The following article is from Melanie, our staff writer. Melanie is in the beginning phase of her journey to Financial Freedom and she’ll offer a refreshing point of view for us.
Burger King Moves Abroad
Recently fast food giant Burger King announced it is merging with much-loved Canadian mainstay Tim Hortons. The seemingly unlikely pair is making the rounds in the news for their somewhat controversial relationship, which includes key financial players like supporter Warren Buffet.
Burger King, which per its namesake serves mainly burgers, is merging with Tim Hortons, essentially a coffee and donut shop, which is ubiquitous in Canada.
Tim Hortons as a business is doing fairly well, as shown by the facts in a recent Forbes article.
“The company’s reported a 9% increase in net revenues year-over-year (y-o-y) in Q2 2014, while the same store sales growth was 2.6% in Canada and 5.9% in the U.S.”
Burger King on the other hand?
“Burger King has been reporting rather unimpressive results… In Q2 2014, the company’s total reported revenues declined by 6%…”
Burger King is hoping to bolster some of its profits and improve their overall financial situation. But many are criticizing Burger King for what they see as a pure unadulterated corporate tax inversion.
Corporate tax inversion is when a U.S. based company merges with a foreign entity in order to offset the hefty 35% corporate tax in the United States. Currently, a company may take advantage of lower tax rates abroad through this tax loophole if foreign shareholders hold 20% or more of its shares after the merger.
Burger King is looking at a roughly ten percent drop in their corporate taxes by merging with Tim Hortons and moving their legal address to Canada. The company will have to pay the 15% federal tax rate as well as the local taxes in Ontario at 11.5%, resulting in a 26.5% tax rate.
While Burger King is slated to receive many financial benefits from the merger, I wonder what Tim Hortons will get out of it? Perhaps a larger American audience? I’m not sure, but it seems like the relationship is uniquely beneficial to Burger King – and many Canadians are worried about the King taking over and ruining their beloved Tim Hortons.
Canadians aren’t the only ones worried, either. The U.S. government has taken a stand against corporate tax inversion, going so far as to call them unpatriotic.
Why would this beacon of business be called unpatriotic? It’s being called unpatriotic because the United States expects to lose $20 billion in earned tax revenue because of companies moving their headquarters and funding abroad.
And who do they expect to make up the loss? The American people. The White House is working hard to make changes to this loophole, but many companies have already jumped on the bandwagon.
The merger between Burger King and Tim Hortons is just the latest, most high profile example, but this has been going on for years.
On one hand, I can see where a business merger could be beneficial for both parties (although in this case I’m really wondering about Tim Hortons) and provide amazing tax breaks. On the other hand, it seems like we are taking away much needed tax revenue to keep our country going. In some arguments people state we are weakening the U.S. economy and others think we are strengthening are companies with ties abroad.
What do you think about corporate tax inversions? Do you think tax inversions affect the economy or you as an investor? If you’re Canadian, I’m interested in your thoughts about the Burger King merger.
Photo credit: flickr scazon