While preparing its bid for Tim Hortons Inc. last year, Burger King Worldwide Inc. initially wanted to set up the new parent company of Canada's iconic supplier of double-doubles and maple-glazed doughnuts across the Atlantic in Britain, to avoid taxes.
Miami-based Burger King's first offer to buy the doughnut chain included a plan to put the new merged company's headquarters in Britain because of the country's "low corporate tax rate" of 21 per cent and its zero-per-cent withholding tax on dividends from most other countries, according to a March 2014 presentation made by top Burger King executives to the company's board.
But this first offer was rebuffed by Tim Hortons, which refused to negotiate until Burger King not only upped its price but guaranteed to put the new head office in Canada. Burger King says the location of the headquarters was also key to winning government approval for the foreign takeover under the Investment Canada Act.
The revelations came on Thursday in testimony before a U.S. Senate subcommittee in Washington by Joshua Kobza, the 28-year-old chief financial officer of Oakville, Ont.-based Restaurant Brands International Inc., the parent company of Burger King and Tims. He was the CFO of Burger King when it was planning its purchase of Tim Hortons last year.
"The marriage of these two iconic brands of similar size … was motivated by compelling business reasons, rather than tax strategies," Mr. Kobza told the hearing, adding that Canada soon emerged the "logical choice" for the parent company since it had the highest concentration of the new company's employees, assets and revenue, in addition to tax advantages.
Amid widespread calls for U.S. tax reform, the U.S. Senate's Permanent Subcommittee on Investigations held hearings Thursday on the rash of recent high-profile "tax inversion" deals in which U.S. corporations have merged with foreign firms in order to move their headquarters elsewhere and escape the U.S. taxman.
According to a report released by the subcommittee before Thursday's hearings and based on internal documents provided by the company, Burger King never seriously considered locating the new merged company's head offices in the U.S. The documents also show the company concluded that a Canadian headquarters would result in a slightly lower effective tax rate than a British one.
Unlike in many other countries, tax rules in the United States force American companies seeking to repatriate offshore earnings to pay full U.S. tax rates on that cash. Canada and many other developed countries have tax treaties with a network of other countries, which means foreign profits can generally return home tax free. As a result, U.S. companies have stashed an estimated $2-trillion in foreign profits offshore.
The United States also has among the developed world's highest nominal corporate tax rates at 35 per cent, much higher than Canada's, where, depending on the province, the rate is around 26.5 per cent.
Before the merger, U.S.-headquartered Burger King paid an effective tax rate of 29 per cent, slightly higher than the nominal Canadian rate. But, as the company did acknowledge at the time, the tax advantages in the Tims deal were linked to Burger King's aggressive plans to grow internationally.
According to the subcommittee report, Burger King estimated that a U.S. address would see the newly merged firm face an effective tax rate swell to 40 per cent if it repatriated its non-U.S. profits, including those from its Tim Hortons operations in Canada. In what Mr. Kobza called a "high-level" estimate, the company concluded that a U.S. headquarters would mean paying an extra $5.5-billion (U.S.) in taxes over the next five years.
Also testifying before the U.S. Senate subcommittee was Howard Schiller, a director and former CFO of Laval, Que.-based Valeant Pharmaceuticals International Inc., a U.S. firm that merged with Mississauga, Ont.-based Biovail in a 2010 tax inversion.
Mr. Schiller told the committee that the lower tax rate that resulted has "turbocharged" Valeant's ability to seek out new acquisitions. In the years since, Valeant has done deals worth $36-billion, including $30-billion worth of U.S. companies, such as contact-lens giant Bausch & Lomb in 2013.
U.S. legislators and the Obama administration have called for reforms to these U.S. tax rules on foreign profits. The Obama administration has also tightened tax rules in an attempt to block tax inversions.
Possible reforms include lower corporate tax rates, or a special lower rate for those trillions in offshore profits. But it remains unclear if any such move can make it through Washington's political gridlock.
At the same time, the Group of 20 and the 34-state Organization for Economic Co-operation and Development have been developing potentially radical proposals to crack down on aggressive tax schemes widely used by the world's biggest corporations to funnel profits out of high-tax jurisdictions and into low- or no-tax countries, such as Luxembourg or the Cayman Islands.