inversion deal.

For its part, Burger King has said the decision to move to Canada is not about avoiding taxes in the U.S., but is about establishing a base for global operations in the country where it has the greatest presence. The combination of Burger King, the second largest hamburger chain in the world, and Tim Hortons (or Timmy's, as it is known in Canada) will create the third-largest quick service restaurant company worldwide.

"Over the past four years, we have transformed Burger King into one of the fastest-growing and most profitable QSR businesses in the world, through successful international growth, a consistent focus on brand revitalization and strong commitment to our franchisees," said Burger King CEO Daniel Schwartz in a statement. "We are excited to build on this progress as we continue to expand Burger King around the world and look forward to working with Tim Hortons as we together create the world's leading global restaurant business."

Burger King operates more than 13,000 locations in 98 countries and territories across the planet. Tim Hortons has 4,546 doughnut and coffee shops overall, with 3,630 in its home market, 866 in the U.S. and 50 in the Gulf Cooperation Council.

Burger King executives claim the impetus behind the deal was to accelerate expansion. "We don't expect there to be meaningful tax savings or any meaningful changes in our tax rate," Mr. Schwartz was quoted by The Wall Street Journal.

Company executives said its current effective tax rate is in the mid-20 percent range. The official federal corporate tax rate in the U.S. is 35 percent, although a 2013 Government Accountability Office report, commissioned by Senators Carl Levin (D) and Tom Coburn (R), found the average effective federal rate is 12.6 percent. State and local levies are estimated to add roughly four percent to the federal rate.

Despite assertions to the contrary, there will be those who see Burger King's deal as a means to avoid its tax obligation here in the U.S. The question is whether the company will face a backlash from U.S. consumers who may see its move to Canada as turning its back on America.

FINANCIALS:     [ NYSE:BKW] [ NYSE:THI]

Discussion Questions:

Will Americans believe Burger King management's claim that its move to Canada is not prompted primarily by a desire to lower its corporate tax rate? Will the company's decision to move its worldwide headquarters to Canada help or hurt its Burger King and Tim Hortons businesses in the U.S.?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Will Burger King's decision to move its worldwide headquarters to Canada help or hurt its businesses in the U.S.?

Comments:

If it talks like and duck and walks like a duck ...

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Bob Phibbs, President/CEO, The Retail Doctor

I don't think anyone really cares where Burger King is based as long as they come through on the store level. No one really cares that Tim Hortons has kept their headquarters in Canada despite expanding in the U.S. Tax avoidance is perfectly legal and a prudent business strategy. Businesses and people move from from state to another all the time to avoid taxes so I would think most people would be very understanding of what Burger King is going through. Keep in mind Burger King will still be paying payroll taxes and property taxes in the locality where their stores are located. As a country, perhaps it's time to abolish or reduce the corporate income tax since businesses always seem to be one step ahead of the tax code.

David Livingston, Principal, DJL Research

How does moving its HQ to Canada "accelerate expansion?" I'm with Bob. It walks like a duck, quacks like a duck and smells like BS.

'Snicker'

Sadly we are in a culture of negativity, lack, entitlement, suspicion and huge distrust. It doesn't matter what the real reasons are for this move by BK, we'll make up a story that supports our mindset. We learned to do that by watching the news, especially political news.

People in the U.S. seem to disdain this Canadian "donut shop" started by a dead NHL defenseman. But this is no small deal—almost nothing is more iconically Canadian than Tim Hortons. And they are far more than a donut shop! Having moved to the U.S. from Canada 17 years ago, I still miss being able to stop at virtually any corner to satisfy my craving for an apple fritter from Timmy's.

Re: corporate taxes, when will we realize the obvious—that the problem is the answer? For goodness sakes stop whining and fix the tax code! Oh, I forgot, that might actually work which goes against everything negative that we stand for.

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Ian Percy, President, The Ian Percy Corporation

If Burger King management wants to end the tax speculation and potential consumer backlash, all it has to do is pledge keep its headquarters in the U.S., and then keep its promise.

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Max Goldberg, President, Max Goldberg & Associates

"For its part, Burger King has said the decision to move to Canada is not about avoiding taxes in the U.S., but is about establishing a base for global operations in the country where it has the greatest presence."

Take that at face value.

Over 3,600 locations of Timmy's in Canada likely is a greater presence by a per capita measurement than Burger King's 13,000 elsewhere in the world and in Canada also.

Do Americans understand excessive taxation and what it doing to American companies? Sure they do. They thoroughly understand all the other issues facing American companies as well. They understand each time they report to work to a position at a lower level than their prior job or they collect their extended unemployment benefit. If there is backlash, it will be likely on the part of jealousy of the fact that they can't manipulate their own financial positions as easily as a corporation can do so.

This is not a closing of locations in the U.S. and a retreat to Canada. It is likely as they say, but with the caveat that the tax benefits are a bonus.

