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The King Moves Abroad


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 Tim Horton's MergerBurger 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

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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{ 41 comments… add one }
  • Harshal Patel September 8, 2014, 12:53 am

    I think corporate tax inversions are a zero sum game.

    If governments/municipalities compete with each other by constantly lowering taxes, they (meaning the individuals who pay taxes) will lose.

    As per this deal, 3G, the company that owns a majority of and operates Burger King, they are known for cost cutting; not for growth. I assume they will cut expenses to boost profits but not be able to grow the top line.

    • Melanie September 8, 2014, 10:16 am

      I think it does and will continue to affect taxpayers the most. If they are known for cost cutting and not growth, I bet it will have an adverse affect on employees too.

  • Stefanie September 8, 2014, 6:25 am

    There’s a documentary on Netflix about corporate tax inversions called “We’re Not Broke”. It made my blood boil!

    • Melanie September 8, 2014, 10:17 am

      Hmmm I’ll have to check it out. Thanks!

    • Sam September 13, 2014, 8:06 am

      The synopsis to the above documentary on Netflix says “…frustrated citizens as they protest how corporations have sheltered over a trillion dollars from the U.S. Government.” Uh, The money does not belong to the U.S. Gov’t the U.S. Gov’t has legalized theft through the levying of taxes. The Corporate tax rate is a travesty. It is just good business and the American way to find the legal means to avoid taxes. I don’t think I will be watching this Documentary.

  • Pretired Nick September 8, 2014, 7:04 am

    Frustrating! My favorite part of these are when members of congress go on TV to complain about it. If only there were some sort of legislative body that could so something about it…

    • Melanie September 8, 2014, 10:19 am

      Hmmmm if only, huh? 🙂

  • Jon September 8, 2014, 7:06 am

    Burger King will be paying the Canadian rate of 26%. The EU average rate is 21.34% (http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/corporate-tax-rates-table.aspx) Why should Burger King, or any other company, continue to submit to the United States’ rate when they can protect their shareholders by lowering their rate?

    What is unpatriotic is the United States’ exorbitant 35% rate.

    • Melanie September 8, 2014, 10:29 am

      Interesting perspective, Jon! Our corporate taxes are higher, but it hardly trickles down to the people. I’m wondering what would be fair for corporations and people, so that everyone could benefit from tax revenue — but alas, I could be far too idealistic.

      • Jon September 9, 2014, 12:09 pm

        Oh, of course the funds don’t trickle down to the people. That is because they get stuck in the intermediary: Government.

        Look, the government does a few things well (I’ve never been afraid to drive over a bridge in the United States for instance), but it does nothing efficiently. Instead of benefiting Joe Citizen, the tax revenues get clogged in bureaucratic waste, onerous regulations and misappropriations.

        Plug a surge protector or extension cord into itself and wonder why it doesn’t work. That is Keynesian Economics.

        • Sam September 13, 2014, 7:58 am

          Jon….Here, Here.
          You are absolutely correct the corporate tax rate in America is what is “unpatriotic”. Melanie mentioned “trickle down to the people”. That is not the mind set here in America. Government has become the solution to all things and the people have come to expect that and know that Gov’t is a money vacuum and that is okay, I suppose with most of the American Public given the results of elections in the past few years.
          Regarding the tax inversion subject…Since when is it the purpose of a business be it corporate or not to provide taxes to sustain Gov’t? What does that sound like? Doesn’t sound like anywhere I want to live.
          I think most businesses are in it for the “PROFIT” and it should be obvious that the higher the tax rate the more that impinges in that profit margin.
          Much more “patriotic” to go for profit that evil “P-word”. The higher the profit the more money there is in the pool. (unless you’re one of those that believes that money is finite, I do not) The more money in the pool the more ……and so forth.

  • John C September 8, 2014, 7:35 am

    I can see how in the eyes of Burger King it is something they have to do. They are performing a legal action to lower their expenses, which in turn will allow them to either distribute more money to its shareholders, expand, or lower prices (and thus gain more market share). I think as long as our country provides dis-incentives to stay in America, there will be more corporations fleeing to other countries, in the same manner that high earners sometimes migrate from high state tax states like CA and NY.

    I would like to see the myriad of special tax treatments for different corporations eliminated and a low flat corporate tax, but I doubt that will ever happen. If it did, I think we would see more companies running to the US than away from it.

