US hamburger giant Burger King is buying Canadian coffee and doughnut chain Tim Hortons for $11.4bn. The deal creates the world’s third-biggest fast-food restaurant group, with around $23bn in sales and 18,000 restaurants in 100 countries.
Warren Buffett’s investment vehicle, Berkshire Hathaway, has provided $3bn of financing for the deal. The new group will be based in Canada, with each brand managed independently. But both Burger King and Buffett have come in for some flack.
The move seems to be driven primarily by a desire to pay less tax in what’s known as a ‘tax inversion’ deal – basing a new company outside America to avoid relatively high corporation tax. The US rate is 39% – Canada’s is 26%.
What the commentators said
Burger King currently pays less than the US headline corporation tax rate because it operates in several countries. In 2013 its effective rate was 27.5%.
That may not represent much of a saving compared to the Canadian rate, said Will Slabaugh of Stephens Inc, but Burger King’s tax rate was set to rise in future, so “the savings over time could be meaningful”.
According to Buffett, it makes sense for the company to domicile in Canada. Tim Hortons has strong roots there, and it earns more money than Burger King. Yet his apparent support for an inversion deal sits ill with his status as an investor “famed for his homespun philosophy on ethical capitalism”, as Simon Neville put it in The Independent.
He has said in the past that he doesn’t think corporate taxes are too high, while he has also proposed higher taxes on millionaires – an idea that the Obama administration has taken him up on.
Analysts point out that Buffett has long been interested in the food sector due to its stable profits. And he is “a capitalist first and a patriot second”, as one of his shareholders said. He is not concerned about the domicile of his investments, and has also said he would change the tax code to address inversion.
Even so, given the government’s strong recent criticism of tax inversions, said Damian Paletta in The Wall Street Journal, “the White House might need a new poster child for its ‘tax fairness’ campaign”.