Will Americans eat fewer Whoppers as a result? I doubt it. Do Americans drink less Budweiser products because they are Belgian-Brazilian owned? Nope. What might happen is that they will likely enjoy more donuts and blazing hot coffee from Timmy's. Americans are doing so in Michigan as Timmy's is rapidly expanding throughout. Timmy's is actually a better alternative than Burger King for lunch if you are looking to eat something even slightly healthier than a double meat Whopper with cheese and oil-soaked french fries, as well as, a soft drink larger than a bucket! In fact, Timmy's is a far better choice all the way around. Just be careful with that first sip of coffee!

'Scanner'

Tim Hortons will not be hurt in the U.S. because the company has always been based in Canada. Americans have nothing against companies based in Canada. Most of Tim Hortons' customers will soon forget that the company is now owned by Burger King, and provided that the quality and service remains the same, most Americans will not concern themselves with the recent merger.

However, Burger King might be a different story, at least in the short term, because Americans don't like the notion that this was an "American" company that decided to be "Canadian" in order to avoid paying taxes in the U.S. No matter what PR statements they put out, the mass media will not let Burger King off the hook, at least not for a while, until the story gets some distance in the rear view mirror, and this too, will be forgotten.

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David Biernbaum, Senior Marketing and Business Development Consultant, David Biernbaum Associates LLC

GE and many other corporate giants have kept trillions overseas for years, to avoid our horrible tax system, and now they want to punish Burger King for trying to save some money. What a crazy world we live in, and maybe we should get our business model together in our country, before we start chastising corporations for leaving, but I don't see this happening as DC is way beyond a disaster zone right now. We as a country are past a very dangerous tipping point, and no one cares to even do one thing to fix the problem.

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Tony Orlando, Owner, Tony O's Supermarket & Catering

I forgot to add this thought to my earlier submission: All the whiners who are now going to boycott Burger King will do so while wearing their Made in China clothes and shoes, while driving their German or Korean-made cars home to watch their Japanese-made television. Cast the first stone if you will.

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Ian Percy, President, The Ian Percy Corporation

An answer to question number one: No.
An answer to question  number two: Help, if product, service and pricing are spot on.

A third question silently posed by this article but not included: Who really benefits from America having the highest corporate tax rate in the world?

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Gene Hoffman, President/CEO, Corporate Strategies International

Bob said it succinctly in a few meaningful words. Quack, quack.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

Clearly all of us believe that Burger King's primary motivation is a desire to lower its corporate taxes. I don't expect their customers to be influenced by that decision unless competitors find a way to use it as a point of difference.

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Joan Treistman, President, The Treistman Group LLC

The Tim Hortons brand will not be hurt by this move. In fact it may help, as there could be cross-brand growth by bringing some of the Tim Hortons brand into the Burger King outlets.

However, on the Burger King side, there will be some short-term hit to the brand. We have very short memories, and a majority of those that are discussing moving their business from Burger King to other chains will be right back at Burger King when the next enticing offer comes by, or when the buzz dies down around this acquisition and moves to the next one.

While the management of Burger King has stated that they are not doing this for tax purposes, it will remain to be seen what the real effect will be come tax time. If this is truly a purchase of Tim Hortons by Burger King then there should be no reason to even move the HQ to Canada.

One question that I haven't seen asked: "If it were the other way around and Tim Hortons had purchased Burger King, would there be any questions asked about the loss of tax revenue to the U.S.?"

Alan Lipson, Retail Industry Marketing Manager, SAS Institute Inc.

Not sure it matters what Americans believe if their behavior does not change (and maintaining or improving product quality, service and experience will determine that). Whether or not it is a move to dodge taxes seems an irrelevancy for most shoppers (MOST, not all). The answer is not to wring our hands over those "traitors" who will use LEGAL means to avoid taxes, but to change the code. Isn't it time?

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David Zahn, Owner, ZAHN Consulting, LLC

First of all, no one going to Burger King will care where the HQ is. Who knew it was in Miami or factored that into their decision-making process? Secondly, the integration of Burger King and Tim Hortons represents a powerful expansion of need states that Burger King is associated with. Great move in that way. Third, I applaud businesses who respond to excessive taxation and teach our government leaders a lesson. So all around, bravo Burger King, eh?

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Joel Rubinson, President, Rubinson Partners, Inc.

Well first of all Burger King is not American-owned. Its owners are from South America. Also, Burger King has been declining in market importance for years as has Tim Hortons. When a ship sinks, the passengers will cling to anything. In this case Burger King and Tim Hortons are hugging each other while both slip below the waves. Whatever the reason, this is not a very important merger.


When is the last time you were in a Burger King? Have you ever been in a Tim Hortons? See, this is of no consequence! And with regard to taxes—no corporation pays any taxes: 1.) they collect taxes from their customers, 2.) They remit profits to government (as taxes) instead of their owners. If the owners had received the distribution they would have paid more in taxes than the corporation did. But don't fool yourself, just because a corporation wrote a check to the IRS they did not pay the tax, they only collected it from their customers and passed it on to government. I know those of you who have never owned a business don't understand this, that is really the major problem here. 95 percent of the American public doesn't understand the simple fact that only people pay taxes! No matter what, moving corporate headquarters to Canada or Ireland, or Grenada isn't going to help either Burger King or Tim Hortons.