    • Melanie September 8, 2014, 10:33 am

      Thanks for your thoughtful and insightful comment! I like your idea too, but I also have doubts that it would happen.

  • Anon E. Mouse September 8, 2014, 8:21 am

    The government has a couple choices:

    1. Add yet another patch to an incredibly complex corporate tax system, making it even more difficult to do business in the US.
    2. Recognize that they have created an environment so unfriendly to business that businesses are running for the door to escape it.

    My money is on #1, because it’s far easier to hurl invectives like “unpatriotic” at businesses that are making rational business decisions, than to admit that the problem is one of our government’s own making.

    • Melanie September 8, 2014, 10:38 am

      I can agree it is a complex issue that is hard to fix — it doesn’t seem inviting for business so they take advantage of low tax rates abroad, and it affects taxpayers. Seems like a loss for all of us in a way.

  • Kyron September 8, 2014, 9:10 am

    Of course, simplify the tax code. But that is easier said than done.

    Simpler fix may be to make a law (again, easier said than done) that says corporations are taxed on US earnings at US corporate rates. And deny them all deductions if they are not US based. So, if you want to do business in US and sell a burger for 7$ (which is probably a daily living wage in many countries), you need to pay the full tax rate with no lobbied benefits if you don’t incorporate in US … or pay the reduced lobbied deductions filled rate if you incorporate in US … how does that sound?

    And if you think that is unfair, what about me when I pay personal income tax? If I live in WA (no state income tax) but work next door in OR, OR still expects me to pay income tax at very hefty OR rates ….

    • Melanie September 8, 2014, 10:44 am

      Thanks for sharing your thoughts. I think your ideas are interesting — I think taxes are a hot button issue. No one wants to pay them, but most of us can realize some value in it. Corporations are dealing with much more money than the average person, so it seems to make sense they are highly taxed, but if it is driving away business, obviously the system isn’t working.

      • Paul N September 8, 2014, 3:37 pm

        @ Kyron + Jon

        I thought i was going to be one of those lone commenter’s here with a comment similar to you both. Nice to see some people not drinking the “unpatriotic” cool aid.

        Great topic by the way too!

        Once governments become very efficient with tax money, entitlement programs are brought under control, and fairness and honesty is transparent to everyone,if there is still a revenue issue, then look at taking more money from businesses or people. Look at Detroit’s example, the rest of the US is on a road to that demise. 1/2 of the country is on food stamps or receives some kind of social assistance. Obviously the other half of the country and businesses pay for that in taxes. At some point that simply does not work anymore. The people receiving assistance mostly don’t understand or care about economics. The people paying keep having to pay more and lower their living standard. This will not work long term.

        Secondly why is there such a concentrated push to vilify success? Lets be proud of our businesses on both sides of the border. (US/Canada) Lets create an environment for them to want to stay here and be able to push into worldwide markets. Bring the money + jobs back to N. America. Who cares if a few CEO’s make what seems like an unfair amount of money. It makes great headlines, but if you taxed every one of those CEO’s even 75% it wouldn’t pay for 24 hours worth payments on the US national debt. It’s petty jealous thoughts nothing more. The proof is that way of thinking is on all all levels. (I saw Joe recently commented on Dividend Mantra’s website where his own family members were jealous of his very hard earned success. You scrimp and save for 5 years, make sacrifices in your life to invest, then because you have a little more money then someone else, they hold their had out and treat you differently??? ). Is this the way people think now? It’s truly sad.

        • Jon September 9, 2014, 11:44 am

          So much of personal finance is maximizing assets available, and one of the most powerful methods of accomplishing this is by reducing the tax burden. It is difficult to increase wages, but if you can keep more of what is coming in the net effect can be similar.

          This is why there is such a focus on tax strategies in personal finance blogs, magazines, or articles. This is why people pay tax attorneys, accountants and financial advisers. So the individual can maximize the assets available to them.

          Burger King seeking to reduce its tax burden and keep more of its wages (revenue) is no more unpatriotic than utilizing a 401(k), IRA, 529 or taking deductions on income taxes. Joe, the author of this site, has publicly written his family’s goal of saving $50,000 in tax-advantaged accounts this year alone. Is that an unpatriotic act? Why not?

          He is spending his time and energy trying to keep as much to benefit his family as he realistically, and legally, can. Should the public cry those funds are being withheld from local, state and federal taxes? Is this selfish? Afterall, it is funding the retirement savings of an already retired man. Of course not! He has sacrificed and earned his ability to raise his son as a stay-at-home father. He has built a brand in himself he can use to freelance and monetize. He should benefit and utilize all strategies available to him so that his family will be in stronger shape, and we should follow his example.

          As a public company (NYSE: BKW) Burger King has a responsibility to its shareholders to seek in increase its profits. They are not “avoiding” or “evading” taxes, but paying corporate taxes at a much more reasonable Canadian rate. This is exactly why businesses are flocking to tax-friendly states like Texas as well. Instead of demonizing Burger King for its move, or Occidental Petroleum’s move from Los Angeles to Houston we should understand why the businesses behave why they do and adjust our tax code to incentivize them to continue the domestic job growth.

  • Tommy September 8, 2014, 9:25 am

    Since the 1% and Corporate America lobby that Corporations are people too then individuals should be able to marry (merge) with a non-US citizen and also participate in tax inversion. Of course I am not advocating that at all but I grow sick and tired of the well-funded finding every loop-hole no matter how outrageous to skirt taxes when the common person is left with a complicated and punitive tax code if you try anything remotely like they do. Perhaps this will be the time and wake-up call for our government to look at bringing the corp tax rate in-line with the rest of the 1rst world countries along with solid loop-hole elimination and start real tax reform for all.

    • Melanie September 8, 2014, 10:46 am

      I agree — I’m right there with ya!

  • Tre September 8, 2014, 10:58 am

    As a lover of Tim Horton’s I’m worried the impact BK will have on their operations. Will they allow the chain to continue as is or try to “improve” it? Also, what impact will the takeover have on dividends? The tax savings are likely short lived as the government will make changes to the tax laws to recoup what they are losing.

    • Melanie @ Dear Debt September 9, 2014, 10:09 am

      I can understand your worry, Tre! I think Tim Hortons has a much better image than BK and I wonder if merging with BK will tarnish Tim Hortons’ reputation or not. Your concerns are valid.

  • Justin September 8, 2014, 11:02 am

    I don’t blame Burger king. If you can legally save on taxes, why not make a smart move. All of us are doing it with 401ks, IRAs, HSAs, etc. I would be tempted to move to another country for residence purposes if it changed my taxes by a large amount (not very feasible under current US tax code).

    • Melanie @ Dear Debt September 9, 2014, 10:12 am

      Sometimes it is all about the money and sometimes it isn’t. BK is saying it’s not, but I think it’s clear that it is. I have mixed feelings about it.

  • jim September 8, 2014, 11:10 am

    First my understanding is that the tax savings are really not enough to justify the merger so thats really not the reason they’re doing it. An article by TIME said the likely tax savings would be about $3M for them. Thats really close to enough to warrant a mult-billion cross country merger.
    Second, I”m puzzled why you’d call BK a ” beacon of business”.

    In the end, I see no practical solution other than lowering the US marginal tax rate. Otherwise big companies WILL move their HQ outside the US to cut their taxes. Now lowering the marginal rate doesn’t mean cutting taxes entirely. We’ve got a LOT of tax breaks for big business they could get rid of at the same time and keep the revenue the same.

    • Melanie @ Dear Debt September 9, 2014, 10:18 am

      Hey Jim. I am sure there are other reasons for the merger as well. Of course! I’m merely bringing to light the conversation regarding corporate tax inversion and I think this is an unlikely pair.

      My statement, “Why would this beacon of business be called unpatriotic?” referred to corporate tax inversion itself, not BK. Sorry if that was not clear. I also think there does need to be some systemic changes to keep the tax revenue, but also keep companies happy.

  • Tawcan September 8, 2014, 11:48 am

    I don’t like this merger one bit. Tim Hortons has a strong corporate brand here in Canada. I think this merger will only hurt that brand.

    • Melanie @ Dear Debt September 9, 2014, 10:19 am

      I think so too. BK doesn’t have a great image in the US and I know TH has a great image in Canada. It just seems odd.