Ed Dennis, Sales, Dennis Enterprises

They won't care. 7-Eleven is Japanese, Traders Joe's is German, H&M is Swedish. Three growing brands popular among younger people, and two of them were at one time American companies.

'beavertontim'

The so-called "tax inversion" controversy is gaining big national attention due to this announcement about the Burger King - Tim Horton's deal. But the previous Walgreens - Boots acquisition story was kindling to the fire.

Of course CFOs at multinational retailers are tasked with finding and implementing the best legal tax strategies possible. We can express our displeasure and try to shame them into ignoring the option, but we can't stop this unless we change our tax laws.

Maybe a simple principle must prevail, in the U.S. and worldwide: If you realize the revenue here, you pay income taxes on it here.

Incidentally, I believe it's naive and simplistic to claim that Burger King wants to locate its global HQ in Canada solely for tax purposes. It's a complex decision. We just haven't heard about the other considerations due to the dust-up.

Do I think that Burger King helped its reputation with American consumers with this announcement? On the contrary. It opened itself to some damning and probably well-deserved criticism, as we have seen.

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James Tenser, Principal, VSN Strategies

Most of BK's customers probably won't even be aware of any change and won't care.

'RetailRetell'

I'm not a whiner, Ian!...but this is disgraceful, and I'm sure that I'm not the only one who'll vote with my feet and avoid BK from now on.

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Cathy Hotka, Principal, Cathy Hotka & Associates

The issue is simple—fix the U.S. tax code to make us competitive with those in other countries.

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Steve Montgomery, President, b2b Solutions, LLC

James Tenser appropriately calls this one properly...the "so-called tax inversion." "Tax inversion" is driven by media and politics. It really isn't about taxes at all. This is the perfect example.

BK's effective tax rate is about 27% +/-. Their Canadian rate would be 26.5%. Why, oh, why, would a company go through the risk and expense of M&A, especially cross-border M&A for a mere 0.5%? Especially when the U.S. corporate tax code has enough loopholes that could swing the effective tax rate several points in either direction?

There are two basic reasons for inversion: 1) demographics and 2) ease of doing international business.

In the next 15 years, the U.S. middle class (the hamburger and donut class) will drop from about 225 million to about 200 million. In the same period the hamburger and donut class will grow by 2 billion in the rest of the world. Just the GROWTH of the middle class in the rest of the world is 10 times larger than the U.S. middle class. Where would you want to do your business?

In other countries, like Canada, the laws make it easier to do cross border business. These countries want their businesses to grow and they understand they MUST encourage international growth. (In the meantime, there is a movement to eliminate the EXIM bank in the U.S.)

There have been over 100 inversions in the last several years. Not one of the companies was paying the headline tax rates of 35% plus. As a matter of fact, the effective tax rate of the 100 largest U.S. companies is less than 17%, with many in the single digits.

And as far as the B.S. that companies can't bring money back into the U.S. because of taxes, be assured, they have no desire to. In 2013, the 100 largest companies invested $206 billion internationally. These companies have $1.95 trillion permanently invested overseas. Why? Simple! It is where the business is.

(BTW—68% of McDonald's revenue is outside the U.S. and growing. It is projected to be at least 75% by 2020.)

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Gene Detroyer, Professor, Independent

Follow-up comment...

My colleagues are suggesting that the U.S. tax code be fixed. The biggest, most powerful companies in the U.S. don't want it fixed. These companies are paying the lowest effective tax rates in the world.

About one of every seven companies had an effective tax rate lower than 10 percent, including Amazon at 6 percent and Verizon at 9 percent. Nine companies paid no taxes at all.

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Gene Detroyer, Professor, Independent

In the interest of accuracy, it should be pointed out that Tim Hortona has NOT always been a Canadian-owned company: for years it was owned by Wendy's (though it retained autonomy).

But back on point, Burger King at this point reminds me of Target. For years it staked out a valued territory, offering an alternative to the front-runner without being defined as an also-ran; lately, though, it seems like everything they do ends up enveloped in controversy.

'notcom'

It is never what the consumer is looking at, but rather how they are looking at it, if they are looking at it at all. Kind of like selling shares in ENRON, pet rocks, or beer with your pants off, the subject matter is always secondary to the need for a profitable sale. And profits are where this maneuver is headed for the sake of the investors and the company in that order only. Fast food sales are off and getting worse for the burger stores. The need for revenue is getting a less creative look in favor of this low risk option.

'gjarnoldjr'

This serves as a great high-visibility example of a company moving HQ to an alternative company to save on corporate taxes. I don't think the consumer cares in this case, but the government should and this may give them a reason to examine the negative effect the higher tax rate has on corporate business in the US.

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Larry Negrich, Vice President, Marketing, nGage Labs

Regardless of the real reason, the damage is done. It's one step further from relevancy to consumers, one step further from understanding consumers' preferred flavor palate, one step further from McDonald's, Wendy's and other surging regional QSRs.

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Carlos Arámbula, Managing Partner, MarcasUSA LLC

It will help its tax rate, but won't impact its businesses...who knows (or cares) where a company is located anymore? The Internet has given us a globally enabled business platform, and it is changing our world view.

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Kai Clarke, President, Kowa Optimed, Inc.

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