  • SavvyFinancialLatina September 8, 2014, 2:59 pm

    What I would like to see is the government figuring out how not to waste taxpayers’ money! Although when they have no competition, the government has no incentive to improve on anything lol.

  • debs September 8, 2014, 3:06 pm

    I agree Mel, it’s hard to see what Tim’s will get out of it. I think it must have something to do with increasing their brand in the US. They tried to do it alone but failed, thwarted by Dunkin Donuts and Starbucks. I guess they figure if they are franchised alongside BK, this will provide growth. BK is not a big brand in Canada but Tim’s is, of course. We had a BK in our neighbourhood but they closed shop at least 5 years ago and was replaced by Arby’s which is an even lesser known chain in Canada. Great read, BTW!

    • Melanie @ Dear Debt September 9, 2014, 10:22 am

      Thanks, Deb! I have a feeling that might be what they want. It does seem hard to compete with Dunkin Donuts and Starbucks though. Wow, you guys have an Arby’s?! That’s really interesting.

  • Kassandra September 9, 2014, 5:39 am

    Being Canadian, I am curious as to how exactly senior management of Tim Hortons will incorporate the BK business and ensure that the TH brand is not adversely affected. TH initially merged with Wendy’s in the 1995 acquisition of TH and you now see both brands operating side by side in some locations and it works. TH and Wendy’s are now separate operating entities but it’ll be interesting to see how Canadians will react new branding that includes the BK banner.

    • Melanie @ Dear Debt September 9, 2014, 10:24 am

      Yeah, from what I’ve heard both companies have changed hands quite a few times. I think not adversely affecting the TH brand is a huge concern. As an American who has visited Canada several times, it just feels odd to me.

  • Aldo September 9, 2014, 7:08 am

    Burger King should pay even more taxes for putting such a strain in our healthcare system by making people fat, lol.

    • retirebyforty September 9, 2014, 9:54 am

      Haha, yeah they should. 🙂

    • Melanie @ Dear Debt September 9, 2014, 10:25 am

      Ha! What a different world we’d live in if we could do that for fast food companies!

  • DivHut September 9, 2014, 12:00 pm

    These corporate moves just highlight the dysfunctional tax system in place in the U.S. It’s not news that besides tax inversions companies such as Google, Apple and more employ all kinds of “tax workarounds” to minimize their payments to the U.S. govt. Part of the system I guess. Don’t fight it. Work within it.

  • Steve September 10, 2014, 7:40 am

    The current Administration and others in Congress have called Burger King’s actions unpatriotic. I think it is pretty disingenuous to call Burger King or any other company (or any individual for than matter) unpatriotic that legally takes any steps it can to reduce its federal tax burden. The story would be completely different if they were committing fraud or otherwise illegally acting to avoid paying taxes, but that is not the case with these “inversions”. Nearly every American taxpayer does their best to minimize their federal tax liability. For example, I put as much money as possible into tax deferred investment vehicles (e.g. 401k’s, Roth IRAs, HSAs) not only to save for retirement, but to minimize my tax liability. I also invest in municipal bonds, whose interest is generally not subject to federal income tax. I deduct the mortgage interest and property taxes I that I pay to reduce my federal income tax. Would I be more patriotic if I saved for retirement in taxable accounts, only invested in bonds that paid taxable interests, and voluntarily stopped deducting my mortgage interest payments? I don’t think so. I, like Burger King, and like millions of other American taxpayers are doing what is their economic best interest by taking legal steps that are either expressly permitted in the code, or are not expressly prohibited by the tax code to reduce their tax burden. It is perfectly reasonable to have a debate about who should pay taxes, and how much they should pay, but to call anyone unpatriotic for taking advantage of the tax laws is totally inappropriate.

  • Dave September 15, 2014, 8:17 pm

    An inversion does not change the fact that Burger King has a U.S. trade or business and will still pay U.S. tax. Inversions allow taxpayers to base erode the U.S. and give companies an opportunity through further planning to prevent future foreign subsidiary earnings from being trapped in the U.S. tax net.

    As you can see through current legislative proposals, the legislative fix to inversions has more to do with tightening the 163j interest stripping rules than stopping inversions.

    The bigger question at hand is what will happen to the multitude of combined Wendy’s/Tim Horton’s restaurants throughout the midwest? Will Wendy’s be replaced by BK? Enjoy your flamed broiled burgers!

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